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0000883053-96-000007	0000883053-96-000007_0000.txt	TRADITIONAL UNIT TRUST 278 843 UNITS OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED OR OTHERWISE PROTECTED BY THE FDIC OR ANY OTHER FEDERAL AGENCY AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. QUICK FACTS ABOUT THIS UNIT TRUST COMPARES TRUST WITH 30-YEAR TREASURY BONDS AND LEHMAN BROTHERS INVESTMENT GRADE LONG CORPORATE BOND INDEX. ASSUMES 39% FEDERAL AND STATE INCOME TAX RATE AND A 4.5% STATE INCOME TAX RATE. TREASURY BONDS ARE SUBJECT TO FEDERAL BUT NOT STATE INCOME TAXES; CORPORATE BONDS ARE GENERALLY SUBJECT TO BOTH. TREASURY BONDS, UNLIKE MUNICIPAL BONDS, ARE GUARANTEED BY THE U.S. GOVERNMENT. THE LEHMAN BROTHERS INVESTMENT GRADE LONG CORPORATE BOND INDEX IS CALCULATED AS OF 12/31/95. CALL 1.800.257.8787 FOR A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION INCLUDING CHARGES AND EXPENSES. BONDS THIS UNIT TRUST CONTAINS HOW TO DETERMINE YOUR INCOME AND YIELD HOW TO CALCULATE YOUR RETURN The table shows the approximate yield an investor must get from a taxable investment to match the estimated current return from this Unit Trust. JOHN NUVEEN & CO. INCORPORATED 333 WEST WACKER DRIVE, CHICAGO, IL 60606 HOW TO CALCULATE YOUR INCOME The table shows expected interest payments for monthly, quarterly and semi-annual plans. Payments will remain relatively constant as long as the Unit Trust's size, composition and expenses remain the same. The first record date is 02/01/96. TRADITIONAL UNIT TRUST 294 843 UNITS OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED OR OTHERWISE PROTECTED BY THE FDIC OR ANY OTHER FEDERAL AGENCY AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. QUICK FACTS ABOUT THIS UNIT TRUST COMPARES TRUST WITH 30-YEAR TREASURY BONDS AND LEHMAN BROTHERS INVESTMENT GRADE LONG CORPORATE BOND INDEX. ASSUMES 41% FEDERAL AND STATE INCOME TAX RATE AND A 7.75% STATE INCOME TAX RATE. TREASURY BONDS ARE SUBJECT TO FEDERAL BUT NOT STATE INCOME TAXES; CORPORATE BONDS ARE GENERALLY SUBJECT TO BOTH. TREASURY BONDS, UNLIKE MUNICIPAL BONDS, ARE GUARANTEED BY THE U.S. GOVERNMENT. THE LEHMAN BROTHERS INVESTMENT GRADE LONG CORPORATE BOND INDEX IS CALCULATED AS OF 12/31/95. CALL 1.800.257.8787 FOR A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION INCLUDING CHARGES AND EXPENSES. BONDS THIS UNIT TRUST CONTAINS HOW TO DETERMINE YOUR INCOME AND YIELD HOW TO CALCULATE YOUR RETURN The table shows the approximate yield an investor must get from a taxable investment to match the estimated current return from this Unit Trust. JOHN NUVEEN & CO. INCORPORATED 333 WEST WACKER DRIVE, CHICAGO, IL 60606 HOW TO CALCULATE YOUR INCOME The table shows expected interest payments for monthly, quarterly and semi-annual plans. Payments will remain relatively constant as long as the Unit Trust's size, composition and expenses remain the same. The first record date is 02/01/96. INSURED UNIT TRUST 259 843 UNITS OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED OR OTHERWISE PROTECTED BY THE FDIC OR ANY OTHER FEDERAL AGENCY AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. QUICK FACTS ABOUT THIS UNIT TRUST COMPARES TRUST WITH 30-YEAR TREASURY BONDS AND LEHMAN BROTHERS INVESTMENT GRADE LONG CORPORATE BOND INDEX. ASSUMES 42% FEDERAL AND STATE INCOME TAX RATE AND A 9.3% STATE INCOME TAX RATE. TREASURY BONDS ARE SUBJECT TO FEDERAL BUT NOT STATE INCOME TAXES; CORPORATE BONDS ARE GENERALLY SUBJECT TO BOTH. TREASURY BONDS, UNLIKE MUNICIPAL BONDS, ARE GUARANTEED BY THE U.S. GOVERNMENT. THE LEHMAN BROTHERS INVESTMENT GRADE LONG CORPORATE BOND INDEX IS CALCULATED AS OF 12/31/95. CALL 1.800.257.8787 FOR A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION INCLUDING CHARGES AND EXPENSES. BONDS THIS UNIT TRUST CONTAINS HOW TO DETERMINE YOUR INCOME AND YIELD HOW TO CALCULATE YOUR RETURN The table shows the approximate yield an investor must get from a taxable investment to match the estimated current return from this Unit Trust. JOHN NUVEEN & CO. INCORPORATED 333 WEST WACKER DRIVE, CHICAGO, IL 60606 HOW TO CALCULATE YOUR INCOME The table shows expected interest payments for monthly, quarterly and semi-annual plans. Payments will remain relatively constant as long as the Unit Trust's size, composition and expenses remain the same. The first record date is 02/01/96. INSURED UNIT TRUST 62 843 UNITS OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED OR OTHERWISE PROTECTED BY THE FDIC OR ANY OTHER FEDERAL AGENCY AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. QUICK FACTS ABOUT THIS UNIT TRUST COMPARES TRUST WITH 30-YEAR TREASURY BONDS AND LEHMAN BROTHERS INVESTMENT GRADE LONG CORPORATE BOND INDEX. ASSUMES 39% FEDERAL AND STATE INCOME TAX RATE AND A 5% STATE INCOME TAX RATE. TREASURY BONDS ARE SUBJECT TO FEDERAL BUT NOT STATE INCOME TAXES; CORPORATE BONDS ARE GENERALLY SUBJECT TO BOTH. TREASURY BONDS, UNLIKE MUNICIPAL BONDS, ARE GUARANTEED BY THE U.S. GOVERNMENT. THE LEHMAN BROTHERS INVESTMENT GRADE LONG CORPORATE BOND INDEX IS CALCULATED AS OF 12/31/95. CALL 1.800.257.8787 FOR A PROSPECTUS CONTAINING MORE COMPLETE INFORMATION INCLUDING CHARGES AND EXPENSES. BONDS THIS UNIT TRUST CONTAINS HOW TO DETERMINE YOUR INCOME AND YIELD HOW TO CALCULATE YOUR RETURN The table shows the approximate yield an investor must get from a taxable investment to match the estimated current return from this Unit Trust. JOHN NUVEEN & CO. INCORPORATED 333 WEST WACKER DRIVE, CHICAGO, IL 60606 HOW TO CALCULATE YOUR INCOME The table shows expected interest payments for monthly, quarterly and semi-annual plans. Payments will remain relatively constant as long as the Unit Trust's size, composition and expenses remain the same. The first record date is 02/01/96.	497	497	1996-01-12T00:00:00	1996-01-12T10:23:23
0000950133-96-000022	0000950133-96-000022_0000.txt	As filed with the Securities and Exchange Commission on January 12, 1996 U.S. SECURITIES AND EXCHANGE COMMISSION (Check appropriate box or boxes) /x/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/ Pre-Effective Amendment No. 1 / / Post-Effective Amendment No. Exact name of Registrant as Specified in Charter c/o Allied Capital Advisers, Inc. 1666 K Street, N.W., 9th Floor Address of Principal Executive Offices (Number, Street, City, State, Zip Code) Registrant's Telephone Number, including Area Code David Gladstone, Chairman and Chief Executive Officer Allied Capital Advisers, Inc. 1666 K Street, N.W., 9th Floor Name and Address of Agent for Service (Number, Street, City, State, Zip Code) Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of the registration statement. If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box: /x/ It is proposed that this filing will become effective (check appropriate box) /x/ when declared effective pursuant to section 8(c) / / This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same offering is - . (1) Estimated for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended (the "1933 Act"), based on the average of the high and low prices per share on November 27, 1995 on the Nasdaq National Market. (2) Previously paid. (3) Estimated for purposes of calculating the registration fee pursuant to Rule 457(c) under the 1933 Act, based on the average of the high and low prices per share on January 11, 1996 on the Nasdaq National Market. 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 Section 8(a), may determine. Pursuant to Rule 495(a) under the Securities Act of 1933 Showing the Location of Information Required by Form N-2 in Part A (Prospectus) and Part B (Statement of Additional Information) and Part C (Other Information) of the Registration Statement INFORMATION REQUIRED IN A PROSPECTUS INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OF QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION: THE DATE OF ISSUANCE OF THIS PRELIMINARY PROSPECTUS IS ________ __, 1996. Allied Capital Corporation (the "Company") is issuing to the beneficial holders of record of the outstanding shares of its common stock at the close of business on January 22, 1996 ("the Record Date") non-transferable rights (the "Subscription Rights"). Each shareholder will be issued one Subscription Right for each share of the Company held as of the Record Date, and will be entitled to subscribe for and purchase from the Company up to one (1) authorized but heretofore unissued share of the Company's common stock for each seven (7) Subscription Rights held (the "Primary Subscription") aggregating a total of 885,448 shares of common stock. Shares of common stock of the Company offered through this Prospectus are referred to as the "Shares." Shareholders who fully exercise their Subscription Rights will be entitled to the additional privilege of subscribing, subject to certain limitations and subject to allocation or increase, for any Shares not acquired by exercise of Subscription Rights (the "Over-Subscription Privilege"). The Primary Subscription and the Over-Subscription Privilege collectively comprise the "Offer." The Company may, at its sole discretion, increase the number of Shares of common stock subject to subscription by up to 15% of the Shares, or 132,817 Shares, for an aggregate total of 1,018,265 Shares available under the Offer. Fractional shares will not be issued upon exercise of Subscription Rights and no fractional Subscription Rights will be issued. Subscription Rights are non-transferable and will not be admitted for trading or quotation on any exchange and therefore may not be purchased or sold. Only persons who are stockholders of the Company on the Record Date may subscribe. Beneficial owners whose shares are held of record by Cede & Co., nominee for The Depository Trust Company ("DTC"), or by any other depository or nominee are also eligible to participate. Stockholder inquires should be directed to the Information Agent and Offering Coordinator, Shareholder Communications Corporation at (800) 221-5724 ext. 331. THE SUBSCRIPTION PRICE PER SHARE WILL BE 95% OF THE AVERAGE OF THE LAST REPORTED SALE PRICE OF A SHARE OF COMMON STOCK ON THE NASDAQ NATIONAL MARKET ("NASDAQ") ON THE DATE OF EXPIRATION OF THE OFFER (THE "PRICING DATE") AND THE FOUR PRECEDING BUSINESS DAYS. SEE "THE OFFER." The Offer will dilute the voting power of the common stock owned by stockholders who do not fully exercise their Subscription Rights. Stockholders who do not fully exercise their Subscription Rights should expect, upon completion of the Offer, to own a smaller proportional interest in the Company than before the Offer. THE OFFER WILL EXPIRE AT 5:00 P.M. EASTERN STANDARD TIME, ON FEBRUARY 23, 1996 (THE "EXPIRATION DATE"), UNLESS EXTENDED AS DESCRIBED HEREIN. Allied Capital Corporation, a Maryland corporation, is a closed-end, management investment company that has elected to operate as a business development company. The Company seeks to achieve a high level of current income as well as long-term growth in the value of the Company's net assets by providing debt, mezzanine and equity financing, primarily to small, privately owned growth companies. The outstanding shares of the Company are quoted on the Nasdaq National Market under the symbol "ALLC." The Company's investment adviser is Allied Capital Advisers, Inc. ("Advisers"), a registered investment adviser whose principal office is located at 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803. Advisers' telephone number is (202) 331-1112. The Company uses a leveraged capital structure by issuing senior securities representing either indebtedness (i.e., borrowings from banks, other institutional lenders, or government agencies) or preferred stock. FOR THE RISKS OF LEVERAGE, SEE "THE COMPANY--RISK FACTORS--LEVERAGE." This Prospectus sets forth concisely the information about the Company that a prospective investor ought to know before investing. It should be retained for future reference. Additional information on the Company has been filed with the U.S. Securities and Exchange Commission (the "Commission") and is available without charge upon written or oral request to the attention of Investor Relations at the address or telephone number listed above. As indicated at some points in this Prospectus, certain of the information in the Information is incorporated in this Prospectus by reference. See page ___ of this Prospectus for the table of contents of the Statement of Additional Information. 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. (Footnotes on the following page) The date of this Prospectus and of the Statement of Additional Information is __________ __, 1996. (1) The Estimated Subscription Price is computed as the average of the last reported sale price of the Company's common stock on Nasdaq on January __, 1996 and the four preceding business days. (2) In connection with the Offer, broker-dealers soliciting the exercise of Subscription Rights will receive solicitation fees equal to 2.5% of the Subscription Price per Share. The Company has agreed to indemnify such broker-dealers against certain liabilities under the Securities Act of 1933, as amended. See "The Offer-Soliciting Fees." (3) Before deduction of offering costs incurred related to this offering, payable by the Company, estimated at $___________. (4) Funds received prior to the final due date of the Offer will be deposited into a segregated interest- bearing bank account (which interest will be paid to the Company) pending proration and distribution of Shares. (5) Assumes all Subscription Rights are exercised at the Estimated Subscription Price. Pursuant to the Over-Subscription Privilege, the Company may, at its sole discretion, increase the number of Shares subject to the Offer by up to 15% of the Shares offered hereby. If the Company increases the number of Shares subject to Subscription by 15%, the aggregate maximum Estimated Subscription Price, Estimated Sales Load, and Estimated Proceeds to the Company will be $_____, $_____, and $_____, respectively. The following summary is qualified in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus. (1) In the event that Shares are sold otherwise than through the Offer, the corresponding Supplement to this Prospectus will disclose the applicable sales load, if any. (2) The expenses of the Dividend Reinvestment Plan are included in stock record expenses, a component of "Other Expenses." The Company has no cash purchase plan. (3) Net assets for this purpose are at September 30, 1995 and after giving effect to the anticipated net proceeds of the present offering less non-redeemable preferred stock outstanding. (4) The investment advisory fee in this table is presented as a percentage of net assets; however, the Company's investment advisory fees are based on a formula based on total assets. The fees payable pursuant to the investment advisory agreement (see "Management--Investment Adviser") are 0.625% per quarter (2.5% per annum) of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Capital Lending Corporation owned by the Company, Interim Investments (i.e., short-term U.S. government/agency securities or repurchase agreements collateralized thereby), and cash and cash equivalents. The percentage in the table assumes that none of the Company's consolidated total assets are in the form of Interim Investments or cash and cash equivalents. Investment advisory fees are payable with respect to Interim Investments and cash and cash equivalents at 0.125% per quarter (0.5% per annum) of the quarter-end value of Interim Investments and cash and cash equivalents. The investment advisory fee percentage above is based on the actual total assets less the Company's investment in Allied Capital Lending Corporation at September 30, 1995 plus the anticipated net proceeds of this offering, multiplied by 2.5%, divided by consolidated net assets attributable to common shares. Actual investment advisory fees for the year ended December 31, 1994 were $2,356,000. At September 30, 1995, 14% of the Company's consolidated total assets were in the form of Interim Investments and cash and cash equivalents. See "The Company--Business of the Company." (5) The Company had outstanding borrowings of $81.3 million at September 30, 1995. The Interest Payments on Borrowed Funds percentage is based on estimated amounts for the year ended December 31, 1995 divided by consolidated net assets attributable to common shares. Actual Interest Payments on Borrowed Funds for the year ended December 31, 1994 was $6,223,000. (6) The Other Expenses percentage is based on estimated amounts for the year ended December 31, 1995 divided by consolidated net assets attributable to common shares. Actual Other Expenses for the year ended December 31, 1994 was $1,401,000. (7) Annual Expenses as a percentage of consolidated net assets attributable to common shares are higher than the Annual Expenses of most closed-end management investment companies due to the Company's consolidated outstanding borrowings of $81.3 million and consolidated outstanding preferred stock of $7 million at September 30, 1995, which significantly reduce the consolidated net assets attributable to common shares on which the Annual Expenses percentage is calculated. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The purpose of the above table, including the example, is to assist the investor in understanding the various costs that an investor in the Company will bear either directly or indirectly. The Company has filed with the Commission a registration statement under the Securities Act of 1933, as amended (the "1933 Act"), with respect to the shares of common stock offered by this Prospectus, which includes this Prospectus plus additional information. The Company also files reports, proxy statements and other information with the Commission under the Securities Exchange Act of 1934. Such reports, proxy statements, and other information can 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 certain of the Commission's Regional Offices located in Suite 1400, 500 West Madison Street, Chicago, Illinois 60661, and Suite 1300, 7 World Trade Center, New York, New York 10006. Copies of these materials can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company also furnishes annual reports to stockholders, which include annual financial information that has been audited and reported on, with an opinion expressed, by independent public accountants, and quarterly reports including unaudited financial information. See "Reports and Independent Public Accountants," page 28. The following condensed consolidated financial information of the Company should be read in conjunction with the consolidated financial statements and notes thereto included in this Prospectus. Such consolidated financial statements as of and for the years ended December 31, 1990, 1991, 1992, 1993 and 1994 have been audited by the firm of Matthews, Carter and Boyce, independent public accountants, whose opinion thereon appears at page F-26 below. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations," page 28. SUMMARY BALANCE SHEET INFORMATION (In Thousands) SUMMARY INCOME STATEMENT INFORMATION (In Thousands) (1) Numbers have been adjusted for the distribution of Allied Capital Advisers, Inc. common shares on December 31, 1990. (2) All per common share figures have been computed assuming that all issuances of the Company's common stock in connection with the Company's dividend reinvestment plan are outstanding for all periods presented. (3) Net increase in net assets resulting from operations is reduced by preferred stock dividends of $203,000 for 1990, $220,000 for 1991, 1992, 1993 and 1994 and $165,000 for the nine months ended September 30, 1994 and 1995 for the purpose of calculating the per common share amount. (4) Total shareholders' equity is reduced by $6 million of non-redeemable preferred stock for the purpose of calculating the per common share amount. (5) Amount represents the total of the quarterly dividends and the year-end extra distribution declared by the Company based on the actual shares outstanding on the record date for each dividend paid. (6) Includes a $2.75 per common share distribution of shares in Allied Capital Advisers, Inc. on December 31, 1990. (7) Includes a tax basis return of capital of $0.25 per share for 1991 and $0.17 per share for 1994. (8) Subsequent to September 30, 1995, the Company's Board of Directors declared a regular quarterly divided of $0.24 per common share or $1,485,000 payable on December 29, 1995 and an extra distribution of $0.58 per common share or $3,588,000 payable on January 31, 1995. These declarations will result in total distributions declared for 1995 of $1.44 per common share. Net asset value per common share at September 30, 1995 does not reflect the effect of these dividend declarations, and these dividend declarations will reduce net asset value by $5,073,000, or approximately $0.82 per common share. QUARTERLY FINANCIAL HIGHLIGHTS (In Thousands) SENIOR SECURITIES (at end of year, consolidated) Certain information about the various classes of senior securities issued by the Company and its consolidated subsidiaries is set forth in the following table. The shaded areas indicate information which the Commission expressly does not require to be disclosed for certain types of senior securities. (1) For the fiscal year ended March 31, 1986. (2) In 1986, the Company changed its fiscal year end from March 31 to December 31. This data is as of December 31, 1986. (3) 1995 figures are as of September 30. (4) Total amount of each class of senior securities outstanding at the end of the year presented. (5) An asset coverage ratio is calculated, where applicable, as the Company's consolidated total assets less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness other than senior securities issued by the Company's small business investment company subsidiaries. This asset coverage ratio is multiplied by $1,000 to determine the asset coverage per unit. (6) The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it. (7) Not applicable as senior securities are not registered for public trading. (8) Issued by the Company's small business investment company subsidiaries, these categories of senior securities are not subject to the asset coverage requirements of the Investment Company Act of 1940 (the "1940 Act"). Therefore, asset coverage per unit is not applicable. (9) The Company itself was the obligor on $15 million of the senior notes. The Company's small business investment company subsidiaries were the obligors on the remaining $5 million, which is not subject to the asset coverage requirements of the 1940 Act. Therefore, asset coverage per unit is based on $15 million of senior securities outstanding in this category. PUBLIC TRADING AND NET ASSET VALUE INFORMATION Shares of the Company are traded on the Nasdaq National Market under the symbol ALLC. The following table sets forth, for the periods indicated, high and low bid prices and average net asset values per common share. The Nasdaq bid quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions. As the table below indicates, shares of the Company have historically traded at a price substantially in excess of net asset value. The last sale price for a share of the Company's common stock on Nasdaq on September 29, 1995 was $13.00. The consolidated net asset value per share on that date was $8.61. The premium was 51%. The Company is offering to the holders of its common stock of record on the Record Date the right to subscribe for Shares. Each Record Date stockholder is being issued one (1) Subscription Right for each share of common stock owned on the Record Date. The number of Subscription Rights to be issued to each stockholder will be rounded down to the nearest whole number of shares and no fractional Subscription Rights will be issued. The Subscription Rights entitle a stockholder to acquire pursuant to the Primary Subscription at the Subscription Price one (1) Share for each seven (7) Subscription Rights held. Subscription Rights may be exercised at any time during the Subscription Period, which commences on January 25, 1996, the date of this Prospectus and ends as of 5:00 p.m., Eastern Standard Time, on February 23, 1996 (the "Expiration Date"), unless extended by the Company until 5:00 p.m. Eastern Standard Time on a date no later than March 1, 1996. In addition, any stockholder who fully exercises all Subscription Rights issued to him is entitled to subscribe for Shares which were not otherwise subscribed for pursuant to the Primary Subscription. Shares acquired through the Over-Subscription Privilege are subject to allocation or increase, which is more fully discussed below under "Over-Subscription Privilege." Subscription Rights are exercisable through a subscription form ("Subscription Form") which will be provided to all eligible stockholders. No certificates or other physical rights will be issued or distributed. The Subscription Rights are non-transferable. Therefore, only the underlying Shares, and not the Subscription Rights, will be admitted for quotation on the Nasdaq National Market. If some stockholders do not exercise all of the Subscription Rights initially issued to them, then any Shares for which subscriptions have not been received from stockholders will be offered by means of the Over-Subscription Privilege to those stockholders who have exercised all of the Subscription Rights initially issued to them and who wish to acquire additional Shares. Stockholders who exercise all of the Subscription Rights initially issued to them should indicate on the Subscription Form how many Shares they wish to acquire through this Over-Subscription Privilege. If sufficient Shares remain, then all requests for additional Shares will be honored in full. If sufficient Shares are not available to honor all requests for additional Shares, then the Company may, in its sole discretion, elect to issue up to an additional 15% of the Shares available through the Offer in order to honor such over-subscriptions. All requests to purchase Shares pursuant to the Primary Subscription and the Over-Subscription Privilege are subject to allocation. To the extent that there are not sufficient Shares to honor all over-subscriptions, the available Shares will be allocated pro rata among those stockholders who over-subscribe based on the number of Subscription Rights originally issued to them by the Company, so that the number of Shares issued to stockholders who subscribe through the Over-Subscription Privilege will be in proportion to the number of shares of the Company's common stock owned by them on the Record Date. The percentage of remaining Shares each over-subscribing holder may acquire may be rounded up or down to result in delivery of whole Shares. The allocation process may involve a series of allocations in order to ensure that the total number of Shares available for over-subscriptions are distributed on a pro rata basis. The Subscription Price per Share will be 95% of the average of the last reported sale price of a share of common stock on the Nasdaq National Market ("Nasdaq") on the date of expiration of the Offer (the "Pricing Date") and the four preceding business days. Since the Expiration Date of the Offer coincides with the Pricing Date, holders who choose to exercise their Subscription Rights will not know the Subscription Price per Share at the time they exercise their Subscription Rights. It may be more or less than the Estimated Subscription Price of $______ per Share. See "Confirmation of Purchase." The Offer commences on January 25, 1996 and expires at 5:00 p.m., Eastern Standard Time, on February 23, 1996, unless extended. Subscription Rights will expire on the Expiration Date and may not be exercised after that date. All Subscription Forms must be received by the Subscription Agent no later than the Expiration Date. As of the date of this prospectus, the Company last determined consolidated net asset value per common share at September 30, 1995 to be $8.61. During the fourth quarter of 1995, the Company declared its fouth quarter dividend of $0.24 per common share, or $1,485,000, and its 1995 extra distribution of $0.58 per common share or $3,588,000. Net asset value per common share at September 30, 1995 does not reflect the effect of these dividend declarations and these dividend declarations will reduce net asset value by $5,073,000, or approximately $0.82 per common share. In addition to these dividend declarations, net asset value per common share at December 31, 1995 will be affected by fourth quarter net income, which includes the effects of unrealized appreciation and depreciation in the Company's portfolio of invested assets. As of the date of this prospectus, 1995 fourth quarter net income has not yet been computed by the Company, and as a result is not available. The Company has, as required by the Commission's registration form, undertaken to suspend the Offer until it amends this Prospectus if subsequent to the effective date of the Company's registration statement, the Company's net asset value declines more than 10% from its consolidated net asset value last determined prior to the effective date. Accordingly, the Company will notify stockholders of any such decline. A subscribing stockholder will have no right to cancel such subscriptions or rescind a purchase after the Subscription Agent has received payment, except that subscription forms received during any period that the Offer is suspended as described above will be returned to the stockholder for resubmission once such suspension has ended. The Company is requesting brokers, banks, trust companies and other nominees (collectively "Nominees") to transmit a copy of this Prospectus and of the Subscription Form, with a return envelope, to each person who is a beneficial owner of shares of the common stock held of record by Nominees as of the Record Date. Nominees will be responsible for tabulating subscriptions received from such beneficial owners, and remitting to the Subscription Agent one Subscription Form and the total aggregate Subscription Price of all shares for which a Nominee's beneficial owners are subscribing. The Company will pay such Nominees their usual and customary charges for transmitting issuer communications to stockholders. The Board of Directors of the Company has concluded that additional capital should be raised for the Company through an offering of its common stock. The Company has determined that new investment opportunities exist, but the Company lacks the liquidity to take full advantage of them. This additional capital will increase the Company's equity base and allow the Company to continue to grow by leveraging against it. The Company's directors have voted unanimously to authorize the Offer. Three of the Company's directors who voted to authorize the Offer are affiliated with Advisers and, therefore, could benefit indirectly from the Offer. The other five directors are not "interested persons" of the Company within the meaning of the Investment Company Act of 1940 (the "1940 Act"). Advisers may also benefit from the Offer because its fee is partially based on the total assets of the Company. See "Management-Investment Adviser." It is not possible to state precisely the amount of additional compensation Advisers might receive as a result of the Offer because it is not known how many Shares will be subscribed for and because the proceeds of the Offer will be invested in additional portfolio securities, which will presumably fluctuate in value. The Company may, in the future and at its discretion, from time to time, choose to make additional rights offerings for a number of shares and on terms which may or may not be similar to this Offer. The Company expects that there will be no dilution of the net asset value of the Company's common stock because the stock has historically traded, and continues to trade as of the date of this Prospectus, at a price that represents a premium over net asset value. See "Public Trading and Net Asset Value Information." Any stockholder who chooses not to participate in the Offer, however, should expect to own a smaller proportional interest in the Company following the expiration of the Offer. The Company may offer and sell any shares which are not subscribed for through the Primary Subscription or the Over-Subscription Privilege, following expiration of the Offer, to certain other investors. The Company undertakes to update this Prospectus before any such sales are consummated. The combination of the Over-Subscription Privilege and the Company's election to issue additional Shares may result in additional dilution of interest and voting rights to stockholders. See "Sales of Shares Subsequent to the Offer." In connection with the Offer, the Company has agreed to pay to certain broker-dealers who have executed and delivered a Soliciting Dealer Agreement fees equal to 2.5% of the Subscription Price per Share for Shares issued upon the exercise of Subscription Rights as a result of their soliciting efforts. Shareholder Communications Corporation will provide offering coordinator services, including coordination among soliciting broker-dealers. See "Expenses of the Offer." The Subscription Agent for the Offer is American Stock Transfer and Trust Company, 40 Wall Street, 46th Floor, New York, New York, 10004, which will receive, for its administrative, processing, invoicing and other services as Subscription Agent, an estimated fee of $35,000 and reimbursement for all out-of-pocket expenses related to the Offer. The Subscription Agent is also the Company's Transfer Agent. Stockholders may contact the Subscription Agent at 718-921-8200. Stockholders should mail or deliver Subscription Forms and acceptable forms of payment for Shares to the Subscription Agent in time to be received by 5:00 p.m. Eastern Standard Time on the Expiration Date by one of the following methods at the following address: BY EXPRESS MAIL OR OVERNIGHT COURIER American Stock Transfer and Trust Company 40 Wall Street, 46th Floor New York, New York 10005 DELIVERY TO AN ADDRESS OTHER THAN THE ABOVE DOES NOT CONSTITUTE VALID DELIVERY. IT IS STRONGLY SUGGESTED THAT STOCKHOLDERS USE A DELIVERY METHOD WHICH WILL GUARANTEE DELIVERY BY THE EXPIRATION DATE AND WHICH WILL PROVIDE A RETURN RECEIPT TO THE SENDER. NEITHER THE SUBSCRIPTION AGENT NOR THE COMPANY WILL BE RESPONSIBLE FOR SUBSCRIPTION FORMS OR PAYMENTS THAT ARE NOT SO DELIVERED. INFORMATION AGENT AND OFFERING COORDINATOR Shareholder Communications Corporation ("SCC") will act as the Information Agent and Offering Coordinator for the Offer, and as such, will distribute materials and be available to answer questions any stockholders may have regarding the Offer. For acting as Information Agent for the Offer, SCC will receive a fee estimated at $5,000 and for acting as Offering Coordinator, SCC will receive a fee estimated at $35,000. SCC will be reimbursed for all out-of-pocket expenses in connection with the Offer. SCC may be contacted at: 17 State Street, 27th and 28th Floors New York, New York 10004 Telephone: (800) 221-5724, Extension 331 Stockholders may also call their Nominees for information with respect to the Offer. unless the Offer is extended to a date not later than March 1, 1996. +a stockholder exercising Subscription Rights must deliver either (1) a Subscription Form and payment for Shares or (2) a Notice of Guaranteed Delivery by the Expiration Date. Subscription Rights may be exercised by stockholders whose shares of the Company's common stock are held in their own name ("Record Owners") by completing the enclosed Subscription Form and delivering it to the Subscription Agent, together with any required payment for the Shares as described below under "Payment for Shares." Stockholders whose shares are held by a Nominee must exercise their Subscription Rights by contacting their Nominees, who can arrange, on a stockholder's behalf, to guarantee delivery of a properly completed and executed Subscription Form and payment for the Shares. A fee may be charged for this service. Subscription Forms must be received by the Subscription Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date, unless the Offer is extended. If Subscription is to be effected by means of a Notice of Guaranteed Delivery, then Subscription Forms are due not later than three (3) business days following the expiration of the Offer and full payment for the Shares is due not later than ten (10) business days following the Confirmation Date. See "Payment for Shares." Stockholders who acquire Shares pursuant to the Primary Subscription or the Over-Subscription Privilege may choose between the following methods of payment: (1) If, prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date (unless extended), the Subscription Agent has received a Notice of Guaranteed Delivery, by telegram or otherwise, from a Nominee guaranteeing delivery of (a) payment of the full Subscription Price for the Shares subscribed for pursuant to the Primary Subscription and any additional Shares subscribed for through the Over-Subscription Privilege and (b) a properly completed and executed Subscription Form, the subscription will be accepted by the Subscription Agent. The Subscription Agent will not honor a Notice of Guaranteed Delivery if a properly completed and executed Subscription Form is not received by the Subscription Agent by the close of business on the third (3rd) business day after the Expiration Date, unless the Offer is extended, and full payment for the Shares is not received by it by the close of business on the tenth (10th) business day after the Confirmation Date (as defined below). (2) Alternatively, a Record Owner may send payment for the Shares acquired pursuant to the Primary Subscription, together with the Subscription Form, to the Subscription Agent based on the Estsimated Subscription Price of $__.__ per Share. To be accepted, such payment, together with the Subscription Form, must be made payable to "Allied Capital Corporation" and received by the Subscription Agent prior to 5:00 p.m., Eastern Standard Time, on the Expiration Date, unless the Offer is extended. IF THE SECOND METHOD DESCRIBED ABOVE IS USED, FULL PAYMENT BY CHECK MUST ACCOMPANY ANY SUBSCRIPTION FORM FOR THE SUBSCRIPTION FORM TO BE ACCEPTED. Within eight business days following the expiration of the Offer (the "Confirmation Date"), a confirmation will be sent by the Subscription Agent to each stockholder (or, if the Company's shares on the Record Date are held by a Nominee, to such Nominee) showing (i) the number of Shares acquired through the Primary Subscription; (ii) the number of Shares, if any, acquired through the Over-Subscription Privilege; (iii) the per Share and total purchase price for the Shares; and (iv) the amount payable by the stockholder to the Company or any excess to be refunded by the Company to the stockholder, in each case based on the Subscription Price as determined on the Pricing Date. In the case of any stockholder who exercises his right to acquire Shares through the Over-Subscription Privilege, any excess payment which would otherwise be refunded to him will be applied by the Company toward the payment for Shares acquired through exercise of the Over-Subscription Privilege. Any payment required from a stockholder must be received by the Subscription Agent within ten (10) business days after the Confirmation Date, and any excess payment to be refunded by the Company to a stockholder will be mailed by the Subscription Agent to him within ten (10) business days after the Confirmation Date. All payments by a stockholder must be made in United States dollars by money order or check drawn on a bank located in the United States of America and payable to "Allied Capital Corporation." Issuance and delivery of certificates for the Shares subscribed for are subject to collection of checks and actual payment through any Notice of Guaranteed Delivery. If a stockholder who acquires Shares through the Primary Subscription or Over-Subscription Privilege does not make payment of all amounts due, the Company reserves the right to: (i) find other purchasers for such subscribed for and unpaid shares; (ii) apply any payment actually received by it toward the purchase of the greatest number of whole Shares which could be acquired by such stockholder upon exercise of the Primary Subscription or Over-Subscription Privilege; or (iii) exercise any and all other rights or remedies to which it may be entitled. Participants in the Company's Dividend Reinvestment Plan (the "Plan") will have any Shares acquired pursuant to the Primary Subscription and pursuant to the Over-Subscription Privilege credited to their accounts in the Plan. Stock certificates will not be issued for Shares credited to Plan accounts. Stockholders whose shares are held of record by a Nominee on their behalf will have the Shares they acquire credited to the account of such Nominee. For Record Owners other than Plan participants, stock certificates for all Shares acquired will be mailed promptly after full payment for the Shares subscribed for has cleared, and no later than 30 days after the Expiration Date of the Offer. In the event that the Offer does not result in all Shares being fully subscribed for after allocating shares pursuant to the Over-Subscription Privilege, the Company may offer the remaining shares to certain other investors. See "Sales of Shares Subsequent to the Offer." A SAMPLE CALCULATION OF A SUBSCRIPTION Assume, for example, that you own 1,000 shares of the Company's common stock as of the Record Date. Dividing that number by seven (7) and dropping the fraction gives you 142. Assuming that you elect to exercise all of your Subscription Rights for the Primary Subscription, in the first blank of the Subscription Form enter 142 Shares and fill in the estimated subscription price for the Shares, which is 142 multiplied by $______, the Estimated Subscription Price per share. If you choose to subscribe for additional Shares pursuant to the Over-Subscription Privilege, enter the number of additional Shares on the next line of the Subscription Form, and again calculate the estimated subscription price by multiplying the number of additional Shares by $_____ . Assuming you decide to purchase 58 shares pursuant to the Over-Subscription Privilege, enter 58 Shares and $______ on the second line. Then enter the total amount due on the third line of the Form. After otherwise completing and signing the form, send it to the Subscription Agent (or your Nominee if your shares are held by a Nominee) with an acceptable form of payment. The Company will, in any event, accept your Primary Subscription to the extent of the 142 shares. Depending on the number of Shares subscribed for by other stockholders, the Company may also accept your over-subscription to the extent of the additional 58 shares for which you have subscribed or some smaller number, possibly as small as zero and will confirm with you in writing how many Shares you have been allocated in total. If your over-subscription is accepted for some number of shares that is smaller than the requested number, the Subscription Agent will, after the close of the Subscription Period, send you a check for the amount, without interest, of your subscription in excess of the amount for which your subscription has been accepted. If the Subscription Price is lower than the Estimated Subscription Price of $_____ per share, you will receive a refund; if the Subscription Price is higher than the Estimated Subscription Price, you will be notified of the additional amount due. You will then, in due course, receive a certificate for the number of shares for which your subscription has been accepted, or otherwise be credited for the Shares if your Shares are held in the Company's Dividend Reinvestment Plan or by a Nominee. Stockholders who are Record Owners. Stockholders who are Record Owners can choose between either option described under "Payment for Shares." Note: If only a short amount of time is remaining prior to the Expiration Date, option (1) will permit delivery of the Subscription Form and payment after the Expiration Date. Investors Whose Shares Are Held Through A Nominee. Stockholders whose shares are held by a Nominee such as a broker, bank or trust company, must contact the Nominee to exercise their Subscription Rights. In that case, the Nominee may complete the Subscription Form on behalf of the stockholder and arrange for proper payment by one of the methods described under "Payment for Shares." Nominees. Nominees should notify the respective beneficial owners of shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Subscription Rights. If the beneficial owner so instructs, the Nominee should complete the Subscription Form and submit it to the Subscription Agent, together with the proper payment described under "Payment for Shares." SALES OF SHARES SUBSEQUENT TO THE OFFER The Company may, by means of a post-effective amendment to this Prospectus, offer any unsubscribed for shares to banks, insurance companies, pension funds and other institutional investors and to certain individuals ("Additional Offerees") in any state in which the offer and sale to such persons may be made consistent with applicable law. The Company may solicit and accept subscriptions from any Additional Offerees for any Shares offered hereby which were not validly subscribed for by stockholders. It is anticipated that, in general, offers and sales to Additional Offerees, if any, will be made on substantially the same terms as those described above for offers and sales made pursuant to the Offer, although the price of Shares sold to Additional Offerees is expected to differ based on then-prevailing market conditions. Any material differences in the terms of sales to Additional Offerees from those made pursuant to the Offer would be described in a supplement to this Prospectus. In connection with the Offer, the Company has agreed to pay to certain broker-dealers who have executed and delivered a Soliciting Dealer Agreement Fees equal to 2.5% of the Subscription Price per Share for Shares issued upon exercise of Subscription Rights as a result of their soliciting efforts. The Company will also pay all other applicable expenses, including but not limited to the normal charges of brokers and other Nominees for transmitting offering materials, which will include Prospectuses, Exercise Forms, and return envelopes, to the beneficial owners of the shares held by them of record. The Company anticipates that proceeds of the offering will be used in accordance with the Company's investment objective, to make new investments to small, private growth companies in the form of subordinated debt, mezzanine and equity financings as well as to fund leveraged buyouts, bridge loans, and acquisitions. The Company may also use proceeds from the offering to repay any borrowings outstanding under the Company's revolving line of credit. Allied Capital Corporation (the "Company") was incorporated under the laws of the District of Columbia in 1958 and was reorganized as a Maryland corporation in 1991. It is a closed-end management investment company that elected in 1991 to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company has two active wholly owned subsidiaries, Allied Investment Corporation ("Allied Investment") and Allied Capital Financial Corporation ("Allied Financial"), which represented 47.6% and 30.1%, respectively, of the Company's consolidated total assets as of September 30, 1995. Allied Investment and Allied Financial are Maryland corporations registered under the 1940 Act as closed-end management investment companies. Allied Investment is licensed by the U.S. Small Business Administration (the "SBA") as a small business investment company ("SBIC") under Section 301(c) of the Small Business Investment Act of 1958, as amended ("SBIA"), and Allied Financial is licensed by the SBA as a specialized small business investment company ("SSBIC") under Section 301(d) of the SBIA. As described below, the Company also has a significant ownership interest in Allied Capital Lending Corporation ("Allied Lending"), a closed-end management investment company that has elected to be regulated as a BDC and is an SBA-approved small business lending company. Allied Capital Advisers, Inc. ("Advisers") serves as the investment adviser of the Company under an investment advisory agreement. The investment objective of the Company is to provide a high level of current income and long-term growth on the value of its net assets by providing debt, mezzanine, and equity financing primarily for small, privately owned growth companies. This objective may be changed by the board of directors of the Company without a vote of a majority of the outstanding voting securities (as defined in the 1940 Act). The Company generally invests in and lends to small businesses directly and through its wholly owned subsidiaries, and also provides financing for leveraged buyouts of such companies, for note purchases and loan restructurings, and for special situations, such as acquisitions, buyouts, recapitalizations, and bridge financings of such companies. The Company also provides financing to private and small public companies through its origination of loans with equity features. Historically, all of the investments of the Company and its subsidiaries (all further references to investments by the Company include those made by its subsidiaries unless otherwise indicated) have been made in domestic small businesses. However, the Company currently intends to begin making investments in conjunction with funding from Overseas Private Investment Corporation ("OPIC"), which would typically involve investments in businesses that engage, in whole or in part, in overseas operations. Generally, the OPIC-related investments to be made by the Company will require that the portfolio company have some affiliation with a U.S.-based business entity. OPIC- related investments ordinarily will be made in countries representing the world's emerging markets. Investments in such countries involve special risks. See "The Company -- Risk Factors -- Foreign Investments," page __. The Company's investments generally take the form of loans with equity features, such as warrants or conversion privileges that entitle the Company to acquire a portion of the equity in the entity in which the investment is made. The typical maturity of such a loan made by the Company is seven years, with payments of interest only in the early years and payments of principal and interest in the later years, although loan maturities and principal amortization schedules vary. The Company also makes senior loans without equity features. Senior loans generally bear interest at a fixed rate that the Company believes is competitive in the venture capital marketplace. Current income is derived primarily from interest earned on the loan element of the Company's investments. Generally, long-term growth in net asset value and realized capital gains, if any, from portfolio companies are achieved through the equity participations acquired as a result of the Company's growth financing and leveraged buyout activity. The Company seeks to structure its investments so that approximately one-half of the potential return is earned in the form of monthly or quarterly interest payments and the balance is derived from capital gains. The Company's investments may be secured by the assets of the entity in which the investment is made, which collateral interests may be subordinated in certain instances to institutional lenders, such as banks. The Company makes available significant managerial assistance to its portfolio companies. Pending investment of its assets, the Company's funds are generally invested in short-term securities issued or guaranteed by the U.S. government or an agency or instrumentality thereof, the value of which generally fluctuates with prevailing levels of interest rates, or in repurchase agreements fully collateralized by such securities. The Company usually invests in privately held companies that have been in business for at least one year, have a commercially proven product or service, and seek capital to finance expansion or ownership changes. The Company generally requires that the companies in which it invests demonstrate sales growth, positive cash flow, and profitability, although turnaround situations are also considered. The Company's emphasis is on low- to medium-technology businesses, such as broadcasting, packaging manufacturers, specialty manufacturing, environmental concerns, wholesale distribution, commodities storage, and retail operations. The Company emphasizes the quality of management of the companies in which it invests, and seeks experienced entrepreneurs with a management track record, relevant industry experience, and high integrity. For the first three quarters of 1995, the Company invested approximately $18 million into small private businesses. In the year ended 1994, the Company invested approximately $36 million, which represented a 50% increase from the $24 million that the Company invested in 1993. The invested assets of the Company at September 30, 1995 were $122 million, a 6% increase over December 31, 1994. December 31, 1994 invested assets were approximately $115 million, a 22% increase from the approximately $95 million in invested assets of the Company at December 31, 1993. The Company also restructured several non-performing investments in 1994, with the result that the non-performing assets (valued at cost) decreased 36% from $15.7 million at December 31, 1993 to $10.1 million at December 31, 1994. At September 30, 1995, the Company's non-performing assets at cost were $9.5 million, a 6% decrease from December 31, 1994. Subsequent to September 30, 1995, one additional investment in the Company's portfolio with a net cost of $3.1 million was determined to be non-performing. The Company's Operation as a BDC As a BDC, the Company may not acquire any asset other than Qualifying Assets unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the value of the Company's total assets (the "70% test"). The principal categories of Qualifying Assets relevant to the business of the Company are the following: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer is an eligible portfolio company. An eligible portfolio company is defined as any issuer that (a) is organized and has its principal place of business in the United States, (b) is not an investment company other than a small business investment company wholly owned by the BDC (the Company's investments in and advances to Allied Investment and Allied Financial are Qualifying Assets, but its investment in Allied Lending, a BDC which is not wholly owned, is not), and (c) does not have any class of publicly traded securities with respect to which a broker may extend margin credit. (2) Securities received in exchange for or distributed with respect to securities described in (1) above, or pursuant to the exercise of options, warrants, or rights relating to such securities. (3) Cash, cash items, government securities, or high quality debt securities (within the meaning of the 1940 Act), maturing in one year or less from the time of investment. In addition, to count securities described in (1) and (2) above as Qualifying Assets for the purpose of the 70% test, a BDC must make available to the issuer of those securities significant managerial assistance. Making available significant managerial assistance means, among other things, (i) any arrangement whereby the BDC, through its directors, officers, or employees, offers to provide, and, if accepted, does provide, significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company or (ii) in the case of a small business investment company, making loans to a portfolio company. Managerial assistance is made available to the portfolio companies by the Company's directors and officers who are employees of Advisers, which manages the Company's investments. Each portfolio company is assigned for monitoring purposes to an investment officer and its principals are contacted and counseled if the portfolio company appears to be encountering business or financial difficulties. The Company also provides managerial assistance on a continuing basis to any portfolio company that requests it, whether or not difficulties are perceived. The Company's directors and officers are highly experienced in providing managerial assistance to small businesses. The Company may not change the nature of its business so as to cease to be, or withdraw its election as, a BDC unless authorized by vote of a "majority of the outstanding voting securities," as defined in the 1940 Act, of the Company. Since the Company made its BDC election, it has not in practice made any substantial change in its structure or, on a consolidated basis, in the nature of its business, except for the disposition of its ownership interest in Allied Lending, as described below, which is not a change that results in the Company ceasing to be a BDC. As a BDC, the Company is entitled to borrow money and issue senior securities representing indebtedness as long as such senior securities representing indebtedness has asset coverage to the extent of at least 200%. This limitation is not applicable to the borrowings of the Company's SBIC and SSBIC subsidiaries. In 1992, the Company, Allied Investment, and Allied Financial, together borrowed $20,000,000 from an insurance company on terms requiring the payment of interest at 9.15% per annum and repayment of principal in equal annual installments in the five years 1998 through 2002. At December 31, 1994, the Company had borrowed $2,205,000 under its revolving line of credit agreement, which permits the Company to borrow up to $10 million at the London Inter-Bank Offered Rate ("LIBOR") plus 1.15 percent (1.15%) through November 30, 1995. At September 30, 1995, there were no borrowings under this line of credit. The Company now has a new line of credit which permits the Company to borrow up to $10,000,000 at LIBOR plus 2.5 percent (2.5%) through September 30, 1998. As of September 30, 1995, Allied Investment and Allied Financial had issued subordinated debentures in the aggregate principal amount of $61,300,000 to the SBA that bear interest from 6.875% to 10.35% per annum and require principal payments commencing in 1997 through 2005. Co-Investment with Allied II, Allied Venture, and Allied Technology In accordance with the conditions of several exemptive orders of the Commission permitting co-investments (the "Co-investment Guidelines"), most of the Company's acquisitions and dispositions of investments are made in participation with Allied Capital Corporation II ("Allied II"). In the past, the Company also acquired certain investments in participation with Allied Venture Partnership ("Allied Venture") and Allied Technology Partnership ("Allied Technology"), private venture capital partnerships managed by Allied Advisers, neither of which is now making new investments. Allied II is a closed-end management investment company that has elected to be regulated as a BDC and for which Advisers serves as its investment adviser. At September 30, 1995 and December 31, 1994, Allied II had total consolidated assets of $108,684,000 and $101,934,000, respectively, compared to the Company's total consolidated assets of $145,590,000 and $135,517,000, respectively. The Co-investment Guidelines generally provide that the Company and its wholly owned subsidiaries must be offered the opportunity to invest in any investment, other than in Interim Investments or marketable securities, that would be suitable for Allied II or its wholly owned subsidiaries and the Company or its wholly owned subsidiaries to the extent proportionate to the companies' respective consolidated total assets. Securities purchased by the Company or its wholly owned subsidiaries in a co-investment transaction with any of Allied II or its wholly owned subsidiaries, Allied Venture or Allied Technology will consist of the same class of securities, will have the same registration rights, if any, and other rights related thereto, and will be purchased for the same unit consideration. Any such co-investment transaction must be approved by the Company's Board of Directors, including a majority of its independent directors. The Company will not make any investment in the securities of any issuers in which Allied II, Allied Venture or Allied Technology, but not the Company, has previously invested. The Co-investment Guidelines also provide that the Company will have the opportunity to dispose of any securities in which the Company or its wholly owned subsidiaries and any of Allied II or its wholly owned subsidiaries, Allied Venture or Allied Technology have invested in proportion to their respective holdings of such securities, and that, in any such disposition, the Company will be required to bear no more than its proportionate share of the transaction costs. Allied Investment, as an SBIC, provides capital to privately owned small businesses primarily through loans, generally with equity features, and, to a lesser extent, through the purchase of common or convertible preferred stock. Loans with equity features are generally evidenced by a note or debenture that is convertible into common stock, requiring the holder to make a choice, prior to the loan's maturity, between accepting repayment and maintaining its equity position, or by a note or debenture that is accompanied by an option or warrant to purchase, frequently for a nominal consideration, common stock of the issuer even after the loan is repaid. Wherever possible, Allied Investment seeks collateral for its loans, but its security interest is usually subordinated to the security interest of other institutional lenders. Allied Investment provides managerial assistance to its portfolio companies by arranging syndicated financings, advising on major business decisions, furnishing one of its executives to serve as a director or otherwise participating in board meetings and assisting portfolio companies when they are having operating difficulties. Allied Financial, as an SSBIC, operates as a small business investment company specializing in the financing of small businesses owned and controlled by socially or economically disadvantaged persons. To determine whether the owners of a small business are socially or economically disadvantaged, the SBA relies on a composite of factors. Business owners who are members of the following groups, among others, are considered socially disadvantaged: African Americans, Hispanic Americans, Native Americans and Asian Pacific Americans. In determining whether the owners of a small business are economically disadvantaged, consideration may be given to factors such as levels of income, location (for instance, urban ghettos, depressed rural areas and areas of high unemployment or underemployment), education level, physical or other special handicap, inability to compete in the marketplace because of prevailing or past restrictive practices or Vietnam-era service in the armed forces, or any other factors that may have contributed to disadvantaged conditions. Allied Financial provides managerial assistance to its portfolio companies by arranging syndicated financings, advising on major business decisions, furnishing one of its executives to serve as a director or otherwise participating in board meetings and assisting portfolio companies when they are having operating difficulties. The Company's Interest in Allied Lending The Company owned 2,380,000 shares, or all of the outstanding capital stock, of Allied Lending prior to consummation of the initial public offering of Allied Lending's common stock in November 1993. As a result of that initial public offering, the Company's ownership of Allied Lending's common stock was reduced to 1,580,000 shares, or 36.2% of the Allied Lending shares outstanding at December 31, 1993. The Company has agreed that it would divest itself of all shares of Allied Lending by December 31, 1998 by public offerings, private placements, distributions to the Company's stockholders or otherwise. Accordingly, the Company declared an extra dividend in December 1994 and distributed in early January 1995 an aggregate of 335,086 Allied Lending reduced its ownership of Allied Lending shares to 1,244,914 shares, or 28.5% of the Allied Lending shares then outstanding. In December 1994, in a move unexpected by Allied Lending or the Company, the SBA altered its regulations concerning the 7(a) guaranteed loan program and announced that it would reduce the maximum loan size that it would guarantee under the 7(a) guaranteed loan program from $1 million to $500,000. The Company believes that the significant decline in the market price of Allied Lending shares during December 1994 resulted from the SBA's actions. As Allied Lending had registered, at the Company's expense, 490,000 Allied Lending shares owned by the Company in December 1994 for sale or distribution, the Company chose to distribute a substantial portion of those Allied Lending shares to its stockholders at the end of December 1994 rather than sell those shares at depressed prices. Although the Company recognized a gain on the portion of the Allied Lending shares which were held for sale or distribution, the amount of gain was significantly less than the Company expected due to the decreased market value of the Allied Lending shares at the end of 1994. In addition, because of the decline in the market value of the Allied Lending shares, the Company's unrealized appreciation in this investment at year-end 1994 declined by $4.1 million as compared to the unrealized appreciation in this investment at year end 1993, which negatively affected the Company's net asset value per common share. In mid-October 1995, federal legislation was enacted which removed the $500,000 loan size limit and restored 75% guarantees on loans up to $1 million. In addition, the guaranteed loan program fees were restructured to redirect some of the program's expenses to the participant lenders and participant borrowers. Overall, management expects these changes to be favorable for Allied Lending. Until 1995, the business of Allied Lending consisted solely of making small business loans which are partially guaranteed under the SBA's Guaranteed Loan Program (so-called "7(a) loans"). Allied Lending has been one of the most active non-bank lenders in the 7(a) loan program. Most of the loans made by Allied Lending during 1994 were made for the purpose of allowing portfolio companies to acquire real estate-related assets, such as factories, workshops, or retail premises, or to refinance outstanding loans made to acquire such real estate; a smaller proportion of such loans was made for the purpose of allowing portfolio companies to purchase or refinance machinery and equipment. Allied Lending, pursuant to stockholder approval at a Special Meeting of Stockholders on November 9, 1995, expanded its ability to make loans to include, in addition to 7(a) guaranteed loans, loans that are made in conjunction with guaranteed loans, as well as other types of loans. The purchase of the shares offered by this Prospectus involves a number of significant risk and other factors relating to the structure and investment objective of the Company. As a result, there can be no assurance that the Company will achieve its investment objective. AN INVESTMENT IN THE SHARES WILL NOT BE SUITABLE FOR PERSONS WHO DO NOT INTEND, OR HAVE THE RESOURCES, TO HOLD THEM AS A LONG-TERM INVESTMENT. Consistent with its operation as a BDC, the Company's portfolio is expected to consist primarily of securities issued by small and developing privately held companies. There is generally little or no publicly available information about such companies, and the Company must rely on the diligence of Allied Advisers to obtain the information necessary for the Company's decision to invest in them. Typically, such companies depend for their success on the management talents and efforts of one person or a small group of persons, so that the death, disability or resignation of such person or persons could have a materially adverse impact on them. Moreover, smaller companies frequently have narrower product lines and smaller market shares than larger companies and therefore may be more vulnerable to competitor's actions and market conditions, as well as general economic downturns. Because these companies will generally have highly leveraged capital structures, reduced cash flow resulting from an adverse competitive development, shift in customer preferences, or an economic downturn may adversely affect the return on, or the recovery of, the Company's investment in them. Investment in such companies therefore involves a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. As noted above, the Company intends to make investments with the proceeds of its OPIC loans, see "OPIC Loan" on page __. These investments ordinarily will be made in countries representing the world's emerging or developing markets. Special risks generally are involved in investments in foreign countries, and these risks are often heightened for investments in emerging or developing markets. In general, foreign investments involve risks not ordinarily associated with domestic investing, including: (1) changes in currency exchange rates; (2) possible imposition of market controls or currency exchange controls; (3) possible imposition of withholding taxes on dividends and interest; (4) possible seizure, expropriation or nationalization of assets; (5) more limited financial information or difficulty in interpreting such information because of foreign regulations and accounting standards; (6) lower liquidity and higher volatility in certain foreign markets; (7) the impact of political, social or diplomatic events; (8) the difficulty of evaluating some foreign economic trends; and (9) the possibility that a foreign government could restrict the ability of an entity in which the Company has invested from meeting its obligations under borrowings or other arrangements. The risks noted above often increase in emerging or developing countries. For example, emerging countries may have more unstable governments than developed countries, and their economies may be based on only a few industries. In addition, foreign investments may be subject to a variety of special restrictions. The Company intends to take steps to reduce or eliminate certain of the above risks. For example, with respect to a currency risk, the Company plans to make only dollar-denominated investments. In the event that the Company does engage in foreign currency transactions, the Company plans to hedge currency risks associated with foreign investments, and not for speculation. The Company also intends to diversify its OPIC-related investments by country and type of business. It is expected that investments made in accordance with the Company's investment objective will usually yield a high current return from the time they are made but will generally produce a profit, if any, from an accompanying equity feature only after a further five to eight years. There can be no assurance that either a high current return or capital gains will actually be achieved. Most of the investments of the Company consist of securities acquired directly from the issuers in private transactions. They are usually subject to restrictions on resale or otherwise illiquid. There is usually no established trading market for such securities into which they could be sold. In addition, most of the securities are not eligible for sale to the public without registration under the 1933 Act, which involves delay and expense. Shares of closed-end investment companies frequently trade at a discount from net asset value, but there are examples of companies, including the Company, Allied Lending, and Allied II, the shares of which have historically traded at a premium to net asset value. This characteristic of shares of closed-end investment companies is separate and distinct from the risk that a company's net asset value per share will decline. It is not possible to predict whether the shares offered hereby will trade at, above, or below net asset value. A large number of entities and individuals compete for the opportunity to make the kinds of investments proposed to be made by the Company. Many of these entities and individuals have greater financial resources than the combined resources of the Company, Allied II, and their respective subsidiaries. As a result of this competition, the Company may from time to time be precluded from making otherwise attractive investments on terms considered by Advisers to be prudent in light of the risks to be assumed. The Company (including its two small business investment company subsidiaries) intends to continue to borrow funds from and issue senior debt securities to banks, insurance companies, or other lenders and to raise capital from the SBA or other investors up to the limit permitted by the 1940 Act. Such additional borrowings, unless fully offset by redemptions or repurchases of the Company's outstanding senior securities, will cause the Company to be further leveraged with respect to its common stock. When such borrowings occur, the providers of these funds will have fixed dollar claims on the Company's consolidated assets superior to the claims of the holders of the Company's common stock. Any increase in the value of the Company's consolidated investments would cause its consolidated net asset value attributable to common shares to increase more than it would had the borrowings or preferred stock financings not occurred. Decreases in the value of the consolidated investments below their value at the time of acquisition, however, would cause the Company's consolidated net asset value attributable to common shares to decline more sharply than it would if the senior funds had not been borrowed or otherwise obtained. Similarly, any increase in the Company's rate of income in excess of consolidated interest payable on the borrowed funds or dividends payable on the preferred stock would cause its net income to increase more than it would without the leverage, while any decrease in consolidated rate of income would cause net income to decline more sharply than it would had the funds not been borrowed or otherwise obtained for investment. Leverage is thus generally considered a speculative investment technique. Conversely, however, the ability of the Company to achieve its investment objective may depend in part on its ability to achieve additional leverage on favorable terms by borrowing from the SBA, banks, or insurance companies and there can be no assurance that such additional leverage can in fact be achieved. Allied Investment, as an SBIC, and Allied Financial, as an SSBIC, currently have the opportunity to sell to the SBA subordinated debentures with a maturity of up to ten years up to an aggregate principal amount determined by a formula which applies a multiple to its private capital, but not in excess of $90 million (the "$90 million limit"). The $90 million limit generally applies to all financial assistance provided by the SBA to any licensee and its "associates," as that term is defined in SBA regulations. For this purpose, Allied Investment and Allied Financial would be deemed to be "associates" of one another and both may be deemed to be "associates" of Allied Investment Corporation II ("Allied Investment II"), which is also an SBIC and is a subsidiary of Allied II. Beginning with the SBA's 1996 fiscal year commencing on October 1, 1995, Congress has discontinued subsidized funding for the SBA's SSBIC program. Prior to this change, an SSBIC was able to sell preferred stock and debentures which were issued with a rate reduction or subsidy. Preferred stock sold to the SBA after November 1989 pays dividends at an annual rate of four percent (4%) of par value and must be redeemed within 15 years of issuance; preferred stock sold to the SBA before November 1989 pays dividends at an annual rate of three percent (3%) of par value and has no required redemption date. In addition to preferred stock, the SBA had provided leverage to SSBICs at a reduced rate through the purchase or guarantee of debentures. As of September 30, 1995 and December 31, 1994, respectively, Allied Investment and Allied Financial had outstanding debentures sold to the SBA in the aggregate principal amounts of $61,300,000 and $54,800,000, respectively. At these respective dates, Allied Financial had $7,000,000 of outstanding preferred stock issued to the SBA-$6,000,000 of 3% preferred stock and $1,000,000 of 4% preferred stock. Allied Investment II has not obtained any financial assistance from the SBA to date. As a group, Allied Investment and Allied Financial have received $68,300,000 in leverage and preferred stock investment from the SBA as of September 30, 1995, and as a result, this combined ability to apply for additional leverage from the SBA will be limited to $21,700,000 due to the $90 million limit. This combined ability to obtain additional leverage assumes that Allied Investment II does not obtain any SBA leverage. The Company is unable to predict the SBA's ability to meet demands for leverage on an ongoing basis, as such funding may be affected if Congress reduces appropriations for the SBA, which may compel the SBA to allocate leverage or to reduce the current limits on available leverage. Therefore, there is no guarantee that Allied Investment or Allied Financial will be able to obtain additional leverage beyond what is currently held. On April 10, 1995, the Company entered into a loan agreement with OPIC under which the Company may borrow up to $20 million to provide financing for international projects involving qualifying U.S. small businesses. The Company had outstanding the following sources of financing as of September 30, 1995: (a) The annual portfolio return to cover interest or dividend payments ("Annual Return") is calculated as total annual interest or dividend payments per class of financing, divided by the total invested assets at September 30, 1995. The total Annual Return needed to cover all classes of financing combined is 6.11%. As of September 30, 1995, the Company, together with Allied Investment and Allied Financial, had $20 million of 10-year senior notes outstanding to an insurance company, with interest payable semi-annually at the fixed rate of 9.15% per annum. The senior notes are scheduled to mature over a five-year period commencing in 1998, with annual principal payments of $4 million. The senior notes restrict the Company's ability to declare or pay any dividends, purchase, redeem or retire any shares of capital stock, or make any payment or distribution in respect to its capital stock, if after giving effect thereto (i) any default or event of default has occurred or (ii) the total debt of the Company has asset coverage of less than 200%. The senior notes require the Company to maintain a minimum consolidated shareholders' equity of $30 million and a minimum consolidated subordinated debt of $35 million at all times. The Company must also meet the following financial ratios at the end of each fiscal quarter: The Company must remain the beneficial owner of 100% of the voting stock of Allied Investment and Allied Financial and will not, or will not permit a consolidated subsidiary to, consolidate with or be a party to a merger with any other corporation. The senior notes permit the Company to incur additional debt as long as the financial covenants above are met and the new debt is junior to the insurance company, and do not restrict the Company's ability to issue additional securities. The terms of the senior notes may be amended with the consent of the insurance company. OPIC Loan. The Company has entered into a loan agreement with OPIC for the Company to make up to $20 million in international investments involving OPIC-qualifying United States small businesses ("OPIC Loan"). The OPIC Loan provides that the Company may borrow at variable interest rates based on the U.S. Department of Treasury interest rates plus fifty basis points (0.50%) for the applicable period of borrowing by the Company. In addition, OPIC is entitled to receive from the Company a contingent fee at maturity of the loan based on five percent (5%) of the return generated by the OPIC-related investments in excess of seven percent (7%). There are no required principal payments until the OPIC Loan matures ten years from the date of the first disbursement under the OPIC Loan. The loan agreement expires on the earlier of the first date on which the amount of the loan(s) equal $20 million or April 10, 1998. As of September 30, 1995, there were no outstanding borrowings under this loan agreement. OPIC Loan proceeds must be used for investments in projects approved by OPIC or to pay the reasonable expenses of the Company to manage the OPIC funds. The individual investments made with the OPIC funds cannot exceed 75 percent (75%) of the total capital requirements of a single project. No more than 25 percent (25%) of OPIC Loan proceeds can be invested in a single project and no more than 40 percent (40%) in a single country. The Company may consider insuring its investments in OPIC qualified investments against political risk by using OPIC insurance and using other OPIC project financing services, to the extent that doing so is in the best interests of the Company and the projects. The OPIC Loan requires the Company to maintain (a) consolidated shareholders' equity of not less than $35 million, (b) an interest charges coverage ratio of at least 1.1 to 1 on a trailing twelve month basis, (c) a quarterly ratio of total indebtedness to consolidate shareholders' equity not exceeding 3 to 1, and (d) a quarterly ratio of senior debt to consolidate shareholders' equity not exceeding 1.5 to 1. The Company may not declare or pay any dividends on its common stock or purchase, acquire, redeem or retire any of such shares if the Company is in default on the loan or if such dividends, distributions, share purchase or other such share retirement would cause a default. Bank Loan. At September 30, 1995, the Company had a revolving line of credit agreement with a commercial bank under which it was able to borrow up to $10 million with interest payable monthly at the variable rate of 1.15 percent (1.15%) per annum above the 30-day London Inter-Bank Offered Rate ("LIBOR"), reset daily. There were no required principal payments until the loan's maturity. As of September 30, 1995, there were no borrowings under this agreement. The Company has established a new line of credit dated December 18, 1995. The new line of credit permits the Company to borrow up to $10,000,000 at LIBOR plus 2.5 percent (2.5%) and expires September 30, 1998. The new line of credit agreement requires that Allied Investment and Allied Financial remain wholly owned subsidiaries of the Company. The new line of credit agreement does not permit the Company or any subsidiary to merge or consolidate with another except that the Company may merge with a subsidiary or any subsidiary may merge with another subsidiary. Under the agreement, the Company's ability to issue additional securities is not restricted and the Company may incur additional debt if it is subordinate to the bank and is on terms satisfactory to the bank. In addition, the agreement provides that with respect to any sources of financing maturing prior to the maturity of this new line of credit, the Company can only refinance 75 percent (75%) of such indebtedness and the new maturity must be after the maturity of this line of credit. The financial covenants of this line of credit agreement require Allied Investment and Allied Financial to maintain a ratio of total liabilities to tangible net worth (as defined in the agreement) of not greater than 3.3 to 1. The Company must maintain (a) a ratio of consolidated total liabilities to consolidated tangible net worth of not greater than 3 to 1; (b) consolidated tangible net worth of not less than $40 million, (c) a minimum interest coverage of at least 1.5 to 1 on a trailing four-quarter basis, and (d) a ratio of consolidated collections of the principal or cost-basis portion of its investments to consolidated total indebtedness of not less than 0.05 to 1 on a trailing basis. The Company may not permit the total principal amount of loans and letters of credit outstanding at any one time to exceed the sum of cash and cash equivalents plus 75% of non-cash tangible assets, minus total liabilities (including letters of credit). Subordinated Debentures. As of September 30, 1995, the Company, through Allied Investment and Allied Financial, had outstanding $61.3 million of 10-year subordinated debentures payable to the SBA, with interest payable semi-annually at various fixed interest rates ranging from 6.08% to 10.35%. The subordinated debentures are scheduled to mature over a 10-year period commencing in 1997, with annual principal payments ranging from $1 million to $8 million. The subordinated debentures also permit the Company to issue additional securities or incur additional debt. Preferred Stock. As of September 30, 1995, the Company, through Allied Financial, had outstanding $1 million of redeemable four percent (4%) cumulative preferred stock, and $6 million of non-redeemable three percent (3%) cumulative preferred stock, both issued to the SBA. The redeemable four percent (4%) cumulative preferred stock must be redeemed by the Company in 2005, and the non-redeemable three percent (3%) cumulative preferred stock has no required redemption date. Nevertheless, the Company has the option to redeem the non-redeemable three percent (3%) cumulative preferred stock in whole or in part by paying the SBA the par value of the securities to be redeemed and any dividends accumulated and unpaid to the date of redemption. The cumulative preferred stock also permits the Company to issue additional securities or incur additional debt. Illustration. The following table is provided to assist the investor in understanding the effects of leverage. The figures appearing in the table are hypothetical, and the actual return may be greater or less than those appearing in the table. Loss of Pass-Through Tax Treatment The Company may cease to qualify for pass-through tax treatment if it is unable to comply with the diversification requirements contained in Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Company may also cease to qualify for pass-through treatment, or be subject to a 4% excise tax, if it fails to make certain distributions. Under the 1940 Act, the Company will not be permitted to make distributions to stockholders unless it meets certain asset coverage requirements with respect to money borrowed and senior securities issued. See "Tax Status" in the Statement of Additional Information. Non-availability of pass- through tax treatment would have a materially adverse effect on the total return, if any, obtainable from an investment in the Company's shares. The business of the Company is managed under the supervision of its Board of Directors. For details concerning the persons who make up the Board of Directors at the date of the Prospectus, see the Statement of Additional Information under the caption "Management -- Board of Directors." Three of the members of the Board of Directors are also officers of the Company as well as of its investment adviser; and five are non-interested persons, as that term is defined in the 1940 Act (such persons are hereinafter referred to as "non-interested directors"). The responsibilities of the Board of Directors include, among other things, the approval of every loan and other investment to be made by the Company, the quarterly valuation of the Company's assets, and the approval of the terms of the Company's borrowing or other leverage arrangements. The Board, and particularly the non-interested directors, must also, at least annually, approve the investment advisory agreement with the Company's investment adviser and, annually and subject to stockholder ratification, appoint the Company's auditors. The audit and stock option committees of the Board of Directors, comprised exclusively of non-interested directors, respectively review with the auditors the scope of the annual audit and the contents of the audited financial statements and determine option awards to the officers under the Company's incentive stock option plan. Under that plan, options on a total of 1,350,000 shares may be granted. Of the authorized options, the stock option plan committee has to date awarded a number of options, of which a total of 789,387 options are currently outstanding and a total of 518,578 options are currently exercisable. For details of the stock option plan, see the Statement of Additional Information under the caption "Management--Stock Options." The members of the Board of Directors are compensated by fees at the rate of $1,000 per meeting of the Board of the Company or its wholly owned subsidiaries or each separate (i.e., not held on the same day as a full Board meeting) meeting of a committee of such Board which the member attends unless such separate meeting occurs on the same day as a Board meeting, in which case directors receive $500 for attendance at such meeting. There is no duplication of directors' fees and expenses even if some directors also take action on behalf of the Company's wholly owned subsidiaries. The Company's stockholders approved, subject to further approval by the Commission, a grant to each member of the Board of Directors who is not an employee of the investment adviser a 10-year option to purchase, at the market price on the date of grant, 10,000 shares of the Company. Application was made to the Commission for such approval and such approval was granted on December 26, 1995. These options were priced on the date of such approval. Advisers, the principal business address of which is 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803, serves as the investment adviser for the Company pursuant to an investment advisory agreement. Under that agreement, Advisers manages the investments of the Company and each of the Company's wholly owned subsidiaries, subject to the supervision and control of the Board of Directors of the Company or the respective subsidiary, and identifies, evaluates, structures, closes, and monitors the investments made by the Company and such subsidiaries. Neither the Company nor any such subsidiary will make any investments that have not been recommended by Advisers. Except as to those investment decisions that require specific approval or ratification by the Company's Board, Advisers has the authority to effect purchases and sales of assets for the Company's account. Advisers also serves as the investment adviser of Allied II, Allied Capital Commercial Corporation ("Allied Commercial") and Business Mortgage Investors, Inc. ("BMI"), both real estate investment trusts ("REITs"), Allied Lending, Allied Venture, and Allied Technology. Some of the directors and officers of Advisers are also directors and officers of the Company. G. Cabell Williams III is the Company's portfolio manager, a position he has held since 1991. From 1981 to 1991, Mr. Williams III held positions of increasing responsibility with Advisers and the Company. The Company and each of its wholly owned subsidiaries pay all of their own operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of its investment officers and the cost of office space, equipment and other personnel necessary for day-to-day operations. The expenses that are paid by the Company include its share of transaction costs incident to the acquisition and disposition of investments, regular legal and auditing fees and expenses, the fees and expenses of the Company's directors, costs of printing and distributing proxy statements and other communications to stockholders, costs associated with promoting the Company's stock, and the fees and expenses of the Company's custodian and transfer agent. The Company, rather than Advisers, pays expenses associated with litigation and other extraordinary or non-recurring expenses with respect to its operations and investments, as well as expenses of required and optional insurance and bonding. All fees that may, to the extent permitted under SBA regulations, be paid to Advisers by any person in connection with an investment transaction in which the Company participates or proposes to participate are paid over to the Company. Advisers may, however, retain for its own account any fees paid by or for the account of a company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to such investment transaction or follow-on managerial assistance. If the Company uses the services of certain professionals on the staff of Advisers for the Company's corporate purposes, the Company will reimburse Advisers for such services at hourly rates calculated to cover the cost of such services, as well as for incidental disbursements. As compensation for its services to and the expenses paid for the account of the Company, Advisers is entitled to be paid quarterly, in arrears, a fee equal to 0.625% per quarter of the quarter-end value of the Company's total consolidated assets (other than the Company's investment in Allied Lending and Interim Investments and cash and cash equivalents). On an annual basis, such fees are equivalent to 2.5% of the Company's total consolidated assets (other than the Company's investment in Allied Lending and Interim Investments and cash and cash equivalents) and 0.5% on Interim Investments and cash and cash equivalents. For the purposes of calculating the fee, the values of the Company's consolidated assets are determined as of the end of each calendar quarter. The quarterly fee is paid as soon as practicable after the values have been determined. The current advisory agreement, which was approved by stockholders in May 1995, is substantially similar to the prior advisory agreement between the Company and Advisers, and it is anticipated that the advisory fee payable by the Company under the existing agreement will be comparable to the fees paid under the prior agreement. The fee provided for in the investment advisory agreement is substantially higher than that paid by most investment companies because of the efforts and resources devoted by Advisers to identifying, structuring, closing and monitoring the types of private investments in which the Company will specialize. Other entities managed by Advisers, however, pay fees on comparable bases and the Company understands that the fee is not in excess of that frequently paid by private investment funds engaged in similar types of investments, in addition to the substantial participation in profits that such private funds also typically allocate to management. For further details of the compensation of Advisers and the expenses paid respectively by Advisers and the Company, see the Statement of Additional Information under the caption "Investment Advisory and Other Services." Pursuant to the Company's Articles of Incorporation, the following are the authorized classes of securities of the Company and its wholly owned subsidiaries as of September 30, 1995: (a) Amount outstanding consists of 60,000 shares of non-redeemable 3% cumulative preferred stock and 10,000 shares of redeemable 4% cumulative preferred stock, both issued to the SBA. (b) Allied Development Corporation is an inactive wholly owned subsidiary of the Company with total assets of less than $35,000. The authorized capital stock of the Company is ten million (10,000,000) shares of common stock, $1 par value, of which 6,185,660 shares are outstanding as of the date of this Prospectus. All shares of common stock have equal rights as to earnings, assets, dividends, and voting privileges and, when issued, will be fully paid and nonassessable. Shares of common stock have no preemptive, conversion, or redemption rights and are freely transferable. In the event of liquidation, each share of common stock is entitled to its proportion of the Company's assets after debts, expenses, and liquidation of preferred stock. Each share is entitled to one vote and does not have cumulative voting rights, which means that holders of a majority of the shares, if they so choose, could elect all of the Directors, and holders of less than a majority of the shares would, in that case, be unable to elect any Director. The Company holds annual stockholders' meetings. The Company intends to distribute substantially all of its net investment income and net realized short-term capital gains to stockholders quarterly, generally on the last day of March, June, September and December of each year. The Company distributed an in-kind dividend, in the form of shares of Allied Lending at a rate equal to $0.60 per share of the Company's common stock (based on Allied Lending's then-market value of $11.00 per share) on January 6, 1995 to the Company's stockholders of record on December 31, 1994. Since then, quarterly dividends were declared in February, May, and August 1995 and paid on March 29, June 28, and September 29, 1995, respectively, at a rate of $0.20, $0.20, and $0.22, respectively, per share, and a dividend of $0.24 per share was declared on November 8, 1995 for payment on December 29, 1995. The Company may also declare in October, November, or December of any year, for payment during the following January, an additional dividend to distribute any net investment income and short-term capital gains (and long-term capital gains, if any) realized by the Company during the year that had not already been distributed through the quarterly dividends. An additional dividend of $0.58 per share was declared on December 14, 1995 for payment on January 31, 1996 to stockholders of record on December 28, 1995. If the Company's investments do not generate sufficient income to make distributions or dividend payments as determined by the Board of Directors, then the Company may determine to liquidate a portion of its portfolio to fund the distribution. Such payments may include a tax basis return of capital to the stockholder, which, in turn, would reduce the stockholder's cost basis in the investment and have other tax consequences. Stockholders should consult their tax advisers for further guidance. The Company has adopted a reinvestment plan pursuant to which the Company's transfer agent, acting as reinvestment plan agent, will reinvest all distributions in additional whole and fractional shares for the account of all stockholders of record who inform the Company or the transfer agent of their preference to participate in this plan before the record date of the distribution. Stockholders may change enrollment status in the reinvestment plan at any time by contacting either the plan agent or the Company. A stockholder's ability to participate in the reinvestment plan may be limited according to how the stockholder's shares are registered. Beneficial owners holding shares in street name may be precluded from participation by the nominee. Stockholders who would like to participate in the reinvestment plan usually must have the shares registered in their own name. Shares issued under the reinvestment plan may be newly issued shares unless the market price of the outstanding shares is less than 110% of their contemporaneous net asset value. The transfer agent may also, as agent for the participant, buy shares in the market. Newly issued shares for reinvestment plan purposes will be valued at the average of the reported closing bid prices of the outstanding shares on the last five trading days prior to the payment date of the distribution, but not less than 95% of the opening bid price on such date. The price in the case of shares bought in the market will be the average actual cost of such shares, including any brokerage commissions. There are no other charges payable in connection with the reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to the stockholders. Any stockholder who has questions about the reinvestment plan may call the Company at (202) 973-6334 and ask for Investor Relations, or contact American Stock Transfer & Trust Company, the plan agent, 40 Wall Street, New York, New York 10005, telephone (800) 937-5449. REPORTS AND INDEPENDENT PUBLIC ACCOUNTANTS For the year ended December 31, 1995, the independent accountant engaged to audit the Company's consolidated financial statements is the firm of Matthews, Carter and Boyce, which has been the Company's auditors since inception. The selection of independent auditors by the Company's directors will be subject to annual ratification by stockholders at the Company's annual meeting. The consolidated financial statements of the Company included in this Prospectus are included in reliance on the authority of Matthews, Carter and Boyce as experts in auditing and accounting. CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR The Company's investments are held under a custodian agreement by The Riggs National Bank of Washington, D.C. at 808 17th Street, N.W., Washington, D.C. 20006, which also provides recordkeeping services. American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005, acts as the Company's transfer, dividend paying, and reinvestment plan agent and registrar. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total investments increased by $6.8 million or 5.9% to $121.8 million at September 30, 1995 from $115.0 million at December 31, 1994. This increase was primarily due to valuation changes in the portfolio resulting in net unrealized appreciation of $6.6 million for the nine month period. In the first nine months of 1995, the Company invested approximately $17.8 million in small business concerns, and received repayments and early payoffs from other small businesses of approximately $17.5 million. Cash and cash equivalents increased $4.4 million primarily due to net cash provided by operating activities. On September 27, 1995, the Company had $7.5 million in SBA debentures that matured. The Company obtained new SBA debentures totaling $14.0 million on September 27, 1995. Proceeds from these new debentures were used to repay the matured debentures. During the third quarter of 1995, the Company applied for a forward commitment from the SBA to provide for up to $6 million in financing to its SSBIC subsidiary. The Company will be able to draw $1.3 million from the SBA for this financing; however, the Company must first submit an application to draw on the committed funds and receive SBA approval of that application. At September 30, 1995, outstanding commitments for future financings were $14 million. Given the availability of the SBA commitment, the OPIC Loan, current cash and government securities available at September 30, 1995, and its available line of credit, the Company believes that it has adequate capital to continue to satisfy its operating needs, commitments and other future investment opportunities that may arise throughout the remainder of the year. The Company continues to explore obtaining new debt or equity capital sources as well. See "Leverage." The Company has a revolving line of credit for $10 million. In December 1995, this line of credit was renewed for a three-year term at a higher rate. See "Leverage -- Bank Loan," page __. The Company has secured a credit facility with the OPIC for up to $20 million in financing for international projects involving small businesses. See "Leverage -- OPIC Loan," page __. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994. The net increase in net assets resulting from operations increased 272% to $12.4 million for the nine months ended September 30, 1995 as compared to $3.3 million for the same period in 1994. Earnings per common share for the nine months increased to $1.97 per common share from $0.51 per common share for the same period in 1994. Total investment income increased 32% from $7.8 million to $10.3 million compared with the first nine months of last year. Interest income increased due to a reduction in the Company's non-performing assets since the end of 1994 and an increase in loans and debt securities outstanding. The Company also received a prepayment penalty on the early payoff of a debt in the third quarter of 1995 totaling $60,000. Other income consists primarily of $327,000 of litigation costs from prior periods recovered during the first nine months of 1995 and $130,000 of income from an equity participation in one portfolio company. Expenses increased 16% from $7.0 million to $8.1 million compared with the corresponding period in 1994. Investment advisory fee expense increased due to an increase in investments and other assets upon which the investment advisory fee is based. Net realized gains on investments increased 77% from $2.0 million to $3.6 million for the nine-month periods ended September 30, 1995 and 1994, respectively. The increase in net realized gains resulted from the disposition or early payoff of investments. A few of the early payoffs were due to portfolio companies being sold. Net realized gains are unpredictable; however, the Company exits transactions when it believes the realized gains can be maximized. YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO DECEMBER 31, 1993. Net increase in net assets resulting from operations was $224,000 or approximately breakeven on a per common share basis, as compared to $20.4 million or $3.28 per common share for the year ended December 31, 1993. In December 1994, in a move unexpected by Allied Lending or the Company, the SBA altered its regulations concerning the 7(a) guaranteed loan program and announced that it would place a loan size cap of $500,000 on the loans that it would guarantee under the 7(a) guaranteed loan program. The Company believes that because of the changes in the SBA's guaranteed loan program that were announced in December 1994, the market price of the Company's investment in Allied Lending declined to $10.38 per share at December 31, 1994. At December 31, 1993, the market price for this stock was $15.75 per share. This decline in market value at December 31, 1994 reduced 1994's net increase in net assets resulting from operations by $4.1 million or $0.66 per common share. In mid-October 1995, federal legislation was passed which removed the $500,000 loan size limit and restored 75% guarantees on loans of up to $1 million. In addition, the guaranteed loan program fees were restructured to redirect some of the programs' expenses to the participant lenders and participant borrowers. Overall, these changes are expected to be favorable for Allied Lending. During 1993, the Company recorded realized gains of approximately $9 million and unrealized appreciation of approximately $15 million, resulting from the 1993 initial public offering of the stock of Allied Lending, formerly a wholly owned subsidiary of the Company. Investment income remained relatively constant in 1994, even though there was significant growth in invested assets. This is primarily due to the fact that 1993 investment income included approximately $3 million, representing eleven months of Allied Lending's interest income and gains on sales of guaranteed loans, while Allied Lending was a wholly owned subsidiary of the Company. Instead, in 1994, the Company received $1.7 million in dividend income from its residual 36% interest in Allied Lending. As a result, the Company replaced approximately $1.3 million in investment income with income from increased investments in the portfolio. Expenses also remained relatively constant in 1994 as compared to 1993. Interest expense remained stable because the Company's borrowings of $7.0 million occurred late in 1994 and were at interest rates below the level of other borrowings of the Company. The investment advisory fee stayed constant even given the growth in invested assets as the Company was not charged a fee on its investment of approximately $14.9 million in Allied Lending, as was agreed to in conjunction with Allied Lending's 1993 initial public offering. During 1993, the Company was charged an investment advisory fee on the assets of Allied Lending for the approximate eleven months that it was a wholly owned subsidiary. Legal and audit fees and other operating expenses remained constant in total; however, the Company continued to incur legal expenses related to various matters. The Company has now successfully settled most of these matters. For the year ended December 31, 1994, net investment income before net unrealized appreciation (depreciation) on investments, which includes ordinary investment income and realized capital gains and losses but excludes the effect of unrealized appreciation and depreciation, was $5.5 million or $0.89 per share, a 33% decrease from $8.2 million or $1.34 per share in 1993. Realized gains of $3.4 million in 1994 were below expectations, again primarily due to the unexpected decline in the market value of Allied Lending stock. During the fourth quarter of 1994, the Company chose to distribute shares of Allied Lending to its stockholders rather than sell these shares at depressed prices. The gain that was recognized on this transaction reflects the decreased market value at the end of the year, and as a result, depressed the Company's net investment income before net unrealized appreciation (depreciation) on investments. Distributions to stockholders for 1994 were $1.40 per share and were comprised of $1.23 in taxable ordinary and capital gain income and $0.17 per share in a return of capital. The Company's taxable income of $1.26 per share differed significantly from its net investment income before unrealized appreciation (depreciation) on investments of $0.89 per share due to timing differences in the recognition of income for tax purposes versus book purposes. The $0.17 per share return of capital was an unexpected result, again due to the decline of value of Allied Lending stock and its effect on the gain recognition from dividends. YEAR ENDED DECEMBER 31, 1993 AS COMPARED TO DECEMBER 31, 1992. Investment income increased by $1.0 million primarily due to the increase in new investments in 1993. Interest expense increased by $1.2 million, primarily due to the effect of a full year of interest expense experienced on the $20.0 million debt financing secured in 1992. Investment advisory fees increased due to continued growth of the Company's assets on which the advisory fee is based. Legal and audit fees increased by $0.4 million due to the increased cost of litigation. These changes had the net effect of decreasing net investment income by $0.8 million. Net realized gains on investments of $5.9 million in 1993 increased over 1992 due to the gain of $9.2 million from the November 1993 sale of 800,000 shares of Allied Lending, net of losses on and write-offs of investments of $3.3 million. Net investment income before net unrealized appreciation (depreciation) on investments increased to $8.2 million in 1993, an increase of $0.7 million or 9% over 1992. Net unrealized appreciation on investments in 1993 of $12 million resulted principally from the appreciation of the Allied Lending stock retained by the Company, net of the appreciation or depreciation of other investments in the portfolio. The net unrealized appreciation added to what was disclosed in prior years as net realized income resulted in a net increase in net assets resulting from operations of $20.4 million, an increase of 147% over the previous year. Distributions paid to stockholders in 1993 of $8.2 million approximate the net investment income before net unrealized appreciation (depreciation) on investments. The distributions were comprised solely of capital gain income. YEAR ENDED DECEMBER 31, 1992 AS COMPARED TO DECEMBER 31, 1991. In 1990, Allied Lending, which was then a wholly owned subsidiary of the Company, held 100% of its loan balances and used the guaranteed portion of its loans as collateral to obtain financing. During 1991, Allied Lending began selling the portion of SBA loans in order to finance further origination, which significantly reduced the Company's consolidated investments at December 31, 1992 as compared to December 31, 1991, and simultaneously, decreased investment income by $2.0 million primarily due to a decline in interest income resulting from non-performing loans, offset by the increase in the gain on sales of SBA-guaranteed loans sold by Allied Lending. Total expenses decreased by $0.9 million, primarily due to a decrease in advisory fees. The decline in total assets resulting from Allied Lending's changes in operations caused a corresponding reduction in investment advisory fees when comparing 1991 to 1992. As a result, net investment income decreased by approximately $1.1 million. Net realized gains on investments increased to $4.5 million from $2.8 million in the previous year primarily due to the sale of one investment, Environmental Air Control, Inc. The change in net unrealized appreciation (depreciation) on investments resulted in a minimal decrease in unrealized depreciation of $0.7 million. Increases in realized and unrealized gains offset the decrease in investment income for an overall net increase in net assets resulting from operations of $8.2 million in 1992, an increase of $3.1 million or 61% over the previous year. ALLIED CAPITAL CORPORATION AND SUBSIDIARIES ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in thousands, except number of shares) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS ALLIED CAPITAL CORPORATION AND SUBSIDIARIES (in thousands, except per share amounts) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS (in thousands, except per share amounts) THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS ALLIED CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the nine months ended September 30, 1995 and 1994 (unaudited) and for the years ended December 31, 1994, 1993, and 1992 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization. The Company is a closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940. The Company's objective is to achieve a high level of current income by providing debt, mezzanine and equity financing, primarily for small privately owned growth companies and through long-term growth on the value of its net assets. The Company has two wholly owned, regulated investment company subsidiaries, Allied Investment and Allied Financial. Allied Investment and Allied Financial are licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company (SBIC) and a Specialized Small Business Investment Company (SSBIC), respectively. The Company has an investment advisory agreement with Allied Advisers, whereby Advisers manages the investments of the Company subject to the supervision and control of the Company's board of directors. Certain directors and officers of Advisers are also directors and officers of the Company. Co-investments. Investments made by the Company are made in participation with a separately organized public closed-end management investment company and two private venture capital partnerships, which are also managed by the Company's investment adviser, in accordance with various exemptive orders issued to the Company by the Securities and Exchange Commission permitting co-investments. Principles of consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany balances and transactions. Valuation of investments. Investments are carried at value, as determined by the Board of Directors. Investments in companies whose securities are publicly traded are generally valued at their quoted market price, less a discount to reflect the effects of restrictions on the sale of such securities. U.S. government securities are carried at cost which approximates fair value. Interest income. Interest income is recorded on the accrual basis to the extent that such amounts will be collected. Realized and unrealized gains or losses on investments. Realized gains or losses are measured by the difference between the proceeds of sale and the cost basis of the investment without regard to unrealized gains or losses previously recognized, and include securities written off during the year, net of recoveries. Unrealized gains or losses reflect the difference between cost and value. Distributions to shareholders. Distributions to shareholders are recorded on the ex-dividend date. Federal income taxes. The Company and its wholly owned subsidiaries' policies are to comply with the requirements of the Internal Revenue Code of 1986, as amended, that are applicable to regulated investment companies. The Company and its wholly owned subsidiaries annually distribute all of their taxable income to their shareholders; therefore, a federal income tax provision is not required. Additionally, no provision for deferred income taxes has been made for unrealized gains on securities since the Company and its wholly owned subsidiaries intend to continue to annually distribute all of their taxable realized capital gains. Dividends declared by the Company in October, November or December which are payable to shareholders of record on a specified date in such months, but are paid during January of the following year, may be treated as if the dividends were received by the shareholder on December 31 of the year declared. Earnings Per Common Share. Earnings are defined as the net investment income and realized and unrealized gains or losses on investments and are reduced by the preferred stock dividend requirements. The computation of earnings per common share are based on the weighted average number of common shares and common share equivalents outstanding. Common share equivalents included in the computation represent shares issuable upon assumed exercise of stock options which would have a dilutive effect in years where there are earnings. In addition, earnings per share is computed assuming that all issuances of the Company's common stock in connection with its dividend reinvestment plan are outstanding for all periods presented. During 1995, the Company has issued 32,957 shares of common stock pursuant to the dividend reinvestment plan. The weighted average number of shares and share equivalents outstanding for the three and nine months ended September 30, 1994 have been restated to include the 1996 common stock issuances under the dividend reinvestment plan. In addition, the computation of net assets per common share as of September 30, 1994 has been restated to reflect the issuance of common stock pursuant to the dividend reinvestment plan during 1995. Cash and Cash Equivalents. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consisted of the following: Reclassifications. Certain reclassifications have been made to the 1994, 1993, and 1992 financial statements to conform with the 1995 financial statement presentation. NOTE 2. INVESTMENT ADVISORY AGREEMENT The Company has an investment advisory agreement with Advisers that is approved at least annually by the Board of Directors or by vote of the holders of a majority of the outstanding shares of the Company. The agreement may be terminated at any time on sixty days' notice, without penalty, by the Company's Board of Directors or by vote of the holders of a majority of the Company's outstanding shares and will terminate automatically in the event of its assignment. The Company pays all operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of the Company's investment officers and the cost of office space, equipment and other personnel required for the Company's day-to-day operations. The expenses that are paid by the Company include the Company's share of transaction costs incident to the acquisition and disposition of investments, legal and audit fees, the fees and expenses of the Company's independent directors and the fees of its officer-directors, the costs of printing and mailing proxy statements and reports to shareholders, costs associated with promoting the Company's stock, and the fees and expenses of the Company's custodian and transfer agent. The Company is also required to pay expenses associated with litigation and other extraordinary or non-recurring expenses, as well as expenses of required and optional insurance and bonding. All fees paid by or for the account of an actual or prospective portfolio company in connection with an investment transaction in which the Company participates are treated as commitment fees or management fees and are received by the Company, pro rata to its participation in such transaction, rather than by Advisers. Advisers is entitled to retain for its own account any fees paid by or for the account of a company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to such investment transaction. As compensation for its services to and the expenses paid for the account of the Company, Advisers is paid a fee, quarterly in arrears. Beginning in the second quarter of 1995, a fee was paid equal to 0.625 percent per quarter of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Lending owned by the Company interim investments (i.e., U.S. government securities) and cash and cash equivalents, plus 0.125 percent per quarter of the quarter-end value of interim investments, cash and cash equivalents. In the first quarter of 1995, and in 1994, 1993 and 1992, a fee was paid equal to 0.625 percent per quarter of the quarter-end value of the Company's consolidated total assets, less the value of the shares of Allied Lending owned by the Company (subsequent to Allied Lending's public offering in November 1993) and cash and cash equivalents in excess of $2,000,000 in working capital. NOTE 3. DIVIDENDS AND DISTRIBUTIONS The Company's Board of Directors declared and the Company paid a $0.22 per share dividend for the third quarter and a $0.20 per share dividend each for the first and second quarters of 1995. The components of the cash dividends and distributions of taxable income declared by the Board of Directors for 1994, 1993 and 1992 are as follows: The 1994 distributions of $1.40 per common share were comprised of cash payments, issuance of the Company's common shares pursuant to the Company's dividend reinvestment plan, and the issuance of shares of Allied Lending in the amounts of $0.76, $0.04, and $0.60, respectively. The 1993 and 1992 distributions of $1.35 and $1.32 per common share, respectively, were paid in cash. Amount represents the total of the quarterly dividends and the year-end extra distribution declared by the Company based on the actual shares outstanding on the record date for each dividend paid. The following represents a reconciliation from taxable income to income for financial reporting purposes for the years ended December 31: Line of Credit. As of September 30, 1995, the Company had a revolving line of credit agreement with a bank under which it could borrow up to $10,000,000, which charged interest at the thirty-day LIBOR rate plus 1.15 percent and expired November 30, 1995. As of September 30, 1995, the Company had available $10,000,000 under the revolving line of credit agreement. The Company has established a new line of credit dated December 18, 1995 which permits the Company to borrow up to $10,000,000 at LIBOR plus 2.5 percent and expires September 30, 1998. Senior Notes. The Company has $20,000,000 of senior notes outstanding to an insurance company. These notes bear interest at a rate of 9.15 percent per annum, payable semi-annually. The senior notes are scheduled to mature over a five-year period commencing in 1998 through 2002 with annual principal payments of $4,000,000. Subordinated Debentures. Subordinated debentures are payable to the Small Business Administration (SBA) and represent amounts due to the SBA as a result of borrowings made pursuant to the Small Business Investment Act of 1958. The debentures require semi-annual interest payments at various interest rates with the entire principal balance due at maturity. Principal payments required on these debentures at September 30, 1995 are as follows: OPIC Facility. On April 10, 1995, the Company entered into a loan agreement with the Overseas Private Investment Corporation under which the Company may borrow up to $20 million to provide financing for international projects involving qualifying U.S. small businesses. Loans under this agreement bear interest at the U.S. Treasury Rate plus 0.5% and have a ten year maturity from the date of disbursement. The loan agreement expires on the earlier of the first date on which the amount of the loan(s) equal $20 million or April 10, 1998. At September 30, 1995, there were no outstanding borrowings under the loan agreement. As of September 30, 1995, the Company's subsidiary, Allied Capital Financial Corporation, had outstanding a total of 60,000 shares of $100 par value, 3 percent cumulative preferred stock and 10,000 shares of $100 par value, 4 percent redeemable cumulative preferred stock issued to the SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3 percent cumulative preferred stock does not have a required redemption date. Allied Capital Financial Corporation has the option to redeem in whole or in part the preferred stock by paying the SBA the par value of such securities and any dividends accumulated and unpaid to the date of redemption. The 4 percent redeemable cumulative preferred stock has a required redemption date of June 4, 2005. During 1994, the Company paid $1,044,000 in distributions that represented a return of capital for tax purposes. This has been charged to additional paid-in capital. The Company has a dividend reinvestment plan (the "Plan"). Shareholders of record may enroll in the Plan at any time. The Company instructs the stock transfer agent to buy shares in the open market or to issue new shares. When the Company issues new shares, the price is equal to the average of the closing sales prices reported for the shares for the five days on which trading in the shares takes place immediately prior to the dividend payment date. During the nine month period ended September 30, 1995, the Company issued 32,957 shares at an average price of $12.30 per share. During 1994, the Company issued 18,513 shares at an average price of $13.13 per share. The Company has an incentive stock option plan which allows the granting of options to the Company's officers. Under the plan as amended, a maximum of 1,350,000 options may be granted at a price not less than the market value on the date of grant and may be exercisable over a ten year period. In May 1994, the option plan was amended to permit grants to non-officer directors. The Company's stockholders approved a one-time grant of options to each member of the Board of Directors who is not an employee of the investment advisor to purchase 10,000 shares of the Company's common stock and such grants were subject to SEC approval. Such approval was granted by the SEC on December 26, 1995 and the options were granted at the current market price as of that date. Holders of ten percent or more of the Company's stock must exercise their options within a five-year period. Officers of the Company may borrow from the Company the funds necessary to exercise vested stock options. The loans have varying terms not exceeding ten years and bear interest generally at the applicable federal interest rate in effect at the date of issue. A summary of the activity in the plan is as follows: NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION The consolidated statement of cash flows excludes the effects of certain noncash investing and financing activities relating to restructuring of investments and the issuance of common shares as follows: In addition, the Company paid interest in the amount of $4,411,000 for the nine months ended September 30, 1995 and $6,223,000, $6,319,000 and $4,659,000 during 1994, 1993, and 1992, respectively. NOTE 8. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding at September 30, 1995 to various prospective portfolio companies totaling $13.6 million. At September 30, 1995, the Company had standby letters of credit and third party guarantees outstanding totaling $1.4 million. The letters of credit have been issued by a financial institution on behalf of the Company to guarantee performance of certain portfolio companies to third parties. Repurchase agreements of $0.9 million have been used as collateral for the letters of credit. The Company is party to certain lawsuits in connection with investments it has made to small businesses. While the outcome of these legal proceedings cannot at this time be predicted with certainty, management does not expect that these actions will have a material effect upon the financial position of the Company. Allied Lending, formerly a wholly owned subsidiary, originates loans which are 70%-90% guaranteed by the SBA. Lending then sells the guaranteed portion of these loans in the secondary market. The Internal Revenue Service may assert that these transactions subject Allied Lending to a liability for income taxes of up to $845,000 for the year ended December 31, 1992. The Company has agreed to indemnify Allied Lending for this potential liability. Management believes that the Company has valid defenses for the position that such transactions do not subject Allied Lending to a liability for additional income taxes. NOTE 9. CONCENTRATIONS OF CREDIT RISK The Company and its subsidiaries place their cash in financial institutions and at times, cash held in checking accounts may be in excess of the FDIC insurance limit. As of September 30, 1995, the Company had invested in repurchase agreements collateralized by U.S. government securities. These repurchase agreements mature within seven days. Investments in U.S. government securities at September 30, 1995 have maturities from December 1995 to December 1996 with interest rates ranging from 4.25 percent to 6.875 percent. NOTE 10. DISPOSITION OF SUBSIDIARY The Company owned all of the outstanding capital stock of Allied Capital Lending Corporation ("Allied Lending") prior to consummation of the initial public offering of Allied Lending shares in November 1993. As a result of that intial public offering, the Company's ownership of Allied Lending shares was reduced to 1,580,000 shares, or approximately 36% of the Allied Lending shares outstanding at December 31, 1993. The Company has agreed that it would divest itself of all shares of Allied Lending by December 31, 1998 by public offerings, private placements, distributions to the Company's shareholders or otherwise. The Company declared an extra dividend in December 1994 and distributed on January 8, 1995 an aggregate of 335,086 Allied Lending shares, which reduced its ownership of Allied Lending shares to 1,244,914 shares, or approximately 28% of the Allied Lending shares then outstanding. NOTE 11. QUARTERLY FINANCIAL HIGHLIGHTS (1) Included in the 1994 fourth quarter income was $0.7 million in interest income resulting from the restructuring of certain non-performing loans that had not been accrued into income in prior periods. Quarterly amounts for 1993 and 1994 have been reclassified to conform with classifications used in the financial statements for 1995. (1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. (1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. (1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. (1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. (1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. (1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. (1) Public company; (2) Interest not being accrued as of September 30, 1995; (3) May be considered an affiliate; (4) Share information as of September 30, 1995; (5) Non-qualifying asset for BDC purposes as of September 30, 1995. (a) Number of loans as of September 30, 1995. (a) Number of loans as of September 30, 1995; (b) Includes 3 loans totaling $5,191 which are non-qualifying assets for BDC purposes at September 30, 1995. ALLIED CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED STATEMENT OF LOANS TO AND INVESTMENTS IN SMALL BUSINESS CONCERNS As of September 30, 1995 (unaudited) and December 31, 1994 and 1993 A. COMPANIES HOLDING LOANS AND INVESTMENTS The loans and other investments listed are held by the Company and its wholly owned subsidiaries. B. LOANS AND DEBT SECURITIES The loans and debt securities included in investments bear interest at an annual rate ranging from 4 percent to 16.75 percent, and are generally payable in installments with final maturities from five to twenty years from date of issue. At September 30, 1995, of the aggregate cost of investments of $113,980,000, investments totaling approximately $9,519,000 are not accruing interest. C. VALUATION AS DETERMINED BY THE BOARD OF DIRECTORS Loans and debt securities, which are not publicly traded, and warrants and stocks for which there is no public market are valued based on collateral, the ability to make payments, the earnings of the investee and other pertinent factors. The values assigned are considered to be amounts which could be realized in the normal course of business or from an orderly sale or other disposition of the investments. In the normal course of business, loans and debt securities are held to maturity, and the amount realized, in addition to interest, is the face value, which equals or exceeds cost. Common stock investments that are traded on the over-the-counter market have been valued at the prevailing bid price, less a discount where appropriate. The portfolios of the Company and its subsidiaries consist primarily of securities issued by privately held companies. The major portion of the assets of the Company and its subsidiaries consists of securities that are subject to restrictions on the resale or are otherwise illiquid. A majority of the securities held by the Company cannot be sold to the public without registration under the Securities Act of 1933. In connection with the Company's investments in securities with publicly traded companies, the securities held with the following companies are subject to restrictions on their sale: Allied Capital Lending Corporation; DeVlieg-Bullard, Inc.; DMI Furniture, Inc.; Garden Ridge Corporation; MLX/SinterMet Corp.; Nobel Education Dynamics; Esquire Communications, Ltd. and Providential Corporation. E. DIVERSIFICATION OF LOANS AND INVESTMENTS The following industries represent 5 percent or more of the total value of the loans and investments outstanding at the dates indicated: F. NET UNREALIZED APPRECIATION (DEPRECIATION) The net unrealized appreciation (depreciation) for all securities based on cost for Federal income tax purposes is as follows: The aggregate cost of securities for federal income tax purposes was $115,212,000 and $113,323,000 at September 30, 1995 and December 31, 1994, respectively. The Board of Directors and Shareholders We have audited the consolidated statement of financial position of Allied Capital Corporation and its wholly owned subsidiaries as of December 31, 1994 and 1993, including the consolidated statement of loans to and investments in small business concerns as of December 31, 1994, and the related consolidated statements of operations, cash flows, and changes in net assets for each of the three years in the period ended December 31, 1994, and the selected per share data presented as financial highlights for each of the five years in the period ended December 31, 1994. These financial statements and per share data are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and per share data based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and per share data are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included the examination or confirmation of securities owned at December 31, 1994 and 1993. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and selected per share data referred to above present fairly, in all material respects, the financial position of Allied Capital Corporation and its wholly owned subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations, cash flows, and changes in net assets for each of the three years in the period ended December 31, 1994, and the selected per share data for each of the five years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As explained in Note 1, the consolidated financial statements include securities valued at $115,026,000 as of December 31, 1994 and $94,630,000 as of December 31, 1993, (85 percent and 70 percent, respectively, of total assets) whose values have been estimated by the Board of Directors in the absence of readily ascertainable market values. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such securities and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. ALLIED CAPITAL CORPORATION (the "Company") is issuing to its existing stockholders non-transferable rights ("Subscription Rights") which entitle the holders thereof to purchase new shares of the Company at a discounted price to the Company's market price. Each stockholder will be issued one Subscription Right for each share of the Company held as of January 22, 1996, the Record Date. Each seven Subscription Rights will entitle stockholders to purchase one new share of the Company's common stock (1-for-7) at a discounted price. EXCLUSIVE OPPORTUNITY TO PURCHASE NEW SHARES AT A DISCOUNT TO THE CURRENT The pricing structure provides current stockholders with a unique and exclusive opportunity to purchase additional shares of the Company's stock at 95% of the average of the last reported sales price of a share of the Company's common stock on the Nasdaq National Market on the Pricing Date and the four preceding business days. This pricing formula guarantees the stockholder a subscription price below the then-current market price. See the dilution section in the prospectus for more information. The Company expects that there will be no dilution to the Company's net asset value because the Company's shares have historically traded, and continue to trade as of the date of this Prospectus, at a premium to the last reported net asset value. Stockholders who choose not to participate in the offer, however should expect to own a smaller proportional interest in the Company following the expiration of the offer. INCREMENTAL PROCEEDS MAY REDUCE EXPENSE RATIO AND INCREASE STOCK LIQUIDITY Proceeds from a well-subscribed offering may reduce the Company's expense ratio, thus benefiting both participating and non-participating stockholders. Additional shares issued as a result of the completion of the rights offering may also increase the liquidity of the shares. INVESTMENT ADVISER WITH AN ESTABLISHED TRACK RECORD IN MANAGING THE COMPANY The Company's investment adviser is Allied Capital Advisers, Inc. Advisers is a registered investment adviser with more than $600 million under management and whose management team has more than 35 years of experience managing Allied Capital Corporation's portfolio of private small business investments. IF YOU HAVE QUESTIONS, CONTACT THE INFORMATION AGENT FOR MORE INFORMATION For additional information on the rights offering, please contact Shareholder Communications Corporation, the Information Agent and Offering Coordinator for the offering, at (800) 221-5724 extension 331. You may also contact your bank, broker or other nominee, or contact the Company at (202) 331-1112. (NOT PART OF THE PROSPECTUS) WHY SHOULD I EXERCISE MY SUBSCRIPTION RIGHTS? Allied Capital Corporation believes that an increase in the assets of the Company at this time will permit the Company to invest in additional small private businesses, as well as to leverage against this additional capital and continue the growth of the Company. The Company is a business Development Company which commenced public operations in January 1960. The investment objective of the Company is to provide a high level of current income and long-term growth in the value of its net assets by providing debt, mezzanine, and equity financing primarily for small privately owned growth companies. The Company's investment adviser is Allied Capital Advisers, Inc. ("Advisers"). HOW MUCH DID THE COMPANY PAY IN DIVIDENDS FOR 1995? The Company declared dividends totaling $1.44 per share for 1995, including a $0.58 per share extra dividend. WHAT WILL BE THE PRICE OF THE NEW SHARES? The purchase price per share (the "Subscription Price") will be 95% of the average of the last reported sales price of a share of the Company's common stock on the Nasdaq National Market on the Expiration Date of the Offer (the "Pricing Date") and the four preceding business days. Therefore, Record Date stockholders have the opportunity to purchase new shares below the market price in the rights offering. CAN STOCKHOLDERS SUBSCRIBE FOR ADDITIONAL SHARES AT THE DISCOUNTED PRICE? Stockholders who fully exercise all of the Subscription Rights issued to them may also request to purchase additional shares at the same discounted price pursuant to the Over-Subscription Privilege. This privilege makes shares not purchased by other stockholders available to those who wish to acquire more than their entitlement through the exercise of Subscription Rights. These shares will be allocated to stockholders requesting over-subscription shares following the expiration of the offering on a pro rata basis, based on the number of Subscription Rights issued. Fractional shares will not be issued. CAN I SELL MY SUBSCRIPTION RIGHTS? No. The Subscription Rights are non-transferable and have no resale value. (NOT PART OF THE PROSPECTUS) These Questions and Answers and Highlights of the Offering should be read in conjunction with the accompanying Prospectus relating to Allied Capital Corporation's rights offering. The Prospectus contains more detailed information, including special risk considerations about the rights offering and the Company. These Questions and Answers and Highlights of the Offering are qualified in their entirety by reference to the information included in the Prospectus. Investment in the Company, which invests in small private businesses, involves a high degree of business and financial risk. The Company and its subsidiaries borrow funds, and as a result are exposed to the risks of leverage. An immediate dilution of each stockholder's proportional share of the Company will be experienced as the number of shares outstanding after the offering will increase. Such dilution will disproportionately affect those stockholders who do not fully exercise their Subscription Rights and should expect that they will, at the completion of the offering, own a smaller proportional interest in the Company than they owned prior to the offering. (NOT PART OF THE PROSPECTUS) Record Date January 22, 1996 Subscription Period January 25 to Feb 23, 1996 Expiration/Pricing Date Feb 23, 1996* Confirmation Date March 6, 1996* (NOT PART OF THE PROSPECTUS) INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION Date of issuance of this preliminary SAI: November __, 1995 This Statement of Additional Information is not a prospectus. It should be read with the prospectus dated ______________ ___, 1996 relating to this offering (the "Prospectus"), which may be obtained by calling the Company at (202) 331-1112 and asking for Investor Relations. Terms not defined herein have the same meaning as given to them in the Prospectus. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may any offers to buy be accepted prior to the time the registration statement becomes effective. This Statement of Additional Information does not constitute a prospectus. The directors and officers of the Company are listed below together with their respective positions with the Company and a brief statement of their principal occupations during the past five years and any positions held with affiliates of the Company: * "Interested persons" as defined in the 1940 Act. The Company has no employees and does not pay any cash compensation to any of its officers, other than directors' fees to those of its officers who are also directors. All of the Company's officers are employed by Allied Advisers, the Company's investment adviser, which pays their cash compensation. The Company, from time to time, grants stock options to its officers under the Company's Stock Option Plan. During 1994, each director received a fee of $1,000 for each meeting of the Board of Directors of the Company and its wholly owned subsidiaries or each separate committee meeting attended. The members of the Board of Directors are compensated by fees at the rate of $1,000 per meeting of the Board of the Company or its wholly owned subsidiaries or each Separate (i.e., not held on the same day as a full Board meeting) meeting of a committee of such Board which the member attends unless such separate meeting occurs on the same day as a Board meeting, in which case directors receive $500 for attendance at such meeting. There is no duplication of directors' fees and expenses even if some directors also take action on behalf of the Company's wholly owned subsidiaries. The Company's stockholders approved a one-time grant of options to each member of the Board of Directors who is not an employee of the investment advisor to purchase 10,000 shares of the Company's common stock pursuant to the Company's Stock Option Plan and such grants were subject to Commission approval. Such approval was granted by the Commission on December 26, 1995 and the options were granted at the current market price as of that date. The following table sets forth certain details of compensation paid to directors during 1994, as well as compensation paid for serving as a director of the two other investment companies to which the Company may be deemed to be related. (1) Consists only of directors' fees. (2) Includes amounts paid as compensation to directors by Allied II and Allied Lending, the other companies in the fund complex. No stock options were granted during 1994. The following chart summarizes the grant of options to directors during the past three fiscal years including the securities underlying those options or stock appreciation rights ("SARs"), and any long term incentive payouts ("LTIP"). CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES As of September 30, 1995, there were 6,185,660 shares of the Company's common stock outstanding. The Company knows of no person who owned beneficially five percent or more of its shares at that date. At that date, the Company's directors and officers as a group, 30 in number, beneficially owned 1,166,373 shares, which includes for this purpose 518,578 shares of underlying unexercised stock options granted under the Company's Stock Option Plan that would be exercisable within sixty days of that date. Those 1,166,373 shares represent 17.26% of the shares that would be outstanding if all of those options were exercised. INVESTMENT ADVISORY AND OTHER SERVICES Subject to the supervision and control of its Board of Directors, the investments of the Company are managed by Allied Capital Advisers, Inc., a publicly owned investment adviser located at 1666 K Street, N.W., 9th Floor, Washington, D.C. 20006-2803, telephone (202) 331-1112. Advisers is registered with the Commission under the Investment Advisers Act of 1940. The shares of Advisers are traded on the Nasdaq National Market (symbol: ALLA). Advisers currently has thirty-eight (38) investment and other professionals, as well as thirty-four (34) other employees. David Gladstone and George C. Williams have 55 years of combined experience in making the types of investments proposed to be made by the Company. Mr. Gladstone holds an MBA degree from the Harvard Business School and worked for Price Waterhouse and ITT Corporation before joining the Allied Capital organization in 1974. He is the author of Venture Capital Handbook and Venture Capital Investing, both published by Simon & Schuster/Prentice Hall. Mr. Williams is a past President of the National Association of Small Business Investment Companies and has lectured as a resident executive at the McIntyre School of Commerce at the University of Virginia. All investments of the Company must be approved by a credit committee composed of the senior investment officers of Allied Advisers, including David Gladstone, George C. Williams, and G. Caball Williams III. Additionally, the Board of Directors reviews and approves every investment made by the Company. David Gladstone, George C. Williams, and G. Cabell Williams III are interested persons and affiliated persons, as those terms are defined in the 1940 Act, of the Company and its investment adviser. Advisers is at this time a party to investment advisory agreements with the Company and with Allied II and Allied Lending, both business development companies which, directly or through one or more small business investment company subsidiaries, specialize in loans with equity features to and equity investments in small business concerns. Advisers is the general partner of a private limited partnership which itself is the general partner of two privately funded venture capital limited partnerships, Allied Venture and Allied Technology, engaging in the same business as the Company and Allied II but no longer making new investments. Advisers serves as the investment adviser to those two limited partnerships. All of these entities co-invest with one another. In addition, Advisers is the investment manager of Allied Commercial, a publicly held real estate investment trust (a "REIT"), and the co-manager of BMI, a privately held REIT. Allied Commercial and BMI participate with one another in buying interest paying business loans secured by real estate. At September 30, 1995, total assets under Advisers' management approximated $639 million. In May 1995, the Company's stockholders approved a new investment advisory agreement (the "current agreement"). The current agreement will remain in effect from year to year as long as its continuance is approved at least annually by the Board of Directors, including a majority of the disinterested directors, or by the vote of the holders of a majority, as defined in the 1940 Act, of the outstanding voting securities of the Company. The current agreement may, however, be terminated at any time on (60) sixty days' notice, without the payment of any penalty, by the Board of Directors or by vote of a majority of the Company's outstanding voting securities, as defined, and will terminate automatically in the event of its assignment. The terms of the current agreement are virtually identical to those of the investment advisory agreement between the Company and Advisers that it replaced ("former agreement") except as to the calculation of the investment advisory fee and to the extent clarifying changes were made regarding the nature of professional or technical fees and expenses to be paid by the Company. The terms of the current agreement regarding calculation of the investment advisory fee are intended to reflect Advisers' practice of generally imposing a significantly lower fee on the Company's cash and cash equivalents and Interim Investments than the fee applicable to the Company's invested assets, which Advisers has effected by waiving portions of the investment advisory fee applicable to the Company's cash and cash equivalents and Interim Investments. In the current agreement the provisions of the former agreement concerning the transaction costs to acquire or dispose of an investment were clarified to describe the nature of professional or technical fees and expenses to be paid by the Company and to provide that those fees and expenses included items such as credit reports, title searches, fees of accountants or industry-specific technical experts, and transaction-specific travel expenses. The effect of those clarifications and the replacement of the former agreement does not result in the imposition of any new fee or expense to be paid by the Company or its stockholders. Replacement of the former agreement with the current agreement is expected to result in an advisory fee that is lower than that provided under the former agreement (absent waiver by Advisers of any portion of its fee) and approximately the same as that provided in recent practice when Advisers waives a portion of its fee annually. The terms of the current agreement are summarized below. Pursuant to the current agreement, Advisers manages the investments of the Company, subject to the supervision and control of the Board of Directors. Specifically, Advisers identifies, evaluates, structures, closes, and monitors the investments made by the Company. The Company will not make any investments that have not been recommended by Advisers as long as the current agreement remains in effect. Advisers has the authority to effect acquisitions and dispositions of investments for the Company's account, subject to approval by the Company's Board of Directors. The current agreement provides that the Company will pay all of its own operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of its investment officers and the cost of office space, equipment, and other personnel necessary for day-to-day operations. The expenses that are paid by the Company include the Company's share of transaction costs (including legal and auditing) incident to the acquisition and disposition of investments, regular legal and auditing fees and expenses, the fees and expenses of the Company's directors, the costs of printing and distributing proxy statements and other communications to stockholders, the costs of promoting the Company's stock, and the fees and expenses of the Company's custodian and transfer agent. The Company, rather than Advisers, is also required to pay expenses associated with litigation and other extraordinary or non-recurring expenses with respect to its operations and investments, as well as expenses of required and optional insurance and bonding. Advisers is, however, entitled to retain for its own account any fees paid by or for the account of any company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to the Company's such investment transaction or follow-on managerial assistance. Advisers will report to the Board of Directors not less often than quarterly all fees received by Advisers from any source whatever and whether, in its opinion, any such fee is one that Advisers is entitled to retain under the provisions of the current agreement. In the event that any member of the Board of Directors should disagree, the matter will be conclusively resolved by a majority of the Board of Directors, including a majority of the independent Directors. If the Company uses the services of attorneys or paraprofessionals on the staff of Advisers for the Company's corporate purposes in lieu of outside counsel, the Company will reimburse Advisers for such services at hourly rates calculated to cover the cost of such services, as well as for incidental disbursements by Advisers in connection with such services. As compensation for its services to and the expenses paid for the account of the Company, Advisers is entitled to be paid quarterly, in arrears, a fee equal to 0.625% per quarter of the quarter-end value of the Company's consolidated total assets (less the Company's investment in Allied Lending and the Company's consolidated Interim Investments and cash) and 0.125% per quarter of the quarter-end value of the Company's Interim Investments and cash. The current agreement provides specifically that the fee to Advisers will not apply to the Company's investment in Allied Lending, as required by the SEC's 1993 exemptive order permitting the stepwise spinoff of Allied Lending. Such fees on an annual basis are equivalent to 2.5% of the Company's consolidated total assets (less the Company's investment in Allied Lending and the Company's consolidated Interim Investments and cash and cash equivalents) and 0.5% of the Company's Interim Investments and cash and cash equivalents. Pursuant to the terms of the former agreement, as compensation for its services to and the expenses paid for the account of the Company, Allied Advisers was entitled to be paid, quarterly in arrears, a fee equal to the sum of 0.625% per quarter of each quarter-end value of the Company's consolidated assets less the Company's investment in Allied Lending. Such fees on an annual basis were equivalent to 2.5% of the Company's consolidated invested assets less the Company's investment in Allied Lending. For the purposes of calculating the fee, the values of the Company's assets are determined as of the end of each calendar quarter. The quarterly fee was paid as soon as practicable after the values had been determined. The total amounts paid to Advisers under the former agreement for the last three fiscal years were $2,125,000 for 1992, $2,160,000 for 1993, and $2,605,000 for 1994. Under the former agreement, during 1992, 1993 and 1994, Advisers waived most of its fee on the Company's consolidated Interim Investments and cash and cash equivalents, as the Company had excess Interim Investments and cash and cash equivalents obtained with debt capital. The total fees waived on Interim Investments and cash and cash equivalents were: $724,000 for 1992, $671,000 for 1993, and $527,000 for 1994. The fee to Advisers provided for by the current agreement is substantially higher than that paid by most investment companies because of the efforts and resources devoted by Advisers to identifying, evaluating, structuring, closing, and monitoring the types of private investments in which the Company specializes. The rate of compensation paid by the Company to Advisers is substantially the same as that paid by Allied II, with which Advisers has also negotiated a new investment advisory agreement. The Company also understands that the fee to Advisers provided for by the current agreement is not in excess of that frequently paid by private investment funds engaged in similar types of investments. Such private funds also typically allocate to management a substantial participation in profits. Under a Custodian Agreement, The Riggs National Bank of Washington, D.C., whose principal business address is 808 17th street, N.W., Washington, D.C. 20006, holds all securities of the Company, provides recordkeeping services, and serves as the Company's custodian. The firm of Matthews, Carter and Boyce is the independent accountant for the Company for the year ending December 31, 1995. Its business address is: 8200 Greensboro Drive, Suite 1000, McLean, Virginia 22102-3864. Their phone number is (703) 761-4600. Matthews, Carter and Boyce is also the independent accountant for the Company's subsidiaries, Allied Investment Corporation, Allied Capital Financial Corporation, and Allied Development Corporation. Matthews, Carter and Boyce, or its predecessor, has served as the Company's independent accountants since its inception and has no financial interest in the Company. The expense recorded during the fiscal year ended December 31, 1994, for the professional services provided to the Company by Matthews, Carter and Boyce consisted of fees for audit services (which included the audit of the consolidated financial statements of the Company and its subsidiaries and review of the filings by the Company of reports and registration statements with the Commission, the SBA or other regulatory authorities) and for non-audit services (the fees for the latter aggregating approximately 17% of the fees for audit services). The non-audit services, which were arranged for by management without prior consideration by the Board of Directors, consisted of non-audit related consultation and the preparation of tax returns for the Company and its subsidiaries. BROKERAGE ALLOCATION AND OTHER PRACTICES Since the Company generally acquires and disposes of its investments in privately negotiated transactions, it infrequently uses brokers. The Company intends to qualify for and elect for each taxable year to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). If the Company qualifies as a regulated investment company and distributes to stockholders annually in a timely manner at least 90% of its "investment company taxable income," as defined in the Code (i.e., net investment income, including accrued original issue discount, and net short-term capital gains) (the "90% Distribution Requirement"), it will not be subject to federal income tax on the portion of its investment company taxable income and net capital gains (net long-term capital gain in excess of net short-term capital loss) distributed to stockholders as required under the Code. In addition, if the Company distributes in a timely manner 98% of its capital gain net income for each one-year period ending on December 31, and distributes 98% of its net ordinary income for each calendar year (as well as any income not distributed in prior years), it will not be subject to the 4% nondeductible federal excise tax imposed with respect to certain undistributed income of regulated investment companies. If the Company qualifies as a regulated investment company as it intends to do, it generally will endeavor to distribute to stockholders all of its investment company taxable income and its net capital gain, if any, for each taxable year so that the Company will not incur income and excise taxes on its earnings. In order to qualify as a regulated investment company for federal income tax purposes, the Company must, among other things: (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale of stock or securities, or other income derived with respect to its business of investing in such stock or securities (the "90% Income Test"); (b) derive in each taxable year less than 30% of its gross income from the sale of stock or securities held for less than three months (the "30% Limitation"); and (c) diversify its holdings so that at the end of each quarter of the taxable year (i) at least 50% of the value of the Company's assets consists of cash, cash items, U.S. government securities, and other securities if such other securities of any one issuer do not represent more than 5% of the Company's assets or 10% of the outstanding voting securities of the issuer, and (ii) no more than 25% of the value of the Company's assets is invested in the securities of one issuer (other than U.S. government securities and securities of other regulated investment companies) or of two or more issuers that are controlled (as determined under applicable Code rules) by the Company and are engaged in the same or similar trades or businesses. Allied Lending, formerly a wholly owned subsidiary of the Company, originates loans which are 70%-90% guaranteed by the SBA. Allied Lending then sells the guaranteed portion of these loans in the secondary market. The Internal Revenue Service may assert that these transactions subject Allied Lending to a liability for income taxes of up to $845,000 for the year ended December 31, 1992. The Company has agreed to indemnify Allied Lending for this potential liability. Management believes that the Company has valid defenses for the position that such transactions do not subject Allied Lending to a liability for additional income taxes. If the Company acquires or is deemed to have acquired debt obligations that were issued originally at a discount or that otherwise are treated under applicable tax rules as having original issue discount, it will be required to include in income each year a portion of the original issue discount that accrues over the life of the obligation regardless of whether cash representing such income is received by the Company in the same taxable year and to make distributions accordingly. Although the Company presently does not expect to do so, it is authorized to borrow funds and to sell assets in order to satisfy its distribution requirements. However, under the 1940 Act, the Company will not be permitted to make distributions to stockholders while the Company's debt obligations and other senior securities are outstanding unless certain "asset coverage" tests are met. Moreover, the Company's ability to dispose of assets to meet its distribution requirements may be limited by other requirements relating to its status as a regulated investment company, including the 30% Limitation and the diversification requirements. If the Company disposes of assets in order to meet its distribution requirements, it may make such dispositions at times which, from an investment standpoint, are not advantageous. If the Company fails to satisfy the 90% Distribution Requirement or otherwise fails to qualify as a regulated investment company in any taxable year, it will be subject to tax in such year on all of its taxable income, regardless of whether the Company makes any distributions to its stockholders. In addition, in that case, all of the Company's distributions to its stockholders will be characterized as ordinary income (to the extent of the Company's current and accumulated earnings and profits). In contrast, as explained below, if the Company qualifies as a regulated investment company, a portion of its distributions may be characterized as long-term capital gain in the hands of stockholders. For any period during which the Company qualifies as a regulated investment company for tax purposes, dividends to stockholders of the Company's investment company taxable income will be taxable as ordinary income to stockholders to the extent of the Company's current or accumulated earnings and profits. Distributions of the Company's net capital gain properly designated by the Company as "capital gain dividends" will be taxable to stockholders as a long-term capital gain regardless of the stockholder's holding period for his or her shares. To the extent that the Company retains any net capital gain, it may designate such retained gain as "deemed distributions" and pay a tax thereon for the benefit of its stockholders. In that event, the stockholders will be required to report their share of retained net capital gain on their tax returns as if it had been distributed to them and report a credit for the tax paid thereon by the Company. The amount of the deemed distribution net of such tax would be added to the stockholder's cost basis for his shares. Since the Company expects to pay tax on net capital gain at the regular corporate tax rate of 35% and the maximum rate payable by individuals on net capital gain is 28%, the amount of credit that individual stockholders may report would exceed the amount of tax that they would be required to pay on net capital gain. Stockholders who are not subject to federal income tax or tax on capital gains should be able to file a Form 990T or an income tax return on the appropriate form that allows them to recover the taxes paid on their behalf. Any dividend declared by the Company in October, November, or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by the stockholders on December 31 of the year in which the dividend was declared. Investors should be careful to consider the tax implications of buying shares just prior to a distribution. Even if the price of the shares includes the amount of the forthcoming distribution, the stockholder generally will be taxed upon receipt of the distribution and will not be entitled to offset the distribution against the tax basis in his shares. A stockholder may recognize taxable gain or loss if he sells or exchanges his shares. Any gain arising from (or, in the case of distributions in excess of earnings and profits, treated as arising from) the sale or exchange of shares generally will be a capital gain or loss except in the case of dealers or certain financial institutions. This capital gain or loss normally will be treated as a long-term capital gain or loss if the stockholder has held his shares for more than one year; otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or exchange of shares held for six months or less will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received with respect to such shares and, for this purpose, the special rules of Section 246(c)(3) and (4) of the Code generally apply in determining the holding period of shares. Net capital gain of noncorporate taxpayers is currently subject to a maximum federal income tax rate of 28% while other income may be taxed at rates as high as 39.6%. Corporate taxpayers are currently subject to federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Tax rates imposed by states and local jurisdictions on capital gain and ordinary income may differ. The Company may be required to withhold U.S. federal income tax at the rate of 31% of all taxable dividends and distributions payable to stockholders who fail to provide the Company with their correct taxpayer identification number or to make required certifications, or regarding whom the Company has been notified by the Internal Revenue Service that they are subject to backup withholding. Backup withholding is not an additional tax, and any amounts withheld may be credited against a stockholder's U.S. federal income tax liability. Federal withholding taxes at a 30% rate (or a lesser treaty rate) may apply to distributions to stockholders that are nonresident aliens or foreign partnerships, trusts, or corporations. Foreign investors should consult their tax advisors with respect to the possible U.S. federal, state, and local tax consequences and foreign tax consequences of an investment in the Company. The Company will send to each of the stockholders, as promptly as possible after the end of each fiscal year, a notice detailing, on a per share and per distribution basis, the amounts includible in such stockholder's taxable income for such year as ordinary income and as long-term capital gain. In addition, the federal tax status of each year's distributions generally will be reported to the Internal Revenue Service. Distributions may also be subject to additional state, local, and foreign taxes depending on each stockholder's particular situation. Stockholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the Company, including the possible effect of any pending legislation or proposed regulation. ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS The following financial statements of Allied Capital Corporation (the "Registrant" or "Company") are included in the Prospectus (Part A of this Registration Statement): Consolidated Statement of Financial Position -- September 30, 1995 (unaudited) and December 31, 1994 and 1993 Consolidated Statement of Operations -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993 and 1992 Consolidated Statement of Changes in Net Assets -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993 and 1992 Consolidated Statement of Cash Flows -- For the Nine Months Ended September 30, 1995 and 1994 (unaudited) and the Years Ended December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements Consolidated Statement of Loans to and Investments in Small Business Concerns -- September 30, 1995 (unaudited) and December 31, 1994 and 1993 Notes to Consolidated Statement of Loans to and Investments in a. Articles of Incorporation of the Registrant (1) b. By-laws of the Registrant, as amended (2) d.1 Specimen certificate of Registrant's Common Stock, par value $1.00, the rights of holders of which are defined in Exhibits d.2 Form of subscription form by which beneficial owners of Registrant's Common Stock may exercise their non-transferable Subscription Rights and Over-Subscription Priviledge. * e. Registrant's dividend reinvestment plan (7) f.1 Form of SBA subordinated debentures comprising the long-term debt of Registrant's wholly-owned subsidiary, Allied f.2 Form of preferred stock agreement for 3 percent cumulative preferred stock, $100 par value, of Allied Capital Financial Corporation, the rights of the holder of which are defined in f.3 Form of preferred stock agreement for 4 percent preferred stock, $100 par value, of Allied Capital Financial Corporation, the rights of the holder of which are defined in f.4 Excerpts from Articles of Incorporation and By-laws of Allied Capital Financial Corporation that define rights of holder of f.5 Form of SBA subordinated debentures comprising the long-term debt of Registrant's wholly owned subsidiary, Allied Capital f.6 Note Agreement between Massachusetts Mutual Life Insurance Company and the Registrant, Allied Investment Corporation, and Allied Capital Financial Corporation dated April 30, 1992 and f.7 Loan Agreement between Overseas Private Investment Corporation and Registrant, dated April 10, 1995 f.8 Unsecured Line of Credit Agreement between The Riggs National Bank of Washington, D.C. and the Registrant dated December 18, g. Investment Advisory Agreement between Registrant and Allied h. Form of solicitive Dealer Agreement between the Registrant i. Registrant's Incentive Stock Option Plan, as amended in May j.1. Custodian Agreement between The Riggs National Bank of Washington, D.C., and the Registrant, dated June 27, 1989 j.2. Custodian Agreement between The Riggs National Bank of Washington, D.C., and Allied Investment Corporation, dated j.3 Custodian Agreement between The Riggs National Bank of Washington, D.C., and Allied Capital Financial Corporation, dated June 27, 1989 k.1. Tax Indemnification Agreement dated November 12, 1993 between the Registrant and Allied Capital Lending Corporation (5) k.2. Letter Agreement dated November 16, 1993 among Allied Capital Lending Corporation, the Registrant and Lehman Brothers Inc. k.3 Form of offering Coordinator/Information Agent Agreement between the Registrant and Shareholder Communications k.4 Form of subscription Agency Agreement between the Registrant and American Stock Transfer & Trust Company l. Opinion of the firm of Sutherland, Asbill & Brennan, as to the legality of the common stock being registered, and Consent to the use of such Opinion * n. Consent of Matthews, Carter and Boyce, independent r. Financial Data Schedule (11) s. Powers of Attorney of certain signatories of this registration ** To be filed by subsequent pre-effective amendment. (1) Incorporated by reference to Exhibit D to the Company's definitive proxy statement filed on April 11, 1991. (2) Incorporated by reference to Exhibit E to the Company's definitive proxy statement filed on April 11, 1991. (3) Incorporated by reference to Exhibit (4)(D)(i) filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. Amendments thereto are incorporated by reference to Exhibits (4)(D)(ii), (4)(D)(iii) and (4)(D)(iv) to the Company's Form 8-K filed on December 9, 1993. (4) Incorporated by reference to Exhibit A to the Company's definitive proxy statement filed on March 30, 1995. (5) Incorporated by reference to an exhibit of the same number filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (6) Incorporated by reference to an exhibit of the same number filed with the Company's Form 8-K dated November 19, 1993. (7) Incorporated by reference to an exhibit of the same number filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (8) Incorporated by reference to Exhibit A to the Company's definitive proxy statement with respect to an annual meeting of stockholders held on May 5, 1994. (9) Incorporated by reference to such Exhibit filed with Registration Statement No. 33-22200. (10) Incorporated by reference to such Exhibit filed with Registration Statement No. 34501 or Pre-Effective Amendment No. 1 thereto. (11) Incorporated by reference to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, (File No. 814-97), filed with the Commission on November 14, 1995. (12) Incorporated by reference to the Company's initial registration statement on Form N-2 (File No. 33-64629), filed with the Commission on November 29, 1995. ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses in connection with the distribution of the securities being offered hereby, other than underwriting discounts and commissions, are estimated as follows: ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL * Each of these entities is, like the Registrant, advised by Allied Capital Advisers, Inc. ("Advisers"). By so including these entities herein, the Registrant does not concede, however, that it and such other entities are controlled by Allied Advisers. ** The members of Allied Capital Funding, L.L.C. are ALCC Acceptance Corporation and BMI Acceptance Corporation. ITEM 28. NUMBER OF HOLDERS OF SECURITIES The following table presents the number of record holders of each class of securities of the Company outstanding as of December 31, 1995: * Estimate. The Company also estimates that there are a total of 9,000 beneficial owners of its common stock. The Annotated Code of Maryland, Corporations and Associations, Section 2-418 provides that a Maryland corporation may indemnify any director of the corporation and any person who, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise or employee benefit plan, made a party to any proceeding by reason of service in that capacity unless it is established that the act or omission of the director was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty; or the director actually received an improper personal benefit in money, property or services; or, in the case of any criminal proceeding, the director had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the director in connection with the proceeding, but if the proceeding was one by or in the right of the corporation, indemnification may not be made in respect of any proceeding in which the director shall have been adjudged to be liable to the corporation. Such indemnification may not be made unless authorized for a specific proceeding after a determination has been made, in the manner prescribed by the law, that indemnification is permissible in the circumstances because the director has met the applicable standard of conduct. On the other hand, the director must be indemnified for expenses if he has been successful in the defense of the proceeding or as otherwise ordered by a court. The law also prescribes the circumstances under which the corporation may advance expenses to, or obtain insurance or similar cover for, directors. The law also provides for comparable indemnification for corporate officers and agents. The Articles of Incorporation of the Company provide that its directors and officers shall, and its agents in the discretion of the Board of Directors may, be indemnified to the fullest extent permitted from time to time by the laws of Maryland. The Company's Bylaws also, however, provide that the Company may not indemnify any director or officer against liability to the Registrant or its security holders to which he might otherwise be subject by reason of such person's willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office unless a determination is made by final decision of a court, by vote of a majority of a quorum of directors who are disinterested, non-party directors or by independent legal counsel that the liability for which indemnification is sought did not arise out of such disabling conduct. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described above, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person in the successful defense of an action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the Company 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 Act and will be governed by the final adjudication of the court of the issue. The Registrant, in conjunction with its investment adviser and other entities managed thereby, carries liability insurance for the benefit of its directors and officers on a claims-made basis of up to $2,500,000, subject to a $200,000 retention and the other terms thereof. ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Allied Capital Advisers, Inc., the investment adviser of the Registrant, is engaged in the business of identifying, evaluating, structuring, closing, and monitoring the investments made by the Registrant as well as other public and private entities engaged in small business finance. Certain information about the activities of each director or executive officer of Allied Capital Advisers, Inc., at any time during the past two fiscal years is set forth below: * The business address of Allied Capital Advisers, Inc., Allied Capital Corporation, Allied Capital Corporation II, Allied Capital Lending Corporation, Allied Capital Commercial Corporation, and Business Mortgage Investors, Inc., is c/o Allied Capital Advisers, Inc., 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803. ITEM 31. LOCATIONS OF ACCOUNTS AND RECORDS All of the accounts and records of the Registrant, including all the accounts, books and documents required to be maintained by Section 31(a) of the 1940 Act and the rules thereunder, are maintained by Allied Capital Advisers, Inc., 1666 K Street, N.W., Ninth Floor, Washington, D.C. 20006-2803. Other than with its investment adviser, the Registrant is not a party to any contract pursuant to which any person performs management-related services to the Registrant. 1. The Registrant undertakes to suspend the offering of shares until the Prospectus is amended if (1) subsequent to the effective date of its Registration Statement, the net asset value declines more than ten percent from its net asset value as of the effective date of the Registration Statement or (2) the net asset value increases to an amount greater than its net proceeds as stated in the Prospectus. 3. The Registrant undertakes in the event that the securities being registered are to be offered to existing shareholders pursuant to warrants or rights and any securities are to be offered to the public, to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by underwriters during the subscription period, the amount of unsubscribed securities to be purchased by underwriters, and the terms of any subsequent reoffering thereof. The Registrant further undertakes that if any public offering by the underwriters of the securities being registered is to be made on terms differing from those set forth on the cover page of the prospectus, the Registrant shall file a post-effective amendment to set forth the terms of such offering. 4. a. The Registrant undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (1) To include any prospectus required by Section 10(a)(3) of (2) To reflect in the prospectus any fact 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; and (3) 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 b. The Registration undertakes that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and c. The Registrant undertakes 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. 5. a. The Registrant undertakes that, for the purpose of determining any liability under the 1933 Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant under Rule 497(h) under the 1933 Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; b. The Registrant undertakes that for the purpose of determining any liability under the 1933 Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. 6. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information. Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, and District of Columbia, on the 11th day of January , 1996. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Thomas R. Salley, Attorney-in-Fact and Agent, on January 11, 1996, pursuant to the Powers of Attorney filed on November 29, 1995, as Exhibit (s) to the initial registration statement.	N-2/A	N-2/A	1996-01-12T00:00:00	1996-01-12T16:11:53
0000950152-96-000092	0000950152-96-000092_0000.txt	/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to (Exact name of registrant as specified in its charter) (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) 3631 Perkins Avenue, Cleveland, Ohio 44114 (Address of principal executive offices) (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock - $1 Par Value 5,295,556 Shares Outstanding as of May 12, 1995 AMENDED CONSOLIDATED CONDENSED BALANCE SHEETS June 30, 1995 and September 30, 1994 See accompanying notes to consolidated condensed financial statements AMENDED CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1995 and 1994 See accompanying notes to consolidated condensed financial statements AMENDED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 1995 AND 1994 See accompanying notes to consolidated condensed financial statements NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) Certain prior year amounts have been reclassified to conform to the 1995 classifications. (2) The consolidated financial statements included in this report have been prepared by the Company from the consolidated statements of HMI Industries Inc. and its subsidiaries. In the opinion of the Company, these consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of June 30, 1995 and September 30, 1994, the results of operations and cash flows for the three and nine months ended June 30, 1995 and 1994. Independent public accountants have not examined these statements. These consolidated financial statements should be read in conjunction with the financial statements and the notes included in the Company's latest annual report on Form 10-K. (3) The Company is contingently liable under a Conditional Purchase Agreement to a Netherlands bank in the amount of $1,260,000. If the contingent liability were called upon by the bank, the Company would take possession of certain finished goods and work in process inventories and sell them into existing markets. (4) Inventories at June 30, 1995 and September 30, 1994 consist of the following: (5) Effective October 1, 1993, the Company adopted Financial Accounting Standard (FAS) No. 109, "Accounting for Income Taxes". The adoption of this accounting principle resulted in the recognition of a ONE TIME CUMULATIVE TAX BENEFIT of $719,016 or $0.15 per share during the quarter ended December 31, 1993. The statement has been applied prospectively and prior year financial statements were not restated. (6) Inventory analysis revealed that costs in the Tubular operations were understated by some items previously sold under contract and due to erroneous accounting entries. Accordingly, cost of goods sold as reported of $22,576,850 has been restated to reflect these items. These adjustments totaled $1,256,538 for the third quarter resulting in cost of goods sold of $23,833,388 for the quarter. OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - MATERIAL CHANGES IN FINANCIAL POSITION The working capital balance at June 30, 1995 was $21,553,000 a decrease of 6% from the September 30, 1994 balance of $22,941,000. The effect of foreign exchange is primarily limited to the Canadian and Mexican operations. The Consolidated Statements of Cash Flows incorporates the effects of foreign exchange in each of the categories presented. There was little change in the US dollar as compared to the Mexico peso during the quarter. The adjustments of $2,575,000 during the first six months rising from the devaluation of the Mexican peso have been reflected as a component of equity based on the nature of the Company's investment and intended timing of repayment of the amounts due. The value of the Mexican Peso versus the US dollar continues to fluctuate. In managements' opinion, the amount of additional adjustments, if any, would not have a material effect on consolidated shareholders' equity. The Company's cash decreased by $239,000 for the nine months ended June 30, 1995. Trade receivables increased by $1,375,000, inventories increased by $3,099,000, trade payables increased by $1,294,000 and accrued expenses and other liabilities decreased by $1,701,000. The increase in inventories since September 30, 1994 reflects the increase in Consumer Goods finished goods inventories from previous low levels, the addition of raw materials for the new products and the slightly slower than projected shipping in June. Inventory levels are anticipated to decrease over the next quarter. The Company acquired all of the assets and business of the HRS Division of Reckitt & Colman Canada, Inc. in December 1993 for $4,875,000. The acquisition was financed by the Company's line of credit. The purchase price included $3,375,000 which was assigned to certain license agreements related to use of trade marks in the US and Canada. The amount is being amortized over 18 months to 4 years. Unamortized balances are reflected in the accompanying balance sheets. The acquisition agreement also provides for a contingent Earn Out of $1,875,000 to be paid out over a 10 year period dependent upon business expansion and revenue generation. At June 30, 1995, $5,000,000 of the unsecured, 9.86%, seven year private placement notes were outstanding. This debt was obtained in 1990 to finance the acquisition of Bliss Manufacturing Company. A portion of the Company's line of credit ($5,000,000) has been classified as long term based on the agreement with the bank dated July 1994. Capital expenditures during the nine months ended June 30, 1995 were $2,635,000 as compared to $1,855,000 in the previous year. The largest outlay in June 1995 was $665,000 to acquire a production and office facility for the Consumer Goods operations in Cleveland, Ohio. The Company is planning to spend an additional $3,000,000 during the next three quarters to renovate the facility. Outlays in the Consumer Goods Division include $446,000 for tooling additions and improvements, $156,000 for computer software and $297,000 for new steam cleaning equipment for the HRS operations. Additions in the Manufactured Products Division include $77,000 for tubular fabrication machinery and equipment and $738,000 for machinery and equipment for the industrial and commercial stamping operations. These latter additions at Bliss Manufacturing Co. were added to specifically meet the customer demand and increase both capacity and efficiencies. Future capital expenditure commitments include $125,000 for the 1995 completion of a new filter cone manufacturing machine. The outstanding balance on the Company's line of credit was $10,756,393 at June 30, 1995. The increase in the outstanding balance is principally due to the debt reductions, inventory increases and the addition of the above-mentioned capital expenditures. Management believes the Company's long term liquidity needs will continue to be met by cash flow from operations, its access to the line of credit and its potential to borrow from existing debt sources. Net Sales - Net product sales decreased from $36,831,000 for the three months ended June 30, 1994 to $34,029,000 for the current quarter. Net product sales for the nine months ended June 30, 1995 were $103,010,000 compared to $98,947,000 for the same period ending June 30, 1994. Sales during the current quarter were down due to the Mexican market and the inability to simultaneously introduce the new Optima and Captiva product lines. After a successful introduction of the Optima product during the last quarter, production difficulties and the introduction problems caused production to be halted resulting in lower sales during April, May and June. Production difficulties are corrected and the Captiva filtration products will be available and introduced during the next two quarters. In Mexico, the peso dollar relationship has increased real prices and lowered consumer confidence. Due to uncertainty of any short term turnaround in the Mexican economy and consumer market, management will emphasize cost reduction and resource allocation to develop our South American markets. The Commercial and Industrial Stamping operations continue to accommodate customer requirements on short-term notice and add sales opportunities. Gross Profit - Gross profit for the quarter ended June 30, 1995 was $10,196,000 or 29.9% as compared to $11,180,000 or 30.4% in the 1994 period. Gross profit for the nine months ended June 30, 1995 was $32,470,000 or 31.5% as compared to $30,274,000 or 30.6% in the period ended June 30, 1994. The Company's Tube Form operations has experienced a decline in profitability due to the erosion of its efficiency of operations and corresponding cost increases. The Company remains focused on utilizing available capacity in the Tubular Products Group and to increase sales and profitability. Selling, General and Administrative Expenses - Selling, general and administrative expenses as a percent of total revenues were 24.4% as compared to 21.8% for the three months ended June 30, 1995 and 1994, respectively. For the nine months ended June 30, 1995, these expenses were 24.0% compared to 21.9% for the prior comparable period. The Company-owned Mexican operation and the HRS operations while contributing higher gross margins, also have higher selling costs, which when combined with the expenditure on new products and their introductions account for the percentage increase over the previous quarter. Financing Revenue - Financing revenue represents the interest and fees generated by the Company's Health-Mor Acceptance Corporation, Australian and Mexican subsidiaries generated on the contracts financed. Interest expense - The 9.86%, seven year, unsecured Term Notes, comprise $129,000 and $152,000 of the three month interest expense for the quarters ended June 30, 1995 and 1994, respectively. The balance of the interest expense was comprised principally of short term borrowing interest of $221,000 (compared to $144,000 in 1994). Trademark amortization - These expenses represent the allocation of the amounts paid for the rights to use specific trademarks arising from the acquisition of HRS over periods ranging from eighteen months to four years. Acquisition related costs - These costs represent amortization of non-compete Agreements arising in the course of the Company's acquisitions. Accounting change for Income Taxes - The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 109 - Accounting for Income Taxes which became effective for the Company in the current fiscal year. The cumulative effect of the change in accounting principle was $719,016 and is included in the results for the nine months ended June 30, 1994. This item should not be considered a continuing item. PART II - OTHER INFORMATION AND SIGNATURE PART II - OTHER INFORMATION Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there to duly authorized. Date: January 12, 1996 \s\Kevin Dow	10-Q/A	10-Q	1996-01-12T00:00:00	1996-01-12T17:30:19
0000949111-96-000002	0000949111-96-000002_0000.txt	AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1996 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (Exact name of registrant as specified in its charter) (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) (Address of Principal Executive Offices) (Zip Code) OREGON METALLURGICAL CORPORATION SAVINGS PLAN (Full title of the plan) 530 34th Avenue, S.W. (Name and address of agent for service) (Telephone number, including area code, of agent for service) 1211 S.W. Fifth Avenue,18th Floor, Pacwest Center Portland, Oregon 97204 (503) 222-9981 Title of maximum maximum Amount of securities to Amount to be offering price aggregate registration be registered registered per unit offering price fee par value 600,000(2) $12.00 $7,200,000(1) $2,482.76 (1) Calculated solely for purposes of this offering under Rule 457(h) as follows: 600,000 shares at the proposed maximum offering price of $12.00, based upon the average of the high and low prices of the Common Stock on January 9, 1996. (2) This Registration Statement covers, in addition, to the number of shares of Common Stock stated above, such indeterminate amount of interests to be offered or sold pursuant to the plan described herein and such indeterminate number of shares of Common Stock as may be granted under the plan by reason of the adjustment provisions thereof. This Registration Statement Includes a Total of 23 Pages. Exhibit Index on Page 15. INFORMATION REQUIRED IN THE SECTION 10(a) PROSPECTUS The following documents listed under this Part 1 and the documents incorporated by reference under Item 3 of Part II to this Form S-8, taken together, constitute a prospectus that meets the requirements of Section 10(a) of the Securities Act of 1933, as amended. The Summary Plan Description for the Oregon Metallurgical Corporation Savings Plan. ITEM 2. REGISTRANT INFORMATION AND EMPLOYEE PLAN ANNUAL INFORMATION. The written statement required to be provided to participants pursuant to this Item is set forth in the Summary Plan Description referenced in Item 1 above. INFORMATION REQUIRED IN THE REGISTRATION STATEMENT Oregon Metallurgical Corporation (the "Registrant") files this Registration Statement with the Securities and Exchange Commission ("Commission") on Form S-8 to register a total of 600,000 shares of the Registrant's Common Stock for issuance pursuant to the Registrant's Savings Plan. ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE. The Registrant incorporates by reference into this Registration Statement the following documents previously filed with, or furnished to, the Commission: (a) The Registrant's latest annual report on Form 10-K filed pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (b) All other reports filed by the Registrant pursuant to Sections 13(a) or 15(d) of the Exchange Act since the end of the fiscal year covered by the annual report on Form 10-K referred to in (a) above. (c) The description of the class of securities that is contained in a registration statement filed under the Exchange Act, including any amendment or report filed for the purpose of updating such description. All documents filed by the Registrant or a plan pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Registration Statement and prior to the filing of a post-effective amendment which indicates that all securities offered hereby have been sold or which deregisters all securities then remaining unsold shall be deemed to be incorporated by reference into this Registration Statement and to be a part hereof from the date of filing of such documents. Any statement made in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Registration Statement to the extent that a statement contained herein or in any other subsequently filed document which is also incorporated or deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Registration Statement. ITEM 4. DESCRIPTION OF SECURITIES. The class of securities to be offered is registered under Section 12 of the Exchange Act. ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL. ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Oregon Business Corporation Act (the "OBCA") permits a corporation to include in its articles of incorporation a provision limiting or eliminating personal liability of a director to the corporation and its shareholders for monetary damages for conduct as a director, except for (a) any breach of the director's duty of loyalty to the corporation or its shareholders; (b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) any unlawful distribution; and (d) any transaction from which the director derived an improper personal benefit. OBCA permits indemnification of officers and directors of the Registrant under certain conditions and subject to certain limitations. Section 60.411 of the OBCA also provides that a corporation has the power to purchase and maintain insurance on behalf of an individual against any liability asserted against or incurred by the individual who is or was a director, officer, employee or agent of the corporation or who, while a director, officer, employee or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, even if the corporation had no power to indemnify the individual against such liability under the provisions of Sections 60.391 or 60.394. Article VII of the Articles of Incorporation, as restated and amended, of the Registrant provides as follows: A. The Corporation shall have the power to indemnify to the fullest extent not prohibited by law any person who is made or threatened to be made a party to, witness in, or otherwise involved in, any action, suit or proceeding, whether civil, criminal, administrative, investigative, legislative, formal or informal, internal or external or otherwise (including an action, suit or proceeding by or in the right of the Corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the Corporation or a fiduciary within the meaning of the Employee Retirement Income Security Act of 1974 with respect to any employee benefit plan of the Corporation, or serves or served at the request of the Corporation as a director, officer, employee or agent or as a fiduciary of an employee benefit plan, or another corporation, partnership, joint venture, trust, or other enterprise. Any indemnification provided pursuant to this Article shall not be exclusive of any rights to which the persons indemnified may otherwise be entitled under any articles of incorporation, bylaw, agreement, statute, policy of insurance, vote of shareholders or Board of Directors, or otherwise, which exists at or subsequent to the time such person incurs or becomes subject to such liability and expense. B. To the fullest extent not prohibited by law, no director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director. No amendment or repeal of this Article, nor the adoption of any provision of these Articles of Incorporation inconsistent with this Article, nor a change in the law, shall adversely affect any right or protection that is based upon this Paragraph B and pertains to conduct that occurred prior to the time of such amendment, repeal, adoption or change. No change in the law shall reduce or eliminate the rights and protections set forth in this Paragraph B unless the change in the law specifically requires such reduction or elimination. If the Oregon Business Corporation Act is amended after this Article becomes effective to authorize corporate action further eliminating or limiting the personal liability of directors of the Corporation, then the liability of directors of the Corporation shall be eliminated or limited to the fullest extent not prohibited by the Oregon Business Corporation Act as so amended. Article XXVIII of the Registrant's Bylaws provides for indemnification of the Registrant's officers and directors to the fullest extent not prohibited by law. Article XXVIII, Section 8 of the Registrant's Bylaws provides that Registrant may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to Article XXVIII upon approval by the Board of Directors of Registrant. Section 7.7 of the Registrant's Savings Plan provides: The Company shall indemnify and defend each member of the Committee and each of its other Employees against any and all claims, loss, damages, expenses (including reasonable attorney fees), and liability arising in connection with the administration of the Plan, except when the same is judicially determined to be due to the gross negligence or willful misconduct of such member or other Employee. ITEM 7. EXEMPTIONS FROM REGISTRATION CLAIMED. EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 4 Specimen Common Stock Certificate (filed previously). 5.1 Opinion of Schwabe, Williamson & Wyatt, P.C. (and Consent). 5.2 Undertaking E. included on page II-4. 23.1 Consent of Independent Public Accountants - Coopers & Lybrand, L.L.P. 23.2 Consent of Schwabe, Williamson & Wyatt, P.C. is contained in Exhibit 5.1. 24 Powers of Attorney of directors and officers of the Registrant are included on page II-5. A. The undersigned Registrant hereby undertakes: (1) to file, during any period in which offers or sales are being made, a post- effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of this 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 this Registration Statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; PROVIDED, however, that clauses (1)(i) and (1)(ii) do not apply if the Registration Statement is on Form S-3, Form S-8 or Form F-3 and the information required to be included in a post- effective amendment by those clauses is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference into this Registration Statement; (2) that for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (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. B. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's Annual Report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this Registration Statement 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. C. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by 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 by such director, officer or controlling person in connection with the securities being registered, 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 Act and will be governed by the final adjudication of such issue. D. The undersigned Registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. E. The undersigned Registrant hereby undertakes to submit the Oregon Metallurgical Corporation Savings Plan and any amendment thereto to the Internal Revenue Service ("IRS") in a timely manner and will make all changes required by the IRS in order to qualify the Savings Plan. THE REGISTRANT. Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Albany, State of Oregon, on January 2, 1996. By /s/ Carlos E. Aguirre Chief Executive Officer & Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Carlos E. Aguirre and Dennis P. Kelly his true and lawful attorney-in-fact and agent, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent with full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. _________________________ _____ ___, 1995 Vice President, Finance Dennis P. Kelly (Principal Financial /s/ Carlos E. Aguirre Jan. 2, 1996 President, Chief Executive Carlos E. Aguirre (Principal Executive Officer) _________________________ _____ ___, 1995 Chairman, Board of _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director THE REGISTRANT. Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Albany, State of Oregon, on December ___, 1995. Chief Executive Officer & Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Carlos E. Aguirre and Dennis P. Kelly his true and lawful attorney-in-fact and agent, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent with full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. /s/ Dennis P. Kelly Jan. 9, 1996 Vice President, Finance Dennis P. Kelly and Principal Accounting Officer) _________________________ _____ ___, 1995 President, Chief Executive Carlos E. Aguirre Officer & Director _________________________ _____ ___, 1995 Chairman, Board of _________________________ ____ ___, 1995 Director _________________________ _____ ___, 1995 Director /s/ Roger V. Carter Jan. 3, 1996 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director THE REGISTRANT. Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Albany, State of Oregon, on December ___, 1995. Chief Executive Officer & Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Carlos E. Aguirre and Dennis P. Kelly his true and lawful attorney-in-fact and agent, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent with full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. _________________________ _____ ___, 1995 Vice President, Finance Dennis P. Kelly (Principal Financial _________________________ _____ ___, 1995 President, Chief Executive Carlos E. Aguirre Officer & Director /s/ Howard T. Cusic 12-27, 1995 Chairman, Board of _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director THE REGISTRANT. Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Albany, State of Oregon, on December ___, 1995. Chief Executive Officer & Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Carlos E. Aguirre and Dennis P. Kelly his true and lawful attorney-in-fact and agent, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent with full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. _________________________ _____ ___, 1995 Vice President, Finance Dennis P. Kelly (Principal Financial _________________________ _____ ___, 1995 President, Chief Executive Carlos E. Aguirre Officer & Director _________________________ _____ ___, 1995 Chairman, Board of _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director /s/ Nicholas P. Collins Dec. 31, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director THE REGISTRANT. Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Albany, State of Oregon, on December ___, 1995. Chief Executive Officer & Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Carlos E. Aguirre and Dennis P. Kelly his true and lawful attorney-in-fact and agent, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent with full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. _________________________ _____ ___, 1995 Vice President, Finance Dennis P. Kelly (Principal Financial _________________________ _____ ___, 1995 President, Chief Executive Carlos E. Aguirre Officer & Director _________________________ _____ ___, 1995 Chairman, Board of _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director /s/ David H. Leonard 12/27, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director THE REGISTRANT. Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Albany, State of Oregon, on December ___, 1995. Chief Executive Officer & Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Carlos E. Aguirre and Dennis P. Kelly his true and lawful attorney-in-fact and agent, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, and to file the same with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent with full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated. _________________________ _____ ___, 1995 Vice President, Finance Dennis P. Kelly (Principal Financial _________________________ _____ ___, 1995 President, Chief Executive Carlos E. Aguirre Officer & Director _________________________ _____ ___, 1995 Chairman, Board of _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director _________________________ _____ ___, 1995 Director /s/ James A. Paddock Jan. 2, 1996 Director _________________________ _____ ___, 1995 Director THE PLAN. Pursuant to the requirements of the Securities Act of 1933, the trustees (or other persons who administer the employee benefit plan) have duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Portland, State of Oregon, on January 10, 1996. Trustee: Key Trust Company of the Northwest By /s/ Roger L.P. Green Roger L.P. Greene, Vice President Arlene Fraser, Vice President and Senior EXHIBIT NUMBER DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER 4 Specimen Common Stock Certificate (filed previously). 5.1 Opinion of Schwabe, Williamson & Wyatt, P.C. (and Consent). 16 5.2 Undertaking E. included on page II-4. 19 23.1 Consent of Independent Public Accountants - 20 Coopers & Lybrand, L.L.P. 23.2 Consent of Schwabe, Williamson & Wyatt, 22 P.C. is contained in Exhibit 5.1. 24 Powers of Attorney of directors and 23 officers of the Registrant are included on page II-5.	S-8	S-8	1996-01-12T00:00:00	1996-01-11T17:39:56
0000912057-96-000463	0000912057-96-000463_0000.txt	Tender Offer Statement Pursuant to Section 14(d)(1) of the Securities Exchange Act of 1934 BAXTER CVG SERVICES II, INC. COMMON STOCK, NO PAR VALUE (TITLE OF CLASS OF SECURITIES) (CUSIP NUMBER OF CLASS OF SECURITIES) (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF BIDDERS) SKADDEN, ARPS, SLATE, MEAGHER & FLOM DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON 1. BAXTER INTERNATIONAL INC. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP 5. / / CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO CITIZENSHIP OR PLACE OF ORGANIZATION 6. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 7. 1,931,426 See Section 11 of the Offer to Purchase dated November 29, 1995 filed as Exhibit (a)(1) to the Statement (as defined herein) 8. / / CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7) 9. 10. TYPE OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON 1. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP 5. / / CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO CITIZENSHIP OR PLACE OF ORGANIZATION 6. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 7. 1,931,426 See Section 11 of the Offer to Purchase dated November 29, 1995 filed as Exhibit (a)(1) to the Statement 8. / / CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7) 9. 10. TYPE OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON 1. Baxter CVG Services II, Inc. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP 5. / / CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO CITIZENSHIP OR PLACE OF ORGANIZATION 6. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 7. 1,931,426 See Section 11 of the Offer to Purchase dated November 29, 1995 filed as Exhibit (a)(1) to the Statement 8. / / CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7) 9. 10. TYPE OF REPORTING PERSON This Amendment No. 3 amends and supplements the Tender Offer Statement on Schedule 14D-1 and Schedule 13D dated November 29, 1995 (as amended by Amendment No. 1 thereto, the "Statement"), filed by Baxter CVG Services II, Inc. ("Purchaser"), a Pennsylvania corporation and direct wholly owned subsidiary of Baxter Healthcare Corporation ("Parent"), a Delaware corporation and indirect wholly owned subsidiary of Baxter International Inc. ("International"), a Delaware corporation (Purchaser, Parent and International, collectively, the "Bidders"), relating to Purchaser's offer to purchase all outstanding shares of Common Stock, no par value (the "Shares") of PSICOR, Inc., a Pennsylvania corporation (the "Company"), at $17.50 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase and the related Letter of Transmittal, copies of which are attached as Exhibits (a)(1) and (a)(2) to the Statement (which are herein referred to as the "Offer"). Capitalized terms not separately defined herein shall have the meanings specified in the Statement. On January 12, 1996, Parent and the Company issued the joint press release attached hereto as Exhibit (a)(12). The information set forth in the press release is incorporated herein by reference. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS. (a)(12) Text of Press Release, dated January 12, 1996, issued by Parent and the Company. After due inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct. By: /S/ HARRY M. JANSEN KRAEMER JR. Name: Harry M. Jansen Kraemer Jr. After due inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct. By: /S/ JAY P. WERTHEIM After due inquiry and to the best of its knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete and correct. BAXTER CVG SERVICES II, INC. By: /S/ JAY P. WERTHEIM Title: Vice President and Secretary	SC 14D1/A	SC 14D1/A	1996-01-12T00:00:00	1996-01-12T17:26:06
0000905729-96-000011	0000905729-96-000011_0000.txt	Information Statement pursuant to Rules 13d-1 and 13d-2 Under the Securities Exchange Act of 1934 COMMON STOCK $10 PAR VALUE (Title of Class of Securities) Check the following box if a fee is being paid with this statement [ ]. (A fee is not required only if the filing person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities described in Item 1; and (2) has filed no amendment subsequent thereto reporting beneficial ownership of five percent or less of such class.) (See Rule 13d-7). *The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter the disclosures provided in a prior cover page. The information required in the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). The filing of this schedule shall not be construed as an admission by Chemical Bank and Trust Company that it is, for purposes of Section 13(d) or 13(g) of the Securities Exchange Act of 1934 or for any other purposes, the beneficial owner of any securities covered by this schedule. (1) Names of Reporting Person S.S. or I.R.S. Identification No. of Above Person Chemical Bank and Trust Company - Trust Department (2) Check the Appropriate Box if a Member of a Group (4) Citizenship or Place of Organization Midland, Michigan Number of (5) Sole Voting Power 849,708 Each (6) Shared Voting Power 0 (7) Sole Dispositive Power 920,574 (8) Shared Dispositive Power 17,118 (9) Aggregate Amount Beneficially Owned by Each (10) Check Box if the Aggregate Amount in Row (9) Excludes Certain Shares [ ] (11) Percent of Class Represented by Amount in Row 9 10.20% (12) Type of Reporting Person BK ITEM 1(A). NAME OF ISSUER: ITEM 1(B). ADDRESS OF ISSUER'S PRINCIPAL EXECUTIVE OFFICES: ITEM 2(A). NAME OF PERSON FILING: Trust Department of Chemical Bank and Trust Company ITEM 2(B). ADDRESS OF PRINCIPAL BUSINESS OFFICE: ITEM 2(D). TITLE OF CLASS OF SECURITIES: Common Stock, $10 par value ITEM 3. IF THIS STATEMENT IS FILED PURSUANT TO RULES 13D-1(B), OR 13D-2(B), CHECK WHETHER THE PERSON IS A: (a) [ ] Broker or dealer registered under Section 15 of the (b) [X] Bank as defined in Section 3(a)(6) of the Act, (c) [ ] Insurance Company as defined in Section 3(a)(19) of the (d) [ ] Investment Company registered under Section 8 of the (e) [ ] Investment Adviser registered under Section 203 of the Investment Advisers Act of 1940, (f) [ ] Employee Benefit Plan, Pension Fund which is subject to the provisions of the Employee Retirement Income Security Act of 1974 or Endowment Fund, (g) [ ] Parent Holding Company, in accordance with Rule (h) [ ] Group, in accordance with Rule 13d-1(b)(1)(ii)(H). (a) Amount Beneficially Owned: 937,692 shares beneficially owned (b) Percent of Class: 10.20% (c) Number of Shares as to which such person has: (i) Sole voting power: 849,708 (ii) Shared voting power: 0 (iii) Sole dispositive power: 920,574 (iv) Shared dispositive power: 17,118 ITEM 5. OWNERSHIP OF FIVE PERCENT OR LESS OF A CLASS. ITEM 6. OWNERSHIP OF MORE THAN FIVE PERCENT ON BEHALF OF ANOTHER PERSON. ITEM 7. IDENTIFICATION AND CLASSIFICATION OF THE SUBSIDIARY WHICH ACQUIRED THE SECURITY BEING REPORTED ON BY THE PARENT HOLDING COMPANY. ITEM 8. IDENTIFICATION AND CLASSIFICATION OF MEMBERS OF THE GROUP. ITEM 9. NOTICE OF DISSOLUTION OF GROUP. By signing below I certify that, to the best of my knowledge and belief, the securities referred to above were acquired in the ordinary course of business and were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer of such securities and were not acquired in connection with or as a participant in any transaction having such purpose or effect. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: As of May 31, 1995 By /S/ BRUCE M. GOOM	SC 13G/A	SC 13G/A	1996-01-12T00:00:00	1996-01-12T17:14:01
0000910503-96-000001	0000910503-96-000001_0000.txt	Securities Exchange Act of 1934 (Title of Class of Securities) 380 East Parkcenter Blvd., Suite 100 (Name, address and telephone number of person authorized to receive notices and communications) (Date of event which requires filing of this Statement) If filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this statement because of Rule 13d-1(b)(3) or (4), check the following box: [ ] Check the following box if a fee is being paid with this statement: [ ] 1. Name of Reporting Person: Kathryn M. Albertson S.S. No. of Above Person: ###-##-#### 2. Check the Appropriate Box if a Member of a Group 4. Source of Funds: N.A.; See Item 3. 5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): [ ] Number of 7. Sole Voting Power: 0 Shares 8. Shared Voting Power: 26,846,046* Beneficially Owned By 9. Sole Dispositive Power: 0 Each Reporting 10. Shared Dispositive Power 26,846,046* Person With: 11. Aggregate Amount Shared voting and shared dispositive Beneficially Owned power in 26,846,046 shares of common by Each Reporting stock. Person: 12. Check if the Aggregate Amount in Row (11) Excludes Certain 13. Percent of Class Represented by Amount in Row 11: 10.62% 14. Type of Reporting Person: IN Excludes 1,180,000 shares held by the J.A. & Kathryn Albertson Foundation, Inc. of which she is a director and officer and in which Kathryn M. Albertson disclaims any beneficial ownership. 1. Name of Reporting Person: Joseph B. Scott S.S. No. of Above Person: ###-##-#### 2. Check the Appropriate Box if a Member of a Group 4. Source of Funds: N.A.; See Item 3. 5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): [ ] Number of 7. Sole Voting Power: 0 Shares 8. Shared Voting Power: 26,846,046 Beneficially Owned By 9. Sole Dispositive Power: 0 Each Reporting 10. Shared Dispositive Power 26,846,046* Person With: 11. Aggregate Amount Shared voting and shared dispositive Beneficially Owned power in 26,846,046 shares of common by Each Reporting stock. Person: 12. Check if the Aggregate Amount in Row (11) Excludes Certain 13. Percent of Class Represented by Amount in Row 11: 10.62% 14. Type of Reporting Person: IN *Excludes 245,440 shares held in trust, of which Joseph B. Scott is not the trustee, for minor children of Joseph B. Scott and in which (as to 160,640 shares) he has an income interest but disclaims any beneficial ownership. Excludes 1,200 shares owned by his spouse in which beneficial ownership is disclaimed. Excludes 1,180,000 shares held by the J.A. & Kathryn Albertson Foundation, Inc. of which he is a director and officer and in which Joseph B. Scott disclaims any beneficial ownership. 1. Name of Reporting Person: Alscott Limited Partnership #1 2. Check the Appropriate Box if a Member of a Group 4. Source of Funds: N.A.; See Item 3. 5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): [ ] 6. Place of Organization: Texas Number of 7. Sole Voting Power: 0 Shares 8. Shared Voting Power: 26,846,046 Beneficially Owned By 9. Sole Dispositive Power: 0 Each Reporting 10. Shared Dispositive Power 26,846,046 Person With: 11. Aggregate Amount Shared voting and shared dispositive Beneficially Owned power in 26,846,046 shares of common by Each Reporting stock. Person: 12. Check if the Aggregate Amount in Row (11) Excludes Certain 13. Percent of Class Represented by Amount in Row 11: 10.62% 14. Type of Reporting Person: PN 1. Name of Reporting Person: Alscott, Inc. 2. Check the Appropriate Box if a Member of a Group 4. Source of Funds: N.A.; See Item 3. 5. Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): [ ] 6. Place of Organization: Idaho Number of 7. Sole Voting Power: 0 Shares 8. Shared Voting Power: 26,846,046 Beneficially Owned By 9. Sole Dispositive Power: 0 Each Reporting 10. Shared Dispositive Power 26,846,046 Person With: 11. Aggregate Amount Shared voting and shared dispositive Beneficially Owned power in 26,846,046 shares of common by Each Reporting stock. Person: 12. Check if the Aggregate Amount in Row (11) Excludes Certain 13. Percent of Class Represented by Amount in Row 11: 10.62% 14. Type of Reporting Person: CO Item 1. Security and Issuer. The class of securities to which this statement relates is the common stock, par value $1.00 per share, (the "Stock") of Albertson's, Inc. (the "Issuer") with the address of 250 Parkcenter Blvd., Box 20, Boise, Idaho 83726. Item 2. Identity and Background. (a) Effective January 1, 1996, all of the assets of Alscott Limited Partnership #2, including the Stock held by the limited partnership, were transferred to Alscott Limited Partnership #1, a Texas limited partnership of which Alscott, Inc. (the "Corporation") is the managing general partner (the "Limited Partnership"), and Alscott Limited Partnership #2 has been liquidated and dissolved. (b) The principal business address and principal office address of the Limited Partnership, the Corporation and each of the Individuals is 380 East Parkcenter Blvd., Suite 100, Boise, Idaho 83706. (c) The principal business of the Limited Partnership and of the Corporation is investments. Kathryn M. Albertson's principal occupation is President of the Corporation. Joseph B. Scott's principal occupation is Vice President of the Corporation. Thomas J. Wilford's principal occupation is Treasurer and Secretary of the Corporation. (d) None of the Limited Partnership, the Corporation or the Individuals has, during the last five years, been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors. (e) None of the Limited Partnership, the Corporation or the Individuals has, during the last five years, been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violation of, or prohibiting or mandating any activity subject to, federal or state securities laws or finding any violation with respect to such laws. (f) Each of the Individuals is a citizen of the United States. Item 3. Source and Amount of Funds or Other Consideration. There was no source or amount of funds or other consideration. Item 4. Purpose of Transaction. The transactions took place in order to conduct the family business in a more efficient manner. Item 5. Interest in Securities of the Issuer. (a) The Limited Partnership holds 26,846,046 shares of Stock, which is 10.62% of the outstanding Stock based upon the number of shares outstanding on December 5, 1995 as set forth in the Report on Form 10-Q filed by the Issuer for the quarter ended November 2, 1995. (b) The managing general partner of the Limited Partnership is the Corporation and the controlling persons of the Corporation are Kathryn M. Albertson and Joseph B. Scott. Therefore, the Limited Partnership, the Corporation, Kathryn M. Albertson and Joseph B. Scott share voting power and dispositive power over the 26,846,046 Shares. (c) Since the filing of Amendment One to the Schedule 13D on August 11, 1995, Kathryn M. Albertson and Joseph B. Scott each exercised a stock option to purchase 2,000 shares of Stock pursuant to the Issuer's 1995 Stock Option Plan for Non-Employee Directors. The 4,000 shares were transferred to Alscott Limited Partnership #2. Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer. The Issuer and Alscott Limited Partnership No. 2 are parties to an agreement dated August 3, 1995 providing for the Issuer to purchase the shares of Stock owned by the Limited Partnership which were previously owned by Kathryn M. Albertson under certain circumstances as set forth in the agreement. While the agreement specifically applies to a successor in interest of Alscott Limited Partnership No. 2, it is anticipated that the agreement will be amended in the near future to formally substitute the Limited Partnership as a party. The Issuer, Alscott Limited Partnership No. 2 and Kathryn M. Albertson are parties to an agreement dated August 3, 1995 which provides for the relationship between the agreement referred to in the preceding paragraph and an agreement dated December 31, 1979 described in the Schedule 13D filed on August 11, 1993. While the agreement specifically applies to a successor in interest of Alscott Limited Partnership No. 2, it is anticipated that the agreement will be amended in the near future to formally substitute the Limited Partnership as a party. The Albertson's, Inc. 1995 Stock Option Plan for Non-Employee Directors provides that each non-employee Director of the Issuer will be granted a nonqualified option to purchase 2,000 shares of Stock on the first business day after each annual stockholders' meeting of the Issuer for the term of the Plan. Item 7. Material to be Filed as Exhibits. After reasonable inquiry and to the best of our knowledge and belief, we certify the information set forth in this amendment is true, complete and correct.	SC 13D/A	SC 13D/A	1996-01-12T00:00:00	1996-01-12T15:49:23
0000038009-96-000011	0000038009-96-000011_0000.txt	PROSPECTUS and Pricing Supplement No. 38 PROSPECTUS SUPPLEMENT, each Effective at 2:45 P.M. Dated October 10, 1995 January 11, 1996 U.S. $4,000,000,000 Rule 424 (b)(3) FORD MOTOR CREDIT COMPANY Statement No. Due from 9 Months to 30 Years from Date of Issue Interest payable each March 15 and September 15 and at Maturity Range of Maturities Per Annum More than 9 months to less than 1 year .......... 2.55% 1 year to less than 18 months................... 3.00 18 months to less than 2 years................... 3.05 2 years to less than 3 years..................... 5.35 3 years to less than 4 years..................... 5.55 4 years to less than 5 years..................... 5.80 5 years to less than 6 years..................... 5.95 6 years to less than 7 years..................... 6.10 7 years to less than 8 years..................... 6.20 8 years to less than 9 years..................... 6.35 9 years to less than 10 years.................... 6.40 10 years to less than 15 years................... 6.45 15 years to less than 20 years................... NA 20 years to less than 25 years................... NA 25 years to less than 30 years................... NA The interest rates on the Medium-Term Notes may be changed by Ford Motor Credit Company from time to time, but any such change will not affect the interest rate on any Medium-Term Note ordered prior to the effective time of the change. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. DAIWA SECURITIES AMERICA INC. NOMURA SECURITIES INTERNATIONAL, INC.	424B3	424B3	1996-01-12T00:00:00	1996-01-12T08:14:27
0000950130-96-000108	0000950130-96-000108_0020.txt	<DESCRIPTION>LORAL CORPORTION SUPPLEMENTAL SEVERANCE PROGRAM Loral Corporation (the "Company") believes that the best interests of the Company and its shareholders will be served if certain key employees who have historically been engaged in or associated with the operations of the Company are encouraged to remain with the Company after the consummation of the Offer for the Common Stock of the Company pursuant to the Agreement and Plan of Merger Dated as of January 7, 1996 By and Among the Company, Lockheed Martin Corporation and LAC Acquisition Corporation (the "Merger Agreement"). Accordingly, the Company hereby establishes this "Loral Corporation Supplemental Severance Program" (the "Program") for the benefit of such key employees. In addition to the terms defined in the preceding paragraph, the following definitions shall apply for purposes of the Program. 1.1. "Annual Salary" means an Eligible Employee's annual rate of base salary as in effect immediately prior to the Effective Date. 1.2. "Board" means the Board of Directors of Lockheed Martin. 1.3. "Cause" means any of the following, other than due to an Eligible Employee's Permanent Disability or death: (a) an Eligible Employee's continuing willful neglect of, or refusal to perform, the duties required or associated with the Eligible Employee's (b) an Eligible Employee's willful disclosure of confidential information or trade secrets of Lockheed Martin which results in material harm to the business or reputation of Lockheed Martin; (c) conviction of a felony, or a misdemeanor involving dishonesty, fraud, theft, larceny, or embezzlement, or any Federal offense of the type described in Article 14 of the Administrative Agreement between Lockheed Martin and the United States Air Force dated June, 1995; or (d) a violation of Lockheed Martin's Standards of Conduct and Code of Ethics, which shall be provided to each Eligible Employee. 1.4. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.5. "Committee" means the Committee of the Board designated to administer the Plan. 1.6. "Company" means the Loral Corporation and any successor or successors thereto. 1.7. "Company Board" means the Board of Directors of the Company. 1.8. "Effective Date" means the date of the successful consummation of the Offer as set forth in the Merger Agreement. 1.9. "Eligible Employee" means each full-time employee of either the Company or another Loral Company selected by the Company Board prior to the Effective Date for participation in the Program. 1.10. "Eligible Termination" means an involuntary termination of employment without Cause (other than by reason of Permanent Disability or death), or a resignation for Good Reason, which occurs on or within the two-year period following the Effective Date; provided, however, that the transfer of employment to another employer that is a member of the Lockheed Martin Companies shall not in itself constitute an Eligible Termination (but any such transfer will not preclude another or accompanying event or reason from constituting or causing an Eligible Termination, and the protections of the Program and corresponding obligations of the Company will remain in effect following any such transfer of employment). 1.11. "Good Reason" means any one or more of the following actions, without an Eligible Employee's express prior written consent or approval, other than due to an Eligible Employee's Permanent Disability or death: (a) any removal of the Eligible Employee from any of the positions he or she holds immediately prior to a Change of Control or an elimination of any such positions, when the effect of such removal or elimination is a material diminution of status, responsibilities or duties, or any lowering of job grade, excluding for this purpose a removal from responsibility for, or involvement with, U.S. Government business affairs which removal is mandated by reason of an indictment, suspension or proposed debarment of the type described in Article 14 Administrative Agreement between Lockheed Martin and the United States Air Force (b) any reduction of an Eligible Employee's Annual Salary. 1.12. "Permanent Disability" means an Eligible Employee's inability, by reason of any physical or mental impairment, to substantially perform the significant aspects of his or her regular duties, which inability is reasonably contemplated to continue for at least one (1) year from its incurrence. 1.13. "Offer" means the Offer as defined in Section 1.1(a) of the Merger Agreement. 1.14. "Program" means the Loral Corporation Supplemental Severance Program, as set forth herein and as amended from time to time. 1.15. "Severance Period" means the period commencing on the date of an Eligible Employee's Eligible Termination and continuing for a period of twelve months. 1.16. "Lockheed Martin" means Lockheed Martin Corporation. 1.17. "Lockheed Martin Companies" means Lockheed Martin and its subsidiaries and affiliates, and any successor or successors thereto. 1.18. "Target Bonus" means the annual bonus which would be payable to an Eligible Employee for the calendar year in which an Eligible Termination occurs, calculated on the assumption that the Eligible Employee and one or more Loral Companies or the Lockheed Martin Companies (or those entities or business units within the Loral Companies or the Lockheed Martin Companies) on whose performance the eligible Employee's bonus depends achieve the applicable target performance goals established under the applicable bonus plan with respect to that year. If no target performance goals for the year in which the Eligible Termination occurs have been set prior to the Eligible Termination, the Target Bonus shall be determined by substituting, in the previous sentence, the highest annual bonus paid to the Eligible Employee during the three years immediately preceding the year in which an Eligible Termination occurs. 1.19. "Loral Companies" means the Company and its subsidiaries and affiliates, and any successor or successors thereto. SECTION 2. EFFECT OF AN ELIGIBLE TERMINATION 2.1. If an Eligible Employee incurs an Eligible Termination, the Eligible Employee shall be entitled to all applicable benefits provided hereafter in this Section 2 or as otherwise set forth in this Program. (a) Payment of Salary Amount: Within twenty (20) business days after the date of his or her Eligible Termination, the Company shall pay or cause to be paid to the Eligible Employee a single lump sum amount, in cash, equal to the sum of (i) the Eligible Employee's Annual Salary, and (ii) the Eligible Employee's Target Bonus. (b) Welfare Benefits: Within thirty (30) days after the date of his or her Eligible Termination, the Company shall pay to the Eligible Employee a single lump amount equal to the full cost of coverage for such Eligible Employee (taking into account any special medical or other conditions applicable to such Eligible Employee) during the Severance Period (or, if the Eligible Employee is provided with such coverage at no additional cost to him or her under any other severance plan or arrangement, for the period from the date such coverage terminates until the end of the Severance Period) for medical, dental, life insurance, disability and accidental death and dismemberment benefits at the level provided to such Eligible Employee immediately prior to such Eligible Termination. (c) Payment of Accrued But Unpaid Amounts: Within twenty (20) business days after the date of his or her Eligible Termination, the Company shall pay the Eligible Employee any unpaid portion of the Eligible Employee's bonus accrued with respect to the full calender year ended prior to the date of the Eligible Termination and all compensation earned by such Eligible Employee but not yet paid (including cash compensation for vacation days accrued but not taken as of the date of the Eligible Termination, based on the Annual Salary amount converted to a per diem equivalent in accordance with the Company's normal payroll practices as in effect prior to the Effective Date), except that any compensation deferred by the Eligible Employee under any qualified or non-qualified deferred compensation plans shall be paid in accordance with the terms and provisions of such plans. (d) Payment for Other Reduced Severance Benefits. The amounts payable to an Eligible Employee under this Section 2 are supplemental to any other severance benefits to which the Eligible Employee is entitled under any severance plan or program of the Loral Companies in effect as of the Effective Date (collectively, "Other Severance Benefits"). In the event that an Eligible Employee's Other Severance Benefits are reduced or eliminated after the Effective Date without consent, the amount otherwise payable to an Eligible Employee hereunder upon an Eligible Termination shall be increased by the amount of such reduction or elimination. 2.2. Maximum Benefits: Anything in Section 2.1 to the contrary notwithstanding, payments under Section 2.1 shall not exceed the maximum amount which can be paid to an Eligible Employee without causing such payments to be treated as "excess parachute payments" for purposes of Section 280G of the Code taking into account all payments made to the Eligible Employee which constitute "parachute payments" for purposes of Section 280G. 2.3. Mitigation: An Eligible Employee shall not be required to mitigate damages or the amount of any payment provided for under this Program by seeking other employment or otherwise, and compensation earned from such employment or otherwise shall not reduce the amounts otherwise payable under this Program. No amounts payable under this Program shall be subject to reduction or offset in respect of any claims which the Company or any member of the Loral Companies (or any other person or entity) may have against the Eligible Employee. 2.4. Withholding: The Company may, to the extent required by law, withhold applicable federal and state income, employment and other taxes from any payments due to any Eligible Employee hereunder. SECTION 3. LIMITS ON AMENDMENT OR TERMINATION; EFFECT ON OTHER PLANS 3.1. The Company Board may terminate this Program prior to the Effective Date. As of the Effective Date, this Program (expressly including, but not limited to, this Section 3) shall remain in effect, and may not be altered or amended in any way which would adversely affect the rights of any Eligible Employee hereunder, for at least two (2) years following the Effective Date, and for such additional time as may be necessary to give effect to the terms of the Program as in effect at the Effective Date. Thereafter, the Company may amend or terminate this Program in any manner which does not adversely affect the rights of any Eligible Employee who has incurred an Eligible Termination. 3.2. An Eligible Employee shall, after the date of his or her Eligible Termination, retain all rights (to the extent any such rights existed at any time prior to the Effective Date) to indemnification under applicable law or under the applicable Loral Companies' Certificate of Incorporation or By-laws, as they may be amended or restated from time to time. In addition, to the extent coverage had been otherwise available to the Eligible Employee prior to the Effective Date, the Company shall maintain Director's and Officer's liability insurance on behalf of the Eligible Employee, at the level in effect immediately prior to the date of his or her Eligible Termination. SECTION 4. ADMINISTRATION OF THE PROGRAM 4.1. The Committee shall be the Administrator of this Program and shall have the exclusive right, power and authority to: (a) interpret, in its sole discretion, any and all of the provisions of (b) establish a claim review procedure, if necessary and advisable; and (c) consider and decide conclusively any questions (whether of fact or otherwise) arising in connection with the administration of the Program or any claim for a benefit arising under the Program. Any decision or action of the Committee pursuant to this Section 4.1 shall be conclusive and binding. 5.1. Neither the establishment of the Program nor any action of the Company, any other member of the Loral Companies or the Lockheed Martin Companies, the Committee, or any fiduciary shall be held or construed to confer upon any person any legal right to continued employment with the Company or with any member of the Loral Companies or the Lockheed Martin Companies. Nothing in the Program shall be construed to prevent the Company or any member of the Loral Companies or the Lockheed Martin Companies from terminating an eligible Employee's employment for Cause. If an Eligible Employee is terminated for Cause, the Company shall have no obligation to make any payments under this Program, except for payments that may otherwise be payable under then existing employee benefit plans, programs and arrangements of the Company or of any other member of the Loral Companies or the Lockheed Martin Companies. 5.2 Benefits payable under the Program shall be paid out of the general assets of the Company. The Company is not required to fund the benefits payable under this Program; provided, however, nothing in this Section 5.2 shall be precluding the Company from funding or setting aside amounts in anticipation of paying any such benefits. 5.3. Benefits payable under the Program shall not be subject to assignment, alienation, transfer, pledge, encumbrance, commutation or anticipation by any Eligible Employee. Any attempt to assign, alienate, transfer, pledge, encumber, commute or anticipate Program benefits shall be void. In addition, no rights or interest under the Program shall be in any manner subject to levy, attachment or other legal process to enforce payment of any claim against any Eligible Employee except to the extent required by law. 5.4. Except as otherwise provided herein, this Program shall be binding upon, inure to the benefit of and be enforceable by the Company and the Eligible Employees and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Program shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation, and such provisions shall also be binding upon and inure to the benefit of any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, and such successor shall assume and perform the obligations, responsibilities and liabilities to which the Company or any member of the Loral Companies is subject under this Program in the same manner and to the same extent that the Company or any member of the Loral Companies would be required to perform if no such succession had taken place. The provisions of this Section 5.4 shall continue to apply to each subsequent employer of any Eligible Employee in the event of any subsequent merger, consolidation or transfer of assets of any such subsequent employer. 5.5 This Program shall be governed by and construed in accordance with the laws of the State of New York (without reference to rules relating to conflicts of laws), except to the extent superseded by applicable federal law. 5.6. Any action required or permitted to be taken by the Company under this Plan shall be taken by the Company Board, the Board or by the Committee, or any designee of the Committee pursuant to Section 4, in each case subject to the limits on amendment and termination contained in Section 3 hereof. 5.7. Entitlement to any benefits under this Program is expressly subject to and conditioned upon the Eligible Employee agreeing to and signing (i) a customary exit letter that may contain confidentiality, future cooperation and other provisions, if requested, and (ii) the Company's standard form general release of employment and other claims that the Eligible Employee may have.	SC 14D1	EX-99.(C)(8)	1996-01-12T00:00:00	1996-01-12T17:26:30
0000950134-96-000100	0000950134-96-000100_0000.txt	<DESCRIPTION>SUPPLEMENT DATED JANUARY 2, 1996 SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF STAGECOACH FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. MONEY MARKET MUTUAL FUND - CLASS A SHARES CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND As Supplemented on August 24, 1995 MONEY MARKET MUTUAL FUND - CLASS A SHARES CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND Stagecoach Funds, Inc. ("Stagecoach Funds") and Stagecoach Inc. are professionally managed, open-end series investment companies, consisting of several separate funds, each with different investment objectives and policies. This Prospectus contains information about three of the funds in the Stagecoach Family of Funds-the MONEY MARKET MUTUAL FUND and the CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND of Stagecoach Funds, and the NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND of Stagecoach Inc. (each a "Fund" and, collectively, the "Funds" or "Money Market Funds"). AN INVESTMENT IN THE FUNDS AND SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUNDS OR THE SERIES WILL BE ABLE TO MAINTAIN A CONSTANT $1.00 NET ASSET VALUE PER SHARE. This Prospectus sets forth concisely information about the Funds and the Series that a prospective investor should know before investing. It should be read and retained for future reference. Statements of Additional Information ("SAIs"), dated May 1, 1995, for the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund, and dated July 19, 1995 for the National Tax-Free Money Market Mutual Fund have been filed with the Securities and Exchange Commission ("SEC") and are incorporated by reference. The SAI for each Fund is available free of charge by writing to Stagecoach Shareholder Services, Wells Fargo Bank, N.A., P.O. Box 7066, San Francisco, CA 94120-7066 or by calling 800-222-8222. Information concerning Class S Shares is also available by calling this number. If you hold shares in an IRA, please call 1-800-BEST-IRA for information or assistance. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. PROSPECTUS DATED MAY 1, 1995 AS SUPPLEMENTED ON AUGUST 24, 1995 The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. This Prospectus describes the Class A Shares of the Money Market Mutual Fund. The Money Market Mutual Fund offers a second class of shares, Class S Shares, that are available only to qualified business investors who purchase Fund shares through certain non-interest bearing transaction accounts at Wells Fargo Bank. The CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND seeks to obtain a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations. The NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income exempt from federal income taxes, while preserving capital and liquidity. The Fund seeks to achieve its investment objective by investing all of its assets in the Tax-Free Money Market Master Series (the "Series") of Managed Series Investment Trust (the "Master Trust"), an open-end, management investment company, rather than in a portfolio of securities. The Series has the same investment objective as the Fund. The Funds are advised by Wells Fargo Bank which also serves as the Funds' transfer and dividend disbursing agent and custodian. In addition, Wells Fargo Bank is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below). Stephens Inc. ("Stephens") is the Funds' sponsor and administrator and serves as the distributor of the Funds' shares. Stagecoach Inc. and Stagecoach Funds are sometimes referred to herein individually as a "Company" and together as the "Companies." WELLS FARGO BANK IS THE INVESTMENT ADVISER TO THE FUNDS AND/OR SERIES AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS AND SERIES, FOR WHICH IT IS COMPENSATED. STEPHENS, WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUNDS. SUMMARY OF FUND EXPENSES 5 HOW THE FUNDS WORK 10 THE FUNDS, THE MASTER TRUST AND MANAGEMENT 16 INVESTING IN THE FUNDS 19 HOW TO REDEEM SHARES 26 MANAGEMENT AND SERVICING FEES 33 PROSPECTUS APPENDIX - ADDITIONAL INVESTMENT POLICIES A-1 The Funds provide you with a convenient way to invest in a portfolio of securities selected and supervised by professional management. The following provides you with summary information about each of the Funds. For more information, please refer specifically to the identified Prospectus sections and generally to the Prospectus and the SAI for each Fund. Q. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? A. The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. In pursuing this objective, the Fund invests in securities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"). These securities include obligations of the U.S. Government, its agencies and instrumentalities, high-quality debt obligations such as corporate debt, certain obligations of U.S. banks and certain repurchase agreements. The CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND seeks to obtain a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations. The Fund, in pursuing its objective, invests in securities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the 1940 Act. Under normal market conditions, substantially all of the Fund's assets will be invested in California municipal obligations that are exempt from federal income taxes and California personal income taxes. Certain risks may arise from the Fund's concentration in investments in California municipal obligations. The NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income exempt from federal income taxes, while preserving capital and liquidity. The Fund seeks to achieve its investment objective by investing all of its assets in the Tax-Free Money Market Master Series of the Master Trust, which has the same investment objective as the Fund. The Series seeks to achieve this investment objective by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations, with remaining maturities not exceeding thirteen months. Each Fund and the Series seeks to maintain a net asset value of $1.00 per share; however, there is no assurance that this will be achieved. See "How the Funds Work -- Investment Objectives and Policies" and "Prospectus Appendix -- Additional Investment Policies." Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the investment adviser to the Money Market Mutual Fund, the California Tax-Free Money Market Mutual Fund and the Series, manages your investments. A separate investment adviser has not been retained for the National Tax-Free Money Market Mutual Fund because this Fund invests all of its assets in the Series. Wells Fargo Bank also provides the Funds and the Series with transfer agency, dividend disbursing agency and custodial services. In addition, Wells Fargo Bank is a Shareholder Servicing Agent and a Selling Agent (as defined below) of the Funds. See "The Funds, the Master Trust and Management" and "Management and Servicing Fees." Q. HOW DO I INVEST? A. You may invest by purchasing Fund shares at their net asset value. You may open an account by investing at least $2,500, and you may add to your account by making additional investments of at least $100, although certain exceptions to these minimums may be available. Shares may be purchased by wire, by mail, or by an automatic investment feature called the AutoSaver Plan on any day the Funds are open. Shares of the California Tax-Free Money Market Mutual Fund and The National Tax-Free Money Market Mutual Fund may not be suitable investments for tax-exempt institutions or tax-exempt retirement plans, since such investors would not benefit from the exempt status of such Funds' dividends. See "Investing in the Funds." In addition, California Tax-Free Money Market Mutual Fund shares are not available in all states. For more details, contact Stephens (the Funds' sponsor and distributor), a Shareholder Servicing Agent (such as Wells Fargo Bank) or a Selling Agent. Q. WHAT ARE THE FEES FOR INVESTING? A. Unlike certain other mutual funds that charge sales loads or other transaction fees, the Funds do not impose shareholder transaction fees on the purchase, redemption or exchange of their shares, or for reinvesting dividends. For its advisory services, Wells Fargo Bank is entitled to monthly investment advisory fees at the annual rate of 0.50%, 0.40% and 0.30% of the average daily net assets of the California Tax-Free Money Market Mutual Fund, the Money Market Mutual Fund, and the Series, respectively. Wells Fargo Bank also provides transfer agency services and custody services to the Funds and the Series. Wells Fargo Bank is not entitled to any additional compensation for providing such services to the Funds or the Series. For its services as administrator of the Funds and the Series, Stephens is entitled to receive an annual fee at the rate of 0.05% of the average daily net assets of each Fund. The Funds have adopted Distribution Plans under the SEC's Rule 12b-1 which permit payment of a monthly fee at the annual rate of 0.05% of each Fund's daily net assets to Stephens as compensation for distribution-related services. The National Tax-Free Money Market Mutual Fund has adopted a Shareholder Servicing Plan pursuant to which it may enter into agreements with Shareholder Servicing Agents. The Shareholder Servicing Plans permit the Funds to compensate Shareholder Servicing Agents at a rate of up to 0.30%, 0.30% and 0.25% of the average daily net assets of the California Tax-Free Money Market Mutual Fund, the Money Market Mutual Fund, and the National Tax-Free Money Market Mutual Fund, respectively. See "The Funds, The Master Trust and Management." Q. HOW ARE THE FUNDS' INVESTMENTS VALUED? A. The price per share or "net asset value"("NAV") of a Fund depends upon the total value of portfolio securities owned by such Fund (plus cash and other assets net of liabilities) and the number of its shares outstanding. In the case of the National Tax-Free Money Market Mutual Fund, the NAV depends upon the total value of portfolio securities owned by the Series (plus cash and other assets net of liabilities) and the number of the Series' shares outstanding. Wells Fargo Bank calculates the NAV for each Fund and the Series on each day that the Funds and the Series are open. See "Investing in the Funds -- Share Price." Q. HOW WILL I RECEIVE DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS? A. Dividends from net investment income are declared daily, paid monthly and automatically reinvested in additional shares of the Funds at net asset value unless you elect to receive dividends in cash. Any capital gains are distributed at least annually. See "Dividends" and "Additional Shareholder Services." Q. ARE EXCHANGES TO OTHER FUNDS PERMITTED? A. Yes. The exchange privilege enables you to exchange Fund shares for shares of another fund offered pursuant to another prospectus of the respective fund's company, or shares of certain other investment companies in the Stagecoach Family of Funds, to the extent such shares are offered for sale in your state of residence. See "Additional Shareholder Services -- Exchange Privilege." Q. HOW MAY I REDEEM SHARES? A. You may redeem your shares, without charge by a Fund, by letter, by an automatic feature called the Systematic Withdrawal Plan, or by telephone unless you have declined telephone privileges, on any day the relevant Fund is open for business. See "How To Redeem Shares." For more details, contact Stephens, a Shareholder Servicing Agent (such as Wells Fargo Bank) or a Selling Agent. Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT? A. Investments in the Funds or the Series are not bank deposits or obligations of Wells Fargo Bank and are not insured by the Federal Deposit Insurance ("FDIC"), nor are they insured or guaranteed against loss of principal. Although the Funds and the Series seek to maintain a stable net asset value of $1.00 per share, there is no assurance that they will be able to do so. Since the California Tax-Free Money Market Mutual Fund invests primarily in securities issued by California, its agencies and municipalities, events in California are more likely to affect this Fund's investments. Also, the California Tax-Free Money Market Mutual Fund is nondiversified, which means that its assets may be invested among fewer issuers and therefore the value of its assets may be subject to greater impact by events affecting one of its investments. You should be prepared to accept some risk with the money you invest in these Funds. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. This expense summary is a standard format required for all mutual funds to help you understand the various costs and expenses you will bear directly or indirectly as a shareholder of the Funds. As shown below, you are not charged sales charges, redemption fees, or exchange fees. You should consider this expense information together with the important information in this Prospectus, including the Funds' investment objectives and policies. (AS A PERCENTAGE OF AVERAGE NET ASSETS) SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell Fund shares. There are no Shareholder Transaction Expenses for these Funds. However, the Company reserves the right to impose a charge for wiring redemption proceeds. ANNUAL FUND OPERATING EXPENSES for the Class A Shares of the Money Market Mutual Fund and shares of the California Tax-Free Money Market Mutual Fund are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Annual Fund Operating Expenses for the National Tax-Free Money Market Mutual Fund summarize expenses charged at the Master Trust level as well as expenses charged at the Company level. The amounts shown above for the National Tax-Free Money Market Mutual Fund under "Management Fee," "Rule 12b-1 Fee" and "Administrative Fee" reflect contract amounts; the amounts shown under "Shareholder Servicing Fee," "Miscellaneous Expenses," "Total Other Expenses" and "Total Fund Operating Expenses" reflect certain anticipated voluntary fee waivers and expense reimbursements for the current fiscal year. Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees if certain Fund expenses exceed limits set by state securities laws or regulations. In addition, Wells Fargo Bank and Stephens each, at its sole discretion, may waive or reimburse all or a portion of its respective fees charged to, or expenses paid by, a Fund or the Series. Any waivers or reimbursements would reduce the total expenses of the Funds or Series. There can be no assurance that such waivers or reimbursements would continue. Absent waivers and reimbursements, the percentages shown above under "Rule 12b-1 Fee," "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.05%, 0.44% and 0.89%, respectively, for the Class A Shares of the Money Market Mutual Fund and 0.05%, 0.53% and 1.08%, respectively, for the California Tax-Free Money Market Mutual Fund. Absent waivers and reimbursements, "Shareholder Servicing Fee," "Miscellaneous Expenses," "Total Other Expenses" Expenses" would be 0.25%, 0.30%, 0.60% and 0.95%, respectively, for the National Tax-Free Money Market Mutual Fund. Long-term shareholders in the Funds could pay more in sales charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers ("NASD"). For more complete descriptions of the various costs and expenses you can expect to incur as an investor in each Fund, please see the Prospectus section captioned "Management and Servicing Fees." EXAMPLE OF EXPENSES is a hypothetical example which illustrates the expenses associated with a $1,000 investment over the periods shown, based on the expenses in the table above and an assumed annual rate of return of 5%. This rate of return should not be considered an indication of actual or expected performance of a Fund. In addition, the example should not be considered a representation of past or future expenses and actual expenses may be greater or lesser than those shown. If current fee waivers and/or reimbursements are discontinued, the amounts contained in the "Example of Expenses" may increase. With regard to the combined fees and expenses of the National Tax-Free Money Market Mutual Fund and the Series, the Board of Directors of Stagecoach Inc. has considered whether various costs and benefits of investing all the Fund's assets in the Series would be more or less than if the Fund invested in portfolio securities directly, and believes that the Fund should achieve economic efficiencies by investing in the Series. Additionally, the Board of Directors believes that the aggregate fees assessed by this Fund and the Series should be less than those expenses that the Directors believe would be incurred had the Fund invested directly in the securities held by the Series. See the Prospectus sections captioned "The Funds, the Master Trust and Management" and "Management and Servicing Fees" for more complete descriptions of the various costs and expenses applicable to investors in this Fund. In addition, if this Fund were to change its fundamental investment strategy and no longer invest in the Series of the Master Trust, these expenses may change. The following information relating to the Class A Shares of the Money Market Mutual Fund and the shares of the California Tax-Free Money Market Mutual Fund has been derived from the Financial Highlights in such Funds' 1994 annual financial statements. The financial statements are included in the SAI for each such Fund and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is included in the SAIs. This information should be read in conjunction with the 1994 annual financial statements for these Funds and the notes thereto. The SAI for each of the Funds has been incorporated by reference into this Prospectus. Financial information is not provided in connection with the National Tax-Free Money Market Mutual Fund because the Fund had not begun operations during the periods presented. FOR A CLASS A SHARE OUTSTANDING CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND THE MONEY MARKET MUTUAL FUND The Money Market Mutual Fund seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. The Fund invests its assets only in U.S. dollar-denominated, high-quality money market instruments, and may engage in certain other investment activities as described in this Prospectus. Permitted investments include U.S. Government short-term obligations, obligations of domestic and foreign banks, commercial paper, and repurchase agreements. In pursuing its objective, the Fund invests in instruments with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the 1940 Act. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. A more complete description of these investments and investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the SAI. THE CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND The California Tax-Free Money Market Mutual Fund seeks to obtain a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations. This investment objective is fundamental and cannot be changed without shareholder approval. There can be no assurance that the Fund, which is a nondiversified portfolio, will achieve its investment objective. Wells Fargo Bank, as investment adviser to the Fund, pursues the Fund's objective by investing (under normal market conditions) substantially all of the Fund's assets in the following types of municipal obligations that pay interest which is exempt from both federal income tax and California personal income tax: bonds, notes, and commercial paper issued by or on behalf of the State of California, its cities, municipalities, political subdivisions and other public authorities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the 1940 Act. These municipal obligations and the taxable investments described below may bear interest at rates that are not fixed ("floating- and variable-rate instruments"). The California Tax-Free Money Market Mutual Fund, which is nondiversified, may temporarily invest some of its assets in certain high-quality, taxable money market instruments or may engage in certain other investment activities as described in this Prospectus. The Fund may elect to invest temporarily up to 20% of its net assets in certain permitted taxable investments, which include cash reserves, U.S. Government obligations, obligations of domestic and foreign commercial paper, taxable municipal obligations, repurchase agreements, and loans of portfolio securities. Such temporary investments would most likely be made when there is an unexpected or abnormal level of investor purchases or redemptions of Fund shares or because of unusual market conditions. The income from these temporary investments and investment activities may be subject to federal income taxes and California personal income taxes. However, as stated above, Wells Fargo Bank seeks to invest substantially all of the Fund's assets in securities exempt from such taxes. An additional description of tax-free municipal obligations, taxable money market instruments, and other investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the SAI. As a matter of fundamental policy, at least 80% of the California Tax-Free Money Market Mutual Fund's net assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from federal income taxes and not subject to the federal alternative minimum tax (or in other open-end tax-free money market funds with a similar fundamental policy). At least 65% of the Fund's total assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from California personal income taxes. However, as a matter of general operating policy, the Fund seeks to have substantially all of its assets invested in such municipal obligations. The Fund's investment adviser may rely either on an opinion of counsel to the issuer of the municipal obligations or on Internal Revenue Service ("IRS") rulings regarding the tax treatment of these obligations. In addition, the Fund may invest 25% or more of its assets in California municipal obligations that are related in such a way that an economic, business or political development or change affecting one such obligation would also affect the other obligations; for example, the California Tax-Free Money Market Mutual Fund may own different municipal obligations which pay interest based on the revenues of similar types of projects. THE NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND The National Tax-Free Money Market Mutual Fund seeks to provide investors with a high level of income exempt from federal income taxes, while preserving capital and liquidity. The Fund seeks to achieve its investment objective by investing all of its assets in the Series, which has the same investment objective as the Fund. The Series seeks to achieve this investment objective by investing in high-quality, U.S. dollar denominated money market instruments, primarily municipal obligations, with remaining maturities not exceeding thirteen months. Since the investment characteristics of the Fund will correspond directly to those of the Series, the following is a discussion of the various investments of and techniques employed by the Series of the Master Trust. Wells Fargo Bank, as investment adviser to the Series, pursues the investment objective of the Series by investing (under normal market conditions) substantially all of the Series' assets in the following types of municipal obligations that pay interest which is exempt from federal income tax: bonds, notes and commercial paper issued by or on behalf of states, territories, and possessions of the United States (including the District of Columbia) and their political subdivisions, agencies, instrumentalities (including government-sponsored enterprises) and authorities, the interest on which, in the opinion of counsel to the issuer or bond counsel, is exempt from federal income tax. These municipal obligations and the taxable investments described below may bear interest at rates that are not fixed ("floating- and variable-rate instruments"). The Series may temporarily invest some of its assets in cash reserves or certain high-quality, taxable money market instruments, or may engage in other investment activities as described in this Prospectus. The Series may elect to invest temporarily up to 20% of its net assets in certain permitted taxable investments, which include cash reserves, U.S. Government obligations, obligations of domestic banks, commercial paper, taxable municipal obligations and repurchase agreements. The Series may also invest in U.S. dollar-denominated obligations of foreign banks and foreign securities. Such temporary investments would most likely be made when there is an unexpected or abnormal level of investor purchases or redemptions of interests in the Series or because of unusual market conditions. The income from these temporary investments and investment activities may be subject to federal income tax. However, as stated above, Wells Fargo Bank seeks to invest substantially all of the Series' assets in securities exempt from such taxes. A more complete description of tax-free municipal obligations, taxable money market instruments, and other investment activities is contained in the "Prospectus Appendix -- Additional Investment Policies." As a matter of fundamental policy, at least 80% of the net assets of the Series are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from federal income tax and is not subject to the federal alternative minimum tax. However, as a matter of general operating policy, the Series seeks to invest substantially all of its assets in such municipal obligations. The Series' investment adviser may rely either on the opinion of counsel to the issuer of the municipal obligations or on IRS rulings regarding the tax treatment of these obligations. In addition, the Series may invest 25% or more of its assets in municipal obligations that are related in such a way that an economic, business or political development or change affecting one such obligation would also affect the other obligations; for example, the Series may own different municipal obligations which pay interest based on the revenues of similar types of projects. The National Tax-Free Money Market Mutual Fund is a feeder fund in a master/feeder structure. Accordingly, it invests all of its assets in the Series. The Series has the same investment objective as the Fund. See "How the Funds Work -- Investment Objectives and Policies." In addition to selling its shares to the Fund, the Series may sell its shares to other mutual funds or other accredited investors. Information regarding additional options, if any, for investments in shares of the Series is available from Stephens by calling 800-643-9691 or by calling Wells Fargo Bank at 800-222-8222. The expenses and, correspondingly, the returns of other investment options in the Series may differ from those of the Fund. The Board of Directors of Stagecoach Inc. believes that certain economic efficiencies may be realized if other mutual funds or institutional investors invest their assets in the Series. For example, fixed expenses that otherwise would have been borne solely by the Fund would be spread among a potentially larger asset base provided by more than one fund investing in the Series. The Fund and other entities (if any) investing in the Series would each be liable for all obligations of the Series. However, the risk of the Fund incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance exists and the Master Trust itself is unable to meet its obligations. Accordingly, Stagecoach Inc.'s Board of Directors believes that neither the Fund nor its shareholders will be adversely affected by reason of investing their assets in the Series. However, if a mutual fund or other investor withdraws its investment from the Series, the economic efficiencies (e.g., spreading fixed expenses across a larger asset base) that Stagecoach Inc.'s Board believes should be available through investment in the Series may not be fully achieved. In addition, given the relatively novel nature of the master/feeder structure, accounting and operational difficulties, although unlikely, could occur. The investment objectives and other fundamental policies of the National Tax-Free Money Market Mutual Fund and the Series cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of such Fund's or Series' outstanding voting shares. Whenever the Fund, as a Series interestholder, is requested to vote on matters pertaining to any fundamental policy of such Series, the Fund will hold a meeting of its shareholders to consider such matters and will cast its votes in proportion to the votes received from Fund shareholders. The Fund will vote Series shares for which it receives no voting instructions in the same proportion as the votes received from Fund shareholders. In addition, certain policies of the Series which are non-fundamental could be changed by vote of a majority of the Master Trust's Trustees without interestholder vote. If the Series' investment objective or fundamental or non-fundamental policies are changed, the Fund investing in such Series could subsequently change its objective or policies to correspond to those of the Series, or the Fund could redeem its Series shares and either seek a new investment company in which to invest with a matching objective or retain its own investment adviser to manage the Fund's portfolio in accordance with its objective. In the latter case, the Fund's inability to find a substitute investment company in which to invest or equivalent management services could adversely affect shareholders' investments in the Fund. The Fund will provide shareholders with 30 days' written notice prior to the implementation of any change in the investment objective of such Fund or the Series, to the extent possible. Additional information regarding the officers and directors of Stagecoach Inc. and the Master Trust is included in the SAI for each Fund under "Management." The Funds and the Series, under the 1940 Act, must comply with certain investment criteria designed to provide liquidity, reduce risk, and allow the Funds and the Series to maintain a stable net asset value of $1.00 per share. Of course, the Funds and the Series cannot guarantee a $1.00 share price. The dollar-weighted average portfolio maturity of each of the Funds and the Series must not exceed 90 days. Any security that a Fund or the Series purchases must have a remaining maturity of not more than thirteen months. In addition, any security that a Fund or the Series purchases must present minimal credit risks and be of high quality (i.e., be rated in the top two rating categories by the required number of nationally recognized statistical rating organizations ("NRSROs") or, if unrated, determined to be of comparable quality to such rated securities). These determinations are made by Wells Fargo Bank, as the Funds' or Series' investment adviser, as the case may be, under guidelines adopted by the Board of Directors of each Company, or the Master Trust's Board of Trustees, respectively. The Funds and the Series seek to reduce risk by investing their assets in securities of various issuers. As such, the Money Market Mutual Fund, the National Tax-Free Money Market Mutual Fund and the Series, but not the California Tax-Free Money Market Mutual Fund, will be considered to be diversified for purposes of the 1940 Act. In addition, the Funds, since their respective inceptions, have emphasized safety of principal and high credit quality. In particular, the internal investment policies of Wells Fargo Bank, the investment adviser to the Funds and Series, have always prohibited the purchase for the Funds and Series of many types of floating-rate derivative securities that are considered potentially volatile. The following types of derivative securities ARE NOT permitted investments for the Funds and the Series: - capped floaters (on which interest is not paid when market rates move above - leveraged floaters (whose interest-rate reset provisions are based on a formula that magnifies changes in interest rates); - range floaters (which do not pay any interest if market interest rates move outside of a specified range); - dual index floaters (whose interest-rate reset provisions are tied to more than one index so that a change in the relationship between these indices may result in the value of the instrument falling below face value); and - inverse floaters (which reset in the opposite direction of their index). Additionally, the Funds and the Series may not invest in securities whose interest rate reset provisions are tied to an index that materially lags Cost of Funds Index ("COFI") floaters. The Funds and the Series may only invest in floating-rate securities that bear interest at a rate that resets quarterly or more frequently, and which resets based on changes in standard money market rate indices such as U.S. Government Treasury bills, London Interbank Offered Rate, the prime rate, published commercial paper rates, federal funds rates, Public Securities Associates ("PSA") floaters or JJ Kenney index floaters. Since the California Tax-Free Money Market Mutual Fund invests primarily in securities issued by California and its agencies and municipalities, events in California will be more likely to affect the Fund's investments. While the California Tax-Free Money Market Mutual Fund seeks to reduce risk by investing its assets in securities of various issuers, the Fund will be considered to be nondiversified for purposes of the 1940 Act. However, the California Tax-Free Money Market Mutual Fund will comply with Internal Revenue Code of 1986 ("Code") diversification requirements, as described in the "Prospectus Appendix -- Additional Investment Policies" section below. California is experiencing recurring budget deficits caused by lower than anticipated tax revenues and increased expenditures for certain programs. These budget deficits have depleted the state's available cash resources, and the state has recently had to use a series of external borrowings to meet its cash needs. In addition, since 1992 some of the credit rating agencies have assigned their third highest rating to certain of the state's debt obligations. On July 15, 1994, three of the ratings agencies rating California's long-term debt lowered their rating of the state's general obligation bonds. Moody's Investors Service lowered its rating from "Aa" to "A1," Standard & Poor's Ratings Group lowered its rating from "A+" to "A" and termed its outlook as "stable," and Fitch Investors Service lowered its rating from "AA" to "A." Since the California Tax-Free Money Market Mutual Fund may invest only in securities rated in the top two rating categories, any further rating downgrade of the state's debt obligations may impact the availability of securities that meet the Fund's investment policies and restrictions. The Fund's investment adviser continues to monitor and evaluate the Fund's investments in light of the events in California and the California Tax-Free Money Market Mutual Fund's investment objective and investment policies. The rating agencies also continue to monitor events in the state and the state and local governments' responses to budget shortfalls. See "Special Considerations Affecting California Municipal Obligations" in the SAI for the California Tax-Free Money Market Mutual Fund. Investments in the Funds are not insured against loss of principal. Although Wells Fargo Bank seeks to achieve the investment objectives of the Funds, there is no assurance that the Funds will be able to maintain a constant $1.00 net asset value per share. The Funds are subject to interest rate risk (i.e., the risk that increases in market interest rates may adversely affect the value of the securities in which the Funds invest and hence the value of your investment in the Funds; the value of such securities generally changes inversely to market interest rates.) See "Prospectus Appendix -- Additional Investment Policies" for further discussion of investment objectives and risks. The performance of the Class A Shares of the Money Market Mutual Fund and the shares of the Tax-Free Funds may be advertised in terms of current yield or effective yield. In addition, the performance of the Tax-Free Funds may be advertised in terms of tax-equivalent yield or effective tax-equivalent yield. These performance figures are based on historical results and are not intended to indicate future performance. The investment performance of the National Tax-Free Money Market Mutual Fund will correspond to the investment experience of the Series. Yield refers to the income generated by an investment in shares of a Tax-Free Fund, or Class of shares of the Money Market Mutual Fund, over a specified period (7-day or 30-day), expressed as an annual percentage rate. Effective yields are calculated similarly but assume that the income earned from a Fund is reinvested in the Fund or in shares of the same class of such Fund. Because of the effects of compounding, effective yields are slightly higher than yields. The tax-equivalent yield and the effective tax-equivalent yield of the Tax-Free Funds assume that a stated income tax rate has been applied to determine the tax-equivalent figures. The application of the stated income tax rate results in higher yield and effective yield figures. The Tax-Free Funds may also present nonstandard performance information, such as distribution rate, for purposes of sales literature. Performance quotations are computed separately for Class A Shares and Class S Shares of the Money Market Mutual Fund. Additional performance information is contained in each Company's annual report which is available upon request without charge by calling the Company at 800-222-8222. THE FUNDS, THE MASTER TRUST THE MONEY MARKET MUTUAL FUND AND THE CALIFORNIA TAX-FREE The Money Market Mutual Fund and the California Tax-Free Money Market Mutual Fund are two funds of Stagecoach Funds. Stagecoach Funds was organized as a Maryland corporation on September 9, 1991, and currently offers shares of nine other funds: the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Income Fund, the Corporate Stock Fund, the Diversified Income Fund, the Ginnie Mae Fund, the Growth and Income Fund, the Short-Intermediate U.S. Government Income Fund and the U.S. Government Allocation Fund. The Money Market Mutual Fund also offers a second class of shares -- Class S Shares. Class S Shares are subject to different levels of fees and expenses than Class A Shares and the performance of such shares may vary accordingly. Class S Shares are currently available only to qualified business investors who purchase such shares through certain non-interest bearing transaction accounts with Wells Fargo Bank. Please contact Stagecoach Shareholder Services at 800-222-8222 if you would like additional information about Class S Shares. The Board of Directors of Stagecoach Funds supervises these funds' activities and monitors their contractual arrangements with various service providers. Although Stagecoach Funds is not required to hold annual shareholder meetings, special meetings may be required for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Funds' investment objectives or fundamental investment policies. All shares of Stagecoach Funds have equal voting rights and will be voted in the aggregate, rather than by fund or class, unless otherwise required by law (such as when the voting matter affects only one fund or class). As a shareholder of the Funds, you are entitled to one vote for each share you own and fractional votes for fractional shares owned. A more detailed description of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the SAI for each Fund. THE NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND AND THE MASTER TRUST The National Tax-Free Money Market Mutual Fund is a fund of Stagecoach Inc. Stagecoach Inc. was organized as a Maryland corporation on October 15, 1992, and currently includes the following thirteen other funds: the Asset Allocation Fund, the Bond Index Fund, the California Tax-Free Intermediate Income Fund, the California Tax-Free Money Market Fund, the California Tax-Free Short-Term Income Fund, the Growth and Income Fund, the Growth Stock Fund, the Money Market Fund, the National Tax-Free Intermediate Income Fund, the Overland National Tax-Free Institutional Money Market Fund, the Short-Intermediate Term Fund, the S&P 500 Stock Fund and the U.S. Treasury Allocation Fund. The Board of Directors of Stagecoach Inc. supervises these funds' activities and monitors their contractual arrangements with various service providers. As noted above, the Fund may withdraw its investment in the Series only if the Board of Directors of Stagecoach Inc. determines that this is in the best interests of the Fund and its shareholders to do so. Upon any such withdrawal, the Board of Directors of Stagecoach Inc. would consider what action might be taken, including the investment of all the assets of the Fund in another pooled investment entity having the same investment objective as the Fund or the hiring of an investment adviser to manage the Fund's assets in accordance with the investment policies described above with respect to the Series. Although Stagecoach Inc. is not required to hold annual shareholder meetings, special meetings may be required for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Fund's investment objective or fundamental investment policies. All shares of Stagecoach Inc. have equal voting rights and will be voted in the aggregate, rather than by fund, unless otherwise required by law (such as when the voting matter affects only one fund). As a shareholder of the Fund, you are entitled to one vote for each share you own and fractional votes for fractional shares owned. In addition, whenever the Fund is requested to vote on matters pertaining to the Series, Stagecoach Inc. will hold a meeting of the Fund's shareholders and will cast its vote as instructed by Fund shareholders. The Directors of Stagecoach Inc. will vote shares for which they receive no voting instructions in the same proportion as the shares for which they do receive voting instructions. A more detailed statement of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the SAI for the Fund. The Master Trust was established on October 28, 1993, as a Delaware business trust. The Master Trust's Declaration of Trust permits the Board of Trustees to issue beneficial interests in the Master Trust to investors based on their proportionate investments in the Master Trust. The Master Trust is divided into separate portfolios called series. The Master Trust has retained the services of Wells Fargo Bank as investment adviser and Stephens as administrator and placement agent. The Board of Trustees of the Master Trust is responsible for the general management of the Master Trust and supervising the actions of Wells Fargo Bank and Stephens in these capacities. Because this Prospectus combines disclosures relating to two separate investment companies, there is a possibility that one investment company might become liable for a misstatement, inaccuracy or incomplete disclosure in this Prospectus concerning the other investment company. Stagecoach Inc. and Stagecoach Funds have entered into an indemnification agreement that creates a right of indemnification from the investment company responsible for any such misstatement, inaccuracy or incomplete disclosure that may appear in this Prospectus. Wells Fargo Bank is the investment adviser to the Series, the Money Market Mutual Fund and the California Tax-Free Money Market Mutual Fund. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of June 30, 1995, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $211 billion of assets of individuals, trusts, estates and institutions. As of the same date, Wells Fargo Bank provided investment advisory services for approximately $28 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank also serves as the investment adviser to the other separately managed series of the Master Trust, funds of Stagecoach Inc. and Stagecoach Funds and to four other registered, open-end, management investment companies each of which consists of several separately managed investment portfolios. Wells Fargo Bank, a wholly owned subsidiary of Wells Fargo & Company, is located at 420 Montgomery Street, San Francisco, California 94105. Morrison & Foerster, counsel to Stagecoach Funds, Stagecoach Inc. and the Master Trust and special counsel to Wells Fargo Bank, has advised Stagecoach Funds, Stagecoach Inc., the Master Trust and Wells Fargo Bank that Wells Fargo Bank may perform the services contemplated by the Advisory Contracts without violation of the Glass-Steagall Act or other applicable banking laws or regulations. Such counsel has pointed out, however, that there are no controlling judicial or administrative interpretations or decisions and that future judicial or administrative interpretations of, or decisions relating to, present federal or state statutes, including the Glass-Steagall Act, and regulations relating to the permissible activities of banks and their subsidiaries or affiliates, as well as future changes in such statutes, regulations and judicial or administrative decisions or interpretations, could prevent Wells Fargo Bank from continuing to perform, in whole or in part, such services. If Wells Fargo Bank were prohibited from performing any such services, it is expected that the Board of Directors/Trustees would recommend to the shareholders/interestholders that they approve a new advisory agreement with another entity or entities qualified to perform such services. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank is also the Funds' and the Series' custodian and transfer and dividend disbursing agent. In addition, Wells Fargo Bank is a Shareholder Servicing Agent and Selling Agent of the Funds. Stephens is the Funds' and the Master Trust's sponsor and administrator, and distributes the Funds' shares. Stephens is a full service broker/dealer and investment advisory firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit-sharing plans, individual investors, foundations, insurance companies and university endowments. You can buy Fund shares in one of the several ways described below. You must complete and sign an Account Application to open an account. Additional documentation may be required from corporations, associations, and certain fiduciaries. Do not mail cash. If you have any questions or need extra forms, you may call 800-222-8222. After an application has been processed and an account has been established, subsequent purchases of different funds of the Company under the same umbrella account do not require the completion of additional applications. A separate application must be processed for each different umbrella account number (even if the registration is the same). Call the number on your confirmation statement to obtain information about what is required to change registration. The Companies or Stephens may make the Prospectus available in an electronic format. Upon receipt of a request from you or your representative, the relevant Company or Stephens will transmit or cause to be transmitted promptly, without charge, a paper copy of the electronic Prospectus. The price of a share of each Fund is its net asset value ("NAV"). The NAV of each share of the California Tax-Free Money Market Mutual Fund and the National Tax-Free Money Market Mutual Fund is computed by adding the value of the respective Fund's portfolio investments plus cash and other assets, deducting liabilities and then dividing the result by the number of outstanding shares of such Fund. The National Tax-Free Money Market Mutual Fund's investments in the Series are valued at the NAV of the Series' shares. The Series calculates the NAV of its shares on the same day and at the same time as the National Tax-Free Money Market Mutual Fund. The NAV of a share of each Class of the Money Market Mutual Fund is the value of total net assets attributable to each Class divided by the number of outstanding shares of that Class. The value of the net assets per Class is determined daily by adjusting the net assets per Class at the beginning of the day by the value of each Class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each Class by attributing to each Class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each Class as appropriate. As noted above, the Funds seek to maintain a constant $1.00 per share NAV, although there is no assurance that they will be able to do so. Shares of a Fund may be purchased on any day such Fund is open (a "Business Day"). Currently, the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund observe the following holidays: New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, with respect to such Funds, a "Holiday"), the National Tax-Free Money Market Mutual Fund observes the aforementioned Holidays and also observes Martin Luther King, Jr. Day, Columbus Day and Veterans Day (with respect to such Fund, these days are also "Holidays"). The NAV of each Fund's shares is calculated as of 9:00 a.m. (Pacific time) on any day such Fund is open. The NAV of shares acquired through other means may be calculated at other times. All transaction orders are processed at the NAV next determined after the order is received. The Funds' and the Series' NAV are each calculated on the basis of the amortized cost method. This valuation method is based on the receipt of a steady rate of payment from the date of purchase until maturity rather than actual changes in market value. The Boards of Directors of Stagecoach Funds and of Stagecoach Inc., respectively and the Master Trust's Board of Trustees believe that this valuation method accurately reflects fair value. You may buy shares of the Funds on any Business Day by any of the methods described below. After a properly completed Account Application is received and your wire order or check is received, or an account with a bank, which is designated in the Account Application and which is approved by the Transfer Agent (an "Approved Account") is debited, your purchase order will be made effective and full and fractional shares will be purchased at the next determined NAV, which is expected to remain a constant $1.00 per share. If shares are purchased by a check which does not clear, the purchase may be cancelled and the investor may be held responsible for any losses or fees incurred. In addition, the Funds may hold payment on any redemption until reasonably satisfied that investments made by check have been collected (which may take up to 15 days). Stagecoach Inc. and Stagecoach Funds reserve the right to reject any purchase order or suspend sales at any time. Generally, the minimum initial investment amount is $2,500. However, the minimum initial investment amount is $100 for investments made through the AutoSaver Plan purchase method (described below) and $250 for investments in Class A Shares of the Money Market Mutual Fund made through any tax-sheltered retirement account for which Wells Fargo Bank serves as custodian or trustee under a prototype trust approved by the IRS (a "Plan Account"). Where shares of the California Tax-Free Money Market Mutual Fund, Class A Shares of the Money Market Mutual Fund or shares of the National Tax-Free Money Market Mutual Fund are purchased in exchange for shares of another fund in the Stagecoach Family of Funds, the minimum initial investment amount applicable to the shares being exchanged carries over. This means, for example, that you can invest $1,000 in shares of the California Tax-Free Money Market Mutual Fund,Class A Shares of the Money Market Mutual Fund or shares of the National Tax-Free Money Market Mutual Fund even though each such Fund ordinarily requires a $2,500 minimum balance, in an exchange from a fund that has a $1,000 minimum balance. In addition, the minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. In addition, the minimum initial purchase amount does not apply to investors who purchase shares of the Funds as customers of a financial institution which has established a cash sweep arrangement with respect to one of the Funds. All subsequent investments must be at least $100. If you have questions regarding purchases of shares, please contact the Company at 800-222-8222 or contact a Shareholder Servicing Agent or Selling Agent (defined below). Shares of the National Tax-Free Money Market Mutual Fund and the California Tax-Free Money Market Mutual Fund may not be suitable investments for tax-exempt institutions or tax-sheltered retirement plans, since such investors would not benefit from the exempt status of the Funds' dividends. See "Federal Income Taxes - Special Tax Considerations" in the SAI for each Fund. In addition, California Tax-Free Money Market Mutual Fund shares are not available in all states. 1. Complete an Account Application. 2. Instruct the wiring bank to transmit the specified amount in federal funds ($2,500 or more) to: Wire Purchase Account Number: 4068-000587 Attention: Stagecoach Funds (Name of Fund) (designate Class A, if Account Name(s): Name(s) in which to be registered Account Number: (if investing into an existing account) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the NAV next determined after the Account Application is received and accepted. 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $2,500 or more, payable to "Stagecoach Funds (Name of Fund) (designate Class A, if applicable)," to the address set forth in "Initial Purchases by Wire." 3. Share purchases are effected at the NAV next determined after the Account Application is received and accepted. The AutoSaver Plan provides you with a convenient way to establish and automatically add to your Fund account on a monthly basis. To participate in the AutoSaver Plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a designated Approved Bank account. Wells Fargo Bank is an Approved Bank. The Transfer Agent withdraws and uses this amount to purchase shares of the specified Fund on your behalf on or about the fifth Business Day of each month. There are no separate fees charged to you by the Funds for participating in the AutoSaver Plan. You may change your investment amount, suspend purchases or terminate your election at any time by notifying the Transfer Agent at least five Business Days prior to any scheduled transaction. You may be entitled to invest in the Money Market Mutual Fund through a Plan Account or other tax-deferred retirement plan. Contact a Shareholder Servicing Agent (such as Wells Fargo Bank) or a Selling Agent for materials describing Plan Accounts available through it, and the benefits, provisions, and fees of such Plan Accounts. The minimum initial investment amount for Class A Shares of the Money Market Mutual Fund acquired through a Plan Account is $250. Pursuant to the Code, individuals who are not active participants (and who do not have a spouse who is an active participant) in certain types of retirement plans ("qualified retirement plans") may deduct contributions to an Individual Retirement Account ("IRA"), up to specified limits. Investment earnings in the IRA will be tax-deferred until withdrawn, at which time the individual may be in a lower tax bracket. The maximum annual deductible contribution to an IRA for individuals under age 70 1/2 is 100% of includible compensation up to a maximum of (i) $2,000 for single individuals; (ii) $4,000 for a married couple when both spouses earn income; and (iii) $2,250 when one spouse earns, or elects for IRA purposes to be treated as earning, no income (together the "IRA contribution limits"). The IRA deduction is also available for single individual taxpayers and married couples who are active participants in qualified retirement plans but who have adjusted gross incomes which do not exceed certain specified limits. If their adjusted gross income exceeds these limits, the amount of the deductible contribution may be phased down and eventually eliminated. Any individual who works may make nondeductible contributions to an IRA in addition to any deductible contributions. Total aggregate deductible and nondeductible contributions are limited to the IRA contribution limits discussed above. Nondeductible contributions in excess of the applicable IRA contribution limit are "nondeductible excess contributions." In addition, contributions made to an IRA for the year in which an individual attains the age of 70 1/2, or any year thereafter, are also nondeductible excess contributions. Nondeductible excess contributions are subject to a 6% excise tax penalty which is charged each year that the nondeductible excess contribution remains in the IRA. An employer also may contribute to an individual's IRA by establishing a Simplified Employee Pension Plan through a Shareholder Servicing Agent or a Selling Agent, known as a SEP-IRA. Participating employers may make an annual contribution in an amount up to the lesser of 15% of earned income or $30,000, subject to certain provisions of the Code. Investment earnings will be tax-deferred until withdrawn. The foregoing discussion regarding IRAs is based on the Code and regulations in effect as of the date of this Prospectus and summarizes only some of the important federal tax considerations generally affecting IRA contributions made by individuals or their employers. It is not intended as a substitute for careful tax planning. Investors should consult their tax advisors with respect to their specific tax situations as well as with respect to state and local taxes. Further federal tax information is contained under the heading "Taxes" in this Prospectus and in the SAI for each Fund. A Shareholder Servicing Agent or Selling Agent also may offer other types of tax-deferred or tax-advantaged plans, including a Keogh retirement plan for self-employed professional persons, sole proprietors and partnerships. Application materials for opening a tax-deferred retirement plan can be obtained from a Shareholder Servicing Agent or a Selling Agent. Return your completed tax-deferred retirement plan application to your Shareholder Servicing Agent or a Selling Agent for approval and processing. If your tax-deferred retirement plan application is incomplete or improperly filled out, there may be a delay before a Fund account is opened. You should ask your Shareholder Servicing Agent or Selling Agent about the investment options available to your tax-deferred retirement plan, since some of the funds in the Stagecoach Family of Funds may be unavailable as options. Moreover, certain features described herein, such as the AutoSaver Plan and the Systematic Withdrawal Plan, may not be available to individuals or entities who invest through a tax-deferred retirement plan. You may make additional purchases of $100 or more by instructing the Funds' Transfer Agent to debit a designated Approved Bank account, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Stagecoach Funds (name of Fund) (designate Class A, if applicable)" to the address set forth in "Initial Purchases by Wire." Write your Fund account number on the check and include the detachable stub from your Statement of Account or a letter providing your Fund account number. You may place a purchase order for shares of the Funds through a broker/dealer or financial institution which has entered into a Selling Agreement with Stephens, as the Funds' Distributor ("Selling Agent"), by 9:00 a.m. (Pacific time) on any Business Day, including placing an order for which payment is to be made from your free cash credit balance in a securities account maintained with a Selling Agent. These purchase orders generally will be executed on the same day the order is placed if notice is provided to the Transfer Agent by 9:00 a.m. and federal funds are received by the Transfer Agent before the close of business. If your purchase order is received by a Selling Agent after 9:00 a.m. on any Business Day or federal funds are not received by the Transfer Agent before the close of business, then your purchase order generally will be executed on the next Business Day following the day your order is placed. The Selling Agent is responsible for the prompt transmission of your purchase order to the Funds. A Selling Agent which is a financial institution may be required to register as a dealer pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. PURCHASES THROUGH SHAREHOLDER SERVICING AGENTS Purchase orders for shares of the Funds may be transmitted to the Transfer Agent through any entity that has entered into a Shareholder Servicing Agreement with the Funds ("Shareholder Servicing Agent"), such as Wells Fargo Bank. See "Management and Servicing Fees - Shareholder Servicing Agent." The Shareholder Servicing Agent may transmit a purchase order to the Transfer Agent, on your behalf, including a purchase order for which payment is to be transferred from an account with an Approved Bank or wired from a financial institution. If your order is transmitted by the Shareholder Servicing Agent to the Transfer Agent before 9:00 a.m. (Pacific time) and federal funds are received by the Transfer Agent before the close of business, the purchase order generally will be executed on the same day. If your Shareholder Servicing Agent transmits your purchase order to the Transfer Agent after 9:00 a.m. or federal funds are not received by the Transfer Agent before the close of business, then your order will be executed on the next Business Day, except that automated investment program purchase orders transmitted through Shareholder Servicing Agents are executed at 1:00 p.m. on each Business Day. The Shareholder Servicing Agent is responsible for the prompt transmission of your purchase order to the Transfer Agent. Financial Institutions acting as Shareholder Servicing Agents required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. The Funds, or a Shareholder Servicing Agent on their behalf, will typically send you a monthly statement of your account after every month in which there has been a transaction that affects your share balance or your Fund account registration. The Funds do not issue share certificates. A statement with tax information will be mailed to you by January 31 of each year, and also will be filed with the IRS. At least twice a year, you will receive financial statements. The Funds intend to declare dividends on a daily basis payable to shareholders of record as of 9:00 a.m. (Pacific time). If your purchase order is received before 9:00 a.m. on any Business Day, you begin earning dividends on that Business Day and continue to earn dividends through the day prior to the date you redeem such shares. If your purchase order for shares is processed at or after 9:00 a.m. on any Business Day, you begin earning dividends on the next Business Day and continue to earn dividends through the day on which you redeem your shares. Dividends for a Saturday, Sunday or Holiday are declared payable to shareholders of record as of the preceding Business Day. If you redeem shares before a dividend payment date, any dividends credited to you are paid on the following dividend payment date unless you have redeemed all of the shares in your account, in which case you will receive your accrued dividends together with your redemption proceeds. The Funds will distribute any capital gains at least annually. Dividends declared in a month generally are paid on the last Business Day of such month. You have three options for receiving dividends and any capital gain distributions. They are discussed under "Additional Shareholder Services - Dividend and Distribution Options." You may redeem all or a portion of your shares in a Fund on any Business Day without any charge by the Funds. Your shares will be redeemed at the next NAV calculated after the Funds have received your redemption request in proper form. Redemption proceeds may be more or less than the amount invested and, therefore, a redemption of shares in a Fund may result in a gain or loss for federal and state income tax purposes. The Funds ordinarily remit your redemption proceeds within seven days after your redemption order is received in proper form, unless the SEC permits a longer period under extraordinary circumstances. Such extraordinary circumstances could include a period during which an emergency exists as a result of which (a) disposal by the Funds and/or Series of securities owned by them is not reasonably practicable or (b) it is not reasonably practicable for the Funds and/or Series fairly to determine the value of their net assets, or a period during which the SEC by order permits deferral of redemptions for the protection of security holders of the Funds and/or Series. In addition, the Funds may hold payment on your redemption until reasonably satisfied that your investments made by check have been collected (which can take up to 15 days from the purchase date). To ensure acceptance of your redemption request, please follow the procedures described below. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. Due to the high cost of maintaining Fund accounts with small balances, the Funds reserve the right to close your account and send you the proceeds if the balance falls below the applicable minimum balance because of a redemption (including a redemption of Fund shares after you have made only the applicable minimum initial investment). You will be given 30 days' notice to make an additional investment to increase your account balance to an amount equal to or greater than the applicable minimum balance. For a discussion of applicable minimum balance requirements, see "Investing in the Funds - How to Buy Shares." Redemption orders that are received by the Transfer Agent before 9:00 a.m. (Pacific Time) on any Business Day generally will be executed on that Business Day. Redemption orders that are received after 9:00 a.m. on any Business Day generally will be executed on the next Business Day. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you specifically decline such privileges. Telephone redemption privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Companies require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the relevant Company and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Companies nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. 1. Write a letter of instruction. Indicate the dollar amount or number of Fund shares you want to redeem. Refer to your Fund account number and give your social security or taxpayer identification number (where applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. Signature guarantees are not required for redemption requests unless redemption proceeds of $5,000 or more are to be paid to someone other than you at your address of record or your designated Approved Bank account, or other unusual circumstances exist which cause the Transfer Agent to determine that a signature guarantee is necessary or prudent to protect against unauthorized redemption requests. If required, a signature must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is an FDIC member, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation may be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. Mail your letter to the Transfer Agent at the mailing address set forth under "Investing in the Funds - Initial Purchases by Wire." Unless other instructions are given in proper form, a check for your redemption proceeds will be sent to your address of record. EXPEDITED REDEMPTIONS BY MAIL OR TELEPHONE You may request an expedited redemption of Fund shares by letter, in which case your receipt of redemption proceeds, but not the Fund's receipt of your redemption request, would be expedited. Telephone redemption or exchange privileges are made available to you automatically upon the opening of an account unless you specifically decline such privileges. You also may request an expedited redemption of Fund shares by telephone on any Business Day, in which case both your receipt of redemption proceeds and the Fund's receipt of your redemption request would be expedited. You may request expedited redemption by telephone only if the total value of the shares redeemed is equal to $100 or more. You may request expedited redemption by telephone by calling the Transfer Agent at the telephone number listed on your transaction confirmation or by calling 800-222-8222. You may mail your expedited redemption request to the Transfer Agent at the mailing address set forth under "Investing in the Funds - Initial Purchases by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more will be wired or credited to an Approved Bank account designated in your Account Application or wired to the Selling Agent designated in your Account Application. The Companies reserve the right to impose a charge for wiring redemption proceeds. When proceeds of your expedited redemption are to be paid to someone else, to an address other than that of record, or to an account with an Approved Bank or Selling Agent that you have not predesignated in your Account Application, your expedited redemption request must be made by letter and the signature(s) on the letter may be required to be guaranteed, regardless of the amount of the redemption. If your expedited redemption request is received by the Transfer Agent before 9:00 a.m. (Pacific time) on a Business Day, your redemption proceeds will be transmitted to your designated account with an Approved Bank or Selling Agent on the same Business Day (assuming your investment check has cleared as described above), absent extraordinary circumstances. Such extraordinary circumstances could include those described above as potentially delaying redemptions, and also could include situations involving an unusually heavy volume of wire transfer orders on a national or regional basis or communication or transmittal delays that could cause a brief delay in the wiring or crediting of funds. A check for proceeds of less than $5,000 will be mailed to your address of record, or, at your election, credited to an Approved Bank account designated in your Account Application. During periods of drastic economic or market activity or changes, you may experience problems implementing an expedited redemption by telephone. In the event you are unable to reach the Transfer Agent by telephone, you should consider using overnight mail to implement an expedited redemption. The Funds reserve the right to modify or terminate the expedited telephone redemption privilege at any time. The Company's Systematic Withdrawal Plan provides you with a convenient way to have Fund shares redeemed from your account and the proceeds distributed to you on a monthly basis. You may participate in this plan only if you have a Fund account valued at $10,000 or more as of the date of your election to participate, your dividend and capital gain distributions are being reinvested automatically and you are not a participant in the AutoSaver Plan at any time while participating in the Systematic Withdrawal Plan. You specify an amount ($100 or more) to be distributed by check to your address of record or deposited in your Approved Bank account designated in the Account Application. The Transfer Agent redeems sufficient shares and mails or deposits your redemption proceeds as instructed on or about the fifth Business Day prior to the end of each month. There are no separate fees charged to you by the Funds for participating in the Systematic Withdrawal Plan. You may change your withdrawal amount, suspend withdrawals or terminate your participation in the Systematic Withdrawal Plan at any time by notifying the Transfer Agent at least ten Business Days prior to any scheduled transaction. Your participation in the Systematic Withdrawal Plan will be terminated automatically if your Fund account is closed or, in some cases, if your Approved Bank account is closed. You may request a redemption of Fund shares through your Selling Agent. Redemption orders transmitted by a Selling Agent to the Transfer Agent before 9:00 a.m. (Pacific time) on any Business Day will be executed on that day. Redemption orders transmitted by a Selling Agent to the Transfer Agent after 9:00 a.m. on any Business Day will be executed on the next Business Day. The Selling Agent is responsible for the prompt transmission of your redemption order to the Funds. Unless you have made other arrangements with a Selling Agent, and the Transfer Agent has been informed of such arrangements, proceeds of a redemption order made by you through a Selling Agent will be credited to an account with an Approved Bank that you have designated in the Account Application. If no such account is designated, a check for the proceeds will be mailed to your address of record or, if such address is no longer valid, the proceeds will be credited to your account with the Selling Agent. You may request a check from the Selling Agent or may elect to retain the redemption proceeds in such account. The Selling Agent may charge you a service fee. In addition, it may benefit from the use of your redemption proceeds until the check it issues to you has cleared or until such proceeds have been disbursed or reinvested on your behalf. REDEMPTIONS THROUGH SHAREHOLDER SERVICING AGENTS You may request a redemption of shares of a Fund through your Shareholder Servicing Agent. Any redemption request made by telephone through your Shareholder Servicing Agent must redeem shares with a total value equal to $100 or more. Redemption orders transmitted by a Shareholder Servicing Agent to the Transfer Agent before 9:00 a.m. (Pacific time) will be executed on that day. Redemption orders transmitted by a Shareholder Servicing Agent to the Transfer Agent after 9:00 a.m. will be executed on the next Business Day, except that automated investment program redemption orders transmitted through Shareholder Servicing Agents are executed at 1:00 p.m. on each Business Day. The Shareholder Servicing Agent is responsible for the prompt transmission of your redemption order to the Funds. Unless you have made other arrangements with your Shareholder Servicing Agent, and the Transfer Agent has been informed of such arrangements, proceeds of a redemption order made by you through your Shareholder Servicing Agent will be credited to an account with the Approved Bank that you have designated in the Account Application. If no such account is designated, a check for the proceeds will be mailed to your address of record or, if such address is no longer valid, the proceeds will be credited to your account with your Shareholder Servicing Agent or to another account designated in your agreement with your Shareholder Servicing Agent. The Companies offer you a number of optional services. As noted above, you can take advantage of the AutoSaver Plan, the Systematic Withdrawal Plan, and Expedited Redemptions by Letter and Telephone. In addition, the Funds offer you three dividend and distribution payment options and an exchange privilege, which are described below. When you fill out your Account Application, you can choose from three dividend and distribution options: A. The AUTOMATIC REINVESTMENT OPTION provides for the reinvestment of your dividends and capital gain distributions in additional shares of the same Class of the Fund which paid such dividends or capital gain distributions. Dividends and distributions declared in a month generally are reinvested at NAV on the last Business Day of such month. You are assigned this option automatically if you make no choice on your Account Application. B. The AUTOMATIC CLEARING HOUSE OPTION permits you to have dividends and capital gain distributions deposited in your Approved Bank account designated in the Account Application. In the event your Approved Bank account is closed, your distribution will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf. C. The CHECK PAYMENT OPTION lets you receive a check for all dividends and capital gain distributions, which generally is mailed either to your designated address or your designated Approved Bank shortly following declaration. If the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, your distributions will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf. The Companies forward moneys to the dividend disbursing agent so that it may issue you dividend checks under the Check Payment Option. The dividend disbursing agent may benefit from the temporary use of such moneys until these checks clear. Wells Fargo Bank advises a variety of other funds, each with its own investment objective and policies. The exchange privilege is a convenient way for you to buy shares in the other funds of the Stagecoach Family of Funds that are registered in your state of residence in order to respond to changes in your investment and savings goals or in market conditions. Before you make an exchange from a Fund into another fund of the Stagecoach Family of Funds, please observe the following: - Obtain and carefully read the prospectus of the fund into which you want to exchange. Prospectuses may be obtained by calling 800-222-8222. - Shares are exchanged at the next determined NAV. - You may exchange shares of the California Tax-Free Money Market Mutual Fund and Class A Shares of the Money Market Mutual Fund for shares of one of the Company's single-class funds, for Class A or Class B Shares of one of the Company's multi-class funds or for Retail Shares of another fund. You may also exchange shares of the California Tax-Free Money Market Mutual Fund for Class A Shares of the Money Market Mutual Fund and vice versa. - If you exchange into a fund with a front-end sales charge, you must pay the difference between that fund's sales charge and any sales charge you already have paid in connection with the shares you are exchanging. - Each exchange, in effect, represents the redemption of shares of one fund and the purchase of shares of another, which may produce a gain or loss for tax purposes. A confirmation of each exchange transaction is sent to you. - The dollar amount of shares you exchange must meet the minimum initial and/or subsequent investment amounts of the other fund. - The Companies reserve the right to limit the number of times shares may be exchanged between funds, to reject any telephone exchange order, to charge a nominal exchange fee (although it currently does not do so) or otherwise to modify or discontinue exchange privileges at any time. Under SEC rules, subject to limited exceptions, each Company must notify you 60 days before it modifies or discontinues the exchange privilege. The procedures applicable to Fund share redemptions also apply to Fund share exchanges. In particular, because the only transaction orders that are processed at 1:00 p.m. are those that are received at that time through Shareholder Servicing Agents in connection with automated investment programs, exchange orders received through other means after 9:00 a.m. will be processed on the next day that is a Business Day for both funds involved in the exchange. In addition, a signature guarantee may be required for exchanges between shareholder accounts registered in identical names if the amount being exchanged is more than $25,000. To exchange shares, write the Transfer Agent at the mailing address under "Investing in the Funds - Initial Purchases by Wire" or call the Transfer Agent at the telephone number listed on your transaction confirmation, or contact your Shareholder Servicing Agent or Selling Agent. The procedures applicable to telephone redemptions, including the discussion regarding the responsibility for the authenticity of telephone instructions, are also applicable to telephone exchange requests. See "How to Redeem Shares - Expedited Redemptions by Letter and Telephone." Subject to the overall supervision of the Boards of Directors of Stagecoach Funds and Stagecoach Inc. and the Board of Trustees of the Master Trust, Wells Fargo Bank, as the Funds' and the Series' investment adviser, provides investment guidance and policy direction in connection with the management of the Funds' assets. Wells Fargo Bank also furnishes the Board of Directors with periodic reports on the Funds' investment strategies and performance. For these services, Wells Fargo Bank is entitled to a monthly investment advisory fee at the annual rate of 0.40% of the average daily net assets of the Money Market Mutual Fund, 0.50% of the average daily net assets of the California Tax-Free Money Market Mutual Fund and 0.30% of the average daily net assets of the Series, of which the National Tax-Free Money Market Mutual Fund bears a pro rata portion. From time to time, Wells Fargo Bank may waive such fees in whole or in part. Any such waiver will reduce expenses of the Funds and the Series and, accordingly, have a favorable impact on the Funds' yields. From time to time, each of the Funds, consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For the year ended December 31, 1994, Wells Fargo Bank was paid 0.40% of the average daily net assets of the Money Market Mutual Fund and 0.49% of the average daily net assets of the California Tax-Free Money Market Mutual Fund for its services as investment adviser. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank also serves as the Funds' and the Series' custodian and transfer and dividend disbursing agent. Wells Fargo Bank performs the custodial services at its address above. Under its respective Custody Agreement with Wells Fargo Bank, each Fund and the Series may, at times, borrow money from Wells Fargo Bank as needed to satisfy temporary liquidity needs. Wells Fargo Bank charges interest on such overdrafts at a rate determined pursuant to each Fund's and/or Series' Custody Agreement. The transfer and dividend disbursing agency activities are performed at 525 Market Street, San Francisco, California 94105. The Funds have entered into Shareholder Servicing Agreements with Wells Fargo Bank, and may enter into similar agreements with other entities. Under such agreements, Shareholder Servicing Agents (including Wells Fargo Bank) will, as agent for their customers, among other things: answer customer inquiries regarding account status and history and the manner in which purchases, exchanges and redemptions of Fund shares may be effected; assist shareholders in designating and changing dividend options, account designations and addresses; provide necessary personnel and facilities to establish and maintain shareholder accounts and records; assist in processing purchase, redemption and exchange transactions; arrange for the wiring of money; transfer money in connection with customer orders to purchase or redeem shares; verify shareholder signatures in connection with redemption and exchange orders and transfers and changes in accounts with Approved Banks; furnish (either separately or on an integrated basis with other reports sent to a shareholder by the Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases, redemptions and exchanges; furnish, on behalf of each of the Funds, proxy statements, annual reports, updated prospectuses and other communications to shareholders; receive, tabulate and send to the Fund proxies executed by shareholders; and provide such other related services as the Funds or a shareholder may reasonably request. For these services, a Shareholder Servicing Agent receives a fee, which may be paid periodically, determined by a formula based upon the number of accounts serviced by the Shareholder Servicing Agent during the period for which payment is being made, the level of activity in such accounts during such period, and the expenses incurred by the Shareholder Servicing Agent. In no event will such fees, as calculated on an annualized basis for each Fund's then-current fiscal year, exceed the lesser of (1) 0.30% of the average daily net assets of the California Tax-Free Money Market Mutual Fund, 0.30% of the average daily net assets attributable to the Class A shares of the Money Market Mutual Fund or 0.25% of the average daily net assets of the National Tax-Free Money Market Mutual Fund, as represented by shares owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the Rules of Fair Practice of the NASD ("NASD Rules"). In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of the average net asset value of a Fund or Class of a Fund, as the case may be. A Shareholder Servicing Agent may impose certain conditions on its customers, subject to the terms of this Prospectus, in addition to or different from those imposed by the Funds, such as requiring a minimum initial investment or payment of a separate fee for additional services. Each Shareholder Servicing Agent will be required to agree to disclose any fees it may directly charge its customers who are shareholders of a Fund and to notify them in writing at least 30 days before it imposes any transaction fees. Subject to the overall supervision of the governing Board of Directors/Trustees, Stephens provides each Fund and the Series with administrative services, including general supervision of each Fund's operation, coordination of the other services provided to each Fund and the Series, compilation of information for reports to the SEC and the state securities commissions, preparation of proxy statements and shareholder reports and general supervision of data compilation in connection with preparing periodic reports. Stephens also furnishes office space and certain facilities to conduct each Fund's and the Series' business, and compensates the Directors/Trustees, officers and employees who are affiliated with Stephens. For these services, Stephens is entitled to a monthly fee at the annual rate of 0.03% of the Money Market Mutual Fund's and California Tax-Free Money Market Mutual Fund's average daily net assets and 0.05% of the National Tax-Free Money Market Mutual Fund's average daily net assets. From time to time, Stephens may waive its fees charged to a Fund in whole or in part. Any such waivers will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield. Stagecoach Funds and Stagecoach Inc. have each adopted Distribution Plans on behalf of the Class A Shares of the Money Market Mutual Fund and shares of the Tax-Free Funds under the SEC's Rule 12b-1 ("Plans"). The Money Market Mutual Fund, pursuant to the Plan adopted on behalf of the Class A Shares, may defray all or part of the actual cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective Class A shareholders by paying on an annual basis up to 0.05% of the average daily net assets attributable to the Class A Shares. Pursuant to the Plan for the California Tax-Free Money Market Mutual Fund, the Fund may defray all or a part of the cost of preparing and printing prospectuses and of delivering prospectuses and those materials to prospective shareholders of the Fund by paying on an annual basis up to 0.05% of the Fund's average daily net assets. Pursuant to the Plan for the National Tax-Free Money Market Mutual Fund, Stephens is entitled to receive as compensation for distribution-related services, a monthly fee at an annual rate of up to 0.05% of the average daily net assets of the Fund. Stephens has entered into Distribution Agreements with the Funds and acts as agent for the Funds for the sale of their shares and may enter into selling agreements with other agents ("Selling Agents") that wish to make available shares of the Funds to their respective customers. The Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund may participate in joint distribution activities with any of the other funds of Stagecoach Funds, in which event, expenses reimbursed out of the assets of either Fund may be attributable, in part, to the distribution-related activities of another fund of Stagecoach Funds. The National Tax-Free Money Market Mutual Fund may participate in joint distribution activities with any of the other funds of Stagecoach Inc., in which event, expenses reimbursed out of the assets of the Fund may be attributable, in part, to the distribution-related activities of another fund of Stagecoach Inc. Generally, the expenses attributable to joint distribution activities will be allocated among each Fund and the other funds of the respective Company in proportion to their relative net asset sizes, although each Company's Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. In addition, the Plans contemplate that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed above) are deemed to be for distribution-related services, such payments are approved and payable pursuant to the Plans. Financial institutions acting as Shareholder Servicing Agents or Selling Agents, or in certain other capacities, may be required to register as dealers pursuant to applicable state securities laws which may differ from federal law and any interpretations expressed herein. From time to time, Wells Fargo Bank and Stephens may waive their respective fees in whole or in part and reimburse expenses payable to others. Any such waivers or reimbursements will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield. Except for the expenses borne by Wells Fargo Bank and Stephens, each Company bears all costs of its operations, including advisory, shareholder servicing, transfer agency, custody and administration fees, payments pursuant to any Plans, interest, fees and expenses of independent auditors and legal counsel, and any extraordinary expenses. Expenses attributable to each Fund or Class are charged against the assets of the Fund or Class. General expenses of each Company are allocated among all of the funds of such Company, including the Funds, in a manner proportionate to the net assets of each fund, on a transactional basis, or on such other basis as each Company's Board of Directors deems equitable. By complying with the applicable provisions of the Code, the Money Market Mutual Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders. Dividends from net investment income (including net short-term capital gains, if any) declared and paid by the Money Market Mutual Fund will be taxable as ordinary income to Fund shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional shares in the Money Market Mutual Fund, they will be taxable as ordinary income. Generally, dividends and distributions are taxable to shareholders at the time they are paid. However, dividends and distributions declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends or distributions are actually paid no later than January 31 of the following year. The Money Market Mutual Fund intends to pay out substantially all of its net investment income and net realized capital gains (if any) for each year. The Money Market Mutual Fund does not expect its dividends to qualify for the dividends-received deduction allowed to corporate shareholders. By complying with the applicable provisions of the Code, the California Tax-Free Money Market Mutual Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders, and the Fund's shareholders will not be subject to federal income taxes on any Fund dividends attributable to interest from tax-exempt securities. However, dividends attributable to interest from taxable securities and capital gains (if any) will be taxable to shareholders. In addition, by complying with the applicable provisions of the California Revenue and Taxation Code, Fund dividends also will be exempt from California personal income tax to the extent such dividends are attributable to instruments that pay interest which would be exempt from California personal income taxes were such instruments held directly by an individual. Stagecoach Inc. intends to qualify the National Tax-Free Money Market Mutual Fund as a regulated investment company under Subchapter M of the Code. The Fund will be treated as a separate entity for tax purposes and thus the provisions of the Code applicable to regulated investment companies generally will be applied to the Fund, rather than to the Company as a whole. In addition, net capital gains, net investment income, and operating expenses will be determined separately for the Fund. By complying with the applicable provisions of the Code, the National Tax-Free Money Market Mutual Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders, and the Fund's shareholders will not be subject to federal income taxes on any dividends of the Fund attributable to interest from tax-exempt securities. However, dividends attributable to interest from taxable securities and capital gains (if any) will be taxable to shareholders. In addition, by complying with the applicable provisions of the Code, Fund dividends also will be exempt from personal income tax to the extent such dividends are attributable to instruments that pay interest which would be exempt from personal income taxes if such instruments were held directly by an individual. The Fund does not make any representation regarding the taxation of its corporate shareholders and recommends that such shareholders consult their tax advisors. The National Tax-Free Money Market Mutual Fund seeks to comply with the applicable provisions of the Code by investing all of its assets in the Series. The Series intends to qualify for federal tax purposes as a partnership. As such, the Fund will be deemed to own directly its proportionate share of the Master Trust's assets. Therefore, any interest, dividends, gains or losses of the Series will be deemed to have been "passed through" to the Fund and other investors in the Series, regardless of whether such interest, dividends or gains have been distributed by the Series or losses have been realized by the Fund or other investors. Accordingly, if the Series were to accrue but not distribute any interest, dividends or gains, the Fund would be deemed to have realized and recognized its proportionate share of interest, dividends, or gains without receipt of any corresponding distribution. The Series will seek to minimize recognition by investors of interest, dividends or gains without a corresponding distribution. The federal alternative minimum tax ("AMT") rules attempt to ensure that at least a minimum amount of tax is paid by corporate and high-income noncorporate taxpayers who obtain significant benefit from certain tax deductions and exemptions. These deductions and exemptions have been designated "tax preference items" which must be added back to taxable income for the purposes of calculating AMT. Among the "tax preference items" and "adjustments" which must be considered when calculating the AMT is tax-exempt interest from private activity bonds issued after August 7, 1986. To the extent that the California Tax-Free Money Market Mutual Fund invests in private activity bonds, shareholders who pay the alternative minimum tax will be required to report that portion of Fund dividends attributable to income from the bonds as a tax preference item in determining their federal AMT. Shareholders will be notified of the tax status of distributions made by the Funds. Persons who may be "substantial users" (or "related persons" of substantial users) of facilities financed by private activity bonds should consult their tax advisors before purchasing shares in the California Tax-Free Money Market Mutual Fund. There are other adjustments that may also affect adjusted current earnings for the purposes of corporate AMT. Shareholders with questions or concerns about AMT should also consult their tax advisors. The Funds, or your Shareholder Servicing Agent on their behalf, will inform you of the amount and nature of such Fund dividends and capital gains. You should keep all statements you receive to assist in your personal record keeping. Each Company is required to withhold, subject to certain exemptions, at a rate of 31% on dividends paid or credited to individual shareholders of the Funds, if a shareholder has not complied with IRS regulations or if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% back-up withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAIs. The foregoing discussion regarding dividends, distributions and taxes is based on tax laws and regulations which were in effect as of the date of this Prospectus and summarizes only some of the important federal tax considerations generally affecting the Funds and their shareholders. It is not intended as a substitute for careful tax planning; you should consult your tax advisor with respect to your specific tax situation as well as with respect to state and local taxes. Further federal tax considerations are discussed in the SAI for each Fund. The Money Market Mutual Fund may invest in the following: (i) obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including government-sponsored enterprises ("U.S. (ii) negotiable certificates of deposit, fixed time deposits, bankers' acceptances or other short-term obligations of U.S. banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC ("bank instruments"); (iii) commercial paper rated at the date of purchase P-1 by Moody's Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by Standard & Poor's Corporation ("S&P") ("rated commercial paper"); (iv) commercial paper unrated at the date of purchase but secured by a letter of credit from a U.S. bank that meets the above criteria for (v) certain floating- and variable-rate instruments ("variable-rate (vi) certain repurchase agreements ("repurchase agreements") (discussed (vii) short-term, U.S. dollar-denominated obligations of U.S. branches of foreign banks that at the time of investment have more than $10 billion, or the equivalent in other currencies, in total assets ("foreign bank obligations") (discussed below). California Tax-Free Money Market Mutual Fund The California Tax-Free Money Market Mutual Fund may invest in the following municipal obligations with remaining maturities not exceeding thirteen months: (i) long-term municipal bonds rated at the date of purchase "MIG 1" or "MIG 2" or, if no medium- or short-term rating is available, "Aa" or better by Moody's or "AA" or better by S&P; (ii) medium-term municipal notes rated at the date of purchase "MIG 1" or "MIG 2" (or "VMIG 1" or "VMIG 2" in the case of an issue having a variable rate with a demand feature) by Moody's or "SP-1+" or "SP-1" by (iii) short-term municipal commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1+" by S&P. Pending the investment of proceeds from the sale of Fund shares or proceeds from sales of portfolio securities or in anticipation of redemptions or to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of market conditions, the California Tax-Free Money Market Mutual Fund may elect to invest temporarily up to 20% of the current value of its total assets in cash reserves or the following taxable high-quality money market instruments: (v) foreign bank obligations; and (vi) high-quality municipal obligations, the income from which may or may not be exempt from federal income taxes. Moreover, the California Tax-Free Money Market Mutual Fund may invest temporarily more than 20% of its total assets in such securities and in high-quality, short-term municipal obligations the interest on which is not exempt from federal income taxes to maintain a temporary defensive posture or in an effort to improve after-tax yield to the California Tax-Free Money Market Mutual Fund's shareholders when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of unusual market conditions. National Tax-Free Money Market Mutual Fund and Tax-Free Money Market Master Series The National Tax-Free Money Market Mutual Fund invests all its assets in shares of the Series of the Master Trust. As a result, the performance of the Fund corresponds to the investment experience of the Series. The Series may invest in the following: (i) certain municipal obligations (discussed below): (ii) certain U.S. Government obligations (discussed below); (iii) negotiable certificates of deposit, fixed time deposits, bankers' acceptances or other obligations of U.S. banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC: (iv) commercial paper rated at the date of purchase P-1 by Moody's or "A-1+" (v) certain floating- and variable-rate instruments (discussed below); (vi) certain repurchase agreements (discussed below); and (vii) short-term U.S. dollar denominated obligations of foreign branches of U.S. banks or U.S. branches of foreign banks (discussed below). The following describes certain instruments in which the Funds and the Series may invest. Subject to the maturity and other restrictions of Rule 2a-7, the Funds and the Series may invest in municipal obligations. Municipal bonds generally have a maturity at the time of issuance of up to 40 years. Medium-term municipal notes are generally issued in anticipation of the receipt of tax funds, of the proceeds of bond placements, or of other revenues. The ability of an issuer to make payments on notes is therefore especially dependent on such tax receipts, proceeds from bond sales or other revenues, as the case may be. Municipal commercial paper is a debt obligation with a stated maturity of 270 days or less that is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. From time to time, the California Tax-Free Money Market Mutual Fund and the Series may each invest 25% or more of the current value of its total assets in certain "private activity bonds," such as pollution control bonds; provided, however, that such investments will be made only to the extent they are consistent with the Fund's fundamental policy of investing, under normal circumstances, at least 80% of its net assets in municipal obligations that are exempt from federal income taxes and not subject to the federal alternative minimum tax. For a further discussion of factors affecting purchases of municipal obligations by the California Tax-Free Money Market Mutual Fund, see "Special Considerations Affecting California Municipal Obligations" in the SAI. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. The Funds and the Series may invest in shares of other investment companies. The California Tax-Free Money Market Mutual Fund and the Series may invest in shares of other open-end investment companies that invest exclusively in high-quality short-term securities, provided however, that any such company has a fundamental policy of investing, under normal circumstances, at least 80% of its net assets in obligations that are exempt from federal income taxes and not subject to the federal alternative minimum tax. Such investment companies can be expected to charge management fees and other operating expenses that would be in addition to those charged to the Funds or the Series; however, Wells Fargo Bank has undertaken to waive its advisory fees with respect to that portion of the Funds' or the Series' assets so invested. In no event may the Funds or the Series, together with any company or companies controlled by a Fund or the Series, own more than 3% of the total outstanding voting stock of any such investment company, nor may a Fund or the Series, together with any such company or companies, invest more than 5% of its assets in any one such investment company or invest more than 10% of its assets in securities of all such investment companies combined. Certain of the debt instruments that the Funds may purchase bear interest at rates that are not fixed, but vary for example, with changes in specified market rates or indices or at specified intervals. These instruments typically have maturities of thirteen months or more, but may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The Funds and the Series may, in accordance with SEC rules, account for these instruments as maturing at the next interest rate readjustment date or the date at which the respective Fund or the Series may tender the instrument back to the issuer, whichever is later. The floating- and variable-rate instruments that the Funds and the Series may purchase include certificates of participation in such obligations. With regard to the California Tax-Free Money Market Mutual Fund and the Series, Wells Fargo Bank, as investment adviser, may rely upon either an opinion of counsel or an IRS ruling regarding the tax-exempt status of these certificates. The Funds and the Series may invest in floating- and variable-rate obligations even if they carry stated maturities in excess of thirteen months, upon compliance with certain conditions of the SEC, in which case such obligations will be treated in accordance with these conditions as having maturities not exceeding thirteen months. Wells Fargo Bank, as investment adviser to the Funds and the Series, monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the time a Fund or the Series elects to demand payment and the time payment is due, thereby affecting such Fund's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The Funds and the Series may enter into repurchase agreements wherein the seller of a security to a Fund or the Series agrees to repurchase that security from such Fund or the Series at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Funds and the Series may enter into repurchase agreements only with respect to U.S. Government obligations and other obligations that could otherwise be purchased by the participating Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. While the maturities of the underlying securities in a repurchase agreement transaction may be greater than thirteen months, the term of any repurchase agreement on behalf of a Fund or the Series will always be less than thirteen months. If the seller defaults and the value of the underlying securities has declined, the participating Fund or the Series, as the case may be, may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, disposition of the security by the participating Fund or the Series may be delayed or limited. The Funds and the Series will enter into repurchase agreements only with registered broker/dealers and commercial banks that meet guidelines established by the Boards of Directors of the Funds or Board of Trustees of the Master Trust and that are not affiliated with Wells Fargo Bank. The Funds and the Series may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. Certain of the debt obligations, certificates of participation, commercial paper and other short-term obligations which the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund are permitted to purchase may be backed by an unconditional and irrevocable letter of credit of a bank, savings and loan association or insurance company which assumes the obligation for payment of principal and interest in the event of default by the issuer. Letter of credit-backed investments must, in the opinion of Wells Fargo Bank, be of investment quality comparable to other permitted investments of such Fund. Each Fund and the Series may invest up to 25% of its assets in high-quality, short-term (thirteen months or less) debt obligations of foreign branches of U.S. banks or U.S. branches of foreign banks that are denominated in and pay interest in U.S. dollars. Investments in foreign obligations involve certain considerations that are not typically associated with investing in domestic obligations. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not subject to the same uniform accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic developments that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries. Pending the investment of proceeds from the sale of shares of the Series or proceeds from sales of portfolio securities or in anticipation of redemptions or to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of market conditions, the Series may elect to invest temporarily up to 20% of the current value of its net assets in cash reserves including the following taxable high-quality money market instruments: (i) U.S. Government obligations; (ii) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; (iii) commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P; (iv) certain repurchase agreements; and (v) high-quality municipal obligations, the income from which may or may not be exempt from federal income taxes. Moreover, the Series may invest temporarily more than 20% of its total assets in such securities and in high-quality, short-term municipal obligations the interest on which is not exempt from federal income taxes to maintain a temporary defensive posture or in an effort to improve after-tax yield to the Series' interestholders when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of unusual market conditions. Each Fund's investment objective, as set forth in the "How the Funds Work -- Investment Objectives and Policies" section, is fundamental; that is, it may not be changed without approval by the vote of the holders of a majority of such Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. In addition, any fundamental investment policy may not be changed without such shareholder approval. If the relevant Company's Board of Directors determines, however, that a Fund's investment objective can best be achieved by a substantive change in a nonfundamental investment policy or strategy, such Company's Board may make such a change without shareholder approval and will disclose any such material changes in the then-current prospectus. As matters of fundamental policy, the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund may: (i) borrow from banks up to 10% of the current value of each of their net assets only for temporary purposes in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of each of their net assets (but investments may not be purchased by a Fund while any such outstanding borrowing in excess of 5% of its net assets exists); (ii) not make loans of portfolio securities or other assets, except that loans for purposes of this restriction will not include the purchase of fixed time deposits, repurchase agreements, commercial paper and other short-term obligations, and other types of debt instruments commonly sold in a public or private offering; and (iii) not invest more than 25% of their assets (i.e. , concentrate) in any particular industry, excluding, (a) investments in municipal securities by the California Tax-Free Money Market Mutual Fund (for the purpose of this restriction, private activity bonds shall not be deemed municipal securities if the payments of principal and interest on such bonds is the ultimate responsibility of nongovernmental users), (b) U.S. Government obligations, and (c) obligations of domestic banks (for purposes of this restriction, domestic bank obligations do not include obligations of foreign branches of U.S. banks and obligations of U.S. branches of foreign banks). As matters of nonfundamental policy: (i) the Money Market Mutual Fund may not purchase securities of any issuer (except for U.S. Government obligations, for certain temporary purposes and for certain guarantees and unconditional puts) if as a result more than 5% of the value of the Money Market Mutual Fund's total assets would be invested in the securities of such issuer or the Money Market more than 10% of the outstanding voting securities of such issuer; (ii) the Money Market Mutual Fund may not invest more than 10% of the current value of its net assets in securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days; and (iii) the California Tax-Free Money Market Mutual Fund may not invest more than 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, illiquid securities and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days. With respect to item (i), it may be possible that the Company would own more than 10% of the outstanding voting securities of an issuer. For purposes of complying with the Code, the California Tax-Free Money Market Mutual Fund will diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the California Tax-Free Money Market Mutual Fund's assets is represented by cash, U.S. Government obligations and other securities limited in respect of any one issuer to an amount not greater than 5% of the California Tax-Free Money Market Mutual Fund's assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government obligations and the securities of other regulated investment companies), or of two or more issuers which the taxpayer controls and which are determined to be engaged in the same or similar trades or businesses or related trades or businesses. In addition, at least 65% of the California Tax-Free Money Market Mutual Fund's total assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from California personal income taxes. However, as a matter of general operating policy, the California Tax-Free Money Market Mutual Fund seeks to have substantially all of its assets invested in such municipal obligations. As matters of fundamental policy the National Tax-Free Money Market Mutual Fund and the Series may: (i) borrow from banks up to 10% of the current value of each of their net assets only for temporary purposes in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of their respective net assets (but investments by the Series may not be purchased while any such outstanding borrowing in excess of 5% of its net assets exists); (ii) not make loans, except that each of the Fund and the Master Series may purchase or hold debt instruments, lend its portfolio securities and enter into repurchase agreement transactions in accordance with its investment policies; loans for purposes of this restriction will not include the Fund's purchase of interests in the Master Series; and (iii) not purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Fund's or Series' investments in that industry would be 25% or more of the current value of the Fund's or Series' total assets, provided that there respect to investments in (a) municipal securities (for the purposes of this restriction, private activity bonds and notes shall not be deemed municipal securities if the payments of principal and interest on such bonds and notes is the ultimate responsibility of non-governmental entities), (b) U.S. Government obligations, and (c) certain obligations of domestic banks; and (iv) not purchase securities of any issuer (except securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, including government-sponsored enterprises) if, as a result, with respect to 75% of its total assets, more than 5% of the value of the Series' total assets would be invested in the securities of any one issuer or, with respect to 100% of its total assets the Series' ownership would be more than 10% of the outstanding voting securities of such issuer. As matters of non-fundamental policy the National Tax-Free Money Market Mutual Fund and the Series may each: (i) invest up to 10% of the current value of its net assets in securities that are illiquid by virtue of the absence of a readily available market or the existence of legal or contractual restrictions on resale and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days; and (ii) invest up to 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, and restricted securities (which include securities that must be registered under the Securities Act of 1933 before they may be offered to the public). THIS PAGE INTENTIONALLY LEFT BLANK INVESTMENT ADVISER, TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN For more information about the Funds, simply call 1-800-222-8222, or write: Printed on Recycled Paper (8/95) SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF STAGECOACH FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. MONEY MARKET MUTUAL FUND -- CLASS A SHARES CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND Stagecoach Funds, Inc. ("Stagecoach Funds") and Stagecoach Inc. are open-end investment companies consisting of several separate funds, each with different investment objectives and policies. This Prospectus contains information about three such funds, the MONEY MARKET MUTUAL FUND and the CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND of Stagecoach Funds and the NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND of Stagecoach Inc. (each, a "Fund" and, collectively, the "Funds"). This Prospectus is intended exclusively for persons investing in one of the funds through any of the following accounts with Wells Fargo Bank, N.A. ("Wells Fargo Bank"): a Money Market Checking Account, California Tax-Free Money Market Checking Account, National Tax-Free Money Market Checking Account (each, a "Checking Account"), Money Market Access Account, California Tax-Free Money Market Access Account or National Tax-Free Money Market Access Account (each, an "Access Account," together with the Checking Accounts, the "Accounts"). AN INVESTMENT IN THE FUNDS, THROUGH AN ACCOUNT OR OTHERWISE, AND/OR THE SERIES (AS DEFINED BELOW) IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. THERE IS NO ASSURANCE THAT THE FUNDS OR THE SERIES WILL BE ABLE TO MAINTAIN A CONSTANT $1.00 NET ASSET VALUE PER SHARE. Please read this Prospectus before investing and retain it for future reference. It sets forth concisely the information about the Funds and the Series that you should know before investing. Statements of Additional Information ("SAIs"), dated May 1, 1995, for the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund, and dated July 19, 1995, for the National Tax-Free Money Market Mutual Fund, as amended from time to time, have been filed with the Securities and Exchange Commission ("SEC") and are incorporated by reference. The SAI for each Fund is available free of charge by writing to Stagecoach Shareholder Services at the address set forth in the Prospectus under "Investing in the Funds -- Opening an Account" or by calling 800-222-8222. THE NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS ASSETS IN THE TAX-FREE MONEY MARKET MASTER SERIES ("SERIES") OF MANAGED SERIES INVESTMENT TRUST (THE "TRUST"), A PROFESSIONALLY MANAGED OPEN-END INVESTMENT COMPANY, WHICH HAS AN IDENTICAL INVESTMENT OBJECTIVE. The National Tax-Free Money Market Mutual Fund and the Series seek to obtain a high level of income exempt FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED JULY 19, 1995 from federal income taxes, while preserving capital and liquidity. The Series seeks to achieve its investment objective by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations, with remaining maturities not exceeding thirteen months. The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. This Prospectus describes only the Class A Shares of the Money Market Mutual Fund. The Money Market Mutual Fund offers another class of shares -- Class S Shares. Class S Shares are available only to qualified business investors who invest in the Money Market Mutual Fund through certain non-interest bearing transaction accounts with Wells Fargo Bank. The CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND seeks to obtain a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations. Each of the Accounts combines a non-interest bearing Wells Fargo Bank deposit account with a daily sweep of balances to or from a designated Fund. Persons investing through an Account also receive a disclosure statement (the "Disclosure Statement") describing the various features and operations of the Accounts. The Disclosure Statement should be reviewed in conjunction with this Prospectus. You may also invest directly in the Funds. Information regarding direct investments in the Funds, including a separate prospectus that describes how to invest directly in a Fund, may be obtained by calling 800-222-8222. In this prospectus, Stagecoach Funds and Stagecoach Inc. are sometimes referred to collectively as "Stagecoach" and individually as a "Company." WELLS FARGO BANK IS THE INVESTMENT ADVISER TO THE FUNDS AND THE SERIES AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS AND THE SERIES FOR WHICH IT IS COMPENSATED, STEPHENS INC., WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND ADMINISTRATOR FOR THE FUNDS AND THE TRUST AND SERVES AS DISTRIBUTOR FOR THE FUNDS AND AS PLACEMENT AGENT FOR THE SERIES. This Prospectus is intended exclusively for use by persons investing in the Funds through an Account with Wells Fargo Bank. Each Account combines a non-interest bearing Wells Fargo Bank deposit account (the "Transaction Account") with a daily sweep of Transaction Account balances to or from a designated Fund. The following provides you with summary information about each of the Funds. For more information, please refer specifically to the identified Prospectus sections and generally to the Prospectus and SAI for each Fund. Q. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? A. THE MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. In pursuing this objective, the Fund invests in securities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"). These securities include obligations of the U.S. Government, its agencies and instrumentalities, high-quality debt obligations such as corporate debt, certain obligations of U.S. banks and certain repurchase agreements. The CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the 1940 Act. Under normal market conditions, substantially all of the Fund's assets will be invested in California municipal obligations that are exempt from federal income taxes and California personal income taxes. Certain risks may arise from the Fund's concentration in investments in California municipal obligations. The NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income exempt from federal income taxes, while preserving capital and liquidity. The Fund seeks to achieve its investment objective by investing all of its assets in the Tax-Free Money Market Master Series of the Trust, which has the same investment objective as the Fund. The Series seeks to achieve this investment objective by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations, with remaining maturities not exceeding thirteen months. Each Fund and the Series seeks to maintain a net asset value of $1.00 per share; however, there is no assurance that this will be achieved. See "How the Funds Work -- Investment Objectives and Policies" and "Prospectus Appendix -- Additional Investment Policies." Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the investment adviser to the Money Market Mutual Fund, the California Tax-Free Money Market Mutual Fund and the Series, manages your investments. A separate investment adviser has not been retained for the National Tax-Free Money Market Mutual Fund because this Fund invests all of its assets in the Series. Wells Fargo Bank also provides the Funds and the Series with transfer agency, dividend disbursing agency and custodial services. In addition, Wells Fargo Bank is a Shareholder Servicing Agent and a Selling Agent (as defined below) of the Funds. See "The Funds, the Trust and Management" and "Management and Servicing Fees." Q. HOW DO I INVEST? A. This Prospectus is designed only for persons who are investing in a Fund through an Account with Wells Fargo Bank. Wells Fargo Bank computes the net amount of deposits to and withdrawals from your Transaction Account (the "Net Sweep Amount") on any day Wells Fargo Bank is open for business. If deposits exceed withdrawals from your Transaction Account, Wells Fargo Bank transmits a purchase order on your behalf to the appropriate Fund in an amount equal to the dollar value of the Net Sweep Amount. Shares of the California Tax-Free Money Market Mutual Fund and National Tax-Free Money Market Mutual Fund (the "Tax-Free Funds") may not be suitable investments for tax-exempt institutions or tax-exempt retirement plans, since such investors would not benefit from the exempt status of such Funds' dividends. In addition, the Funds do not make any representations regarding the taxation of their corporate shareholders. The information in this Prospectus should be read in conjunction with the Disclosure Statement. See "Investing in the Funds." You also may invest directly in the Funds. For more details, including a separate prospectus that describes how to invest directly in a Fund, contact Stephens Inc. ("Stephens") (the Funds' sponsor and distributor) or a Shareholder Servicing Agent or Selling Agent (such as Wells Fargo Bank). Q. HOW WILL I RECEIVE DIVIDENDS AND ANY CAPITAL GAINS? A. Dividends from net investment income of the Funds are declared daily and are paid monthly to your Account through automatic reinvestment in the Funds. Any capital gains are distributed at least annually in a similar manner. Various dividend and distribution options, such as the option to direct the payment of proceeds from dividends and distributions to another account, are not available to persons investing in the Funds through an Account. See "Dividends" and "Additional Shareholder Services." Q. HOW MAY I REDEEM SHARES? A. If, on any day Wells Fargo Bank is open for business, withdrawals from your Account exceed deposits, Wells Fargo Bank transmits a redemption order on your behalf to the appropriate Fund in the dollar amount of that day's Net Sweep Amount. If your Account with Wells Fargo Bank is closed as described in the applicable Disclosure Statement, Wells Fargo Bank transmits a redemption request on your behalf to the appropriate Fund for the balance of your Fund shares held through such Account. See "How To Redeem Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT? A. Investments in the Funds and the Series are not insured against loss of principal. Although the Funds seek to maintain a stable net asset value of $1.00 per share, there is no assurance that they will be able to do so. Deposits to the Accounts are eligible for federal deposit insurance only for the brief period they are in the Transaction Account prior to being swept into a Fund. The Funds' shares are not insured or guaranteed by the U.S. Government. Since the California Tax-Free Money Market Mutual Fund will invest primarily in securities issued by California, its agencies and municipalities, events in California are more likely to affect this Fund's investments. Also, the California Tax-Free Money Market Mutual Fund is nondiversified, which means that its assets may be invested among fewer issuers and therefore the value of its assets may be subject to greater impact by events affecting one of its investments. You should be prepared to accept some risk with the money you invest in the Funds. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. See "How The Funds Work -- Risk Factors" and "Prospectus Appendix -- Additional Investment Policies." The purpose of this summary is to help you understand the various costs and expenses you will bear directly or indirectly as a shareholder of the Funds. As shown below, you are not charged sales charges, redemption fees, or exchange fees. You should consider this expense information together with the important information in this Prospectus, including the Funds' investment objectives and policies. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) You may purchase or redeem Fund shares directly without opening an Account and without incurring the fees and charges for, or deriving the benefits of, the Account Services described above. Information regarding direct investment in the Funds, including a separate prospectus that describes how to invest directly in a Fund, may be obtained by calling 800-222-8222. (2) Fee is waived for qualifying accounts with balances in excess of $75,000 as further described in the Disclosure Statement. (3) A Transaction Fee is charged to an Account whenever one of the listed transactions occurs. (4) Accounts are each charged $3.00 per check if more than three checks are posted during a statement period. (5) Various miscellaneous fees may be charged to an Account on a per transaction, per statement or other basis as described in "Miscellaneous Fees and Charges" and "Using Your Money Market Checking or Money Market Access Accounts" and elsewhere in the Disclosure Statement. SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell Fund shares. There are no Shareholder Transaction Expenses for these Funds. However, the Company reserves the right to impose a charge for wiring redemption proceeds. ANNUAL FUND OPERATING EXPENSES for the Class A Shares of the Money Market Mutual Fund and shares of the California Tax-Free Money Market Mutual Fund are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Annual Fund Operating Expenses for the National Tax-Free Money Market Mutual Fund summarize expenses charged at the Trust level as well as expenses charged at the Company level. The amounts shown above for the National Tax-Free Money Market Mutual Fund under "Master Series Management Fee," "Rule 12b-1 Fee" and "Administrative Fee" reflect contract amounts; the amounts shown under "Shareholder Servicing Fee," "Other Expenses," "Total Other Expenses" and "Total Fund Operating Expenses" reflect certain anticipated voluntary fee waivers and expense reimbursements for the current fiscal year. Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees if certain Fund expenses exceed limits set by state securities laws or regulations. In addition, Wells Fargo Bank and Stephens each, at its sole discretion, may waive or reimburse all or a portion of its respective fees charged to, or expenses paid by, a Fund or the Series. Any waivers or reimbursements would reduce the total expenses of the Funds or Series. There can be no assurance that such waivers or reimbursements would continue. Absent waivers and reimbursements, the percentages shown above under "Rule 12b-1 Fees," "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.05%, 0.44% and 0.89%, respectively, for the Class A Shares of the Money Market Mutual Fund and 0.05%, 0.53% and 1.08%, respectively, for the California Tax-Free Money Market Mutual Fund. Absent waivers and reimbursements, "Shareholder Servicing Fee," "Other Expenses," "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.25%, 0.30%, 0.60% and 0.95%, respectively, for the National Tax-Free Money Market Mutual Fund. Long-term shareholders in the Funds could pay more in sales charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers ("NASD"). For more complete descriptions of the various costs and expenses you can expect to incur as an investor in each Fund, please see the Prospectus section captioned "Management and Servicing Fees." EXAMPLE OF EXPENSES is a hypothetical example which illustrates the expenses associated with a $1,000 investment over the periods shown, based on the expenses in the table above and an assumed annual rate of return of 5%. This rate of return should not be considered an indication of actual or expected performance of a Fund. In addition, the example should not be considered a representation of past or future expenses and actual expenses may be greater or lesser than those shown. If current fee waivers and/or reimbursements are discontinued, the amounts contained in the "Example of Expenses" may increase. With regard to the combined fees and expenses of the National Tax-Free Money Market Mutual Fund and Series, the Board of Directors of Stagecoach Inc. has considered whether various costs and benefits of investing all the Fund's assets in the Series would be more or less than if the Fund invested in portfolio securities directly, and believes that the Fund should achieve economic efficiencies by investing in the Series. Additionally, the Board of Directors believes that the aggregate fees assessed by this Fund and the Series should be less than those expenses that the Directors believe would be incurred had the Fund invested directly in the securities held by the Series. See the Prospectus sections captioned "The Funds, the Trust and Management" and "Management and Servicing Fees" for more complete descriptions of the various costs and expenses applicable to investors in this Fund. In addition, if this Fund was to change its fundamental investment strategy and no longer invest in the Series of the Trust, these expenses may change. ACCOUNT FEES AND CHARGES are charges you pay to Wells Fargo Bank for banking services offered to you as an Account holder. The fees and charges applicable to each Account are discussed below. Wells Fargo Bank currently charges a monthly account fee for each of the Checking Accounts. This fee may be waived for certain accounts meeting specified requirements as set forth in the applicable Disclosure Statement. Wells Fargo Bank may, in certain cases, charge a check writing fee for the Access Accounts. In addition, each Account is subject to various other fees and charges which may be assessed on a monthly or other periodic basis, or on a per transaction, per statement or other basis. For additional information with respect to Account fees and charges, including a description of the services available to Accountholders, you should refer to the applicable consumer Disclosure Statement, particularly the sections captioned "Miscellaneous Fees and Charges" and "Using Your Money Market Checking or Money Market Access Accounts." This Prospectus is intended exclusively for use by persons investing in a Fund through an Account. Wells Fargo Bank may, in the future, permit investors to acquire shares of the Funds through additional accounts not described in this Prospectus. Investors desiring to invest directly in a Fund should obtain a separate prospectus by calling 800-222-8222. The following information relating to the Class A Shares of the Money Market Mutual Fund and the shares of the California Tax-Free Money Market Mutual Fund has been derived from the Financial Highlights in such Funds' 1994 annual financial statements. The financial statements are incorporated by reference into the SAI for each such Fund and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the 1994 annual financial statements for these Funds and the notes thereto. The SAI for each of the Funds has been incorporated by reference into this Prospectus. Financial information is not provided in connection with the National Tax-Free Money Market Mutual Fund because the Fund had not begun operations during the periods presented. FOR A CLASS A SHARE OUTSTANDING CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND THE MONEY MARKET MUTUAL FUND The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. The Fund invests its assets only in U.S. dollar-denominated, high-quality money market instruments, and may engage in certain other investment activities as described in this Prospectus. Permitted investments include U.S. Government short-term obligations, obligations of domestic and foreign banks, commercial paper, and repurchase agreements. In pursuing its objective, the Fund invests in instruments with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the 1940 Act. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. A more complete description of these investments and investment activities is contained in the "Prospectus Appendix -- Additional Investment Policies" and in the SAI. THE CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND The CALIFORNIA TAX-FREE MONEY MARKET MUTUAL FUND seeks to obtain a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital and liquidity, by investing in high-quality, U.S. dollar-denominated money market instruments, primarily municipal obligations. This investment objective is fundamental and cannot be changed without shareholder approval. There can be no assurance that the Fund, which is a nondiversified portfolio, will achieve its investment objective. Wells Fargo Bank, as investment adviser to the Fund, will pursue the Fund's objective by investing (under normal market conditions) substantially all of the Fund's assets in the following types of municipal obligations that pay interest which is exempt from both federal income tax and California personal income tax: bonds, notes and commercial paper issued by or on behalf of the State of California, its cities, municipalities, political subdivisions and other public authorities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the 1940 Act. These municipal obligations and the taxable investments described below may bear interest at rates that are not fixed ("floating- and variable-rate instruments"). The California Tax-Free Money Market Mutual Fund may temporarily invest some of its assets in certain high-quality, taxable money market instruments or may engage in other investment activities as described in this Prospectus. The Fund may elect to invest temporarily up to 20% of its net assets in certain permitted taxable investments, which include cash reserves, U.S. Government obligations, obligations of domestic and foreign banks, foreign securities, rated commercial paper, taxable municipal obligations, repurchase agreements, and loans of portfolio securities. Such temporary investments would most likely be made when there is an unexpected or abnormal level of investor purchases or redemptions of Fund shares or because of unusual market conditions. The income from these temporary investments and investment activities may be subject to federal income taxes and California personal income taxes. However, as stated above, Wells Fargo Bank seeks to invest substantially all of the Fund's assets in securities exempt from such taxes. A more complete description of tax-free municipal obligations, taxable money market instruments, and other investment activities is contained in the "Prospectus Appendix -- Additional Investment Policies" and in the Fund's SAI. As a matter of fundamental policy, at least 80% of the California Tax-Free Money Market Mutual Fund's net assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from federal income taxes and not subject to the federal alternative minimum tax (or in other open-end tax-free money market funds with a similar fundamental policy). At least 65% of the Fund's total assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from California personal income taxes. However, as a matter of general operating policy, the Fund seeks to have substantially all of its assets invested in such municipal obligations. The Fund's investment adviser may rely either on an opinion of counsel to the issuer of the municipal obligations or on Internal Revenue Service ("IRS") rulings regarding the tax treatment of these obligations. In addition, the Fund may invest 25% or more of its assets in California municipal obligations that are related in such a way that an economic, business or political development or change affecting one such obligation would also affect the other obligations. For example, the California Tax-Free Money Market Mutual Fund may own different municipal obligations which pay interest based on the revenues of similar types of projects. THE NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND The National Tax-Free Money Market Mutual Fund seeks to provide investors with a high level of income exempt from federal income taxes, while preserving capital and liquidity. The Fund seeks to achieve its investment objective by investing all of its assets in the Series, which has the same investment objective as the Fund. The Series seeks to achieve this investment objective by investing in high-quality, U.S. dollar denominated money market instruments, primarily municipal obligations, with remaining maturities not exceeding thirteen months. Since the investment characteristics of the Fund will correspond directly to those of the Series, the following is a discussion of the various investments of and techniques employed by the Series of the Trust. Wells Fargo Bank, as investment adviser to the Series, pursues the investment objective of the Series by investing (under normal market conditions) substantially all of the Series' assets in the following types of municipal obligations that pay interest which is exempt from federal income tax: bonds, notes and commercial paper issued by or on behalf of states, territories, and possessions of the United States (including the District of Columbia) and their political subdivisions, agencies, instrumentalities (including government-sponsored enterprises) and authorities, the interest on which, in the opinion of counsel to the issuer or bond counsel, is exempt from federal income tax. These municipal obligations and the taxable investments described below may bear interest at rates that are not fixed ("floating- and variable-rate instruments"). The Series may temporarily invest some of its assets in cash reserves or certain high-quality, taxable money market instruments, or may engage in other investment activities as described in this Prospectus. The Series may elect to invest temporarily up to 20% of its net assets in certain permitted taxable investments, which include cash reserves, U.S. Government obligations, obligations of domestic banks, commercial paper, taxable municipal obligations and repurchase agreements. The Series may also invest in U.S. dollar-denominated obligations of foreign banks and foreign securities. Such temporary investments would most likely be made when there is an unexpected or abnormal level of investor purchases or redemptions of interests in the Series or because of unusual market conditions. The income from these temporary investments and investment activities may be subject to federal income tax. However, as stated above, Wells Fargo Bank seeks to invest substantially all of the Series' assets in securities exempt from such taxes. A more complete description of tax-free municipal obligations, taxable money market instruments, and other investment activities is contained in the "Prospectus Appendix -- Additional Investment Policies." As a matter of fundamental policy, at least 80% of the net assets of the Series are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from federal income tax and is not subject to the federal alternative minimum tax. However, as a matter of general operating policy, the Series seeks to invest substantially all of its assets in such municipal obligations. The Series' investment adviser may rely either on the opinion of counsel to the issuer of the municipal obligations or on IRS rulings regarding the tax treatment of these obligations. In addition, the Series may invest 25% or more of its assets in municipal obligations that are related in such a way that an economic, business or political development or change affecting one such obligation would also affect the other obligations; for example, the Series may own different municipal obligations which pay interest based on the revenues of similar types of projects. The National Tax-Free Money Market Mutual Fund is a feeder fund in a master/feeder structure. Accordingly, it invests all of its assets in the Series. The Series has the same investment objective as the Fund. See "Investment Objectives and Policies". In addition to selling its shares to the Fund, the Series may sell its shares to other mutual funds or other accredited investors. Information regarding additional options, if any, for investments in shares of the Series is available from Stephens by calling 1-800-643-9691 or by calling Wells Fargo Bank at 1-800-222-8222. The expenses and, correspondingly, the returns of other investment options in the Series may differ from those of the Fund. The Board of Directors of Stagecoach Inc. believes that certain economic efficiencies may be realized if other mutual funds or institutional investors invest their assets in the Series. For example, fixed expenses that otherwise would have been borne solely by the Fund would be spread among a potentially larger asset base provided by more than one fund investing in the Series. The Fund and other entities (if any) investing in the Series would each be liable for all obligations of the Series. However, the risk of the Fund incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance exists and the Trust itself is unable to meet its obligations. Accordingly, the Company's Board of Directors believes that neither shareholders will be adversely affected by reason of investing their assets in the Series. However, if a mutual fund or other investor withdraws its investment from the Series, the economic efficiencies (e.g., spreading fixed expenses across a larger asset base) that the Company's Board believes should be available through investment in the Series may not be fully achieved. In addition, given the relatively novel nature of the master/feeder structure, accounting and operational difficulties, although unlikely, could occur. The investment objectives and other fundamental policies of the National Tax-Free Money Market Mutual Fund and the Series cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of such Fund's or Series' outstanding voting shares. Whenever the Fund, as a Series shareholder, is requested to vote on matters pertaining to any fundamental policy of such Series, the Fund will hold a meeting of its shareholders to consider such matters and will cast its votes in proportion to the votes received from Fund shareholders. The Fund will vote Series shares for which it receives no voting instructions in the same proportion as the votes received from Fund shareholders. In addition, certain policies of the Series which are non-fundamental could be changed by vote of a majority of the Trust's Trustees without shareholder vote. If the Series' investment objective or fundamental or non-fundamental policies are changed, the Fund investing in such Series could subsequently change its objective or policies to correspond to those of the Series, or the Fund could redeem its Series shares and either seek a new investment company in which to invest with a matching objective or retain its own investment adviser to manage the Fund's portfolio in accordance with its objective. In the latter case, the Fund's inability to find a substitute investment company in which to invest or equivalent management services could adversely affect shareholders' investments in the Fund. The Fund will provide shareholders with 30 days' written notice prior to the implementation of any change in the investment objective of such Fund or the Series, to the extent possible. Additional information regarding the officers and directors of Stagecoach Funds, Stagecoach Inc. and the Trust is included in the SAI for each Fund under "Management." The Funds and the Series, under the 1940 Act, must comply with certain investment criteria designed to provide liquidity, reduce risk, and allow the Funds and the Series to maintain a stable net asset value of $1.00 per share. Of course, the Funds and the Series cannot guarantee a $1.00 share price. The dollar-weighted average portfolio maturity of each of the Funds and the Series must not exceed 90 days. Any security that a Fund or the Series purchases must have a remaining maturity of not more than thirteen months. In addition, any security that a Fund or the Series purchases must present minimal credit risks and be of high quality (i.e., be rated in the top two rating categories by the required number of nationally recognized statistical rating organizations ("NRSROs") or, if unrated, determined to be of comparable quality to such rated securities). These determinations are made by Wells Fargo Bank, as the Funds' or Series' Investment Adviser, as the case may be, under guidelines adopted by the Board of Directors of each Company, or the Trust's Board of Trustees, respectively. The Funds and the Series seek to reduce risk by investing their assets in securities of various issuers. As such, the Money Market Mutual Fund, the National Tax-Free Money Market Mutual Fund and the Series, but not the California Tax-Free Money Market Mutual Fund, will be considered to be diversified for purposes of the 1940 Act. In addition, the Funds, since their respective inceptions, have emphasized safety of principal and high credit quality. In particular, the internal investment policies of Wells Fargo Bank, the investment adviser to the Funds and Series, have always prohibited the purchase for the Funds and Series of many types of floating-rate derivative securities that are considered potentially volatile. The following types of derivative securities ARE NOT permitted investments for the Fund: - capped floaters (on which interest is not paid when market rates move - leveraged floaters (whose interest-rate reset provisions are based on a formula that magnifies changes in interest rates); - range floaters (which do not pay any interest if market interest rates move outside of a specified range); - dual index floaters (whose interest-rate reset provisions are tied to more than one index so that a change in the relationship between these indices may result in the value of the instrument falling below face - inverse floaters (which reset in the opposite direction of their index). Additionally, the Funds and the Series may not invest in securities whose interest rate reset provisions are tied to an index that materially lags short-term interest rates, such Cost of Funds Index ("COFI") floaters. The Funds and the Series may only invest in floating-rate securities that bear interest at a rate that resets quarterly or more frequently, and which resets based on changes in standard money market rate indices such as U.S. Government Treasury bills, London Interbank Offered Rate, the prime rate, published commercial paper rates, federal funds rates, Public Securities Associates ("PSA") floaters or JJ Kenney index floaters. Since the California Tax-Free Money Market Mutual Fund will invest primarily in securities issued by California and its agencies and municipalities, events in California will be more likely to affect the Fund's investments. While the California Tax-Free Money Market Mutual Fund will seek to reduce risk by investing its assets in securities of various issuers, the Fund will be considered to be nondiversified for purposes of the 1940 Act. However, the California Tax-Free Money Market Mutual Fund will comply with Internal Revenue Code of 1986 ("Code") diversification requirements, as described in the "Prospectus Appendix - Additional Investment Policies" section below. California is experiencing recurring budget deficits caused by lower than anticipated tax-revenues and increased expenditures for certain programs. These budget deficits have depleted the state's available cash resources, and the state has recently had to use a series of external borrowings to meet its cash needs. In addition, since 1992 some of the credit rating agencies have assigned their third highest rating to certain of the state's debt obligations. On July 15, 1994, three of the ratings agencies rating California's long-term debt lowered their rating of the state's general obligation bonds. Moody's Investors Service lowered its rating from "Aa" to "A1," Standard & Poor's Ratings Group lowered its rating from "A+" to "A" and termed its outlook as "stable," and Fitch Investors Service lowered its rating from "AA" to "A." Since the California Tax-Free Money Market Mutual Fund may invest only in securities rated in the top two rating categories, any further rating downgrade of the state's debt obligations may impact the availability of securities that meet the Fund's investment policies and restrictions. The Fund's investment adviser continues to monitor and evaluate the Fund's investments in light of the events in California and the California Tax-Free Money Market Mutual Fund's investment objective and investment policies. The rating agencies also continue to monitor events in the state and the state and local governments' responses to budget shortfalls. See "Special Considerations Affecting California Municipal Obligations" in the SAI for the California Tax-Free Money Market Mutual Fund. Investments in the Funds, through an Account or otherwise, are not insured against loss of principal. Although Wells Fargo Bank will seek to achieve the investment objectives of the Funds, there is no assurance that the Funds will be able to maintain a constant $1.00 net asset value per share. The Funds are subject to interest rate risk (i.e., the risk that increases in market interest rates may adversely affect the value of the securities in which the Funds invest and hence the value of your investment in the Funds; the value of such securities generally changes inversely to market interest rates.) See "Prospectus Appendix -- Additional Investment Policies" for further discussion of investment objectives and risks. The performance of the Class A Shares of the Money Market Mutual Fund and the shares of the Tax-Free Funds may be advertised in terms of current yield or effective yield. In addition, the performance of the Tax-Free Funds may be advertised in terms of tax-equivalent yield or effective tax-equivalent yield. These performance figures are based on historical results and are not intended to indicate future performance. The investment performance of the National Tax-Free Money Market Mutual Fund will correspond to the investment experience of the Series. Yield refers to the income generated by an investment in a Fund, or class of a Fund, over a seven-day period, expressed as an annual percentage rate. Effective yields are calculated similarly, but assume that the income earned from a Fund is reinvested in the Fund or in shares of the same class of such Fund. Because of the effects of compounding, effective yields are slightly higher than yields. The tax-equivalent yield and the effective tax-equivalent yield of the Tax-Free Funds assume that a stated income tax rate has been applied to determine the tax-equivalent figures. The application of the stated income tax rate results in higher yield and effective yield figures. The National Tax-Free Money Market Mutual Fund may also advertise thirty-day yield information. Additional performance information is contained in each Company's annual report which is available upon request without charge by calling the Company at 1-800-222-8222. THE FUNDS, THE TRUST AND MANAGEMENT THE MONEY MARKET MUTUAL FUND AND THE CALIFORNIA TAX-FREE The Money Market Mutual Fund and the California Tax-Free Money Market Mutual Fund are two funds of Stagecoach Funds. Stagecoach Funds was organized as a Maryland corporation on September 9, 1991, and currently offers shares of ten other funds: the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Income Fund, the Corporate Stock Fund, the Diversified Income Fund, the Ginnie Mae Fund, the Growth and Income Fund, the Short-Intermediate U.S. Government Fund, the U.S. Government Allocation Fund and the Variable Rate Government Fund. The Money Market Mutual Fund also offers a second class of shares -- Class S Shares. Class S Shares are subject to different levels of fees and expenses than Class A Shares and the performance of such shares may vary accordingly. Class S Shares are currently available only to qualified business investors who purchase such shares through certain non-interest bearing transaction accounts with Wells Fargo Bank. Please contact Stagecoach Shareholder Services at 1-800-222-8222 if you would like additional information about Class S Shares. The Board of Directors of Stagecoach Funds supervises these funds' activities and monitors their contractual arrangements with various service-providers. Although Stagecoach Funds is not required to hold annual shareholder meetings, special meetings may be required for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Funds' investment objectives or fundamental investment policies. All shares of Stagecoach Funds have equal voting rights and will be voted in the aggregate, rather than by fund or class, unless otherwise required by law (such as when the voting matter affects only one fund or class). As a shareholder of the Funds, you are entitled to one vote for each share you own and fractional votes for fractional shares owned. A more detailed description of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the SAI for each Fund. THE NATIONAL TAX-FREE MONEY MARKET MUTUAL FUND AND THE TRUST The National Tax-Free Money Market Mutual Fund is a fund of Stagecoach Inc. Stagecoach Inc. was organized as a Maryland corporation on October 15, 1992, and currently includes the following thirteen other funds: the Asset Allocation Fund, the Bond Index Fund, the California Tax-Free Intermediate Income Fund, the California Tax-Free Money Market Fund, the California Tax-Free Short-Term Income Fund, the Growth and Income Fund, the Growth Stock Fund, the Money Market Fund, the National Tax-Free Intermediate Income Fund, the Overland National Tax-Free Institutional Money Market Fund, the Short-Intermediate Term Fund, the S&P 500 Stock Fund and the U.S. Treasury Allocation Fund. The Board of Directors of Stagecoach Inc. supervises these funds' activities and monitors their contractual arrangements with various service-providers. As noted above, the Fund may withdraw its investment in the Series only if the Board of Directors of Stagecoach Inc. determines that this is in the best interests of the Fund and its shareholders to do so. Upon any such Directors of Stagecoach Inc. would consider what action might be taken, including the investment of all the assets of the Fund in another pooled investment entity having the same investment objective as the Fund or the hiring of an investment adviser to manage the Fund's assets in accordance with the investment policies described above with respect to the Series. Although Stagecoach Inc. is not required to hold annual shareholder meetings, special meetings may be required for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Fund's investment objectives or fundamental investment policies. All shares of Stagecoach Inc. have equal voting rights and will be voted in the aggregate, rather than by fund, unless otherwise required by law (such as when the voting matter affects only one fund). As a shareholder of the Fund, you are entitled to one vote for each share you own and fractional votes for fractional shares owned. In addition, whenever the Fund is requested to vote on matters pertaining to the Series, Stagecoach Inc. will hold a meeting of the Fund's shareholders and will cast its vote as instructed by Fund shareholders. The directors of Stagecoach Inc. will vote shares for which they receive no voting instructions in the same proportion as the shares for which they do receive voting instructions. A more detailed statement of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the SAI for the Fund. The Trust was established on October 28, 1993, as a Delaware business trust. The Trust's Declaration of Trust permits the Board of Trustees to issue beneficial interests in the Trust to investors based on their proportionate investments in the Trust. The Trust is divided into separate portfolios called series. The Trust has retained the services of Wells Fargo Bank as investment adviser and Stephens as administrator and placement agent. The Board of Trustees of the Trust is responsible for the general management of the Trust and supervising the actions of Wells Fargo Bank and Stephens in these capacities. Because this Prospectus combines disclosures relating to two separate investment companies, there is a possibility that one investment company might become liable for a misstatement, inaccuracy or incomplete disclosure in this Prospectus concerning the other investment company. Stagecoach Inc. and Stagecoach Funds have entered into an indemnification agreement that creates a right of indemnification from the investment company responsible for any such misstatement, inaccuracy or incomplete disclosure that may appear in this Prospectus. Wells Fargo Bank is the investment adviser to the Series, the Money Market Mutual Fund and the California Tax-Free Money Market Mutual Fund. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of March 31, 1995, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $196 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank also serves as the investment adviser to the other separately managed funds of the Trust, Stagecoach Inc. and Stagecoach Funds and to four other registered, open-end, management invest- ment companies each of which consists of several separately managed investment portfolios. Wells Fargo Bank, a wholly owned subsidiary of Wells Fargo & Company, is located at 420 Montgomery Street, San Francisco, California 94105. Morrison & Foerster, counsel to Stagecoach and the Trust and special counsel to Wells Fargo Bank, has advised Stagecoach, the Trust and Wells Fargo Bank that Wells Fargo Bank may perform the services contemplated by the Advisory Contracts without violation of the Glass-Steagall Act or other applicable banking laws or regulations. Such counsel has pointed out, however, that there are no controlling judicial or administrative interpretations or decisions and that future judicial or administrative interpretations of, or decisions relating to, present federal or state statutes, including the Glass-Steagall Act, and regulations relating to the permissible activities of banks and their subsidiaries or affiliates, as well as future changes in such statutes, regulations and judicial or administrative decisions or interpretations, could prevent Wells Fargo Bank from continuing to perform, in whole or in part, such services. If Wells Fargo Bank were prohibited from performing any such services, it is expected that the Board of Directors/Trustees would recommend to the shareholders that they approve a new advisory agreement with another entity or entities qualified to perform such services. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank is also the Funds' and the Series' custodian and transfer and dividend disbursing agent. In addition, Wells Fargo Bank is a Shareholder Servicing Agent and Selling Agent of the Funds. Stephens is the Funds' and the Trust's sponsor and administrator, and distributes the Funds' shares. Stephens is a full service broker/dealer and investment advisory firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit-sharing plans, individual investors, foundations, insurance companies and university endowments. The shares of the Funds described in this Prospectus are offered to consumers and businesses that establish an Account with Wells Fargo Bank. Each Account combines a Transaction Account (a non-interest bearing deposit account) with a daily sweep of balances to or from a Fund designated by the Accountholder. Investors may open an Account and designate a Fund by completing and signing an Account Application and appropriate Disclosure Statement corresponding to the type of Account being opened. The Disclosure Statement contains important information about the various features and operations of the Accounts and should be reviewed in conjunction with this Prospectus. Wells Fargo Bank may, in the future, permit investors to acquire shares of the Funds through additional accounts not described in this Prospectus. Although this Prospectus is intended exclusively for persons investing in a Fund through an Account, the Funds are available to investors by direct investment. Information regarding direct investments, including a separate prospectus that describes how to invest directly in a Fund, may be obtained by calling 800-222-8222 or by writing to Stagecoach Shareholder Services at the address set forth below: The price of a share of each Fund is its net asset value ("NAV"). The NAV of each share of the California Tax-Free Money Market Mutual Fund and the National Tax-Free Money Market Mutual Fund is computed by adding the value of the respective Fund's portfolio investments plus cash and other assets, deducting liabilities and then dividing the result by the number of outstanding shares of such Fund. The National Tax-Free Money Market Mutual Fund's investments in the Series are valued at the NAV of the Series' shares. The Series calculates the NAV of its shares on the same day and at the same time as the National Tax-Free Money Market Mutual Fund. The NAV of a share of each Class of the Money Market Mutual Fund is the value of total net assets attributable to each Class divided by the number of outstanding shares of that Class. The value of the net assets per Class is determined daily by adjusting the net assets per Class at the beginning of the day by the value of each Class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each Class by attributing to each Class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each Class as appropriate. As noted above, the Funds seek to maintain a constant $1.00 per share NAV, although there is no assurance that they will be able to do so. Shares of a Fund may be purchased through an Account on any day the Fund and Wells Fargo Bank are open (a "Business Day"). Currently, the National Tax-Free Money Market Mutual Fund and Wells Fargo Bank observe the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day (each, a "Holiday"); the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund observe the aforementioned Holidays, except for Martin Luther King, Jr. Day, Columbus Day and Veterans Day. The NAV of each Fund's shares is calculated as of 9:00 a.m. (Pacific time) on any day such Fund is open. The NAV of shares acquired through other means may be calculated at other times. All transaction orders are processed at the NAV next determined after the order is received. The Funds' and the Master Series' NAV are each calculated on the basis of the amortized cost method. This valuation method is based on the receipt of a steady rate of payment from the date of purchase until maturity rather than actual changes in market value. The Company's Board of Directors and the Trust's Board of Trustees believe that this valuation method accurately reflects fair value. Fund shares may be purchased by making a deposit into your Account. Each Business Day Wells Fargo Bank computes the Net Sweep Amount, which is the net amount of all deposits, withdrawals, charges and credits made to and from a Transaction Account. If deposits and credits exceed withdrawals and charges, you authorize Wells Fargo Bank, on your behalf, to transmit a purchase order to the Fund designated in your Account in the amount of that day's Net Sweep Amount. For example, if you make a $500 deposit and withdraw $100 on the same day, and there are no other transactions on that day, the Net Sweep Amount for that day would be $400. Wells Fargo Bank, on your behalf, would transmit a purchase order to the designated Fund on the next Business Day in the amount of $400. Your purchase order will be made effective and full and fractional Shares will be purchased at the next determined NAV, which is expected to remain a constant $1.00 per share. Deposits and other transactions to your Account are sometimes not immediately included in the Net Sweep Amount. Cash and items drawn on Wells Fargo Bank are generally credited to the Net Sweep Amount on the same Business Day as the day of deposit. Local and non-local checks are usually credited to your Net Sweep Amount on the first or second Business Day, respectively, after the day of your deposit. In addition, adjustments may sometimes be made to your Account to reflect dishonored or returned items. For additional information refer to the applicable Disclosure Statement and, specifically therein, "Holds and Funds Availability". Shares of the Tax-Free Funds may not be suitable investments for tax-exempt institutions or tax-sheltered retirement plans, since such investors would not benefit from the exempt status of the Funds' dividends and distributions. See "Federal Income Taxes -- Special Tax Considerations" in the SAI. The Funds intend to declare dividends daily payable to shareholders of record as of 9:00 a.m. (Pacific time). You will begin earning dividends on shares of the Funds on the day your purchase order for shares is effective and continue to earn dividends through the day prior to the date you redeem such shares. Dividends for a Saturday, Sunday or Holiday are credited on the preceding business day. If you redeem shares before the dividend payment date, any dividends credited to you will be paid on the following dividend payment date. The Funds will declare capital gains (if any) at least annually. Dividends declared in a month will be reinvested in Fund shares early in the following month. If, on any day Wells Fargo Bank is open for business, withdrawals from your Account, including check transactions, exceed deposits and credits, Wells Fargo Bank will transmit a redemption order on your behalf to the appropriate Fund in the dollar amount of that day's Net Sweep Amount. If your Account with Wells Fargo Bank is closed as described in the applicable Disclosure Statement, Wells Fargo Bank will transmit a redemption request on your behalf to the appropriate Fund for the balance of your Fund shares held through your Account. Fund shares will normally be redeemed at the next NAV, expected to be a constant $1.00 per share, calculated after the Fund has received the redemption order transmitted on your behalf. Redemption proceeds may be more or less than the amount invested and, therefore, a redemption of shares in a Fund may result in a gain or loss for federal and state income tax purposes. The Funds ordinarily will remit your redemption proceeds within seven days after your redemption order is received from Wells Fargo Bank unless the SEC permits a longer period under extraordinary circumstances. Such extraordinary circumstances could include a period during which an emergency exists as a result of which (a) disposal by the Funds and/or Series of securities owned by them is not reasonably practicable or (b) it is not reasonably practicable for the Funds and/or Series fairly to determine the value of their net assets, or a period during which the SEC by order permits deferral of redemptions for the protection of security holders of the Funds and/or Series. In addition, Wells Fargo Bank may withhold redemption proceeds pending check collection or processing or for other reasons all as set forth more fully in "Holds and Funds Availability" and elsewhere in the applicable Disclosure Statement. A number of services available to persons who invest directly in the Funds, including certain exchange privileges which allow shareholders to exchange their Fund shares for shares of other Funds, are not available to persons who invest in Fund shares through Accounts. These services are described in separate prospectuses describing direct investments in the Funds, which are available from Stagecoach Shareholder Services by calling 800-222-8222. Subject to the overall supervision of Stagecoach Funds' Board of Directors, Wells Fargo Bank, as the investment adviser to the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund, provides investment guidance and policy direction in connection with the management of such Funds' assets. Wells Fargo Bank also furnishes the Board of Directors with periodic reports on the investment strategies and performance of these Funds. For its services as investment adviser, Wells Fargo Bank is entitled to a monthly investment advisory fee at the annual rate of 0.40% of the average daily net assets of the Money Market Mutual Fund and 0.50% of the average daily net assets of the California Tax-Free Money Market Mutual Fund. From time to time, Wells Fargo waive such fees in whole or in part. Any such waiver will reduce expenses of the Funds and, accordingly, have a favorable impact on the Funds' yields. From time to time, each of the Funds, consistent with its investment objectives, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For the year ended December 31, 1994, Stagecoach Funds paid advisory fees at the annual rate of 0.40% of the average daily net assets of the Money Market Mutual Fund and 0.50% of the average daily net assets of the California Tax-Free Money Market Mutual Fund to Wells Fargo Bank as compensation for its services to such Funds. Subject to the overall supervision of the Trust's Board of Trustees, Wells Fargo Bank, as the Series' investment adviser, provides investment guidance and policy direction in connection with the management of the Series' assets. Wells Fargo Bank also furnishes the Board of Trustees with periodic reports on the Series' investment strategies and performance. From time to time, the Series, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services as investment adviser, Wells Fargo Bank is entitled to a monthly investment advisory fee at the annual rate of 0.30% of the average daily net assets of the Series. From time to time, Wells Fargo Bank may waive such fees in whole or in part. Any such waiver will reduce the expenses of the Series and, accordingly, have a favorable impact on the Series' yields and total returns. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank also serves as the Funds' and the Series' custodian and transfer and dividend disbursing agent. Pursuant to their respective Custody Agreements, the Funds and the Series may, at times, borrow money from Wells Fargo Bank as needed to satisfy temporary liquidity needs. Wells Fargo Bank charges interest on such overdrafts at a rate determined pursuant to each Fund's Custody Agreement. The custodial, transfer and dividend disbursing agency activities are performed at 525 Market Street, San Francisco, California 94105. The Funds have entered into Shareholder Servicing Agreements with Wells Fargo Bank, and may enter into similar agreements with other entities ("Shareholder Servicing Agents"). Under such agreements, Shareholder Servicing Agents will, as agent for their customers, among other things: answer customer inquiries regarding account status and history and the manner in which purchases, exchanges and redemptions of Fund shares may be effected; assist shareholders in designating and changing dividend options, account designations and addresses; provide necessary personnel and facilities to establish and maintain shareholder accounts and records; assist in processing purchase, redemption and exchange transactions; arrange for the wiring of money; transfer money in connection with customer orders to purchase or redeem shares; verify shareholder signatures in connection with redemption and exchange orders and transfers and changes in accounts with Approved Banks; furnish (either separately or on an integrated basis with other reports sent to a shareholder by the Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases, redemptions and exchanges; furnish, on behalf of each of the Funds, proxy statements, annual reports, updated prospectuses and other communications to shareholders; receive, tabulate and send to the Fund proxies executed by shareholders; and provide such other related services as the Funds or a shareholder may reasonably request. For these services, a Shareholder Servicing Agent is entitled to receive a fee, which may be paid periodically, determined by a formula based upon the asset level or number of accounts serviced by the Shareholder Servicing Agent during the period for which payment is being made, the level of activity in such accounts during such period, and the expenses incurred by the Shareholder Servicing Agent. The fees paid by each Fund as calculated on an annualized basis for the respective Fund's then-current fiscal year, may not exceed the lesser of (1) 0.30% of the average daily net assets of the California Tax-Free Money Market Mutual Fund, 0.30% of the average daily net assets attributable to the Class A Shares of the Money Market Mutual Fund or 0.25% of the average daily net assets of the National Tax-Free Money Market Mutual Fund, as represented by shares owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"), whichever is less. In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of the average NAV of each Fund or Class of a Fund. Subject to the overall supervision of the governing Board of Directors/Trustees, Stephens provides each Fund and the Series with administrative services, including general supervision of each Fund's operation, coordination of the other services provided to each Fund and the Series, compilation of information for reports to the SEC and the state securities commissions, preparation of proxy statements and shareholder reports and general supervision of data compilation in connection with preparing periodic reports. Stephens also furnishes office space and certain facilities to conduct each Fund's and the Series' business, and compensates the Directors/Trustees, officers and employees who are affiliated with Stephens. For these services, Stephens is entitled to a monthly fee at the annual rate of 0.03% of the Money Market Mutual Fund's and California Tax-Free Money Market Mutual Fund's average daily net assets and 0.05% of the National Tax-Free Money Market Mutual Fund's average daily net assets. From time to time, Stephens may waive its fees charged to a Fund in whole or in part. Any such waivers will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield. Stagecoach Funds and Stagecoach Inc. have each adopted Distribution Plans on behalf of the Class A Shares of the Money Market Mutual Fund and shares of the Tax-Free Funds under the SEC's Rule 12b-1 ("Plans"). The Money Market Mutual Fund, pursuant to the Plan adopted on behalf of the Class A Shares, may defray all or part of the actual cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective shareholders of a Fund by paying on an annual basis up to 0.05% of each such Fund's average daily net assets. Pursuant to the Plan for the National Tax-Free Money Market Mutual Fund, Stephens is entitled to receive as compensation for distribution-related services, a monthly fee at an annual rate of up to 0.05% of the average daily net assets of the Fund. Stephens has entered Agreements with the Funds and acts as agent for the Funds for the sale of their shares and may enter into selling agreements with other agents ("Selling Agents") that wish to make available shares of the Funds to their respective customers. The Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund may participate in joint distribution activities with any of the other funds of Stagecoach Funds, in which event, expenses reimbursed out of the assets of either Fund may be attributable, in part, to the distribution-related activities of another fund of Stagecoach Funds. The National Tax-Free Money Market Mutual Fund may participate in joint distribution activities with any of the other funds of Stagecoach Inc., in which event, expenses reimbursed out of the assets of the Fund may be attributable, in part, to the distribution-related activities of another fund of Stagecoach Inc. Generally, the expenses attributable to joint distribution activities will be allocated among each Fund and the other funds of the respective Company in proportion to their relative net asset sizes, although each Company's Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. In addition, the Plans contemplate that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed above) are deemed to be for distribution-related services, such payments are approved and payable pursuant to the Plans. Financial institutions acting as Shareholder Servicing Agents or Selling Agents, or in certain other capacities, may be required to register as dealers pursuant to applicable state securities laws which may differ from federal law and any interpretations expressed herein. As noted previously, from time to time, Wells Fargo Bank and Stephens may waive their respective fees in whole or in part and reimburse expenses payable to others. Any such waivers or reimbursements will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield. Except for the expenses borne by Wells Fargo Bank and Stephens, the Companies and the Trust bear all costs of their respective operations, including the following: the compensation of each Company's Directors and the Trust's Trustees who are not affiliated with Wells Fargo Bank or Stephens or any of their affiliates; advisory, shareholder servicing and administration fees; payments pursuant to any Plan; interest charges; taxes; fees and expenses of independent auditors, legal counsel, transfer agents and dividend disbursing agents; expenses of redeeming shares of a Fund or interests in the Trust; expenses of preparing and printing prospectuses (except the expense of printing and mailing prospectuses used for promotional purposes, unless otherwise payable pursuant to a Plan), shareholders' reports, notices, proxy statements and reports to regulatory agencies; insurance premiums and certain expenses relating to insurance coverage; trade association membership dues; brokerage and other expenses connected with the execution of portfolio transactions; fees and expenses of the custodian, including those for keeping books and accounts and calculating a NAV per share; expenses of shareholders' meetings; expenses relating to the issuance, registration and qualification of the shares of a Fund; pricing services; and any extraordinary expenses. Expenses attributable to each Fund, Class and/or Series are charged against the assets of such Fund, Class and/or Series. General expenses of each Company or the Trust are allocated among all of the funds of such Company (including the Funds) or series of the Trust (including the Series), in a manner proportionate to the net assets of each fund or series, on a transactional basis, or on such other basis as such Company's Board of Directors or the Trust's Board of Trustees deems equitable. By complying with the applicable provisions of the Code, the Money Market Mutual Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders. Dividends from net investment income (including net short-term capital gains, if any) declared and paid by the Money Market Mutual Fund will be taxable as ordinary income to Fund shareholders. Generally, dividends and distributions are taxable to shareholders at the time they are paid. However, dividends and distributions declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends or distributions are actually paid no later than January 31 of the following year. The Money Market Mutual Fund intends to pay out substantially all of its net investment income and net realized capital gains (if any) for each year. The Money Market Mutual Fund does not expect its dividends to qualify for the dividends-received deduction allowed to corporate shareholders. By complying with the applicable provisions of the Code, the California Tax-Free Money Market Mutual Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders, and the Fund's shareholders will not be subject to federal income taxes on any Fund dividends attributable to interest from tax-exempt securities. However, dividends attributable to interest from taxable securities and capital gains (if any) will be taxable to shareholders. In addition, by complying with the applicable provisions of the California Revenue and Taxation Code, the Fund's dividends also will be exempt from California personal income tax to the extent such dividends are attributable to instruments that pay interest which would be exempt from California personal income taxes were such instruments held directly by an individual. By complying with the applicable provisions of the Code, the National Tax-Free Money Market Mutual Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders, and the Fund's shareholders will not be subject to federal income taxes on any dividends of the Fund attributable to interest from tax-exempt securities. However, dividends attributable to interest from taxable securities and capital gains (if any) will be taxable to shareholders. The Fund does not make any representation regarding the taxation of its corporate shareholders with respect to Fund distributions and recommends that each such shareholder consult a tax advisor. The National Tax-Free Money Market Mutual Fund seeks to comply with the applicable provisions of the Code by investing all of its assets in the Series. The Series intends to qualify for federal tax purposes as a partnership. As such, the Fund will be deemed to own directly its proportionate share of the Trust's assets. Therefore, any interest, dividends, gains or losses of the Series will be deemed to have been "passed through" to the Fund and other investors in the Series, regardless of whether such interest, dividends or gains have been distributed by the Series or losses have been realized by the Fund or other investors. Accordingly, if the Series were to accrue but not distribute any interest, dividends or gains, the Fund would be deemed to have realized and recognized its proportionate share of interest, dividends, or gains without receipt of any corresponding distribution. The Series will seek to minimize recognition by investors of interest, dividends or gains without a corresponding distribution. The federal alternative minimum tax ("AMT") rules attempt to ensure that at least a minimum amount of tax is paid by corporate and high-income noncorporate taxpayers who obtain significant benefit from certain tax deductions and exemptions. These deductions and exemptions have been designated "tax preference items" which must be added back to taxable income for the purposes of calculating AMT. Among the "tax preference items" and "adjustments" which must be considered when calculating the AMT is tax-exempt interest from private activity bonds issued after August 7, 1986. To the extent that the California Tax-Free Money Market Mutual Fund invests in private activity bonds, shareholders who pay the alternative minimum tax will be required to report that portion of Fund dividends attributable to income from the bonds as a tax preference item in determining their federal AMT. Shareholders will be notified of the tax status of distributions made by the Funds. Persons who may be "substantial users" (or "related persons" of substantial users) of facilities financed by private activity bonds should consult their tax advisors before purchasing shares in the California Tax-Free Money Market Mutual Fund. There are other adjustments that may also affect adjusted current earnings for the purposes of corporate AMT. Shareholders with questions or concerns about AMT should also consult their tax advisors. The Funds, or your Shareholder Servicing Agent on their behalf, will inform you of the amount and nature of such Fund's dividends and capital gains. You should keep all statements you receive to assist in your personal record keeping. Each Company is required to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of a Fund if a shareholder has not complied with IRS regulations or if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% back-up withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes -- Foreign Shareholders" in the SAI for each Fund. Further federal tax considerations are discussed in the SAI for each Fund. All investors should consult their individual tax advisers with respect to their particular tax situations as well as the state and local tax status of investments in shares of the Funds. The Money Market Mutual Fund may invest in the following: California Tax-Free Money Market Mutual Fund The California Tax-Free Money Market Mutual Fund may invest in the following municipal obligations with remaining maturities not exceeding thirteen months: Pending the investment of proceeds from the sale of Fund shares or proceeds from sales of portfolio securities or in anticipation of redemptions or to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of market conditions, the California Tax-Free Money Market Mutual Fund may elect to invest temporarily up to 20% of the current value of its total assets in cash reserves or the following taxable high-quality money market instruments: Moreover, the California Tax-Free Money Market Mutual Fund may invest temporarily more than 20% of its total assets in such securities and in high-quality, short-term municipal obligations the interest on which is not exempt from federal income taxes to maintain a temporary defensive posture or in an effort to improve after-tax yield to the California Tax-Free Money Market Mutual Fund's shareholders when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of unusual market conditions. National Tax-Free Money Market Mutual Fund and Tax-Free Money Market Master The National Tax-Free Money Market Mutual Fund invests all its assets in shares of the Series of the Trust. As a result, the performance of the Fund will correspond to the investment experience of the Series. The Series may invest in the following: The following describes certain instruments in which the Funds and the Series may invest. Subject to the maturity and other restrictions of Rule 2a-7, the Funds and the Series may invest in municipal obligations. Municipal bonds generally have a maturity at the time of issuance of up to 40 years. Medium-term municipal notes are generally issued in anticipation of the receipt of tax funds, of the proceeds of bond placements, or of other revenues. The ability of an issuer to make payments on notes is therefore especially dependent on such tax receipts, proceeds from bond sales or other revenues, as the case may be. Municipal commercial paper is a debt obligation with a stated maturity of 270 days or less that is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. From time to time, the California Tax-Free Money Market Mutual Fund and the Series may each invest 25% or more of the current value of its total assets in certain "private activity bonds," such as pollution control bonds; provided, however, that such investments will be made only to the extent they are consistent with the Fund's fundamental policy of investing, under normal circumstances, at least 80% of its net assets in municipal obligations that are exempt from federal income taxes and not subject to the federal alternative minimum tax. For a further discussion of factors affecting purchases of municipal obligations by the California Tax-Free Money Market Mutual Fund, see "Special Considerations Affecting California Municipal Obligations" in the SAI. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. The Funds and the Series may invest in shares of other investment companies. The California Tax-Free Money Market Mutual Fund and the Series may invest in shares of other open-end investment companies that invest exclusively in high-quality short-term securities, provided however, that any such company has a fundamental policy of investing, under normal circumstances, at least 80% of its net assets in obligations that are exempt from federal income taxes and not subject to the federal alternative minimum tax. Such investment companies can be expected to charge management fees and other operating expenses that would be in addition to those charged to the Funds or the Series; however, Wells Fargo Bank has undertaken to waive its advisory fees with respect to that portion of the Funds' or the Series' assets so invested. In no event may the Funds or the Series, together with any company or companies controlled by a Fund or the Series, own more than 3% of the total outstanding voting stock of any such investment company, nor may a Fund or the Series, together with any such company or companies, invest more than 5% of its assets in any one such investment company or invest more than 10% of its assets in securities of all such investment companies combined. Certain of the debt instruments that the Funds may purchase bear interest at rates that are not fixed, but vary for example, with changes in specified market rates or indices or at specified intervals. These instruments typically have maturities of thirteen months or more, but may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The Funds and the Series may, in accordance with SEC rules, account maturing at the next interest rate readjustment date or the date at which the respective Fund or the Series may tender the instrument back to the issuer, whichever is later. The floating- and variable-rate instruments that the Funds and the Series may purchase include certificates of participation in such obligations. With regard to the California Tax-Free Money Market Mutual Fund and the Series, Wells Fargo Bank, as investment adviser, may rely upon either an opinion of counsel or an IRS ruling regarding the tax-exempt status of these certificates. The Funds and the Series may invest in floating-and variable-rate obligations even if they carry stated maturities in excess of thirteen months, upon compliance with certain conditions of the SEC, in which case such obligations will be treated in accordance with these conditions as having maturities not exceeding thirteen months. Wells Fargo Bank, as investment adviser to the Funds and the Series, will monitor on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the time a Fund or the Series elects to demand payment and the time payment is due, thereby affecting such Fund's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The Funds and the Series may enter into repurchase agreements wherein the seller of a security to a Fund or the Series agrees to repurchase that security from such Fund or the Series at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Funds and the Series may enter into repurchase agreements only with respect to U.S. Government obligations and other obligations that could otherwise be purchased by the participating Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. While the maturities of the underlying securities in a repurchase agreement transaction may be greater than thirteen months, the term of any repurchase agreement on behalf of a Fund or the Series will always be less than thirteen months. If the seller defaults and the value of the underlying securities has declined, the participating Fund or the Series, as the case may be, may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, disposition of the security by the participating Fund or the Series may be delayed or limited. The Funds and the Series will enter into repurchase agreements only with registered broker/dealers and commercial banks that meet guidelines established by the Boards of Directors of the Funds or Board of Trustees of the Trust and that are not affiliated with Wells Fargo Bank. The Funds and the Series may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. Certain of the debt obligations, certificates of participation, commercial paper and other short-term obligations which the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund are permitted to purchase may be backed by an unconditional and irrevocable letter of credit of a bank, savings and loan association or insurance company which assumes the obligation for payment of principal and interest in the event of default by the issuer. Letter of credit-backed investments must, in the opinion of Wells Fargo Bank, be of investment quality comparable to other permitted investments of the Fund. Each Fund and the Series may invest up to 25% of its assets in high-quality, short-term (thirteen months or less) debt obligations of foreign branches of U.S. banks or U.S. branches of foreign banks that are denominated in and pay interest in U.S. dollars. Investments in foreign obligations involve certain considerations that are not typically associated with investing in domestic obligations. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not subject to the same uniform accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic developments that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries. Pending the investment of proceeds from the sale of shares of the Series or proceeds from sales of portfolio securities or in anticipation of redemptions or to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of market conditions, the Series may elect to invest temporarily up to 20% of the current value of its net assets in cash reserves including the following taxable high-quality money market instruments: (i) U.S. Government obligations; (ii) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; (iii) commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P; (iv) certain repurchase agreements; and (v) high-quality municipal obligations, the income from which may or may not be exempt from federal income taxes. Moreover, the Series may invest temporarily more than 20% of its total assets in such securities and in high-quality, short-term municipal obligations the interest on which is not exempt from federal income taxes to maintain a temporary defensive posture or in an effort to improve after-tax yield to the Series' shareholders when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of unusual market conditions. Each Fund's investment objective, as set forth in the "How the Funds Work -- Investment Objectives and Policies" section, is fundamental; that is, it may not be changed without approval by the vote of the holders of a majority of such Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. In addition, any fundamental investment policy may not be changed without such shareholder approval. If the Company's Board of Directors determines, however, that a Fund's investment objective can best be achieved by a substantive change in a nonfundamental investment policy or strategy, the Company's Board may make such change without shareholder approval and will disclose any such material changes in the then-current prospectus. As matters of fundamental policy, the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund may: (i) borrow from banks up to 10% of the current value of each of their net assets only for temporary purposes in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of each of their net assets (but investments may not be purchased by a Fund while any such outstanding borrowing in excess of 5% of its net assets exists); (ii) not make loans of portfolio securities or other assets, except that loans for purposes of this restriction will not include the purchase of fixed time deposits, repurchase agreements, commercial paper and other short-term obligations, and other types of debt instruments commonly sold in a public or private offering; and (iii) not invest more than 25% of their assets (i.e. , concentrate) in any particular industry, excluding, (a) investments in municipal securities by the California Tax-Free Money Market Mutual Fund (for the purpose of this restriction, private activity bonds shall not be deemed municipal securities if the payments of principal and interest on such bonds is the ultimate responsibility of nongovernmental users), (b) U.S. Government obligations, and (c) obligations of domestic banks (for purposes of this restriction, domestic bank obligations do not include obligations of foreign branches of U.S. banks and obligations of U.S. branches of foreign banks). As a matter of nonfundamental policy: (i) the Money Market Mutual Fund may not purchase securities of any issuer (except for U.S. Government obligations, for certain temporary purposes and for certain guarantees and unconditional puts) if as a result more than 5% of the value of the Money Market Mutual Fund's total assets would be invested in the securities of such issuer or the Money Market Mutual Fund would own more than 10% of the outstanding voting securities of such issuer; (ii) the Money Market Mutual Fund may not invest more than 10% of the current value of its net assets in securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days; and (iii) the California Tax-Free Money Market Mutual Fund may not invest more than 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, illiquid securities and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days. With respect to item (i), it may be possible that the Company would own more than 10% of the outstanding voting securities of an issuer. For purposes of complying with the Code, the California Tax-Free Money Market Mutual Fund will diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the California Tax-Free Money Market Mutual Fund's assets is represented by cash, U.S. Government obligations and other securities limited in respect of any one issuer to an amount not greater than 5% of the California Tax-Free Money Market Mutual Fund's assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government obligations and the securities of other regulated investment companies), or of two or more issuers which the taxpayer controls and which are determined to be engaged in the same or similar trades or businesses or related trades or businesses. In addition, at least 65% of the California Tax-Free Money Market Mutual Fund's total assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from California personal income taxes. However, as a matter of general operating policy, the California Tax-Free Money Market Mutual Fund seeks to have substantially all of its assets invested in such municipal obligations. As matters of fundamental policy the National Tax-Free Money Market Mutual Fund and the Series may: (i) borrow from banks up to 10% of the current value of each of their net assets only for temporary purposes in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of their respective net assets (but investments by the Series may not be purchased while any such outstanding borrowing in excess of 5% of its net assets exists); (ii) not make loans, except that each of the Fund and the Master Series may purchase or hold debt instruments, lend its portfolio securities and enter into repurchase agreement transactions in accordance with its investment policies; loans for purposes of this restriction will not include the Fund's purchase of interests in the Master Series; and (iii) not purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Fund's or Series' investments in that industry would be 25% or more of the current value of the Fund's or Series' total assets, provided that there is no limitation with respect to investments in (a) municipal securities (for the purposes of this restriction, private activity bonds and notes shall not be deemed municipal securities if the payments of principal and interest on such bonds and notes is the ultimate responsibility of non-governmental entities), (b) U.S. Government obligations, and (c) certain obligations of domestic banks; and (iv) not purchase securities of any issuer (except securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, including government-sponsored enterprises) if, as a result, with respect to 75% of its total assets, more than 5% of the value of the Series' total assets would be invested in the securities of any one issuer or, with respect to 100% of its total assets the Series' ownership would be more than 10% of the outstanding voting securities of such issuer. As a matter of non-fundamental policy the National Tax-Free Money Market Mutual Fund and the Series may each: (i) invest up to 10% of the current value of its net assets in securities that are illiquid by virtue of the absence of a readily available market or the existence of legal or contractual restrictions on resale and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days; and (ii) invest up to 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, and restricted securities (which include securities that must be registered under the Securities Act of 1933 before they may be offered to the public). FOR MORE INFORMATION ABOUT THE FUNDS, OR WRITE: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF STAGECOACH FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. As Supplemented on May 2, 1995 and August 24, 1995 SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND Stagecoach Funds, Inc. (the "Company") is a professionally managed, open-end series investment company. This Prospectus contains information about two of the funds in the Stagecoach Family of Funds - the GINNIE MAE FUND and the SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND (each a "Fund" and, collectively, the "Funds"). The GINNIE MAE FUND seeks to provide investors with a long-term total rate of return through preserving capital and earning high interest income by investing principally in a portfolio of U.S. Government mortgage pass-through securities, consisting primarily of securities issued by the Government National Mortgage Association (popularly called "Ginnie Maes"), Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. The SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND seeks to provide investors with current income, while preserving capital, by investing primarily in a portfolio consisting of short- to intermediate-term securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. Please read this Prospectus before investing and retain it for future reference. It is designed to provide you with important information and to help you decide if the Funds' goals match your own. Statements of Additional Information ("SAIs"), dated May 1, 1995, for the Funds, have been filed with the Securities and Exchange Commission ("SEC") and are incorporated by reference. The SAI for each Fund is available free of charge by writing to Stagecoach Funds, Inc., c/o Stagecoach Shareholder Services, Wells Fargo Bank, N.A., P.O. Box 7066, San Francisco, CA 94120-7066 or by calling the Company at 800-222-8222. If you hold shares in an IRA, please call 1-800-BEST-IRA for information or assistance. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. PROSPECTUS DATED MAY 1, 1995 AS SUPPLEMENTED ON MAY 2, 1995 AND AUGUST 24, 1995 The Ginnie Mae Fund offers two classes of shares - Class A Shares and Class B Shares (each, a "Class"). The Short-Intermediate U.S. Government Income Fund offers a single class of shares. Each Fund is advised by Wells Fargo Bank, which also serves as each Fund's transfer and dividend disbursing agent and Custodian. In addition, Wells Fargo Bank is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below). Stephens Inc. ("Stephens") is the Funds' sponsor and administrator and serves as the distributor of the Funds' shares. THE FUNDS' SHARES AND PORTFOLIO INVESTMENTS (EXCEPT AS NOTED UNDER "HOW THE FUNDS WORK - INVESTMENT OBJECTIVES AND POLICIES" AND "PROSPECTUS APPENDIX - ADDITIONAL INVESTMENT POLICIES") ARE NOT INSURED OR GUARANTEED BY THE UNITED STATES OR ANY FEDERAL AGENCY OR INSTRUMENTALITY. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS, FOR WHICH IT IS COMPENSATED. STEPHENS, WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUNDS. SUMMARY OF FUND EXPENSES 5 HOW THE FUNDS WORK 10 THE FUNDS AND MANAGEMENT 15 INVESTING IN THE FUNDS 17 HOW TO REDEEM SHARES 28 MANAGEMENT AND SERVICING FEES 36 PROSPECTUS APPENDIX - ADDITIONAL INVESTMENT POLICIES A-1 The Funds provide you with a convenient way to invest in a portfolio of securities selected and supervised by professional management. The following provides you with summary information about the Funds. For more information, please refer specifically to the identified Prospectus sections and generally to the Prospectus and SAI for each Fund. Q. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? A. The GINNIE MAE FUND seeks to provide investors with a long-term total rate of return through preserving capital and earning high interest income by investing principally in a portfolio of U.S. Government mortgage pass-through securities, consisting primarily of securities issued by the Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"). Under normal market conditions, the Fund will invest at least 65% of its assets in securities issued by GNMA. The SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND seeks to provide investors with current income, while preserving capital, by investing primarily in a portfolio consisting of short- to intermediate-term securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. The Fund invests primarily in U.S. Treasury securities, notes and bonds and obligations issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises such as GNMA and FNMA. Under normal market conditions, at least 65% of the Fund's total assets will be invested in U.S. Government obligations and the dollar-weighted effective average maturity of the portfolio is expected to be between two and five years. The Fund may also invest in investment-grade corporate debt obligations. The Fund is designed for investors with investment horizons of two to five years. Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the Funds' investment adviser, manages your investments. Wells Fargo Bank also provides transfer agency and dividend disbursing agency and custodial services to the Funds. In addition, Wells Fargo Bank is a Shareholder Servicing Agent and a Selling Agent under a Selling Agreement with Stephens, the Funds' distributor. See "The Funds and Management" and "Management and Servicing Fees." Q. HOW DO I INVEST? A. You may invest by purchasing shares of the Funds at their public offering price, which is the net asset value per share plus any applicable sales charge. Class A Shares of the Ginnie Mae Fund are subject to a maximum front-end sales charge of 4.50%. Class B Shares of the Ginnie Mae Fund that are redeemed within four years of purchase are subject to a maximum contingent deferred sales charge of 3.00% of the lesser of net asset value at purchase or net asset value at redemption. The shares of the Short-Intermediate U.S. Government Income Fund are subject to a maximum front-end sales charge of 3.00%. In some cases, such as for investments by certain fiduciary or retirement accounts, the front-end sales charge may be waived. In particular, no front-end sales charge is imposed on sales of Class A Shares of the Ginnie Mae Fund and shares of the Short-Intermediate U.S. Government Income Fund made to various retirement plan customers of Wells Fargo Bank, including IRAs, Simplified Employee Pension Plans and other self-directed retirement plans for which Wells Fargo Bank serves as trustee. In other cases, the front-end sales charge may be reduced. You may open an account by investing at least $1,000 and may make additional investments of at least $100, although certain exceptions to these minimums may be available. Shares of a Fund may be purchased by wire, by check or by electing an automatic investment feature called the AutoSaver Plan on any day the Fund is open. See "Investing in the Funds." For more details, contact Stephens (the Funds' Sponsor and Distributor), a Shareholder Servicing Agent or Selling Agent (such as Wells Fargo Bank). Q. HOW WILL I RECEIVE DIVIDENDS AND ANY CAPITAL GAINS? A. Dividends from net investment income of the Funds are declared daily. Dividends paid by the Short-Intermediate U.S. Government Income Fund are automatically reinvested at net asset value without a sales charge in shares of the Fund paying the dividends. Dividends paid by the Ginnie Mae Fund are automatically reinvested in shares of the Class of the Fund which paid such dividends. You may also elect to receive dividends in cash or to reinvest the dividends in shares of the same class of another multi-class fund or in shares of certain other funds in the Stagecoach Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. Any capital gains will be distributed at least annually in the same manner. The net investment income available for distribution to holders of Class B Shares will be reduced by the amount of the higher Rule 12b-1 fee payable on behalf of the Class B Shares. Class B Shares automatically convert into Class A Shares of the same Fund six years after the end of the month in which they were acquired. See "Dividends" and "Additional Shareholder Services." Q. HOW MAY I REDEEM SHARES? A. You may redeem your shares by telephone, by letter, or by an automatic feature called the Systematic Withdrawal Plan on any day the New York Stock Exchange is open for business. Contingent deferred sales charges may be charged upon redemption of Class B Shares. In addition, the Company reserves the right to impose charges for wiring redemption proceeds. See "How To Redeem Shares" and "How to Purchase Shares - Contingent Deferred Sales Charges - Class B Shares." For more details, contact Stephens, a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank). Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT? A. An investment in any of the Funds is not insured against loss of principal. Therefore, you should be prepared to accept some risk with the money you invest in the Funds. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. Each Fund invests primarily in U.S. Government obligations. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market interest rates increase, and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. Although the GNMA securities in the Ginnie Mae Fund's portfolio are guaranteed by the U.S. Government as to timely payment of principal and interest, this Fund as well as the other Funds, also may purchase other types of U.S. Government obligations that are not backed by the full faith and credit of the U.S. Government. In addition, the corporate debt securities in which the Short-Intermediate U.S. Government Income Fund may invest are subject to credit risk, which is the risk that the issuer cannot pay all or a portion of the obligation represented by a particular security. The adjustable rate feature of the mortgages underlying the adjustable rate mortgage securities ("ARMS") and the collateralized mortgage obligations which the Short-Intermediate U.S. Government Income Fund invests should reduce, but will not eliminate, price fluctuations in such securities. Accordingly, the net asset value of shares of this Fund, as well as the other Funds, will fluctuate. Q. WHAT ARE DERIVATIVES AND DO THE FUNDS USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. Some of the permissible investments described in this Prospectus, such as adjustable rate mortgage-backed securities, floating- and variable-rate instruments and certain U.S. Government obligations, are considered derivatives. Some derivatives may be more sensitive than direct securities to changes in interest rates or sudden market moves. Some derivatives also may be susceptible to fluctuations in yield or value due to their structure or contract terms. Q. WHAT STEPS DO THE FUNDS TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with a Fund's investment objective, does not expose the Fund to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by each Fund also is subject to broadly applicable investment policies. For example, the Funds may not invest more than a specified percentage of their assets in "illiquid securities," including those derivatives that do not have active secondary markets. Nor may a Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. For more information on all of the Funds' investment activities, see "Prospectus Appendix -- Additional Investment Policies." This expense summary is a standard format required for all mutual funds to help you understand the various costs and expenses you will bear directly or indirectly as a shareholder of the Funds. As shown below, you are not charged exchange fees. You should consider this expense information together with the important information in this Prospectus, including the Funds' investment objectives and policies. (AS A PERCENTAGE OF AVERAGE NET ASSETS) EXAMPLE OF EXPENSES - CLASS B SHARES SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell shares of the Funds. You are subject to a front-end sales charge on purchases of Class A Shares of the Ginnie Mae Fund and shares of the Short-Intermediate U.S. Government Income Fund. You may be subject to a contingent deferred sales charge on Class B Shares if you redeem such shares within a specified period. See "Investing in the Funds - Sales Charges." The Company reserves the right to impose a charge for wiring redemption proceeds. In certain instances, you may qualify for a reduction or waiver of the front-end sales charge. See "Investing in the Funds - Sales Charges." ANNUAL FUND OPERATING EXPENSES for the Class A Shares of the Ginnie Mae Fund and the shares of the Short-Intermediate U.S. Government Income Fund are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees if certain expenses of the Funds exceed limits set by state securities laws or regulations. In addition, Wells Fargo Bank and Stephens, at their sole discretion, may waive or reimburse all or a portion of their respective fees charged to, or expenses paid by, a Fund. Any waivers or reimbursements would reduce a Fund's total expenses. There can be no assurances that waivers or reimbursements will continue. Absent waivers and reimbursements, the percentages shown above under "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.52% and 1.07%, respectively, for the Class A Shares of the Ginnie Mae Fund and 1.73% and 2.28%, respectively, for the shares of the Short-Intermediate U.S. Government Income Fund. Since Class B Shares were not offered during 1994, the percentages shown above with respect to Class B Shares under "Total Other Expenses" and "Total Fund Operating Expenses" reflect certain anticipated voluntary fee waivers and expense reimbursements for the current fiscal year. Absent waivers and reimbursements, the "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.57% and 1.77%, respectively, for Class B Shares of the Ginnie Mae Fund. The Funds could pay more in sales charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers ("NASD"). For more complete descriptions of the various costs and expenses you can expect to incur as an investor in each Fund, please see the Prospectus sections captioned "Investing in the Funds - How To Buy Shares" and "Management and Servicing Fees." EXAMPLE OF EXPENSES is a hypothetical example that illustrates the expenses associated with a $1,000 investment in shares of the Funds over stated periods, based on the expenses in the respective tables above and an assumed annual rate of return of 5%. This rate of return should not be considered an indication of actual or expected performance of a Fund. In addition, the example should not be considered a representation of past or future expenses and actual expenses may be greater or lesser than those shown. The following information for each of the Funds has been derived from the Financial Highlights in the Funds' 1994 annual financial statements. The financial statements are included in the SAI for each Fund. Except for periods ending prior to January 1, 1992, which were audited by other auditors whose report dated February 19, 1992, expressed an unqualified opinion on this information, the Financial Statements have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is included in the SAIs. This information should be read in conjunction with the Funds' 1994 annual financial statements and the notes thereto. The SAI for each Fund has been incorporated by reference into this Prospectus. Financial information is not provided in connection with Class B Shares because Class B Shares were not offered during the periods presented. FOR A CLASS A SHARE OUTSTANDING AS SHOWN FOR A SHARE OUTSTANDING AS SHOWN The Ginnie Mae Fund seeks to provide investors with a long-term total rate of return through preserving capital and earning high interest income by investing principally in a portfolio of U.S. Government mortgage pass-through securities, consisting primarily of securities issued by GNMA, FNMA and FHLMC. This investment objective is fundamental and cannot be changed without shareholder approval. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. Under normal market conditions, the Fund will invest at least 65% of its total assets in GNMA securities. These securities may bear interest at rates that are not fixed ("floating- and variable-rate instruments") or may be purchased on a "when-issued" or "firm commitment basis." The Fund also may invest in U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Government, and repurchase agreements. GNMAs, FNMAs and FHLMCs are mortgage-backed securities representing part ownership of a pool of residential mortgage loans. A "pool" or group of such mortgages is assembled and, after being approved by the entity, is offered to investors through securities dealers. Once approved by GNMA, a government corporation within the U.S. Department of Housing and Urban Development, the timely payment of interest and principal of a GNMA security is guaranteed by the full faith and credit of the U.S. Government. FNMA and FHLMC are federally chartered corporations supervised by the U.S. Government and acting as government-sponsored enterprises. FNMA and FHLMC securities are not direct obligations of the U.S. Treasury, but are supported by the credit of FNMA or FHLMC only. FNMA guarantees timely payment of interest and principal on its securities; FHLMC guarantees timely payment of interest and ultimate payment of principal only. Although the GNMA securities in the Ginnie Mae Fund's portfolio are guaranteed by the U.S. Government as to timely payment of principal and interest, the market value of these securities, upon which the Fund's daily net asset value is based, will fluctuate. The Fund is subject to interest rate risk, that is, the risk that increases in interest rates may adversely affect the value of the securities in which the Fund invests, and hence the value of your investment in the Fund. The value of the securities in which the Fund invests generally changes inversely to changes in interest rates. Moreover, no assurance can be given that the U.S. Government would supply financial support to U.S. Government-sponsored enterprises such as FNMA and FHLMC in the event of a default in payment on the underlying mortgages which the government-sponsored enterprise is unable to make good. Principal on the mortgage pass-through securities in which the Ginnie Mae Fund invests may be prepaid in advance of maturity. Such prepayments tend to increase when interest rates decline and may present the Fund with more principal to invest at lower rates. The converse also tends to be the case. Portfolio turnover should not adversely affect the Fund since portfolio transactions ordinarily will be made directly with principals on a net basis and, consequently, the Fund will not incur brokerage expenses. The Ginnie Mae Fund may temporarily invest some of its assets in high-quality money market instruments, which include U.S. Government obligations, obligations of domestic and foreign banks, and short-term corporate debt obligations. Such temporary investments would most likely be made when there is an unexpected or abnormal level of investor purchases or redemptions of Fund shares or because of unusual market conditions. The Fund also may lend its portfolio securities. A more complete description of the Fund's investments and investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the Fund's SAI. SHORT-INTERMEDIATE U.S. GOVERNMENT INCOME FUND The Short-Intermediate U.S. Government Income Fund seeks to provide investors with current income, while preserving capital, by investing primarily in a portfolio consisting of short- to intermediate-term securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. This investment objective is fundamental and cannot be changed without shareholder approval. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. The Short-Intermediate U.S. Government Income Fund may invest in obligations of any maturity. Under ordinary circumstances, the dollar-weighted effective average maturity of the Fund's portfolio is generally expected to be between two and five years and at least 65% of the value of its total assets will be invested in U.S. Government obligations. The Fund seeks to enhance its total return by shortening the average maturity of portfolio securities when interest rates are anticipated to increase and lengthening the maturity of such portfolio securities to take advantage of anticipated interest rate declines. Portfolio turnover generally involves some expense to the Fund, including dealer mark-ups. The Short-Intermediate U.S. Government Income Fund's assets will be invested and reinvested in U.S. Government obligations and in investment-grade corporate debt obligations rated at the date of purchase in the top four rating groups by Standard & Poor's Corporation ("S&P") or Moody's Investor Services, Inc. ("Moody's"), i.e., AAA/Aaa, AA/Aa, A/A, and BBB/Baa by S&P and Moody's, respectively. Securities rated BBB/Baa have speculative characteristics. In addition, it is possible that securities in which the Fund may invest could be downgraded by a ratings group subsequent to purchase by the Fund. The Fund will not hold more than 5% of its assets in securities that have been downgraded below investment grade subsequent to purchase. The Fund may also purchase securities which represent the interest portion or the principal portion (sometimes referred to as "STRIPs") of securities in which the Fund may otherwise invest. STRIPs have significantly different investment characteristics than the instruments from which they derive. S&P and Moody's assign ratings based upon their judgement of the risk of default of the securities underlying the STRIPs. However, investors should understand that most of the risk of these securities comes from interest rate risk and not from the risk of default. STRIPs may have significantly greater interest rate risk than traditional government securities with identical ratings. The Short-Intermediate U.S. Government Income Fund may invest in ARMS whose interest rates are periodically reset when market rates change. The Fund is designed for investors who seek a relatively stable net asset value while providing high current income relative to high-quality, short-term investment alternatives. ARMS are pass-through certificates representing ownership interests in a pool of adjustable rate mortgages and the resulting cash flow from those mortgages. The ARMS in which the Fund may invest are issued or guaranteed by GNMA, FNMA or FHLMC. Unlike conventional debt securities, which provide for periodic (usually semi-annual) payments of interest and payments of principal at maturity or on specified call dates, ARMS provide for monthly payments based on a pro rata share of both periodic interest and principal payments and prepayments of principal on the underlying mortgage pool (less GNMA's, FNMA's or FHLMC's fees and any applicable loan servicing fees.) The full and timely payment of principal and interest on GNMA ARMS is guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. FNMA also guarantees full and timely payment of both interest and principal, while FHLMC guarantees full and timely payment of interest and ultimate payment of principal. FNMA and FHLMC ARMS are not backed by the full faith and credit of the U.S. Government. However, because FNMA and FHLMC are government-sponsored enterprises, these securities are considered by some investors to be high-quality investments that present minimal credit risks. The yields provided by these ARMS have historically exceeded the yields on other types of U.S. Government securities with comparable maturities. Of course, there can be no assurance that this historical performance will continue or that the Fund will meet its investment objective. The Short-Intermediate U.S. Government Income Fund also may invest in the adjustable rate portions of collateralized mortgage obligations ("CMOs") issued by government agencies, instrumentalities or government-sponsored enterprises including, primarily, FNMA and FHLMC, and collateralized by pools of mortgage loans. Payments of principal and interest on the collateral mortgages are used to pay debt service on the CMOs. All CMOs purchased by the Fund will be rated, at the time of purchase, AAA by S&P or Aaa by Moody's. S&P and Moody's assign ratings based upon their judgment of the risk of default (i.e., the risk that the issuer or guarantor may default in the payment of principal and/or interest) of the securities underlying the CMOs. However, investors should understand that most of the risk of these securities comes from interest rate risk (i.e., the risk that market interest rates may adversely affect the value of the securities in which the Fund invests) and not from the risk of default. CMOs may have significantly greater interest rate risk than traditional government securities with identical ratings. The adjustable rate portions of CMOs have significantly less interest rate risk. The Short-Intermediate U.S. Government Income Fund, on a temporary basis may invest cash balances in U.S. Treasury bills, engage in repurchase agreements and lend its portfolio securities, provided the value of such loans of portfolio securities does not exceed one-third of the current value of its total assets. Such temporary investments would most likely be made when there is an unexpected or abnormal level of investor purchases or redemptions of Fund shares or because of unusual market conditions. A more complete description of the Fund's investments and investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the Fund's SAI. Although the ARMS are guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises as noted above), the market value of these securities, upon which the Short-Intermediate Government Income Fund's daily net asset value is based, will fluctuate. The Fund is subject to interest rate risk, that is, the risk that increases in interest rates may adversely affect the value of the securities in which the Fund invests, and hence the value of your investment in the Fund. The values of these securities generally change inversely to changes in interest rates. However, the adjustable rate feature of the mortgages underlying the ARMS and the CMOs in which the Fund may invest should reduce, but will not eliminate, price fluctuations in such securities, particularly during periods of extreme fluctuations in market interest rates. Moreover, there can be no assurance that the U.S. Government would supply financial support to its agencies or instrumentalities, where it is not obligated to do so. Principal on the mortgages underlying the mortgage pass-through securities in which the Short-Intermediate U.S. Government Income Fund invests may be prepaid in advance of maturity; these prepayments tend to increase when interest rates decline, presenting the Fund with more principal to invest at lower rates. The converse also tends to be the case when interest rates rise. A more complete description of the Short-Intermediate U.S. Government Income Fund's investments and investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the Fund's SAI. U.S. Government obligations have been selected by Wells Fargo Bank as the Short-Intermediate U.S. Government Income Fund's principal investments because of their relatively low purchase and sale transaction costs and because of the low default risk associated with them (i.e., they are issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities). On May 2, 1995, the Company's Board of Directors approved an Agreement and Plan of Reorganization (the "Plan"). Under the Plan, the Short-Intermediate U.S. Government Income Fund will acquire all of the assets of the Variable Rate Government Fund, a Fund of the Stagecoach Family of Funds, in exchange for shares of the Short-Intermediate U.S. Government Income Fund and the assumption by the Short-Intermediate U.S. Government Income Fund of stated liabilities of the Variable Rate Government Fund. The Plan has been approved by shareholders of the Variable Rate Government Fund at a Special Meeting of Shareholders on August 7, 1995, and the reorganization will take place at the end of August 1995. A more complete description of the Short-Intermediate U.S. Government Income Fund's investments and investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the Fund's SAI. The performance of shares of the Short-Intermediate U.S. Government Income Fund and each Class of shares of the Ginnie Mae Fund may be advertised in terms of yield and average annual total return. These performance figures are based on historical results and are not intended to indicate future performance. The yield of a Class of shares of the Ginnie Mae Fund is calculated by dividing the net investment income per share earned during a specified period (usually 30 days) for the Class A shares by the public offering price per share (which includes the maximum sales charge), or for the Class B shares by the net asset value per share (which does not include the maximum contingent deferred sales charge), on the last day of such period and annualizing the result. The yield of the shares of the Short-Intermediate U.S. Government Income Fund is calculated by dividing the Fund's net investment income per share earned during a specified period (usually 30 days) by the public offering price per share (which includes the maximum sales charge) on the last day of such period and annualizing the result. In addition to presenting a standardized yield, at times, each Fund also may present nonstandardized yields, total returns and distribution rates for purposes of sales literature. For example, the performance figure may be calculated on the basis of an investment in the Funds at the net asset value per share or at net asset value per share plus a reduced sales charge, rather than the public offering price per share. In this case, the figure might not reflect the effect of the sales charge that you may have paid (see "Investing in the Funds - How To Buy Shares"). Standardized and nonstandardized total return figures for shares of the Short- Intermediate U.S. Government Income Fund or a Class of shares of the Ginnie Mae Fund also may be presented. Average annual total return is based on the overall dollar or percentage change in value of a hypothetical investment in the Fund or Class and assumes that all the dividends and capital gain distributions attributable to the Fund or Class, as the case may be, are reinvested at net asset value in such Fund or Class. Standardized average annual total return is calculated for Class A Shares assuming you have paid the maximum sales charge, and for Class B Shares assuming on a one-year investment you have paid the maximum contingent deferred sales charge, on your hypothetical investment. Nonstandardized total return may be calculated assuming no sales charge or a reduced sales charge was paid on such investment. Because of differences in the fees and/or expenses borne by Class B Shares, the performance figures on such shares can be expected, at any given time, to be lower than the performance figures on Class A Shares. Standardized performance quotations are computed separately for Class A and Class B Shares. Additional information about the performance of each Fund is contained in the Annual Report for each Fund. The Annual Reports may be obtained free of charge by calling the Company at 800-222-8222. The Funds are two of the funds in the Stagecoach Family of Funds. The Company was organized as a Maryland corporation on September 9, 1991, and currently offers shares of nine other series: the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Income Fund, the California Tax-Free Money Market Mutual Fund, the Corporate Stock Fund, the Diversified Income Fund, the Growth and Income Fund, the Money Market Mutual Fund and the U.S. Government Allocation Fund. The Board of Directors of the Company supervises each Fund's activities and monitors its contractual arrangements with various service-providers. Although the Company is not required to hold annual shareholder meetings, special meetings may be requested for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing a Fund's investment objectives or fundamental investment policies. All shares of the Company have equal voting rights and will be voted in the aggregate, rather than by series or Class, unless otherwise required by law (such as when the voting matter affects only one series or Class). As a shareholder of a Fund, you receive one vote for each share you own and fractional votes for fractional shares owned. A more detailed description of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the Funds' SAIs. Wells Fargo Bank is the Funds' investment adviser, transfer agent and dividend disbursing agent. Wells Fargo Bank is also the custodian for the Ginnie Mae Fund and the Short-Intermediate U.S. Government Income Fund. In addition, Wells Fargo Bank is a Shareholder Servicing Agent of the Funds and a Selling Agent under Selling Agreements with the Funds' distributor. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of June 30, 1995, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $211 billion of assets of individuals, trusts, estates and institutions. As of June 30, 1995, Wells Fargo Bank managed or advised approximately $28 billion in assets. Wells Fargo Bank also serves as the investment adviser to the other separately managed series of the Company, and to seven other registered, open-end, management investment companies, which consist of several separately managed investment portfolios. Wells Fargo Bank, a wholly owned subsidiary of Wells Fargo & Company, is located at 420 Montgomery Street, San Francisco, California 94163. Mr. Paul Single assumed responsibility for the day-to-day management of the portfolio of the Ginnie Mae Fund on May 1, 1995. Mr. Single has managed taxable bond portfolios for over a decade, and has specific expertise in mortgage-backed securities. Prior to joining Wells Fargo Bank, in early 1988, he was a senior portfolio manager for Benham Capital Management Group. Mr. Single received his B.S. from Springfield College and is a chartered financial analyst. Mr. Mark Kraschel has been responsible for the day-to-day management of the portfolio of the Short-Intermediate U.S. Government Income Fund since October 1993. He has also been responsible for the day-to-day management of the portfolio of the Ginnie Mae Fund since May 1, 1995. He has specialized in short-term bond investment applications for over a decade. He joined Wells Fargo Bank in 1988 after five years in fixed-income management at First Boston Corporation. Mr. Kraschel holds a B.S. in business administration from the University of Oregon and an M.B.A. in finance from the University of San Francisco. Mr. Scott Smith also has been responsible for the day-to-day management of the portfolio of the Short-Intermediate U.S. Government Income Fund since 1993 and has been responsible for the management of the portfolio of the Ginnie Mae Fund since May 1, 1995. He joined Wells Fargo Bank in 1988 as a taxable money market portfolio specialist. His experience includes a position with a private money management firm with mutual fund investment operations. Mr. Smith holds a B.A. degree from the University of San Diego and is a chartered financial analyst. Stephens is the Funds' sponsor and administrator, and distributes the Funds' shares. Stephens is a full service broker/dealer and investment advisory firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its predecessor have been providing securities and investment services for more than 60 years and have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. You can buy shares in either Fund in one of the several ways described below. You must complete and sign an Account Application to open an account. Additional documentation may be required from corporations, associations and certain fiduciaries. Do not mail cash. If you have any questions or need extra forms, you may call 1-800-222-8222. After an application has been processed and an account has been established, subsequent purchases of different funds of the Company under the same umbrella account do not require the completion of additional applications. A separate application must be processed for each different umbrella account number (even if the registration is the same). Call the number on your confirmation statement to obtain information about what is required to change registration. The Company or Stephens may make the Prospectus available in an electronic format. Upon receipt of a request from you or your representative, the Company or Stephens will transmit or cause to be transmitted promptly, without charge, a paper copy of the electronic Prospectus. To invest in the Funds through a tax-deferred retirement plan, please contact a Shareholder Servicing Agent or a Selling Agent to receive information and the required separate application. See "Tax-Deferred Retirement Plans" below. The value of a share of each Fund is its "net asset value," or NAV. The NAV per share of the Short-Intermediate U.S. Government Income Fund is computed by adding the value of the Fund's portfolio investments plus cash and other assets, deducting liabilities and then dividing the result by the total number of Fund shares outstanding. The NAV of a share of a Class of the Ginnie Mae Fund is the value of total net assets attributable to each Class divided by the number of outstanding shares of that Class. The value of the net assets per Class is determined daily by adjusting the net assets per Class at the beginning of the day by the value of each Class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each Class by attributing to each Class a pro rata share of daily income and common expenses, and by assigning class specific expenses to each Class as appropriate. The NAV of a share of each Class is expected to fluctuate daily. The Funds are open for business each day the New York Stock Exchange ("NYSE") is open for trading ("Business Day"). Currently, the NYSE is closed on New Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a weekend, the NYSE is closed on the weekday immediately before or after such Holiday. Wells Fargo Bank calculates the NAV of the Funds and each Class of the Funds, as appropriate, each Business Day as of the close of regular trading on the NYSE (referred to hereafter as "the close of the NYSE"), which is currently 1:00 p.m. (Pacific time). Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, the other assets of the Funds are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the Company's Board of Directors. Prices used for such valuations may be obtained from independent pricing services. Shares of the Funds are offered continuously at the applicable offering price (the NAV plus the applicable sales charge) next determined after a purchase order is received in the form specified for the purchase method being used, as described in the following sections. Payment for shares purchased through a Selling Agent will not be due from the Selling Agent until the settlement date. The settlement date is normally three Business Days after the order is placed. It is the responsibility of the Selling Agent to forward payment for shares being purchased to a Fund promptly. Payment must accompany orders placed directly through the Transfer Agent. Payments for shares of each Fund will be invested in full and fractional shares of the Fund at the applicable offering price. If shares are purchased by a check which doesn't clear, the Company reserves the right to cancel the purchase and hold the investor responsible for any losses or fees incurred. In addition, the Funds may hold payment on any redemption until reasonably satisfied that your payments made by check have been collected (which may take up to 15 days). The Company reserves the right to reject any purchase order or suspend sales at any time. The minimum initial investment is $100 by the AutoSaver Plan purchase method (described below), $250 for any tax-sheltered retirement account for which Wells Fargo Bank serves as trustee or custodian under a prototype trust approved by the Internal Revenue Service ("IRS") (a "Plan Account"), and $1,000 by all other methods or for all other investors. All subsequent investments must be at least $100. If you have questions regarding purchases of shares, please contact the Company at 800-222-8222, or a Shareholder Servicing Agent or Selling Agent. Set forth below are the Front-end Sales Charge Schedules listing the front-end sales charges applicable to purchases of Class A Shares of the Ginnie Mae Fund and shares of the Short-Intermediate U.S. Government Income Fund. As shown the rates of front-end sales charges ("Volume Discounts") are available as you purchase additional shares (other than Class B Shares). You should consider the front-end sales charge information set forth below and the other information contained in this Prospectus when making your investment decisions. The following is the Front-end Sales Charge Schedule for purchasing Class A Shares of the Ginnie Mae Fund: The following is the Front-end Sales Charge Schedule for purchasing shares of the Short-Intermediate U.S. Government Income Fund: Class B Shares are not subject to a front-end sales charge. However, Class B Shares which are redeemed within one, two, three or four years from the date of purchase of such shares will be subject to a contingent deferred sales charge equal to 3.00%, 2.00%, 1.00% and 1.00%, respectively, of the dollar amount equal to the lesser of the NAV at the time of purchase of the shares being redeemed or the NAV of such shares at the time of redemption. See "Investing in the Funds - Contingent Deferred Sales Charges - Class B Shares." A selling agent or servicing agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class B Shares. If Class A shares are purchased through a Selling Agent, Stephens reallows the portion of the sales charge shown above as the Dealer Allowance. Stephens also compensates Selling Agents for sales of Class B Shares, and is then reimbursed out of applicable Rule 12b-1 Fees and contingent deferred sales charges applicable to such shares. When shares are purchased directly through the Transfer Agent and no Selling Agent is involved with the purchase, the entire front-end sales charge is paid to Stephens. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. The Volume Discounts described in the Front-end Sales Charge Schedules are available to you based on the combined dollar amount you invest in shares of one or more of the Company's funds which assess a front-end sales charge (the "Load Funds"). Since Class B Shares are not subject to front-end sales charges, you may not consider the amount of any Class B Shares you hold in determining a Volume Discount. The Right of Accumulation allows you to combine the amount you invest in Class A Shares of the Ginnie Mae Fund and in shares of the Short-Intermediate U.S. Government Income Fund with the total NAV of Class A Shares or other shares (other than Class B Shares) in any of the Load Funds to determine reduced sales charges in accordance with the above Sales Charge Schedules. In addition, you also may combine the total NAV of shares (other than Class B Shares) which you currently have invested in any other mutual fund that assesses a front-end sales charge and is advised by Wells Fargo Bank and sponsored by Stephens. For example, if you own Class A Shares of the Load Funds with an aggregate NAV of $90,000 and you invest an additional $20,000 in Class A Shares of a Fund, the front-end sales charge on the additional $20,000 investment would be 3.50% of the applicable offering price for the Ginnie Mae Fund and 2.25% for the Short- Intermediate U.S. Government Income Fund. To obtain such discount, you must provide sufficient information at the time of your purchase to verify that your purchase qualifies for the reduced front-end sales charge. Confirmation of the order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time without prior notice with respect to all subsequent shares purchased. A Letter of Intent allows you to purchase Class A Shares of the Ginnie Mae Fund and shares of the Short-Intermediate U.S. Government Income Fund over a at a reduced front-end sales charge based on the total amount you intend to purchase plus the total NAV of shares (other than Class B Shares) in any of the Load Funds you already own. Each investment you make during the period may be made at the reduced front-end sales charge that is applicable to the total amount you intend to invest. If you do not invest the total amount within the period, you must pay the difference between the higher front-end sales charge rate that would have been applied to the purchases you made and the reduced front-end sales charge rate you have paid. The minimum initial investment for a Letter of Intent is 5% of the total amount you intend to purchase, as specified in the Letter. Shares of a Fund equal to 5% of the amount you intend to invest will be held in escrow and, if you do not pay the difference within 20 days following the mailing of a request, a sufficient amount of escrowed shares will be redeemed for payment of the additional front-end sales charge. Dividend and capital gains paid on such shares held in escrow will be reinvested in additional Fund shares. You may reinvest proceeds from a redemption of Class A Shares or shares of the Short-Intermediate U.S. Government Income Fund in Class A Shares of a Fund or in shares of another of the Company's funds registered in your state of residence at NAV, without a front-end sales charge, within 120 days after your redemption. However, if the fund you are purchasing imposes a front-end sales charge that is higher than the one you have paid in connection with the shares you have redeemed, you pay the difference. You may reinvest at NAV up to the total amount of the redemption proceeds. A written purchase order for the shares must be delivered to the Company, a Selling Agent, a Shareholder Servicing Agent, or the Transfer Agent at the time of reinvestment. If you realized a gain on your redemption, your reinvestment would not alter the amount of any federal capital gains tax you pay on the gain. If you realized a loss on your redemption, your reinvestment may cause some or all of the loss to be disallowed as a tax deduction, depending on the number of shares you purchase by reinvestment and the period of time that elapses after the redemption, although for tax purposes, the amount disallowed is added to the cost of the shares you acquire upon the reinvestment. Reductions for Families or Fiduciaries Reductions in front-end sales charges apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Waivers for Investments of Proceeds From Other Investments Purchases may be made at NAV, without a front-end sales charge, to the extent that: (i) you are (a) investing proceeds from a redemption of shares of another open-end investment company or (b) investing proceeds from a redemption of units investment trust sold through Wells Fargo Securities, Inc. on which you paid a front-end sales charge; (ii) such redemption occurred within thirty (30) days prior to the date of the purchase order; and (iii) such other company or trust is distributed and advised by entities other than Stephens and Wells Fargo Bank, respectively, or their affiliates. You must notify the Fund and/or the Transfer Agent at the time you place such purchase order of your eligibility for the waiver of front-end sales charges and provide satisfactory evidence thereof (e.g., a confirmation of the redemption). Reductions in front-end sales charges also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of shares purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the Investment Company Act of 1940 (the "1940 Act"), which has been in existence for more than six months and which has a primary purpose other than acquiring shares of a Fund at a reduced front-end sales charge, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote 5% or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote 5% or more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Investors seeking to rely on their membership in a qualified group to purchase shares at a reduced sales load must provide evidence satisfactory to the Transfer Agent of the existence of a bona fide qualified group and their membership therein. Shares of a Fund may be purchased at NAV, without a front-end sales charge, by directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and Selling Agents. Shares of a Fund also may be purchased at NAV, without a front-end sales charge, by present and retired directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo Bank and its affiliates if Wells Fargo Bank and/or the respective affiliates agree. Shares also may be purchased at NAV, without a front-end sales charge, by employee benefit and thrift plans for such persons and by any investment advisory, trust or other fiduciary account, including a Plan Account, that is maintained, managed or advised by Wells Fargo Bank or its affiliates ("Fiduciary Accounts"). In addition, you may purchase shares of a Fund at NAV, without a front-end sales charge, with proceeds from a required minimum distribution from any Individual Retirement Account ("IRA"), Simplified Employee Pension Plan or other self-directed retirement plan for which Wells Fargo Bank serves as trustee, provided that the proceeds are invested in the Fund within 30 days of such distribution and such distribution is required as a result of reaching age 70 1/2. CONTINGENT DEFERRED SALES CHARGE - CLASS B SHARES Class B Shares are not subject to front-end sales charges but may be subject to contingent deferred sales charges. Class B Shares which are redeemed within one, two, three or four years from the receipt of a purchase order for such shares will be subject to a contingent deferred sales charge equal to 3.00%, 2.00%, 1.00% and 1.00%, respectively, of the dollar amount equal to the lesser of the NAV at the time of purchase of the shares being redeemed or the NAV of such shares at the time of redemption. Contingent deferred sales charges will not be imposed on amounts representing increases in NAV above the NAV at time of purchase. Contingent deferred sales charges will not be assessed on Class B Shares purchased through reinvestment of dividends or capital gains distributions. Class B Shares automatically convert into Class A Shares of the same Fund six years after the end of the month in which such Class B Shares were acquired. The amount of a contingent deferred sales charge, if any, paid upon redemption of Class B Shares is determined in a manner designed to result in the lowest sales charge rate being assessed. When a redemption request is made, Class B Shares acquired pursuant to the reinvestment of dividends and capital gain distributions are considered to be redeemed first. After this, Class B Shares are considered redeemed on a first-in, first-out basis so that Class B Shares held for a longer period of time are considered redeemed prior to more recently acquired Class B Shares. For a discussion of the interaction between the optional Exchange Privilege and contingent deferred sales charges on Class B Shares, see "Additional Shareholder Services - Exchange Privilege." Contingent deferred sales charges are waived on redemptions of Class B Shares (i) following the death or disability (as defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a shareholder, (ii) to the extent that the redemption represents a minimum required distribution from an individual retirement account or other retirement plan to a shareholder who has reached age 70 1/2, (iii) effected pursuant to the Company's right to liquidate a shareholder's account if the aggregate net asset value of the shareholder's account is less than the minimum account size, or (iv) in connection with the combination of the Company with any other registered investment company by a merger, acquisition of assets, or by any other transaction. In deciding whether to purchase Class A or Class B shares, you should compare the fees assessed on Class A Shares (including front-end sales charges) against those assessed on Class B Shares (including potential contingent deferred sales charges and higher Rule 12b-1 Fees than Class A Shares) in light of the amount to be invested and the anticipated time that the shares will be owned. You may buy shares of a Fund on any Business Day by any of the methods described below. 1. Complete an Account Application. 2. Instruct the wiring bank to transmit the specified amount in federal funds ($1,000 or more) to: Wire Purchase Account Number: 4068-000587 Attention: Stagecoach Funds (Name of Fund) (designate Class A or B, if Account Name(s): Name(s) in which to be registered Account Number: (if investing into an existing account) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price or, in the case of Class B Shares, at the NAV next determined after the Account Application is received and accepted. 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $1,000 or more payable to "Stagecoach Funds (Name of Fund) (designate Class A or B, if applicable)," to the address set forth in "Initial Purchases by Wire." 3. Share purchases are effected at the public offering price or, in the case of Class B Shares, at the NAV next determined after the Account Application is received and accepted. The Company's AutoSaver Plan provides you with a convenient way to establish and automatically add to a Fund account on a monthly basis. To participate in the AutoSaver Plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from an account with a bank, which is designated in your Account Application and which is approved by the Transfer Agent ("Approved Bank"). Wells Fargo Bank is an Approved Bank. The Transfer Agent withdraws and uses this amount to purchase specified Fund shares on your behalf on or about the fifth Business Day of each month. There are no separate fees charged to you by the Funds for participating in the AutoSaver Plan. You may change your investment amount, suspend purchases or terminate your election at any time by providing notice to the Transfer Agent at least five Business Days prior to any scheduled transaction. You may be entitled to invest in the Funds through a Plan Account or other tax-deferred retirement plan. Contact a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank) for materials describing Plan Accounts available through it, and the benefits, provisions, and fees of such Plan Accounts. The minimum initial investment for Fund shares acquired through a Plan Account is $250. Pursuant to the Code, individuals who are not active participants (and who do not have a spouse who is an active participant) in certain types of retirement plans ("qualified retirement plans") may deduct contributions to an IRA, up to specified limits. Investment earnings in the IRA will be tax-deferred until withdrawn, at which time the individual may be in a lower tax bracket. The maximum annual deductible contribution to an IRA for individuals under age 70 1/2 is 100% of includible compensation up to a maximum of (i) $2,000 for single individuals; (ii) $4,000 for a married couple when both spouses earn income; and (iii) $2,250 when one spouse earns, or elects for IRA purposes to be treated as earning, no income (together the "IRA contribution limits"). The IRA deduction is also available for single individual taxpayers and married couples who are active participants in qualified retirement plans but who have adjusted gross incomes which do not exceed certain specified limits. If their adjusted gross income exceeds these limits, the amount of the deductible contribution may be phased down and eventually eliminated. Any individual who works may make nondeductible contributions to an IRA in addition to any deductible contributions. Total aggregate deductible and nondeductible contributions are limited to the IRA contribution limits discussed above. Nondeductible contributions in excess of the applicable IRA contribution excess contributions". In addition, contributions made to an IRA for the year in which an individual attains the age of 70 1/2, or any year thereafter, are also nondeductible excess contributions. Nondeductible excess contributions are subject to a 6% excise tax penalty which is charged each year that the nondeductible excess contribution remains in the IRA. An employer also may contribute to an individual's IRA by establishing a Simplified Employee Pension Plan through a Shareholder Servicing Agent or a Selling Agent, known as a SEP-IRA. Participating employers may make an annual contribution in an amount up to the lesser of 15% of earned income or $30,000, subject to certain provisions of the Code. Investment earnings will be tax-deferred until withdrawn. The foregoing discussion regarding IRAs is based on the Code and regulations in effect as of the date of this Prospectus and summarizes only some of the important federal tax considerations generally affecting IRA contributions made by individuals or their employers. It is not intended as a substitute for careful tax planning. Investors should consult their tax advisors with respect to their specific tax situations as well as with respect to state and local taxes. Further federal tax information is contained under the heading "Taxes" of this Prospectus and in the SAI. A Shareholder Servicing Agent or Selling Agent also may offer other types of tax-deferred or tax-advantaged plans, including a Keogh retirement plan for self-employed professional persons, sole proprietors and partnerships. Application materials for opening a tax-deferred retirement plan can be obtained from a Shareholder Servicing Agent or a Selling Agent. Return your completed tax-deferred retirement plan application to your Shareholder Servicing Agent or a Selling Agent for approval and processing. If your tax-deferred retirement plan application is incomplete or improperly filled out, there may be a delay before a Fund account is opened. You should ask your Shareholder Servicing Agent or Selling Agent about the investment options available to your tax-deferred retirement plan, since some of the funds in the Stagecoach Family of Funds may be unavailable. Moreover, certain features described herein, such as the AutoSaver Plan and the Systematic Withdrawal Plan, may not be available to individuals or entities who invest through a tax-deferred retirement plan. You may make additional purchases of $100 or more by instructing a Fund's Transfer Agent to debit an Approved Bank account designated in your Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Stagecoach Funds (Name of Fund) (designate Class A or B if applicable)" to the address set forth in "Initial Purchases by Wire". Write your Fund account number on the check and include the detachable stub from your Statement of Account or a letter providing your Fund account number. You may place a purchase order for shares of a Fund through a broker/dealer or financial institution which has entered into a Selling Agreement with Stephens, as the Funds' Distributor ("Selling Agent"). If your order is placed by the close of the NYSE, the purchase order generally will be executed on the same day if the order is received by the Transfer Agent before the close of business. If your purchase order is received by a Selling Agent after the close of the NYSE or by the Transfer Agent after the close of business, then your purchase order will be executed on the next Business Day following the day your order is placed. The Selling Agent is responsible for the prompt transmission of your purchase order to the Funds. Because payment for shares of a Fund will not be due until settlement date, the Selling Agent might benefit from the temporary use of your payment. A financial institution which acts as a Selling Agent, Shareholder Servicing Agent or in certain other capacities may be required to register as a dealer pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. PURCHASES THROUGH SHAREHOLDER SERVICING AGENTS Purchase orders for shares of the Funds may be transmitted to the Transfer Agent through any entity that has entered into a Shareholder Servicing Agreement with the Funds ("Shareholder Servicing Agent"), such as Wells Fargo Bank. See "Management and Servicing Fees - Shareholder Servicing Agent." The Shareholder Servicing Agent may transmit a purchase order to the Transfer Agent, on your behalf, including a purchase order for which payment is to be transferred from an account with an Approved Bank or wired from a financial institution. If your order is transmitted by the Shareholder Servicing Agent, on your behalf, to the Transfer Agent before the close of the NYSE, the purchase order generally will be executed on the same day. If your Shareholder Servicing Agent transmits your purchase order to the Transfer Agent after the close of the NYSE, then your order will be executed on the next Business Day following the day your order is received. The Shareholder Servicing Agent is responsible for the prompt transmission of your purchase order to the Transfer Agent. The Funds, or a Shareholder Servicing Agent on their behalf, will typically send you a confirmation or statement of your account after every transaction that affects your share balance or your Fund account registration. The Funds do not issue share certificates. A statement with tax information will be mailed to you by January 31 of each year, and also will be filed with the IRS. At least twice a year, you will receive financial statements. Each Fund intends to declare a daily dividend of substantially all of its net investment income. Dividends declared in a month generally are paid on the last Business Day of such month to shareholders of record. The Funds will distribute any capital gains at least annually. You have several options for receiving dividends and capital gain distributions. They are discussed under "Additional Shareholder Services - Dividend and Distribution Options." Dividends and capital gain distributions will have the effect of reducing the NAV per share by the amount distributed. Although a distribution paid to you on newly issued shares shortly after your purchase would represent, in substance, a return of your capital, the distribution would consist of net investment income and, accordingly, would be taxable to you as ordinary income. Net investment income available for distribution to the holders of Class B Shares will be reduced by the amount of the higher Rule 12b-1 Fee payable on such shares. Other expenses, such as state securities registration fees and transfer agency fees, that are attributable to a particular class also may affect the relative dividends and/or capital gain distributions of Class A Shares and Class B Shares. Dividends for a Saturday, Sunday or Holiday are declared payable to shareholders of record as of the preceding Business Day. If you redeem shares before the dividend payment date, any dividends credited to you are paid on the following dividend payment date unless you have redeemed all shares in your account, in which case you will receive your accrued dividends together with your redemption proceeds. You may redeem all or a portion of your shares in a Fund on any Business Day. Your shares will be redeemed at the next NAV calculated after the Funds have received your redemption request in proper form. Redemption proceeds may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. The Funds ordinarily will remit redemption proceeds, net of any contingent deferred sales charge applicable with respect to Class B Shares (the "net redemption proceeds"), within seven days after your redemption order is received in proper form, unless the SEC permits a longer period under extraordinary circumstances. Such extraordinary circumstances could include a period during which an emergency exists as a result of which (a) disposal by a Fund of securities owned by it is not reasonably practicable or (b) it is not reasonably practicable for a Fund fairly to determine the value of its net assets, or a period during which the SEC by order permits deferral of redemptions for the protection of security holders of such Fund. In addition, the Funds may hold payment on your redemptions until reasonably satisfied that your investments made by check have been collected (which can take up to 15 days from the purchase date). To ensure acceptance of your redemption request, please follow the procedures described below. Although it is not the Funds' current intention, the Funds may make payment of redemption proceeds in securities if conditions warrant, subject to regulation by some state securities commissions. In addition, the Funds reserve the right to impose charges for wiring redemption proceeds. Due to the high cost of maintaining Fund accounts with small balances, the Funds reserve the right to close your account and send you the proceeds if the balance falls below the applicable minimum balance because of a redemption (including a redemption of shares of a Fund after an investor has made only the applicable minimum initial investment). However, you will be given 30 days' notice to make an additional investment to increase your account balance to an amount equal to or greater than the applicable minimum balance. Plan Accounts are not subject to minimum Fund account balance requirements. For a discussion of applicable minimum balance requirements, see "Investing in the Funds -- How To Buy Shares." Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you specifically decline the privileges. Telephone redemption privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Company and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. 1. Write a letter of instruction. Indicate the Class, if applicable, and the dollar amount or number of Fund shares you want to redeem. Refer to your Fund account number and give your social security or taxpayer identification number (where applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. Signature guarantees are not required for redemption requests unless redemption proceeds of $5,000 or more are to be paid to someone other than of record or your designated Approved Bank account, or other unusual circumstances exist which cause the Transfer Agent to determine that a signature guarantee is necessary or prudent to protect against unauthorized redemption requests. If required, a signature must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is an FDIC member, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation may be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. Mail your letter to the Transfer Agent at the mailing address set forth under "Investing in the Funds - Initial Purchases by Wire." Unless other instructions are given in proper form, a check for your net redemption proceeds will be sent to your address of record. EXPEDITED REDEMPTIONS BY MAIL OR TELEPHONE You may request an expedited redemption of shares of a Fund by letter, in which case your receipt of redemption proceeds, but not the Fund's receipt of your redemption request, would be expedited. In addition, you also may request an expedited redemption of shares of a Fund by telephone on any Business Day, in which case both your receipt of redemption proceeds and the Fund's receipt of your redemption request would be expedited. You may request expedited redemption by telephone only if the total value of the shares redeemed is $100 or more. You may request expedited redemption by telephone by calling the Transfer Agent at the telephone number listed on your transaction confirmation or by calling 800-222-8222. You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Investing in the Funds - Initial Purchases by Wire." Upon request, net redemption proceeds of your expedited redemptions of $5,000 or more will be wired or credited to an Approved Bank account designated in your Account Application or wired to the Selling Agent designated in your Account Application. The Company reserves the right to impose a charge for wiring redemption proceeds. When proceeds of your expedited redemption are to be paid to someone else, to an address other than that of record, or to an account with an Approved Bank or Selling Agent that you have not predesignated in your Account Application, your expedited redemption request must be made by letter and the signature(s) on the letter may be required to be guaranteed, regardless of the amount of the redemption. If your expedited redemption request is received by the Transfer Agent by the close of the NYSE on a Business Day, your redemption proceeds will be transmitted to your designated account with an Approved Bank or Selling Agent on the next Business Day (assuming your investment check has cleared as described above), absent extraordinary circumstances. Such extraordinary circumstances could include those described above as potentially delaying redemptions, and also could include situations involving an unusually heavy volume of wire transfer orders on a national or regional basis or communication or transmittal delays that could cause a brief delay in the wiring or crediting of funds. A check for net redemption proceeds will be mailed to your address of record or, at your election, credited to an Approved Bank account designated in your Account Application. During periods of drastic economic or market activity or changes, you may experience problems implementing an expedited redemption by telephone. In the event you are unable to reach the Transfer Agent by telephone, you should consider using overnight mail to implement an expedited redemption. The Funds reserve the right to modify or terminate the expedited telephone redemption privilege at any time. The Company's Systematic Withdrawal Plan provides you with a convenient way to redeem Fund shares from your account and have the net redemption proceeds distributed to you on a monthly basis. You may participate in the Systematic Withdrawal Plan only if you have a Fund account valued at $10,000 or more as of the date of your election to participate, your dividends and capital gain distributions are being reinvested automatically and you are not participating in the AutoSaver Plan at any time while participating in the Systematic Withdrawal Plan. You specify an amount ($100 or more) to be distributed by check to your address of record or deposited in your Approved Bank account designated in the Account Application. The Transfer Agent redeems sufficient shares and mails or deposits your net redemption proceeds as instructed on or about the fifth Business Day prior to the end of each month. There are no separate fees charged to you by the Funds for participating in the Systematic Withdrawal Plan. However, you should not participate in the Systematic Withdrawal Plan if you also are purchasing shares of the same Fund that are subject to a sales charge. You may change your withdrawal amount, suspend withdrawals or terminate your election at any time by notifying the Transfer Agent at least ten Business Days prior to any scheduled transaction. Your participation in the Systematic Withdrawal Plan will be terminated automatically if your Fund account is closed or, in some cases, if your Approved Bank account is closed. If your redemption order for shares of a Fund is received by a Selling Agent before the close of the NYSE and received by the Transfer Agent before the close of business on the same day, the order will be executed at the NAV determined as of the close of the NYSE on that day. If your redemption order is received by a Selling Agent after the close of the NYSE, or not received by the Transfer Agent prior to the close of business, your order will be executed at the NAV determined as of the close of the NYSE on the next Business Day. The Selling Agent is responsible for the prompt transmission of your redemption order to the Funds. Unless you have made other arrangements with the Selling Agent, and the Transfer Agent has been informed of such arrangements, net redemption proceeds of a redemption order made by you through a Selling Agent will be credited to an account with an Approved Bank that you have designated in your Account Application. If no such account is designated, a check for the net redemption proceeds will be mailed to your address of record or, if such address is no longer valid, the net proceeds will be credited to your account with the Selling Agent. You may request a check from the Selling Agent or may elect to retain the net redemption proceeds in such account. The Selling Agent may charge you a service fee. In addition, the Selling Agent may benefit from the use of your redemption proceeds until the check it issues to you has cleared or until such proceeds have been disbursed or reinvested on your behalf. REDEMPTIONS THROUGH SHAREHOLDER SERVICING AGENTS You may request a redemption of shares of a Fund through your Shareholder Servicing Agent. Any redemption request made by telephone through your Shareholder Servicing Agent must redeem shares with a total value equal to $100 or more. If your redemption order is transmitted by the Shareholder Servicing Agent, on your behalf, to the Transfer Agent before the close of the NYSE, the redemption order will be executed at the NAV determined as of the close of the NYSE on that day. If your Shareholder Servicing Agent transmits your redemption order to the Transfer Agent after the close of the NYSE, then your order will be executed on the next Business Day following the date your order is received. The Shareholder Servicing Agent is responsible for the prompt transmission of your redemption order to the Funds. Unless you have made other arrangements with your Shareholder Servicing Agent, and the Transfer Agent has been informed of such arrangements, net redemption proceeds of a redemption order made by you through your Shareholder Servicing Agent will be credited to an account with the Approved Bank that you have designated in the Account Application. If no such account is designated, a check for the net redemption proceeds will be mailed to your address of record or, if such address is no longer valid, the net proceeds will be credited to your account with your Shareholder Servicing Agent or to another account designated in your agreement with your Shareholder Servicing Agent. The Company offers you a number of optional services. As noted above, you can take advantage of the AutoSaver Plan, Tax-Deferred Retirement Plans, the Systematic Withdrawal Plan, and Expedited Redemptions by Letter and Telephone. In addition, the Funds offer you several dividend and distribution payment options and an exchange privilege, which are described below. If you have any questions about the options available to you, please call 800-222-8222. When you fill out your Account Application, you can choose from the following dividend and distribution options: A. The Automatic Reinvestment Option provides for the reinvestment of your dividends and capital gain distributions in additional shares of the same Class of the Fund which paid such dividend or capital gain distribution. Dividends and distributions declared in a month generally are reinvested at NAV on the last Business day of such month. You are assigned this option automatically if you make no choice on your Account Application. B. The Fund Purchase Option lets you use your dividends and/or capital gain distributions from the Funds to purchase, at NAV, shares of another fund in the Stagecoach Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. Dividends and distributions paid on Class A or Class B Shares of the Ginnie Mae Fund may be invested in Class A or Class B Shares, respectively, of another fund, in Retail Shares of another fund, in Class A Shares of the Money Market Mutual Fund, or in shares of the California Tax-Free Money Market Mutual Fund. Dividends and distributions paid on Class A Shares may also be invested in shares of a non-money market fund with a single class of shares (a "single class fund"). Dividends and distributions paid on Class B Shares may not be invested in shares of a single class fund. Dividends and distributions paid on shares of the Short- Intermediate U.S. Government Income Fund may be invested in Class A Shares, in Retail Shares of another fund, in shares of a single class fund or in shares of the California Tax-Free Money Market Mutual Fund. C. The Automatic Clearing House Option permits you to have dividends and capital gain distributions deposited in your Approved Bank account designated in the Account Application. In the event your Approved Bank account is closed, your distribution will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf. D. The Check Payment Option lets you receive a check for all dividends and/or capital gain distributions, which generally is mailed either to your designated or your designated Approved Bank shortly following declaration. If the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, your distributions will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf. Wells Fargo Bank advises a variety of other funds, each with its own investment objective and policies. The exchange privilege is a convenient way to buy shares in the other funds of the Stagecoach Family of Funds that are registered in your state of residence in order to respond to changes in your investment and savings goals or in market conditions. Shares of the Short-Intermediate U.S. Government Income Fund may be exchanged for Class A Shares or Retail Shares of another fund, for shares of a single class fund or for shares of the California Tax Free Money Market Mutual Fund. Class A Shares of the Ginnie Mae Fund may be exchanged for Class A Shares or Retail Shares of another fund, for shares of the California Tax Free Money Market Mutual Fund or for shares of a single class fund. Class B Shares of the Ginnie Mae Fund may be exchanged for Class B Shares of another fund, for shares of the California Tax-Free Money Market Mutual Fund or for Class A Shares of the Money Market Mutual Fund (the Money Market Mutual Fund and California Tax-Free Money Market Mutual Fund are, collectively, the "Money Market Mutual Funds"). Before making an exchange from a Fund into another fund of the Stagecoach Family of Funds, please observe the following: - Obtain and carefully read the prospectus of the fund into which you want to exchange. - If you exchange into another fund with a front-end sales charge, you must pay the difference between that fund's sales charge and any sales charge you already have paid in connection with the shares you are exchanging. - If you exchange Class B Shares for Class B Shares of another fund, for shares of the California Tax-Free Money Market Mutual Fund or for Class A Shares of the Money Market Mutual Fund a contingent deferred sales charge will not be imposed upon the exchange. - Each exchange, in effect, represents the redemption of shares of one fund and the purchase of shares in another, which may produce a gain or loss for tax purposes. A confirmation of each exchange transaction will be sent to you. - The dollar amount of shares you exchange must meet the minimum initial and/or subsequent investment amounts of the other fund. - The Company reserves the right to limit the number of times shares may be exchanged between funds, to reject any telephone exchange order, or otherwise to modify or discontinue exchange privileges at any time. Under SEC rules, limited exceptions, the Company must notify you 60 days before it modifies or discontinues the exchange privilege. - If you exchange Class B Shares for Class B Shares of another fund, for shares of the California Tax-Free Money Market Mutual Fund or for Class A Shares of the Money Market Mutual Fund, the remaining period of time (if any) that the contingent deferred sales charge applicable to such shares is in effect will be computed from the time of initial purchase of the previously held shares. For example, if you exchange Class B Shares of a Fund for shares of the California Tax-Free Money Market Mutual Fund and redeem those shares of the California Tax-Free Money Market Mutual Fund within four years of the purchase of the exchanged Class B Shares, you will be required to pay a contingent deferred sales charge equal to the charge which would have applied had you redeemed the original Class B Shares at that time. - If you exchange Class B Shares for shares of one of the Money Market Mutual Funds as described above, you subsequently may re-exchange the acquired shares only for Class B Shares of one of the Company's funds or for shares of the other Money Market Mutual Fund. The procedures applicable to Fund share redemptions also apply to Fund share exchanges. To exchange shares, write the Transfer Agent at the mailing address under "Investing in the Funds - Initial Purchases by Wire" or call the Transfer Agent at the telephone number listed on your transaction confirmation, or contact your Shareholder Servicing Agent or Selling Agent. The procedures applicable to telephone redemptions, including the discussion regarding the responsibility for the authenticity of telephone instructions, are also applicable to telephone exchange requests. See "How to Redeem Shares - Expedited Redemptions by Letter and Telephone." Class B Shares of the Ginnie Mae Fund that have been outstanding for six years after the end of the month in which the shares were initially purchased automatically convert to Class A Shares of the same Fund and, consequently, will no longer be subject to the higher Rule 12b-1 fees applicable to Class B Shares. Such conversion will be on the basis of the relative net asset values of the two Classes, without the imposition of any sales charge or other charge except that the lower Rule 12b-1 fees applicable to Class A Shares shall thereafter be applied to such converted shares. Because the per share net asset value of the Class A Shares may be higher than that of the Class B Shares at the time of conversion, a shareholder may receive fewer Class A Shares than the number of Class B Shares converted, although the dollar value will be the same. Reinvestments of dividends and distributions in Class B Shares will be considered new purchases for purposes of the conversion feature. If a shareholder effects one or more exchanges among Class B Shares of any fund or among shares of the Money Market Mutual Funds during the six-year period and exchange back into Class B Shares, the holding period for shares so exchanged will be counted toward the six-year period and any Class B Shares held at the end of six years will be converted into Class A Shares. Subject to the overall supervision of the Company's Board of Directors, Wells Fargo Bank, as the Funds' investment adviser, provides investment guidance and policy direction in connection with the management of the Funds' assets. Wells Fargo Bank also furnishes the Board of Directors with periodic reports on the Funds' investment strategy and performance. For these services, Wells Fargo Bank is entitled to a monthly investment advisory fee from the Ginnie Mae Fund, at the annual rate of 0.50% of the first $250 million of the Fund's average daily net assets, 0.40% of the next $250 million, and 0.30% in excess of $500 million; and a monthly investment advisory fee for the Short-Intermediate U.S. Government Income Fund at the annual rate of 0.50% of the Fund's average daily net assets. From time to time, Wells Fargo Bank may waive such fees in whole or in part. Any such waiver will reduce the Funds' expenses and, accordingly, have a favorable impact on the Funds' yield and total return. For the year ended December 31, 1994, the Ginnie Mae Fund and the Short-Intermediate U.S. Government Income Fund paid 0.50% and 0.00%, respectively, of their average daily net assets to Wells Fargo Bank for its services as investment adviser. Purchase and sale orders of the securities held by the Funds may be combined with those of other accounts that Wells Fargo Bank manages, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for the Funds and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, the Funds, to the extent consistent with their investment objectives, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank serves as the custodian for the Funds. Under its Custody Agreement with Wells Fargo Bank, each Fund may, at times, borrow money from Wells Fargo Bank as needed to satisfy temporary liquidity needs. Wells Fargo Bank charges interest on such overdrafts at a rate determined pursuant to each Fund's Custody Agreement. Wells Fargo Bank performs the custodial services at its address above. Wells Fargo Bank also serves as the transfer and dividend disbursing agent for the Funds. Wells Fargo Bank performs the transfer and dividend disbursing agency activities at 525 Market Street, San Francisco, California 94163. The Funds have entered into Shareholder Servicing Agreements with Wells Fargo Bank and may enter into similar agreements with other entities. Under such agreements, Shareholder Servicing Agents (including Wells Fargo Bank) will, as agent for their customers, among other things: answer customer inquiries regarding account status and history, and the manner in which purchases, redemptions and exchanges of Fund shares may be effected; assist shareholders in designating and changing dividend options, account designations and addresses; provide necessary personnel and facilities to establish and maintain shareholder accounts and records; assist in processing purchase, redemption and exchange transactions; arrange for the wiring of money; transfer money in connection with customer orders to purchase or redeem shares; verify shareholder signatures in connection with redemption and exchange orders and transfers and changes in accounts with Approved Banks; furnish (either separately or on an integrated basis with other reports sent to a shareholder by the Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases, redemptions and exchanges; furnish, on behalf of each of the Funds, proxy statements, annual reports, updated prospectuses and other communications to shareholders; receive, tabulate and send to the Funds proxies executed by shareholders; and provide such other related services as the Funds or a shareholder may reasonably request. For these services, a Shareholder Servicing Agent receives a fee, which may be paid periodically, determined by a formula based upon the number of accounts serviced by the Shareholder Servicing Agent during the period for which payment is being made, the level of activity in such accounts during such period, and the expenses incurred by the Shareholder Servicing Agent. In no event will shareholder servicing fees for the Short-Intermediate U.S. Government Income Fund, as calculated on an annualized basis for the Fund's then-current fiscal year, exceed the lesser of (1) 0.30% of the average daily net assets of the Fund represented by shares owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the Rules of Fair Practice of the NASD ("NASD Rules"). In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of the average net asset value of the Fund. In no event will shareholder servicing fees for the Ginnie Mae Fund, as calculated on an annualized basis for the Fund's then-current fiscal year, exceed the lesser of (1) 0.30% of the average daily net assets of the Fund represented by Class A or Class B Shares, as the case may be, owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the NASD Rules. In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of the average NAV attributable to the Class A and Class B Shares of the Fund. A Shareholder Servicing Agent also may impose certain conditions on its customers, subject to the terms of this Prospectus, in addition to or different from those imposed by the Funds, such as requiring a higher minimum initial investment or by directly charging its customers for its services. Each Shareholder Servicing Agent will be required to agree to disclose any fees it may directly charge its customers who are shareholders of a Fund and to notify them in writing at least 30 days before it imposes any transaction fees. Subject to the overall supervision of the Company's Board of Directors, Stephens provides the Funds with administrative services, including general supervision of each Fund's operation, coordination of the other services provided to each Fund, compilation of information for reports to the SEC and the state securities commissions, preparation of proxy statements and shareholder reports, and general supervision of data compilation in connection with preparing periodic reports to the Company's Directors and officers. Stephens also furnishes office space and certain facilities to conduct each Fund's business, and compensates the Company's Directors, officers and employees who are affiliated with Stephens. For these services, Stephens is entitled to receive from each Fund a monthly fee at the annual rate of up to 0.03% of each Fund's average daily net assets. From time to time, Stephens may waive its fees from a Fund in whole or in part. Any such waiver will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield and total return. Stephens, as the principal underwriter of the Funds within the meaning of the 1940 Act, has entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing shares of the Funds. The Company also has adopted a Distribution Plan on behalf of each of the Funds under the SEC's Rule 12b-1 (each, a "Plan"). Under the Plan for the Class A Shares of the Ginnie Mae Fund, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective Class A shareholders by paying on an annual basis up to 0.05% of the average daily net assets attributable to Class A Shares of such Fund. Under the Plan for the shares of the Short-Intermediate U.S. Government Income Fund, the Fund may defray all or a part of the cost of preparing and printing prospectuses and other promotional material to prospective shareholders by paying on an annual basis up to 0.05% of the average daily net assets attributable to the Fund. The Plan for the shares of the Short-Intermediate U.S. Government Income Fund provides only for the reimbursement of actual expenses. Under the Class B Plan for the Ginnie Mae Fund, the Fund may defray all or part of such costs and pay compensation to the Distributor and Selling Agents for sales support services. The Class B Plan for the Ginnie Mae Fund provides for payments, on an annual basis, of up to 0.70% of the average daily net assets attributable to the Class B Shares of the Fund. The Distribution Agreement provides that Stephens shall act as agent for the Funds for the sale of their shares, and may enter into Selling Agreements with Selling Agents that wish to make available shares of the Funds to their respective customers. The Funds may participate in joint distribution activities with any of the other funds of the Company, in which event, expenses reimbursed out of the assets of the Funds may be attributable, in part, to the distribution-related activities of another fund of the Company. Generally, the expenses attributable to joint distribution activities will be allocated among each Fund and the other funds of the Company in proportion to their relative net asset sizes, although the Company's Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. In addition, the Plans contemplate that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed above) are deemed to be for distribution-related services, such payments are approved and payable pursuant to the Plans subject to any limits under applicable law, regulations or rules, including the NASD Rules. Financial Institutions acting as Selling Agents, Shareholder Servicing Agents, or in certain other capacities may be required to register as dealers pursuant to applicable state securities laws which may differ from Federal law and any interpretations expressed herein. From time to time, Wells Fargo Bank and Stephens may waive their respective fees in whole or in part and reimburse expenses payable to others. Any such waivers or reimbursements will reduce a Fund's expenses and, accordingly, have a favorable impact on a Fund's yield and total return. Except for the expenses borne by Wells Fargo Bank and Stephens, the Company bears all costs of its operations, including advisory, shareholder servicing, transfer agency, custody and administration fees, payments pursuant to any Plans, fees and expenses of independent auditors and legal counsel, and any extraordinary expenses. Expenses attributable to each Fund or class are charged against the assets of the Fund or class. General expenses of the Company are allocated among all of the funds of the Company, including the Funds, in a manner proportionate to the net assets of each fund, on a transactional basis, or on such other basis as the Company's Board of Directors deems equitable. By complying with the applicable provisions of the Code, the Funds are not subject to federal income taxes with respect to net investment income and net realized capital gains distributed to their shareholders. Dividends from the investment income (including net short-term capital gains, if any) declared and paid by each Fund will be taxable as ordinary income to Fund shareholders. Whether you take such dividend payments in cash or have them automatically reinvested in additional shares, they will be taxable as ordinary income. Generally, dividends and distributions are taxable to shareholders at the time they are paid. However, dividends and distributions declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends or distributions are actually paid no later than January 31 of the following year. You may be eligible to defer the taxation of dividend and capital gain distributions on shares of a Fund which are held under a qualified tax-deferred retirement plan. See "Investing in the Funds - Tax-Deferred Retirement Plans" above. The Funds pay out all their net investment income and net realized capital gains (if any) for each year. The Funds' dividends do not qualify for the dividends-received deduction allowed to corporate shareholders. Portions of the investment income of the Short-Intermediate U.S. Government Income Fund may be subject to foreign taxes withheld at the source; however, the Fund will be able to pass through any portion of the foreign taxes to its shareholders. The Funds, or your Shareholder Servicing Agent on their behalf, will inform you of the amount and nature of such Fund dividends and capital gains. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Funds if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAIs. Further federal tax considerations are discussed in the SAIs. All investors should consult their individual tax advisors with respect to their particular tax situations as well as the state and local tax status of investments in shares of the Funds. FHLMC issues two types of mortgage pass-through securities: mortgage participation certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA certificates in that each PC represents a pro rata share of all interest and principal payments made and owed on the underlying pool of mortgages. GMCs also represent a pro rata interest in a pool of mortgages. These instruments, however, pay interest semiannually and return principal once a year in guaranteed minimum payments. These mortgage-backed securities differ from bonds in that principal is paid back by the borrower over the length of the loan rather than returned in a lump sum at maturity. They are called "pass-through" securities because both interest and principal payments, including prepayments, are passed through to the holder of the security. The GNMA securities in which the Ginnie Mae Fund will invest are of the "modified" type, which entitles the holder of such certificates to receive its share of all interest and principal payments owed on the underlying pool of mortgage loans, regardless of whether or not the mortgagors actually make the payments. The payment of principal on the underlying mortgages may exceed the minimum required by the schedule of payments for the mortgages. Such prepayments are made at the option of the mortgagors for a wide variety of reasons reflecting their individual circumstances. For example, mortgagors may speed up the rate at which they prepay their mortgages when interest rates decline sufficiently to encourage refinancing. The Ginnie Mae Fund, when such prepayments are passed through to it, may be able to reinvest them only at a lower rate of interest. As a result, if the Fund purchases such securities at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Conversely, if the Fund purchased such securities at a discount, faster than expected prepayments will increase, while slower than expected prepayments will reduce, yield to maturity. Accelerated prepayments on securities purchased by the Fund at a premium also impose a risk of loss of principal because the premium may not have been fully amortized at the time the principal is repaid in full. In choosing specific issues, Wells Fargo Bank, as investment adviser, will have made assumptions about the likely speed of prepayment. Actual experience may vary from this assumption resulting in a higher or lower investment return than anticipated. Short-Intermediate U.S. Government Income Fund The mortgages underlying ARMS guaranteed by GNMA are fully insured or guaranteed by the Federal Housing Administration, the Veterans Administration or the Farmers Home Administration, while those underlying ARMS issued by FNMA or FHLMC are typically conventional residential mortgages which are not so insured or guaranteed, but which conform to specific underwriting, size and maturity standards. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a "tranche," is issued at a specified coupon rate and has a stated maturity or final distribution date. The principal and interest payment on the underlying mortgages may be allocated among the classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full. One or more classes of CMOs may have coupon rates that reset periodically based on an index, such as the London Interbank Offered Rate ("LIBOR"). The interest rates on the mortgages underlying the ARMS and the CMOs in which the Short-Intermediate U.S. Government Income Fund may invest generally are readjusted at intervals of one year or less in response to changes in a predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as cost-of-funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity U.S. Treasury note rates, the three-month U.S. Treasury bill rate, the 180-day U.S. Treasury bill rate, rates on longer-term U.S. Treasury securities, the National Median Cost of Funds, the one-month, three-month, six-month or one-year LIBOR, a published prime rate, or commercial paper rates. Certain of these indices follow overall market interest rates more closely than others. Adjustable rate mortgages, an increasingly common form of residential financing, generally are originated by banks and thrift institutions and have a specified maturity date. Most provide for amortization of principal in a manner similar to fixed-rate mortgages but have interest payment amounts that change in response to changes in a specified interest rate index. The rate of interest due on such a mortgage is calculated by adding an agreed-upon "margin" to the specified index, although there generally are limitations or "caps" on interest rate movements in any given period or over the life of the mortgage. To the extent that the interest rates on adjustable rate mortgages underlying the ARMS or the CMOs in which the Short-Intermediate U.S. Government Income Fund may invest cannot be adjusted in response to interest rate changes because of such caps, the ARMS or CMOs are likely to respond to changes in market rates more like fixed-rate securities. In other words, interest rate increases in excess of such caps can be expected to cause the ARMS or CMOs backed by mortgages that have such caps to decline in value to a greater extent than would be the case in the absence of such caps. Conversely, interest rate decreases below such floors can be expected to cause the ARMS or CMOs backed by mortgages that have such floors to increase in value to a greater extent than would be the case in the absence of such floors. Since the interest rates on many mortgages underlying ARMS and CMOs are reset on an annual basis and generally are subject to caps, it can be expected that the prices of such ARMS and CMOs will fluctuate to the extent prevailing market interest rates are not reflected in the interest rates payable on the underlying adjustable rate mortgages or the CMO. In this regard, the NAV of the Short-Intermediate U.S. Government Income Fund's shares could fluctuate to the extent interest rates on underlying mortgages differ from prevailing market interest rates during interim periods between interest rate reset dates. Accordingly, investors could experience some principal loss or less gain than might otherwise be achieved if they redeem their Fund shares before the interest rates on the mortgages underlying the Fund's portfolio securities are adjusted to reflect prevailing market interest rate. The holder of ARMS and certain CMOs receives not only monthly scheduled payments of principal and interest but also may receive unscheduled principal payments representing prepayments on the underlying mortgages. An investor, therefore, may have to reinvest the periodic payments and any unscheduled prepayments of principal it receives at a rate of interest which is lower than the rate on the ARMS and CMOs held by it. The Short-Intermediate U.S. Government Income Fund also may invest cash balances temporarily in U.S. Treasury bills, which are short-term U.S. Government obligations with maturities which do not exceed one year. As described further in its SAI, the Fund may purchase certain securities on a when-issued basis, although it currently does not expect to invest more than 5% of its assets in such securities. Money Market Instruments and Temporary Investments The Funds may have temporary cash balances on account of new purchases, dividends, interest and reserves for redemptions, which will generally be less than 5% of a Fund's portfolio and which will be invested in the following high-quality money market instruments: (i) U.S. Government obligations; (ii) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; (iii) commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of comparable quality as determined by Wells Fargo Bank, as investment adviser; (iv) nonconvertible corporate debt securities (e.g., bonds and debentures) with remaining maturities of no more than one year that are rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and (vi) short-term, U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that at the time of investment: (a) have more than $10 billion, or the equivalent in other currencies, in total assets; (b) are among the 75 largest foreign banks in the world as determined on the basis of assets; (c) have branches or agencies in the United States; and (d) in the opinion of Wells Fargo Bank, as investment adviser, are of comparable quality to obligations of U.S. banks which may be purchased by the Funds. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government would provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market interest rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. The Funds may invest in commercial paper (including variable amount master demand notes) which refers to short-term, unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. Variable amount master demand notes are demand obligations which permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payee of such notes whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. The Short-Intermediate U.S. Government Income Fund may invest in nonconvertible corporate debt securities (e.g., bonds and debentures). The Ginnie Mae Fund also may invest in nonconvertible corporate debt securities with no more than one year remaining to maturity at the date of settlement, provided that such corporate bonds and debentures are rated at the time of purchase at least "Aa" by Moody's or "AA" by S&P. Certain of the instruments which the Funds may purchase bear interest at rates that are not fixed but vary, for example, with changes in specified market rates or indices or specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The floating- and variable-rate instruments that the Funds may purchase include certificates of participation in such obligations purchased from banks. Wells Fargo Bank monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the date a Fund elects to demand payment and the date payment is due. Such events may affect the ability of the issuer of the instrument to make payment when due, thereby affecting the Funds' ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The Funds may enter into repurchase agreements wherein the seller of a security to a Fund agrees to repurchase that security from such Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Funds may enter into repurchase agreements only with respect to U.S. Government obligations and other obligations that would be permissible investments for the Funds. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction entered into by the Funds may be greater than one year. If the seller defaults and the value of the underlying securities has declined, a Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the participating Fund's disposition of the security may be delayed or limited. A Fund will enter into repurchase agreements only with registered broker/dealers and commercial banks which meet guidelines established by the Company's Board of Directors and are not affiliated with the Fund's investment adviser. The Funds may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. The Short-Intermediate U.S. Government Income Fund may lend securities from their portfolio to brokers, dealers and financial institutions (but not individuals) if cash, U.S. Government obligations or other high-quality debt instruments equal to at least 100% of the current market value of the securities loan (including accrued interest thereon) plus the interest payable to the Fund with respect to the loan are maintained with the Fund. In determining whether to lend a security to a particular broker, dealer or financial institution, the Fund's investment adviser considers all relevant facts and circumstances, including the credit-worthiness of the broker, dealer or financial institution. Any loans of portfolio securities will be fully collateralized based on values that are marked to market daily. The Fund will not enter into any portfolio security lending arrangement having a duration of longer than one year. Any securities that the Fund may receive as collateral will not become part of the Fund's portfolio at the time of the loan and, in the event of a default by the borrower, the Fund, if permitted by law, will dispose of such collateral except for such part thereof that is a security in which the Fund is permitted to invest. During the time securities are on loan, the borrower will pay the Fund any accrued income on those securities, and the Fund may invest the cash collateral and earn income or receive an agreed-upon fee from a borrower that has delivered cash-equivalent collateral. The Fund does not lend securities having a value that exceeds one-third of the current value of its assets. Loans of securities by the Fund are subject to termination at the Fund's or the borrower's option. The Fund may pay reasonable administrative and custodial fees in connection with a securities loan and may pay a negotiated portion of the interest or fee earned with respect to the collateral to the borrower or the placing broker. Borrowers and placing brokers may not be affiliated, directly or indirectly, with the Company, the investment adviser, or the Distributor. The Short-Intermediate U.S. Government Income Fund may invest up to 25% of its assets in high-quality, short-term debt obligations of foreign branches of U.S. banks or U.S. branches of foreign banks that are denominated in and pay interest in U.S. dollars. Investments in foreign obligations involve certain considerations that are not typically associated with investing in domestic obligations. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not subject to the same uniform accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic developments that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries. The Funds may invest in shares of other open-end, management investment companies, subject to the limitations of Section 12(d)(1) of the 1940 Act, provided that any such purchases will be limited to temporary investments in shares of unaffiliated investment companies and the Funds' investment adviser will waive its advisory fees for that portion of the Funds' assets so invested, except when such purchase is part of a plan of merger, consolidation, reorganization or acquisition. Notwithstanding any other investment policy or limitation (whether or not fundamental), as a matter of fundamental policy, the Short-Intermediate U.S. Government Income Fund may invest all of its assets in the securities of a single open-end, management investment company with substantially the same fundamental investment objective, policies and limitations as the Fund. When-Issued Securities and Firm Commitment Agreements The Ginnie Mae Fund may engage in securities transactions on a "when-issued" or "firm commitment" basis. The price of such securities is fixed at the time a commitment to purchase or sell is made, but delivery and payment for the when-issued securities take place at a later date. Normally, the settlement date occurs within one month of the purchase or sale. As an operating policy, the settlement date always will be within 120 days. At the time securities purchased on a when-issued basis are actually delivered to the Fund, their value may be higher or lower than the price the Fund agreed to pay for such securities. During the period between commitment and settlement, no payment is made by the Fund and no interest accrues to the Fund. In some instances, the Fund may sell a security and at the same time make a commitment to purchase the same security at a future date at a specified price. Conversely, the Fund may purchase a security and at the same time make a commitment to sell the same security at a future date at a specified price. These types of transactions are executed simultaneously in what are known as "roll" transactions. For example, a securities dealer may seek to purchase a particular security which the Fund owns. The Fund will sell that security to the dealer and simultaneously enter into a "firm commitment" agreement to buy back the same security at a future date, as described above. The net effect of these transactions is to generate income for the Fund since the dealer is willing to execute these transactions at prices favorable to the Fund in order to acquire the specific security which it buys in the initial purchase transaction. Wells Fargo Bank will limit these transactions to a maximum of 35% of the Fund's total assets. There is a risk that a party with whom the Ginnie Mae Fund enters into when-issued or firm commitment agreements may not perform its obligation to deliver or purchase the securities, which could result in a gain or loss to the Fund. To minimize the risk of default, the Fund enters into such transactions only with those major banks and non-bank U.S. Government securities dealers who are recognized by the Board of Governors of the Federal Reserve System as primary dealers. Each Fund's investment objective, as set forth in "How the Funds Work - Investment Objectives and Policies," is fundamental; that is, it may not be changed without approval by the vote of the holders of a majority of such Fund's outstanding voting securities, as described under "Capital Stock" in the SAI for each Fund. In addition, any fundamental investment policy may not be changed without such share-holder approval. If the Board of Directors determines, however, that a Fund's investment objective can best be achieved by a substantive change in a nonfundamental investment policy or strategy, the Company's Board may make such change without shareholder approval and will disclose any such material changes in the then-current prospectus. As matters of fundamental policy, a Fund may: (i) not purchase securities of any issuer (except U.S. Government obligations) if as a result more than 5% of the value of a Fund's total assets would be invested in the securities of such issuer or a Fund would own more than 10% of the outstanding voting securities of such issuer; (ii) make loans of portfolio securities in accordance with its investment policies; and (iii) not invest 25% or more of its assets (i.e., concentrate) in any particular industry, except that the Fund may invest 25% or more of its assets in U.S. Government obligations. In addition, as a matter of fundamental policy, the Short-Intermediate U.S. Government Income Fund may borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets. As a matter of fundamental policy, the Ginnie Mae Fund may borrow from banks up to 20% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 20% of the current value of its net assets. Each Fund may not purchase investments while any such outstanding borrowing exceeds 5% of such Fund's net assets. With respect to fundamental investment policy (i) above, the Short-Intermediate U.S. Government Income Fund is subject to this restriction only with respect to 75% of the Fund's assets, and, with regard to both Funds, it may be possible that the Company would own more than 10% of the outstanding voting securities of the issuer. With respect to fundamental investment policy concerning bank borrowing above, the Ginnie Mae Fund presently does not intend to put at risk more than 5% of its assets during the coming year. With respect to fundamental investment policy (ii) above, the Short-Intermediate U.S. Government Income Fund does not intend to make loans of its portfolio securities during the coming year, and the Ginnie Mae Fund does not intend to put at risk more than 5% of its assets during the coming year. As a matter of nonfundamental policy, the Ginnie Mae Fund may invest up to 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, illiquid securities and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days. As a matter of nonfundamental policy, the Short-Intermediate U.S. Government Income Fund may invest up to 15% of the current value of its net assets in illiquid securities. For this purpose, illiquid securities include, among others, (a) securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale, (b) fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days, and (c) repurchase agreements not terminable within seven days. THIS PAGE INTENTIONALLY LEFT BLANK INVESTMENT ADVISER, TRANSFER AND DIVIDEND DISBURSING AGENT AND For more information about the Funds, simply call 1-800-222-8222, or write: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF STAGECOACH FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. As Supplemented on May 31, 1995 and August 24, 1995 Stagecoach Funds, Inc. (the "Company") is a professionally managed, open-end series investment company. This Prospectus contains information about two of the funds in the Stagecoach Family of Funds - the CALIFORNIA TAX-FREE BOND FUND and the CALIFORNIA TAX-FREE INCOME FUND (each a "Fund" and, collectively, the "Funds"). The CALIFORNIA TAX-FREE BOND FUND seeks to provide investors with a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital, by investing in medium- to long-term, investment-grade municipal securities. The CALIFORNIA TAX-FREE INCOME FUND seeks to provide investors with a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital. Please read this Prospectus before investing and retain it for future reference. It is designed to provide you with important information and to help you decide if a Fund's goals match your own. Statements of Additional Information ("SAIs"), dated May 1, 1995, for the Funds have been filed with the Securities and Exchange Commission ("SEC") and are incorporated by reference. The SAI for each Fund is available free of charge by writing to Stagecoach Funds, Inc., c/o Stagecoach Shareholder Services, Wells Fargo Bank, N.A., P.O. Box 7066, San Francisco, CA 94120-7066 or by calling the Company at 800-222-8222. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. PROSPECTUS DATED MAY 1, 1995 AS SUPPLEMENTED ON MAY 31, 1995 AND AUGUST 24, 1995 Two classes of the California Tax-Free Bond Fund (each a "Class") are described in this Prospectus - Class A Shares and Class B Shares. The California Tax-Free Income Fund offers only one class of shares. Under ordinary market conditions, substantially all of the Funds' assets will consist of securities the interest on which is exempt from federal income taxes and California personal income taxes. The Funds, nondiversified portfolios of the Company, are advised by Wells Fargo Bank, N.A. ("Wells Fargo Bank"), which also serves as the Funds' transfer and dividend disbursing agent and custodian. In addition, Wells Fargo Bank is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below). Stephens Inc. ("Stephens") is the Funds' sponsor and administrator and serves as the distributor of the Funds' shares. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS, FOR WHICH IT IS COMPENSATED. STEPHENS, WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUNDS. SUMMARY OF FUND EXPENSES 4 HOW THE FUNDS WORK 10 THE FUNDS AND MANAGEMENT 13 INVESTING IN THE FUNDS 15 HOW TO REDEEM SHARES 25 MANAGEMENT AND SERVICING FEES 33 PROSPECTUS APPENDIX - ADDITIONAL INVESTMENT POLICIES A-1 The Funds provide you with a convenient way to invest in a portfolio of securities selected by professional management. The following provides you with summary information about each of the Funds. For more information, please refer specifically to the identified Prospectus sections and generally to the Prospectus and SAI for each Fund. Q. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? A. The CALIFORNIA TAX-FREE BOND FUND seeks to provide investors with a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital, by investing in medium- to long-term, investment-grade municipal securities. The CALIFORNIA TAX-FREE INCOME FUND seeks to provide investors with a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital. Under normal market conditions, substantially all of the Funds' assets will be invested in California municipal obligations that are exempt from federal income taxes and California personal income taxes. Certain risks may arise from the Funds' concentration in investments in California municipal obligations. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. See "How the Funds Work" and "Prospectus Appendix - Additional Investment Policies." Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the Funds' investment adviser, manages your investments. Wells Fargo Bank also provides the Funds with transfer agency, dividend disbursing agency and custodial services. In addition, Wells Fargo Bank is a Shareholder Servicing Agent and a Selling Agent. See "The Funds and Management" and "Management and Servicing Fees." Q. HOW DO I INVEST? A. You may invest by purchasing shares of the Funds at their public offering price, which is the net asset value per share plus any applicable sales charge. There is a maximum front-end sales charge of 4.50% for purchasing Class A Shares of the California Tax-Free Bond Fund and a maximum front-end sales charge of 3.00% for purchasing shares of the California Tax-Free Income Fund. Class B Shares of the California Tax-Free Bond Fund that are redeemed within four years of purchase are subject to a maximum contingent deferred sales charge of 3.00% of the lesser of net asset value at purchase or net asset value at redemption. In some cases, such as for investments by certain fiduciary or retirement accounts, the front-end sales charge may be waived. In other cases the front-end sales charge may be reduced. You may open an account by investing at least $1,000 in the California Tax-Free Bond or California Tax-Free Income Fund and you may add to your account by making additional investments of at least $100, although certain exceptions to these minimums may be available. Shares of a Fund may be purchased by wire, by mail or by an automatic investment feature called the AutoSaver Plan on any day the Fund is open. Shares of the Funds may not be suitable investments for tax-exempt institutions or tax-exempt retirement plans, since such investors would not benefit from the exempt status of the Funds' dividends. See "Investing in the Funds." For more details, contact Stephens (the Funds' sponsor and distributor), a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank). Q. HOW WILL I RECEIVE DIVIDENDS AND ANY CAPITAL GAINS? A. Dividends from net investment income of the California Tax-Free Bond Fund are declared daily and automatically reinvested monthly in additional shares of the same Class of such Fund at net asset value. You may also elect to receive dividends in cash or to reinvest dividends from the California Tax-Free Bond Fund in shares of certain other funds in the Stagecoach Family of Funds. Capital gains, if any, will be distributed at least annually in the same manner as dividends. The net investment income available for distribution by the California Tax-Free Bond Fund to holders of Class B Shares will be reduced by the amount of the higher Rule 12b-1 fee payable on behalf of those shares. Class B Shares of the California Tax-Free Bond Fund automatically convert into Class A Shares of the same Fund after six years. See "Dividends" and "Additional Shareholder Services." Dividends from net investment income of the California Tax-Free Income Fund are declared daily and automatically reinvested monthly in additional shares of the Fund at net asset value. You may also elect to receive dividends in cash. Capital gains, if any, will be distributed annually in the same manner as dividends. See "Dividends" and "Additional Shareholder Services." Q. HOW MAY I REDEEM SHARES? A. You may redeem your shares by telephone, by letter or by an automatic feature called the Systematic Withdrawal Plan on any day the respective Fund is open. Except for any contingent deferred sales charge which may be applicable upon redemption of Class B Shares of the California Tax-Free Bond Fund, the Funds make no charge for redeeming their shares. The Company reserves the right to impose charges for wiring redemption proceeds. See "How To Redeem Shares" and "How to Purchase Shares - Contingent Deferred Sales Charges - Class B Shares." For more details, contact Stephens, a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank). Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT? A. An investment in any of the Funds is not insured against loss of principal. When the value of the securities that the Funds own declines, so does the shares. The portfolio debt instruments of the Funds are subject to interest rate risk and credit risk. Interest rate risk is the risk that increases in market interest rates may adversely affect the value of the municipal securities in which the Funds invest and hence the value of your investment in the Funds; the value of such securities generally changes inversely to changes in market interest rates. Credit risk is the risk that the issuer of a debt instrument is unable, due to financial constraints, to make timely payments on its outstanding obligations. In addition, the Funds may invest a portion of their assets in municipal securities that are considered to have speculative characteristics. Since the Funds will invest primarily in securities issued by California, its agencies and municipalities, events in California are more likely to affect the Funds' investments. Also, the Funds are nondiversified, which means that their assets may be invested among fewer issuers and therefore the value of their assets may be subject to greater impact by events affecting one of their investments. You should be prepared to accept some risk with the money you invest in the Funds. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. Q. WHAT ARE DERIVATIVES AND DO THE FUNDS USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. Some of the permissible investments described in this Prospectus, such as variable rate instruments which have an interest rate that is reset periodically based on an index, can be considered derivatives. Some derivatives may be more sensitive than direct securities to changes in interest rates or sudden market moves. Some derivatives also may be susceptible to fluctuations in yield or value due to their structure or contract terms. Q. WHAT STEPS DO THE FUNDS TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with a Fund's investment objective, does not expose the Fund to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by each Fund also is subject to broadly applicable investment policies. For example, the Funds may not invest more than a specified percentage of their assets in "illiquid securities," including types of derivatives without active secondary markets. Nor may a Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. For more information on all of the Funds' investment activities, see "Prospectus Appendix -- Additional Investment Policies." This expense summary is a standard format required for all mutual funds to help you understand the various costs and expenses you will bear directly or indirectly as a shareholder of the Funds. As shown below, you are not charged exchange fees. You should consider this expense information together with the important information in this Prospectus, including the Funds' investment objectives and policies. (AS A PERCENTAGE OF AVERAGE NET ASSETS) SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES (AS A PERCENTAGE OF AVERAGE NET ASSETS) SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell Fund shares. You are subject to a front-end sales charge only on purchases of the Class A Shares of the California Tax-Free Bond Fund and the shares of the California Tax-Free Income Fund. In certain instances, you may qualify for a reduction or waiver of the sales charge for these two Funds. You may also be subject to a contingent deferred sales charge on Class B Shares of the California Tax-Free Bond Fund if you redeem such shares within a specified period. See "Investing in the Funds - Sales Charges." However, the Company reserves the right to impose a charge for wiring redemption proceeds. ANNUAL FUND OPERATING EXPENSES for the California Tax-Free Income Fund and the Class A Shares of the California Tax-Free Bond Fund are based on amounts incurred during the most recent fiscal year, restated to include voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Since Class B Shares were not offered during 1994, the figures with respect to Class B Shares contained under "Total Other Expenses" and "Annual Fund Operating Expenses," are based on anticipated fees and expenses, including anticipated voluntary fee waivers and reimbursements. Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees if certain expenses of the Funds exceed limits set by state securities laws or regulations. In addition, Wells Fargo Bank and Stephens, at their sole discretion, may waive or reimburse all or a portion of the respective fees charged to, or expenses paid by, a Fund. Any waivers or reimbursements would reduce a Fund's total expenses. There can be no assurance that waivers or reimbursements will continue. Absent waivers and reimbursements, the percentages shown above under "Total Other Expenses," and "Total Fund Operating Expenses" would be 0.51% and 1.06%, respectively, for the Class A Shares of the California Tax-Free Bond Fund and 0.66% and 1.21%, respectively, for the California Tax-Free Income Fund. Absent waivers and reimbursements, the percentages shown above under "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.56% and 1.76%, respectively, for the Class B Shares of the California Tax-Free Bond Fund. Long-term shareholders in the Funds could pay more in sales charges than the maximum front-end sales charge applicable to mutual funds sold by members of the National Association of Securities Dealers ("NASD"). For more complete descriptions of the various costs and expenses you can expect to incur as an investor in each Fund, please see the Prospectus section captioned "Management and Servicing Fees." EXAMPLE OF EXPENSES is a hypothetical example which illustrates the expenses associated with a $1,000 investment over stated periods, based on the expenses in the respective tables above and an assumed annual rate of return of 5%. This rate of return should not be considered an indication of actual or expected performance of a Fund. In addition, the example should not be considered a representation of past or future expenses and actual expenses may be greater or lesser than those shown. The following information has been derived from the Financial Highlights in the Funds' 1994 annual financial statements. The financial statements are included in the SAI for each Fund and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is included in the SAIs. This information should be read in conjunction with the Funds' 1994 annual financial statements and notes thereto. The SAI for each Fund has been incorporated by reference into this Prospectus. Financial information is not provided in connection with Class B Shares because Class B Shares were not offered during the periods presented. FOR A CLASS A SHARE OUTSTANDING AS SHOWN FOR A SHARE OUTSTANDING AS SHOWN The CALIFORNIA TAX-FREE BOND FUND seeks to provide investors with a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital, by investing in medium- to long-term, investment-grade municipal securities. Medium- and long-term securities include those securities issued with maturities of 2 to 10 years and 10 or more years, respectively. Investment grade is a term used to describe securities suitable for purchase by prudent investors. Standard & Poor's Corporation ("S&P"), a nationally recognized statistical rating organization ("NRSRO"), designates its top four bond ratings as investment grade: AAA, AA, A and BBB. Moody's Investors Service, Inc. ("Moody's") is also an NRSRO and designates its top four bond ratings as investment grade: Aaa, Aa, A and Baa. The Fund also may invest in unrated municipal securities that are determined by Wells Fargo Bank, as investment adviser, to be of comparable quality to municipal securities that are rated investment grade. A description of the relevant ratings is contained in the Appendix to the SAI for the Fund. The CALIFORNIA TAX-FREE INCOME FUND seeks to provide investors with a high level of income exempt from federal income taxes and California personal income taxes, while preserving capital. It pursues this objective by investing primarily in short- and intermediate-term, investment-grade municipal securities. Short-term securities are securities issued with maturities of less than 2 years. Intermediate-term securities are securities issued with maturities of 2 to 10 years. The Fund also may invest in unrated municipal securities that are determined by Wells Fargo Bank, as investment adviser, to be of comparable quality to municipal securities that are rated investment grade. A description of the relevant ratings is contained in the Appendix to the SAI for the Fund. The investment objective for each Fund is fundamental and cannot be changed without shareholder approval. As with all mutual funds, there can be no assurance that the Funds, which are nondiversified, will achieve their investment objectives. Wells Fargo Bank, as investment adviser to the Funds, will pursue the Funds' objectives by investing (under normal market conditions) substantially all of the Funds' assets in the following types of municipal obligations that pay interest which is exempt from both federal income tax and California personal income tax: bonds, notes and commercial paper issued by or on behalf of the State of California, its cities, municipalities, political subdivisions and other public authorities. These municipal obligations and the taxable investments described below may bear interest at rates that are not fixed ("floating- and variable-rate instruments"). Each Fund may temporarily invest some of its assets in cash reserves or certain high-quality, taxable money market instruments, or may engage in other investment activities. Each Fund may elect to invest temporarily up to 20% of its net assets in certain permitted taxable investments, which include cash reserves, U.S. Government obligations, obligations of domestic banks, commercial paper, taxable municipal obligations, and repurchase agreements. The Funds may make loans of portfolio securities. Such temporary investments would most likely be made when there is an unexpected or abnormal level of investor purchases or redemptions of shares of a Fund or because of unusual market conditions. The income from these temporary investments and investment activities may be subject to federal income taxes and California personal income taxes. However, as stated above, Wells Fargo Bank seeks to invest substantially all of the Funds' assets in securities exempt from such taxes. Additional description of tax-free municipal obligations, taxable money market instruments, and other investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the SAI for each Fund. As a matter of fundamental policy, at least 80% of each Fund's net assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from federal income taxes and not subject to the federal alternative minimum tax (or in other open-end tax-free funds with a similar fundamental policy). In addition, under normal market conditions, at least 65% of the California Tax-Free Bond Fund's total assets are invested in municipal bonds, as opposed to municipal notes or commercial paper, and at least 65% of the California Tax-Free Income Fund's total assets are invested in short- and intermediate-term municipal securities. As a matter of general operating policy, the California Tax-Free Income Fund intends that, under normal market conditions, the average expected duration of its portfolio securities will be from one to five years. At least 65% of each Fund's total assets are invested (under normal market conditions) in municipal obligations that pay interest which is exempt from California personal income taxes. However, as a matter of general operating policy, each Fund seeks to have substantially all of its assets invested in such municipal obligations. The Funds' investment adviser may rely either on an opinion of counsel to the issuer of the municipal obligations or on Internal Revenue Service ("IRS") rulings regarding the tax treatment of these obligations. In addition, each Fund may invest 25% or more of its assets in California municipal obligations that are related in such a way that an economic, business or political development or change affecting one such obligation would also affect the other obligations; for example, a Fund may own different municipal obligations which pay interest based on the revenues of similar types of projects. As noted above and discussed further in the section captioned "Prospectus Appendix - Additional Investment Policies," some of the securities purchased by the Funds may be rated in the lowest investment grade category (i.e., rated BBB by S&P or Baa by Moody's). These securities are regarded by S&P as having an adequate capacity to pay interest and repay principal, but changes in economic circumstances are more likely to lead to a weakened capacity to make such repayments. Moody's considers such securities as having speculative characteristics. Since the Funds will invest primarily in securities issued by California and its agencies and municipalities, events in California will be more likely to affect the Funds' investments. While the Funds will seek to reduce risk by investing their assets in securities of various issuers, the Funds will be considered to be nondiversified for purposes of the 1940 Act. However, the Funds will comply with the Internal Revenue Code of 1986 ("Code") diversification requirements, as described in the "Prospectus Appendix - Additional Investment Policies" section below. California is experiencing recurring budget deficits caused by lower than anticipated tax-revenues and increased expenditures for certain programs. These budget deficits have depleted the state's available cash resources, and the state has recently had to use a series of external borrowings to meet its cash needs. In addition, since 1992 some of the credit rating agencies have assigned their third highest rating to certain of the state's debt obligations. On July 15, 1994, three of the ratings agencies rating California's long-term debt lowered their ratings of the state's general obligation bonds. Moody's Investors Service lowered its rating from "Aa" to "A1," Standard & Poor's Ratings Group lowered its rating from "A+" to "A" and termed its outlook as "stable," and Fitch Investors Service lowered its rating from "AA" to "A." The Funds may invest in securities rated in the top four rating categories, i.e., investment grade securities. Any further rating downgrade of the state's debt obligations may impact the availability of securities that meet the Funds' investment policies and restrictions. The Funds' investment adviser will continue to monitor and evaluate the investments of each Fund in light of the events in California and each Funds' investment objective and investment policies. The rating agencies will also continue to monitor events in the state and the state and local governments' responses to budget shortfalls. See "Special Considerations Affecting California Municipal Obligations" in the SAI for each Fund. The performance of each Class of shares of the California Tax-Free Bond Fund and the shares of the California Tax-Free Income Fund may be advertised in terms of yield, tax-equivalent yield and average annual total return. Performance figures are based on historical results and are not intended to indicate future performance. The yield of a Class of shares of the California Tax-Free Bond Fund is calculated by dividing the net investment income per share earned during a specified period (usually 30 days) for Class A Shares by its public offering price per share (which includes the maximum sales charge), or for Class B Shares by its net asset value (which does not include the maximum contingent deferred sales charge), on the last day of such period and annualizing the result. Similarly, the yield of the shares of the California Tax-Free Income Fund is calculated by dividing the net investment income per share earned during a specified period (usually 30 days) by its public offering price per share (which includes the maximum sales charge) on the last day of such period and annualizing the result. The tax-equivalent yield of the shares of a Class of the California Tax-Free Bond Fund and the shares of the California Tax-Free Income Fund is similarly calculated but assumes that a stated income tax rate has been applied to determine the tax-equivalent figure. In addition to presenting these standardized yields, at times, the Funds also may present nonstandardized total returns, yields, and distribution rates for purposes of sales literature. For example, these performance figures may be calculated on the basis of an investment in the Funds at the net asset value per share or at the net asset value per share plus, in the case of Class A Shares, at net asset value or at a reduced sales charge (see "Investing in the Funds - How To Buy Shares"), rather than the public offering price per share. In this case, the figures might not reflect the effect of the sales charge that you may have paid. Standardized and nonstandardized total return figures for the Funds also may be presented. Average annual total return is based on the overall dollar or percentage change in value of a hypothetical investment in the Funds and assumes that all dividends and capital gain distributions attributable to a Class or Fund are reinvested in that Class or Fund. Standardized average annual total return for Class A Shares is calculated assuming you have paid the maximum sales charge; and for Class B Shares is calculated assuming on a one-year investment you have paid the maximum contingent deferred sales charge, on your hypothetical investment. Nonstandardized average annual or cumulative total returns may be calculated assuming no sales charge or a reduced sales charge was paid on such investment. Because of differences in the fees and/or expenses borne by Class B Shares of the California Tax-Free Bond Fund, the performance figures are on such shares can be expected, at any given time, to be lower than the performance figures are on such Funds' Class A Shares. Performance figures are computed separately for Class A Shares and Class B Shares. Additional information about the performance of each Fund is contained in the Annual Report for each Fund. The Annual Reports may be obtained free of charge by calling the Company at 800-222-8222. The Funds are two of the funds in the Stagecoach Family of Funds. The Company was organized as a Maryland corporation on September 9, 1991, and currently offers shares of nine other series: the Asset Allocation Fund, the California Tax-Free Money Market Mutual Fund, the Corporate Stock Fund, the Diversified Income Fund, the Ginnie Mae Fund, the Growth and Income Fund, the Money Market Mutual Fund, the Short-Intermediate U.S. Government Income Fund and the U.S. Government Allocation Fund. The Board of Directors of the Company supervises the their contractual arrangements with various service providers. Although the Company is not required to hold annual shareholder meetings, special meetings may be required for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Funds' investment objectives or fundamental investment policies. Pursuant to a plan approved by the Board of Directors, the previously existing single class of shares of the California Tax-Free Bond Fund has been redesignated the "Class A Shares" and a new Class of Shares, the "Class B Shares", has been created. All shares of the Company have equal voting rights and will be voted in the aggregate, rather than by series or Class, unless otherwise required by law (such as when the voting matter affects only one series or Class). As a shareholder of the Funds, you are entitled to one vote for each share you own and fractional votes for fractional shares owned. A more detailed description of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the SAI for each Fund. Wells Fargo Bank is the Funds' investment adviser, transfer and dividend disbursing agent and custodian. In addition, Wells Fargo Bank is a Shareholder Servicing Agent of the Funds, and a Selling Agent under a Selling Agreement with the Funds' distributor. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of June 30, 1995, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $211 billion of assets of individuals, trusts, estates and institutions. As of June 30, 1995, Wells Fargo Bank provided investment advisory services for approximately $28 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank also serves as the investment adviser to the other separately managed series of the Company, and to six other registered, open-end, management investment companies, which consist of several separately managed investment portfolios. Wells Fargo Bank, a wholly owned subsidiary of Wells Fargo & Company, is located at 420 Montgomery Street, San Francisco, California 94163. Mr. David Klug assumed sole responsibility for the day-to-day management of the portfolio of the California Tax-Free Bond Fund on June 1, 1995. Mr. Klug had been a co-manager of the Fund since January 1992, and has managed municipal bond portfolios for Wells Fargo Bank for over nine years. Prior to joining Wells Fargo Bank, he managed the municipal bond portfolio for a major property and casualty insurance company. Mr. Klug holds an M.B.A. from the University of Chicago, and is a member of the National Federation of Municipal Analysts and its California chapter. Ms. Laura Milner assumed sole responsibility for the day-to-day management of the portfolio of the California Tax-Free Income Fund on June 1, 1995. Ms. Milner had been a co-manager of the Fund since November 1992. Her background includes over seven years experience specializing in short- and long-term municipal securities with Salomon Brothers. She is a member of the National Federation of Municipal Analysts and its California chapter. Stephens is the Funds' sponsor and administrator, and distributes the Funds' shares. Stephens is a full service broker/dealer and investment advisory firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. You can buy shares in any of the Funds in one of the several ways described below. You must complete and sign an Account Application to open an account. Additional documentation may be required from corporations, associations and certain fiduciaries. Do not mail cash. If you have any questions or need extra forms, you may call 1-800-222-8222. After an application has been processed and an account has been established, subsequent purchases of different funds of the Company under the same umbrella account do not require the completion of additional applications. A separate application must be processed for each different umbrella account number (even if the registration is the same). Call the number on your confirmation statement to obtain information about what is required to change registration. The Company or Stephens may make the Prospectus available in an electronic format. Upon receipt of a request from you or your representative, the Company or Stephens will transmit or cause to be transmitted promptly, without charge, a paper copy of the electronic Prospectus. The value of a share of each Fund is its "net asset value," or NAV. The NAV of each share of the California Tax-Free Income Fund is determined by dividing the value of the Fund's total assets less the value of Fund liabilities by the number of outstanding shares of the Fund. The NAV of each share of a Class of the California Tax-Free Bond Fund is the value of total net assets attributable to each Class divided by the number of outstanding shares of that Class. The value of the net assets per Class is determined daily by adjusting the net assets per Class at the beginning of the day by the value of each Class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each Class by attributing to each Class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each Class as appropriate. The NAV of a share of the California Tax-Free Income Fund and the NAV of a share of each Class of the California Tax-Free Bond Fund is expected to fluctuate daily. Shares of a Fund may be purchased on any day the Fund is open. The Funds are open for business each day the New York Stock Exchange ("NYSE") is open for trading (a "Business Day"). Currently, the NYSE is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each a "Holiday"). When any Holiday falls on a weekend, the NYSE typically is closed on the weekday immediately before or after such Holiday. Wells Fargo Bank calculates the NAV of the California Tax-Free Bond Fund and California Tax-Free Income Fund as of the close of regular trading on the NYSE (referred to hereafter as "the close of the NYSE"), which is currently 1:00 p.m. (Pacific time). Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, the other assets of the Funds are valued at current market prices or, if such prices are not readily available, at fair value as determined in good faith by the Company's Board of Directors. Prices used for such valuations may be obtained from independent pricing services. You may buy shares of a Fund on any day the Fund is open by any of the methods described below. Shares of the Funds are offered continuously at the applicable offering price (the NAV plus any applicable sales charge) next determined after a purchase order is received in the form specified for the purchase method being used, as described in the following sections. Payment for shares of the Funds purchased through a Selling Agent (as defined below) will not be due from the Selling Agent until the settlement date. The settlement date is normally three Business Days after the order is placed. It is the responsibility of the Selling Agent to forward payment for shares being purchased to the Funds promptly. Payment must accompany orders placed directly through the Transfer Agent. Payments for shares of a Fund will be invested in full and fractional shares of such Fund at the applicable offering price. If shares are purchased by a check which doesn't clear, the Company reserves the right to cancel the purchase and hold the investor responsible for any losses or fees incurred. In addition, the Funds may hold payment on any redemption until reasonably satisfied that your investments made by check have been collected (which may take up to 15 days). The Company reserves the right to reject any purchase order or suspend sales at any time. The minimum initial investment amount in the Funds is generally $1,000. In addition, the minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. If you have questions regarding purchases of shares, please 800-222-8222 or contact a Shareholder Servicing Agent or Selling Agent (defined below). Shares of the Funds may not be suitable investments for tax-exempt institutions or tax-sheltered retirement plans, since such investors would not benefit from the exempt status of the Funds' dividends. See "Federal Income Taxes - Special Tax Considerations" in each Fund's SAI. Set forth below are Front-end Sales Charge Schedules listing the front-end sales charges applicable to purchases of Class A Shares of the California Tax-Free Bond Fund and the shares of the California Tax-Free Income Fund. As shown below, reductions in the rate of front-end sales charges ("Volume Discounts") are available as you purchase additional shares (other than Class B Shares). You should consider the front-end sales charge information set forth below and the other information contained in this prospectus when making your investment decisions. The following is the Front-end Sales Charge Schedule for purchasing Class A Shares of the California Tax-Free Bond Fund: The following is the Front-end Sales Charge Schedule for purchasing shares of the California Tax-Free Income Fund: Class B Shares of the California Tax-Free Bond Fund are not subject to front-end sales charges. Class B Shares of the California Tax-Free Bond Fund which are redeemed within one, two, three and four years from the receipt of a purchase order will be subject to a contingent deferred sales charge equal to 3.00%, 2.00%, 1.00% or 1.00%, respectively, of the dollar amount equal to the lesser of the NAV at the time of purchase of the shares being redeemed or the NAV of such shares at the time of redemption (the "NAV Amount"). See "Investing in the Funds - Contingent Deferred Sales Charges - Class B Shares." A selling agent or servicing agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class B Shares of the same Fund. If Class A Shares of the California Tax-Free Bond Fund or shares of the California Tax-Free Income Fund are purchased through a Selling Agent, Stephens reallows the portion of the front-end sales charge shown above as the Dealer Allowance. Stephens also compensates Selling Agents for sales of Class B Shares, and is then reimbursed out of Rule 12b-1 Fees and contingent deferred sales charges applicable to such shares. When shares are purchased directly through the Transfer Agent and no Selling Agent is involved with the purchase, the entire sales charge is paid to Stephens. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. The Volume Discounts described in the Front-end Sales Charge Schedules are available to you based on the combined dollar amount you invest in shares (other than Class B Shares) of one or more of the Company's funds which assess a front-end sales charge (the "Load Funds"). Since Class B Shares are not subject to a front-end sales charge you may not consider the amount of Class B Shares you hold in determining Volume Discount. The Right of Accumulation allows you to combine the amount you invest in Class A Shares of the California Tax-Free Bond Fund and shares of the California Tax-Free Income Fund with the total NAV of shares (other than Class B Shares) in any of the Load Funds to determine reduced front-end sales charges in accordance with the appropriate Front-end Sales Charge Schedule. In addition, you also may combine the total NAV of shares (other than Class B Shares) which you currently have invested in any other mutual fund that assesses a front-end sales charge and is advised by Wells Fargo Bank and sponsored by Stephens. For example, if you own Class A Shares of the Load Funds with an aggregate NAV of $90,000 and you invest an additional $20,000 in the Class A Shares of the California Tax-Free Bond Fund, the front-end sales charge on the additional $20,000 investment would be 3.50% of the offering price. If instead you invest the $20,000 in the California Tax-Free Income Fund, the front-end sales charge on the additional amount would be 2.25% of the offering price. To obtain such discount, you must provide sufficient information at the time of your purchase to verify that your purchase qualifies for the reduced front-end sales charge. Confirmation of the order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time without prior notice with respect to all subsequent shares purchased. A Letter of Intent allows you to purchase Class A Shares of the California Tax-Free Bond Fund and shares of the California Tax-Free Income Fund over a 13-month period at a reduced front-end sales charge based on the total amount of Class A Shares you intend to purchase plus the total NAV of the shares (other than Class B Shares) in any of the Load Funds you already own. Each investment you make during the period may be made at the reduced front-end sales charge that is applicable to the total amount you intend to invest. If you do not invest the total amount within the period, you must pay the difference between the higher front-end sales charge rate that would have been applied to the purchases you made and the reduced front-end sales charge rate you have paid. The minimum initial investment for a Letter of Intent is 5% of the total amount you intend to purchase, as specified in the Letter. Shares of the Fund equal to 5% of the amount you intend to invest will be held in escrow and, if you do not pay the difference within 20 days following the mailing of a request, a sufficient amount of escrowed shares will be redeemed for payment of the additional sales charge. Dividend and capital gains paid on such shares held in escrow will be reinvested in additional Fund shares. You may reinvest proceeds from a redemption of Fund shares in Class A Shares of a Fund, or in certain of the Company's funds registered in your state of residence at NAV, without a front-end sales charge, within 120 days after your redemption. However, if the fund you are purchasing imposes a front-end sales charge that is higher than the one you have paid in connection with the shares you have redeemed, you pay the difference. You may reinvest at this NAV price up to the total amount of the redemption proceeds. A written purchase order for the shares must be delivered to the Company, a Selling Agent, a Shareholder Servicing Agent, or the Transfer Agent at the time of reinvestment. If you realized a gain on your redemption, your reinvestment would not alter the amount of any federal capital gains tax you pay on the gain. If you realized a loss on your redemption, your reinvestment may cause some or all of the loss to be disallowed as a tax deduction, depending on the number of shares you purchase by reinvestment and the period of time that elapses after the redemption, although for tax purposes, the amount disallowed is added to the cost of the shares you acquire upon the reinvestment. Reductions for Families or Fiduciaries Reductions in front-end sales charges apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Waivers for Investments of Proceeds From Other Investments Purchases may be made at NAV, without a front-end sales charge, to the extent that: (i) you are investing proceeds from a redemption of shares of another open-end investment company or (ii) you are investing proceeds from a redemption of units of a unit investment trust sold through Wells Fargo Securities Inc. on which you paid a front-end sales charge; (iii) such redemption occurred within thirty (30) days prior to the date of the purchase order; and (iv) such other company or trust is distributed and advised by entities other than Stephens and Wells Fargo Bank, respectively, or their affiliates. You must notify the Fund and/or the Transfer Agent at the time you place such purchase order of your eligibility for the waiver of sales charges and provide satisfactory evidence thereof (e.g., a confirmation of the redemption). Reductions in front-end sales charges also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of shares (other than Class B Shares) purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the 1940 Act, which has been in existence for more than six months and which has a primary purpose other than acquiring Fund shares at a reduced front-end sales charge, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote 5% or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote 5% or more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Investors seeking to rely on their membership in a qualified group to purchase shares at a reduced sales load must provide evidence satisfactory to the Transfer Agent of the existence of a bona fide qualified group and their membership therein. Class A Shares of the California Tax-Free Bond Fund and shares of the California Tax-Free Income Fund may be purchased at NAV, without a front-end sales charge, by directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and Selling Agents. Class A Shares of such Funds also may be purchased at NAV, without a front-end sales charge, by present and retired directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo Bank and its affiliates if Wells Fargo Bank and/or the respective affiliates agree. Class A Shares of such Funds also may be purchased at NAV, without a front-end sales charge, by employee benefit and thrift plans for such persons and to any investment advisory, trust or other fiduciary or retirement account that is maintained, managed or advised by Wells Fargo Bank or its affiliates. In addition, you may purchase shares of the Funds at NAV, without a sales charge, with proceeds from a required minimum distribution from any IRA, Simplified Employee Pension Plan or other self-directed retirement plan for which Wells Fargo Bank serves as trustee, provided that the proceeds are invested in the Funds within 30 days of such distribution and such distribution is required as a result of reaching age 70 1/2. CONTINGENT DEFERRED SALES CHARGE - CLASS B SHARES Class B Shares of the California Tax-Free Bond Fund are not subject to front-end sales charges but may be subject to contingent deferred sales charges. Class B Shares which are redeemed within one, two, three or four years of the purchase of such shares will be subject to a contingent deferred sales charge equal to 3.00%, 2.00%, 1.00% and 1.00%, respectively, of the NAV Amount. Contingent deferred sales charges will not be imposed on amounts representing increases in NAV above the NAV at the time of purchase. Contingent deferred sales charges will not be assessed on Class B Shares purchased through reinvestment of dividends or capital gains distributions. Class B Shares automatically convert to Class A Shares of the same Fund six years after the end of the month in which such Class B Shares were acquired. The amount of a contingent deferred sales charge, if any, paid upon redemption of Class B Shares is determined in a manner designed to result in the lowest sales charge rate being assessed. When a redemption request is made, Class B Shares acquired pursuant to the reinvestment of dividends and capital gain distributions are considered to be redeemed first. After this, Class B Shares are considered redeemed on a first-in, first-out basis so that Class B Shares held for a longer period of time are considered redeemed prior to more recently acquired Class B Shares. For a discussion of the interaction between the optional Exchange Privilege and contingent deferred sales charges on Class B Shares, see "Additional Shareholder Services -- Exchange Privilege." Contingent deferred sales charges are waived on redemptions of Class B Shares of a Fund (i) following the death or disability (as defined in the Code) of a shareholder, (ii) to the extent that the redemption represents a minimum required distribution from an individual retirement account or other retirement plan to a shareholder who has reached age 70 1/2, (iii) effected pursuant to the Company's right to liquidate a shareholder's account if the aggregate NAV of the shareholder's account is less than the minimum account size, or (iv) in connection with the combination of the Company with any other registered investment company by a merger, acquisition of assets, or by any other transaction. In deciding whether to purchase Class A or Class B Shares, you should compare the fees assessed on Class A Shares (including front-end sales charges) against those assessed on Class B Shares (including potential contingent deferred sales charges and higher Rule 12b-1 Fees than Class A Shares) in light of the amount to be invested and the anticipated time that the shares will be owned. A Selling Agent or Servicing Agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class B Shares. 1. Complete an Account Application. 2. Instruct the wiring bank to transmit the specified amount in federal funds to: Wire Purchase Account Number: 4068-000587 Attention: Stagecoach Funds (Name of Fund) (designate Class A or B, if Account Name(s): name(s) in which to be registered Account Number: (if investing into an existing account) Generally, the minimum investment amount for shares of the California Tax-Free Bond Fund and California Tax-Free Income Fund is $1,000. 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price or, in the case of Class B Shares, at the NAV next determined after the Account Application is received and accepted. 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for an appropriate amount, payable to "Stagecoach Funds (Name of Fund) (designate Class A or B, if applicable)" to the address set forth in "Initial Purchases by Wire." 3. Share purchases are effected at the public offering price or, in the case of Class B Shares, at the NAV, next determined after the Account Application is received and accepted. The Company's AutoSaver Plan provides you with a convenient way to establish and automatically add to a Fund account on a monthly basis. To participate in the AutoSaver Plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from an account with a bank, which is designated in your Account Application and which is approved by the Transfer Agent ("Approved Bank"). Wells Fargo Bank is an Approved Bank. The Transfer Agent withdraws and uses this amount to purchase specified shares of a Fund on your behalf on or about the fifth Business Day of each month. There are no separate fees charged to you by a Fund for participating in the AutoSaver Plan. You may change your investment amount, suspend purchases or terminate your election at any time by notifying the Transfer Agent at least five Business Days prior to any scheduled transaction. You may make additional purchases of $100 or more by instructing the Funds' Transfer Agent to debit a designated Approved Bank account, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Stagecoach Funds (Name of Fund) (designate Class A or B, if applicable)" to the address set forth in "Initial Purchases by Wire." Write your Fund account number on the check and include the detachable stub from your Statement of Account or a letter providing your Fund account number. You may place a purchase order for shares of the Funds through a broker/dealer or financial institution which has entered into a Selling Agreement with Stephens, as the Funds' Distributor, ("Selling Agent"). If your order for shares of the Funds is placed by the close of the NYSE, the purchase order generally will be executed on the same day if the order is received by the Transfer Agent before the close of business. If your purchase order is received by a Selling Agent after the close of the NYSE or by the Transfer Agent after the close of business, then your purchase order will be executed on the next Business Day following the day your order is placed. Because payment for shares of the Funds will not be due until settlement date, the Selling Agent might benefit from temporary use of your payment. The Selling Agent is responsible for the prompt transmission of your purchase order to the Funds. A financial institution acting as a Selling Agent, Shareholder Servicing Agent or in certain other capacities may be required to register as a dealer pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. PURCHASES THROUGH SHAREHOLDER SERVICING AGENTS Purchase orders for shares of the Funds may be transmitted to the Transfer Agent through any entity that has entered into a Shareholder Servicing Agreement with the Funds ("Shareholder Servicing Agent"), such as Wells Fargo Bank. See "Management and Servicing Fees - Shareholder Servicing Agent." The Shareholder Servicing Agent may transmit a purchase order to the Transfer Agent, on your behalf, including a purchase order for which payment is to be transferred from an account with an Approved Bank or wired from a financial institution. If your order for shares of the Funds is transmitted by the Shareholder Servicing Agent, on your behalf, to the Transfer Agent before the close of the NYSE, the purchase order generally will be executed on the same day. If your Shareholder Servicing Agent transmits your purchase order to the Transfer Agent after the close of the NYSE, then your order will be executed on the next Business Day following the day your order is received. The Shareholder Servicing Agent is responsible for the prompt transmission of your purchase order to the Transfer Agent. The Funds or a Shareholder Servicing Agent on their behalf, will typically send you a confirmation or statement of your account after every transaction that affects your share balance or your Fund account registration. The Funds do not issue share certificates. A statement with tax information will be mailed to you by January 31 of each year, and also will be filed with the IRS. At least twice a year, you will receive financial statements. The Funds intend to declare daily substantially all of their net investment income as a dividend payable to shareholders of record as of the close of regular trading of the NYSE, which is currently 1:00 p.m. (Pacific time). You will begin earning dividends on the Business Day following the date your purchase order is effective and continue to earn dividends through the day you redeem such shares. The net investment income of the California Tax-Free Bond Fund available for distribution to the holders of Class B Shares is reduced by the amount of the higher Rule 12b-1 Fee payable on such shares. Other expenses, such as state securities registration fees and transfer agency fees, that are attributable to a particular class also may affect the relative dividends and/or capital gains distributions of Class A Shares and Class B Shares. Dividends for a Saturday, Sunday or Holiday are declared payable to shareholders of record as of the preceding Business Day. If you redeem shares before the dividend payment date, any dividends credited to you are paid on the following dividend payment date unless you have redeemed all of the shares in your account, in which case you will receive your accrued dividends together with your redemption proceeds. The Funds will distribute any capital gains at least annually. Dividends declared in a month generally are paid on the last Business Day of each month. You have several options for receiving dividends and any capital gains distributions. They are discussed under "Additional Shareholder Services - Dividend and Distribution Options." You may redeem all or a portion of your shares in a Fund on any day the Fund is open. Your shares will be redeemed at the next NAV calculated after the Funds have received your redemption request in proper form. Redemption proceeds may be more or less than the amount invested and, therefore, a redemption of shares in a Fund may result in a gain or loss for federal and state income tax purposes. The California Tax-Free Bond Fund ordinarily remits your redemption proceeds, net of any contingent deferred sales charge applicable with respect to Class B Shares, (the "net redemption proceeds") within seven days after your redemption order is received in proper form, unless the SEC permits a longer period under extraordinary circumstances. The California Tax-Free Income Fund ordinarily remits your net redemption proceeds, without any charge by the Fund, within seven days after your redemption order is received in proper form, unless the SEC permits a longer period under extraordinary circumstances. Such extraordinary circumstances could include a period during which an emergency exists as a result of which (a) disposal by the Funds of securities owned by them is not reasonably practicable or (b) it is not reasonably practicable for the Funds fairly to determine the value of their net assets, or a period during which the SEC by order permits deferral of redemptions for the protection of security holders of the Funds. In addition, the Funds may hold payment on your redemption until reasonably satisfied that your investments made by check have been collected (which can take up to 15 days from the purchase date). To ensure acceptance of your redemption request, please follow the procedures described below. Although it is not the Funds' current intention, the Funds may make payment of redemption proceeds in securities if conditions warrant, subject to regulation by some state securities commissions. In addition, the Funds reserve the right to impose charges for wiring redemption proceeds. Due to the high cost of maintaining Fund accounts with small balances, the Funds reserve the right to close your account and send you the proceeds if the balance falls below the applicable minimum balance because of a redemption (including a redemption of shares of a Fund after an investor has made only the applicable minimum initial investment). You will be given 30 days' notice to make an additional investment to increase your account balance to the applicable minimum balance. For a discussion of applicable minimum balance requirements, see "Investing in the Funds -- How to Buy Shares." Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you specifically decline the privileges. Telephone redemption privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Company and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. 1. Write a letter of instruction. Indicate the Class, if applicable, and the dollar amount or number of Fund shares you want to redeem. Refer to your Fund account number and give your social security or taxpayer identification number (where applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. Signature guarantees are not required for redemption requests unless redemption proceeds of $5,000 or more are to be paid to someone other than you at your address of record or your designated Approved Bank account, or exist which cause the Transfer Agent to determine that a signature guarantee is necessary or prudent to protect against unauthorized redemption requests. If required, a signature must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is an FDIC member, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation may be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. Mail your letter to the Transfer Agent at the mailing address set forth under "Investing in the Funds - Initial Purchases by Wire." Unless other instructions are given in proper form, a check for your net redemption proceeds will be sent to your address of record. EXPEDITED REDEMPTIONS BY MAIL OR TELEPHONE You may request an expedited redemption of shares of a Fund by letter, in which case your receipt of redemption proceeds, but not the Fund's receipt of your redemption request, would be expedited. In addition, you also may request an expedited redemption of shares of a Fund by telephone on any day the Fund is open, in which case both your receipt of redemption proceeds and the Fund's receipt of your redemption request would be expedited. You may request expedited redemption by telephone only if the total value of the shares redeemed is $100 or more. You may request expedited redemption by telephone by calling the Transfer Agent at the telephone number listed on your transaction confirmation or by calling 800-222-8222. You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Investing in the Funds - Initial Purchases by Wire." Upon request, net redemption proceeds of expedited redemptions of $5,000 or more will be wired or credited to an Approved Bank account designated in your Account Application or wired to the Selling Agent designated in your Account Application. The Company reserves the right to impose a charge for wiring redemption proceeds. When proceeds of your expedited redemption are to be paid to someone else, to an address other than that of record, or to an account with an Approved Bank or Selling Agent that you have not predesignated in your Account Application, your expedited redemption request must be made by letter and the signature(s) on the letter may be required to be guaranteed, regardless of the amount of the redemption. If your expedited redemption request for shares of the Funds is received by the Transfer Agent by the close of the NYSE on a Business Day, your net proceeds will be transmitted to your designated account with an Approved Bank or Selling Agent on the next Business Day (assuming your investment check has cleared as described above), absent extraordinary circumstances. Extraordinary circumstances could include those described above as potentially delaying redemptions, and also could include situations involving an unusually heavy volume of wire transfer orders on a national or regional basis or communication or transmittal delays that could cause a brief delay in the wiring or crediting of funds. A check for proceeds of less than $5,000 will be mailed to your address of record or, at your election, credited to an Approved Bank account designated in your Account Application. During periods of drastic economic or market activity or changes, you may experience problems implementing an expedited redemption by telephone. In the event you are unable to reach the Transfer Agent by telephone, you should consider using overnight mail to implement an expedited redemption. The Funds reserve the right to modify or terminate the expedited telephone redemption privilege at any time. The Company's Systematic Withdrawal Plan provides you with a convenient way to have shares of a Fund redeemed from your account and the net redemption proceeds distributed to you on a monthly basis. You may participate in this plan only if you have a Fund account valued at $10,000 or more as of the date of your election to participate, your dividend and capital gain distributions are being reinvested automatically and you are not a participant in the AutoSaver Plan at any time while participating in the Systematic Withdrawal Plan. You specify an amount ($100 or more) to be distributed by check to your address of record or deposited in your Approved Bank account designated in the Account Application. The Transfer Agent redeems sufficient shares and mails or deposits your net redemption proceeds as instructed on or about the fifth Business Day prior to the end of each month. There are no separate fees charged to you by the Funds for participating in the Systematic Withdrawal Plan. However, you should not participate in the Systematic Withdrawal Plan if you also are purchasing shares of a Fund subject to a sales charge. You may change your withdrawal amount, suspend withdrawals or terminate your election at any time by notifying the Transfer Agent at least ten Business Days prior to any scheduled transaction. Your participation in the Systematic Withdrawal Plan will be terminated automatically if your Fund account is closed, or, in some cases, if your Approved Bank account is closed. If your redemption order for a Fund is received by a Selling Agent before the close of the NYSE and received by the Transfer Agent before the close of business on the same day, the order will be executed at the NAV determined as of the close of the NYSE on that day. If your redemption order is received by a Selling Agent after the close of the NYSE, or not received by the Transfer Agent prior to the close of business, your order will be executed at the NAV determined as of the close of the NYSE on the next Business Day. The Selling Agent is responsible for the prompt transmission of your redemption order to the Funds. Unless you have made other arrangements with a Selling Agent, and the Transfer Agent has been informed of such arrangements, net proceeds of a redemption order made by you through a Selling Agent will be credited to an account with an Approved Bank that you have designated in your Account Application. If no such account is designated, a check for the net redemption proceeds will be mailed to your address of record or, if such address is no longer valid, the net redemption proceeds will be credited to your account with the Selling Agent. You may request a check from the Selling Agent or may elect to retain the net redemption proceeds in such account. The Selling Agent may charge you a service fee. In addition, it may benefit from the use of your redemption proceeds until the check it issues to you has cleared or until such proceeds have been disbursed or reinvested on your behalf. REDEMPTIONS THROUGH SHAREHOLDER SERVICING AGENTS You may request a redemption of shares of a Fund through your Shareholder Servicing Agent. Any redemption request made by telephone through your Shareholder Servicing Agent must redeem shares with a total value equal to $100 or more. If your redemption order for shares of a Fund is transmitted by the Shareholder Servicing Agent, on your behalf, to the Transfer Agent before the close of the NYSE, the redemption order will be executed at the NAV determined as of the close of the NYSE on that day. If your Shareholder Servicing Agent transmits your redemption order to the Transfer Agent after the close of the NYSE, then your order will be executed on the next Business Day following the date your order is received. The Shareholder Servicing Agent is responsible for the prompt transmission of your redemption order to the Funds. Unless you have made other arrangements with your Shareholder Servicing Agent, and the Transfer Agent has been informed of such arrangements, net proceeds of a redemption order made by you through your Shareholder Servicing Agent will be credited to an account with the Approved Bank that you have designated in the Account Application. If no such account is designated, a check for the net redemption proceeds will be mailed to your address of record or, if such address is no longer valid, the net redemption proceeds will be credited to your account with your Shareholder Servicing Agent or to another account designated in your agreement with your Shareholder Servicing Agent. The Company offers you a number of optional services. As noted above, you can take advantage of the AutoSaver Plan, the Systematic Withdrawal Plan, and Expedited Redemptions by Letter and Telephone. In addition, the Funds offer you several dividend and distribution payment options and an exchange privilege, which are described below. When you fill out your Account Application, you can choose from the dividend and distribution options listed below. If you have questions about the dividend and distribution options available to you, please call 800-222-8222. A. The Automatic Reinvestment Option provides for the reinvestment of your dividends and capital gain distributions in additional shares of the same Class of the Fund which paid such dividends or capital gain distributions. Dividends and distributions declared in a month generally are reinvested in additional shares at NAV on the last Business Day of such month. You are assigned this option automatically if you make no choice on your Account Application. B. The Fund Purchase Option lets you use your dividends and/or capital gain distributions from the Funds to purchase, at NAV, shares of another fund in the Stagecoach Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. Dividends and distributions paid on Class A or Class B Shares of the California Tax-Free Bond Fund may be invested in Class A or Class B Shares, respectively, of another fund, in Retail Shares of another Fund, in Class A Shares of the Money Market Mutual Fund or in shares of the California Tax-Free Money Market Mutual Fund (the Money Market Mutual Fund and the California Tax-Free Money Market Mutual Fund are collectively, the "Money Market Mutual Funds"). Dividends and distributions paid on Class A Shares of the California Tax-Free Bond Fund may also be invested in shares of a non-money market fund with a single class of shares (a "single class fund"). Dividends and distributions paid on Class B Shares of the California Tax-Free Bond Fund may not be invested in shares of a single class fund. Dividends and distributions paid on shares of the California Tax-Free Income Fund may be reinvested in Class A Shares of a multi-class fund, shares of a single class fund or shares of the California Tax-Free Money Market Mutual Fund. C. The Automatic Clearing House Option permits you to have dividends and capital gain distributions deposited in your Approved Bank account designated in the Account Application. In the event your Approved Bank account is closed, your distribution will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf. D. The Check Payment Option lets you receive a check for all dividends and capital gain distributions, which generally is mailed either to your designated address or your designated Approved Bank shortly following declaration. If the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, your distributions will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf. Wells Fargo Bank advises a variety of other funds, each with its own investment objective and policies. The exchange privilege is a convenient way for you to buy shares in the other funds of the Stagecoach Family of Funds that are registered in your state of residence in order to respond to changes in your investment and savings goals or in market conditions. Class A and Class B Shares of the California Tax-Free Bond Fund may be exchanged for Class A and Class B Shares, respectively, of another fund, for Class A Shares of the Money Market Mutual Fund or for shares of the California Tax-Free Money Market Mutual Fund. Class A Shares of the California Tax-Free Bond Fund may also be exchanged for shares of a single class fund or for Retail Shares of another fund. Shares of the California Tax-Free Income Fund may be exchanged for Class A Shares or Retail Shares of another fund, shares of a single class fund or shares of the California Tax-Free Money Market Mutual Fund. Before making an exchange from a Fund into another fund of the Stagecoach Family of Funds, please observe the following: - Obtain and carefully read the prospectus of the fund into which you want to exchange. - If you exchange into another fund with a sales charge, you must pay the difference between that fund's sales charge and any sales charge you already have paid in connection with the shares you are exchanging. - If you exchange Class B Shares for Class B Shares of another fund, for Class A Shares of the Money Market Mutual Fund or for shares of the California Tax-Free Money Market Mutual Fund, a contingent deferred sales charge will not be imposed upon the exchange. - Each exchange, in effect, represents the redemption of shares of one fund and the purchase of shares of another, which may produce a gain or loss for tax purposes. A confirmation of each exchange transaction will be sent to you. - The dollar amount of shares you exchange must meet the minimum initial and/or subsequent investment amounts of the other fund. - The Company reserves the right to limit the number of times shares may be exchanged between funds, to reject any telephone exchange order, or otherwise to modify or discontinue exchange privileges at any time. Under limited exceptions, the Company ordinarily must notify you 60 days before it modifies or discontinues the exchange privilege. - If you exchange Class B Shares for Class B Shares of another fund, for Class A Shares of the Money Market Mutual Fund or for shares of the California Tax-Free Money Market Mutual Fund, the remaining period of time (if any) that the contingent deferred sales charge applicable to such shares is in effect will be computed from the time of initial purchase of the previously held shares. For example, if you exchange Class B Shares of the California Tax-Free Bond Fund for shares of the California Tax-Free Money Market Mutual Fund and redeem those shares of the California Tax-Free Money Market Mutual Fund within four years of the purchase of the exchanged Class B Shares, you will be required to pay a contingent deferred sales charge equal to the charge which would have applied had you redeemed the original Class B Shares at that time. - If you exchange Class B Shares for shares of one of the Money Market Mutual Funds as described above, you subsequently may re-exchange the acquired shares only for Class B Shares of one of the Company's funds or for shares of the other Money Market Mutual Fund. The procedures applicable to Fund share redemptions also apply to Fund share exchanges. In particular, because the only transaction orders involving the California Tax-Free Money Market Mutual Fund that are processed at 1:00 p.m. are those that are received at that time through Shareholder Servicing Agents in connection with automated investment programs, exchange orders involving the California Tax-Free Money Market Mutual Fund received through other means after 9:00 a.m. will be processed on the next day that is a Business Day for both funds involved in the exchange. To exchange shares, write the Transfer Agent at the mailing address under "Investing in the Funds - Initial Purchases by Wire" or call the Transfer Agent at the telephone number listed on your transaction confirmation, or contact your Shareholder Servicing Agent or Selling Agent. The procedures applicable to telephone redemptions, including the discussion regarding the responsibility for the authenticity of telephone instructions, are also applicable to telephone exchange requests. See "How to Redeem Shares - Expedited Redemptions by Letter and Telephone." Class B Shares of the California Tax-Free Bond Fund that have been outstanding for six years after the end of the month in which the shares were initially purchased will automatically convert to Class A Shares of the same Fund and, consequently, will no longer be subject to the higher Rule 12b-1 Fees applicable to Class B Shares of such Fund. Such conversion will be on the basis of the relative NAV of the two Classes, without the imposition of any sales charge or other charge except that the lower Rule 12b-1 Fees applicable to Class A Shares shall thereafter be applied to such converted shares. Because the per share NAV of the Class A Shares may be higher than that of the Class B Shares at the time of conversion, a shareholder may receive fewer Class A Shares than the number of Class B Shares converted, although the dollar value will be the same. Reinvestments of dividends and distributions in Class B Shares will be considered new purchases for purposes of the conversion feature. If a shareholder effects one or more exchanges among Class B Shares of any fund, Class A Shares of the Money Market Mutual Fund or shares of the California Tax-Free Money Market Mutual Fund during the six-year period and exchange back into Class B Shares, the holding period for the shares so exchanged will be counted toward the six-year period and any Class B Shares held at the end of six years will be converted into Class A Shares. Subject to the overall supervision of the Company's Board of Directors, Wells Fargo Bank, as the Funds' investment adviser, provides investment guidance and policy direction in connection with the management of the Funds' assets. Wells Fargo Bank also furnishes the Board of Directors with periodic reports on the Funds' investment strategies and performance. For these services, Wells Fargo Bank is entitled to a monthly investment advisory fee at the annual rate of 0.50% of the average daily net assets of each Fund. From time to time, Wells Fargo Bank may waive such fees in whole or in part. Any such waiver will reduce expenses of the Funds and, accordingly, have a favorable impact on the Funds' yields and total returns. From time to time, each of the Funds, consistent with its investment objectives, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For the year ended December 31, 1994, the Company paid 0.50% of the average daily net assets of the California Tax-Free Bond Fund to Wells Fargo Bank for its services as investment adviser. For the year ended December 31, 1994, Wells Fargo Bank waived all advisory fees for the California Tax-Free Income Fund and the Company did not pay advisory fees to Wells Fargo Bank on behalf of the Fund. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank also serves as each Fund's custodian and transfer and dividend disbursing agent. Pursuant to separate Custody Agreements with Wells Fargo Bank, each Fund may, at times, borrow money from Wells Fargo Bank as needed to satisfy temporary liquidity needs. Wells Fargo Bank charges interest on such overdrafts at a rate determined pursuant to each Fund's Custody Agreement. The transfer and dividend disbursing agency activities are performed at 525 Market Street, San Francisco, California 94163. The Funds have entered into Shareholder Servicing Agreements with Wells Fargo Bank, and may enter into similar agreements with other entities. Under such agreements, Shareholder Servicing Agents (including Wells Fargo Bank) will, as agent for their customers, among other things: answer customer inquiries regarding account status and history and the manner in which purchases, exchanges and redemptions of Fund shares may be effected; assist shareholders in designating and changing dividend options, account designations and addresses; provide necessary personnel and facilities to establish and maintain shareholder accounts and records; assist in processing purchase, redemption and exchange transactions; arrange for the wiring of money; transfer money in connection with customer orders to purchase or redeem shares; verify shareholder signatures in connection with redemption and exchange orders and transfers and changes in accounts with Approved Banks; furnish (either separately or on an integrated basis with other reports sent to a shareholder by the Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases, redemptions and exchanges; furnish, on behalf of each of the Funds, proxy statements, annual reports, updated prospectuses and other communications to shareholders; receive, tabulate and send to the Funds proxies executed by shareholders; and provide such other related services as the Funds or a shareholder may reasonably request. For these services, a Shareholder Servicing Agent receives a fee, which may be paid periodically, determined by a formula based upon the number of accounts serviced by the Shareholder Servicing Agent during the period for which payment is being made, the level of activity in such accounts during such period, and the expenses incurred by the Shareholder Servicing Agent. In no event will the shareholder servicing fees for the California Tax-Free Bond Fund, as calculated on an annualized basis for the Fund's then current fiscal year, exceed the lesser of (1) 0.30% of the average daily net assets attributable to Class A or Class B Shares, as the case may be, owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the Rules of Fair Practice of the NASD ("NASD Rules"). In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of such Fund's average net asset value attributable to the Class A and Class B Shares. In no event will the shareholder servicing fees for the California Tax-Free Income Fund, as calculated on an annualized basis for the Fund's then current fiscal year, exceed the lesser of (1) 0.30% of the average daily net assets of the Fund represented by shares owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the NASD Rules. In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of each such Fund's average net asset value. A Shareholder Servicing Agent also may impose certain conditions on its customers, subject to the terms of this Prospectus, in addition to or different from those imposed by the Funds, such as requiring a higher minimum initial investment or payment of a separate fee for additional services. Each Shareholder Servicing Agent will be required to agree to disclose any fees it may directly charge its customers who are shareholders of a Fund and to notify them in writing at least 30 days before it imposes any transaction fees. Subject to the overall supervision of the Company's Board of Directors, Stephens provides the Funds with administrative services, including general supervision of each Fund's operation, coordination of the other services provided to each Fund, compilation of information for reports to the SEC and the state securities commissions, preparation of proxy statements and shareholder reports, and general supervision of data compilation in connection with preparing periodic reports to the Company's Directors and officers. Stephens also furnishes office space and certain facilities to conduct each Fund's business, and compensates the Company's Directors, officers and employees who are affiliated with Stephens. For these services, Stephens is entitled to a monthly fee at the annual rate of 0.03% of each Fund's average daily net assets. From time to time, Stephens may waive its fees from a Fund in whole or in part. Any such waivers will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield and total return. Stephens, as the principal underwriter of the Funds within the meaning of the 1940 Act, has entered into a Distribution Agreement with the Company pursuant to which Stephens is responsible for distributing Fund shares. The Company also has adopted a Distribution Plan on behalf of the Funds under the SEC's Rule 12b-1 ("Plans"). Under the Plan of the California Tax-Free Income Fund, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective Fund Shareholders by paying on an annual basis up to 0.05% of the average daily net assets of the Fund. Under the Class A Plan, the California Tax-Free Bond Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective Fund shareholders by paying on an annual basis up to 0.05% of the average daily net assets attributable to the Class A Shares. The Plans, other than the Class B Plan, provide only for the reimbursement of actual expenses. Under the Plan for the Class B Shares of the California Tax-Free Bond Fund, the Fund may defray all or part of such costs and pay compensation to the Distributor and Selling Agents for sales support services. The Class B Plan provides for payment, on an annual basis, of up to 0.70% of the average daily net assets attributable to the Class B Shares of the California Tax-Free Bond Fund. The Distribution Agreement provides that Stephens shall act as agent for the Funds for the sale of their shares and may enter into Selling Agreements with Selling Agents that wish to make available shares of the Funds to their respective customers. The Funds may participate in joint distribution activities with any of the other funds of the Company, in which event, expenses reimbursed out of the assets of the Funds may be attributable, in part, to the distribution-related activities of another fund of the Company. Generally, the expenses attributable to joint distribution activities will be allocated among each Fund and the other funds of the Company in proportion to their relative net asset sizes, although the Company's Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. In addition, the Plans contemplate that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed above) are deemed to be for distribution-related services, such payments are approved and payable pursuant to the Plans, subject to any limits under applicable law, regulations or rules, including the NASD Rules. Financial institutions acting as Selling Agents, Shareholder Servicing Agents, or in certain other capacities may be required to register as dealers pursuant to applicable state securities laws which may differ from federal law and any interpretations expressed herein. From time to time, Wells Fargo Bank and Stephens may waive their respective fees in whole or in part and reimburse expenses payable to others. Any such waivers or reimbursements will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield and total return. Except for the expenses borne by Wells Fargo Bank and Stephens, the Company bears all costs of its operations, including advisory, shareholder servicing, transfer agency, custody and administration fees, payments pursuant to any Plans, fees and expenses of independent auditors and legal counsel, and any extraordinary expenses. Expenses attributable to each Fund or class are charged against the assets of the Fund or class. General expenses of the Company are allocated among all of the funds of the Company, including the Funds, in a manner proportionate to the net assets of each fund, on a transactional basis, or on such other basis as the Company's Board of Directors deems equitable. By complying with the applicable provisions of the Code, the Funds will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to their shareholders, and the Funds' shareholders will not be subject to federal income taxes on any dividends of the Funds attributable to interest from tax-exempt securities. However, dividends attributable to interest from taxable securities, accretion of market discount on certain bonds and capital gains (if any) will be taxable to shareholders. In addition, by complying with the applicable provisions of the California Revenue and Taxation Code, dividends of the Funds also will be exempt from California personal income tax to the extent such dividends are attributable to instruments that pay interest which would be exempt from California personal income taxes were such instruments held directly by an individual. The Funds do not make any representation regarding the taxation of their corporate shareholders with respect to their distributions and recommends that they consult their tax advisors. Interest on indebtedness incurred or continued to purchase or carry shares of the Funds will not be deductible to the extent that a Fund's distributions are exempt from federal tax. In an attempt to maintain equity among taxpayers, the IRS has devised federal alternative minimum tax ("AMT") rules to ensure that at least a minimum amount of tax is paid by corporate and high-income noncorporate taxpayers who obtain significant benefit from certain tax deductions and exemptions. These deductions and exemptions have been designated "tax preference items" which must be added back to taxable income for purposes of calculating AMT. Among the "tax preference items" and "adjustments" which must be considered when calculating the AMT is tax-exempt interest from private activity bonds issued after August 7, 1986. To the extent that a Fund invests in private activity bonds, shareholders who pay the alternative minimum tax will be required to report that portion of Fund dividends attributable to income from the bonds as a tax preference item in determining their federal AMT. Shareholders will be notified of the tax status of distributions made by the Funds. Persons who may be "substantial users" (or "related persons" of substantial users) of facilities financed by private activity bonds should consult their tax advisors before purchasing shares in the Funds. There are other adjustments that may also affect adjusted current earnings for the purposes of corporate AMT. Shareholders with questions or concerns about AMT should also consult their tax advisors. The Funds, or your Shareholder Servicing Agent on their behalf, will inform you of the amount and nature of the Fund's dividends and capital gains. You should keep all statements you receive to assist in your personal record keeping. The Company is required to withhold, subject to certain exemptions, at a rate of 31% on dividends paid or credited to individual shareholders of the Funds, if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAI for each Fund. Further federal tax considerations are discussed in the SAIs. All investors should consult their individual tax advisors with respect to their particular tax situations. The Funds invest in municipal bonds rated at the date of purchase "Baa" or better by Moody's or "BBB" or better by S&P, or unrated bonds that are considered by Wells Fargo Bank, as investment adviser, to be of comparable quality. Bonds rated at the minimum permitted level have speculative characteristics and are more likely than higher-rated bonds to have a weakened capacity to pay principal and interest in times of adverse economic conditions; all are considered investment grade. Municipal bonds generally have a maturity at the time of issuance of up to 40 years. The Funds invest in municipal notes rated at the date of purchase "MIG 2" (or "VMIG 2" in the case of an issue having a variable rate with a demand feature) or better by Moody's or "SP-2" or better by S&P, or unrated notes that are considered by Wells Fargo Bank, as investment adviser, to be of comparable quality. Municipal notes generally have maturities at the time of issuance of three years or less. Municipal notes are generally issued in anticipation of the receipt of tax funds, of the proceeds of bond placements, or of other revenues. The ability of an issuer to make payments on notes is therefore especially dependent on such tax receipts, proceeds from bond sales or other revenues, as the case may be. The Funds invest in municipal commercial paper rated at the date of purchase "P-1" or "P-2" by Moody's or "A-1+," "A-1" or "A-2" by S&P, or unrated commercial paper that is considered by Wells Fargo Bank, as investment adviser, to be of comparable quality. Municipal commercial paper is a debt obligation with a stated maturity of 270 days or less that is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. In the event a security purchased by the Funds is downgraded below investment grade, the Funds may retain such security, although the Funds may not have more than 5% of their assets invested in securities rated below investment grade at any time. A description of the ratings is contained in the Appendix to the SAI for each Fund. From time to time, each Fund may invest 25% or more of the current value of its total assets in certain "private activity bonds," such as pollution control bonds; provided, however, that such investments will be made only to the extent they are consistent with the Funds' fundamental policy of investing, under normal circumstances, at least 80% of their net assets in municipal obligations that are exempt from federal income taxes and not subject to the federal alternative minimum tax, and provided further that the Funds may not invest 25% or more of their assets in industrial development bonds. For a further discussion of factors affecting purchases of municipal obligations by the Funds, see "Special Considerations Affecting California Municipal Obligations" in the SAI for each Fund. Pending the investment of proceeds from the sale of shares of the Funds or proceeds from sales of portfolio securities or in anticipation of redemptions or to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of market conditions, each Fund may elect to invest temporarily up to 20% of the current value of its net assets in cash reserves, in instruments that pay interest which is exempt from federal income taxes, but not from California personal income taxes, or the following taxable high-quality money market instruments: (i) U.S. Government obligations; (ii) negotiable certificates of deposit, bankers' acceptance and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; (iii) commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P; (iv) certain repurchase agreements; and (v) high-quality municipal obligations, the income from which may or may not be exempt from federal income taxes. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. Certain of the securities in which the Funds invest are purchased on a when-issued basis, in which case delivery and payment normally take place within 45 days after the date of the commitment to purchase. The Funds make commitments to purchase securities on a when-issued basis only with the intention of actually acquiring the securities, but may sell them before the settlement date if it is deemed advisable. When-issued securities are subject to market fluctuation, and no income accrues to the purchaser during the period prior to issuance. The purchase price and the interest rate received on debt securities are fixed at the time the purchaser enters into the commitment. Purchasing a security on a when-issued basis can involve a risk that the market price at the time of delivery may be lower than the agreed-upon purchase price, in which case there could be an unrealized loss at the time of delivery. Each Fund establishes a segregated account in which it maintains cash, U.S. Government obligations or other high-quality debt instruments in an amount at least equal in value to its respective commitments to purchase when-issued securities. If the value of these assets declines, the Fund places additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments. The Funds may invest in shares of other open-end investment companies that have a fundamental policy of investing, under normal circumstances, at least 80% of their net assets in obligations that are exempt from federal income taxes and are not subject to the federal alternative minimum tax. Such investment companies can be expected to charge management fees and other operating expenses that would be in addition to those charged to the Funds. However, the Funds' investment adviser has undertaken to waive its advisory fees with respect to assets so invested. In no event may each Fund, together with any company or companies controlled by it, own more than 3% of the total outstanding voting stock of any such company, nor may any Fund, together with any such company or companies, invest more than 5% of its assets in any one such company or invest more than 10% of its assets in securities of all such companies combined. Notwithstanding any other investment policy or limitation (whether or not fundamental), as a matter of fundamental policy, the California Tax-Free Income Fund may invest all of its assets in the securities of a single open-end, management investment company with substantially the same fundamental investment objective, policies and limitations as the Fund. Certain of the debt instruments that the Funds may purchase bear interest at rates that are not fixed, but vary, for example, with changes in specified market rates or indices or at specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The floating- and variable-rate instruments that the Funds may purchase include certificates of participation in such obligations. Wells Fargo Bank, as investment adviser to the Funds, will monitor on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the time a Fund elects to demand payment and the time payment is due, thereby affecting such Fund's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days, may be treated as liquid provided that an active secondary market exists. The Funds may enter into repurchase agreements wherein the seller of a security to a Fund agrees to repurchase that security from such Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Funds may enter into repurchase agreements only with respect to U.S. Government obligations and other obligations that could otherwise be purchased by the participating Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction may be greater than one year. If the seller defaults and the value of the underlying securities has declined, the participating Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the participating Fund's disposition of the security may be delayed or limited. The Funds will enter into repurchase agreements only with registered broker/dealers and commercial banks that meet guidelines established by the Board of Directors of the Funds and that are not affiliated with Wells Fargo Bank. The Funds may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. The Funds may lend securities from their portfolios to brokers, dealers and financial institutions (but not individuals) if cash, U.S. Government obligations or other high-quality debt instruments equal to at least 100% of the current market value of the securities loan (including accrued interest thereon) plus the interest payable to a Fund with respect to the loan is maintained with such Fund. In determining whether to lend a security to a particular broker, dealer or financial institution, the Funds' investment adviser will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer or financial institution. Any loans of portfolio securities will be fully collateralized based on values that are marked to market daily. The Funds will not enter into any portfolio security lending arrangement having a duration of longer than one year with respect to the California Tax-Free Income Fund, and 13 months with respect to the California Tax-Free Bond Fund. Any securities that a Fund may receive as collateral will not become part of such Fund's portfolio at the time of the loan and, in the event of a default by the borrower, such Fund, if permitted by law, will dispose of such collateral except for such part thereof that is a security in which such Fund is permitted to invest. During the time securities are on loan, the borrower will pay such Fund any accrued income on those securities, and such Fund may invest the cash collateral and earn additional income or receive an agreed-upon fee from a borrower that has delivered cash-equivalent collateral. The Funds will not lend securities having a value that exceeds one-third of the current value of each of their total assets. Loans of securities by the Funds will be subject to termination at the Funds' or the borrower's option. The Funds may pay reasonable administrative and custodial fees in connection with a securities loan and may pay a negotiated portion of the interest or fee earned with respect to the collateral to the borrower or the placing broker. Borrowers and placing brokers may not be affiliated, directly or indirectly, with the Company, the investment adviser, or the Distributor. Each Fund's investment objective, as set forth in the "How the Funds Work - Investment Objectives and Policies," section is fundamental; that is, it may not be changed without approval by the vote of the holders of a majority of such Fund's outstanding voting securities, as described under "Capital Stock" in the SAI for each Fund. In addition, any fundamental investment policy may not be changed without such shareholder approval. If the Company's Board of Directors determines, however, that a Fund's investment objective can best be achieved by a substantive change in a nonfundamental investment policy or strategy, the Company's Board may make such change without shareholder approval and will disclose any such material changes in the then-current prospectus. As matters of fundamental policy (i) the Funds may borrow from banks up to 10% of the current value of each of their net assets only for temporary purposes in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of each of their net assets (but investments may not be purchased by a Fund while any such outstanding borrowings exceed 5% of its net assets); (ii) the California Tax-Free Bond Fund may make loans of portfolio securities in accordance with its investment policies and (iii) the Funds may not purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of a Fund's investments in that industry would be 25% or more of the current value of such Fund's total assets, provided that there is no limitation with respect to investments in (a) municipal securities purpose of this restriction, private activity bonds shall not be deemed municipal securities if the payment of principal and interest on such bonds is the ultimate responsibility of nongovernmental users) and (b) U.S. Government obligations. As a matter of nonfundamental policy, the California Tax-Free Bond Fund may invest up to 10%, and the California Tax-Free Income Fund may invest up to 15%, of the current value of each Fund's net assets in repurchase agreements having maturities of more than seven days, illiquid securities and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days. For purposes of complying with the Code, each Fund will diversify its holdings so that, at the end of each quarter of the taxable year: (i) at least 50% of the market value of each Fund's assets is represented by cash, U.S. Government obligations and other securities limited in respect of any one issuer to an amount not greater than 5% of the Fund's assets and 10% of the outstanding voting securities of such issuer; and (ii) not more than 25% of the value of its assets is invested in the securities of any one issuer (other than U.S. Government obligations and the securities of other regulated investment companies), or of two or more issuers which the taxpayer controls and which are determined to be engaged in the same or similar trades or businesses or related trades or businesses. With respect to paragraph (i), it may be possible that the Company would own more than 10% of the outstanding voting securities of an issuer. THIS PAGE INTENTIONALLY LEFT BLANK INVESTMENT ADVISER, TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN For more information about the Funds, simply call 1-800-222-8222, or write: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF STAGECOACH FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. As Supplemented on August 24, 1995 Stagecoach Funds, Inc. (the "Company") is a professionally managed, open-end series investment company. This Prospectus contains information about two of the funds in the Stagecoach Family of Funds - the DIVERSIFIED INCOME FUND and the GROWTH AND INCOME FUND (each, a "Fund" and, collectively, the "Funds"). Two classes of shares of the Funds (each, a "Class") are described in this Prospectus - Class A Shares and Class B Shares. The DIVERSIFIED INCOME FUND seeks to earn current income and a growing stream of income over time, consistent with preservation of capital. The Fund pursues this objective by investing primarily in income-producing debt instruments and equity securities, including common stocks, and preferred stocks and debt instruments that are convertible into common stocks. The GROWTH AND INCOME FUND seeks to earn current income and achieve long-term capital appreciation by investing primarily in common stocks, and preferred stocks and debt securities that are convertible into common stocks. Please read this Prospectus before investing and retain it for future reference. It is designed to provide you with important information and to help you decide if the Funds' goals match your own. Statements of Additional Information ("SAIs"), dated May 1, 1995, for the Funds have been filed with the Securities and Exchange Commission ("SEC") and are incorporated by reference. The SAI for each Fund is available free of charge by writing to Stagecoach Funds, Inc., c/o Stagecoach Shareholder Services, Wells Fargo Bank, N.A., P.O. Box 7066, San Francisco, CA 94120-7066, or by calling the Company at 800-222-8222. If you hold shares in an IRA, please call 1-800-BEST-IRA for information or assistance. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. PROSPECTUS DATED MAY 1, 1995 AS SUPPLEMENTED ON AUGUST 24, 1995 The Diversified Income Fund and the Growth and Income Fund are advised by Wells Fargo Bank, which also serves as the Funds' transfer and dividend disbursing agent and custodian. In addition, Wells Fargo Bank is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below). Stephens Inc. ("Stephens") is the Funds' sponsor and administrator and serves as the distributor of the Funds' shares. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS, FOR WHICH IT IS COMPENSATED. STEPHENS, WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUNDS. SUMMARY OF FUND EXPENSES 4 HOW THE FUNDS WORK 10 THE FUNDS AND MANAGEMENT 14 INVESTING IN THE FUNDS 16 HOW TO REDEEM SHARES 27 MANAGEMENT AND SERVICING FEES 34 PROSPECTUS APPENDIX - ADDITIONAL INVESTMENT POLICIES A-1 The Funds provide you with a convenient way to invest in a portfolio of securities selected and supervised by professional management. The following provides you with summary information about the Funds. For more information, please refer specifically to the identified Prospectus sections and generally to the Prospectus and SAI for each Fund. Q. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? A. The DIVERSIFIED INCOME FUND seeks to earn current income and a growing stream of income over time, consistent with preservation of capital. It pursues this objective by investing primarily in income-producing debt instruments and equity securities, including common stocks, and preferred stocks and debt instruments that are convertible into common stocks. Debt instruments will include obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities, high quality bonds and a broad range of other debt instruments, such as bonds and other debt securities of domestic companies, U.S. dollar-denominated debt obligations of foreign issuers, including foreign corporations and foreign governments, and various asset-backed securities. Common stocks will be selected on the basis of strong earnings growth trend, above-average prospects for future earnings growth and diversification among industries and companies. Convertible securities will be selected on the basis of strong earnings and credit record, the ability to provide current income and the characteristics described above with respect to common stocks. The GROWTH AND INCOME FUND seeks to earn current income and achieve long-term capital appreciation by investing primarily in common stocks, and preferred stocks and debt securities that are convertible into common stocks. Common stocks will be selected on the basis of strong earnings growth trend, above-average prospects for future earnings growth and diversification among industries and companies. Convertible securities will be selected on the basis of strong earnings and credit record, the ability to provide current income and the same characteristics described above with respect to common stocks. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. See "How the Funds Work" and "Prospectus Appendix - Additional Investment Policies" for further information on investments. Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the Funds' investment adviser, manages your investments. Wells Fargo Bank also provides transfer agency, dividend disbursing agency and custodial services to the Funds. In addition, Wells Fargo Bank is a Shareholder Servicing Agent and a Selling Agent under a Selling Agreement with Stephens, the Funds' distributor. See "The Funds and Management" and "Management and Servicing Fees." Q. HOW DO I INVEST? A. You may invest by purchasing shares of the Funds at their public offering price, which is the net asset value plus any applicable sales charge. Class A Shares are subject to a maximum front-end sales charge of 4.50%. Class B Shares that are redeemed within four years of purchase are subject to a maximum contingent deferred sales charge of 3.00% of the lesser of net asset value at purchase or net asset value at redemption. In some cases, such as for investments by certain fiduciary or retirement accounts, the front-end sales charge may be waived. In particular, no front-end sales charge is imposed on sales of Class A Shares made to various retirement plan customers of Wells Fargo Bank, including IRAs, Simplified Employee Pension Plans and other self-directed retirement plans for which Wells Fargo Bank serves as trustee. In other cases, the front-end sales charge may be reduced. You may open an account by investing at least $1,000 and may add to your account by making additional investments of at least $100, although certain exceptions to these minimums may be available. Shares may be purchased by wire, by mail or by an automatic investment feature called the AutoSaver Plan on any day the New York Stock Exchange is open. See "Investing in the Funds." For more details, contact Stephens (the Funds' sponsor and distributor), a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank). Q. HOW WILL I RECEIVE DIVIDENDS AND ANY CAPITAL GAINS? A. Dividends from net investment income are declared quarterly and automatically reinvested in shares of the same Class of the respective Fund at net asset value without a sales charge unless you elect to receive dividends in cash. You may also elect to reinvest the dividends earned by the Funds in shares of the same Class of another multi-class fund or in shares of certain other funds in the Stagecoach Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. Any capital gains will be distributed at least annually in the same manner. Each Fund's net investment income available for distribution to holders of Class B Shares will be reduced by the amount of the higher Rule 12b-1 Fee payable on behalf of the Class B Shares. Class B Shares automatically convert into Class A Shares of the same Fund six years after the end of the month in which they were acquired. See "Dividends" and "Additional Shareholder Services." Q. HOW MAY I REDEEM SHARES? A. You may redeem your shares by telephone, by letter or by an automatic feature called the Systematic Withdrawal Plan on any day the New York Stock Exchange is open for business. The Company does not charge a fee for redemption of Class A Shares. However, contingent deferred sales charges may be charged upon redemption of Class B Shares. In addition, the Company reserves the right to impose charges for wiring redemption proceeds. See "How To Redeem Shares" and "How to Purchase Shares -- Contingent Deferred Sales Charges -- Class B Shares." For more details, contact Stephens, a Shareholder Servicing Agent or a Selling Agent (such as Wells Fargo Bank). Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT? A. An investment in a Fund is not insured against loss of principal. When the value of the securities that a Fund owns declines, so does the value of your shares of the Fund. Therefore, you should be prepared to accept some risk with the money you invest in the Funds. The portfolio equity securities of the Funds are subject to equity market risk. Equity market risk is the risk that common stock prices will fluctuate or decline over short or even extended periods. The portfolio debt instruments of the Funds are subject to credit and interest rate risk. Credit risk is the risk that issuers of the debt instruments in which the Funds invest may default on the payment of principal and/or interest. Interest rate risk is the risk that increases in market interest rates may adversely affect the value of the debt instruments in which the Funds invest and hence the value of your investment in a Fund. The Growth and Income Fund's investments in smaller-size companies present greater risks than investments in larger-size companies with more established operating histories and financial capacity. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. Q. WHAT ARE DERIVATIVES AND DO THE FUNDS USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. Some of the permissible investments described in this Prospectus, such as variable rate instruments which have an interest rate that is reset periodically based on an index, can be considered derivatives. Some derivatives may be more sensitive than direct securities to changes in interest rates or sudden market moves. Some derivatives also may be susceptible to fluctuations in yield or value due to their structure or contract terms. Q. WHAT STEPS DO THE FUNDS TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser to each Fund, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with each Fund's investment objective, does not expose the Fund to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by each Fund also is subject to broadly applicable investment policies. For example, the Funds may not invest more than a specified percentage of their assets in "illiquid securities," including those derivatives that do not have active secondary markets. Nor may a Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. For more information on the Funds' investment activities, see "Prospectus Appendix - Additional Investment Policies." This expense summary is a standard format required for all mutual funds to help you understand the various costs and expenses you will bear directly or indirectly as a shareholder of the Funds. As shown below, you are not charged exchange fees. You should consider this expense information together with the important information in this Prospectus, including the Funds' investment objectives and policies. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (AS A PERCENTAGE OF AVERAGE NET ASSETS) SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell Fund shares. You are subject to a front-end sales charge on purchases of Class A Shares of the Funds and may be subject to a contingent deferred sales charge on Class B Shares if you redeem such shares within a specified period. See "Investing in the Funds - Sales Charges." The Company reserves the right to impose a charge for wiring redemption proceeds. In certain instances, you may qualify for a reduction or waiver of the front-end sales charge. See "Investing in the Funds - Sales Charges." ANNUAL FUND OPERATING EXPENSES for the Class A Shares of the Growth and Income Fund are based on amounts incurred during the most recent fiscal year reflecting voluntary fee waivers or reimbursements. Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of their respective fees if certain Fund expenses exceed limits set by state securities laws or regulations. In addition, Wells Fargo Bank and Stephens at their sole discretion may waive or reimburse all or a portion of their respective fees charged to, or expenses paid by, a Fund. Any waivers or reimbursements would reduce a Fund's total expenses. Absent waivers and reimbursements, the percentages shown above under "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.60% and 1.15%, respectively, for the Class A Shares of the Growth and Income Fund. There can be no assurance that waivers or reimbursements will continue. Annual fund operating expenses for the Class A Shares of the Diversified Income Fund are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Absent such waivers and reimbursements, "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.79% and 1.34%, respectively, for the Class A Shares of the Diversified Income Fund. Since Class B Shares were not offered during 1994, the percentages shown above with respect to Class B Shares under "Total Other Expenses" and "Total Fund Operating Expenses" reflect certain anticipated voluntary fee waivers and expense reimbursements for the current fiscal year. Absent waivers and reimbursements, "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.84% and 2.04%, respectively, for the Class B Shares of the Diversified Income Fund and 0.65% and 1.85%, respectively, for the Class B Shares of the Growth and Income Fund. Long-term shareholders of the Funds could pay more in sales charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers ("NASD"). For more complete descriptions of the various costs and expenses you can expect to incur as an investor in each Fund, please see the Prospectus sections captioned "Investing in the Funds - How To Buy Shares" and "Management and Servicing Fees." EXAMPLE OF EXPENSES is a hypothetical example which illustrates the expenses associated with a $1,000 investment in shares of the Funds over stated periods based on the expenses in the respective tables above and an assumed annual rate of return of 5%. This rate of return should not be considered an indication of actual or expected performance of a Fund. In addition, the example should not be considered a representation of past or future expenses and actual expenses may be greater or lesser than those shown. The following information has been derived from the Financial Highlights in the Funds' 1994 annual financial statements. The financial statements are included in the SAI for each Fund. Except for periods ending prior to January 1, 1992, which were audited by other auditors whose report dated February 19, 1992, expressed an unqualified opinion on this information, the financial statements have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is included in the SAI for each Fund. This information should be read in conjunction with the Funds' 1994 annual financial statements and notes thereto. The SAI for each Fund has been incorporated by reference into this Prospectus. Financial information is not provided in connection with Class B Shares because Class B Shares were not offered during the periods presented. FOR A CLASS A SHARE OUTSTANDING AS SHOWN FOR A CLASS A SHARE OUTSTANDING AS SHOWN The Diversified Income Fund's investment objective is to seek current income and a growing stream of income over time, consistent with preservation of capital. The Fund pursues this objective by investing primarily in income-producing debt instruments and equity securities, including common stocks, and preferred stocks and debt instruments that are convertible into common stocks. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. The Fund invests, under normal market conditions, substantially all of its total assets in income-producing securities, including both debt instruments and equity securities, and, under normal market conditions, at least 50% of its total assets in equity securities. The Diversified Income Fund will invest in common stocks of issuers that, in the opinion of Wells Fargo Bank, as the Fund's investment adviser, exhibit a strong earnings growth trend and that are believed by Wells Fargo Bank to have above-average prospects for future earnings growth. The Fund's common stocks will be diversified among industries and companies. Emphasis will be placed on common stocks which are trading at low price-to-earnings ratios, either relative to the overall market or to the security's historic price-to-earnings relationship, and in common stocks of issuers that have historically paid above-average dividends. Under normal market conditions, at least 90% of the Diversified Income Fund's equity securities, including, for this purpose, the convertible securities described below, will be issued by large companies (i.e., for purposes of the Fund, companies with a market capitalization of more than $1 billion). Some investments also may be made in equity securities of medium- and smaller-size companies (i.e., for purposes of the Fund, those companies with at least $250 million but less than $1 billion in capitalization) which may have the potential to generate high levels of future revenue and earnings growth and where the investment opportunity may not be fully reflected in the price of the securities but which may involve greater risks than investments in larger companies. There may be some additional risks associated with investments in smaller companies because securities issued by such companies tend to trade less frequently and may be less liquid than securities issued by larger companies. In addition, smaller companies, relative to larger concerns, may depend on a small group of key managers or may have limited product lines, financial resources or available markets. As a result, the price of securities issued by small companies may be more volatile than the price of securities issued by larger companies. The debt instruments held by the Diversified Income Fund will include obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises) ("U.S. Government obligations"), and a broad range of other debt instruments, as described in this Prospectus or in the SAI, such as bonds and other debt securities of domestic companies, U.S. dollar-denominated debt obligations of foreign issuers, including foreign corporations and foreign governments, and various asset-backed securities. Most of the debt instruments acquired by the Fund will be issued by companies or governmental entities located within the United States. All of the nonconvertible debt instruments acquired by the Fund will be rated within the four highest rating categories by one or more nationally recognized statistical rating organizations ("NRSROs"), such as Moody's Investor Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"), or unrated instruments determined by the Adviser to be of comparable quality. Up to 20% of the assets of the Fund that are invested in debt instruments may be rated, at the time of purchase, in the lowest of these four rating categories (i.e., rated BBB by S&P or Baa by Moody's). These securities are regarded by S&P as having an adequate capacity to pay interest and repay principal, but changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make such repayments. Moody's considers such securities as having speculative characteristics. Subsequent to its purchase by the Fund, an issue of securities may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. The Adviser will consider such an event in determining whether the Fund should continue to hold the obligation. The Diversified Income Fund may temporarily hold assets in cash or make short-term investments to the extent appropriate to maintain adequate liquidity for redemption requests or other cash management needs, or for temporary defensive purposes. The short-term investments that the Fund may purchase for liquidity purposes include U.S. Treasury bills, shares of other mutual funds and repurchase agreements (as described below). The Growth and Income Fund seeks to earn current income and achieve long-term capital appreciation by investing primarily in common stocks, and preferred stocks and debt securities that are convertible into common stocks. There can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. Under normal market conditions, the Fund will invest at least 65% of its total assets in common stocks and securities which are convertible into common stocks and at least 65% of its total assets in income-producing securities. Up to 10% of the Fund's assets may be invested in securities of foreign issuers. The Growth and Income Fund will invest in common stocks of issuers that, in the opinion of Wells Fargo Bank, as the Fund's investment adviser, exhibit a strong earnings growth trend and that are believed by Wells Fargo Bank to have for future earnings growth. The Fund will maintain a portfolio of common stocks diversified among industries and companies. The Fund may invest in common stocks of large companies (i.e., for the purposes of the Fund, those companies with more than $750 million in capitalization) which Wells Fargo Bank believes offer the potential for long-term earnings growth or above-average dividend yield. Emphasis may be placed on common stocks which are trading at low price-to-earnings ratios, either relative to the overall market or to the security's historic price-to-earnings relationship, and on common stocks of issuers that have historically paid above-average dividends. Some investments also may be made in common stocks of medium- and smaller-size companies (i.e., for the purposes of the Fund, those companies with at least $250 million, but less than $750 million in capitalization) which may have the potential to generate high levels of future revenue and earnings growth and where the investment opportunity may not be fully reflected in the price of the securities but which may involve greater risks than investments in larger companies. The Growth and Income Fund intends to invest less than 50% of its assets in the securities of medium- and smaller-size companies and the remainder in securities of larger-size companies. However, the actual percentages may vary according to changes in market conditions and the judgment of the Fund's investment adviser of how best to achieve the Fund's investment objective. There may be some additional risk associated with investments in smaller companies because securities of such companies tend to trade less frequently and may be less liquid than securities issued by larger companies. In addition, smaller companies, relative to larger concerns, may depend on a small group of key managers or may have limited product lines, financial resources or available markets. As a result, the price of securities issued by small companies may be more volatile than the price of securities issued by larger companies. The Growth and Income Fund may temporarily hold assets in cash or make short-term investments to the extent appropriate to maintain adequate liquidity for redemption requests or other cash management needs, or for temporary defensive purposes. The short-term investments that the Fund may purchase for liquidity purposes include U.S. Treasury bills, shares of other mutual funds and repurchase agreements (as described below). Convertible Securities. The Funds will seek to invest in convertible securities that provide current income and are issued by companies with the characteristics described above for each Fund and that have a strong earnings and credit record. The Funds may purchase convertible securities that are fixed-income debt securities or preferred stocks, and which may be converted at a stated price within a specified period of time into a certain quantity of the common stock of the same issuer. Convertible securities, while usually subordinate to similar nonconvertible securities, are senior to common stocks in an issuer's capital structure. Convertible securities offer flexibility by the investor with a steady income stream (which generally yield a lower amount than similar nonconvertible securities and a higher amount than common stocks yield) as well as the opportunity to take advantage of increases in the price of the issuer's common stock through the conversion feature. Fluctuations in the convertible security's price can reflect changes in the market value of the common stock or changes in market interest rates. At most, 5% of each Fund's net assets will be invested, at the time of purchase, in convertible securities that are not rated in the four highest rating categories by one or more NRSROs, such as Moody's or S&P, or unrated but determined by the Adviser to be of comparable quality. A more complete description of the Funds' investments and investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the SAI for each Fund. The performance of each Class of shares of the Funds may be advertised in terms of average annual total return and yield. These performance figures are based on historical results and are not intended to indicate future performance. Average annual total return of the shares of a Class is based on the overall dollar or percentage change in value of a hypothetical investment in such shares and assumes that all Fund dividends and capital gain distributions are reinvested in shares of that Class. The standardized average annual total return is calculated for Class A Shares assuming you have paid the maximum sales charge, and for Class B Shares assuming on a one-year investment you have paid the maximum contingent deferred sales charge, on your hypothetical investment. In addition to presenting a standardized total return, at times, the Funds also may present nonstandardized total returns, yields and distribution rates for purposes of sales literature. For example, the performance figure of the shares of a Class may be calculated on the basis of an investment at the net asset value per share or at net asset value per share plus a reduced sales charge (see "Investing in the Funds - How To Buy Shares"), rather than the public offering price per share. In this case, the figure might not reflect the effect of the sales charge that you may have paid. The yield of a Class of shares of each Fund is calculated by dividing the net investment income per share earned during a specified period (usually 30 days) for Class A Shares by its public offering price per share (which includes the maximum sales charge), or for Class B Shares by its net asset value (which does not include the maximum contingent deferred sales charge), on the last day of such period and annualizing the result. Because of differences in the fees and/or expenses borne by Class B Shares of the Fund, the net performance quotations on such shares can be expected, at any given time, to be lower than the net performance quotations on Class A Shares. Performance quotations are computed separately for Class A Shares and Class B Shares. Additional information about the performance of each Fund is contained in the Annual Report for each Fund. The Annual Reports may be obtained free of charge by calling the Company at 800-222-8222. The Funds are two of the funds in the Stagecoach Family of Funds. The Company was organized as a Maryland corporation on September 9, 1991, and currently offers shares of nine other series: the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Income Fund, the California Tax-Free Money Market Mutual Fund, the Corporate Stock Fund, the Ginnie Mae Fund, the Money Market Mutual Fund, the Short-Intermediate U.S. Government Income Fund and the U.S. Government Allocation Fund. The Board of Directors of the Company supervises the Funds' activities and monitors their contractual arrangements with various service-providers. Although the Company is not required to hold annual shareholder meetings, special meetings may be requested for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Funds' investment objectives or fundamental investment policies. All shares of the Company have equal voting rights and will be voted in the aggregate, rather than by series or Class, unless otherwise required by law (such as when the voting matter affects only one series or Class). As a shareholder of the Funds, you receive one vote for each share you own and fractional votes for fractional shares owned. A more detailed description of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the Funds' SAIs. Wells Fargo Bank is the Funds' investment adviser, transfer and dividend disbursing agent, and custodian. In addition, Wells Fargo Bank is a Shareholder Servicing Agent of the Funds and a Selling Agent under a Selling Agreement with the Funds' distributor. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of June 30, 1995, Wells Fargo Bank provided investment advisory services for approximately $28 billion of assets of individuals, trusts, estates and institutions. As of June 30, 1995, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $211 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank also serves as the investment adviser to the other separately managed series of Company, and to seven other registered, open-end, management investment companies, which consist of several separately managed investment portfolios. Wells Fargo Bank, a wholly owned subsidiary of Wells Fargo & Company, is located at 420 Montgomery Street, San Francisco, California 94163. Mr. Allen Wisniewski has been responsible for the day-to-day management of the portfolios of the Diversified Income Fund and the Growth and Income Fund since November 1992 and January 1992, respectively. He also is responsible for managing equity and balanced accounts for high-net-worth individuals and pensions. Mr. Wisniewski joined Wells Fargo Bank in April 1987 with the acquisition of Bank of America's consumer trust services, where he was a portfolio manager. He received his B.A. degree and M.B.A. degree in economics and finance from the University of California at Los Angeles. He is a member of the Los Angeles Society of Financial Analysts. Mr. Robert Bissell also has been responsible for the day-to-day management of the portfolios of the Diversified Income Fund and the Growth and Income Fund since November 1992 and January 1992, respectively. Mr. Bissell joined Wells Fargo Bank at the time of its merger with Crocker Bank and has been with the combined organization for over 20 years. Prior to joining Wells Fargo Bank, he was a vice president and investment counsel with M.H. Edie Investment Counseling, where he managed institutional and high-net-worth portfolios. Mr. Bissell holds a finance degree from the University of Virginia. He is a chartered financial analyst and a member of the Los Angeles Society of Financial Analysts. Stephens is the Funds' sponsor and administrator, and distributes the Funds' shares. Stephens is a full service broker/dealer and investment advisory firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. You can buy shares in either Fund in one of the several ways described below. You must complete and sign an Account Application to open an account. Additional documentation may be required from corporations, associations and certain fiduciaries. Do not mail cash. If you have any questions or need extra forms, you may call 800-222-8222. After an application has been processed and an account has been established, subsequent purchases of different funds of the Company under the same umbrella account do not require the completion of additional applications. A separate application must be processed for each different umbrella account number (even if the registration is the same). Call the number on your confirmation statement to obtain information about what is required to change registration. To invest in the Funds through tax-deferred retirement plans through which the Funds are available, please contact a Shareholder Servicing Agent or a Selling Agent to receive information and the required separate application. See "Tax-Deferred Retirement Plans" below. The Company or Stephens may make the Prospectus available in an electronic format. Upon receipt of a request from you or your representative, the Company or Stephens will transmit or cause to be transmitted promptly, without charge, a paper copy of the electronic Prospectus. The value of a share of each Fund is its "net asset value," or NAV. The NAV of a share of each Class of a Fund is the value of the total net assets attributable to each such Class divided by the number of outstanding shares of that Class. The value of the net assets per Class is determined daily by adjusting the net assets per Class at the beginning of the day by the value of each Class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each Class by attributing to each Class a pro rata share of daily income and common expenses, and by assigning Class-specific expenses to each Class as appropriate. The NAV of a share of each Class is expected to fluctuate daily. The Funds are open for business each day the New York Stock Exchange ("NYSE") is open for trading (a "Business Day"). Currently, the NYSE is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each a "Holiday"). When any Holiday falls on a weekend, the NYSE is closed on the weekday immediately before or after such Holiday. Wells Fargo Bank calculates the NAV of each Class of the Funds each Business Day as of the close of regular trading on the NYSE (referred to hereafter as "the close of the NYSE"), which is currently 1:00 p.m. (Pacific time). Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, the Funds' other assets are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the Company's Board of Directors. Prices used for such valuations may be provided by independent pricing services. Shares of each Class of a Fund are offered continuously at the applicable offering price (the NAV plus the applicable sales charge) next determined after a purchase order is received in the form specified for the purchase method being used, as described in the following sections. Payment for shares purchased through a Selling Agent will not be due from the Selling Agent until the settlement date. The settlement date normally is three Business Days after the order is placed. It is the responsibility of the Selling Agent to forward payment for shares being purchased to the Fund promptly. Payment must accompany orders placed directly through the Transfer Agent. Payments for shares of each Class of a Fund will be invested in full and fractional shares of such Class at the applicable offering price. If shares are purchased by a check which does not clear, the Company reserves the right to cancel the purchase and hold the investor responsible for any losses or fees incurred. In addition, the Funds may hold payment on any redemption until reasonably satisfied that your investments made by check have been collected (which may take up to 15 days). The Company reserves the right to reject any purchase order or suspend sales at any time. The minimum initial investment is $100 by the AutoSaver Plan purchase method (described below), $250 for any tax-sheltered retirement account for which Wells Fargo Bank serves as trustee or custodian under a prototype trust approved by the Internal Revenue Service ("IRS") (a "Plan Account"), and $1,000 by all other methods or for all other investors. All subsequent investments must be at least $100. If you have questions regarding purchases of shares, please contact the Company at 800-222-8222, or a Shareholder Servicing Agent or Selling Agent. Set forth below is a Front-end Sales Charge Schedule listing the front-end sales charges applicable to purchases of Class A Shares of the Funds. As shown below, reductions in the rate of front-end sales charges ("Volume Discounts") are available as you purchase additional shares (other than Class B Shares). You should consider the front-end sales charge information set forth below and the other information contained in this Prospectus when making your investment decisions. The following is the Front-end Sales Charge Schedule for purchasing Class A Shares of each Fund: Class B Shares of the Funds are not subject to a front-end sales charge. However, Class B Shares which are redeemed within one, two, three or four years from the receipt of a purchase order affecting such shares will be subject to a contingent deferred sales charge equal to 3.00%, 2.00%, 1.00% and 1.00%, respectively, of the dollar amount equal to the lesser of the NAV at the time of purchase of the shares being redeemed or the NAV of such shares at the time of redemption (the "NAV Amount"). See "Investing in the Funds - Contingent Deferred Sales Charges - Class B Shares." A Selling Agent or Servicing Agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class B Shares of the same fund. If Class A Shares are purchased through a Selling Agent, Stephens reallows the portion of the front-end sales charge shown above as the Dealer Allowance. Stephens also compensates Selling Agents for sales of Class B Shares and is then reimbursed out of Rule 12b-1 Fees and contingent deferred sales charges applicable to such shares. When shares are purchased directly through the Transfer Agent and no Selling Agent is involved with the purchase, the entire sales charge is paid to Stephens. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. REDUCED SALES CHARGE - CLASS A SHARES The Volume Discounts described in the Front-end Sales Charge Schedule are available to you based on the combined dollar amount you invest in shares (other Shares) of one or more of the Company's funds which assess a front-end sales charge (the "Load Funds"). Because Class B Shares are not subject to a front-end sales charge, the amount of Class B Shares you hold is not considered in determining any Volume Discount. The Right of Accumulation allows you to combine the amount you invest in Class A Shares of a Fund with the total NAV of shares (other than Class B Shares) in any of the Load Funds to determine reduced front-end sales charges in accordance with the above Front-end Sales Charge Schedule. In addition, you also may combine the total NAV of shares (other than Class B Shares) which you currently have invested in any other mutual fund that assesses a front-end sales charge and is advised by Wells Fargo Bank and sponsored by Stephens. For example, if you own Class A Shares of the Load Funds with an aggregate NAV of $90,000 and you invest an additional $20,000 in Class A Shares of a Fund, the front-end sales charge on the additional $20,000 investment would be 3.50% of the offering price. To obtain such a discount, you must provide sufficient information at the time of your purchase to verify that your purchase qualifies for the reduced front-end sales charge. Confirmation of the order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time without prior notice with respect to all subsequent shares purchased. A Letter of Intent allows you to purchase Class A Shares of a Fund over a 13-month period at a reduced front-end sales charge based on the total amount of Class A Shares you intend to purchase plus the total NAV of shares (other than Class B Shares) in any of the Load Funds you already own. Each investment in Class A Shares that you make during the period may be made at the reduced front-end sales charge that is applicable to the total amount you intend to invest. If you do not invest the total amount within the period, you must pay the difference between the higher front-end sales charge rate that would have been applied to the purchases you made and the reduced front-end sales charge rate you have paid. The minimum initial investment for a Letter of Intent is 5% of the total amount you intend to purchase, as specified in the Letter. Shares of a Fund equal to 5% of the amount you intend to invest will be held in escrow and, if you do not pay the difference within 20 days following the mailing of a request, a sufficient amount of escrowed shares will be redeemed for payment of the additional front-end sales charge. Dividends and capital gains paid on such shares held in escrow will be reinvested in additional Fund shares. You may reinvest proceeds from a redemption of Class A Shares in Class A Shares of a Fund or shares of another of the Company's funds registered in your NAV, without a front-end sales charge, within 120 days after your redemption. However, if the other investment portfolio charges a front-end sales charge that is higher than the front-end sales charge that you have paid in connection with the Class A Shares you have redeemed, you must pay the difference between the dollar amount of the two front-end sales charges. You may reinvest at this NAV price up to the total amount of the redemption proceeds. A written purchase order for the shares must be delivered to the Company, a Selling Agent, a Shareholder Servicing Agent, or the Transfer Agent at the time of reinvestment. If you realized a gain on your redemption, your reinvestment would not alter the amount of any federal capital gains tax you pay on the gain. If you realized a loss on your redemption, your reinvestment may cause some or all of the loss to be disallowed as a tax deduction, depending on the number of shares you purchase by reinvestment and the period of time that elapses after the redemption, although for tax purposes, the amount disallowed is added to the cost of the shares you acquire upon the reinvestment. Reductions for Families or Fiduciaries Reductions in front-end sales charges apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Waivers for Investments of Proceeds From Other Investments Purchases may be made at NAV, without a front-end sales charge, to the extent that: (i) you are investing proceeds from a redemption of shares of another open-end investment company or (ii) you are investing proceeds from a redemption of units of a unit investment trust sold through Wells Fargo Securities Inc. on which you paid a front-end sales charge; (iii) such redemption occurred within thirty (30) days prior to the date of the purchase order; and (iv) such other company or trust is distributed and advised by entities other than Stephens and Wells Fargo Bank, respectively, or their affiliates. You must notify the Fund and/or the Transfer Agent at the time you place such purchase order of your eligibility for the waiver of front-end sales charges and provide satisfactory evidence thereof (e.g., a confirmation of the redemption). Reductions in front-end sales charges also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of Class A Shares purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the Investment Company Act of 1940 (the "1940 Act"), which has been in existence for more than six months and which has a primary purpose other than acquiring shares of a Fund at a reduced sales charge, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote 5% percent or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote 5% or more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Investors seeking to rely on their membership in a qualified group to purchase shares at a reduced sales load must provide evidence satisfactory to the Transfer Agent of the existence of a bona fide qualified group and their membership therein. Class A Shares of the Funds may be purchased at NAV, without a front-end sales charge, by directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and Selling Agents. Class A Shares of the Funds also may be purchased at NAV, without a front-end sales charge, by present and retired directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo Bank and its affiliates if Wells Fargo Bank and/or the respective affiliates agree. Class A Shares of such Funds also may be purchased at NAV, without a front-end sales charge, by employee benefit and thrift plans for such persons and to any investment advisory, trust or other fiduciary account, including a Plan Account, that is maintained, managed or advised by Wells Fargo Bank or its affiliates ("Fiduciary Accounts"). In addition, you may purchase Class A Shares of the Funds at NAV, without a front-end sales charge, with proceeds from a required minimum distribution from any Individual Retirement Account ("IRA"), Simplified Employee Pension Plan or other self-directed retirement plan for which Wells Fargo Bank serves as trustee, provided that the proceeds are invested in the Funds within 30 days of such distribution and such distribution is required as a result of reaching age 70 1/2. CONTINGENT DEFERRED SALES CHARGE - CLASS B SHARES Class B Shares of the Funds are not subject to front-end sales charges but may be subject to contingent deferred sales charges. Class B Shares which are redeemed within one, two, three or four years from the receipt of a purchase order for such shares will be subject to a contingent deferred sales charge equal to 3.00%, 2.00%, 1.00% and 1.00%, respectively, of the dollar amount equal to the lesser of the NAV at the time of purchase of the shares being redeemed or the NAV of such shares at the time of redemption. Contingent deferred sales charges will not be imposed on amounts representing increases in NAV above the NAV at the time of purchase and will not be assessed on Class B Shares purchased through reinvestment of dividends or capital gains distributions. Class B Shares automatically convert into Class A Shares of the same Fund six years after the end of the month in which such Class B Shares were acquired. The amount of a contingent deferred sales charge, if any, paid upon redemption of Class B Shares is determined in a manner designed to result in the lowest sales charge rate being assessed. When a redemption request is made, Class B Shares acquired pursuant to the reinvestment of dividends and capital gain distributions are considered to be redeemed first. After this, Class B Shares are considered redeemed on a first-in, first-out basis so that Class B Shares held for a longer period of time are considered redeemed prior to more recently acquired Class B Shares. For a discussion of the interaction between the optional Exchange Privilege and contingent deferred sales charges on Class B Shares, see "Additional Shareholder Services - Exchange Privilege." Contingent deferred sales charges are waived on redemptions of Class B Shares of a Fund (i) following the death or disability (as defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a shareholder, (ii) to the extent that the redemption represents a minimum required distribution from an individual retirement account or other retirement plan to a shareholder who has reached age 70 1/2, (iii) effected pursuant to the Company's right to liquidate a shareholder's account if the aggregate net asset value of the shareholder's account is less than the minimum account size, or (iv) in connection with the combination of the Company with any other registered investment company by a merger, acquisition of assets, or by any other transaction. In deciding whether to purchase Class A or Class B Shares, you should compare the fees assessed on Class A Shares (including front-end sales charges) against those assessed on Class B Shares (including potential contingent deferred sales charges and higher Rule 12b-1 Fees than Class A Shares) in light of the amount to be invested and the anticipated time that the shares will be owned. You may buy shares of the Funds on any Business Day by any of the methods described below. 1. Complete an Account Application. 2. Instruct the wiring bank to transmit the specified amount in federal funds to: Wire Purchase Account Number: 4068-000587 Attention: Stagecoach Funds (Name of Fund) (designate Class A or B) Account Name(s): Name(s) in which to be registered Account Number: (if investing into an existing account) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price or, in the case of Class B Shares, at the NAV next determined after the Account Application is received and accepted. 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $1,000 or more payable to "Stagecoach Funds (Name of Fund) (designate Class A or B)," to the address set forth in "Initial Purchases by Wire." 3. Share purchases are effected at the public offering price or, in the case of Class B Shares, at the NAV next determined after the Account Application is received and accepted. The Company's AutoSaver Plan provides you with a convenient way to establish and automatically add to a Fund account on a monthly basis. To participate in the AutoSaver Plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from an account with a bank, which is designated in your Account Application and which is approved by the Transfer Agent ("Approved Bank"). Wells Fargo Bank is an Approved Bank. The Transfer Agent withdraws and uses this amount to purchase specified Fund shares on your behalf on or about the fifth Business Day of each month. There are no separate fees charged to you by the Funds for participating in the AutoSaver Plan. You may change your investment amount, suspend purchases or terminate your election at any time by providing notice to the Transfer Agent at least five Business Days prior to any scheduled transaction. You may be entitled to invest in the Funds through a Plan Account or other tax-deferred retirement plan. Contact a Shareholder Servicing Agent or a Selling as Wells Fargo Bank) for materials describing Plan Accounts available through it, and the benefits, provisions, and fees of such Plan Accounts. The minimum initial investment amount for Fund shares acquired through a Plan Account is $250. Pursuant to the Code, individuals who are not active participants (and who do not have a spouse who is an active participant) in certain types of retirement plans ("qualified retirement plans") may deduct contributions to an IRA, up to specified limits. Investment earnings in the IRA will be tax-deferred until withdrawn, at which time the individual may be in a lower tax bracket. The maximum annual deductible contribution to an IRA for individuals under age 70 1/2 is 100% of includible compensation up to a maximum of (i) $2,000 for single individuals; (ii) $4,000 for a married couple when both spouses earn income; and (iii) $2,250 when one spouse earns, or elects for IRA purposes to be treated as earning, no income (together the "IRA contribution limits"). The IRA deduction is also available for single individual taxpayers and married couples who are active participants in qualified retirement plans but who have adjusted gross incomes which do not exceed certain specified limits. If their adjusted gross income exceeds these limits, the amount of the deductible contribution may be phased down and eventually eliminated. Any individual who works may make nondeductible contributions to an IRA in addition to any deductible contributions. Total aggregate deductible and nondeductible contributions are limited to the IRA contribution limits discussed above. Nondeductible contributions in excess of the applicable IRA contribution limit are "nondeductible excess contributions." In addition, contributions made to an IRA for the year in which an individual attains the age of 70 1/2, or any year thereafter, are also nondeductible excess contributions. Nondeductible excess contributions are subject to a 6% excise tax penalty which is charged each year that the nondeductible excess contribution remains in the IRA. An employer also may contribute to an individual's IRA by establishing a Simplified Employee Pension Plan through a Shareholder Servicing Agent or a Selling Agent, known as a SEP-IRA. Participating employers may make an annual contribution in an amount up to the lesser of 15% of earned income or $30,000, subject to certain provisions of the Code. Investment earnings will be tax-deferred until withdrawn. The foregoing discussion regarding IRAs is based on the Code and regulations in effect as of the date of this Prospectus and summarizes only some of the important federal tax considerations generally affecting IRA contributions made by individuals or their employers. It is not intended as a substitute for careful tax planning. Investors should consult their tax advisors with respect to their specific tax situations as well as with respect to state and local taxes. Further federal tax information is contained under the heading "Taxes" in this Prospectus and in the SAI for each Fund. A Shareholder Servicing Agent or Selling Agent also may offer other types of tax-deferred or tax-advantaged plans, including a Keogh retirement plan for self-employed professional persons, sole proprietors and partnerships. Application materials for opening a tax-deferred retirement plan can be obtained from a Shareholder Servicing Agent or a Selling Agent. Return your completed tax-deferred retirement plan application to your Shareholder Servicing Agent or a Selling Agent for approval and processing. If your tax-deferred retirement plan application is incomplete or improperly filled out, there may be a delay before a Fund account is opened. You should ask your Shareholder Servicing Agent or Selling Agent about the investment options available to your tax-deferred retirement plan, since some of the funds in the Stagecoach Family of Funds may be unavailable as options. Moreover, certain features described herein, such as the AutoSaver Plan and the Systematic Withdrawal Plan, may not be available to individuals or entities who invest through a tax-deferred retirement plan. You may make additional purchases of $100 or more by instructing the Funds' Transfer Agent to debit an Approved Bank account designated in your Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Stagecoach Funds (Name of Fund) (designate Class A or B)" to the address set forth under "Initial Purchases by Wire." Write your Fund account number on the check and include the detachable stub from your Statement of Account or a letter providing your Fund account number. You may place a purchase order for shares of the Funds through a broker/dealer or financial institution which has entered into a Selling Agreement with Stephens, as the Funds' Distributor ("Selling Agent"). If your order is placed by the close of the NYSE, the purchase order generally will be executed on the same day if the order is received by the Transfer Agent before the close of business. If your purchase order is received by a Selling Agent after the close of the NYSE or by the Transfer Agent after the close of business, then your purchase order will be executed on the next Business Day following the day your order is placed. The Selling Agent is responsible for the prompt transmission of your purchase order to the Funds. Because payment for shares of the Funds will not be due until settlement date, the Selling Agent might benefit from the temporary use of your payment. A financial institution which acts as a Selling Agent, Shareholder Servicing Agent or in certain other capacities may be required to register as a dealer pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. PURCHASES THROUGH SHAREHOLDER SERVICING AGENTS Purchase orders for shares of the Funds may be transmitted to the Transfer Agent through any entity that has entered into a Shareholder Servicing Agreement with the Funds ("Shareholder Servicing Agent"), such as Wells Fargo Bank. See "Management and Servicing Fees - Shareholder Servicing Agent." The Shareholder Servicing Agent may transmit a purchase order to the Transfer Agent, on your behalf, including a purchase order for which payment is to be transferred from an account with an Approved Bank or wired from a financial institution. If your order is transmitted by the Shareholder Servicing Agent, on your behalf, to the Transfer Agent before the close of the NYSE, the purchase order generally will be executed on the same day. If your Shareholder Servicing Agent transmits your purchase order to the Transfer Agent after the close of the NYSE, then your order will be executed on the next Business Day following the day your order is received. The Shareholder Servicing Agent is responsible for the prompt transmission of your purchase order to the Transfer Agent. The Funds, or a Shareholder Servicing Agent on their behalf, will typically send you a confirmation or statement of your account after every transaction that affects your share balance or your Fund account registration. The Funds do not issue share certificates. A statement with tax information will be mailed to you by January 31 of each year, and also will be filed with the IRS. At least twice a year, you will receive financial statements. The Funds intend to declare quarterly dividends of substantially all of their net investment income. The Funds will distribute any capital gains at least annually. You have several options for receiving dividends and capital gain distributions. They are discussed under "Additional Shareholder Services - Dividend and Distribution Options." Dividends and capital gain distributions have the effect of reducing the NAV per share by the amount distributed. Although a distribution paid to you on newly issued shares shortly after your purchase would represent, in substance, a return of your capital, the distribution would consist of net investment income and, accordingly, would be taxable to you as ordinary income. Net investment income available for distribution to the holders of Class B Shares is reduced by the amount of the higher Rule 12b-1 Fee payable on such shares. Other expenses, such as state securities registration fees and transfer attributable to a particular class also may affect the relative dividends and/or capital gains distributions of Class A and Class B Shares. You may redeem all or a portion of your shares in a Fund on any Business Day. Your shares will be redeemed at the next NAV calculated after the Funds have received your redemption request in proper form. Redemption proceeds may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. The Funds ordinarily remit redemption proceeds, net of any contingent deferred sales charge applicable with respect to Class B Shares (the "net redemption proceeds"), within seven days after your redemption order is received in proper form, unless the SEC permits a longer period under extraordinary circumstances. Such extraordinary circumstances could include a period during which an emergency exists as a result of which (a) disposal by a Fund of securities owned by it is not reasonably practicable or (b) it is not reasonably practicable for a Fund fairly to determine the value of its net assets, or a period during which the SEC by order permits deferral of redemptions for the protection of security holders of such Fund. In addition, a Fund may hold payment on your redemptions until reasonably satisfied that your investments made by check have been collected (which can take up to 15 days from the purchase date). To ensure acceptance of your redemption request, please follow the procedures described below. Although it is not the Funds' current intention, the Funds may make payment of redemption proceeds in securities if conditions warrant, subject to regulation by some state securities commissions. In addition, the Funds reserve the right to impose charges for wiring redemption proceeds. Due to the high cost of maintaining Fund accounts with small balances, the Funds reserve the right to close your account and send you the proceeds if the balance falls below the applicable minimum balance because of a redemption (including a redemption of shares of a Fund after an investor has made only the applicable minimum initial investment). However, you will be given 30 days' notice to make an additional investment to increase your account balance to $1,000 or more. Plan Accounts are not subject to minimum Fund account balance requirements. For a discussion of applicable minimum balance requirements, see "Investing in the Funds -- How To Buy Shares." Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you specifically decline the privileges. Telephone redemption privileges authorize the Transfer Agent to act from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Company and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. 1. Write a letter of instruction. Indicate the Class and the dollar amount or number of Fund shares you want to redeem. Refer to your Fund account number and give your social security or taxpayer identification number (where applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. Signature guarantees are not required for redemption requests unless redemption proceeds of $5,000 or more are to be paid to someone other than yourself at your address of record or your designated Approved Bank account, or other unusual circumstances exist which cause the Transfer Agent to determine that a signature guarantee is necessary or prudent to protect against unauthorized redemption requests. If required, a signature must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is an FDIC member, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation may be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. Mail your letter to the Transfer Agent at the mailing address set forth under "Investing in the Funds - Initial Purchases by Wire." Unless other instructions are given in proper form, a check for your net redemption proceeds will be sent to your address of record. EXPEDITED REDEMPTIONS BY MAIL OR TELEPHONE You may request an expedited redemption of shares of a Fund by letter, in which case your receipt of redemption proceeds, but not the Fund's receipt of your redemption request, would be expedited. In addition, you also may request an expedited redemption of shares of a Fund by telephone on any Business Day, in which case both your receipt of redemption proceeds and the Fund's receipt of your redemption request would be expedited. You may request expedited redemption by telephone only if the total value of the shares redeemed is $100 or more. You may request expedited redemption by telephone by calling the Transfer Agent at the telephone number listed on your transaction confirmation or by calling 800-222-8222. You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Investing in the Funds - Initial Purchases by Wire." Upon request, net redemption proceeds of your expedited redemptions of $5,000 or more will be wired or credited to an Approved Bank account designated in your Account Application or wired to the Selling Agent designated in your Account Application. The Company reserves the right to impose a charge for wiring redemption proceeds. When proceeds of your expedited redemption are to be paid to someone else, to an address other than that of record, or to an account with an Approved Bank or Selling Agent that you have not predesignated in your Account Application, your expedited redemption request must be made by letter and the signature(s) on the letter may be required to be guaranteed, regardless of the amount of the redemption. If your expedited redemption request is received by the Transfer Agent by the close of the NYSE on a Business Day, your redemption proceeds will be transmitted to your designated account with an Approved Bank or Selling Agent on the next Business Day (assuming your investment check has cleared as described above), absent extraordinary circumstances. Such extraordinary circumstances could include those described above as potentially delaying redemptions, and also could include situations involving an unusually heavy volume of wire transfer orders on a national or regional basis or communication or transmittal delays that could cause a brief delay in the wiring or crediting of funds. A check for net redemption proceeds will be mailed to your address of record or, at your election, credited to an Approved Bank account designated in your Account Application. During periods of drastic economic or market activity or changes, you may experience problems implementing an expedited redemption by telephone. In the event you are unable to reach the Transfer Agent by telephone, you should consider using overnight mail to implement an expedited redemption. The Funds reserve the right to modify or terminate the expedited telephone redemption privilege at any time. The Company's Systematic Withdrawal Plan provides you with a convenient way to have shares of a Fund redeemed from your account and the net redemption proceeds distributed to you on a monthly basis. You may participate in the Systematic Withdrawal Plan only if you have a Fund account valued at $10,000 or more as of the date of your election to participate, your dividends and capital gain distributions are being reinvested automatically and you are not participating in the AutoSaver Plan at any time while participating in the Systematic Withdrawal Plan. You specify an amount ($100 or more) to be distributed by check to your address of record or deposited in your Approved Bank account designated in the Account Application. The Transfer Agent redeems sufficient shares and mails or deposits your net redemption proceeds as instructed on or about the fifth Business Day prior to the end of each month. There are no separate fees charged to you by the Funds for participating in the Systematic Withdrawal Plan. However, you should not participate in the Systematic Withdrawal Plan if you also are purchasing shares of the same Fund that are subject to a sales charge. You may change your withdrawal amount, suspend withdrawals or terminate your election at any time by notifying the Transfer Agent at least ten Business Days prior to any scheduled transaction. Your participation in the Systematic Withdrawal Plan will be terminated automatically if your Fund account is closed, or, in some cases, if your Approved Bank account is closed. If your redemption order is received by a Selling Agent before the close of the NYSE and received by the Transfer Agent before the close of business on the same day, the order will be executed at the NAV determined as of the close of the NYSE on that day. If your redemption order is received by a Selling Agent after the close of the NYSE, or not received by the Transfer Agent prior to the close of business, your order will be executed at the NAV determined as of the close of the NYSE on the next Business Day. The Selling Agent is responsible for the prompt transmission of your redemption order to the Funds. Unless you have made other arrangements with the Selling Agent, and the Transfer Agent has been informed of such arrangements, net redemption proceeds of a redemption order made by you through a Selling Agent will be credited to an account with an Approved Bank that you have designated in your Account Application. If no such account is designated, a check for the net redemption proceeds will be mailed to your address of record or, if such address is no longer valid, the net proceeds will be credited to your account with the Selling Agent. You may request a check from the Selling Agent or may elect to retain the net redemption proceeds in such account. The Selling Agent may charge you a service fee. In addition, it may benefit from the use of your redemption proceeds until the check it issues to you has cleared or until such proceeds have been disbursed or reinvested on your behalf. REDEMPTIONS THROUGH SHAREHOLDER SERVICING AGENTS You may request a redemption of shares of a Fund through your Shareholder Servicing Agent. Any redemption request made by telephone through your Shareholder Servicing Agent must redeem shares with a total value equal to $100 or more. If your redemption order is transmitted by the Shareholder Servicing Agent, on your behalf, to the Transfer Agent before the close of the NYSE, the redemption order will be executed at the NAV determined as of the close of the NYSE on that day. If your Shareholder Servicing Agent transmits your redemption order to the Transfer Agent after the close of the NYSE, then your order will be executed on the next Business Day following the date your order is received. The Shareholder Servicing Agent is responsible for the prompt transmission of your redemption order to the Funds. Unless you have made other arrangements with your Shareholder Servicing Agent, and the Transfer Agent has been informed of such arrangements, net redemption proceeds of a redemption order made by you through your Shareholder Servicing Agent will be credited to an account with the Approved Bank that you have designated in the Account Application. If no such account is designated, a check for the net redemption proceeds will be mailed to your address of record or, if such address is no longer valid, the net redemption proceeds will be credited to your account with your Shareholder Servicing Agent or to another account designated in your agreement with your Shareholder Servicing Agent. The Company offers you a number of optional services. As noted above, you can take advantage of the AutoSaver Plan, Tax-Deferred Retirement Plans, the Systematic Withdrawal Plan, and Expedited Redemptions by Letter and Telephone. In addition, the Funds offer you several dividend and distribution payment options and an exchange privilege, which are described below. When you fill out your Account Application, you can choose from the following dividend and distribution options: A. The Automatic Reinvestment Option provides for the reinvestment of your dividends and capital gain distributions in additional shares of the same Class of the Fund which paid such dividends or capital gain distributions. Dividends and distributions declared in a month generally are reinvested in additional shares at NAV on the last business day of such month. You are assigned this option automatically if you make no choice on your Account Application. B. The Fund Purchase Option lets you use your dividends and/or capital gain distributions from the Funds to purchase, at NAV, shares of another fund in the Stagecoach Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. Dividends and distributions paid on Class A or Class B Shares may be invested in Class A or Class B Shares, respectively, of another fund, in Retail Shares of another fund, in Class A Shares of the Money Market Mutual Fund or in shares of the California Tax-Free Money Market Mutual Fund (the California Tax-Free Money Market Mutual Fund and the Money Market Mutual Fund are, collectively the "Money Market Mutual Funds"). Dividends and distributions paid on Class A Shares may also be invested in shares of a non-money market fund with a single class of shares (a "single class fund"). Dividends and distributions paid on Class B Shares may not be invested in shares of a single class fund. C. The Automatic Clearing House Option permits you to have dividends and capital gain distributions deposited in your Approved Bank account designated in the Account Application. In the event your Approved Bank account is closed, your distribution will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf. D. The Check Payment Option lets you receive a check for all dividends and capital gain distributions, which generally is mailed either to your designated address or your designated Approved Bank shortly following declaration. If the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, your distributions will be held in a non-interest-bearing omnibus bank account established by the Funds' dividend disbursing agent on your behalf. Wells Fargo Bank advises a variety of other funds, each with its own investment objective and policies. The exchange privilege is a convenient way to buy shares in the other funds of the Stagecoach Family of Funds that are registered in your state of residence, and allows you to respond to changes in your investment and savings goals or in market conditions. Class A and Class B Shares of each Fund may be exchanged for Class A and Class B Shares, respectively, of another fund, for Class A Shares of the Money Market Mutual Fund or for shares of the California Tax-Free Money Market Mutual Fund. Class A Shares may also be exchanged for shares of a single class fund or for Retail Shares of another fund. Before making an exchange from a Fund into another fund of the Stagecoach Family of Funds, please observe the following: - Obtain and carefully read the prospectus of the fund into which you want to exchange. - If you exchange into another fund with a front-end sales charge, you must pay the difference between that fund's sales charge and any sales charge you already have paid in connection with the shares you are exchanging. - If you exchange Class B Shares for Class B Shares of another fund, for Class A Shares of the Money Market Mutual Fund or for shares of the California Tax-Free Money Market Mutual Fund, a contingent deferred sales charge will not be imposed upon the exchange. - Each exchange, in effect, represents the redemption of shares of one fund and the purchase of shares of another, which may produce a gain or loss for tax purposes. A confirmation of each exchange transaction will be sent to you. - The dollar amount of shares you exchange must meet the minimum initial and/or subsequent investment amounts of the other fund. - The Company reserves the right to limit the number of times shares may be exchanged between funds, to reject any telephone exchange order, or otherwise to modify or discontinue exchange privileges at any time. Under SEC rules, subject to limited exceptions, the Company must notify you 60 days before it modifies or discontinues the exchange privilege. - If you exchange Class B Shares for Class B Shares of another fund, for Class A Shares of the Money Market Mutual Fund or for shares of the California Tax-Free Money Market Mutual Fund, the remaining period of time (if any) that the contingent deferred sales charge applicable to such shares is in effect will be computed from the time of initial purchase of the previously held shares. For example, if you exchange Class B Shares of a Fund for shares of the California Tax-Free Money Market Mutual Fund and redeem those shares of the California Tax-Free Money Market Mutual Fund within four years of the purchase of the exchanged Class B Shares, you will be required to pay a contingent deferred sales charge equal to the charge which would have applied had you redeemed the original Class B Shares at that time. - If you exchange Class B Shares for shares of one of the Money Market Mutual Funds as described above, you subsequently may re-exchange the acquired shares only for Class B Shares of one of the Company's funds or for shares of the other Money Market Mutual Fund. The procedures applicable to Fund share redemptions also apply to Fund share exchanges. To exchange shares, write the Transfer Agent at the mailing address under "Investing in the Funds - Initial Purchases by Wire" or (if you have authorized telephone exchanges) call the Transfer Agent at the telephone number listed on your transaction confirmation, or contact your Shareholder Servicing Agent or Selling Agent. The procedures applicable to telephone redemptions, including the discussion regarding the responsibility for the authenticity of telephone instructions, are also applicable to telephone exchange requests. See "How to Redeem Shares - Expedited Redemptions by Letter and Telephone." Class B Shares of a Fund that have been outstanding for six years after the end of the month in which the shares were initially purchased will automatically Shares of such Fund and, consequently, will no longer be subject to the higher Rule 12b-1 Fees applicable to Class B Shares. Such conversion will be on the basis of the relative NAV of the two Classes, without the imposition of any sales charge or other charge except that the lower Rule 12b-1 Fees applicable to Class A Shares shall thereafter be applied to such converted shares. Because the per share NAV of the Class A Shares may be higher than that of the Class B Shares at the time of conversion, a shareholder may receive fewer Class A Shares than the number of Class B Shares converted, although the dollar value will be the same. Reinvestments of dividends and distributions in Class B Shares will be considered new purchases for purposes of the conversion feature. If a shareholder effects one or more exchanges among Class B Shares, Class A Shares of the Money Market Mutual Fund or shares of the California Tax-Free Money Market Mutual Fund during the six-year period, and exchanges back into Class B Shares, the holding period for shares so exchanged will be counted toward the six-year period and any Class B Shares held at the end of six years will be converted into Class A Shares. Subject to the overall supervision of the Company's Board of Directors, Wells Fargo Bank, as the Funds' investment adviser, provides investment guidance and policy direction in connection with the management of the Funds' assets. Wells Fargo Bank also furnishes the Board of Directors with periodic reports on the Funds' investment strategy and performance. For these services, Wells Fargo Bank is entitled to a monthly investment advisory fee at the annual rate of 0.50% of the Diversified Income Fund's average daily net assets; and 0.50% of the first $250 million of the Growth and Income Fund's average daily net assets, 0.40% of the next $250 million, and 0.30% of the Growth and Income Fund's average daily net assets in excess of $500 million. From time to time, Wells Fargo Bank may waive such fees in whole or in part. Any such waiver will reduce expenses of the Funds, and, accordingly, have a favorable impact on the Funds' yield and total return. From time to time, each of the Funds, consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For the year ended December 31, 1994, the Company paid 0.50% and 0.50% of the average daily net assets of the Diversified Income Fund and the Growth and Income Fund, respectively, to Wells Fargo Bank as compensation for its services as investment adviser. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank serves as each Fund's custodian and transfer and dividend disbursing agent. Pursuant to separate Custody Agreements with Wells Fargo Bank, each Fund may, at times, borrow money from Wells Fargo Bank as needed to satisfy temporary liquidity needs. Wells Fargo Bank charges interest on such overdrafts at a rate determined pursuant to each Fund's Custody Agreement. The transfer and dividend disbursing agency activities are performed at 525 Market Street, San Francisco, California 94163. The Funds have entered into Shareholder Servicing Agreements with Wells Fargo Bank on behalf of each Class of the Funds, and may enter into similar agreements with other entities. Under such agreements, Shareholder Servicing Agents (including Wells Fargo Bank) will, as agent for their customers, among other things: answer customer inquiries regarding account status and history, and the manner in which purchases, redemptions and exchanges of Fund shares may be effected; assist shareholders in designating and changing dividend options, account designations and addresses; provide necessary personnel and facilities to establish and maintain shareholder accounts and records; assist in processing purchase, redemption and exchange transactions; arrange for the wiring of money; transfer money in connection with customer orders to purchase or redeem shares; verify shareholder signatures in connection with redemption and exchange orders and transfers and changes in accounts with Approved Banks; furnish (either separately or on an integrated basis with other reports sent to a shareholder by the Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases, redemptions and exchanges; furnish, on behalf of each of the Funds, proxy statements, annual reports, updated prospectuses and other communications to shareholders; receive, tabulate and send to the Funds proxies executed by shareholders; and provide such other related services as the Funds or a shareholder may reasonably request. For these services, a Shareholder Servicing Agent receives a fee, which may be paid periodically, determined by a formula based upon the number of accounts serviced by the Shareholder Servicing Agent during the period for which payment is being made, the level of activity in such accounts during such period and the expenses incurred by the Shareholder Servicing Agent. In no event will the shareholder servicing fees charged to each Class, as calculated on an annualized basis for each Fund's then current fiscal year, exceed the lesser of (1) 0.30% of the average daily net assets attributable to Class A or Class B Shares, as the case may be, owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the Rules of Fair Practice of the NASD ("NASD Rules"). In no event will the portion of such fees that constitutes a "service fee," as that term is used by the NASD, exceed 0.25% of the average net asset value attributable to the Class A and Class B Shares of each Fund. Shareholder Servicing Agents also may impose certain conditions on their customers, subject to the terms of this Prospectus, in addition to or different from those imposed by the Funds, such as requiring a higher minimum initial investment or payment of a separate fee for additional services. Each Shareholder Servicing Agent will be required to agree to disclose any fees it may directly charge its customers who are shareholders of a Fund and to notify them in writing at least 30 days before it imposes any transaction fees. Subject to the overall supervision of the Company's Board of Directors, Stephens provides the Funds with administrative services, including general supervision of each Fund's operation, coordination of the other services provided to each Fund, compilation of information for reports to the SEC and the state securities commissions, preparation of proxy statements and shareholder reports, and general supervision of data compilation in connection with preparing periodic reports to the Company's Directors and officers. Stephens also furnishes office space and certain facilities to conduct each Fund's business, and compensates the Company's Directors, officers and employees who are affiliated with Stephens. For these services, Stephens is entitled to receive from each Fund a monthly fee at the annual rate of 0.03% of each Fund's average daily net assets. From time to time, Stephens may waive its fees from a Fund in whole or in part. Any such waiver will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield and total return. Stephens, as the principal underwriter of the Funds within the meaning of the 1940 Act, has entered into a Distribution Agreement with the Company pursuant to which Stephens is responsible for distributing Class A and Class B Shares of the Funds. The Company also has adopted a Distribution Plan on behalf of each Class of shares of the Funds under the SEC's Rule 12b-1 ("Plans"). Under the Class A Plan for each Fund, each Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective Class A shareholders paying on an annual basis up to 0.05% of the average daily net assets attributable to the Class A Shares. The Class A Plans provide only for the reimbursement of actual expenses. Under the Class B Plans, each Fund may defray all or part of such costs and pay compensation to the Distributor and Selling Agents for sales support services. The Class B Plans provide for payments, on an annual basis, of up to 0.70% of the average daily net assets attributable to the Class B Shares of each Fund. The Distribution Agreement provides that Stephens shall act as agent for the Funds for the sale of their shares, and may enter into Selling Agreements with Selling Agents that wish to make available shares of the Funds to their respective customers. The Funds may participate in joint distribution activities with any of the other funds of the Company, in which event, expenses reimbursed out of the assets of the Funds may be attributable, in part, to the distribution-related activities of another fund of the Company. Generally, the expenses attributable to joint distribution activities will be allocated among and the other funds of the Company in proportion to their relative net asset sizes, although the Company's Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. In addition, the Plans contemplate that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed above) are deemed to be for distribution-related services, such payments are approved and payable pursuant to the Plans, subject to any limits under applicable law, regulations or rules, including the NASD Rules. Financial institutions acting as Selling Agents, Shareholder Servicing Agents or in certain other capacities may be required to register as dealers pursuant to applicable state securities laws which may differ from federal law and any interpretations expressed herein. From time to time, Wells Fargo Bank and Stephens may waive their respective fees in whole or in part and reimburse expenses payable to others. Any such waivers or reimbursements will reduce a Fund's expenses and, accordingly, have a favorable impact on such Fund's yield and total return. Except for the expenses borne by Wells Fargo Bank and Stephens, the Company bears all costs of its operations, including advisory, shareholder servicing, transfer agency, custody and administration fees, payments pursuant to any Plans, fees and expenses of its independent auditors and legal counsel, and any extraordinary expenses. Expenses attributable to each Fund or Class are charged against the assets of the Fund or Class. General expenses of the Company are allocated among all of the funds of the Company, including the Funds, in a manner proportionate to the net assets of each fund, on a transactional basis, or on such other basis as the Company's Board of Directors deems equitable. By complying with the applicable provisions of the Code, the Funds will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to their shareholders. Dividends from investment income (including net short-term capital gains, if any) declared and paid by each Fund will be taxable as ordinary income to a Fund's shareholders. Whether you take such dividend payments in cash or have them automatically reinvested in additional shares, they will be taxable as ordinary income. Generally, dividends and distributions are taxable to shareholders at the time they are paid. However, dividends and distributions declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that dividends or distributions are actually paid no later than January 31 of the following year. You may be eligible to defer the taxation of dividend and capital gain distributions on shares of a Fund which are held under a qualified tax-deferred retirement plan. See "Investing in the Funds - Tax-Deferred Retirement Plans" above. The Funds intend to pay out substantially all their net investment income and net realized capital gains (if any) for each year. Corporate shareholders of the Funds may be eligible for the dividends-received deduction on the dividends (excluding the net capital gains dividends) paid by a Fund to the extent the Fund's income is derived from certain dividends received from domestic corporations. In order to qualify for the dividends-received deduction a corporate shareholder must hold shares of the Fund paying the dividends upon which such deduction is based for at least 46 days. Portions of each Fund's investment income may be subject to foreign taxes withheld at the source; however, neither Fund will be able to pass through any portion of the foreign taxes to its shareholders. The Funds, or your Shareholder Servicing Agent on their behalf, will inform you of the amount and nature of such dividends and capital gains. You should keep all statements you receive to assist in your personal record keeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Funds if a correct taxpayer identification number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in each Fund's SAI. Further federal tax considerations are discussed in the SAIs. All investors should consult their individual tax advisors with respect to their particular tax situations as well as the state and local tax status of investments in shares of the Funds. From time to time, for temporary defensive purposes, the Funds may hold assets in cash or make short-term investments, to the extent appropriate, to maintain adequate liquidity for redemption requests or other cash management needs or for temporary defensive purposes. The short-term investments that the Funds may purchase for liquidity purposes include: U.S. Treasury bills, shares of other mutual funds and repurchase agreements (as discussed below). Other permissible investments include: (i) obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises) ("U.S. Government obligations"); (ii) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; (iii) commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of comparable quality as determined by Wells Fargo Bank, as investment adviser; and (iv) short-term, U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that, at the time of investment: (a) have more than $10 billion, or the equivalent in other currencies, in total assets; (b) are among the 75 largest foreign banks in the world as determined on the basis of assets; (c) have branches or agencies in the United States; and (d) in the opinion of Wells Fargo Bank, as investment adviser, are of comparable quality to obligations of U.S. banks which may be purchased by the Fund. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. The Funds may invest a portion of their assets (generally, no more than 35% of the Diversified Income Fund, and generally no more than 10%, but in no event more than 25%, of the Growth and Income Fund) in securities of foreign governmental and private issuers that are denominated in and pay interest in U.S. dollars. Investments in foreign securities involve certain considerations that are not typically associated with investing in domestic securities. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not generally subject to the same accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic developments that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries. Certain of the debt instruments that the Funds may purchase bear interest at rates that are not fixed, but vary, for example with, changes in specified market rates or indices or specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. Wells Fargo Bank, as investment adviser, will monitor on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the date a Fund elects to demand payment and the date payment is due. Such events may affect the ability of the issuer of the instrument to make payment when due, thereby affecting a Fund's ability to obtain payment at par, except when such demand instruments permit same-day settlement. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The Funds may enter into repurchase agreements wherein the seller of a security to a Fund agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Funds may enter into repurchase agreements only with respect to U.S. Government obligations and other obligations that could otherwise be purchased by the Funds. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction entered into by the Funds may be greater than one year. If the seller defaults and the value of the underlying securities has declined, a Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, a Fund's disposition of the security may be delayed or limited. The Funds will enter into repurchase agreements only with registered broker/dealers and commercial banks that meet guidelines established by the Company's Board of Directors and are not affiliated with the Funds' investment adviser. The Funds may participate in pooled repurchase agreement transactions with other Funds advised by Wells Fargo Bank. The Funds may lend securities from their portfolios to brokers, dealers and financial institutions (but not individuals) if cash, U.S. Government obligations or other high-quality debt instruments equal to at least 100% of the current market value of the securities loan (including accrued interest thereon) plus the interest payable to a Fund with respect to the loan is maintained with the Fund. In determining whether to lend a security to a particular broker, dealer or financial institution, a Fund's investment adviser will consider all relevant facts and circumstances, including the creditworthiness of the broker, dealer or financial institution. Any loans of portfolio securities will be fully collateralized based on values that are marked to market daily. The Funds will not enter into any portfolio security lending arrangement having a duration of longer than one year. Any securities that a Fund may receive as collateral will not become part of the Fund's portfolio at the time of the loan and, in the event of a default by the borrower, the Fund, if permitted by law, will dispose of such collateral except for such part thereof that is a security in which the Fund is permitted to invest. During the time securities are on loan, the borrower will pay a Fund any accrued income on those securities, and the Fund may invest the cash collateral and earn additional income or receive an agreed-upon fee from a borrower that has delivered cash-equivalent collateral. Neither Fund will lend securities having a value that exceeds one-third of the current value of its total assets. Loans of securities by a Fund will be subject to termination at the Fund's or the borrower's option. The Funds may pay reasonable administrative and custodial fees in connection with a securities loan and may pay a negotiated portion of the interest or fee earned with respect to the collateral to the borrower or the placing broker. Borrowers and placing brokers may not be affiliated, directly or indirectly, with the Company, the investment adviser, or the Distributor. The Funds may invest in shares of other open-end, management investment companies, subject to the limitations of Section 12(d)(1) of the 1940 Act, provided that any such purchases will be limited to temporary investments in shares of unaffiliated investment companies and the Investment Adviser will waive its advisory fees for that portion of the Fund's assets so invested, except when such purchase is part of a plan of merger, consolidation, reorganization or acquisition. Notwithstanding any other investment policy or limitation (whether or not fundamental), as a matter of fundamental policy, the Diversified Income Fund may invest all of its assets in the securities of a single open-end, management investment company with substantially the same fundamental investment objective, policies and limitations as the Fund. Subject to the limitations of the 1940 Act, the Funds may purchase shares of exchange-listed, closed-end funds consistent with pursuing their investment objectives. Each Fund's investment objective, as set forth in "How the Funds Work - Investment Objectives and Policies," is fundamental; that is, it may not be changed without approval by the vote of the holders of a majority of a Fund's outstanding voting securities, as described under "Capital Stock" in the SAI for each Fund. If the Board of Directors determines, however, that a Fund's investment objective can best be achieved by a substantive change in a nonfundamental investment policy or strategy, the Company may make such change without shareholder approval and will disclose any such material changes in the then-current Prospectus. As matters of fundamental policy: (i) the Funds may not purchase securities of any issuer (except U.S. Government obligations) if as a result, more than 5% of the value of a Fund's total assets would be invested in the securities of such issuer or a Fund would own more than 10% of the outstanding voting securities of such issuer; (ii) each Fund may borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased by a Fund while any such outstanding borrowings exceed 5% of the Fund's net assets); (iii) each Fund may make loans of portfolio securities in accordance with its investment policies; and (iv) each Fund may not invest 25% or more of its assets (i.e., concentrate) in any particular industry, except that a Fund may invest 25% or more of its assets in U.S. Government obligations. With respect to fundamental investment policy (i) above, the Diversified Income Fund is subject to this restriction only with respect to 75% of the Fund's assets, and, with regard to both Funds, it may be possible that the Company would own more than 10% of the outstanding voting securities of the issuer. With respect to fundamental investment policy (iii) above, the Diversified Income Fund does not intend to make loans of its portfolio securities during the coming year. As a matter of nonfundamental policy, the Funds each may invest up to 10% of the current value of its net assets in illiquid securities. For this purpose, illiquid securities include, among others, (a) securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale, (b) fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days and (c) repurchase agreements not terminable within seven days. THIS PAGE INTENTIONALLY LEFT BLANK For more information about the Funds, simply call 1-800-222-8222, or write: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF STAGECOACH FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. P R O S P E C T U S MONEY MARKET MUTUAL FUND -- CLASS S SHARES Stagecoach Funds, Inc. ("Stagecoach Funds" or the "Company") is an open-end investment company consisting of several separate funds, each with different investment objectives and policies. This Prospectus contains information about one class of shares of a fund in the Stagecoach Family of Funds -- the CLASS S SHARES of the MONEY MARKET MUTUAL FUND (the "Fund"). The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. Currently, Class S Shares are available only to qualified business investors who purchase such shares through a Managed Sweep Account (sometimes, an "Account") offered by Wells Fargo Bank, N.A. ("Wells Fargo Bank"). A Managed Sweep Account combines a non-interest bearing Wells Fargo Bank deposit account with a daily sweep of balances to or from the Fund's Class S Shares. Persons investing in Class S Shares through a Managed Sweep Account also receive a Business Account Agreement and Disclosure Statement (the "Disclosure Statement") describing the various features and operations of the Account. The Disclosure Statement should be reviewed in conjunction with this Prospectus. AN INVESTMENT IN THE FUND, THROUGH A MANAGED SWEEP ACCOUNT OR OTHERWISE, IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A CONSTANT $1.00 NET ASSET VALUE PER SHARE. Please read this Prospectus before investing and retain it for future reference. It sets forth concisely the information about the Fund and Class S Shares that an investor should know before investing. A Statement of Additional Information (the "SAI"), dated May 1, 1995, for the Money Market Mutual Fund has been filed with the Securities and Exchange Commission (the "SEC") and is incorporated by reference. The SAI for the Fund is available free of charge by writing to Stagecoach Funds, Inc., c/o Stagecoach Shareholder Services, Wells Fargo Bank, N.A., P.O. Box 7066, San Francisco, CA 94120-7066 or by calling the Company at 800-222-8222. This Prospectus describes one class of shares of the Fund -- the Class S Shares. The Fund also offers a class of shares designated the Class A Shares. Investors who are not eligible to invest in Class S shares may be eligible to invest in Class A Shares. Investments in Class A Shares may be made through the Fund's distributor or through selling agents authorized to sell such shares on behalf of the distributor, or directly from the Fund. Information regarding investments in Class A Shares of the Fund, including a separate prospectus describing such shares, may be obtained by calling 800-222-8222. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUND FOR WHICH IT IS COMPENSATED. STEPHENS INC., WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUND. PROSPECTUS, DATED MAY 24, 1995 The following provides you with summary information about the Fund. For more information, please refer specifically to the identified Prospectus sections and generally to the Prospectus and SAI for the Fund. Q. WHAT IS THE FUND'S INVESTMENT OBJECTIVE? A. The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. In pursuing this objective, the Fund invests in securities with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"). The securities in which the Fund invests include obligations of the U.S. Government, its agencies and instrumentalities, high-quality debt obligations such as corporate debt, certain obligations of U.S. banks and certain repurchase agreements. The Fund seeks to maintain a net asset value of $1.00 per share; however, there is no assurance that this will be achieved. See "How the Fund Works - Investment Objectives and Policies" and "Prospectus Appendix - Additional Investment Policies." Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the Fund's investment adviser, manages your investments. Wells Fargo Bank also provides the Fund with transfer agency, dividend disbursing agency and custodial services. In addition, Wells Fargo Bank is a Shareholder Servicing Agent (as defined below) and a Selling Agent (as defined below) of the Fund. See "The Fund and Management" and "Management and Servicing Fees." Q. HOW DO I INVEST? A. This Prospectus is designed only for businesses that invest in Class S Shares of the Fund through a Managed Sweep Account with Wells Fargo Bank. A Managed Sweep Account combines a non-interest bearing Wells Fargo Bank deposit account (the "Transaction Account") with a daily sweep of Transaction Account balances to or from the Fund. Wells Fargo Bank computes the net amount of deposits to and withdrawals from your Transaction Account (the "Net Sweep Amount") each day Wells Fargo Bank is open for business. If deposits exceed withdrawals from your Transaction Account, Wells Fargo Bank transmits a purchase order on your behalf to the Fund in an amount equal to the dollar value of the Net Sweep Amount. The information in this Prospectus should be read in conjunction with the Disclosure Statement related to your Account. See "Investing in the Fund." Q. HOW WILL I RECEIVE DIVIDENDS AND ANY CAPITAL GAINS? A. Dividends from net investment income of the Fund are declared daily and are paid monthly to your Account through automatic reinvestment in Class S Shares of the Fund. Any capital gains will be distributed at least annually in a similar manner. Various dividend and distribution options, such as the option to direct the payment of proceeds from dividends and distributions to another account, which may be available to holders of the Fund's Class A Shares, are not available to persons investing in Class S Shares through a Managed Sweep Account. See "Dividends" and "Additional Shareholder Services." Q. HOW MAY I REDEEM SHARES? A. If, on any day Wells Fargo Bank is open for business, withdrawals from your Managed Sweep Account exceed deposits, Wells Fargo Bank transmits a redemption order on your behalf to the Fund in the dollar amount of that day's Net Sweep Amount. If your Managed Sweep Account with Wells Fargo Bank is closed as described in the applicable Disclosure Statement, Wells Fargo Bank will transmit a redemption request on your behalf to the Fund for the balance of your Fund shares held through such Account. See "How To Redeem Shares." Q. WHAT ARE THE POTENTIAL RISKS ASSOCIATED WITH THIS TYPE OF INVESTMENT? A. An investment in the Fund is not insured against loss of principal. Although the Fund seeks to maintain a stable net asset value of $1.00 per share, there is no assurance that it will be able to do so. Deposits to the Accounts are eligible for federal deposit insurance only for the brief period they are in the Transaction Account prior to being swept into the Fund. The Fund's shares are neither insured nor guaranteed by the U.S. Government. You should be prepared to accept some risk with the money you invest in the Fund. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. See "How The Fund Works - Risk Factors" and "Prospectus Appendix - Additional Investment Policies." The following tables provide: (i) a summary of expenses relating to purchases and sales of Class S Shares of the Fund, (ii) the aggregate annual operating expenses of the Fund as a percentage of average net assets, (iii) an example illustrating the dollar cost of such expenses on a $1,000 investment in the Fund's Class S Shares and (iv) a summary of Account fees and charges. As shown below, shareholders of the Class S Shares are not charged sales charges, redemption fees or exchange fees. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) The Company reserves the right to impose a charge for wiring redemption proceeds. (2) After any waivers or reimbursements. (3) Additional fees charged by Wells Fargo Bank related to the Accounts are not included in this table. See Account Fees and Charges. Set forth below is a summary of fees which may be charged by Wells Fargo Bank for various banking services available through the Managed Sweep Account. For additional information on Account fees and charges please refer to the Disclosure Statement accompanying this Prospectus. * Currently, Class S Shares of the Fund may be purchased only through a Managed Sweep Account. Class A Shares of the Fund may be purchased without opening an Account and without incurring the fees for, or deriving the benefits of, the Account Services described above. Information regarding Class A Shares may be obtained by calling 800-222-8222. (1) A Transaction Fee is charged whenever one of the listed transactions occurs. (2) A fee of $1.20 is charged for every $1,000 of cash deposited. (3) Various miscellaneous fees may be charged on a per transaction, per statement or other basis as described in "Miscellaneous Fees and Charges" and elsewhere in the Disclosure Statement. SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy or sell Fund shares. There are no Shareholder Transaction Expenses for the Fund, except that the Company reserves the right to impose a charge for wiring redemption proceeds. The ANNUAL FUND OPERATING EXPENSES table illustrates the operating expenses of the Class S Shares of the Fund as a percentage of average net assets. Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees or expenses if certain Fund expenses exceed limits set by state securities laws or regulations. In addition, Wells Fargo Bank and Stephens, at their sole discretion, may waive or reimburse all or a portion of their respective fees charged to, or expenses paid by, the Fund. Any waivers or reimbursements would reduce the Fund's total expenses. There can be no assurances that waivers or reimbursements will continue. The percentages shown above under "Total Other Expenses" and "Total Fund Operating Expenses" reflect certain anticipated voluntary fee waivers and expense reimbursements for the current fiscal year. Absent waivers and reimbursements, the percentages shown above under "Total Other Expenses" and "Total Fund Operating Expenses" would be 0.39% and 1.54%, respectively. Long-term shareholders in the Fund could pay more in sales charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers ("NASD"). For more complete descriptions of the various costs and expenses you can expect to incur as an investor in Class S Shares of the Fund, please see the Prospectus section captioned "Management and Servicing Fees." EXAMPLE OF EXPENSES is a hypothetical example which illustrates the expenses associated with a $1,000 investment over the periods shown, based on the expenses in the table above and an assumed annual rate of return of 5%. This rate of return should not be considered an indication of actual or expected performance of the Fund. In addition, the example should not be considered a representation of past or future expenses and actual expenses may be greater or lesser than those shown. ACCOUNT FEES AND CHARGES are charges you pay to Wells Fargo Bank for banking services offered to you as a Managed Sweep Account holder. The fees and charges applicable to your Account are discussed below. Wells Fargo Bank currently charges monthly account fees for the Managed Sweep Account. In addition, your Account is subject to various other fees and charges which may be assessed on a monthly or other periodic basis, or on a per transaction, per statement or other basis. For additional information with respect to Account fees and charges, including a description of the services available to Account holders, you should refer to the Disclosure Statement, particularly the section captioned "Miscellaneous Fees and Charges." The MONEY MARKET MUTUAL FUND seeks to provide investors with a high level of income, while preserving capital and liquidity, by investing in high-quality, short-term securities. The Fund invests its assets only in U.S. dollar-denominated, high-quality money market instruments, and may engage in certain other investment activities as described in this Prospectus. Permitted investments include U.S. Government short-term obligations, obligations of domestic and foreign banks, commercial paper, and repurchase agreements. In pursuing its objective, the Fund invests in instruments with remaining maturities not exceeding thirteen months, as determined in accordance with Rule 2a-7 under the 1940 Act. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. A more complete description of these investments and investment activities is contained in the "Prospectus Appendix - Additional Investment Policies" and in the SAI. The Fund seeks to reduce risk by investing its assets in securities of various issuers. As such, the Fund is considered to be diversified for purposes of the 1940 Act. In addition, the Fund, since its inception, has emphasized safety of principal and high credit quality. In particular, the internal investment policies of the Fund's investment adviser, Wells Fargo Bank, have always prohibited the purchase for the Fund of many types of floating rate derivative securities that are considered potentially volatile. The following types of derivative securities are not permitted investments for the Fund: - capped floaters (on which interest is not paid when market rates move above - leveraged floaters (whose interest rate reset provisions are based on a formula that magnifies changes in interest rates); - range floaters (which do not pay any interest if market interest rates move outside of a specified range); - dual index floaters (whose interest rate reset provisions are tied to more than one index so that a change in the relationship between these indices may result in the value of the instrument falling below face value); and - inverse floaters (which reset in the opposite direction of their index). Additionally, the Fund may not invest in securities whose interest rate reset provisions are tied to an index that materially lags short-term interest rates, such as "COFI floaters." The Fund may only invest in floating rate securities that bear interest at a rate that resets quarterly or more frequently, and which resets based on changes in standard money market rate indices such as U.S. Treasury bills, London Interbank Offered Rate, the prime rate, published commercial paper rates or federal funds rates. Pursuant to the 1940 Act, the Fund must comply with certain investment criteria designed to provide liquidity, reduce risk, and allow the Fund to maintain a stable net asset value of $1.00 per share. Of course, the Fund cannot guarantee a $1.00 share price. The Fund maintains a dollar-weighted average portfolio maturity of no more than 90 days. Any security that the Fund purchases must have a remaining maturity of not more than thirteen months. In addition, any security that the Fund purchases must present minimal credit risks and be of high quality (i.e., be rated in the top two rating categories by the required number of nationally recognized statistical rating organizations ("NRSROs") or, if unrated, determined to be of comparable quality to such rated securities). These determinations are made by Wells Fargo Bank, as the Fund's Investment Adviser, pursuant to guidelines adopted by the Company's Board of Directors. The performance of the Class S Shares may be advertised in terms of current yield or effective yield. Performance figures are based on historical results calculated under uniform SEC formulas and are not intended to indicate future performance. Yield refers to the income generated by an investment in the Class S Shares of the Fund over a seven-day period, expressed as an annual percentage rate. Effective yields are calculated similarly, but assume that the income earned from the Fund is reinvested in the Fund. Because of the effects of compounding, effective yields are slightly higher than yields. Additional information about the Fund's performance is contained in the Fund's Annual Report. The Annual Report may be obtained free of charge by calling the Company at 800-222-8222. The MONEY MARKET MUTUAL FUND is a fund of Stagecoach Funds. Stagecoach Funds was organized as a Maryland corporation on September 9, 1991 and currently offers shares of eleven other funds: the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Income Fund, the California Tax-Free Money Market Mutual Fund, the Corporate Stock Fund, the Diversified Income Fund, the Ginnie Mae Fund, the Growth and Income Fund, the Short-Intermediate U.S. Government Income Fund, the U.S. Government Allocation Fund and the Variable Rate Government Fund. The Board of Directors of Stagecoach Funds supervises these funds' activities and monitors their contractual arrangements with various service-providers. Although Stagecoach Funds is not required to hold annual shareholder meetings, special meetings may be required for purposes such as electing or removing Directors, approving advisory contracts and distribution plans, and changing the Funds' investment objectives or fundamental investment policies. All shares of Stagecoach Funds have equal voting rights and will be voted in the aggregate, rather than by series or Class, unless otherwise required by law (such as when the voting matter affects only one series or Class). As a shareholder of the Fund, you are entitled to one vote for each share you own and fractional votes for fractional shares owned. The Money Market Mutual Fund also offers a second class of shares -- Class A Shares. Class A Shares are subject to different levels of fees and expenses than Class S Shares and the performance of such shares may vary accordingly. A more detailed description of the voting rights and attributes of the shares is contained in the "Capital Stock" section of the Fund's SAI. Wells Fargo Bank is the Fund's investment adviser. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank also serves as the investment adviser to the other separately managed funds of the Company and to six other registered, open-end, management investment companies each of which consists of several separately managed investment portfolios. Wells Fargo Bank, a wholly owned subsidiary of Wells Fargo & Company, is located at 525 Market Street, San Francisco, California 94163. Morrison & Foerster, counsel to the Company and special counsel to Wells Fargo Bank, has advised Stagecoach and Wells Fargo Bank that Wells Fargo Bank may perform the services contemplated by the Advisory Contract without violation of the Glass-Steagall Act or other applicable banking laws or regulations. Such counsel has pointed out, however, that there are no controlling judicial or administrative interpretations or decisions and that future judicial or administrative interpretations of, or decisions relating to, present federal or state statutes, including the Glass-Steagall Act, and regulations relating to the permissible activities of banks and their subsidiaries or affiliates, as well as future changes in such statutes, regulations and judicial or administrative decisions or interpretations, could prevent Wells Fargo Bank from continuing to perform, in whole or in part, such services. If Wells Fargo Bank were prohibited from performing any such services, it is expected that the Company's Board of Directors would recommend to the shareholders that they approve a new advisory agreement with another entity or entities qualified to perform such services. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank is also the Fund's custodian and transfer and dividend disbursing agent. In addition, Wells Fargo Bank is a Shareholder Servicing Agent and Selling Agent of the Fund. Stephens is the Fund's sponsor and administrator, and distributes the Fund's shares. Stephens is a full service broker/dealer and investment advisory firm located at 111 Center Street, Little Rock, Arkansas 72201. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit-sharing plans, individual investors, foundations, insurance companies and university endowments. Class S Shares of the Fund are offered by this Prospectus to businesses that establish a Managed Sweep Account with Wells Fargo Bank. Each Account combines a Transaction Account (a non-interest bearing deposit account) with a periodic sweep of balances to or from the Fund. Investors may open an Account by completing and signing an Account Application and appropriate Disclosure Statement. The Disclosure Statement contains important information about the various features and operations of the Accounts and should be reviewed in conjunction with this Prospectus. Wells Fargo Bank may, in the future, permit investors to acquire shares of the Fund through additional accounts not described in this Prospectus. The price of a share of each Class of the Fund is its net asset value ("NAV"). The NAV of a share of each Class of the Money Market Mutual Fund is the value of total net assets attributable to each Class divided by the number of outstanding shares of that Class. The value of the net assets per Class is determined daily by adjusting the net assets per Class at the beginning of the day by the value of each Class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each Class by attributing to each Class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each Class as appropriate. As noted above, the Fund seeks to maintain a constant $1.00 per share NAV, although there is no assurance that it will be able to do so. Shares of the Fund may be purchased on any day the Fund is open (a "Business Day"). The Fund is open on any day that either the New York Stock Exchange or Wells Fargo Bank is open. Currently, the holidays observed by both the New York Stock Exchange and Wells Fargo Bank are New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). Wells Fargo Bank calculates the NAV of Fund shares acquired through the Managed Sweep Account as of 9:00 a.m. (Pacific time). The NAV of shares acquired through other means may be calculated at other times. All transaction orders are processed at the NAV next determined after the order is received. The Funds' portfolio investments are valued on the basis of amortized cost. This valuation method is based on the receipt of a steady yield on portfolio instruments from the date of purchase until maturity rather than actual changes in market value. The Company's Board of Directors believes that this valuation method accurately reflects fair value. Class S Shares may be purchased by making a deposit into your Account. On each day Wells Fargo Bank and the Fund are open Wells Fargo Bank computes the Net Sweep Amount, which is the net amount of all deposits, withdrawals, charges and credits made to and from a Transaction Account. If deposits and credits exceed withdrawals and charges, you authorize Wells Fargo Bank, on your behalf, to transmit a purchase order to the Fund designated in your Account in the amount of that day's Net Sweep Amount. For example, if you make a $500 deposit and withdraw $100 on the same day, and there are no other transactions on that day, the Net Sweep Amount for that day would be $400. Wells Fargo Bank, on your behalf, would transmit a purchase order to the designated Fund on the next Business Day in the amount of $400. Your purchase order will be made effective and full and fractional Shares will be purchased at the next determined NAV, which is expected to remain a constant $1.00 per share. Deposits and other transactions to your Account are sometimes not immediately included in the Net Sweep Amount. Cash and items drawn on Wells Fargo Bank are generally credited to the Net Sweep Amount on the same Business Day as the day of deposit. Local and non-local checks are usually credited to your Net Sweep Amount on the first or second Business Day, respectively, after the day of your deposit. In addition, adjustments may sometimes be made to your Account to reflect dishonored or items. For additional information refer to the applicable Disclosure Statement and, specifically therein, "Holds and Funds Availability." The Fund declares dividends daily payable to shareholders of record as of 9:00 a.m. (Pacific time). You begin earning dividends on your Class S shares of the Fund on the day your purchase order for such shares is effective and continue to earn dividends through the day prior to the date you redeem such shares. Dividends for a Saturday, Sunday or Holiday are credited on the preceding Business Day. If you redeem shares before the dividend payment date, any dividends credited to you will be paid on the following dividend payment date. The Fund declares any capital gains at least annually. Dividends declared in a month are reinvested in Class S Shares of the Fund early in the following month. If, on any day Wells Fargo Bank and the Fund are open for business, withdrawals from your Managed Sweep Account, including check transactions, exceed deposits and credits, Wells Fargo Bank will transmit a redemption order on your behalf to the Fund in the dollar amount of that day's Net Sweep Amount. If your Managed Sweep Account with Wells Fargo Bank is closed as described in the applicable Disclosure Statement, Wells Fargo Bank transmits a redemption request on your behalf to the Fund for the balance of the Class S Shares of the Fund held through your Account. Your shares are normally redeemed at the next NAV, expected to be a constant $1.00 per share, calculated after the Fund has received the redemption order transmitted on your behalf. Redemption proceeds may be more or less than the amount invested and, therefore, a redemption of Fund shares may result in a gain or loss for federal and state income tax purposes. The Fund ordinarily will remit your redemption proceeds within seven days after your redemption order is received from Wells Fargo Bank unless the SEC permits a longer period under extraordinary circumstances. Such extraordinary circumstances could include a period during which an emergency exists as a result of which (a) disposal by the Fund of securities owned by it is not reasonably practicable or (b) it is not reasonably practicable for the Fund to determine fairly the value of its net assets, or a period during which the SEC by order permits deferral of redemptions for the protection of security holders of the Fund. In addition, Wells Fargo Bank may withhold redemption proceeds pending check collection or processing or for other reasons all as set forth more fully in "Holds and Funds Availability" and elsewhere in the applicable Disclosure Statement. Certain optional services available to persons who invest directly in Class A Shares of the Fund, including certain exchange privileges which allow shareholders to exchange their Fund shares for shares of other funds in the Stagecoach Family of Funds, are not available to persons who invest in Class S Shares of the Fund. These services are described in separate prospectuses describing direct investments in Class A Shares of the Fund, which are available from Stagecoach Shareholder Services by calling 800-222-8222. Subject to the overall supervision of the Company's Board of Directors, Wells Fargo Bank, as the investment adviser to the Fund, provides investment guidance and policy direction in connection with the management of the Fund's assets. Wells Fargo Bank also furnishes the Board of Directors with periodic reports on the investment strategies and performance of the Fund. For its services as investment adviser, Wells Fargo Bank is entitled to a monthly investment advisory fee at the annual rate of 0.40% of the average daily net assets of the Fund. From time to time, Wells Fargo Bank, may waive such fees in whole or in part. Any such waiver will reduce the Fund's expenses and, accordingly, have a favorable impact on the Fund's yield. From time to time the Fund consistent with its investment objectives, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For the year ended December 31, 1994, Wells Fargo Bank was paid 0.40% of the average daily net assets of the Fund for its services as investment adviser. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank also serves as the Fund's custodian, transfer agent and dividend disbursing agent. Under its Custody Agreement with Wells Fargo Bank, the Fund may, at times, borrow money from Wells Fargo Bank as needed to satisfy temporary liquidity needs. Wells Fargo Bank charges interest on such overdrafts at a rate determined pursuant to the Fund's Custody Agreement. The transfer and dividend disbursing agency activities are performed at 525 Market Street, San Francisco, California 94105. The Company has entered into a Shareholder Servicing Agreement with Wells Fargo Bank on behalf of the Class S Shares and may enter into similar agreements with other entities. Under such agreements, Shareholder Servicing Agents will, as agent for their customers, among other things: answer customer inquiries regarding account status and history and the manner in which purchases and redemptions of Fund shares may be effected; provide necessary personnel and facilities to establish and maintain shareholder accounts and records; assist in processing purchase and redemption transactions; arrange for the wiring of money; transfer money in connection with customer orders to purchase or redeem shares; verify shareholder signatures in connection with redemption orders and transfers; furnish (either separately or on an integrated basis with other reports sent to a shareholder by the Shareholder Servicing Agent) monthly and year-end statements and confirmations of purchases and redemptions; furnish, on behalf of the Fund, proxy statements, annual reports, updated prospectuses and other communications to shareholders; receive, tabulate and send to the Fund proxies executed by shareholders; and provide such other related services as the Fund or a shareholder may reasonably request. For these services, a Shareholder Servicing Agent receives a fee, which may be paid periodically, determined by a formula based upon the asset level or number of accounts serviced by the Shareholder Servicing Agent during the period for which payment is being made, the level of activity in such accounts during such period, and the expenses incurred by the Shareholder Servicing Agent. The fee will not exceed, on an annualized basis for the Fund's then-current fiscal year, the lesser of (1) 0.25% of the average daily net assets attributable to the Class S Shares of the Fund, as represented by shares owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or (2) an amount which equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD"). A Shareholder Servicing Agent may impose certain conditions on its customers, subject to the terms of this Prospectus, in addition to or different from those imposed by the Fund, such as requiring a minimum initial investment or payment of a separate fee for additional services. Each Shareholder Servicing Agent will be required to agree to disclose any fees it may directly charge its customers who are shareholders of the Fund and to notify them in writing at least 30 days before it imposes any transaction fees. Subject to the overall supervision of the Company's Board of Directors, Stephens provides the Fund with administrative services, including general supervision of the Fund's operation, coordination of the other services provided to the Fund, compilation of information for reports to the SEC and the state securities commissions, preparation of proxy statements and shareholder reports and general supervision of data compilation in connection with preparing periodic reports. Stephens also furnishes office space and certain facilities to conduct the Fund's business, and compensates the Directors, officers and employees who are affiliated with Stephens. For these services, Stephens is entitled to a monthly fee at the annual rate of 0.03% of the Fund's average daily net assets. From time to time, Stephens may waive its fees charged to the Fund in whole or in part. Any such waivers will reduce the Fund's expenses and, accordingly, have a favorable impact on the Fund's yield. Stephens also has entered into a Distribution Agreement pursuant to which it has the responsibility for distributing Fund shares. The Company has adopted a Distribution Plan on behalf of the Class S Shares of the Fund under the SEC's Rule 12b-1 (the "Plan"). Under the Plan and pursuant to the Distribution Agreement, the Fund pays Stephens, as compensation for distribution-related services, a monthly fee at the annual rate of up to 0.75% of the average daily net assets attributable to the Class S Shares of the Fund or the maximum amount payable under applicable laws, regulations and rules, whichever is less. The actual fee payable to Stephens is determined, within the applicable limit, from time to time by mutual agreement between the Company and Stephens. Stephens may retain any portion of the total distribution fee payable under the Distribution Agreement to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. Since the fee payable to Stephens under the Distribution Agreement is not based upon the actual expenditures of Stephens, the expenses of Stephens (which may include overhead expenses) may be more or less than the fees received by it under the Distribution Agreement. The Plan contemplates further that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed above) are deemed to be for distribution-related services, rather than shareholder services, such payments are approved and payable pursuant to the Plan. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Fund may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. Financial institutions acting as Selling Agents, Shareholder Servicing Agents, or in certain other capacities, may be required to register as dealers pursuant to applicable state securities laws which may differ from federal law and any interpretations expressed herein. As noted previously, from time to time, Wells Fargo Bank and Stephens may waive their respective fees in whole or in part and reimburse expenses payable to others. Any such waivers or reimbursements will reduce the Fund's expenses and, accordingly, have a favorable impact on the yield of the Fund's shares. Except for the expenses borne by Wells Fargo Bank and Stephens, the Company bears all costs of its operations, including advisory, shareholder servicing, transfer agency, custody and administration fees; payments pursuant to the Plan; interest, fees and expenses of independent auditors and legal counsel; and any extraordinary expenses. Expenses attributable to the Fund are charged against the Fund's assets. Certain expenses attributable only to Class S Shares or Class A Shares are charged to such shares. General expenses of the Company are allocated among all of the Company's funds, in a manner proportionate to the net assets of each fund, on a transactional basis or on such other basis as the Company's Board of Directors deems equitable. By complying with the applicable provisions of the Code, the Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders. Dividends from net investment income (including net short-term capital gains, if any) declared and paid by the Fund will be taxable as ordinary income to Fund shareholders, even if such dividends are automatically reinvested in Class S Shares. Generally, dividends and distributions are taxable to shareholders at the time they are paid. However, dividends and distributions declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends or distributions are actually paid no later than January 31 of the following year. The Fund intends to pay out substantially all of its net investment income and net realized capital gains (if any) for each year. The Fund does not expect its dividends to qualify for the dividends-received deduction allowed to corporate shareholders. The Fund, or the Fund's Shareholder Servicing Agent on its behalf, will inform you of the amount and nature of the Fund's dividends and capital gains. You should keep all statements you receive to assist in your personal record keeping. The Company is required to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Fund if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% back-up withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the Fund's SAI. Further federal tax considerations are discussed in the Fund's SAI. All investors should consult their individual tax advisers with respect to their particular tax situations as well as the state and local tax status of investments in shares of the Fund. In addition to the Class S Shares, the Fund also offers another class of shares -- the Class A Shares. Class A Shares are available through direct investment or through Wells Fargo Bank sweep accounts. Class A Shares are subject to the same fees and expenses as the Class S Shares, except that Class A shares are subject to a Rule 12b-1 fee of 0.05% of net assets and a shareholder services fee of up to 0.30% of net assets. Under the Distribution Plan for Class A Shares of the Fund, Stephens is entitled to receive as compensation for distribution-related services, a monthly fee at an annual rate of up to 0.05% of the Fund's average daily net assets attributable to Class A Shares. This fee may be used by Stephens to compensate Selling Agents or to compensate or reimburse Stephens for distribution-related expenses. Further, the Class A Shares have exactly the same preference and conversion rights, restrictions, limitations, qualifications, terms and conditions of redemption as the Class S Shares. The Class A Shares also have identical voting rights except that, on matters that affect one class but not another, only shareholders of the affected class have voting rights and they vote as a class. Class A Shares of the Fund may be exchanged for Class A Shares of any other investment portfolio of the Company or for shares of certain other funds in the Stagecoach Family of Funds (provided that shares of the investment portfolio to be acquired are registered for sale in your state of residence). You may call 800-222-8222 to obtain additional information about Class A Shares and a prospectus describing such shares. FUND INVESTMENTS -- MONEY MARKET MUTUAL FUND The Money Market Mutual Fund may invest in the following: (i) obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including government-sponsored enterprises ("U.S. Government obligations") (discussed below); (ii) negotiable certificates of deposit, fixed time deposits, bankers' acceptances or other short-term obligations of U.S. banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") ("bank instruments"); (iii) commercial paper rated at the date of purchase P-1 by Moody's Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by Standard & Poor's Corporation ("S&P") ("rated commercial paper"); (iv) commercial paper unrated at the date of purchase but secured by a letter of credit from a U.S. bank that meets the above criteria (v) certain floating and variable rate instruments ("variable rate (vi) certain repurchase agreements ("repurchase agreements") (discussed (vii) short-term, U.S. dollar-denominated obligations of U.S. branches of foreign banks that at the time of investment have more than $10 billion, or the equivalent in other currencies, in total assets ("foreign bank obligations") (discussed below). Municipal bonds generally have a maturity at the time of issuance of up to 40 years. Medium-term municipal notes are generally issued in anticipation of the receipt of tax funds, of the proceeds of bond placements, or of other revenues. The ability of an issuer to make payments on notes is therefore especially dependent on such tax receipts, proceeds from bond sales or other revenues, as the case may be. Municipal commercial paper is a debt obligation with a stated maturity of 270 days or less that is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market interest rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. Certain of the debt instruments that the Fund may purchase bear interest at rates that are not fixed, but vary, for example, with changes in specified market rates or indices or at specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The Fund may, in accordance with SEC rules, account for these instruments as maturing at the next interest rate readjustment date or the date at which the Fund may tender the instrument back to the issuer, whichever is later. The floating- and variable-rate instruments that the Fund may purchase include certificates of participation in such obligations. The Fund may invest in floating- and variable-rate obligations even if they carry stated maturities in excess of thirteen months, upon compliance with certain conditions of the SEC, in which case such obligations will be treated in accordance with these conditions as having maturities not exceeding thirteen months. Wells Fargo Bank, as investment adviser to the Fund, monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the time a Fund elects to demand payment and the time payment is due, thereby affecting such Fund's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists for those instruments. The Fund may enter into repurchase agreements wherein the seller of a security to the Fund agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Fund may enter into repurchase agreements only with respect to U.S. Government obligations and other obligations that could otherwise be purchased by the Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. While the maturities of the underlying securities in a repurchase agreement transaction may be greater than thirteen months, the term of any repurchase agreement on behalf of the Fund will always be less than thirteen months. If the seller defaults and the value of the underlying securities has declined, the Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the Fund's disposition of the security may be delayed or limited. The Fund will enter into repurchase agreements only with registered broker/dealers and commercial banks that meet guidelines established by the Company's Board of Directors and that are not affiliated with Wells Fargo Bank or Stephens. The Fund may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. Certain of the debt obligations, certificates of participation, commercial paper and other short-term obligations which the Fund is permitted to purchase may be backed by an unconditional and irrevocable letter of credit of a bank, savings and loan association or insurance company that assumes the obligation for payment of principal and interest in the event of default by the issuer. Letter of credit-backed investments must, in the opinion of Wells Fargo Bank, be of investment quality comparable to other permitted investments of the Fund. The Fund may invest up to 25% of its assets in high-quality, short-term debt obligations of foreign branches of U.S. banks or U.S. branches of foreign banks that are denominated in and pay interest in U.S. dollars. Investments in foreign obligations raise certain considerations that are not typically associated with investing in domestic obligations. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not subject to the same uniform accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic developments that could adversely affect investments in, the liquidity of and the ability to enforce contractual obligations with respect to securities of issuers located in those countries. The Fund's investment objective, as set forth in "How the Fund Works - Investment Objective and Policies," is fundamental; that is, it may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the Fund's SAI. If the Company's Board of Directors determines, however, that the investment objective of the Fund can best be achieved by a substantive change in a nonfundamental investment policy or strategy, the Company's Board may make such change without shareholder approval and will disclose any such material changes in the then-current prospectus. As matters of fundamental policy, the Fund may: (i) borrow from banks up to 10% of the current value of its net assets only for temporary purposes in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of the Fund's net assets (but investments may not be purchased by the Fund while any such outstanding borrowing in excess of 5% of its net assets exists); (ii) not make loans of portfolio securities or other assets, except that loans for purposes of this restriction will not include the purchase of fixed time deposits, repurchase agreements, commercial paper and other short-term obligations, and other types of debt instruments commonly sold in a public or private offering; and (iii) not invest more than 25% of its assets (i.e., concentrate) in any particular industry, excluding U.S. Government obligations and obligations of domestic banks (for purposes of this restriction, domestic bank obligations do not include obligations of foreign branches of U.S. banks and obligations of U.S. branches of foreign banks). As a matter of nonfundamental policy: (i) the Fund may not purchase securities of any issuer (except for U.S. Government obligations, for certain temporary purposes and for certain guarantees and unconditional puts) if as a result more than 5% of the value of the Fund's total assets would be invested in the securities of such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer; and (ii) the Fund may not invest more than 10% of the current value of its net assets in securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days. With respect to item (i), it may be possible that the Company would own more than 10% of the outstanding voting securities of an issuer. INVESTMENT ADVISER, TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN For more information about the Funds simply call 1-800-222-8222, or write:	497	497	1996-01-12T00:00:00	1996-01-12T15:42:53
0000899243-96-000019	0000899243-96-000019_0007.txt	THIS STOCK OPTION AGREEMENT ("Agreement"), dated as of December 29, 1995, is by and between NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Delaware corporation (the "Company"), and HENRY W. SULLIVAN ("Employee"). FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the Company and the Employee hereby agree as follows: 1. GRANT OF OPTION; VESTING SCHEDULE. (a) Grant of Option. The Company hereby grants to Employee an option the ("Option") to purchase, subject to the terms and conditions hereof, from the Company two hundred thousand (200,000) shares (the "Option Shares") of Common Stock, par value $0.001 per share, of the Company (the "Common Stock") beginning on the Commencement Date (as defined below) and ending at 5:00 p.m. Eastern Standard Time, on December 29, 2004 (the "Termination Date"), at an exercise price equal to $2.50 per share of Common Stock. As used herein, the term "Commencement Date" shall mean the date first set out above. The number of Option Shares and the exercise price per share shall be subject to adjustment from time to time upon the occurrence of certain events as set forth below. The shares of Common Stock or any other shares or other units of stock or other securities or property, or any combination thereof then receivable upon exercise of the Option, as adjusted from time to time, are sometimes referred to hereinafter as "Exercise Shares." The exercise price per share as from time to time in effect is referred to hereinafter as the "Exercise Price." The Option is not an "incentive stock option" as described in Section 422A of the Internal Revenue Code of 1986, as amended. (b) Vesting Schedule. Following the Commencement Date, the Option shall vest and be exerciseable (unless earlier terminated as provided herein) on December 29 in the years set forth below and in the amounts set forth below: ; provided, however, that (i) the Option to acquire such shares shall vest on the date set forth above only in the event that Employee is in the employ of the its subsidiaries in any capacity on such date and (ii) the Option to acquire any Exercise Shares, if not earlier terminated by the terms of this Agreement, shall terminate on the 5th annual anniversary date of the date on which the Option to acquire such Exercise Shares vested as provided in this clause (b). The period beginning on the Commencement Date and ending on the Termination Date is sometimes referred to herein as the Option Period. Except as provided otherwise in the next succeeding paragraph, if Employee is not in the employ of the Company or any of its subsidiaries in any capacity on any of the various vesting dates set forth above, regardless of the reason therefore, then the Option with respect to such year shall not vest. Notwithstanding anything herein to the contrary, in the event Employee is no longer employed by the Company or any of its subsidiaries as a result of the termination of such employment relationship: (x) by the Company or any of its subsidiaries for any reason other than "Cause" (as such term is then defined in any written employment agreement between Employee, on the one hand, and the Company or any such subsidiary, on the other hand (the "Employment Agreement"), or the death or disability (as such term may be defined in such Employment Agreement) of Employee, or (y) by Employee for "Good Reason" (as such term may be defined in such Employment Agreement), then 50% of all Option Shares that have not vested on or before the date of such termination shall immediately vest as of such termination date, and the Option Period with respect to such newly vested Option Shares shall begin on such termination date and shall continue for a period of five years thereafter and expire on the fifth anniversary date of such termination date. 2. EXERCISE OF OPTION. The Option may be exercised, so long as it is then valid and outstanding, from time to time in whole (as to Option Shares then exercisable) or in part, and if in part, on as many occasions during the Option Period as Employee shall desire, subject to the terms and provisions of this Agreement. The Option may be exercised upon delivery on any business day to the Company at its address set forth below (or such other office of the Company, if any, as shall theretofore have been designated by the Company by written notice to the Employee) of the following: (a) a completed and executed Notice of Option Exercise in the form set forth in Appendix A hereto and made a part hereof; and (b) payment of the full Exercise Price for the number of Exercise Shares set forth in the Notice of Option Exercise, in lawful money of the United States of America, by certified check or cashier's check made payable to the order of the Company (or with the consent of the Company, the purchase price therefor may be paid in whole or in part by the delivery to the Company of certificates representing shares of Common Stock held by Employee, duly endorsed for transfer or accompanied by blank stock, each of which shares shall be valued at a price equal to its then Current Market Value, as defined below). In the event that Employee is no longer in the employ of the Company or any of its subsidiaries in any capacity, Employee shall be entitled to exercise this Option, according to the terms and conditions set forth herein, to purchase only that number of Option Shares in which Employee has become vested prior to the termination of such employment or, pursuant to the provisions of the last paragraph of Section 1(b) hereof, immediately as of such termination. 3. ISSUANCE OF EXERCISE SHARES; DELIVERY OF STOCK CERTIFICATE. The Company shall, within ten (10) business days (or as soon thereafter as is practicable) of the exercise of this Option, issue in the name of and cause to be delivered to the Employee (or such other person or persons, if any, as the Employee shall have designated in the Notice of Option Exercise) one or more certificates representing the Exercise Shares to which the Employee (or such other person or persons) shall be entitled upon such exercise under the terms hereof. Such certificate or certificates shall be deemed to have been issued and the Employee (or such other person or persons so designated) shall be deemed to have become the record holder of the Exercise Shares as of the date of the due exercise of this Option. 4. EXERCISE SHARES FULLY PAID AND NON-ASSESSABLE. The Company agrees and covenants that all Exercise Shares issuable upon the due exercise of the Option will, upon issuance of a certificate therefor in accordance with the terms hereof, be duly authorized, validly issued, fully paid and non-assessable and free and clear of all taxes (other than taxes which, pursuant to this Agreement, the Company shall not be obligated to pay) or liens, charges, and security interests created by the Company with respect to the issuance thereof. 5. RESERVATION OF EXERCISE SHARES. At the time of or before taking any action which would cause an adjustment pursuant to this Agreement increasing the number of shares of capital stock constituting the Exercise Shares, the Company will take any corporate action which may be necessary in order that the Company have remaining, after such adjustment, a number of shares of such capital stock unissued and unreserved for other purposes sufficient to permit the exercise of all the then vested Options under this Agreement of like tenor immediately after such adjustment. The Company will also from time to time take action to increase the authorized amount of its capital stock constituting the Exercise Shares if at any time the number of shares of capital stock authorized but remaining unissued and unreserved for other purposes shall be insufficient to permit the exercise of the Options under this Agreement then vested. The Company may but shall not be limited to reserve and keep available, out of the aggregate of its authorized but unissued shares of capital stock, for the purpose of enabling it to satisfy any obligation to issue Exercise Shares upon through the Termination Date, the number of Exercise Shares deliverable upon the full exercise of this Option. At the time of or before taking any action which would cause (pursuant to the provisions of this Section 5) an adjustment resulting in a reduction of the Exercise Price below the then par value (if any) of the Exercise Shares issuable upon exercise of the Options, the Company will take any corporate action which may be necessary in order to assure that the par value per share of the Exercise Shares is at all times equal to or less than the Exercise Price per share and so that the Company may validly and legally issue fully paid and non-assessable Exercise Shares at the Exercise Price, as so adjusted. The Company will also from time to time take similar action if at any time the Exercise Price is below the then par value of the Exercise Shares. 6. FRACTIONAL SHARES. The Company shall not be required to issue fractional shares of capital stock upon the exercise of this Option or to deliver stock certificates which evidence fractional shares of capital stock. In the event that any fraction of an Exercise Share would, except for the provisions of this Section 6, be issuable upon the exercise of this Option, the Company shall pay to the Employee an amount in cash equal to such fraction multiplied by the Current Market Value (as defined herein) of the Exercise Share. For purposes of this subparagraph, the "Current Market Value" shall mean, and be determined, as follows: (a) if the type of securities representing the Exercise Shares are traded in the over-the-counter market and not on any national securities exchange and not in the NASDAQ Reporting System, the average of the mean between the last bid and asked prices per share, as reported by the National Quotation Bureau, Inc., or another generally accepted reporting service, for the last business day prior to the date on which this Option is exercised, or if not so reported, the average of the closing bid and asked prices for an Exercise Share as furnished to the Company by any member of the National Association of Securities Dealers, Inc., selected by the Company for that purpose; (b) if the type of securities representing the Exercise Shares are listed or traded on a national securities exchange or in the NASDAQ National Market System, the closing price on the principal national securities exchange on which they are so listed or traded or in the NASDAQ National Market System, as the case may be, on the last business day prior to the date of the exercise of this Option. The closing price referred to in this clause (b) shall be the last reported sales price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case, on the national securities exchange on which the Exercise Shares are then listed or in the NASDAQ Reporting System; or (c) if no such closing price or closing bid and asked prices are available, as determined in any reasonable manner as may be prescribed by the Board of Directors of the Company. 7. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the issuance of Exercise Shares upon the exercise of this Option; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any certificates representing the Exercise Shares in a name other than that of the Employee, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 8. RIGHTS OF EMPLOYEE. The Employee shall not, by virtue of anything contained in this Agreement or otherwise, be entitled to any right whatsoever, either in law or equity, of a stockholder of the Company, including without limitation, the right to receive dividends or to vote or to consent or to receive notice as a shareholder in respect of the meetings of shareholders or the election of directors of the Company or any other matter, with respect to any Exercise Shares prior to the acquisition of such Exercise Shares on the exercise of this Option as provided in this Agreement . 9. ADJUSTMENT OF EXERCISE SHARES AND EXERCISE PRICE. The Exercise Price and the number and kind of Exercise Shares purchasable upon the exercise of this Option shall be subject to adjustment from time to time upon the happening of certain events as provided in this Section 9. The Exercise Price in effect at any time and the number and kind of securities purchasable upon exercise of this Option also shall be subject to adjustment as hereinafter provided. (a) In the case the Company shall (i) pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock, (ii) subdivide or classify its outstanding Common Stock into a greater number of shares or (iii) combine or reclassify its outstanding Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, classification, combination or reclassification shall be proportionally adjusted so that the Employee, upon any exercise of this Option immediately thereafter shall be entitled to receive the aggregate number and kind of shares which, if this Option had been exercised by such Employee immediately prior to such date, he would have owned upon such exercise and been entitled to receive upon such dividend, subdivision, classification, combination or reclassification. For example, if the Company declares a 2 for 1 stock dividend or stock split and the Exercise Price immediately prior to such event was $5.00 per share, the adjusted Exercise Price immediately after such event would be $2.50 per share, and as a result, the number of Option Shares would double. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall hereafter issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares (or securities convertible into Common Stock) at a price (or having a conversion price per share) less than the current market price of the Common Stock (as defined in the subsection (d) below) on the record date mentioned below, the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the Exercise Price in effect immediately prior to the date of such issuance by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the record date mentioned below and the number of additional shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such current market price per share of the Common Stock, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants the Exercise Price shall be readjusted to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (c) Whenever the Exercise Price payable upon exercise of this Option is adjusted pursuant to the provisions of (a) or (b) above, the number of Exercise Shares purchasable upon exercise of this Option shall simultaneously be adjusted by multiplying the number of Exercise Shares initially issuable upon exercise of this Option by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (d) For the purpose of any computation under the subsection above, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for 30 consecutive business days before such date. The closing price for each day shall be the last sale price (regular way) or, in case no such reported sale takes place on such day, the average of the last reported bid and lowest reported asked prices as reported by NASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors. (e) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least one cent ($0.01) in such price; provided, however, that any adjustments which by reason of the provisions of this sentence are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 9 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this section to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section 9 as it, in its sole discretion, shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, classification, reclassification or combination of Common Stock, issuance of warrants or options or other rights to acquire Common Stock or distribution of evidences of indebtedness or other assets (excluding cash dividends) referred to hereinabove in this Section 9 hereafter made by the Company to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. (f) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly cause a notice setting forth the adjusted Exercise Price and adjusted number of Shares issuable upon exercise of this Option to be mailed to the Employee, at the address set forth in this Agreement for notice, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section 9, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (g) In the event that at any time, as a result of an adjustment made pursuant to this Section 9, the Employee thereafter shall become entitled to receive any Exercise Shares of the Company other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Option shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section 9. 10. RESTRICTIONS ON EXERCISE AND TRANSFERABILITY. This Option, and the rights of Employee under this Agreement, shall be exerciseable only by the Employee or, upon his death or disability, by his estate or any duly appointed guardian, executor, administrator, trustee or other legal representative(s), and shall not be transferred or assigned to any other party other than Employee's estate upon his death. 11. RESTRICTIVE LEGENDS. So long as an exemption therefrom is then available, the Company shall not be required by the terms of this Agreement to register, under the Securities Act of 1933, as amended (the "Act"), or under applicable state securities laws (together with the Act, the "Securities Laws"), any of the Exercise Shares issued or to be issued upon the exercise of the Option. In addition, in the event that any such Exercise Shares are not so registered, Employee consents to the placement on the certificate or certificates representing such Exercise Shares a legend or legends to the effect that, among other things, neither such certificate or certificates nor the Exercise Shares evidenced thereby have been registered under any Securities Laws and that no sale, transfer or other disposition thereof or any interest therein may be made or shall be recognized unless in the satisfactory written opinion of counsel for, or satisfactory to, the Company, such transaction would not violate or required registration under such Securities Laws. The Company may also place on such certificate or certificates any other legend it deems necessary or desirable in order to conform to any of the Securities Laws. 12. CERTAIN REGISTRATION RIGHTS. If at any time prior to the Termination Date the Company registers under the Act any shares of Common Stock to be issued to an executive officer of the Company or any of its subsidiaries upon exercise of an option (a "Management Option") to acquire such shares of Common Stock granted in connection with such person's employment with the Company or any of its subsidiaries as an executive officer, then the Company shall offer in writing to Employee a corresponding right to receive shares of Common Stock that are registered under the Act upon the exercise of any of Employee's then vested and unexercised shares of Common Stock under this Agreement upon similar terms and provisions as those offered to such other executive officer. In addition, if at any time prior to the Termination Date the Company offers to register any of such other executive officer's outstanding shares of Common Stock that were issued to him upon exercise of a Management Option, then the Company shall offer in writing to Employee at the same time a corresponding right to cause the Company to register any of the Employee's then outstanding shares of Common Stock that were issued to him upon exercise of the Option granted under this Agreement. The rights granted in favor of Employee under this Section 12: (a) shall be as equal in nature to the rights granted in favor of such other executive officer as is reasonably practicable, (b) shall relate to a proportionate number of Employee's shares of Common Stock as the Board of Directors of the Company deems reasonable and (c) shall be subject to such other reasonable terms and conditions as the Board of Directors of the Company may then impose. 13. NOTICES. All notices or other communications under or relating to this Agreement shall be in writing and shall be deemed to have been given if delivered by hand or mailed by certified mail, postage prepaid, return receipt request, addressed as follows: North American Technologies Group, Inc. 4710 Bellaire Blvd., Suite 301 4710 Bellaire Blvd., Suite 301 Either of the Company or the Employee may from time to time change the address to which notices to it are to be mailed hereunder by notice in accordance with the provisions of this Section. 14. AMENDMENTS. This Agreement may be amended or supplement only by a writing signed by both parties hereto. 15. SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 10 hereof, this Agreement shall inure to the benefit of and be binding on the respective successors, assigns and legal representatives of the Employee and the Company. 16. SEVERABILITY. If for any reason any provision, paragraph or terms of this Agreement is held to be invalid or unenforceable, all other valid provisions herein shall remain in full force and effect and all terms, provisions and Sections of this Agreement shall be deemed to be severable. 17. GOVERNING LAW. To the full extent controllable by stipulation of the Company and Employee, this Agreement shall be interpreted and enforced under Texas law. 18. HEADINGS. Headings used herein are included herein for convenience of reference only and shall not affect the construction of this Agreement or constitute a part of this Agreement for any other purpose. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed the day and year first set out above. By: /s/ Tim B. Tarrillion President and Chief Executive Officer NOTICE OF STOCK OPTION EXERCISE Pursuant to that certain Stock Option Agreement, dated as of ____________, 1995, as amended to date (the "Agreement"), by and between North American Technologies Group, Inc., a Delaware corporation (the "Company"), and the undersigned, and subject to the vesting periods set forth therein, the undersigned hereby irrevocably elects to exercise an option to acquire ________________ shares of _____________________________, at an exercise price of $____ per share, or an aggregate purchase price of $__________. Enclosed herewith is a certified check or cashier's check made payable to the order of the Company in the amount of the aggregate purchase price set forth in the preceding sentence [or, if, applicable: "; provided, however, that $________ of such purchase price therefor is hereby paid by the delivery to the Company of ______ shares of Common Stock represented by certificate no(s) ___________, duly endorsed for transfer or accompanied by a blank stock power, all in accordance with the terms and provisions of the Agreement"]. Each capitalized terms used herein, unless otherwise defined, has the meaning given such term in the Agreement. The undersigned hereby represents and agrees that the Exercise Shares purchased pursuant hereto are being purchased for investment and not with a view to the distribution or resale thereof, and that the undersigned understands that said Exercise Shares have not been registered under the Securities Laws. The undersigned requests that a certificate for the Exercise Shares be issued in the name of: Address of Employee (if different from above):	8-K	EX-10.6	1996-01-12T00:00:00	1996-01-12T16:52:02
0000096608-96-000002	0000096608-96-000002_0000.txt	Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported) DECEMBER 28, 1995 (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation) (Commission File Number) (IRS Employer Identification No.) 9500 ARBORETUM BOULEVARD, AUSTIN, TEXAS 78759-6399 (Address of principal executive offices) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 512/345-5700 (Former name or former address, if changed since last report) Exhibit Index appears on Page 5. Item 2. Acquisition or Disposition of Assets. (a) On December 19, 1995, The Continuum Company, Inc. ("Continuum") acquired all of the outstanding shares of SOCS Holding ("SOCS"). SOCS is a limited company incorporated under the law of France. The consideration for the purchase was a cash payment of FRF 175,000,000 made on the date of acquisition. In addition, as prescribed in Section 3.4.2 of the Acquisition Agreement (as defined below) Continuum shall pay to the SOCS shareholders a royalty on license sales of certain software owned by SOCS for a specified period. The determination of the amount of the consideration was based on a detailed analysis of current and future business operations and was the subject of arm's length negotiations between Continuum and the SOCS shareholders. The acquisition of the shares of SOCS was accomplished pursuant to an Acquisition Agreement of 100% of the Issued Shares of SOCS Holding dated December 19, 1995 (the "Acquisition Agreement") and Warranty Agreement for the Purchase of SOCS Holding dated December 19, 1995 (the "Warranty Agreement"), copies of which are filed as exhibits to this report and which are incorporated by reference herein. All of the shares of SOCS were acquired from three individuals: Jean-Michel Renck, Jean-Charles Miginiac, and Marie-Claude Rossignol as represented by Jean-Louis Rossignol. For a description of the underlying assets involved, reference is made to the information under the following captions in the Warranty Agreement: "Subsidiaries - Shareholders" (Page 3 and Exhibit 1.3); "Activity - Officers" (Page 4 and Exhibit 1.7); "Intellectual and Industrial Property" (Page 7 and Exhibit 1.15.1); "Significant Commitments" (Page 8 and Exhibit 1.17); and "Bank Accounts" (Page 9 and Exhibit 1.20). The source of the cash funds used to purchase SOCS derived in part from existing cash and in part from Continuum's revolving bank line of credit from Texas Commerce Bank N.A. Prior to the acquisition taking effect, there were no material relationships between SOCS or its affiliates and Continuum or its affiliates, any director or officer of Continuum, or any associate of any such director or officer. (b) SOCS provides insurance application software and related services to the French insurance industry. Management of Continuum believes that the acquisition of SOCS represents a logical extension of Continuum's existing business, principally taking advantage of SOCS' management expertise and its product and service offerings to the insurance industry. Continuum intends to enhance the tools and methodologies developed by SOCS and to integrate them with Continuum's current and planned development efforts. Item 7. Financial Statements and Exhibits. (a) Financial Statements of Business Acquired It is impracticable to provide the required financial statements at this time. (b) Pro Forma Financial Information It is impracticable to provide the required pro forma financial information at this time. (c) The exhibits listed below are filed as a part of this report. 2.1 Acquisition Agreement of 100% of the Issued Shares of SOCS Holding 2.2 Warranty Agreement for the Purchase of SOCS Holding dated December 19, The annexes and schedules to the agreement incorporated as Exhibit 2.1 listed below have been omitted from the exhibits filed as a part of this report. Continuum shall furnish supplementally a copy of such omitted annexes and schedules to the Securities and Exchange Commission upon request. Exhibit 1: Chart of the SOCS Group The annexes and schedules to the agreement incorporated as Exhibit 2.2 listed below have been omitted from the exhibits filed as a part of this report. Continuum shall furnish supplementally a copy of such omitted annexes and schedules to the Securities and Exchange Commission upon request. Exhibit 1.3 List of shareholdings of the Companies Exhibit 1.4 CBDIS draft agreements Exhibit 1.5 By-laws and certificates of registration with the commercial Exhibit 1.6.2 Distribution and representation of the share capital of the Exhibit 1.7 Description of Companies activities, address of principal place of business and other offices Exhibit 1.9.1 Balance sheet, profit and loss account and notes to the financial statements for the Companies as of September 30, 1994, Interim financial statements of SOCS, SATURNE and OBJECTUM as of June 30, 1995 and consolidated interim financial statements as of September 30, 1995 Exhibit 1.11 Off balance-sheet commitments Exhibit 1.14 Exception to representations on assets Exhibit 1.15.1 Industrial and intellectual property Exhibit 1.15.2 Owned software and licenses on such software Exhibit 1.16 Personnel of the Companies, with details of remuneration and benefits if any, in excess of the applicable law or Exhibit 1.17 Significant commitments of the Companies Exhibit 1.19 List of the insurance policies of the Companies Exhibit 1.20 List of the bank accounts of the Companies and of the Exhibit 1.23 Distribution rights granted to third parties in the computer software listed in Exhibit 1.15.1 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. January 12, 1996 By: JOHN L. WESTERMANN III 2.1 Acquisition Agreement of 100% of the Issued Shares of SOCS Holding dated December 19, 1995 6 2.2 Warranty Agreement for the Purchase of SOCS Holding dated ACQUISITION AGREEMENT OF 100% OF THE ISSUED SHARES OF SOCS HOLDING Residing at Residence Champagne, 2 allee des Vertus, 77220 - GRETZ 2. Mrs. Marie-Claude ROSSIGNOL represented by Mr. Jean-Louis ROSSIGNOL, Residing at RUEIL MALMAISON - 92500, 8, rue des Pyrenees, Residing at PONTAULT - COMBAULT - 77340, 25 rue Galilee, The parties 1. to 3., acting severally and not jointly (conjointement et non solidairement) for the purposes of this agreement, each for his future prorata shareholding in SOCS HOLDING (respectively 80.86% for Jean-Michel RENCK, 14.41% for Jean-Louis ROSSIGNOL and 4.73% for Jean-Charles MIGINIAC), hereinafter collectively referred to as the "SELLERS", 4. THE CONTINUUM COMPANY INC., A limited company incorporated under the laws of DELAWARE (U.S.A.) whose registered office is at 9500 Arboretum boulevard, Austin, TEXAS 78759 (U.S.A.), Represented by John L. Westermann III, Who represents and warrants that he is fully authorized for the purpose Hereinafter referred to as the "PURCHASER", HAVE AGREED THE FOLLOWING : 1. The SELLERS own 200139 shares of the total 266476 issued shares with a par value of FRF 100 each, issued by SOCS HOLDING, a limited company incorporated under the law of France having its registered office at CHARENTON LE PONT, 94220, Axe Liberte, 2, place de la Coupole, registered at the Commercial Registry of Creteil under n(degree) 338 839 391 ("SOCS HOLDING"). The sharecapital of SOCS HOLDING is represented by 266,476 shares and 3 warrants (hereinafter collectively referred to as the SHARES"), all of which will be owned by the SELLERS immediately prior to the consummation of the transactions contemplated hereby on the COMPLETION DATE (as defined below). 2. SOCS HOLDING is the holding company of the companies appearing in Exhibit 1 hereto, including Societe d'Organisation de Conseils et de Services - SOCS, a French societe anonyme, having its registered office located in CHARENTON LE PONT (92420), 2, Place de la Coupole, Axe Liberte, registered at the CRETEIL Commercial Registry under n(degree) B 323 127 332 ("SOCS") (All companies to be held 100% at COMPLETION except for director shares and except for HYPERION, CBDIS, NTI SARL, DATA SOCS and FINARGOS). 3. The SELLERS and the PURCHASER have agreed to enter into this agreement which is intended to set out the conditions in which the acquisition of the SHARES by the PURCHASER shall be completed. THE FOLLOWING HAS BEEN AGREED: 1.1 This agreement shall be construed by applying the following definitions but only when the corresponding words are spelled in uppercase letters. Two business days after the date when the CONDITION PRECEDENT hereafter defined shall be met but in no event later than the TERM hereafter defined. The earlier of (i) the date when the French Treasury determines not to approve the acquisition provided for hereunder and (ii) March 31, 1996. The condition precedent stipulated under 2. This agreement is subject to the condition precedent of the authorization from the French Treasury Department for the acquisition provided for hereunder. This condition precedent must be met by the TERM at the latest. The PURCHASER undertakes to use its best endeavours so that such authorization be obtained within the shortest possible time limit. Without the prior written consent of the SELLERS, the PURCHASER agrees not to amend its application for such authorization or to otherwise take action the effect of which will be to cause the Treasury Department to extend the time during which it may consider the application for such authorization. Should this condition precedent not be met by the TERM, this agreement shall be null and void. 3. ACQUISITION OF THE SHARES 3.1 Subject to the CONDITION PRECEDENT, the SELLERS hereby agree to sell the SHARES to the PURCHASER, who hereby agrees to purchase them for the price stipulated hereafter. The SELLERS represent that, as of the COMPLETION DATE, they will hold all the SHARES. For the purpose hereof, on the COMPLETION DATE, substantially simultaneously with the PURCHASER's purchase of the SHARES, the SELLERS will purchase such shares and warrants in SOCS HOLDING as they do not currently hold. On the COMPLETION DATE, the SELLERS hereby represent and warrant to the PURCHASER that the representations and warranties in the Warranty Agreement for the Purchase of SOCS HOLDING of even date herewith will be true and correct on the COMPLETION DATE as if made on and as of such date. It is understood that, if such representations and warranties are not true and correct on the COMPLETION DATE, the PURCHASER shall not have any right to refuse to purchase the SHARES, but shall also not be deemed to have waived any right to make an indemnity claim therefor under the Warranty Agreement for the Purchase of SOCS HOLDING (subject to the limitations set forth in the Warranty Agreement for the Purchase of SOCS HOLDING). 3.2 The SELLERS represent and warrant that, as of the COMPLETION DATE, the SHARES will represent 100% of the sharecapital and voting rights issued by SOCS HOLDING or authorized to be issued and that no securities (including options, warrants and other rights to purchase securities) have been issued or are authorized to be issued other than the SHARES. The SELLERS further represent and warrant that, as of the COMPLETION DATE, they hold the SHARES free of any pledge, lien or encumbrance. 3.3 The SHARES shall be transferred to the PURCHASER with all rights to dividend to be paid after the date hereof. The SELLERS warrant that no dividends have been authorized or distributed in 1995, except for the preferential dividend distributed out of 1994 profits to ASTORG - COMPAGNIE D'INVESTISSEMENTS with a total amount of FRF 340,010. Transfer of title to the SHARES shall occur simultaneously with payment of the fixed portion of the purchase price. 3.4 The total price for the SHARES is comprised of a fixed portion and of a variable portion. 3.4.1 The fixed portion amounts to FRF 175,000,000 paid in one installment on the COMPLETION DATE by transfer to the bank accounts of the SELLERS specified by notice in writing to the PURCHASER, or as directed by the SELLERS, each SELLER receiving his prorata share: - Jean-Michel RENCK: FRF 141,505,000, less the amount directed by such SELLER pursuant to the immediately following sentence, - Jean-Louis ROSSIGNOL: FRF 25,217,500, less the amount directed by such SELLER pursuant to the immediately following sentence, - Jean-Charles MIGINIAC: FRF 8,277,500, less the amount directed by such SELLER pursuant to the immediately following sentence. In connection therewith, the SELLERS will provide the PURCHASER with a direction to pay, on the COMPLETION DATE, a portion of the purchase price identified above to the current minority holders of shares and warrants issued by SOCS HOLDING not owned by the SELLERS on the date of this Agreement. 3.4.2 In addition to the Purchase Price stated in Section 3.4.1, the PURCHASER shall pay to the SELLERS a royalty ("COMPLEMENT VARIABLE DE PRIX") equal to a percentage of license fees (hereinafter referred to as the "PAYMENT AMOUNT") collected by the PURCHASER and its consolidated subsidiaries from licensing the OCEANIC software and software derived or developed therefrom outside of the PURCHASER'S core business, all as more particularly described below. The PAYMENT AMOUNT shall be equal to the "APPLICABLE PERCENTAGE" (defined below) of "ELIGIBLE LICENSE FEES" (defined below) received by the PURCHASER and its consolidated subsidiaries during the period beginning on the COMPLETION DATE and ending on December 31, 2007, subject to the minimum payments described below. "ELIGIBLE LICENSE FEES" shall mean fees received by the PURCHASER for rights granted to use or exploit in any way the OCEANIC software (including future versions of the OCEANIC software) or application software developed on the OCEANIC software platform, excluding, however, fees received by the PURCHASER for rights granted to customers in the "PURCHASER'S CORE BUSINESS AREA" (defined below) and fees received by the PURCHASER for rights granted in application software developed specifically for the PURCHASER'S CORE BUSINESS AREA. The "PURCHASER'S CORE BUSINESS AREA" shall mean the insurance industry (including life insurance, property and casualty insurance, health insurance, reinsurance, and all other forms of insurance), the financial services industry and the health care industry. The ELIGIBLE LICENSE FEES shall not include fees for services of any kind, such as maintenance services, development services or consulting services. The PURCHASER shall establish license fees in good faith and shall not attempt to minimize the ELIGIBLE LICENSE FEES by unreasonably characterizing amounts received as service fees rather than license fees. Fees shall be considered received by the PURCHASER when they are received by the PURCHASER or any entity in which the PURCHASER has an equity interest of 50% or more. The "APPLICABLE PERCENTAGE" shall depend upon the calendar year in which ELIGIBLE LICENSE FEES are received as determined by the following table: Installments on the PAYMENT AMOUNT shall be paid every year on February 15th at the latest for the ELIGIBLE LICENSE FEES received during the previous calendar year. The first installment shall be paid on or before February 15, 1997 for the ELIGIBLE LICENSE FEES received by the PURCHASER during the period beginning on the COMPLETION DATE and ending on December 31, 1996. Installments of the PAYMENT AMOUNT shall be allocated among the SELLERS in the following proportions: If the total PAYMENT AMOUNT paid for the period beginning on the COMPLETION DATE and ending on December 31, 1999 is less than FRF 15,000,000, the PURCHASER shall pay to the SELLERS on or before February 15, 2000 a MINIMUM PAYMENT equal to FRF 15,000,000 less the total PAYMENT AMOUNT paid for the period through December 31, 1999. If the total PAYMENT AMOUNT paid for the period beginning on the COMPLETION DATE and ending on December 31, 2000, plus any MINIMUM PAYMENT made pursuant to the preceding sentence, is less than FRF 30,000,000, the PURCHASER shall pay to the SELLERS on or before February 15, 2001 a MINIMUM PAYMENT equal to FRF 30,000,000 less the sum of the total PAYMENT AMOUNT paid for the period through December 31, 2000 and any MINIMUM PAYMENT made pursuant to the preceding sentence. The MINIMUM PAYMENTS shall be paid to the SELLERS in the same proportions as installments of the PAYMENT AMOUNT. The SELLERS shall be entitled to cause a firm of independent public accountants which shall not be a competitor of the PURCHASER (or an affiliate of such competitor), to inspect the books and records of the companies of the PURCHASER's group relating to licenses or rights giving rise to the payment of the PAYMENT AMOUNT. Such accountants shall be required to treat as confidential all information reviewed in the course of their inspection. Such inspection may occur once for a reasonable number of consecutive business days in any 12 month period during normal business hours. The PURCHASER agrees to furnish such accountants with access during normal business hours to all books and records reasonably relating to the applicable licenses and rights. After such accountants deliver their report to the SELLERS, if the SELLERS believe additional amounts are owed by the PURCHASER under the PAYMENT AMOUNT provisions above, the SELLERS will give notice to the PURCHASER setting forth the requested adjustment and make available to the PURCHASER copies of the relevant portion(s) of such accountants' report. If the PURCHASER disagrees, the PURCHASER and the SELLERS, and their respective accountants, shall attempt to resolve to their mutual satisfaction such disagreement. If the parties are not able to agree upon any adjustment, the disagreement will be referred to a third independent accounting firm that is not a competitor of the PURCHASER (or an affiliate of such competitor) (the "ARBITRATOR") who will make its own determination of the adjustment, if any, according to Section 1592 of the French Civil code. The ARBITRATOR shall be appointed by the Paris Trade Court in summary proceedings (en refere) should the parties not agree to his name within 30 days of the date when the PURCHASER has received copies of the relevant portion(s) of the accountants' report. If there shall be any adjustment, PURCHASER will pay the additional amount owed to the SELLERS within 10 days from receipt of the ARBITRATOR's award. This award shall be final and binding upon the parties. If such adjustment exceeds 10%, determined either by agreement of the parties or by decision of the ARBITRATOR, PURCHASER will pay the reasonable fees and expenses of the accountants which conducted the inspection on behalf of the SELLERS and of the ARBITRATOR. Should there be no adjustment or should the adjustment be less than 10% each party shall bear the fees and expenses of its accountants and the fees and expenses of the ARBITRATOR shall be allocated 50% to the SELLERS and 50% to the PURCHASER. 3.5 On the COMPLETION DATE, the SELLERS shall hand over to the PURCHASER the transfer forms (ordres de mouvement) and minority shareholders waiver of their rights of first refusal for all the SHARES. 3.6 The PURCHASER shall bear the transfer taxes related to the sale of the SHARES. On the COMPLETION DATE, the PURCHASER shall cause (se porte fort): - SOCS HOLDING to repay in full all of the outstanding principal, accrued but unpaid interest on ASTORG - COMPAGNIE D'INVESTISSEMENTS' loan with a principal amount of FRF 4,000,000, extended on September 29, 1995 and unpaid ASTORG - COMPAGNIE D'INVESTISSEMENTS' fees, - SOCS to repay in full all of the outstanding principal, and accrued but unpaid interest on ASTORG - COMPAGNIE D'INVESTISSEMENTS' loan with a principal amount of FRF 10,000,000, extended on July 31, 1992. As of September 30, 1995, aggregate accrued but unpaid interest and fees on both loans were FRF 1,043,702,56 including VAT. Since October 1, 1995, the daily interest for boths loans is: FRF 3,260,27. This repayment is to be made by way of transfer to ASTORG - COMPAGNIE D'INVESTISSEMENTS to a bank account specified by such party to the PURCHASER. The SELLERS represent and warrant that these loans are the only loans extended by ASTORG - COMPAGNIE D'INVESTISSEMENTS to SOCS HOLDING and any of the companies appearing in Exhibit 1. Such loans bear interest at a rate of 8,5% per annum. Interest accrued on the loans will be repaid by the relevant companies on the COMPLETION DATE. The SELLERS agree that the PURCHASER shall be entitled to set off against amounts owing by the PURCHASER to the SELLERS under Section 3.4.2. any unsatisfied claims for which it has been finally determined or agreed that the PURCHASER is entitled to indemnification under Article 2 of the "Warranty Agreement for the Purchase of SOCS HOLDING" signed as of this date. 6. BOARD OF DIRECTORS - TRANSFORMATION OF SOCS 6.1 On the COMPLETION DATE, the SELLERS shall procure that as many directors as may be designated by the PURCHASER are appointed to be members of SOCS HOLDING board. 6.2 On or prior to the COMPLETION DATE, SOCS will be transformed into a corporation with directorate and supervisory board (societe anonyme a directoire et conseil de surveillance). Jean-Michel RENCK, Jean-Charles MIGINIAC and Jean-Louis ROSSIGNOL are appointed as the first directors. On the COMPLETION DATE, the SELLERS shall procure that the persons designated by the PURCHASER are appointed to be members of SOCS supervisory board. 7. SPECIFIC UNDERTAKINGS OF THE SELLERS 7.1 The SELLERS and the PURCHASER have agreed that the SELLERS shall have the following responsibilities set opposite their names below: Jean-Michel RENCK: President du conseil d'administration de SOCS HOLDING, President du Directoire de SOCS, Directeur commercial et marketing France Jean-Louis ROSSIGNOL: Directeur general et Administrateur de SOCS HOLDING, membre du Directoire de SOCS, Directeur commercial et marketing Jean-Charles MIGINIAC: Directeur general adjoint et Administrateur de SOCS HOLDING, membre du Directoire de SOCS, Directeur Recherche - Developpement et Services. The SELLERS undertake for a period ending on the fifth anniversary of the COMPLETION DATE not to conduct, Directly or indirectly, either on their own behalf or on behalf of any other person or entity, any activity which competes or may compete with the Protected Products and Services of the CONTINUUM Group and/or the SOCS Group. For the purpose of this Agreement the following words have the following meanings: "CONTINUUM Group" shall mean The Continuum Company and any company more than 50% owned directly or indirectly by The Continuum Company or any of its subsidiaries. "SOCS Group" shall mean SOCS HOLDING and any company more than 50% owned directly or indirectly by SOCS HOLDING. "CONTINUUM" shall mean The Continuum Company, Inc. and any company in its Group. The Valued Products shall mean software or services which provide for the end-user any material function provided by a software or service offered or under development by the SOCS Group or which the SOCS Group is planning to develop in the areas of insurance, financial services and health care. The "CONTINUUM Products and Services" shall mean software or services which provide for the end-user any material function provided by a software or service offered or under development by CONTINUUM or which CONTINUUM is planning to develop in the areas of insurance, financial services and health care; provided that, except with respect to insurance-related software or services, the CONTINUUM Products and Services shall not include any software or services, whether offered or under development, with which the SELLERS have no material involvement, or access to confidential information in respect of, during the five year period of validity of this non-competition covenant. The "Protected Products and Services" shall mean the Valued Products and the CONTINUUM Products and Services. The parties understand and acknowledge that the restraints set forth in this sub-clause 7.2 are intended not to prohibit the SELLERS from finding gainful or interesting employment, but to protect the goodwill of SOCS Group and the CONTINUUM Group with whom the SELLERS have had or will have access to confidential and commercially sensitive and valuable information developed at great expense. It is also understood between the parties that nothing is intended to prohibit the SELLERS from being employed by an insurance company which does not offer, or have under development, any products and services which may compete with the Protected Products and Services of the CONTINUUM Group and/or the SOCS Group. For the 5 years following the COMPLETION DATE, the SELLERS shall not, directly or indirectly, either on their own behalf or on behalf of any other person or entity either (a) solicit, entice, interfere or induce any employee, either salaried or non-salaried, associated with the GROUP, to become affiliated with him or any other person, partnership, joint venture, corporation or other business organization, or (b) hire any employee, either salaried of non-salaried, associated with the CONTINUUM GROUP (unless such employee has not been associated with the CONTINUUM GROUP for at least six months). The PURCHASER acknowledges that, on the COMPLETION DATE, substantially simultaneously with the purchase of the SHARES, SOCS will purchase the shares issued by CBDIS, which it does not currently hold for a total consideration of FRF 3,816,400. The PURCHASER agrees to invest or contribute to SOCS the amount necessary to consummate such purchase. The PURCHASER has reviewed the agreements concerning the said purchase, appended in Exhibit 1.2 to the "Warranty Agreement for the Purchase of SOCS HOLDING", and has no objection to the same. 9. COMMITMENT TO RUN THE SOCS GROUP IN THE ORDINARY COURSE OF BUSINESS The SELLERS undertake that, between the date of execution hereof and the COMPLETION DATE, they will run the companies appearing in Exhibit 1 in the ordinary course of business and in accordance with past practice. No announcement or circular in connection with this Agreement shall be made by or on behalf of any of the parties hereto otherwise than with the prior approval of the others (such approval not to be unreasonably withheld or delayed), except (i) as required by law or stock exchange rules and (ii) for announcements to and conferences with securities analysts and customers of the PURCHASER in respect of which PURCHASER uses its best efforts to advise the SELLERS in advance of the general content thereof. This agreement is binding on the undersigned parties pursuant to the conditions defined above as well as on their heirs successors assigns or beneficiaries which they expressly accept. Each party shall bear the costs and expenses incurred in connection with the transaction contemplated hereunder, except that the PURCHASER shall pay the reasonable fees and expenses, not to exceed FRF 3,000,000 in the aggregate, including the reasonable fees and expenses of the broker and French and US counsel to the SELLERS. 13. APPLICABLE LAW - JURISDICTION 13.1 This agreement shall be governed by and construed in accordance with the law of France. 13.2 Any dispute which may arise in connection with the validity, the interpretation and/or the performance of this agreement shall be submitted to the exclusive jurisdiction of the Paris Courts. 13.3 This agreement shall be signed in English and French. The French version need not be signed on the date hereof but may be signed on or before the COMPLETION DATE. In case of difference, the English version of this agreement shall prevail, except that French words used in the English version and referring to legal concepts shall prevail in all cases. Executed in 4 original copies. . JEAN-MICHEL RENCK . JEAN-LOUIS ROSSIGNOL . . . . . . . . . . . . . JEAN-CHARLES MIGINIAC . CONTINUUM . . . . . . . . . . . . E X H I B I T EXHIBIT 1: CHART OF THE SOCS GROUP WARRANTY AGREEMENT FOR THE PURCHASE This agreement is made in Paris Residing at Residence Champagne, 2, allee des Vertus, 77220 CRETZ Residing at 8, rue des Pyrenees, 92500 RUEIL MALMAISON, Residing at 25, rue Galilee, 77340 PONTAULT - COMBAULT, The parties 1. to 3., acting severally and not jointly (conjointement et non solidairement) for the purposes of this agreement, each for his prorata shareholding in SOCS HOLDING (i.e., Jean-Michel Renck: 80.86%, Jean-Louis Rossignol: 14.41% and Jean-Charles Miginiac: 4.73%), hereinafter collectively referred to as the "GUARANTOR", A limited company incorporated under the laws of the State of Delaware whose principal office is at 9500 Arboretum Boulevard, Austin, Texas, U.S.A., Represented by Mr. John L. Westermann III, its Vice President Who represents and warrants that he is fully authorized for the purpose Hereinafter referred to as the "PURCHASER", In order to allow the acquisition of shares of SOCS HOLDING, a company incorporated under the laws of France, having its registered office located at 2, place de la Coupole, Axe Liberte, 94220 Charenton le Pont, with a share capital of FRF 26.647.000 registered at the Creteil commercial registry under n(degree) 388 839 910 hereinafter referred to And as a condition to this acquisition, the parties referred to as THE GUARANTOR, acting severally and not jointly, HEREBY REPRESENT AND WARRANT THE FOLLOWING: The GUARANTOR makes the following representations as of the date hereof and as of the COMPLETION DATE as defined in the acquisition agreement of even date herewith: The parties referred to as the GUARANTOR have full power and authority to enter into and perform this agreement. The parties referred to as the GUARANTOR are entitled to transfer the ownership of all of the COMPANY's shares to the PURCHASER on the terms of the agreement of even date herewith without the consent of any third party (except for the French Treasury department authorization). 1.3 Exhibit 1.3 is the exhaustive list of the shares held by the COMPANY in the sharecapital of other companies. The COMPANY and companies appearing in Exhibit 1.3 are hereinafter collectively referred to as the COMPANIES. However, prior to making any claim against the GUARANTOR in respect of CBDIS, 66% of which is currently owned by third parties and which SOCS is in the process of acquiring, it is understood that the PURCHASER shall first exercise any recourse available (or cause SOCS to exercise any such recourse) under the warranty granted by such third parties to SOCS in order to obtain an appropriate indemnification and that absent such appropriate indemnification, the PURCHASER shall then exercise its rights against the GUARANTOR hereunder. The COMPANIES do not have and have never had any interest in any company, group, entity, partnership, association (either incorporated or unincorporated) in which the partners thereof may incur any unlimited liability. The COMPANIES do not have any other subsidiaries as defined by French company law. 1.4 Attached as Exhibit 1.4, appears a copy of the draft agreements between SOCS and Messrs. F. ROUGE and G. GOSSET in connection with the purchase by the former of 66% of the share capital of CBDIS. 1.5 MEMORANDUM - ARTICLES OF ASSOCIATION - CERTIFICATES OF REGISTRATION The up to date memorandum and articles of association of the COMPANIES as well as their certificates of registration with the commercial registry are attached hereto in Exhibit 1.5. There are no amendment(s) to these articles of association in progress, nor amendments that have been authorized by any shareholders meeting except for those contemplated by the acquisition agreement of even date herewith. 1.6.1 Exhibit 1.3. comprises the following information: - The amount of authorized, issued and paid up share capital of the COMPANIES, the details of its representation, with the indication of each existing category of shares and its distribution, and - All securities issued or any of those which are intended to be issued by the COMPANIES. 1.6.2 Except in the situations outlined in Exhibit 1.6.2: - There has been no resolution of the shareholders in general meeting to authorize the issue of new shares by the COMPANIES, - The COMPANIES have not issued any securities, nor any other instruments, convertible into, exchangeable for, or giving the right to subscribe for, any equity interest of the COMPANIES and no authorization therefor has been given, and - The COMPANIES have never reduced or amortized their capital. 1.6.3 The shares of the COMPANY to be transferred to the PURCHASER on the COMPLETION DATE consist of 100% of the issued shares of the COMPANY. 1.6.4 The shares of the COMPANY to be transferred to the PURCHASER by the GUARANTOR are free of all liens, pledges, encumbrances or commitments of any type whatsoever. 1.6.5 Once the shares of the COMPANY have been transferred to the PURCHASER, same shall hold, directly or indirectly, 100% of the voting rights and any other rights attached to the shares of the COMPANIES (except for HYPERION, in which the PURCHASER shall hold a 66% interest). - A description of the COMPANIES activities, and - The exact address of their principal place of business and any other offices. 1.8 COMPLIANCE WITH THE LAWS The COMPANIES are duly incorporated, organised and registered and validly existing and in good standing. The COMPANIES have in full force and effect all licences, registrations, permits and other qualifications necessary for the carrying on of all their business in France and each other jurisdiction in which the COMPANIES carry on business. 1.9.1 Exhibit 1.9.1 hereattached contains: - The balance sheet, the profit and loss account and the notes to the financial statements for the COMPANIES as at September 30, 1994, certified by their statutory auditors, - The interim financial statements of SOCS (together with the interim financial statements of the companies which were absorbed by SOCS - SATURNE and OBJECTUM) as at June 30, 1995, certified by their - The consolidated interim financial statements of the COMPANY as at Hereinafter referred to as the "ACCOUNTS". 1.9.2 The ACCOUNTS fairly and truthfully reflect the COMPANIES' assets and liabilities as at the dates thereof and they were prepared in accordance with generally accepted accounting principles in France applied on a consistent basis. The ACCOUNTS fairly and truthfully reflect the operations and the results of the COMPANIES. 1.9.3 As of the COMPLETION DATE, other than as reflected in the Sept. 30, 1995 balance sheet contained in Exhibit 1.9.1, the Companies have no liabilities, contingent or otherwise, that would be required by French generally accepted accounting principles to be reflected in the Companies' balance sheet, other than (x) liabilities incurred after September 30, 1995 in the ordinary course of business consistent with past practice (excluding any liabilities for indebtedness and any liabilities arising out of commitments or contracts with customers) and (y) liabilities which, individually or in the aggregate, do not exceed FRF 500,000 (excluding a provision of approximately FRF 500,000 for an audit of the COMPANIES by the COMPANIES' independent accounting firm). From September 30, 1995 until the COMPLETION DATE, the COMPANIES have conducted and will conduct their affairs in the ordinary and normal course of business and there has been and will be no adverse material change in the financial and trading position of the COMPANIES. Without limiting the foregoing, from September 30, 1995 to the COMPLETION DATE, the net worth of the COMPANIES has not decreased by more than FRF three million (FRF 3,000,000) and the COMPANIES have not made any commitment to make capital expenditures in excess of FRF five hundred thousand (FRF 500,000) (excluding the commitment to make a capital expenditure for an IBM RS6000, an IBM AS/400 and the build out for the 7th floor at the premises of the COMPANY). The COMPANIES are not in "cessation des paiements", nor have they entered into any assignment for the benefit of creditors and have not entered into any bankruptcy and/or insolvency proceedings of any kind, whether judicial or amiable. 1.11 OFF BALANCE SHEET COMMITMENTS The COMPANIES have no commitments outside the balance sheet (engagement hors bilan) other than those which are shown in Exhibit 1.11 and other than those which, individually or in the aggregate, do not exceed FRF five hundred thousand (FRF 500,000). 1.12 TAXES, DUTIES AND OTHER GOVERNMENT OR STATUTORY LEVIES 1.12.1 The COMPANIES have always duly filed all returns and reports relating to taxes and social charges required to be filed and all such returns are correct and complete in all material terms. 1.12.2 The COMPANIES have duly and timely paid all taxes, duties and other governmental levies (including tax and custom authorities) as well as all social security charges and any other payments due or arising from the employment of any personnel. 1.12.3 There is no existing or pending investigation or enquiry by any authority, commission, body or agency, nor any pending or threatened judicial or administrative proceedings having as an object the ascertainment or enforcement of the COMPANIES liability for taxes or social security charges or other payments to be made due to the employment of any personnel. The COMPANIES are not a party to nor, to the knowledge of the GUARANTOR, are they threatened to become a party to: - Any disputes, litigation or proceedings against them, before any court, governmental agency or arbitration tribunal, and/or - Any judicial decision, award, decree, order or resolution entered or issued against them by any court, governmental agency, arbitration except for those which appear in Exhibit 1.13 and except for those arising between the date hereof and the COMPLETION DATE which, if adversely determined, would not have a material adverse effect on the financial position of the COMPANY. 1.14 OWNERSHIP OF THE ASSETS - LIENS - RIGHTS - PRIVILEGES The COMPANIES have good title to all their properties and assets, and to the knowledge of the GUARANTOR, nothing can affect the title to the ownership of this property. These items on the balance sheet are: - In a state of fair wear and tear taking into account their age and the provisions for depreciation which appear in the ACCOUNTS, and - Free from all liens, encumbrances or commitments of any nature whatsoever except those which do not, individually or in the aggregate, affect the use or value of the underlying property or except as set forth in Exhibit 1.14. The "fonds de commerce" of the COMPANIES are free from all liens, encumbrances and privileges. 1.15 INTELLECTUAL AND INDUSTRIAL PROPERTY 1.15.1 Exhibit 1.15.1 comprises an exhaustive list of all items of industrial property and intellectual property and, in particular, of all software, trademarks, patents, tradenames and copyrights used by the COMPANIES. Exhibit 1.15.1 lists the nature of the title and protections that the COMPANIES have for each of these items. 1.15.2 The COMPANIES own, free and clear of all liens and privileges, the intellectual property rights pertaining to the software appearing in Exhibit 1.15.2 (hereinafter referred to as the "Intellectual Property" and, except as set forth in Exhibit 1.15.2, the COMPANIES have treated such software as trade secrets. No representation is made as to whether such ownership would be recognized in any jurisdiction which does not recognize ownership rights in intellectual property by companies similarly situated to the COMPANIES. Exhibit 1.15.2 comprises an exhaustive list of all licenses granted by the COMPANIES on the said software. The GUARANTOR does not have knowledge of (i) any notice or claim or other that the rights of the COMPANIES in the Intellectual Property are not valid or enforceable, or (ii) any infringement upon or conflict with any intellectual property owned by any third party other than infringements that would not, individually and in the aggregate, have a material adverse effect. The GUARANTOR does not have knowledge of any infringement by any person of any Intellectual Property and to the knowledge of the GUARANTOR, the COMPANIES have not taken or omitted to take any action which action or omission would have the waiving of any of its rights with respect thereto. The development, use, licensing, marketing and distribution of the computer software listed in Exhibit 1.15.2 are not infringing any intellectual property rights of any third party, except that, with respect only to patent rights of third parties in jurisdictions in which the COMPANIES do not carry on business, this representation is made to the knowledge of the GUARANTOR. Exhibit 1.16 comprises an exhaustive list of the employees of the COMPANIES, as of this date, indicating, in relation to each of them: - The date of birth and number of years of employment, - The duties, functions and status or title and remuneration, and - All of the benefits and/or rights granted in excess of those provided for by law or by the "conventions collectives" (Collective employment agreements). There exists no specific contract between any of the COMPANIES and its employees (accord d'entreprise) or any other similar commitment of any of the COMPANIES to its employees. With the exception of the employment contracts between the COMPANIES and the employees referred to in Section 1.16, Exhibit 1.17 comprises an exhaustive list of each of the contracts and commitments involving the COMPANIES that: - involve a total commitment, in one or several agreements, of an amount greater than FRF five hundred thousand (FRF - have a duration greater than one year or may not be terminated without respecting a notice period of one year or more. All receivables of the COMPANIES, unpaid at the date hereof and at the COMPLETION DATE, are actually due, properly recorded for goods and services which have been actually delivered/rendered and the GUARANTOR has no knowledge of any dispute by payors of accounts receivables concerning their obligation to pay. The GUARANTOR has no reason to believe that the accounts receivables are not collectible. The COMPANIES subscribe to insurance policies with recognized insurance companies for all risks against which companies of their size typically obtain insurance, a list of all such insurance contracts being attached as Exhibit 1.19 hereto. The COMPANIES have duly paid all premiums due up to the present date and generally fulfilled all the obligations under the aforesaid policies so that they are entitled to all the benefits guaranteed thereunder. The GUARANTOR is not aware of any reason why the amount of insurance stated in such policies would not be available. A list of the bank accounts of the COMPANIES and of the signatories to these bank accounts is attached hereto as Exhibit 1.20. The COMPANIES have unrestrained control of all the sums credited to the said bank accounts. There is no customer relationship (consisting of one or multiple contracts) under which the cost to one of the COMPANIES of completing its tasks for such customer pursuant to such contract(s) will exceed the revenue remaining to be recognized to be received from such customer and the effect of which would be materially adverse to the COMPANIES taken as a whole. There are no contracts prohibiting any of the COMPANIES from doing business in any jurisdiction. No distribution rights in the computer software listed as owned in Exhibit 1.15.1 have been granted to any third parties except as set forth in Exhibit 1.23. The COMPANIES are not in default under any contract, except for (i) defaults which, individually or in the aggregate, would not have a material adverse effect on the financial condition of the COMPANIES and (ii) to GUARANTOR's knowledge, any other default. 2.1 SCOPE OF THE WARRANTIES The parties referred to as the GUARANTOR, severally and not jointly, warrant the accuracy and truthfulness of the representations made in this document and in its Exhibits. The GUARANTOR shall indemnify the PURCHASER from, against and with respect to any loss or damage suffered by the COMPANIES, arising out of any misrepresentation or breach of warranty. Disclosures made in any Exhibit to this Agreement shall relieve the GUARANTOR from his liability hereunder to the extent that the amount of the aforesaid loss or damage suffered by the COMPANIES has been set forth in such disclosures and that the appropriate provisions, if they are required by French generally accepted accounting principles, have been recorded in the ACCOUNTS. For the purpose hereof, an indemnifiable loss or damage shall be a loss or damage computed on a net after-tax basis taking account of all causes directly related to such loss or damage for mitigating the same (e.g. insurance proceeds). Tax reassessments which only pertain to the disallowance of the deductibility of a charge which is deductible from future taxable profits will only be taken into consideration for the amount of the corresponding penalties and/or interest. These warranties shall be in full force and valid until: - March 31, 1998 as regards any matters other than the tax, social contributions and customs matters, and - the end of a one month period following the last day on which the competent authorities may exercise recourse regarding all tax, social contributions and customs matters. 2.3 DE MINIMUS - CAP 2.3.1 The GUARANTOR shall not be obligated to indemnify the PURCHASER hereunder unless and until the aggregate amount of all claims against the GUARANTOR exceeds the sum of FF 3,000,000 and then only for the amount in excess thereof; provided that this provision shall not apply to claims by the PURCHASER for intentional misrepresentation or for misrepresentation or breach of warranty under Section 1.1, 1.6, the first paragraph of Section 1.15.2, the fifth paragraph of Section 1.15.2, 1.22 or 1.23. The PURCHASER shall use commercially reasonable efforts to mitigate any loss for which indemnification is sought. 2.3.2 GUARANTOR's total liability hereunder shall not exceed: (a) for intentional misrepresentation, no limit; (b) for misrepresentations and breaches of warranty under Sections 1.1, 1.6, the first paragraph of 1.15.2, the fifth paragraph of 1.15.2 (relating to infringement of copyrights and trade secrets of third parties), 1.22 and 1.23, FRF one hundred and seventy eight million (FRF (c) for misrepresentations and breaches of warranty under Section 1.9.3, 1.11 and the fifth paragraph of 1.15.2 (relating to infringement of patents of third parties), FRF one hundred million (FRF 100,000,000); and (d) for any misrepresentations and breaches of warranty not falling within clauses (a), (b) or (c) above, FRF forty million (FRF 40,000,000). Any liability hereunder shall be several and not joint in the following percentages : with each being only liable for his percentage of any particular loss or damage. For the purposes of this agreement, the PURCHASER, as promptly as practicable, shall give notice of any indemnifiable loss or damage hereunder to the GUARANTOR. The failure of the PURCHASER to give such notice shall not relieve the GUARANTOR of its indemnification obligations hereunder, except to the extent such failure results in a lack of actual notice to the GUARANTOR and the GUARANTOR is materially prejudiced as a result of failure to receive such notice (e.g. cannot exercise a recourse or present his arguments against a third party claim). In the case of any claim asserted by a third party, the PURCHASER shall permit the GUARANTOR, at its option and expense, to take over and assume the defense of any such claim by counsel reasonably satisfactory to the PURCHASER and to settle or otherwise dispose of the same; provided that the PURCHASER may at its discretion at all times participate, at its own expense, in such defense by counsel of its own choice; and provided further that the GUARANTOR shall, to the extent possible, consult with the PURCHASER with respect to any such defense or settlement or disposition. In the event the GUARANTOR does not accept the defense of any claim within 30 days of delivery of notice thereof by the PURCHASER, the PURCHASER shall have the right to defend against any such claim but shall not be entitled to settle or agree to pay in full such claim or demand until it is finally judicially determined that he should do so or GUARANTOR consents thereto. 3. TRANSFER OF THE WARRANTIES The PURCHASER will not be allowed to transfer the benefit of this agreement to any third party without the prior writtent consent of the GUARANTOR and such consent will not be unreasonably withheld. This clause 3 does not apply to a transfer to any legal entity in which the PURCHASER is holding directly or indirectly more than fifty per cent of the voting rights, but no such transfer will relieve PURCHASER of any obligations hereunder. 4. APPLICABLE LAW - JURISDICTION 4.1 This agreement is governed by the laws of France. 4.2 Any dispute which may arise in connection with the validity, the interpretation and/or the performance of this agreement shall be submitted to the exclusive jurisdiction of the Paris Courts. 4.3 This agreement shall be signed in English and French. In case of difference, the English version of this agreement shall prevail, except that French words contained in the English version and referring to legal concepts shall prevail in all cases. Executed in 4 original copies, . Jean-Michel Renck . Jean-Louis Rossignol . . . . Jean-Charles Miginiac . Continuum . . 1.3 List of shareholdings of the COMPANIES 1.5. By-laws and certificates of registration with the commercial registry 1.6.2. Distribution and representation of the share capital of the COMPANIES 1.7. Description of COMPANIES activities, address of principal place of 1.9.1. Balance sheet, profit and loss account and notes to the financial statements for the COMPANIES as of September 30, 1994, Interim financial statements of SOCS, SATURNE and OBJECTUM as of June 30, 1995 and consolidated interim financial statements as of September 30, 1995 1.14. Exception to representations on assets 1.15.1. Industrial and intellectual property 1.15.2. Owned software and licences on such software 1.16. Personnel of the COMPANIES, with details of remuneration and benefits if any, in excess of the applicable law or convention collective 1.17. Significant commitments of the COMPANIES 1.19 List of the insurance policies of the COMPANIES 1.20 List of the bank accounts of the COMPANIES and of the signatories to 1.23 Distribution rights granted to third parties in the computer software	8-K	8-K	1996-01-12T00:00:00	1996-01-12T16:20:54
0000950134-96-000093	0000950134-96-000093_0001.txt	FIRST: The name of the corporation is CANYON RESOURCES CORPORATION. SECOND: The address of the Corporation's registered office is 100 West 10th Street, in the city of Wilmington, County of New Castle, State of Delaware. The name of its registered agent is THE CORPORATION TRUST COMPANY. THIRD: (a) Purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. (b) In furtherance of the foregoing purposes, the Corporation shall have and may exercise all of the rights, powers and privileges granted by the General Corporation Law of the State of Delaware. In addition, it may do everything necessary suitable and proper for the accomplishment of any of its corporate purposes. FOURTH: The aggregate number of shares that the Corporation shall have authority to issue is 110,000,000 shares of stock consisting of 100,000,000 shares of Common Stock, $.01 par value per share and 10,000,000 shares of Preferred Stock, $.01 par value per share. The Board of Directors of the Corporation is expressly authorized to determine the designations, rates, privileges, restrictions, rights and conditions of the Preferred Stock, including, without limitation, the dividend rates, conversion rights, preemptive rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms of any future series of Preferred Stock, the number of shares constituting such series and the designation thereof, without any vote or action by the Corporation's shareholders. FIFTH: The name and address of the incorporator is: SIXTH: The names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualified are as follows: Robert L. Fuchs Geosystems Corporation Thor Gjelsteen Ferret Exploration Company Richard H. De Voto 675 Estes Street William W. Walker 5370 Pineridge Road William G. Webb Ferret Exploration Company (a) Shareholder Voting. Each outstanding share of Common Stock shall be entitled to one vote and each outstanding fractional share of Common Stock shall be entitled to a corresponding fractional vote on each matter submitted to a vote of stockholders. Cumulative voting shall not be allowed in the election of directors. (b) Directors. Number, Election and Terms. The business and affairs of the Corporation shall be managed and controlled by a Board of Directors consisting of not less than three (3) persons. The exact number of directors shall be fixed from time to time by the Board of Directors pursuant to a resolution amending the Bylaws of the Corporation adopted by a majority of the entire Board of Directors. At the 1989 Annual Meeting of Stockholders, the directors shall be divided into three classes as nearly equal in number as possible, with the term of office of the first class to expire at 1990 Annual Meeting of Stockholders, the term of office of the second class to expire at the 1991 Annual Meeting of Stockholders and the term of office of the third class to expire at the 1992 Annual Meeting of Stockholders. At each Annual Meeting of Stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders after their election. (c) Newly created directorships and vacancies. Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by a majority vote of the directors then in office, and directors so chosen shall hold office for a term expiring at the Annual Meeting of Shareholders at which the term of the class to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (d) Removal. Any director or the entire Board of Directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 66 2/3% of the voting power of all shares of the Corporation entitled to vote for the election of directors. (e) Amendment, Repeal, Etc. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 66 2/3% of the voting power of all of the shares of the corporation entitled to vote for the election of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article SEVENTH. EIGHTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title VIII of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title VIII of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. NINTH: The election of directors need not be by written ballot unless the bylaws of the Corporation so provide. TENTH: The board of directors of the Corporation is expressly authorized to make, alter or repeal the bylaws of the Corporation. ELEVENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. TWELFTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (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 the law, (iii) for paying dividends or approving a stock purchase or redemption which is illegal or otherwise impermissible or prohibited under the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Dated this 15th day of August, 1979. CITY AND COUNTY OF DENVER ) Before me, Sarah Otis Pinter, a Notary Public of Colorado, on the 15th day of August, 1979, personally appeared Nancy A. Walla, to me known and known to be the person who signed the foregoing Certificate of Incorporation, who being duly sworn, acknowledged that she signed, sealed and delivered the same as her voluntary act and deed, for the uses and purposes therein expressed, and that the facts stated therein are true. My commission expires: December 17, 1979. CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES AND PRIVILEGES OF SERIES A PREFERRED STOCK OF The undersigned, Richard H. De Voto and Linda J. Engel hereby certify that: 1. They are the duly elected and acting President and Secretary, respectively, of Canyon Resources Corporation, a Delaware corporation 2. The following is a resolution of the Board of Directors of the corporation, duly adopted as of December 12, 1990 pursuant to Section 151(g) of the Delaware Corporation Law and Article FOURTH of the corporation's Certificate of Incorporation, which resolution sets forth the rights, preferences, and privileges of the corporation's Series A Preferred Stock: BE IT RESOLVED, that the Company, pursuant to the provisions of its Certificate of Incorporation, as amended, hereby authorizes and establishes one million shares of "Series A Preferred Stock" containing the designations, voting rights, and preferences set forth in Exhibit A attached hereto and incorporated herein by this reference. {The following provisions are the terms of the Series A Preferred Stock as set forth in Exhibit A to the above resolutions of the corporation's Out of the 10,000,000 authorized shares of Preferred Stock of the corporation, having a par value of $0.01 per share, as set forth in Article FOURTH of the corporation's Certificate of Incorporation, 1,000,000 Shares are designated "Series A Preferred Stock." These shares shall have the rights, preferences, and privileges as set forth in this Certificate of Designation (hereafter the "Certificate"). Subject to the dividend rights of any future series of preferred stock, the holders of shares of Series A Preferred Stock shall be entitled to participate with the holders of Common Stock and to receive, out of any assets legally available therefor, when, as, and if declared by the Board of Directors, dividends paid on its Common Stock in an amount equal to the amount of dividends paid on the Common Stock, assuming for this purpose that the Series A Preferred Stock had, at the time of declaration and payment of such dividend, been converted into shares of Common Stock as provided below in Section 4 of this Certificate, at the then existing rate of conversion. (a) In the event of any liquidation, dissolution, or winding up of this corporation, either voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive, subject to the liquidation rights of future series of preferred stock and prior and in preference to any distribution of any of the assets of this corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) $2.50 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price") and (ii) an amount equal to all declared and unpaid dividends on such shares. If, upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the corporation legally available for distribution shall, subject to the liquidation rights of future series of preferred stock, be distributed ratably among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder. (a) In the event of the termination, for whatever reason, on or prior to May 31, 1991, of that certain Farm-In Agreement (hereafter the "Farm-In Agreement"), effective December 1, 1990, between the corporation, CR Briggs Corporation, a Colorado corporation, and Kennecott Exploration Company, a Delaware corporation (a copy of which Farm-In Agreement shall be maintained for inspection by any shareholder at this corporation's principal office), the holders of at least a majority of the then outstanding Series A Preferred Stock shall have the right, at their option, to cause this corporation to redeem, from any source of funds legally available therefor, and prior and in preference to the payment of cash dividends or other distributions on any shares of Common Stock, all of the then outstanding shares of Series A Preferred Stock in exchange for a promissory note as provided in the Farm-In Agreement equal to the Original Series A Issue Price per share, plus all declared and unpaid dividends (such total price is hereafter referred to as the "Series A Redemption Price"); provided, however, that such election by the holders to have these shares redeemed by the corporation, if made, shall constitute an election to have all the outstanding shares redeemed; and provided further, that this corporation shall only be required to effect such redemption if it is then lawful for this corporation to do so under the Delaware Corporation Law. (b) This option to cause this corporation to redeem these shares of Series A Preferred Stock shall be effected by the holders of at least a majority of such shares sending written notice to the corporation at its principal office of the exercise of this option, which notice shall be effective on the date that it is sent to the corporation and which notice shall call for the redemption of the number of shares of Series A Preferred Stock specified above on a date 21 days following the effective date thereof. Such notice must be sent within 10 days of the date of termination of the Farm-In Agreement. Within 7 business days of the effective date of such notice, the corporation shall send a written notice (hereinafter the "Redemption Notice"), to each holder of record (at the close of business on the business day next preceding the day on which this Redemption Notice is given) of the Series A Preferred Stock to be redeemed, at the address last shown on the records of this corporation for such holder or given by the holder to this corporation for the purpose of notice, notifying such holder of the redemption to be effected, specifying the Redemption Date, the Series A Redemption Price, the place at which payment may be obtained, the date on which such holder's conversion rights (as hereinafter defined) as to such shares terminate, and calling upon such holder to surrender to this corporation, in the manner and at the place designated, the certificate(s) representing the shares to be redeemed. Except as provided in Section 3(c) of this Certificate below, on or after the Redemption Date, each holder of Series A Preferred Stock shall surrender to this corporation the certificate(s) representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable in the manner set forth in Section 3(a) above to the order of the person whose name appears on such certificate(s) as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate(s) are redeemed, a new certificate shall be issued representing the unredeemed shares. (c) From and after the Redemption Date, all rights of the holders of the Series A Preferred Stock designated for the redemption in the Redemption Notice (except the right to receive the Series A Redemption Price without interest upon surrender of the certificate(s)) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the corporation legally available for redemption of shares of Series A Preferred Stock on any Redemption Date are insufficient to redeem the total number of shares of Series A Preferred Stock to be redeemed on such date, those funds which are legally available, prior to any payment of cash dividends or other distributions on any shares of Common Stock, shall be used by the corporation to redeem the maximum possible number of such shares ratably among the holders of such shares of such series in proportion to the total number of such shares of such series. The shares of Series A Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter, when additional funds of the Company are legally available for the redemption of shares of Series A Preferred Stock, such funds shall immediately be used by the corporation to redeem the balance of the shares which the corporation has become obligated to redeem on the Redemption Date but which it has not redeemed in accordance with the terms of the promissory note issued therefor. (d) Upon any repurchase or redemption of shares of Series A Preferred Stock, the corporation shall be prohibited from reissuing such shares. Accordingly, the corporation shall promptly retire such shares pursuant to Section 243 of the Delaware Corporation Law and shall promptly file with the Delaware Secretary of State, in accordance with such provision, a certificate reciting the retirement of such shares and stating that the reissuance of such shares is prohibited. These shares of Series A Preferred Stock so retired shall resume their status as authorized and unissued shares of Preferred Stock as provided in Section 243 of the Delaware Corporation Law. Additionally, upon any repurchase or redemption of shares of Series A Preferred Stock, the corporation shall promptly reduce the stated capital of such shares pursuant to Section 244 of the Delaware Corporation Law. (a) Right to Convert. Subject to such adjustments as may be made pursuant to Section 4 of this Certificate below, each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business five (5) days prior to any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of this corporation or any transfer agent for the Series A Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price by the conversion price for the Series A Preferred Stock at the time in effect for such share (hereafter the "Conversion Price"). The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Series A Issue Price; provided, however, that the Conversion Price for the Preferred Stock shall be subject to adjustment as set forth in Section 4 of this Certificate below. In the event of any conversion of Series A Preferred Stock under this subsection, the converting holder shall be entitled to receive any dividends which may have been declared but have not been paid with respect to the shares of Series A Preferred Stock so converted. In the event of a call for redemption of any shares of Series A Preferred Stock pursuant to Section 3 hereof, the conversion rights of the Series A Preferred Stock shall terminate as to the shares designated for redemption at the close of business five (5) days prior to the Redemption Date. (b) Mechanics of Conversion. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock pursuant to Section 4(a) above, such holder shall surrender the certificate(s) therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Series A Preferred Stock, shall give written notice to this corporation at its principal corporate office of the election to convert the same, and shall state therein the name(s) in which the certificate(s) for shares of Common Stock are to be issued. This corporation shall, promptly thereafter, issue and deliver to such holder of Series A Preferred Stock, or to the nominee(s) of such holder, a certificate(s) for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person(s) entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder(s) of such shares of Common Stock as of such date. (c) Automatic Conversion. Notwithstanding the right of a holder to convert the shares of Series A Preferred Stock into Common Stock at the option of such holder pursuant to Sections 4(a) and (b) above, each share of Series A Preferred Stock outstanding on January 1, 1993 shall automatically be converted on that date into shares of Common Stock at the Conversion Price at the time in effect for such Series A Preferred Stock. Promptly after such date, the corporation shall send written notice of such conversion to each holder of Series A Preferred Stock and shall request in such notice that each such holder surrender the certificate(s) therefor to the corporation. Each such holder thereafter shall surrender such certificate(s) at the office of this corporation or of any transfer agent for the Series A Preferred Stock and shall inform the corporation of the name(s) in which the certificates for shares of Common Stock are to be issued. The corporation shall, promptly thereafter, issue and deliver to such holder of Series A Preferred Stock, or to the nominee(s) of such holder, a certificate(s) for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be effective as of January 1, 1993, and the persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock as of such date. (d) Stock Splits, Stock Dividends, Etc. In the event the corporation should at any time or from time to time, after the date on which the Series A Preferred Stock was initially sold by the corporation, fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into or entitling the holder thereof to receive directly or indirectly additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision, if no record date is fixed), the Conversion Price of the Series A Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of outstanding shares of Common Stock. If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the number of outstanding shares of Common Stock. (e) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 4(d) above, then, in each such case for the purpose of this Section 4(e), the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series A Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization or reclassification of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 5), the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number or shares of stock or other securities or property of the Company or otherwise to which a holder of Common Stock deliverable upon conversion of the Series A Preferred Stock would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. This corporation will not, by amendment of its Certificate of Incorporation (including this Certificate) or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment; provided, however, that nothing herein shall be deemed to prevent the corporation from entering into any such reorganization, recapitalization, etc. if the holders of Series A Preferred Stock are entitled to receive, after such event, securities containing substantially equivalent rights as those contained in the Series A Preferred Stock. (h) No Fractional Shares. No fractional shares shall be issued upon conversion of the Series A Preferred Stock. In lieu of any fractional shares which would otherwise be issuable, the Company shall pay to the holder cash equal to the product of such fraction multiplied by the then current fair market value of one share of Common Stock, computed to the nearest whole cent. The then current fair market value of such shares shall be as determined in good faith by the Board of Directors with reference to the public trading price for such shares. (i) Certificate of Adjustment. Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall have its Chief Financial Officer compute such adjustment or readjustment in accordance with the terms hereof. Such officer shall promptly prepare and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. (j) Notices to Holders of Certain Events. So long as any shares of the Series A Preferred Stock shall be outstanding (i) if the corporation shall pay any dividend or make any distribution upon its Common Stock, of (ii) if the corporation shall offer to the holders of its Common Stock the opportunity for subscription or purchase by them of any shares of stock of any class or any other rights, or (iii) in the event of any capital reorganization of the corporation, reclassification of the capital stock of the corporation, consolidation or merger of the corporation with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the corporation to another corporation, or voluntary or involuntary dissolution, the corporation shall cause to be delivered to each holder of such shares a notice containing a brief description of the proposed transaction, together with the date, as the case may be, on which a record is to be taken for the purpose of such dividend, distribution, or rights or on which such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation, or winding up is to take place. In the case of a dividend or other distribution by the corporation, or any offer by the corporation to the holders of its Common Stock for subscription or purchase by them of stock of any class or other rights, the corporation shall deliver such notice to each holder of the Series A Preferred Stock at least 10 days prior to record date for such dividend, distribution, or subscription right. In the case of a reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation, or winding up, the corporation shall deliver such notice to each holder of Series A Preferred Stock at least 20 days prior to the earlier of the date of a shareholders meeting called to approve such transaction, if any, or the date of such event. (k) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized by unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including the corporation's using its best efforts to obtain the approval of the shareholders to such increase, if required. (l) Notices. Any notice required by the provisions of this Section 4 to be given to the corporation or to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to the corporation or to each holder of record at his address appearing on the books of this corporation. (m) Taxes. The holders of the Series A Preferred Stock shall pay any and all documentary, stamp, or other transactional taxes attributable to the issuance or delivery of shares of Common Stock of this corporation upon conversion of any shares of Preferred Stock. The holder of each share of Series A Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis and being rounded to the nearest whole share). With respect to such vote, such holder shall have full voting rights and powers, equal to the voting rights and powers of the holders of Common Stock, shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. (a) So long as any shares of Series A Preferred Stock remain outstanding, the corporation shall not do any of the following and shall not cause or permit any of its subsidiary corporations to do any of the following without the vote or prior written consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock: (i) Authorize or issue, or obligate itself to issue, any other equity security (including any security convertible into or exercisable for any equity security) that is senior to or on a parity with the Series A Preferred Stock as to redemption rights; or (ii) Increase or decrease the total number of authorized shares of Series A Preferred Stock, other than by redemption or conversion pursuant to Sections 3 and 4 of this Certificate above. (b) The corporation shall not amend its Certificate of Incorporation, without the prior note or written consent of the holders of at least a majority of the then outstanding Series A Preferred Stock, if such amendment would change any of the rights, preferences, or privileges that are intended for the benefit of the holders of the Series A Preferred Stock. Without limiting the generality of the preceding sentence, the corporation shall not amend its Certificate of Incorporation without the prior written consent of the holders of at least a majority of the then outstanding Series A Preferred Stock if such amendment would: (i) Reduce the amount payable to the holders of Series A Preferred Stock upon the voluntary or involuntary liquidation, dissolution, or winding up of the corporation, or change the seniority of the liquidation preference of the holders of Series A Preferred Stock relative to the rights upon such liquidation of the holders of Common Stock; (ii) Reduce the Series A Redemption Price specified in (iii) Make the Series A Preferred Stock redeemable at the option of the corporation; or (iv) Cancel or modify the conversion rights of the Series A Preferred Stock set forth in Section 4 above. 7. Reissuance of Shares Prohibited. No share or shares of Series A Preferred Stock acquired by the Company by reason of redemption, repurchase, conversion, or otherwise shall be reissued, and the corporation shall, promptly upon such event, retire such shares in accordance with Section 243 of the Delaware Corporation Law, including the filing of a certificate with the Delaware Secretary of State reciting such retirement. The shares of Series A Preferred Stock so retired shall resume their status as authorized and unissued shares of Preferred Stock as provided in Section 243 of the Delaware Corporation Law: 3. This Certificate of Designations is filed pursuant to Section 151(g) and 103 of the Delaware Corporation Law and, upon such filing, is intended to be an amendment to the corporation's Certificate of Incorporation. IN WITNESS WHEREOF, the undersigned have executed this Certificate of Designation on December 26, 1990 and by such signatures acknowledge, under penalties of perjury, that this instrument is their act and deed and the act and deed of the corporation and that the facts stated herein are true. /s/ Richard H. De Voto Richard H. De Voto, President	S-3	EX-3.1	1996-01-12T00:00:00	1996-01-12T13:01:08
0000950134-96-000093	0000950134-96-000093_0002.txt	The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. Section 1. Annual Meeting. The annual meeting of the stockholders shall be held at 10:00 o'clock in the morning on the first Wednesday in the month of March in each year, beginning with the year 1980, or such other date as the board shall determine, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. If the election of directors shall not be held on the day designated herein for any annual meeting of the stockholders, or at any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the stockholders as soon thereafter as conveniently may be. Section 2. Special Meetings. Special meetings of the stockholders, for any purpose, unless otherwise prescribed by statute, may be called by the president, or by the board of directors, and shall be called by the president at the request of the holders of not less than a majority of all the outstanding shares of the corporation entitled to vote at the meeting. Such request shall state the purpose or purposes of the proposed meeting. Section 3. Place of Meeting. The board of directors may designate any place, either within or outside Delaware, as the place for any annual meeting or for any special meeting called by the board of directors. A waiver of notice signed by all stockholders entitled to vote at a meeting may designate any place, either within or outside Delaware, as the place for such meeting. If no designation is made, or if a special meeting shall be called otherwise than by the board, the place of meeting shall be the registered office of the corporation in Delaware. Section 4. Fixing Date for Determination of Stockholders of Record. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for any other lawful action, the board of directors may fix, in advance, a date as the record date for any such determination of stockholders, which date shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed then the record date shall be: (a) for determining stockholders entitled to notice of or to vote at a meeting of stockholders the close of business on the day next preceding the day on which the meeting is held; (b) for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, the day on which the first written consent is expressed, and (c) for determining stockholders for any other purpose the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or a vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Section 5. Notice of Meeting. Written notice stating the place, day and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, unless otherwise required by statute, either personally or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at his address as it appears on the stock books of the corporation, with postage thereon prepaid. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is more than thirty days, or if after adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the Section 6. Voting Lists. The officer who has charge of the stock books of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 7. Quorum. A one-third of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If less than one-third of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time in accordance with Section 5 of this Article, until a quorum shall be present or represented. Section 8. Manner of Acting. When a quorum is present at any meeting, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless a different vote is required by law or the certificate of incorporation, in which case such express provision shall govern. Section 9. Informal Action by Stockholders. Unless otherwise provided in the certificate of incorporation, any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. In the event that the action which is consented to is such as would have required the filing of a certificate with the Secretary of State of Delaware under the General Corporation Law of the State of Delaware, if such action had been voted on by meeting thereof, the certificate filed shall state, in lieu of any statement required under law concerning any vote of stockholders, that written consent has been given in accordance with the provisions of law and that written notice has been given as provided by law. Section 10. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize any other person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 11. Voting of Shares. Unless otherwise provided in the certificate of incorporation and subject to the provisions of Section 4 of this Article, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. Section 12. Voting of Shares by Certain Holders. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent such shares and vote thereon. If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the secretary of the corporation is given written notice to the contrary and if furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall be as set forth in the General Corporation Law of the State of Delaware. Section 1. General Powers. The business and affairs of the corporation shall be managed by or under the direction of its board of directors, except as otherwise provided in the General Corporation Law of the State of Delaware or the certificate of incorporation. Section 2. Number, Tenure and Qualifications. The number of directors of the corporation shall be nine. A slate of three of the nine directors shall be elected at each annual meeting of stockholders, each slate to serve for three year terms except as provided in Section 3 of this Article. office until his successor shall have been elected and qualified or until the earliest of his death, resignation, or removal. Directors need not be residents of Delaware or stockholders of the corporation. Section 3. Vacancies. Any director may resign at any time by giving written notice to the corporation. Such resignation shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any vacancy or newly created directorship resulting from any increase in the authorized number of directors may be filled by the affirmative vote of the majority of directors then in office, although less than a quorum, or by a sole remaining director, and a director so chosen shall hold office until the next annual election and until his successor is duly elected and qualified, unless sooner displaced. If at any time, by reason of death, resignation or other cause the corporation should have no directors in office, then an election of directors may be held in the manner provided by law. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of outstanding shares at the time and who have the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. When one or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill any vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office until the next annual election and until his successor is duly elected and qualified. Section 4. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw immediately after and at the same place as the annual meeting of stockholders. The board of directors may provide by resolution the time and place, either within or outside Delaware, for the holding of additional regular meetings without other notice than such resolution. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the president, chairman of the board, or any two directors. The person or persons authorized to call special meetings of the board of directors may fix any place, either within or outside Delaware, as the place for holding any special meeting of the board of Section 6. Notice. Notice of any special meeting shall be given at least five days previously thereto by written notice delivered personally or mailed to each director at his business address, or by notice given at least two days previously thereto by telegraph. If mailed, such notice shall be deemed to be delivered when deposited in the United States Mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 8. Manner of Acting. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, except as may be otherwise specifically provided by law or the certificate of incorporation. Section 9. Removal. Unless otherwise restricted by law, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of shares then entitled to vote at an election of directors. Section 10. Committees. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no committee power or authority in reference to amend the certificate of incorporation, to adopt an agreement of merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or to amend the bylaws of the corporation; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. Section 11. Compensation. Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at such meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of any committee of the board may be allowed like compensation for attending committee meetings. Section 12. Informal Action by Directors. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors or any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of the board or committee. Section 13. Meetings by Telephone. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee thereof, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting in such manner shall constitute presence in person at the meeting. Section 1. General. The officers of the corporation shall be a president, a chairman of the board, a secretary and a treasurer. The board of directors may appoint such other officers, assistant officers, and agents, a vice-chairmen of the board, assistant secretaries and assistant treasurers, as they may consider necessary, who shall be chosen in such manner and hold their offices for such terms and have such authority and duties as from time to time may be determined by the board of directors. The salaries of all the officers of the corporation shall be fixed by the board of directors. Any number of offices may be held by the same person with the exception of the office of president and secretary being held by the same person, or as otherwise provided in the certificate of incorporation or these bylaws. Section 2. Election and Term of Office. The officers of the corporation shall be elected by the board of directors annually at the first meeting of the board held after each annual meeting of the stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until his successor shall have been duly elected and qualified or until the earliest to occur of his death, resignation or removal. Section 3. Removal. Any officer or agent elected or appointed by the board of directors may be removed at any time by the board whenever in its judgment the best interests of the corporation will be served thereby. Section 4. Vacancies. Any officer may resign at any time upon written notice to the corporation. Such resignation shall take effect at the time stated therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any vacancy occurring in any office by death, resignation, removal or otherwise shall be filled by the board of directors for the unexpired portion of the term. If any officer shall be absent or unable for any reason to perform his duties, the board of directors, to the extent not otherwise inconsistent with these bylaws or law, may direct that the duties of such officer during such absence or inability shall be performed by such other officer or assistant officer as seems advisable to the board. Section 5. Authority and Duties of Officers. The officers of the corporation shall have the authority and shall exercise the powers and perform the duties specified below, and as may be otherwise specified by the board of directors or by these by-laws, except that in any event each officer shall exercise such powers and perform such duties as may be required by law, and in cases where the duties of any officer or agent are not prescribed by these bylaws or by the board of directors, such officer or agent shall follow the orders and instructions of the president and chairman of the board. (a) President and Chairman of the Board. The president and chairman of the board, subject to the direction and supervision of the board of directors, shall: (i) be the chief executive officers of the corporation and have general and active control of its affairs, business and property and general supervision of its officers, agents and employees; (ii) preside at all meetings of the stockholders and the board of directors; (iii) see that all orders and resolutions of the board of directors are carried into effect; and (iv) sign or countersign all certificates, contracts and other instruments of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. In addition, the president and chairman of the board shall, unless otherwise directed by the board of directors, attend in person or by substitute appointed by them, or by written instruments appointing a proxy or proxies to represent the corporation, all meetings of the stockholders of any corporation in which the corporation shall hold any stock and may, on behalf of the corporation, in person or by substitute or proxy, execute written waivers of notice and consents with respect to such meetings. At all such meetings and otherwise, the president and chairman of the board, in person or by substitute or proxy as aforesaid, may vote the stock so held by the corporation and may execute written consents and other instruments with respect to such stock and may exercise any and all rights and powers incident to the ownership of said stock, subject however to the instructions, if any, of the board of directors. Subject to the directions of the board of directors, the president shall exercise all other powers and perform all other duties normally incident to the office of president of a corporation and shall exercise such other powers and perform such other duties as from time to time may be assigned to him by the board. (b) Vice Presidents. The vice presidents, if any shall be elected, and if they be so directed shall assist the president and shall perform such duties as may be assigned to them by the president or by the board of directors. In the absence of the president, the vice president designated by the board of directors or (if there be no such designation) designated in writing by the president shall have the powers and perform the duties of the president. If no such designation shall be made all vice presidents may exercise such powers and perform such duties. (c) Secretary. The secretary shall: (i) record or cause to be recorded the proceedings of the meeting of the stockholders, the board of directors and any committees of the board of directors in a book to be kept for that purpose; (ii) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (iii) be custodian of the corporate records and of the seal of the corporation; (iv) keep at the corporation's registered office or principal place of business within or outside Delaware a record containing the names and addresses of all stockholders and the number and class of shares held by each, unless such a record shall be kept at the office of the corporation's transfer agent or registrar; (v) have general charge of the stock books of the corporation, unless the corporation has a transfer agent; and (vi) in general, perform all other duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president, chairman of the board, or by the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. (d) Treasurer. The treasurer shall: (i) be the principal financial officer of the corporation and have the care and custody of all funds, securities, evidences of indebtedness and other personal property of the corporation and deposit the same in accordance with the instructions of the board of directors; (ii) receive and give receipts and acquittances for monies paid in on account of the corporation, and pay out of the funds on hand all bills, payrolls and other just debts of the corporation of whatever nature upon maturity; (iii) be the principal accounting officer of the corporation and as such prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit, and prepare and furnish to the president, chairman of the board, and the board of directors statements of account showing the financial position of the corporation and the results of its operations; and (iv) perform all other duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the president, the chairman of the board or the board of directors. Assistant treasurers, if any, shall have the same powers and duties, subject to the supervision of the treasurer. Section 6. Surety Bonds. The board of directors may require any officer or agent of the corporation to execute to the corporation a bond in such sums and with such sureties as shall be satisfactory to the board, conditioned upon the faithful performance of his duties and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 1. Certificates. Each holder of stock in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman or a vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Any of or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Certificates of stock shall be consecutively numbered and shall be in such form consistent with law as shall be prescribed by the board of directors. Section 2. Consideration for Shares. Shares shall be issued for such consideration (but not less than the par value thereof) as shall be determined from time to time by the board of directors. Treasury shares shall be disposed of for such consideration as may be determined from time to time by the board. Such consideration may consist, in whole or in part, of cash, personal property, real property, leases of real property, services rendered, or promissory notes, and shall be paid in such form, in such manner and at such times as the directors may require. Section 3. Issuance of Stock. The capital stock issued by the corporation shall be deemed to be fully paid and nonassessable stock, if: (a) the entire amount of the consideration has been received by the corporation in the form or forms set forth in Section 2 of this Article V and if any part of the consideration is in the form of a promissory note or other obligation, such note or obligation has been satisfied in full; or (b) not less than the amount of the consideration determined to be capital pursuant to statute has been received by the corporation in the form or forms set forth in Section 2 of this Article V and the corporation has received a binding obligation of the subscriber or purchaser to pay the balance of the subscription or purchase price; provided, however, nothing contained herein shall prevent the board of directors from issuing partly paid shares as described herein. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend upon partly paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of consideration actually paid thereon. The directors may from time to time demand payment, in respect of each share of stock not fully paid, of such sum of money as the necessities of the business may, in the judgment of the board of directors, require, not exceeding in the whole, the balance remaining unpaid on said stock, and such sum so demanded shall be paid to the corporation at such times and by such installments as the directors shall direct. The directors shall give written notice of the time and place of such payments, which notice shall be mailed to each holder or subscriber to his last known post office address at least thirty days before the time for such payment for stock which is not fully paid. The corporation may, but shall not be required to, issue fractions of a share. If it does not issue fractions of a share, it shall: (a) arrange for the disposition of fractional interest by those entitled thereto; (b) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined; or (c) issue scrip or warrants in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The board of directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the board of directors may impose. The board of directors may, at any time and from time to time, if all of the shares of capital stock which the corporation is authorized by its certificate of incorporation to issue have not been issued, subscribed for, or otherwise committed to be issued, issue or take subscriptions for additional shares of its capital stock up to the amount authorized in its certificate of incorporation. Section 4. Lost Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock the board of directors may direct the issuance of a new certificate in lieu thereof upon such terms and conditions in conformity with law as it may prescribe. The board of directors require a bond in such form and amount and with such surety as it may determine, before issuing a new certificate. Section 5. Transfer of Shares. Upon surrender to the corporation or to a transfer agent of the corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in the stock books. Section 6. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and the corporation shall be entitled to hold liable for calls and assessments a person registered on its books as the owner of shares, and the corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Section 7. Transfer Agents, Registrars and Paying Agents. The board may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the corporation. Such agents and registrars may be located either within or outside Delaware. They shall have such rights and duties and shall be entitled to such compensation as may be agreed. The corporation, to the fullest extent permitted by the General Corporation Law of the State of Delaware and by the common law of the State of Delaware, shall indemnify each person who is or was an officer, director or employee of the corporation acting in his capacity as such and may indemnify each person who is or was an agent of the corporation acting in his capacity as such. The indemnification rights provided by this Article VI are deemed a contract between the corporation and its officers, directors, and employees, and any repeal or modification of those rights will not affect any right of such persons to be indemnified against claims relating to events occurring prior to such repeal or modification. To assure indemnification under this Article VI of all such persons who are or were "fiduciaries" of an employee benefit plan governed by the Act of Congress entitled "Employee Retirement Income Security Act of 1974," as amended from time to time, Section 145 of said the purposes hereof, be interpreted as follows: "other enterprise" shall be deemed to include an employee benefit plan; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to said Act of Congress shall be deemed "fines"; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation. Section 1. Waivers of Notice. Whenever notice is required to be given by law, by the certificate of incorporation or by these bylaws, a written waiver thereof, signed by the person entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting or (in the case of a stockholder) by proxy shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need to be specified in any written waiver or notice unless so required by the certificate of incorporation or these bylaws. Section 2. Presumption of Assent. A director or stockholder of the corporation who is present at a meeting of the board of directors or stockholders at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director or a stockholder who voted in favor of such action. Section 3. Seal. The corporate seal of the corporation shall be circular in form and shall contain the name of the corporation, the year of its organization and the words "Seal, Delaware". The custodian of the seal shall be the secretary, who along with the president, chairman of the board or other officer authorized by the board of directors, may affix the seal to documents of the corporation. Section 4. Fiscal Year. The fiscal year of the corporation shall be as established by the board of directors. Section 5. Amendments. These bylaws may be altered, amended or repealed or new bylaws may be adopted by the board of directors at any meeting of the directors or by the stockholders at any meeting of the stockholders if notice of such alteration, amendment, repeal or adoption is contained in the notice of such stockholders' meeting.	S-3	EX-3.2	1996-01-12T00:00:00	1996-01-12T13:01:08
0000950115-96-000013	0000950115-96-000013_0008.txt	As used in this Plan, the following definitions apply to the terms indicated below: A. "Board" means the Board of Directors of the Company. B. "Committee" means the Stock Option Committee appointed by the Board from time to time to administer the Plan. The Committee shall consist of at least three persons, who shall be directors of the Company, and who shall not be or have been eligible, while serving on the Committee or within one year prior thereto, to receive grants of Options pursuant to this Plan or any plan of the Company or any of its affiliates entitling the participants therein to acquire stock, stock options, or stock appreciation rights of the Company or any of its affiliates. C. "Company" means MEDIQ Incorporated. D. "Fair Market Value" of a Share on a given day means the mean between the highest and lowest quoted selling prices of a Share as reported on the principal securities exchange on which the Shares are then listed or admitted to trading, or if not so reported, the mean between the highest and lowest selling prices as reported on the National Association of Securities Dealers Automated Quotation System, or if not so reported, as furnished by any members of the National Association of Securities Dealers, Inc. selected by the Committee. If the price of a Share shall not be so quoted, the Fair Market Value shall be determined by the Committee taking into account all relevant facts and circumstances. E. "Grantee" means a person who is either an Optionee or an Optionee-Shareholder. F. "Incentive Stock Option" means an Option that qualifies as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code. G. "Nonqualified Option" means an option that is not an Incentive Stock Option. H. "Option" means a right to purchase Shares under the terms and conditions of this Plan as evidenced by an option certificate or agreement for Shares in such form, not inconsistent with this Plan, as the Committee may adopt for general use or for specific cases from time to time. I. "Optionee" means a person other than an Optionee- Shareholder to whom an option is granted under this Plan. J. "Optionee-Shareholder" means a person to whom an option is granted under this Plan and who at the time such option is granted owns, actually or constructively, stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, or its parent or subsidiary corporations. K. "Plan" means this MEDIQ Incorporated 1987 Stock Option Plan, including any amendments to the Plan. L. "Share" means a share of the Company's common stock, par value $1 per share, now or hereafter owned by the Company as treasury stock, or authorized but unissued shares of the Company's common stock, subject to adjustment as provided in this Plan. M. "Subsidiary" means any corporation, now or hereafter existent, in an unbroken chain of corporations beginning with the Company if, at the time of granting an Option, each of the corporations in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. N. Options shall be deemed "granted" under this Plan on the date on which the Committee, by appropriate action, approves the grant of an Option hereunder or on such subsequent date as the Committee may designate. O. As used herein, the masculine includes the feminine, the plural includes the singular, and the singular includes the plural. The purposes of the Plan are as follows: A. To secure for the Company and its shareholders the benefits arising from share ownership by those officers and key employees of the Company and its Subsidiaries who will be responsible for the Company's future growth and continued success. The Plan is intended to provide an incentive to officers and key employees by providing them with an opportunity to acquire an equity interest or increase an existing equity interest in the Company, thereby increasing their personal stake in its continued success and progress. B. To enable the Company and its Subsidiaries to obtain and retain the services of key employees, by providing such key employees with an opportunity to acquire Shares under the terms and conditions and in the manner contemplated by this Plan. 3. Plan Adoption and Term A. This Plan shall become effective upon its adoption by the Board or by the Committee acting pursuant to authority duly vested in it by the Board, and options may be issued upon such adoption and from time to time thereafter; provided, however, that the Plan, if adopted by the Committee, shall be submitted to the Board for its approval at its next regularly scheduled meeting, and further, that the Plan shall be submitted to the Company's shareholders for their approval at the next annual meeting of shareholders, or prior thereto at a special meeting of shareholders expressly called for such purpose; and provided further, that the approval of the Company's shareholders shall be obtained within 12 months of the date of adoption of the Plan. If the Plan is not approved at such a meeting by the affirmative vote of a majority of all shares entitled to vote upon the matter, then this Plan and all Options then under it shall forthwith automatically terminate and be of no force and effect. B. Subject to the provisions hereinafter contained relating to amendment or discontinuance, this Plan shall continue to be in effect for ten (10) years from the date of adoption of this Plan by the Committee or the Board or the date of Shareholder approval, whichever is earlier. No Options may be granted hereunder except within such period of ten (10) years. A. This Plan shall be administered by the Committee. Except as otherwise expressly provided in this Plan, the Committee shall have authority to interpret the provisions of the Plan, to construe the terms of any Option, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Options granted hereunder, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. Without limiting the foregoing, the Committee, shall, to the extent and in the manner contemplated herein, exercise the discretion granted to it to determine who shall participate in the Plan, how many Shares shall be sold to each such participant, and the prices at which Shares shall be sold to participants. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option in the manner and to the extent it shall deem expedient to carry the Plan into effect and shall be the sole and final judge of such expediency. B. No member of the Committee shall be liable for any action taken or omitted or any determination made by him in good faith relating to the Plan, and the Company shall indemnify and hold harmless each member of the Committee and each other director or employee of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been delegated against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Committee) arising out of any act or omission in connection with the Plan, unless arising out of such person's own fault or bad faith. C. Any power granted to the Committee either in this Plan or by the Board, except the granting of any Option or the determination of eligibility of individual employees to participate in the Plan, may at any time be exercised by the Board, and any determination by the Committee, other than with respect to the granting of any Option or the determination of eligibility of individual employees to participate in the Plan, shall be subject to review and reversal or modification by the Board on its own motion. Officers and key employees of the Company and its Subsidiaries shall be eligible for selection by the Committee to participate in the Plan. No member of the Board shall be eligible to participate in the Plan unless he or she is also an officer or employee of the Company or a Subsidiary and no member of the Committee shall be eligible to participate in the Plan. An employee who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options if the Committee shall so determine. A. Subject to adjustment as provided in Paragraph 13 hereof, Options may be issued pursuant to the Plan for the purchase of not more than 1,000,000 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan. B. All Options granted under the Plan shall be clearly identified either as Incentive Stock Options or as Non- qualified Options. Each Option granted under the Plan shall be evidenced by an option certificate in such form, not inconsistent with this Plan, as the Committee may adopt for general use or for specific cases from time to time. C. The aggregate Fair Market Value (determined as of the time Options are granted) of the Shares with respect to which incentive stock options are exercisable for the first time by an Optionee during any calendar year (whether granted under this Plan or any other plan of the Company or any parent of the Company under which incentive stock options may be granted), shall not exceed $100,000. A. The purchase price per Share deliverable upon the exercise of an Option shall be determined by the Committee; provided, however, that the purchase price per Share at which Shares may be purchased pursuant to any Incentive Stock Option shall not be less than 100% of the Fair Market Value of such Shares on the date an Option is granted to an Optionee and shall not be less than 110% of the Fair Market Value of such Shares on the date an Option is granted to an Optionee-Shareholder. B. Payment for Shares purchased by exercise of an Option may be made (1) in cash; (2) in Shares valued at their, Fair Market Value on the date of exercise, or (3) in a combination of cash and Shares. Each Incentive Stock Option and all rights thereunder shall expire and such Incentive Stock Option shall no longer be exercisable on a date not later than ten (10) years from the date on which the Incentive Stock Option was granted. Each Non- qualified Option and all rights thereunder shall expire and such Nonqualified Option shall no longer be exercisable on a date not later than ten (10) years and one (1) day from the date on which the Nonqualified Option was granted. Options may expire and cease to be exercisable on such earlier date as the Committee may determine at the time of grant. Provided, Incentive Stock Option granted to an Optionee-Shareholder and all rights thereunder shall expire and such Incentive Stock Option shall no longer be exercisable on a date not later than five (5) years from the date on which such Incentive Stock Option was granted. All Options regardless of to whom granted shall be subject to earlier termination as provided herein. 9. Conditions Relating to Exercise of Options A. The Shares subject to any Option may be purchased at any time during the term of the option, unless, at the time an Option is granted, the Committee shall have fixed a specific period or periods in which exercise must take place. To the extent an Option is not exercised when it becomes initially exercisable, or is exercised only in part, the Option or remaining part thereof shall not expire but shall be carried forward and shall be exercisable until the expiration or termination of the Option. Partial exercise is permitted from time to time provided that no partial exercise of an Option shall be for a number of Shares having a purchase price of less than $1,000. B. No Option shall be transferable by the Grantee thereof other than by will or by the laws of descent and distribution and Options shall be exercisable during the lifetime of a Grantee only by such Grantee or, to the extent that such exercise would not prevent an Option from qualifying as an incentive stock option under the Internal Revenue Code, by his or her guardian or legal representative. C. Certificates for Shares purchased upon exercise of Options shall be issued either in the name of the Grantee or in the name of the Grantee and another person jointly with the right of survivorship. Such certificates shall be delivered as soon as practical following the date the Option is exercised. D. An Option shall be exercised by the delivery to the Company at its principal office, to the attention of its Secretary, of written notice of the number of Shares with respect to which the Option is being exercised, and of the name or names in which the certificate for the Shares is to be issued, and by paying the purchase price for the Shares in accordance with Paragraph 7 hereof. E. Notwithstanding any other provision in this Plan, no Option may be exercised unless and until (i) this Plan has been approved by the Board and by the shareholders of the Company, (ii) the Shares to be issued upon the exercise thereof have been registered under the Securities Act of 1933 and applicable state securities laws, or are, in the opinion of counsel to the Company, exempt from such registration. The Company shall not be under any obligation to register under applicable Federal or state securities laws any Shares to be issued upon the exercise of an Option granted hereunder, or to comply with an appropriate exemption from registration under such laws in order to permit the exercise of an Option or the issuance and sale of Shares subject to such Option. If the Company chooses to comply with such an exemption from certificates for Shares issued under the Plan, may, at the direction of the Committee, bear an appropriate restrictive legend restricting the transfer or pledge of the Shares represented thereby, and the Committee may also give appropriate stop transfer instructions to the transfer agent of the Company. Provided, however, that if the operation of this Paragraph 9E would cause Incentive Stock Options to become exercisable in such a way as to violate Paragraph 6C hereof, the exercisability of such Incentive Stock Options shall be delayed as necessary to avoid such a violation. F. Any person exercising an Option or transferring or receiving Shares shall comply with all regulations and requirements of any governmental authority having jurisdiction over the issuance, transfer, or sale of securities of the Company or the requirements of any stock exchange on which the Shares may be listed, and as a condition to receiving any Shares, shall execute all such instruments as the Committee in its sole discretion may deem necessary or advisable. G. Each Option shall be subject to the requirement that if the Committee shall determine that the listing, registration or qualification of the Shares subject to such Option upon any securities exchange or under any state or Federal law, or the consent or approval of any governmental or regulatory body is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issuance or purchase of Shares thereunder, such option may whole or in part unless such listing, registration, qualification, consent or approval shall have been effective or obtained free of any conditions not acceptable to the Committee. 10. Effect of Termination of Employment or Death. A. In the event that the employment of a Grantee with the Company or a Subsidiary shall at any time be terminated for cause, then all rights of any kind under any Option then held by such Grantee shall immediately lapse and terminate. B. In the event that a Grantee shall at any time cease to be employed by the Company for any reason other than the termination of the Grantee's employment for cause or the death of the Grantee, the term of each Option held by such Grantee shall expire on the earlier of the termination date set forth in the Option and a date three (3) months after the date on which employment terminates. During such period, the Option shall be exercisable only to the extent it was exercisable at the time of termination of employment. If, however, the death of the Grantee should occur before the date on which the Option would terminate hereunder, the termination of the Option will be governed by subparagraph C below. C. In the event of the death of any Grantee, any Option then held by such Grantee which shall not have lapsed or terminated prior to the Grantee's death, shall, notwithstanding the termination date stated in such Option, be exercisable by the executors, administrators, legatees or distributees of the Grantee's estate for a period of six (6) months after the Grantee's death as to that number of Shares which were purchasable by the Grantee at the time of his or her death. Provided, however, that in no case shall an Incentive Stock Option granted to an Optionee remain exercisable after a date ten (10) years from the date on which such Incentive Stock Option was granted; nor shall an Incentive Stock Option granted to an Optionee- Shareholder remain exercisable after a date five (5) year from the date on which such Incentive Stock Option was granted. 11. No Special Employment Rights. Nothing contained in the Plan or in any Option shall confer upon any Grantee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Grantee from the rate in existence at the time of the grant of an Option. Whether an authorized leave of absence, or absence in military or government service, shall constitute a termination of employment shall be determined by the Committee at the time. 12. Rights as a Shareholder. The Grantee of an Option shall have no rights as a shareholder with respect to any Shares covered by the Option until the date such Option is exercised. Except as otherwise expressly provided in the Plan no adjustment dividends or other rights for which the record date occurs prior to the date of exercise. 13. Anti-dilution Provision. Except as otherwise expressly provided herein, the following provisions shall apply to all Shares authorized for issuance and optioned, granted or awarded under the Plan: A. In case the Company shall (i) declare a dividend or dividends on its Shares payable in shares of its capital stock, (ii) subdivide its outstanding Shares, (iii) combine its outstanding Shares into a smaller number of shares, or (iv) issue any shares of capital stock by reclassification of its Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), the number of shares of capital stock authorized under the Plan will be adjusted proportionately. Similarly, in any such event, there will be a proportionate adjustment in the number of shares of capital stock subject to unexercised Options (but without adjustment to the aggregate option price). B. In the event that the outstanding common stock of the Company is changed or converted into, or exchanged for, a different number or kind of shares or other securities of the Company or of another corporation, by reason of reorganization, merger, consolidation or combination, appropriate adjustment will be made by the Committee in the number and kind of Shares for which Options may or may have been awarded under the Plan, to the end that the proportionate interests of Grantees shall be maintained as before the occurrence of such event; provided, however, that in the event of any kind of delayed transaction which may constitute a change in control of the Company, the Committee, with the approval of the majority of the members of the Board who are not then holding Options, may modify any and all outstanding Options so as to accelerate, as a consequence of or in connection with such transaction, a Grantee's right to exercise any such Option. Whenever an Option is to be exercised under the Plan, the Company shall have the right to require the Grantee, as a condition of exercise of the Option, to remit to the Company an amount sufficient to satisfy the Company's (or a Subsidiary's) Federal, state and local withholding tax obligation, if any, that will, in the sole opinion of the Committee, result from the exercise. 15. Amendment of the Plan. The Plan may at any time or from time to time be terminated, modified or amended by a majority of the shareholders of the Company. The Board may at any time and from time to time modify or amend the Plan in any respect, except that, without shareholder approval, the Board may not (a) materially increase the benefits accruing to participants under the Plan, (b) materially increase the number of Shares which may be issued under the Plan, or (c) materially modify the requirements as to eligibility for participation under the modification or amendment of the Plan shall not, without the consent of a Grantee affect his rights under an Option previously granted to him or her. With the consent of the Grantee, the Board may amend outstanding Options in a manner not inconsistent with the Plan. 16. Miscellaneous. A. It is expressly understood that this Plan grants powers to the Committee but does not require their exercise; nor shall any person, by reason of the adoption of this Plan, be deemed to be entitled to the grant of any Option; nor shall any rights begin to accrue under the Plan except as Options may be granted hereunder. B. All expenses of the Plan, including the cost of maintaining records, shall be borne by Company. FORM OF AMENDMENT TO THE Section 6A of the Company's 1987 Stock option Plan will be amended to read in full as follows: A. Subject to adjustment as provided in paragraph 13 hereof, Options may be issued pursuant to the Plan for the purchase of not more than 2,000,000 Shares; provided, however, that if prior to the termination of the Plan, an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased Shares subject thereto shall again be available for the purposes of the Plan.	10-K405	EX-10.7	1996-01-12T00:00:00	1996-01-12T11:57:13
0000950124-96-000212	0000950124-96-000212_0000.txt	Under the Securities Exchange Act of 1934 RODMAN & RENSHAW CAPITAL GROUP, INC. COMMON STOCK, $0.09 PAR VALUE (Title of Class of Securities) FRANCISCO QUINTANILLA DE LA GARZA, C.P. ABACO CORPORATIVO, S.A. DE C.V. GARZA GARCIA, N.L. MEXICO 66260 (Name, Address and Telephone Number of Person Authorized to receive Notices and Communications) (Dates of Events which Require Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with this statement [ ]. (A fee is not required only if the reporting person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities described in Item 1; and (2) has filed no amendment subsequent thereto reporting beneficial ownership of less than five percent of such class. Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). CUSIP No. 774877 10 4 1. Name of reporting person S.S. or I.R.S. Identification No. of above person Abaco Grupo Financiero, S.A. de C.V., I.R.S. No.: None 2. Check the appropriate box if a member of a group (a) / / 5. Check if disclosure of legal proceedings is required / / pursuant to Items 2(d) or 2(e) 6. Citizenship or place of organization Beneficially Owned by 7. Sole Voting Power with: 11. Aggregate amount beneficially owned by each reporting person 4,625,788 shares of Common Stock 12. Check box if the aggregate amount in row (11) excludes / / 13. Percent of class represented by amount in row (11) 14. Type of reporting person CUSIP No. 774877 10 4 1. Name of reporting person S.S. or I.R.S. Identification No. of above person Abaco Casa de Bolsa, S.A. de C.V., Abaco Grupo Financiero, 2. Check the appropriate box if a member of a group (a) / / 5. Check if disclosure of legal proceedings is required / / pursuant to items 2(d) or 2(e) 6. Citizenship or place of organization Beneficially Owned by 7. Sole Voting Power with: 11. Aggregate amount beneficially owned by each reporting person 4,625,788 shares of Common Stock 12. Check box if the aggregate amount in row (11) excludes certain shares 13. Percent of class represented by amount in row (11) 14. Type of reporting person This Amendment No. 1 amends and supplements the Schedule 13D filed by EDGAR on January 18, 1994 as part of Amendment No. 3 (Final Amendment) to a Schedule 14D-1 (the "Schedule 14D-1") of Abaco Casa de Bolsa, S.A. de C.V., Abaco Grupo Financiero (the "Purchaser") and Abaco Grupo Financiero, S.A. de C.V. ("Parent"). Capitalized terms not defined herein have the meanings set forth in the Schedule 14D-1. ITEM 2. IDENTITY AND BACKGROUND. See Amended Schedule I to Offer to Purchase attached hereto as Exhibit 1 and incorporated herein by reference, which amends and supersedes Schedule I to the Offer to Purchase previously filed as part of Exhibit (a)(1) of the Schedule 14D-1. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. The Purchaser used working capital in the aggregate amount of $17,121,521.34 to effect the purchases reported herein. ITEM 4. PURPOSE OF TRANSACTION. The Purchaser entered into the private transactions reported herein with certain former directors and/or executive officers of the Company to purchase common stock, par value $.09 per share, of the Company (the "Common Stock") pursuant to the terms of the Acquisition Agreement dated as of November 17, 1993, among the Purchaser, Parent and the Company, which agreement was filed as Exhibit (c)(1) of the Schedule 14D-1. Subsequent to the consummation of the Purchaser's tender offer for a majority of the outstanding shares of the Company, the Company substantially replaced its senior management team. On April 11, 1994, the Company appointed Charles W. Daggs, III as its President and Chief Executive Officer. Following Mr. Daggs' appointment, the Company conducted a review of each of its core businesses and developed overall Company and departmental business plans. Management determined that the Company was in urgent need of additional capital to conduct its current business. It concluded that the Company would require a capital infusion of $25 million both to meet its current needs and to implement the new business plans. In light of the Company's financial condition, Purchaser appeared to be the most viable source of this additional capital. Purchaser indicated its willingness to provide the Company with an aggregate of $25 million in additional capital, which amount was requested by Mr. Daggs in a meeting with management of the Purchaser. On June 24, 1994, Confia, S.A., Institucion de Banca Multiple, Abaco Grupo Financiero ("Confia, S.A."), a commercial banking subsidiary of Parent, entered into an agreement with the Company pursuant to which Confia, S.A. agreed to provide the Company with $10 million of capital in the form of a loan. Purchaser agreed to provide the remaining $15 million in capital in the form of an investment in additional shares of the Common Stock. However, the New York Stock Exchange, Inc. (the "Exchange"), which lists the Company's outstanding Common Stock, has a policy requiring stockholder approval of such an issuance. Management of the Company believed that the process of calling a special stockholders' meeting to approve the issuance of the Common Stock and preparing and circulating proxy materials would have unacceptably delayed the infusion of capital. Therefore, the Company, with the approval of the Exchange, entered into a Stock Purchase Agreement with the Purchaser as of June 24, 1994 (the "Stock Purchase Agreement") which is attached hereto as Exhibit 2 and incorporated herein by reference, under which the Company issued 150 shares of Series A Non-Voting Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred Stock") to Purchaser in a private placement. Purchaser purchased the Series A Preferred Stock at a price of $100,000 per share (the "Subscription Price") for an aggregate purchase price of $15,000,000. Under the terms of the Stock Purchase Agreement, each of the 150 outstanding shares of the Series A Preferred Stock converted automatically into fully paid and nonassessable shares of Common Stock upon the approval of such conversion by the stockholders of the Company pursuant to the Exchange requirements. The Series A Preferred Stock was otherwise not convertible. Each share of Series A Preferred Stock was to be converted into the number of shares of Common Stock equal to the Subscription Price divided by the conversion price. The Company and Purchaser agreed in a letter agreement executed simultaneously with the Stock Purchase Agreement that the conversion price would be fixed by the Board of Directors of the Company following receipt of an analysis of the fair market value of the Common Stock to be prepared by a "big six" public accounting firm (the "Valuation Report") and upon recommendation of the Company's Audit Committee. The Valuation Report, which was prepared by KPMG Peat Marwick LLP, concluded that the fair market value of the Common Stock to be issued to Purchaser in the conversion was $7.25 per share as of June 24, 1994. This conversion price would result in the receipt by Purchaser upon conversion of the Series A Preferred Stock of 13,793.103 shares of Common Stock for each of its 150 shares of Series A Preferred Stock, for a total of 2,068,965 shares of Common Stock. The Series A Preferred Stock was fully converted. See Item 5(c). On September 29, 1995, the Company and Confia, S.A. entered into a Note Conversion Agreement (the "Note Conversion Agreement"), a copy of which is attached hereto as Exhibit 3 and incorporated herein by reference, pursuant to which the Company granted Confia, S.A. the right, at its option, to convert the aggregate principal amount of the credit outstanding from Confia, S.A. to the Company, together with any accrued interest thereon, into shares of the Company's Common Stock at a floating conversion ratio equal to the book value per share of the Company's Common Stock determined on the date of conversion in accordance with the terms of the Note Conversion Agreement. However, the debt is not presently convertible because conversion is subject to approval by the stockholders of the Company pursuant to the listing requirements of the Exchange or, in the alternative, a rights offering to the stockholders of the Company for their pro rata number of shares at a cash price equal to the conversion ratio in accordance with the terms of the Note Conversion Agreement. In any event, such a rights offering would be required to be made within one year after any conversion. Pursuant to the agreement, Confia, S.A. loaned the Company an additional $2,500,000 to pay off the loan of a third party subordinated lender which was then due and agreed to issue a standby letter of credit for the account of the Company in the amount of $6,000,000. On November 10, 1995, the Company and Confia, S.A. entered into Amendment No. 1 to Note Conversion Agreement (the "Amendment No. 1 to Note Conversion Agreement"), a copy of which is attached hereto as Exhibit 4 and incorporated herein by reference, pursuant to which Confia, S.A. loaned the Company an additional $10,000,000. As of the date of the Amendment No. 1 to Note Conversion Agreement, the aggregate principal amount of the credit outstanding from Confia, S.A. to the Company was $32,500,000 and the conversion ratio, subject to adjustment, was $1.81 per share. The outstanding credit consists of the $10,000,000 loan which is the subject of the Amendment No. 1 to Note Conversion Agreement, the $2,500,000 loan, the $6,000,000 letter of credit to be issued, the $10,000,000 loan on June 24, 1994 discussed above and a $4,000,000 loan on August 25, 1995. The Note Conversion Agreement is assignable by Confia, S.A. to the Purchaser and in the event of any conversion it is likely that the Purchaser would become the owner of the shares of Common Stock subject to the Note Conversion Agreement. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. (a) As of November 30, 1995, the Purchaser and Parent respectively each beneficially owned an aggregate amount of 4,625,788 shares of the Company's Common Stock. Based upon the most recently available filing by the Company with the Securities and Exchange Commission, which shows an aggregate of 6,645,802 shares of the Company's Common Stock outstanding, such shares constitute approximately 69.6% of the outstanding shares of the Company's Common Stock. (b) The Purchaser and Parent share the power to vote and the power to dispose of the aggregate number of shares of the Company's Common Stock reported herein as beneficially owned by each of them. (c) On January 10, 1995, pursuant to previously disclosed agreements dated January 10, 1994 entered into in accordance with the terms of the Acquisition Agreement, the Purchaser purchased an aggregate of 166,820 shares of outstanding Common Stock at a purchase price of $10.50 per share plus accrued interest calculated at 4% per annum from the date of such agreements from six former directors and executive officers of the Company in private transactions. On April 10, 1995, pursuant to another previously disclosed agreement dated January 10, 1994 entered into in accordance with the terms of the Acquisition Agreement, the Purchaser purchased an aggregate of 27,000 shares of outstanding Common Stock at a purchase price of $10.50 per share plus accrued interest calculated at 4% per annum from the date of such agreement from another former director and executive officer of the Company. The Purchaser had a similar agreement dated January 10, 1994 with another former director and executive officer of the Company to purchase 2,800 shares of Common Stock to take place on January 10, 1995, but the purchase did not occur on that date and it is the Purchaser's position that such agreement is null and void. At a special meeting of stockholders on January 31, 1995, the stockholders approved the conversion of the Series A Preferred Stock into 2,068,965 shares of Common Stock after solicitation of proxies pursuant to a proxy statement dated December 27, 1994, and the shares were issued to Purchaser. Purchaser waived its right to receive the dividends which had accrued prior to conversion. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. See Items 4 and 5(c). ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. (1) Amended Schedule I to Offer to Purchase (2) Stock Purchase Agreement between the Purchaser and the Company. (3) Note Conversion Agreement between Confia and the Company. (4) Amendment No. 1 to Note Conversion Agreement. (5) Agreement between the Purchaser and Frederick G. Uhlmann. (6) Agreement between the Purchaser and Norman E. Mains. (7) Agreement between the Purchaser and Lawrence R. Helfand. (8) Agreement between the Purchaser and Kurt B. Karmin. (9) Agreement between the Purchaser and Victor C. Chigas. (10) Agreement between the Purchaser and Scott H. Lang. (11) Agreement between the Purchaser and Mark J. Grant. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Amendment is true, complete and correct. ABACO GRUPO FINANCIERO, S.A. DE C.V. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Amendment is true, complete and correct. ABACO CASA DE BOLSA, S.A. DE C.V.,	SC 13D	SC 13D	1996-01-12T00:00:00	1996-01-12T13:22:08
0000046189-96-000007	0000046189-96-000007_0002.txt	Dated as of November 14, 1995 THIS REVOLVING CREDIT AGREEMENT is made as of November 14, 1995, by and between ESSEX COUNTY GAS COMPANY (the "Company"), a Massachusetts corporation having its chief executive office at 7 North Hunt Road, Amesbury, Massachusetts 01913-0800 and THE FIRST NATIONAL BANK OF BOSTON (the "Bank"), a national banking association having its head office at 100 Federal Street, Boston, Massachusetts 02110. All capitalized terms used in this Agreement or in the Note or in any certificate, report or other document made or delivered pursuant to this Agreement (unless otherwise defined therein) shall have the meanings assigned to them below: Adjusted Eurodollar Rate. Applicable to any Interest Period, a rate per annum determined pursuant to the following formula, rounded upwards, if necessary, to the next higher 1/100 of 1%: Adjusted Eurodollar Rate = Interbank Offered "Interbank Offered Rate" applicable to any Eurodollar Loan for any Interest Period means the rate of interest determined by the Bank to be the prevailing rate per annum at which deposits in U.S. Dollars are offered to the Bank by first-class banks in the interbank Eurodollar market in which it regularly participates on or about 10:00 a.m. (Boston, Massachusetts time) two Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Eurodollar Loan to which such Interest Period is to apply for a period of time approximately equal to such Interest Period. "Reserve Percentage" applicable to any Interest Period means the rate (expressed as a decimal) applicable to the Bank during such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency or marginal reserve requirement) of the Bank with respect to "Eurocurrency liabilities" as that term is defined under such regulations. The Adjusted Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Reserve Percentage. Agreement. This Agreement, as the same may be supplemented or amended from time to time. Base Rate. The greater of (i) the rate of interest announced from time to time by the Bank at its head office as its Base Rate, and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/8 of 1%). "Federal Funds Effective Rate" means, for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Bank from three Federal funds brokers of recognized standing selected by the Bank. Base Rate Loan. Any Loan bearing interest determined with reference to the Base Rate. Business Day. Any day other than a Saturday, Sunday or legal holiday on which banks in Boston, Massachusetts or New York, New York are open for the conduct of a substantial part of their commercial banking business, and with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day that is such a Business Day and that is also a day for trading between banks in U.S. Dollar deposits in the interbank Eurodollar market. Code. The Internal Revenue Code of 1986 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended. Collateral. As defined in the Security Agreement. Commitment Amount. $10,000,000 or any lesser amount, including zero, resulting from a termination or reduction of such amount in accordance with Section 2.4 or Section 7.2. Consolidated Funded Debt. On any date as of which the amount thereof shall be determined, all Indebtedness of the Company and its Subsidiaries that is payable on a date more than one year from such date of determination, including Indebtedness arising hereunder and Indebtedness from capitalized leases and any portion of any such Indebtedness that is payable within one year from such date of determination. Consolidated Stockholders' Equity. On any date as of which the amount thereof shall be determined, the consolidated common stock, paid in capital and retained earnings of the Company and its Subsidiaries. Consolidated Total Capitalization. On any date as of which the amount thereof shall be determined, the sum of Consolidated Stockholders' Equity, consolidated preferred stock of the Company and its Subsidiaries and Consolidated Funded Debt. Controlled Group. All trades or businesses (whether or not incorporated) under common control that, together with the Company, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA. Credit Documents. This Agreement, the Note, the Security Agreement and any documents, agreements or other writings executed in connection therewith. Default. An Event of Default or event or condition that, but for the requirement that time elapse or notice be given, or both, would constitute an Event of Default. Effective Date. The date on which the Order of the Massachusetts Department of Public Utilities referred to in Section 3.1(b) approving of this Agreement and the Indebtedness created hereunder shall have become final and not subject to further appeal, and all of the other conditions precedent set forth in Section III shall have been satisfied. ERISA. The Employee Retirement Income Security Act of 1974 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended. Environmental Laws. All applicable foreign, federal, state and local environmental, health or safety statutes, laws, regulations, rules, ordinances, policies and rules or common law whether now existing or hereafter enacted or promulgated, relating to injury to, or the protection of, real or personal property or human health or the environment. Eurodollar Loan. Any Loan bearing interest at a rate determined with reference to the Adjusted Eurodollar Rate. Event of Default. Any event described in Section 7.1. Federal Funds Rate. Applicable to any Interest Period, the rate of interest equal to the rate per annum at which the Bank is offered seven-day term Federal funds in the term Federal funds market as of 10:00 a.m. (Boston, Massachusetts time) on the first Business Day of such Interest Period, for settlement on such day in an amount approximately equal to the principal amount of the Fed Funds Rate Loan to which such Interest Period is to apply. Federal Funds Rate Loans. Any Loan bearing interest at a Federal Funds Rate. Guarantees. All guarantees, endorsements or other contingent or surety obligations with respect to obligations of others whether or not reflected on the consolidated balance sheet of the Company and its Subsidiaries, including any obligation to furnish funds, directly or indirectly (whether by virtue of partnership arrangements, by agreement to keep-well or otherwise), through the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan, or to enter into a contract for any of the foregoing, for the purpose of payment of obligations of any other person or entity. Hazardous Material. Any substance which is or becomes defined as a "hazardous waste", "hazardous material" or "hazardous substance" or "controlled industrial waste" or "pollutant" or "contaminant" under any Environmental Law or which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority or instrumentality or which contains gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated biphenyls ("PCB's"). Indebtedness. All obligations (i) for borrowed money or other extensions of credit, whether or not secured or unsecured, absolute or contingent, including, without limitation, unmatured reimbursement obligations with respect to letters of credit, bankers' acceptances or guarantees issued for the account of or on behalf of the Company and its Subsidiaries, (ii) representing the deferred purchase price of property, other than accounts payable arising in the ordinary course of business, (iii) evidenced by bonds, notes, debentures or other similar instruments, (iv) secured by any mortgage, pledge, security interest or other lien on property owned or acquired by the Company or any of its Subsidiaries whether or not the obligations secured thereby shall have been assumed, (v) arising under capital leases and required to be capitalized on the consolidated balance sheet of the Company and its Subsidiaries, (vi) all Guarantees. Indenture. The Indenture of First Mortgage dated as of October 1, 1955 by the Company (formerly known as Haverhill Gas Company) to State Street Bank and Trust Company (formerly known as Second Bank-State Street Trust Company), Trustee, as supplemented and amended from time to time. (a) With respect to each Eurodollar Loan, the period commencing on the date of the making or continuation of or conversion to such Eurodollar Loan and ending one, two, three, six or (if then available) twelve months thereafter, as the Company may elect in the applicable Notice of Borrowing or (b) with respect to each Federal Funds Rate Loan, the period commencing on the date of the making of such Federal Funds Rate Loan and ending seven days thereafter, as the Company may elect in the applicable Notice of Borrowing or Conversion; (i) any Interest Period (other than an Interest Period determined pursuant to clause (iii) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless, in the case of Eurodollar Loans, such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period applicable to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Business Day of a calendar month; (iii) any Interest Period that would otherwise end after the Termination Date shall end on the Termination (iv) notwithstanding clause (iii) above, no Interest Period applicable to a Eurodollar Loan shall have a duration of less than one month; and if any Interest Period applicable to such Loan would be for a shorter period, such Interest Period shall not be available hereunder. Investment. The purchase or acquisition of any share of capital stock, partnership interest, evidence of indebtedness or other equity security of any other person or entity, any loan, advance or extension of credit to, or contribution to the capital of, any other person or entity, any real estate held for sale or investment, any commodities futures contracts held other than in connection with bona fide hedging transactions, any other investment in any other person or entity, and the making of any commitment or acquisition of any option to make an Investment. Loan. A loan made to the Company by the Bank pursuant to Section II of this Agreement, and "Loans" means all of such loans, collectively. Note. A promissory note of the Company, substantially in the form of Exhibit A hereto, evidencing the obligation of the Company to the Bank to repay the Loans. Notice of Borrowing or Conversion. See Section 2.2. Obligations. All obligations of the Company to the Bank hereunder of every kind and description, direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising, regardless of how they arise or by what agreement or instrument, if any, and including obligations to perform acts and refrain from taking action as well as obligations to pay money. PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. Permitted Encumbrances. See Section 6.5. Plan. An employee pension or other benefit plan that is subject to Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by the Company or any member of the Controlled Group for employees of the Company or any member of the Controlled Group or (ii) if such Plan is established, maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Company or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five Plan years made contributions. Qualified Investments. Investments in (i) notes, bonds or other obligations of the United States of America or any agency thereof that as to principal and interest constitute direct obligations of or are guaranteed by the United States of America; (ii) certificates of deposit or other deposit instruments or accounts of banks or trust companies organized under the laws of the United States or any state thereof that have capital and surplus of at least $100,000,000, (iii) commercial paper of Bank of Boston Corporation or any other issuer that is rated not less than prime-one or A-1 or their equivalents by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or their successors, and (iv) any repurchase agreement secured by any one or more of the foregoing. Security Agreement. The Security Agreement dated as of November 14, 1995 executed by the Company in favor of the Bank, pursuant to which the Company granted to the Bank a security interest in certain gas properties. Storage Gas. All gas and other gaseous hydrocarbons of the Company and all products refined therefrom and all other minerals, ores and other substances of value of the Company and the products and proceeds therefrom, in each case that are held for sale, lease or other disposition, or leased or consigned, whether in transit or in the possession of the Company or another, and all such hydrocarbons and other substances of value billed and held by suppliers, carriers, forwarding agents, warehousemen, vendors, selling agents or other third parties. Subsidiary. Any corporation, association, joint stock company, business trust or other similar organization of which 50% or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity is held or controlled by the Company or a Subsidiary of the Company; or any other such entity the management of which is directly or indirectly controlled by the Company or a Subsidiary of the Company through the exercise of voting power or otherwise; or any joint venture, whether incorporated or not, in which the Company has an ownership interest of 50% or more. Termination Date. December 31, 2000 or such earlier date on which the commitment to make Loans is terminated or the Commitment Amount is reduced to zero in accordance with the terms hereof. 1.2. Accounting Terms. All terms of an accounting character shall have the meanings assigned thereto by generally accepted accounting principles applied on a basis consistent with the financial statements referred to in Section 4.6 of this Agreement, but as herein specifically modified. 2.1. The Loans. (a) Subject to the terms and conditions hereof, the Bank will make Loans to the Company, from time to time until the close of business on the Termination Date, in such sums as the Company may request, provided that the aggregate principal amount of all Loans at any one time outstanding hereunder may not exceed the Commitment Amount. The Company may borrow, prepay pursuant to Section 2.10 and reborrow, from the date of this Agreement until the Termination Date, the Commitment Amount or any lesser sum that is at least $500,000 and an integral multiple of $100,000 (in the case of Eurodollar Loans or Federal Funds Rate Loans) and at least $100,000 and an integral multiple of $100,000 (in the case of Base Rate Loans). Any Loan not repaid by the Termination Date shall be due and payable on the Termination Date. (b) Provided that no Default shall have occurred and be continuing, the Company may convert all or any part (in minimum amounts of $500,000 and integral multiples of $100,000 (in the case of Loans converted to Eurodollar Loans or Federal Funds Rate Loans) and at least $100,000 and integral multiples of $100,000 (in the case of Loans converted to Base Rate Loans)) of any outstanding Loan into a Loan of any other type provided for in this Agreement in the same principal amount, on any Business Day (which, in the case of a conversion of a Eurodollar Loan or Federal Funds Rate Loan, shall be the last day of the applicable Interest Period). The Company shall give the Bank prior notice of each such conversion (which notice shall be effective upon receipt) in accordance with Section 2.2. 2.2. Notice and Manner of Borrowing or Conversion of Loans. (a) Whenever the Company desires to borrow, continue a Loan or convert an outstanding Loan into a Loan of another type provided for in this Agreement, the Company shall notify the Bank (which notice shall be irrevocable) by telex, telegraph or telephone received no later than 10:00 a.m. (Boston, Massachusetts time) (i) one Business Day before the day on which the requested Loan is to be made, continued as or converted to a Base Rate Loan, (ii) three Business Days before the day on which the requested Loan is to be made, continued as or converted to a Eurodollar Loan and (iii) on the day on which the requested Loan is to be made, continued as or converted to a Federal Funds Rate Loan. Such notice shall specify (i) the effective date and amount of each Loan or portion thereof to be continued or converted, subject to the limitations set forth in Section 2.1, (ii) the applicable interest rate option, and (iii) the duration of the applicable Interest Period, if any (subject to the provisions of the definition of Interest Period and Section 2.6). Each such notification (a "Notice of Borrowing or Conversion") shall be immediately followed by a written confirmation thereof by the Company in substantially the form of Exhibit B hereto, provided that if such written confirmation differs in any material respect from the action taken by the Bank, the records of the Bank shall control absent manifest error. (b) Subject to the terms and conditions hereof, the Bank shall make each Loan on the effective date specified therefor by crediting the amount of such Loan to the Company's demand deposit account with the Bank. 2.3. Commitment Fee. The Company shall pay to the Bank a commitment fee computed at the rate of 1/8 of one percent (1/8%) per annum on the average daily amount of the unborrowed portion of the Commitment Amount during each quarter or portion thereof. Commitment fees shall be payable quarterly in arrears on the last day of each calendar quarter, beginning December 31, 1995, and on the Termination Date. In addition, the Company shall pay to the Bank a facility fee equal to 1/8 of 1% of the Commitment Amount, payable quarterly in arrears on the last day of each calendar quarter, beginning December 31, 1995, and on the Termination Date. 2.4. Reduction of Commitment Amount. The Company may from time to time by written notice delivered to the Bank at least five Business Days prior to the date of the requested reduction, reduce by integral multiples of $1,000,000 any unborrowed portion of the Commitment Amount. No reduction of the Commitment Amount shall be subject to reinstatement without the Bank's prior written consent. 2.5. The Note. The Loans shall be evidenced by the Note, payable to the order of the Bank and having a final maturity of December 31, 2000. The Note shall be dated on or before the date of the first Loan and shall have the blanks therein appropriately completed. The Bank shall, and is hereby irrevocably authorized by the Company to, enter on the schedule forming a part of the Note or otherwise in its records appropriate notations evidencing the date and the amount of each Loan, the applicable interest rate and the date and amount of each payment of principal made by the Company with respect thereto; and in the absence of manifest error, such notations shall constitute conclusive evidence thereof; provided that no failure on the part of the Bank to make any such notation shall in any way affect any Loan or the rights or obligations of the Bank or the Company with respect thereto. 2.6. Duration of Interest Periods. (a) Subject to the provisions of the definition of Interest Period, the duration of each Interest Period applicable to a Loan shall be as specified in the applicable Notice of Borrowing or Conversion. The Company shall have the option to elect a subsequent Interest Period to be applicable to any Eurodollar Loan by giving notice of such election to the Bank received no later than 10:00 a.m. (Boston, Massachusetts time) (i) on the date one Business Day before the end of the then applicable Interest Period if such Loan is to be continued as or converted to a Base Rate Loan, and (ii) three Business Days before the end of the then applicable Interest Period if such Loan is to be continued as or converted to a Eurodollar Loan. (b) If the Bank does not receive a Notice of Borrowing or Conversion with respect to any maturing Eurodollar Loan within the applicable time limits specified in subsection (a) above, or if a Default exists when such notice must be given, the Company shall be deemed to have elected to convert such Loan into a Base Rate Loan on the last day of the then current Interest Period. (c) Notwithstanding the foregoing, the Company may not select an Interest Period that would end, but for the provisions of the definition of Interest Period, after the Termination Date. 2.7. Interest Rates and Payments of Interest. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the Base Rate, which rate shall change contemporaneously with any change in the Base Rate. Such interest shall be payable on the last day of each calendar quarter, beginning December 31, 1995, and when such Loan is due (whether at maturity, by reason of acceleration or otherwise). (b) Each Eurodollar Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period, at a rate per annum equal to the applicable Adjusted Eurodollar Rate plus 1/2 of one percent (0.50%). Such interest shall be payable for such Interest Period on the last day thereof and when such Eurodollar Loan is due (whether at maturity, by reason of acceleration or otherwise) and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. (c) Each Federal Funds Rate Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period, at a rate per annum equal to the applicable Federal Funds Rate plus 1/2 of one percent (0.50%). Such interest shall be payable for such Interest Period on the last day thereof and when such Federal Funds Rate Loan is due (whether at maturity, by reason of acceleration or otherwise). (a) In the event that the Bank shall have determined in good faith (which determination shall be final and conclusive) that: (i) adequate and fair means do not exist for ascertaining the Interbank Offered Rate or a Federal Funds Rate on any date on which the Adjusted Eurodollar Rate or a Federal Funds Rate would otherwise be set, or (ii) the making of a Eurodollar Loan or Federal Funds Rate Loan or the continuation of or conversion of any Loan to a Eurodollar Loan or Federal Funds Rate Loan has been made impracticable (as reasonably determined by the Bank) or unlawful by (1) the occurrence of a contingency that materially and adversely affects the interbank Eurodollar market or Federal funds market, as applicable, or (2) compliance by the Bank in good faith with any applicable law or governmental regulation, guideline or order or interpretation or change thereof by any governmental authority charged with the interpretation or administration thereof or with any request or directive of any such governmental authority (whether or not having the force of (iii) the Adjusted Eurodollar Rate no longer represents the effective cost to the Bank for U.S. dollar deposits in the interbank market for deposits in which it then, and in any such event, the Bank shall forthwith so notify the Company. Until the Bank notifies the Company that the circumstances giving rise to such notice no longer apply, the obligation of the Bank to allow selection by the Company of the affected Loans shall be suspended. If at the time the Bank so notifies the Company, the Company has previously given the Bank a Notice of Borrowing or Conversion with respect to one or more affected Loans but such Loans have not yet been made, continued or converted, such notification shall be deemed to be void and the Company may borrow Loans of another type by giving a substitute Notice of Borrowing or Conversion pursuant to Section 2.2 hereof. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the Company shall forthwith prepay all outstanding affected Loans, together with interest thereon and any amounts required to be paid pursuant to Section 2.13, and may borrow a Loan of another type in accordance with Section 2.1 hereof by giving a Notice of Borrowing or Conversion pursuant to Section 2.2 hereof. (b) In case the adoption of or any change in any law, regulation, treaty or official directive or the interpretation or application thereof by any court or by any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (i) subjects the Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by the Company or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of the Bank imposed by the United States of America or any political subdivision thereof), or (ii) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, the Bank (other than such requirements as are already included in the determination of the Adjusted (iii) imposes upon the Bank any other condition with respect to its or the Company's performance under this and the result of any of the foregoing is to increase the cost to the Bank, reduce the income receivable by the Bank or impose any expense upon the Bank with respect to any Loans, the Bank shall notify the Company thereof. The Company agrees to pay to the Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by the Bank of a statement in the amount and setting forth the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. 2.9. Capital Requirements. If after the date hereof the Bank determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any governmental authority charged with the administration thereof, or (ii) compliance by the Bank or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on the Bank's or such holding company's capital as a consequence of the Bank's commitment to make Loans hereunder to a level below that which the Bank or such holding company could have achieved but for such adoption, change or compliance (taking into consideration the Bank's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by the Bank to be material, then the Bank shall notify the Company thereof. The Company agrees to pay to the Bank the amount of such reduction in the return on capital as and when such reduction is determined, upon presentation by the Bank of a statement in the amount and setting forth the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. In determining such amount, the Bank may use any reasonable averaging and attribution methods. 2.10. Payments and Prepayments of the Loans. Any of the Loans may be prepaid at any time, in whole in the case of Eurodollar Loans or Federal Funds Rate Loans and in whole or in part in the case of Base Rate Loans, without premium or penalty, but with accrued interest to the date of payment (i) in the case of Eurodollar Loans, on the last day of any applicable Interest Period and upon three Business Days' notice, (ii) in the case of Federal Funds Rate Loans, on the last day of any applicable Interest Period and upon one Business Day's notice and (iii) in the case of Base Rate Loans, at any time upon one Business Day's notice. No prepayment of any Loan shall affect the Commitment Amount or impair the Company's right to borrow as set forth in Section 2.1. 2.11. Method of Payment. All payments and prepayments of principal and all payments of interest, fees and other amounts payable hereunder shall be made by the Company to the Bank at its head office in immediately available funds, on or before 11:00 a.m. (Boston, Massachusetts time) on the due date thereof, free and clear of, and without any deduction or withholding for, any taxes or other payments. The Bank may, and the Company hereby authorizes the Bank to, debit the amount of any payment not made by such time to the demand deposit account of the Company with the Bank. 2.12. Overdue Payments. Overdue principal (whether at maturity, by reason of acceleration or otherwise) and, to the extent permitted by applicable law, overdue interest and fees or any other amounts payable hereunder or under the Note shall bear interest from and including the due date until paid, compounded daily and payable on demand, at a rate per annum equal to (i) if such due date occurs prior to the end of an Interest Period, 2% above the interest rate applicable to such Loan for such Interest Period until the expiration of such Interest Period, and thereafter, 2% above the Base Rate; and (ii) in all other cases, 2% above the rate then applicable to Base Rate Loans. 2.13. Payments Not at End of Interest Period. If the Company for any reason makes any payment of principal of any Eurodollar Loan or Federal Funds Rate Loan on any day other than the last day of an Interest Period applicable to such Eurodollar Loan or Federal Funds Rate Loan, or fails to borrow, continue or convert to a Eurodollar Loan or Federal Funds Rate Loan after giving a Notice of Borrowing or Conversion pursuant to Section 2.2, the Company shall pay to the Bank an amount equal to the losses, costs and expenses incurred by the Bank in connection with any redeployment of funds as a result of such payment of principal or failure to borrow or continue or convert. The Company shall pay such amount upon presentation by the Bank of a statement setting forth the amount and the Bank's calculation thereof, which statement shall be deemed true and correct absent manifest error. 2.14. Computation of Interest and Fees. Interest and all fees payable hereunder shall be computed daily on the basis of a year of 360 days and paid for the actual number of days for which due. If the due date for any payment of principal is extended by operation of law, interest shall be payable for such extended time. If any payment required by this Agreement becomes due on a day that is not a Business Day such payment may be made on the next succeeding Business Day (unless, in the case of Eurodollar Loans, such next succeeding Business Day falls in the next calendar month, in which case payment shall be due on the preceding Business Day), and such extension shall be included in computing interest in connection with such payment. 2.15. Collateral Security. The payment of the Loans and the performance of the Company's obligations hereunder shall at all times be subject to a security interest in all Storage Gas now owned or hereafter acquired by the Company, pursuant to the Security Agreement. 3.1. Conditions Precedent to Initial Loan. The occurrence of the Effective Date, and the obligation of the Bank to make its initial Loan is subject to the condition precedent that the Bank shall have received, in form and substance satisfactory to the Bank and its counsel, the following: (a) this Agreement and the Note, duly executed by the (b) a copy of Order No. ________ of the Massachusetts Department of Public Utilities dated ________________, approving this Agreement and the Indebtedness created hereunder; (c) a certificate of the Clerk or an Assistant Clerk of the Company with respect to votes of the Board of Directors of the Company authorizing the execution and delivery of this Agreement and the Note and identifying the officer(s) authorized to execute, deliver and take all other actions required under the Credit Documents, and providing specimen signatures of such (d) all amendments and supplements to the articles of organization of the Company filed in the office of the Secretary of State of Massachusetts since the date of this Agreement, each certified by said Secretary of State as being a true and correct (e) all amendments and supplements to the Bylaws of the Company since the date of this Agreement, certified by the Clerk or an Assistant Secretary Clerk as being a true and correct copy thereof as currently in effect; (f) a certificate of the Secretary of State of Massachusetts, as to legal existence and good standing in such state and listing all documents on file in the office of said (g) a certificate of the Department of Revenue of The Commonwealth of Massachusetts as to the tax good standing of the (h) an opinion addressed to it from Keohane & Keegan, counsel to the Company, substantially in the form of Exhibit G (i) such other documents, and completion of such other matters, as counsel for the Bank may deem necessary or appropriate. 3.2. Conditions Precedent to all Loans. The obligation of the Bank to make each Loan, including the initial Loan, or continue or convert Loans to Loans of another type, is further subject to the following conditions: (a) timely receipt by the Bank of the Notice of Borrowing or Conversion as provided in Section 2.2; (b) the representations and warranties contained in Section IV of this Agreement and in Section 3 of the Security Agreement shall be true and accurate in all material respects on and as of the date of such Notice of Borrowing or Conversion and on the effective date of the making, continuation or conversion of each Loan as though made at and as of each such date (except to the extent that such representations and warranties expressly relate to an earlier date), and no Default shall have occurred and be continuing, or would result from such Loan; (c) the resolutions referred to in Section 3.1(c) shall remain in full force and effect; and (d) no change shall have occurred in any law or regulation or interpretation thereof that, in the opinion of counsel for the Bank, would make it illegal or against the policy of any governmental agency or authority for the Bank to make Loans hereunder. The making of each Loan shall be deemed to be a representation and warranty by the Company on the date of the making, continuation or conversion of such Loan as to the accuracy of the facts referred to in subsection (b) of this Section 3.2. In order to induce the Bank to enter into this Agreement and to make Loans hereunder, the Company represents and warrants to the Bank that: 4.1. Organization and Qualification. Each of the Company and its Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, (b) has all requisite corporate power to own its property and conduct its business as now conducted and as presently contemplated and (c) is duly qualified and in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction except where the failure to be so qualified would not have a material adverse effect on the business, financial condition, assets or properties of the Company or any such Subsidiary. 4.2. Corporate Authority. The execution, delivery and performance of each of the Credit Documents and the transactions contemplated thereby are within the corporate power and authority of the Company and have been authorized by all necessary corporate proceedings, and do not and will not (a) require any consent or approval of the stockholders of the Company, (b) contravene any provision of the charter documents or by-laws of the Company or any material law, rule or regulation applicable to the Company, (c) contravene any provision of, or constitute an event of default or event that, but for the requirement that time elapse or notice be given, or both, would constitute an event of default under, any other material agreement, instrument, order or undertaking binding on the Company, or (d) result in or require the imposition of any Encumbrance on any of the material properties, assets or rights of the Company, other than the Encumbrances on the Collateral created by the Security Agreement. 4.3. Valid Obligations. Each of the Credit Documents and all of their respective terms and provisions are the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, and except as the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. 4.4. Consents or Approvals. The execution, delivery and performance of the Credit Documents and the transactions contemplated therein do not require any approval or consent of, or filing or registration with, any governmental or other agency or authority, or any other party, other than other than the periodic filing of UCC-1 financing statements and the issuance of Order No. __________ of the Massachusetts Department of Public Utilities, which Order has been duly issued, is in full force and effect and is not subject to further appeal. 4.5. Title to Properties; Absence of Encumbrances. Each of the Company and its Subsidiaries has good and marketable title to all of the properties, assets and rights of every kind and nature now purported to be owned by it, including, without limitation, such properties, assets and rights as are reflected in the financial statements referred to in Section 4.6 (except such properties, assets or rights as have been disposed of in the ordinary course of business since the date thereof), free from all Encumbrances except Permitted Encumbrances or those Encumbrances disclosed in Exhibit C hereto, and, except as so disclosed, free from all defects of title that might materially adversely affect such properties, assets or rights, taken as a whole. 4.6. Financial Statements. The Company has furnished the Bank its consolidated balance sheet as of August 31, 1995 and its consolidated statements of income, changes in stockholders' equity and cash flow for the fiscal year then ended, and related footnotes, audited and certified by Arthur Andersen LLP All such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods specified and present fairly the financial position of the Company and its Subsidiaries as of such date and the results of the operations of the Company and its Subsidiaries for such periods. There are no liabilities, contingent or otherwise, not disclosed in such financial statements that involve a material amount. 4.7. Changes. Since the date of the most recent financial statements referred to in Section 4.6, there have been no changes in the assets, liabilities, financial condition, business or prospects of the Company or any of its Subsidiaries other than changes in the ordinary course of business, the effect of which has not, in the aggregate, been materially adverse. 4.8. Defaults. As of the date of this Agreement, no Default exists. 4.9. Taxes. The Company and each Subsidiary have filed all federal, state and other tax returns required to be filed, and all taxes, assessments and other governmental charges due from the Company and each Subsidiary have been fully paid, other than those taxes, assessments and charges as to which the failure to pay would not have a material adverse effect on the business, financial condition, assets or properties of the Company or such Subsidiary. The Company and each Subsidiary have established on their books reserves adequate for the payment of all federal, state and other tax liabilities. 4.10. Litigation. Except as set forth on Exhibit D hereto, there is no litigation, arbitration, proceeding or investigation pending, or, to the knowledge of the Company's or any Subsidiary's officers, threatened, against the Company or any Subsidiary that, if adversely determined, could result in a material judgment not fully covered by insurance, could result in a forfeiture of all or any substantial part of the property of the Company or its Subsidiaries, or could otherwise have a material adverse effect on the assets, business or prospects of the Company or any Subsidiary. 4.11. Use of Proceeds. The proceeds of the Loans shall be used exclusively for the acquisition of Storage Gas. No portion of any Loan is to be used for the "purpose of purchasing or carrying" any "margin stock" as such terms are used in Regulations U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R. 221 and 224, as amended; and following the application of the proceeds of each Loan, the value of all "margin stock" of the Company will not exceed 25% of the value of the total assets of the Company that are subject to the restrictions set forth in Sections 6.5 and 6.6. 4.12. Subsidiaries. As of the date of this Agreement, all the Subsidiaries of the Company are listed on Exhibit E hereto. The Company or a Subsidiary of the Company is the owner, free and clear of all liens and encumbrances, of all of the issued and outstanding stock of each Subsidiary. All shares of such stock have been validly issued and are fully paid and nonassessable, and no rights to subscribe to any additional shares have been granted, and no options, warrants or similar rights are outstanding. 4.13. Investment Company Act, etc. Neither the Company nor any of its Subsidiaries is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, or any other statute or regulation that limits its ability to incur Indebtedness. 4.14. Compliance with ERISA. The Company and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA; and no "prohibited transaction" or "reportable event" (as such terms are defined in ERISA) has occurred with respect to any Plan. 4.15. Environmental Matters. In all material respects relative to the ability of the company to meet its financial and operational obligations, the Company and each of its Subsidiaries are in compliance with all Environmental Laws. No demand, claim, notice, suit, suit in equity, action, administrative action, investigation or inquiry arising under, relating to or in connection with any Environmental Laws is pending or threatened against the Company or any of its Subsidiaries, any real property in which the Company or any such Subsidiary holds or, to the Company's knowledge, has held, an interest, or any past or present operation of the Company or any such Subsidiary, that would prevent the Company from meeting its financial and operational obligations. Neither the Company nor any of its Subsidiaries (i) is the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any Hazardous Materials or other wastes into the environment, (ii) has received any notice of any Hazardous Materials or other wastes in or upon any of its properties in violation of any Environmental Laws, or (iii) knows of any basis for any such investigation, notice or violation, except as disclosed to the Bank on Exhibit D, and as to such matters disclosed on such Exhibit, none will have a material adverse effect on the financial condition, business, operations or prospects of the Company or the Company and its Subsidiaries on a consolidated basis such that the Company will be unable to meet its financial and operational obligations. 4.16. Security. The Security Agreement, together with the filing of Uniform Commercial Code financing statements in such offices as the Company has deemed appropriate, acting in good faith and with due inquiry, for the locations of the Collateral referred to therein, and the delivery of notices to all gas storage providers pursuant to Section 9-305 of the Uniform Commercial Code of the Bank's security interest in the Storage Gas held in storage by them, create a valid and continuing first lien on and perfected security interest in the Collateral, prior to all other Encumbrances, and is enforceable as such against creditors of the Company, any owner of the real property where any of the Collateral is located, any purchaser of such real property and any present or future creditor obtaining a lien on such real property. So long as the Bank has any commitment to lend hereunder or any Loan or other Obligation hereunder remains outstanding, the Company covenants as follows: 5.1. Financial Statements and other Reporting Requirements. The Company shall furnish to the Bank: (a) as soon as available to the Company, but in any event within 90 days after the end of each of its fiscal years, a consolidated and consolidating balance sheet as of the end of such year, and the related consolidated and consolidating statements of income, changes in stockholders' equity and cash flow for such year, audited and certified by Arthur Andersen LLP (or other independent certified public accountants acceptable to the Bank) in the case of such consolidated statements, and certified by the chief financial officer in the case of such consolidating statements, it being understood that the Company may submit its Report on Form 10-K as filed with the Securities and Exchange Commission to satisfy this covenant; and, concurrently with such financial statements, a written statement by such accountants that, in the making of the audit necessary for their report and opinion upon such financial statements they have obtained no knowledge of any Default or, if in the opinion of such accountants any such Default exists, they shall disclose in such written statement the nature and status thereof; (b) as soon as available to the Company, but in any event within 45 days after the end of each of its fiscal quarters, the consolidated and consolidating balance sheet as of the end of such quarter, and a related consolidated and consolidating statements of income and cash flow for the period then ended, certified by the chief financial officer of the Company but subject, however, to normal, recurring year-end adjustments that shall not in the aggregate be material in amount, it being understood that the Company may submit its Report on Form 10-Q as filed with the Securities and Exchange Commission to satisfy this (c) concurrently with the delivery of each financial statement pursuant to subsections (a) and (b) of this Section 5.1, a report in substantially the form of Exhibit F hereto signed on behalf of the Company by its chief financial officer; (d) promptly upon the filing thereof, copies of all proxy statements, financial statements and reports as the Company shall send to its stockholders or as the Company may file with the Securities and Exchange Commission, the Massachusetts Department of Public Utilities or any other governmental authority at any time having jurisdiction over the Company or its Subsidiaries; (e) if and when the Company gives or is required to give notice to the PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with respect to any Plan that might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that any member of the Controlled Group or the plan administrator of any Plan has given or is required to give notice of any such Reportable Event, a copy of the notice of such Reportable Event given or required to be given to the PBGC; (f) immediately upon becoming aware of the existence of any condition or event that constitutes a Default, written notice thereof specifying the nature and duration thereof and the action being or proposed to be taken with respect thereto; (g) promptly upon becoming aware of any litigation or of any investigative proceedings by a governmental agency or authority commenced or threatened against the Company or any of its Subsidiaries, the outcome of which would or might have a materially adverse effect on the assets, business or prospects of the Company or the Company and its Subsidiaries on a consolidated basis, written notice thereof and the action being or proposed to be taken with respect thereto; (h) promptly upon becoming aware of any investigative proceedings by a governmental agency or authority commenced or threatened against the Company or any of its Subsidiaries regarding any potential violation of Environmental Laws or any spill, release, discharge or disposal of any Hazardous Material, the outcome of which would or might have a materially adverse effect on the assets, business or prospects of the Company or the Company and its Subsidiaries on a consolidated basis, written notice thereof and the action being or proposed to be taken with (i) from time to time, such other financial data and information about the Company or its Subsidiaries as the Bank may reasonably request. 5.2. Conduct of Business. Each of the Company and its Subsidiaries shall: (a) duly observe and comply in all material respects with all applicable laws and valid requirements of any governmental authorities relative to its corporate existence, rights and franchises, to the conduct of its business and to its property and assets (including without limitation all Environmental Laws and ERISA), and shall maintain and keep in full force and effect all licenses and permits necessary in any material respect to the proper conduct of its business; (b) maintain its corporate existence; and (c) remain engaged substantially in the sale and distribution of Storage Gas. 5.3. Maintenance and Insurance. Each of the Company and its Subsidiaries shall maintain its properties in good repair, working order and condition as required for the normal conduct of its business, and shall at all times maintain liability and casualty insurance with financially sound and reputable insurers in such amounts as the officers of the Company in the exercise of their reasonable judgment deem to be adequate but in any event as required by the Security Agreement. The Company shall furnish to the Bank certificates or other evidence satisfactory to the Bank of compliance with the foregoing insurance provisions. 5.4. Taxes. The Company shall pay or cause to be paid all taxes, assessments or governmental charges on or against it or any of its Subsidiaries or its or their properties on or prior to the time when they become due; provided that this covenant shall not apply to any tax, assessment or charge that is being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been established and are being maintained in accordance with generally accepted accounting principles if no lien shall have been filed to secure such tax, assessment or charge. 5.5. Inspection by the Bank. The Company shall permit the Bank or its designees, at any reasonable time and upon reasonable notice (or if a Default shall have occurred and is continuing, at any time and without prior notice), to (i) visit and inspect the properties of the Company and its Subsidiaries, (ii) examine and make copies of and take abstracts from the books and records of the Company and its Subsidiaries, and (iii) discuss the affairs, finances and accounts of the Company and its Subsidiaries with their appropriate officers, employees and accountants. 5.6. Maintenance of Books and Records. Each of the Company and its Subsidiaries shall keep adequate books and records of account, in which true and complete entries will be made reflecting all of its business and financial transactions, and such entries will be made in accordance with generally accepted accounting principles consistently applied and applicable law. 5.7. Further Assurances. At any time and from time to time the Company shall, and shall cause each of its Subsidiaries to, execute and deliver such further instruments and take such further action as may reasonably be requested by the Bank to effect the purposes of this Agreement and the Note. So long as the Bank has any commitment to lend hereunder or any Loan or other Obligation hereunder remains outstanding, the Company covenants as follows: 6.1. Indebtedness. Neither the Company nor any of its Subsidiaries shall create, incur, assume or be or remain liable with respect to any Indebtedness other than the following: (a) Indebtedness to the Bank or any of its affiliates; (b) Indebtedness incurred under the Indenture and other Indebtedness existing as of the date of this Agreement and disclosed on Exhibit C hereto or in the financial statements referred to in Section 4.6; (c) Indebtedness of the Company incurred in connection with the purchase of tangible property used in its business and secured by Permitted Encumbrances, in amounts not exceeding in the aggregate at any time $200,000; (d) capitalized lease obligations of the Company in amounts not exceeding in the aggregate at any time $2,000,000; (e) Indebtedness arising under unsecured short term lines of credit extended by banks in principal amounts not to exceed in the aggregate principal amount $20,000,000; and (f) other unsecured Indebtedness or additional Indebtedness secured by Encumbrances on non-current assets of the Company (assets not classified as "current assets" on the Company's consolidated balance sheet prepared in accordance with generally accepted accounting principles) that does not exceed in aggregate principal amount $20,000,000, provided that except with respect to Restricted Payments, such other Indebtedness shall be on terms no more restrictive than the Indebtedness hereunder and shall not be repayable in whole or in part until the date occurring one year after the Termination Date. 6.2. Contingent Liabilities. Neither the Company nor any of its Subsidiaries shall create, incur, assume or remain liable with respect to any Guarantees other than the following: (a) Guarantees in favor of the Bank or any of its (b) Guarantees existing on the date of this Agreement and disclosed on Exhibit C hereto or in the financial statements referred to in Section 4.6; (c) Guarantees resulting from the endorsement of negotiable instruments for collection in the ordinary course of business; (d) Guarantees with respect to surety, appeal, performance and return-of-money and other similar obligations incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money) not exceeding in the aggregate at any (e) Guarantees of normal trade debt incurred in connection with the acquisition of goods and supplies. 6.3. Leases. Neither the Company nor any of its Subsidiaries shall during any fiscal year enter into any leases of real or personal property as lessee, except for capital leases or leases providing for payments in any one fiscal year (whether or not such payments are termed rent) in the aggregate of less than $500,000. 6.4. Sale and Leaseback. Neither the Company nor any of its Subsidiaries shall enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property owned by it in order to lease such property or lease other property that the Company or any such Subsidiary intends to use for substantially the same purpose as the property being sold or transferred. 6.5. Encumbrances. Neither the Company nor any of its Subsidiaries shall create, incur, assume or suffer to exist any mortgage, pledge, security interest, lien or other charge or encumbrance, including the lien or retained security title of a conditional vendor upon or with respect to any of its property or assets ("Encumbrances"), or assign or otherwise convey any right to receive income, including the sale or discount of accounts receivable with or without recourse, except the following ("Permitted Encumbrances"): (a) Encumbrances in favor of the Bank or any of its (b) Encumbrances created by the Indenture and other Encumbrances existing as of the date of this Agreement and disclosed in Exhibit C hereto; (c) liens for taxes, fees, assessments and other governmental charges to the extent that payment of the same may be postponed or is not required in accordance with the provisions (d) landlords' and lessors' liens in respect of rent not in default or liens in respect of pledges or deposits under workmen's compensation, unemployment insurance, social security laws, or similar legislation (other than ERISA) or in connection with appeal and similar bonds incidental to litigation; mechanics', laborers' and materialmen's and similar liens, if the obligations secured by such liens are not then delinquent; liens securing the performance of bids, tenders, contracts (other than for the payment of money); and statutory obligations incidental to the conduct of its business and that do not in the aggregate materially detract from the value of its property or materially impair the use thereof in the operation of its business; (e) judgment liens that shall not have been in existence for a period longer than 30 days after the creation thereof or, if a stay of execution shall have been obtained, for a period longer than 30 days after the expiration of such stay; (f) rights of lessors under capitalized leases permitted by (g) Encumbrances securing Indebtedness permitted by Section 6.1(d), provided that any such Encumbrances shall not extend to assets of the Company or any such Subsidiary not financed by such (h) Encumbrances securing Indebtedness permitted by Section (i) easements, rights of way, restrictions and other similar charges or Encumbrances relating to real property and not interfering in a material way with the ordinary conduct of its (j) Encumbrances on its assets created in connection with the refinancing of Indebtedness secured by Permitted Encumbrances on such assets, provided that the amount of Indebtedness secured by any such Encumbrance shall not be increased as a result of such refinancing and no such Encumbrance shall extend to property and assets of the Company or any such Subsidiary not encumbered prior to any such refinancing. 6.6. Merger; Consolidation; Sale or Lease of Assets. Neither the Company nor any of its Subsidiaries shall sell, lease or otherwise dispose of all or any substantial portion of its assets; or liquidate, merge or consolidate into or with any other person or entity, provided that any Subsidiary of the Company may merge or consolidate into or with (i) the Company if no Default has occurred and is continuing or would result from such merger and if the Company is the surviving company, or (ii) any other wholly-owned Subsidiary of the Company. 6.7. Additional Stock Issuance. The Company shall not permit any of its Subsidiaries to issue any additional shares of its capital stock or other equity securities, any options therefor or any securities convertible thereto other than to the Company. Neither the Company nor any of its Subsidiaries shall sell, transfer or otherwise dispose of any of the capital stock or other equity securities of a Subsidiary, except (i) to the Company or any of its wholly-owned Subsidiaries, or (ii) in connection with a transaction permitted by Section 6.6. 6.8. Capital Expenditures. Neither the Company nor any of its Subsidiaries shall purchase or agree to purchase, or incur any Indebtedness (including that portion of the Indebtedness arising under capital leases that is required to be capitalized on the consolidated balance sheet of the Company and its Subsidiaries) for, any equipment or other property constituting fixed assets in any fiscal year in excess of $10,000,000. 6.9. Investments. Neither the Company nor any of its Subsidiaries shall make or maintain any Investments other than (i) Qualified Investments, (ii) existing Investments in Subsidiaries and new Investments in such Subsidiaries in the ordinary course of its business, (iii) acquisitions of new Subsidiaries, provided that such Subsidiaries engage in the same or related lines of business as the Company and its Subsidiaries, and (iv) loans to customers of the Company to enable the installation of systems for the storage and distribution of gas products sold to such customers on open account. 6.10. ERISA. Neither the Company nor any member of the Controlled Group shall permit any Plan maintained by it to (i) engage in any "prohibited transaction" (as defined in Section 4975 of the Code, (ii) incur any "accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or not waived, or (iii) terminate any Plan in a manner that could result in the imposition of a lien or encumbrance on the assets of the Company or any of its Subsidiaries pursuant to Section 4068 of ERISA. 6.11. Interest Charge Coverage. The Company shall not permit its Interest Charge Coverage Ratio to be less than 2.0 to 1.0. As used in this Section 6.11, "Interest Charge Coverage Ratio" shall mean, as of the end of each period of four consecutive fiscal quarters, the ratio of (i) consolidated net income, excluding any nonrecurring or extraordinary items, plus (ii) income tax expense for such period, plus (iii) consolidated interest expense (including interest on the Loans notwithstanding any contrary classification of such expense required by any regulatory authority, and including interest on fuel inventory and imputed interest on capitalized lease obligations, but excluding any charges for accumulated funds used during construction) and amortized debt discount for such period (collectively, "Interest Expense"); to Interest Expense for such period. 6.12. Equity to Total Capitalization. The Company shall not permit the percentage of (i) Consolidated Stockholders' Equity to (ii) Consolidated Total Capitalization to be less than 30%. 6.13. Restricted Payments. The Company shall not directly or indirectly (a) declare or pay any dividend (other than dividends payable in common stock of the Company) or declare or make any other distribution on any shares of common stock, or (b) make any expenditures for the purchase, redemption or other retirement for a consideration of any shares of capital stock of the Company (other than in exchange for, or from the net cash proceeds of, other and new shares of capital stock of the Company and other than any shares of any class of stock required to be purchased, redeemed or otherwise retired for any sinking fund or purchase fund for such class of stock), if the aggregate amount of all such dividends, distributions and expenditures made since August 31, 1990 would exceed the aggregate amount of the net income of the Company (as such term is defined in Section 1.04 of the Twelfth Supplemental Indenture dated as of December 1, 1990 to the Indenture) accumulated after August 31, 1990 plus $2,000,000. 7.1. Events of Default. There shall be an Event of Default hereunder if any of the following events occurs: (a) the Company shall fail to pay when due (i) any amount of principal of any Loans, or (ii) any amount of interest thereon or any fees or expenses payable hereunder or under the Note within five days of the due date therefor; or (b) The Company shall fail to perform any term, covenant or agreement contained in Sections 5.1(f), 5.5, 5.7 or Section VI of this Agreement or any term, covenant or agreement contained in (c) the Company shall fail to perform any covenant contained in Sections 5.1(e), 5.1(g), 5.1(h) or 5.2, and such failure shall continue for 30 days; or (d) the Company shall fail to perform any term, covenant or agreement (other than in respect of subsections 7.1(a) through (c) hereof) contained in this Agreement and such default shall continue for 30 days after notice thereof has been sent to the Company by the Bank; or (e) any representation or warranty of the Company made in this Agreement or in any of the other Credit Documents or any other documents or agreements executed in connection with the transactions contemplated thereunder or in any certificate delivered thereunder shall prove to have been false in any material respect upon the date when made or deemed to have been (f) there shall occur any material adverse change in the assets, liabilities, financial condition, business or prospects of the Company or the Company and its Subsidiaries, taken as a whole, as determined by the Bank acting in good faith; or (g) the Company or any of its Subsidiaries shall fail to pay at maturity, or within any applicable period of grace, any Indebtedness under the Indenture or any other Indebtedness in excess of $1,000,000 in the aggregate for borrowed money, or for the use of real or personal property, or fail to observe or perform any term, covenant or agreement evidencing or securing such Indebtedness, or relating to such use of real or personal property, the result of which failure is to permit the holder or holders of such obligations to cause such Indebtedness to become due prior to its stated maturity upon delivery of required (h) the Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of itself or of all or a substantial part of its property, (ii) be generally not paying its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (v) take any action or commence any case or proceeding under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, or any other law providing for the relief of debtors, (vi) fail to contest in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code or other law, (vii) take any action under the laws of its jurisdiction of incorporation or organization similar to any of the foregoing, or (viii) take any corporate action for the purpose of effecting any of the foregoing; or (i) a proceeding or case shall be commenced, without the application or consent of the Company or any of its Subsidiaries in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding-up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (iii) similar relief in respect of it, under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts or any other law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 45 days; or an order for relief shall be entered in an involuntary case under the Federal Bankruptcy Code, against the Company or such Subsidiary; or action under the laws of the jurisdiction of incorporation or organization of the Company or any of its Subsidiaries similar to any of the foregoing shall be taken with respect to the Company or such Subsidiary and shall continue unstayed and in effect for any period of 45 days; or (j) a judgment or order for the payment of money shall be entered against the Company or any of its Subsidiaries by any court, or a warrant of attachment or execution or similar process shall be issued or levied against property of the Company or such Subsidiary, that in the aggregate exceeds $1,000,000 in value and such judgment, order, warrant or process shall continue undischarged or unstayed for 45 days; or (k) the Company or any member of the Controlled Group shall fail to pay when due any amount that it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by the Company, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Company and such proceedings shall not have been dismissed within 45 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated. 7.2. Remedies. Upon the occurrence of an Event of Default described in subsections 7.1(h) and (i), immediately and automatically, and upon the occurrence of any other Event of Default, at any time thereafter while such Event of Default is continuing, at the Bank's option and upon the Bank's declaration: (a) the Bank's commitment to make any further Loans (b) the unpaid principal amount of the Loans together with accrued interest and all other Obligations hereunder shall become immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived (provided that the Bank shall endeavor to advise the Company if any payment required to be made hereunder is not (c) the Bank may exercise any and all rights it has under the Credit Documents or at law or in equity, and proceed to protect and enforce the Bank's rights by any action at law, in equity or other appropriate proceeding. 8.1. Notices. Unless otherwise specified herein, all notices hereunder and under the other Credit Documents to any party hereto shall be in writing and shall be deemed to have been given when (i) delivered by hand, (ii) properly deposited in the mails postage prepaid, (iii) sent by telex, answerback received, or electronic facsimile transmission, or (iv) delivered to the telegraph company or overnight courier, in each case addressed to such party at its address indicated below: If to the Company, at Attention: James H. Hastings, Vice President and If to the Bank, at THE FIRST NATIONAL BANK OF BOSTON Attention: Sarah P.Z. Dwyer, Assistant Vice or at any other address specified by such party in writing. 8.2. Expenses; Indemnification. (a) The Company will pay on demand all expenses of the Bank in connection with the preparation, waiver or amendment of this Agreement and the other Credit Documents, or the administration, default or collection of the Loans or other Obligations or in connection with the Bank's exercise, preservation or enforcement of any of its rights, remedies or options thereunder, including, without limitation, fees and expenses of outside legal counsel or the allocated costs of in-house legal counsel, accounting, consulting, brokerage or other similar professional fees or expenses, and any fees or expenses associated with any travel or other costs relating to any appraisals or examinations conducted in connection with the Obligations or any collateral therefor, and the amount of all such expenses shall, until paid, bear interest at the rate applicable to principal hereunder (including any default rate). (b) The Company agrees to indemnify and hold harmless the Bank from and against any and all claims, actions and suits whether groundless or otherwise, and from and against any and all liabilities, losses, damages and expenses of every nature and character arising out of this Agreement and the other Credit Documents or the transactions evidenced thereby; provided that the Bank shall have no right to be indemnified hereunder with respect to any such claims, actions, suits, liabilities, losses, damages and expenses to the extent arising as a result of its own gross negligence or willful misconduct; and provided, further that the Company shall not be liable for any settlement, compromise or consent to the entry of any order adjudicating or otherwise disposing of any claim, action, suit, liability, loss, damage or expense effected without the consent of the Company. Should any claim be made by a person not a party to this Agreement with respect to any matter to which the foregoing indemnity relates, the Bank shall promptly notify the Company of any such claim, and the Company shall have the right to direct and control the defense of such claim or any litigation based thereon at its own expense through counsel of its own choosing. 8.3. Set-Off. Regardless of the adequacy of any collateral or other means of obtaining repayment of the Obligations, any deposits, balances or other sums credited by or due from the head office of the Bank or any of its branch offices to the Company may, at any time and from time to time after the occurrence of an Event of Default hereunder, without notice to the Company or compliance with any other condition precedent now or hereafter imposed by statute, rule of law, or otherwise (all of which are hereby expressly waived) be set off, appropriated, and applied by the Bank against any and all obligations of the Company to the Bank or any of its affiliates in such manner as the head office of the Bank or any of its branch offices in their sole discretion may determine, and the Company hereby grants the Bank a continuing security interest in such deposits, balances or other sums for the payment and performance of all such Obligations. 8.4. Term of Agreement. This Agreement shall continue in full force and effect so long as the Bank has any commitment to make Loans hereunder or any Loan or any Obligation hereunder shall be outstanding. 8.5. No Waivers. No failure or delay by the Bank in exercising any right, power or privilege hereunder or under the other Credit Documents shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided herein and in the Note and such other documents and agreements are cumulative and not exclusive of any rights or remedies otherwise provided by agreement or law. 8.6. Governing Law. This Agreement and the other Credit Documents shall each be deemed to be a contract made under seal and shall be construed in accordance with and governed by the laws of The Commonwealth of Massachusetts (without giving effect to any conflicts of laws provisions contained therein). 8.7. Amendments. Neither this Agreement nor the other Credit Documents nor any provision thereof may be amended, waived, discharged or terminated except by a written instrument signed by the Bank and, in the case of amendments, by the Company. 8.8. Binding Effect of Agreement. This Agreement shall be binding upon and inure to the benefit of the Company and the Bank and their respective successors and assigns; provided that the Company may not assign or transfer its rights or obligations hereunder. The Bank may sell or transfer its interests hereunder and under the Note, or grant participations therein, without the prior written consent of the Company. In the case of any such participation, the Company agrees that any such participant shall be entitled to the benefits of Sections 2.8, 2.9, 2.13, 5.5 and 8.3 to the same extent as if such transferee or participant were the Bank hereunder; provided the Company may, for all purposes of this Agreement, treat the Bank as the person entitled to exercise all rights hereunder and under the Note and to receive all payments with respect thereto. 8.9. Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures hereto and thereto were upon the same instrument. 8.10. Partial Invalidity. The invalidity or unenforceability of any one or more phrases, clauses or sections of this Agreement shall not affect the validity or enforceability of the remaining portions of it. 8.11. Captions. The captions and headings of the various sections and subsections of this Agreement are provided for convenience only and shall not be construed to modify the meaning of such sections or subsections. 8.12. WAIVER OF JURY TRIAL. THE BANK AND THE COMPANY AGREE THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE BANK AND THE COMPANY, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE COMPANY HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 8.13. Entire Agreement. This Agreement and the other Credit Documents constitute the final agreement of the parties hereto and supersede any prior agreement or understanding, written or oral, with respect to the matters contained herein and therein. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. THE FIRST NATIONAL BANK OF BOSTON	10-Q	EX-4	1996-01-12T00:00:00	1996-01-12T13:01:44
0000912057-96-000461	0000912057-96-000461_0000.txt	Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant /X/ Filed by a Party other than the Registrant / / / / Confidential, for Use of the Commission Only (as permitted by Rule / / Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Section 240.14a-11(c) or Section (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): /X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 2) Form, Schedule or Registration Statement No.: NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MARCH 6, 1996 TO THE SHAREHOLDERS OF PACIFICARE HEALTH SYSTEMS, INC.: The Annual Meeting of Shareholders of PacifiCare Health Systems, Inc., a Delaware corporation (the "Company"), will be held at the offices of the Company, 5995 Plaza Drive, Cypress, California on Wednesday, March 6, 1996 at 10:00 a.m., Pacific Standard Time (P.S.T.), to vote upon the following matters: (1) To elect two Directors of the Company; (2) To approve adoption of an amendment to the Company's Certificate of (3) To approve the Amended 1992 Non-Officer Directors Stock Option Plan of PacifiCare Health Systems, Inc.; and (4) To transact such other business as may properly come before the meeting and any adjournment thereof. The Proxy Statement is being mailed to the holders of both the Class A Common Stock and Class B Common Stock. Only the holders of Class A Common Stock are entitled to vote at the March 6, 1996 Annual Meeting of Shareholders and will receive a Proxy Card. The Proxy Statement is being mailed to the holders of the Class B Common Stock for informational purposes only. The Board of Directors has fixed the close of business on January 8, 1996 as the record date. Holders of record of the Class A Common Stock, as of that date, are entitled to vote at the meeting. The Company invites the holders of both classes of stock to attend the meeting in person. TO THE HOLDERS OF CLASS A COMMON STOCK: Your attention is directed to the accompanying Proxy Statement and Proxy Card. The Company invites you to attend the meeting in person but if you are unable to be present, you are requested to check the appropriate boxes, sign, date and return the enclosed Proxy Card as promptly as possible so that your shares may be represented. By order of the Board of Directors ANNUAL MEETING OF SHAREHOLDERS OF PACIFICARE HEALTH SYSTEMS, INC. TO BE HELD ON MARCH 6, 1996 APPROXIMATE DATE OF MAILING PROXY STATEMENT This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of PacifiCare -Registered Trademark- Health Systems, Inc., a Delaware corporation (the "Company"), in the form of the accompanying proxy card (the "Proxy Card"), to be used at the Annual Meeting of Shareholders to be held on March 6, 1996 (the "Annual Meeting"). The Proxy Statement is being mailed to the holders of both the Class A Common Shares, par value $0.01 per share, of the Company (the "Class A Common Stock") and the Class B Common Shares, par value $0.01 per share, of the Company (the "Class B Common Stock"). The Class A Common Stock together with the Class B Common Stock shall hereinafter be referred to as the "Common Stock." Only the holders of the Class A Common Stock are entitled to vote at the Annual Meeting and will receive a Proxy Card. This Proxy Statement is being mailed to the holders of the Class B Common Stock for informational purposes only. TO THE HOLDERS OF CLASS A COMMON STOCK: It is important that your shares of Class A Common Stock be represented at the Annual Meeting whether or not you plan to attend. Accordingly, you are asked to sign and return the Proxy Card in order to ensure that your shares of Class A Common Stock are voted. Shares cannot be voted at the meeting unless the shareholder is represented by proxy or is present in person. The shares of Class A Common Stock represented by the proxy will be voted in accordance with the specifications or other indications set forth on the Proxy Card. The shareholder appointing a proxy has the power to revoke the appointment by a later appointment received by the Company, or by giving notice of revocation to the Company in writing or in open meeting. Any vote taken prior to a revocation is not affected by such revocation. A revocable appointment of proxy is not revoked by the death or incompetency of the shareholder, unless, before the vote is taken or the authority is otherwise exercised, written notice of such death or incompetency is received by the Company from the executor or administrator of the estate of such shareholder or from the fiduciary having control of the shares in respect of which the proxy was appointed. On January 8, 1996, there were 12,358,508 shares of Class A Common Stock of the Company issued and outstanding and entitled to vote. Only those shareholders of record of the Class A Common Stock at the close of business on January 8, 1996 will be entitled to vote at the Annual Meeting. Each outstanding share of Class A Common Stock is entitled to one vote on all matters properly brought before the meeting. A majority of outstanding voting shares is required for adoption of the amendment to the Company's certificate of incorporation; a majority of the oustanding shares voting is sufficient for approval of the Amended Directors Stock Option Plan (as defined herein); and except as described below with regard to cumulative voting for Directors, a plurality of shares voting may elect all of the Directors. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the transaction of business but shall neither be counted as affirmative nor negative votes. In the election of Directors, a shareholder may cumulate his votes for one or more nominees, but only if, prior to the voting (a) such nominee(s) or nominee's name(s) have been placed in nomination, and (b) the shareholder has given notice at the meeting of his intention to cumulate his votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for the nominees. If the voting for Directors is conducted by cumulative voting, each share of Class A Common Stock will be entitled to a number of votes equal to the number of Directors to be elected, which votes may be cast for a single nominee or may be distributed among two or more nominees in such proportions as the shareholder deems appropriate. The nominees receiving the highest number of affirmative votes shall be elected. If no such notice is given, there will be no cumulative voting which means a plurality of shares voting may elect all of the Directors. In the event of cumulative voting, the proxy solicited confers discretionary authority on the proxies to cumulate votes so as to elect the maximum number of nominees. (ITEM 1 ON PROXY CARD) Pursuant to the Company's Certificate of Incorporation, as amended (the "Certificate of Incorporation"), members of the Board of Directors are divided into three classes: Class I, Class II and Class III. The terms of the Directors in each of these three classes are staggered and Directors in each of the three classes hold office for a three-year term until their successors have been duly elected and qualified. The number of authorized members of the Company's Board of Directors is 10. There are two nominees to be elected as Directors at the Annual Meeting. It is the intention of the person(s) named in the Proxy Card to vote the proxies in favor of the election of Directors of the two nominees named below unless the authority is withheld in accordance with the instructions on the Proxy Card. Both nominees are presently Directors of the Company. In the event the nominees named below refuse or are unable to serve as Directors (which is not anticipated), the persons named as proxies reserve full discretion to vote for any or all persons as may be nominated. Gary L. Leary and Warren E. Pinckert II are standing for reelection as Class II Directors at the Annual Meeting. If reelected, Messrs. Leary and Pinckert will serve as Class II Directors for a three-year term which expires as of the 1999 Annual Meeting. Terry Hartshorn was reelected and Alan Hoops was elected as Class I Directors at the 1994 Annual Meeting. Jean Bixby Smith was elected as a Class I Director at the 1995 Annual Meeting to fill a vacancy for a Class I Director at that time. Messrs. Hartshorn and Hoops and Ms. Smith are all currently serving terms which expire as of the 1997 Annual Meeting. David Carpenter, David Reed and Lloyd Ross were reelected as Class III Directors at the 1995 Annual Meeting and are serving as Class III Directors for a three-year term which expires as of the 1998 Annual Meeting. Two vacancies on the Board of Directors currently exist. The Board of Directors has not as yet identified candidates to fill these vacancies. Proxies cannot be voted for a greater number of persons than the number of nominees. The following sets forth, as of the date hereof, information concerning the two nominees for election as Directors of the Company. POSITION WITH COMPANY (OTHER THAN AS A DIRECTOR DIRECTOR), IF ANY; PRESENT PRINCIPAL NAME AND AGE SINCE OCCUPATION FOR PAST FIVE YEARS Gary L. Leary, 60 1989 Executive Vice President of UniHealth* (as defined herein) since April 1992, General Counsel of UniHealth since 1988, Director and member of the Executive Committee of UniHealth since 1988, and Secretary of UniHealth's board since November 1994. Mr. Leary has served as Corporate Counsel to UniHealth and its predecessor since 1977. Warren E. Pinckert II, 52 1985 President, Chief Executive Officer and a Director of Cholestech Corporation, a medical device manufacturing firm, since June 1993. Mr. Pinckert served as from 1991 to June 1993, Vice President of Finance and Business Development from 1989 to 1991, and Secretary from 1989 to June 1993 of Cholestech Corporation. Mr. Pinckert is a member of the Opportunities Committees and is Chairman of the Audit/Finance Committee. Mr. Pinckert is a certified public accountant. * UniHealth is the single largest holder of the Company's Class A Stock. The Board of Directors has established: (i) the Executive Committee; (ii) the Audit/Finance Committee; (iii) the Compensation Committee; and (iv) the Nominating Committee. In June 1994, the Board of Directors established the Executive Committee as a standing committee of the Board with the members comprised solely of the Chairman of the Board, the President and Chief Executive Officer of the Company and the chairman of each standing committee of the Board, except for the Special Opportunities Committee. The members of the Executive Committee currently are Messrs. Hartshorn, Hoops, Carpenter and Pinckert. The Executive Committee has all of the powers and authority of the Board of Directors in the management of the business and affairs of the Company. The Executive Committee held 11 meetings during fiscal 1995. The Audit/Finance Committee, comprised of Messrs. Pinckert, Reed and Ross, meets with the Company's independent auditors, makes recommendations to the Board of Directors concerning acceptance of the reports of such auditors and the accounting policies and procedures of the Company and reviews financial plans and operating results of the Company. The Audit/Finance Committee held five meetings during fiscal 1995. The Compensation Committee, comprised of Messrs. Carpenter, Pinckert and Ross, meets with management and makes recommendations to the Board of Directors concerning officer and key employee compensation and contributions to be made by the Company to the Company's employee benefit and performance incentive plans. The Compensation Committee met six times during fiscal 1995. The Compensation Committee has formed a sub-committee (the "Sub-Committee") to deal with compensation issues affected by Section 162(m) and the regulations promulgated thereunder ("Section 162(m)") of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Sub-Committee also administers the Employee Plan (as defined herein), the LTPIP (as defined herein) and the MICP (as defined herein). The Sub-Committee is comprised of Messrs. Pinckert and Ross. The Nominating Committee, comprised of Messrs. Carpenter, Hartshorn and Hoops, considers candidates for the directorships of the Company which are, or become vacant, and makes recommendations to the Board of Directors concerning the nomination of such candidates. The Nominating Committee does not consider nominees recommended by shareholders of the Company. During fiscal 1995, the Board of Directors held 11 meetings. No Director, except for Mr. Carpenter, attended fewer than 75 percent of the aggregate of (a) the total number of meetings of the Board of Directors, and (b) the total number of meetings held by all Committees of the Board on which they served. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth the names of those shareholders known to the Company to be the beneficial owners (as defined under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of more than five percent of the Company's outstanding shares of Class A Common Stock as of December 31, 1995. UniHealth, a California nonprofit public benefit corporation ("UniHealth"), is the parent corporation in a multi-state health care delivery system consisting of seven nonprofit medical centers and various for-profit health care companies, including one company in the health maintenance organization business. UniHealth has stated its intent to maintain a significant interest in the Company as its single largest holder of Class A Common Stock. (1) Number of shares beneficially owned as of December 8, 1995 according to a Schedule 13G filed with the Securities and Exchange Commission (the "SEC"). The following table sets forth the number of shares of the Company's Common Stock, which are beneficially owned as of December 31, 1995, by: (1) each of the Directors and nominees of the Company; (2) the Named Executive Officers (as defined herein); and (3) all Executive Officers (as defined in Section 3b-7 of the Exchange Act) and Directors of the Company as a group. * Less than 1 percent of class. (1) Information with respect to the beneficial ownership is based on information furnished to the Company by each person in this table. Each shareholder included in the table has sole voting and dispositive power with respect to the shares of Common Stock shown to be beneficially owned by the shareholder. Most of the shareholders included in this table reside in states having community property laws under which the spouse of the shareholder, in whose name the securities are registered, may be entitled to share in the management of their community property, which may include the right to vote or dispose of the shares of Common Stock. (2) Includes stock options of Class A Common Stock exercisable within 60 days for the following named individuals and group, and number of shares: Mr. Hartshorn, 89,000 shares; Mr. Hoops, 72,000 shares; Mr. Carpenter, 6,900 shares; Mr. Leary, 6,900 shares; Mr. Pinckert, 15,184 shares; Mr. Reed, 0 shares; Mr. Ross, 1,500 shares; Ms. Smith, 0 shares; Mr. Folick, 3,000 shares; Mr. Lipeles, 35,000 shares; Mr. Lowell, 14,500 shares; Dr. Taylor, 0 shares; and all Executive Officers and Directors as a group (23 persons), 285,234 shares. (3) Includes options of Class B Common Stock exercisable within 60 days for the following named individuals and group, and number of shares: Mr. Hartshorn, 67,500 shares; Mr. Hoops, 94,250 shares; Mr. Carpenter, 9,900 shares; Mr. Leary, 9,900 shares; Mr. Pinckert, 7,900 shares; Mr. Reed, 1,500 shares; Mr. Ross, 3,900 shares; Ms. Smith, 0 shares; Mr. Folick, 41,750 shares; Mr. Lipeles, 44,400 shares; Mr. Lowell, 23,600 shares; Dr. Taylor, 23,916 shares; and all Executive Officers and Directors as a group (23 persons), 439,316 shares. EXECUTIVE OFFICERS AND DIRECTORS OTHER THAN NOMINEES The following table sets forth, as of the date hereof, information concerning the Executive Officers and Directors other than nominees of the Company. Terry O. Hartshorn has been a Director of the Company since 1985. Mr. Hartshorn has been Chairman of the Board of Directors of the Company and President and Chief Executive Officer of UniHealth since April 1993. Mr. Hartshorn served as President and Chief Executive Officer of the Company from 1976 to April 1993 and as Secretary and a director of the Company from 1977 to 1981. Mr. Hartshorn has served as a Director of Apria HealthCare Group Inc., a provider of home health care products and services, since 1991, and also as a Director of Emcare Holdings Inc., a provider of emergency department services, since November 1994. Mr. Hartshorn is a member of the Executive and Nominating Committees. Alan R. Hoops has been a Director of the Company since 1994. Mr. Hoops has been President and Chief Executive Officer of the Company since April 1993. Mr. Hoops served as Executive Vice President and Chief Operating Officer of the Company from 1986 to April 1993, as Secretary of the Company from 1982 to April 1993, as Senior Vice President of the Company from 1985 to 1986 and as Vice President, Marketing and Planning of the Company from 1977 to 1985. Mr. Hoops is a member of the Executive and Nominating Committees. David R. Carpenter has been a Director of the Company since 1989. Mr. Carpenter has been self-employed since June 1, 1995. Mr. Carpenter served as Executive Vice President of Transamerica Corporation from 1993 through 1995, Group Vice President of Transamerica Corporation from 1990 through 1993, Chairman from 1985 through 1995 and Chief Executive Officer from 1984 through 1995 of Transamerica Occidental Life Insurance Company. Mr. Carpenter has also been Chairman of the Board of Directors of UniHealth since 1994, an Ex-Officio Member of the Compensation Committee of UniHealth since 1994 and serves as Chairman of its Executive and Nominating Committees and Governance Subcommittee. Mr. Carpenter is Chairman of the Company's Compensation and Nominating Committees and is a member of the Executive Committee. Mr. Carpenter has served as a Director of H.F. Ahmanson & Company, parent of Home Savings of America, since 1995. David A. Reed has been a Director of the Company since 1992. Mr. Reed currently is the President of DAR Consulting Group and serves as a special advisor to the Health Care Practice Group of Deloitte & Touche LLP. Mr. Reed served as President and Chief Executive Officer of St. Joseph Health System, a nonprofit public benefit corporation, owning and operating hospitals and other health care service entities, from 1990 through December 1994. Mr. Reed is a former chairman and speaker of the House of Delegates of the American Hospital Association. Mr. Reed is a member of the Audit and Special Opportunities Committees. Lloyd Ross has been a Director of the Company since 1985. Mr Ross has been President and Chief Executive Officer of SMI Construction, Inc., a commercial and industrial building company, since 1976. Mr. Ross is a member of the Audit/Finance, Compensation and Special Opportunties Committees. Jean Bixby Smith has been a Director of the Company since 1995. Ms. Smith has been President of Bixby Land Company since January 1984 and President of Alamitos Land Company since March 1991, both of which are engaged in the development and management of commercial and industrial real estate. Ms. Smith has also been a Director of UniHealth since 1988. Jeffrey Folick has been an Executive Vice President and Chief Operating Officer of the Company since December 1994. Between July 1992 and December 1994, Mr. Folick served in various capacities for the Company, including Regional Vice President of the West, President of PacifiCare of California ("PCC") and Chief Operating Officer of PCC. Prior to joining PCC in July 1992, Mr. Folick served as President of Secure Horizons from January 1991 to July 1992 and Vice President, Secure Horizons from December 1989 to December 1990. Wayne Lowell has been Chief Administrative Officer of the Company since December 1994, an Executive Vice President of the Company since April 1993 and Chief Financial Officer of the Company since November 1986. Mr. Lowell served as Senior Vice President of the Company from March 1992 to April 1993 and as Treasurer of the Company from 1986 to April 1993. Mr. Lowell is a certified public accountant. Roger Taylor, M.D. has been Executive Vice President of the Company since April 1993 and Chief Medical Officer of the Company since December 1992. Dr. Taylor served as Senior Vice President of the Company from December 1992 to April 1993. Prior to joining the Company, Dr. Taylor served as National Leader for The Wyatt Company, a health care employee benefit consulting company, and as a Senior Vice President of Equicor Inc., a general medical utilization review company, prior to December 1990. Patrick Feyen has been Regional Vice President of the Southwest, President and Chief Executive Officer of PacifiCare of Oklahoma, Inc. ("PCOK") and President and Chief Executive Officer of PacifiCare of Texas, Inc. ("PCTX") since December 1994. Mr. Feyen served as Regional Vice President of the Northwest from September 1994 to December 1994 and President and Chief Executive Officer of PacifiCare of Oregon, Inc. ("PCOR") from 1993 to December 1994. Mr. Feyen served as Vice President, Finance and Chief Financial Officer of PCOR from 1991 to 1993. Prior to joining PCOR, Mr. Feyen served as Vice President, Finance and Controller from 1990 to 1992 and Senior Administrator, Operations from 1989 to 1990 of Michigan Health Care Corporation, a provider of medical care and mental health services in Detroit. Mitchell Goodstein has been Regional Vice President of the Southeast and President of PacifiCare of Florida ("PCFL") since September 1995. Prior to joining the Company, Mr Goodstein served as Chief Executive Officer of HMO California, a licensed health care service plan, from June 1992 to August 1995. From July 1986 to June 1992, he was a principal of Tillinghast, a Towers Perrin Company, which provides consulting services to managed care entities. Mary McWilliams has been Regional Vice President of the Northwest since September 1994, President of PCOR since December 1994 and has been President and Chief Executive Officer of PacifiCare of Washington, Inc. since January 1994. Prior to joining the Company, Ms. McWilliams served as Chief Executive Officer of the Sisters of Providence Health Plans, a federally qualified health maintenance organization in Oregon, from 1984 to January 1994. Jon Wampler has been Regional Vice President of the West and President of PCC since December 1994. Mr. Wampler served as Regional Vice President of the Southwest and President of PCOK from September 1994 to December 1994 and served as President of PCTX from August 1990 to December 1994. Prior to joining the Company, Mr. Wampler served as Executive Director of Humana Health Care Plan of Colorado, Inc. from July 1988 to August 1990. Joseph S. Konowiecki has been General Counsel of the Company since October 1989 and Secretary of the Company since April 1993. Mr. Konowiecki served as Assistant Secretary from 1989 to April 1993. Mr. Konowiecki has been a partner of Konowiecki & Rank, a law partnership including a professional corporation, or its predecessor, since 1980 and has over seventeen years of practice in business, corporate and health care law. Ron Davis has been Senior Vice President, Corporate Operations since June 1995. Mr. Davis served as Senior Vice President, Operations of PCC from January 1993 to June 1995 and Vice President, Operations of PCC from November 1991 to December 1992. From October 1989 to November 1991, Mr. Davis was Senior Vice President, Operations and Controller of Health Plan of America, a federally qualified health maintenance organization based in southern California, which was merged into PCC in December 1991. Wanda Lee has been Senior Vice President, Corporate Human Resources of the Company since March 1993. From 1989 to March 1993, Ms. Lee was Vice President of Human Resources of FHP, Inc., a southern California-based managed care organization. Ms. Lee was Vice President, Human Resources and Administration of Denny's Incorporated, a division of TW Services, from 1974 to 1989. Fred V. Ryder has been Senior Vice President of the Company since November 1994 and Corporate Controller and Chief Accounting Officer since 1987. Mr. Ryder served as Vice President from December 1990 to November 1994. Mr. Ryder is a certified public accountant. Craig Schub has been Senior Vice President, Government Programs since December 1994 and President of Secure Horizons USA, Inc., since April 1993. Mr. Schub served as Senior Vice President of PCC, Secure Horizons of California from 1992 to 1993, Vice President of PCC, Secure Horizons of Northern California from 1991 to 1992 and Director of Corporate Planning from 1990 to 1991. Prior to joining the Company, Mr. Schub served as Director of Market Development and Communications for the Travelers Health Network from 1988 to 1990. James Williams has been Senior Vice President and Chief Information Officer since June 1993. Prior to joining the Company, Mr. Williams served as Senior Vice President, Information Services of Sanwa Bank California from August 1992 to May 1993 and Senior Vice President, Retail Systems Department of Security Pacific Automation Company from May 1988 through August 1992. William Young has been Senior Vice President, Corporate Marketing since February 1994. Prior to joining the Company, Mr. Young served as Division President of Blue Cross/Blue Shield from 1992 to 1994, as Vice President of Lincoln National Life Insurance Company from 1990 to 1992 and as President, MetLife HealthCare Network, southeast and Vice President of marketing and sales from 1985 to 1990. John Ninomiya has been Vice President, Health Data Analysis of the Company since 1990. Mr. Ninomiya served as Director, Health Data Analysis of the Company from 1988 to 1990 and has been employed with the Company in various capacities since 1986. Each Executive Officer of the Company is elected or appointed by the Board of Directors of the Company and holds office until his successor is elected, or until the earlier of his death, resignation or removal. The information given in this Proxy Statement concerning the Directors is based upon statements made or confirmed to the Company by or on behalf of such Directors, except to the extent that such information appears in its records. The following table sets forth for the fiscal years ended September 30, 1995, 1994 and 1993, the compensation for services in all capacities to the Company of those persons who were during the fiscal year ended September 30, 1995: (i) the chief executive officer; and (ii) the other four most highly compensated executive officers of the Company (collectively, the "Named Executive Officers"). (1) The amounts shown in this column include payments made pursuant to the Amended Management Incentive Compensation Plan, as amended, of the Company (the "MICP") and include amounts awarded and accrued during the fiscal year in which they were earned but paid in the following fiscal year. (2) Includes amounts awarded and accrued during the fiscal year in which they were earned but paid in the following fiscal year. Please refer to "Long- Term Performance Incentive Plan Awards in Last Fiscal Year." In fiscal 1995, 1994 and 1993, 40 percent of the payments made under the Amended Long-Term Performance Incentive Plan, as amended (the "LTPIP"), were paid out in stock and 60 percent of the payments made under the LTPIP were paid out in cash. For the Named Executive Officers the cash portion equaled: $235,950, $200,553 and $168,120 for Mr. Hoops; $143,319, $82,846 and $66,255 for Mr. Folick; $130,330, $125,288 and $105,679 for Mr. Lipeles; $101,288, $93,165 and $83,328 for Mr. Lowell; and $77,538, $79,270 and $0 for Dr. Taylor for fiscal 1995, 1994 and 1993, respectively. For the Named Executive Officers, the stock portion equaled: 1,817, 2,113 and 2,767 shares of Class B Common Stock for Mr. Hoops; 1,104, 872 and 1,090 shares of Class B Common Stock for Mr. Folick; 1,003, 1,319 and 1,741 shares of Class B Common Stock for Mr. Lipeles; 780, 981 and 1,372 shares of Class B Common Stock for Mr. Lowell; 596, 835 and no shares of Class B Common Stock for Dr. Taylor for fiscal 1995, 1994 and 1993, respectively. For each Named Executive Officer, the shares of Class B Common Stock were valued at $86.50 per share (the fair market value of the Class B Common Stock at the time the payment was awarded) for payments made in fiscal 1995, at $63.25 per share (the fair market value of the Class B Common Stock at the time the payment was awarded) for payments made in fiscal 1994 and at $40.50 per share (the fair market value of the Class B Common Stock at the time of payment) for payments made in fiscal 1993. (3) Mr. Lipeles resigned as an Executive Vice President of the Company effective October 1, 1995. Mr. Lipeles is currently serving as a consultant to the Company. (4) Amounts in this column include contributions by the Company to the PacifiCare Health Systems, Inc. Savings and Profit Sharing Plan (the "Profit Sharing Plan"). All employees of the Company who have completed 12 months of continuous service and have worked at least 1,000 hours are eligible to participate in the Profit Sharing Plan. The Company contributed the following amounts for each employee: (a) An amount equal to two percent of their annual salary up to a specified maximum amount. For the Named Executive Officers, this amount equaled: $3,000, $3,000 and $4,717 for Mr. Hoops; $3,263, $5,484 and $4,069 for Mr. Folick; $3,000, $3,424 and $4,292 for Mr. Lipeles; $3,557, $4,564 and $3,152 for Mr. Lowell for fiscal 1995, 1994 and 1993, respectively. For Dr. Taylor, this amount equaled $3,280 and $3,000 for fiscal years 1995 and 1994, respectively. Dr. Taylor became eligible for the Profit Sharing Plan in December 1993. (b) An amount equal to one half of the compensation deferred by each employee up to three percent of the employee's annual compensation up to a specified amount. For the Named Executive Officers, this amount equaled: $4,620, $4,500 and $4,497 for Mr. Hoops; $6,514, $4,096 and $3,750 for Mr. Folick; $4,620, $4,500 and $2,268 for Mr. Lipeles; and $5,575, $4,500 and $4,497 for Mr. Lowell for fiscal 1995, 1994 and 1993, respectively. This amount equaled $5,055 for fiscal 1995 and $4,500 for 1994 for Dr. Taylor who became eligible for the Profit Sharing Plan in December 1993. (c) A discretionary amount, determined solely at the discretion of the Board of Directors, from the Company's current or accumulated earnings which is generally based upon a percentage of pretax income. This amount equaled $4,771 and $4,440 for each of Messrs. Hoops, Folick, Lipeles and Lowell and Dr. Taylor for fiscal 1995 and 1994, respectively; and $4,434 for each of Messrs. Hoops, Folick, Lipeles and Lowell for fiscal 1993. (d) Includes amounts contributed by the Company pursuant to the Statutory Restoration Plan of the Company (the "Statutory Restoration Plan"). For the Named Executive Officers, this amount equaled: $32,824, $44,506 and $3,410 for Mr. Hoops; $24,729, $21,854 and $1,108 for Mr. Folick; $33,395, $30,335 and $0 for Mr. Lipeles; $22,691, $17,943 and $0 for Mr. Lowell; and $24,511, $14,848 and $3,900 for Dr. Taylor for fiscal 1995, 1994 and 1993, respectively. The Statutory Restoration Plan allows participants to defer the portion of their pay that otherwise would be limited by the Company's Profit Sharing Plan and to receive excess matching contributions, profit- sharing contributions and discretionary contributions in the same percentages as those provided by the Profit Sharing Plan. Senior Vice Presidents and above are eligible to participate in the Statutory Restoration Plan. (e) An amount equal to premiums paid by the Company for term life insurance for all employees. For the Named Executive Officers this amount equaled: $822 for Messrs. Hoops and Dr. Taylor, $675 for Mr. Folick, $606 for Mr. Lipeles and $498 for Mr. Lowell. For Mr. Hoops and Mr. Folick, the amount includes additional insurance premiums paid by the Company equal to $38,979 and $29,419, respectively. (5) Amount includes $88,200 paid as a sign-on bonus and $82,329 paid in moving expenses to Dr. Taylor. (6) Amount includes $97,952 paid in moving expenses to Dr. Taylor. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth for the fiscal year ended September 30, 1995, the stock options granted to the Company's Named Executive Officers pursuant to the Second Amended and Restated 1989 Stock Option Plan for Officers and Key Employees of PacifiCare Health Systems, Inc., as amended (the "Employee Plan"). (1) Mr. Lipeles resigned as an Executive Vice President effective October 1, 1995. No stock options were granted to Mr. Lipeles in fiscal 1995. (2) Only non-qualified stock options ("NQSOs") were granted in fiscal 1995 pursuant to the Employee Plan. No incentive stock options or stock appreciation rights were granted in fiscal 1995. The date of grant for the NQSOs was December 20, 1994, except for Mr. Hoops whose date of grant was December 21, 1994. NQSOs which have been held for six months and which are not already exercisable and not expired shall upon a "Change of Control" automatically become exercisable. A Change of Control is defined as the occurrence of any of the following: (i) a business combination effectuated through the merger or consolidation of the Company with or into another entity where the Company is not the Surviving Organization (as defined herein); (ii) any business combination effectuated through the merger or consolidation of the Company with or into another entity where the Company is the Surviving Organization and such business combination occurred with an entity whose market capitalization prior to the transaction was greater than 50 percent of the Company's market capitalization prior to the transaction; (iii) the sale in a transaction or series of transactions of all or substantially all of the Company's assets; (iv) any "person" or "group" (within the meaning of Sections 13(d)and 14(d) of the Exchange Act) other than UniHealth, acquires beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act), directly or indirectly, of 20 percent or more of the voting common stock of the Company and the beneficial ownership of the voting common stock of the Company owned by UniHealth at that date is less than or equal to the beneficial ownership interest of voting securities attributable to such other person or group; (v) a dissolution or liquidation of the Company; or (vi) the Company ceases to be subject to the reporting requirements of the Exchange Act as a result of a "going private transaction" (within the meaning of the Exchange Act). For purposes hereof, "Surviving Organization" shall mean any entity where the majority of the members of such entity's board of directors are persons who were members of the Company's board of directors prior to the merger, consolidation or other business combination and the senior management of the surviving entity includes all of the individuals who were the Company's executive management (the Company's chief executive officer and those individuals who report directly to the Company's chief executive officer) prior to the merger, consolidation or other business combination and such individuals are in at least comparable positions with such entity. (3) The exercise price may be paid in cash, in shares of Common Stock valued at fair market value on the date of exercise or pursuant to a cashless exercise procedure under which the optionee provides irrevocable instructions to a brokerage firm to sell the purchased shares and to remit to the Company, out of the sale proceeds, an amount equal to the exercise price plus all applicable withholding taxes. (4) The NQSOs granted to the Named Executive Officers become exercisable in four cumulative installments of 25 percent of the shares on the first anniversary of the date of grant and in subsequent installments of 25 percent on each anniversary of the date of grant. (5) The dollar amounts in this table are the result of calculations at the five and 10 percent rates used to determine the potential realizable value of the stock options in the above table and therefore are not intended to forecast possible future appreciation, if any, of the Company's stock prices. No assurances can be given that the stock prices will appreciate at these rates or experience any appreciation at all. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth information with respect to the Named Executive Officers concerning the exercise of options during fiscal 1995 and unexercised options held as of the end of fiscal 1995. AWARDS IN LAST FISCAL YEAR The following table sets forth the LTPIP Awards for the fiscal year ended September 30, 1995 for the Company's Named Executive Officers: (1) Incentive compensation under the LTPIP is based on the achievement of performance objectives established by the Sub-Committee and approved by the shareholders of the Company, measured over a three year performance period. The performance objective for this performance period is based on increases in earnings per share. Prior to the commencement of services for this performance period, the Sub-Committee established, in writing, minimum targets for earnings per share which must be achieved, maximum targets above which no additional awards will be earned and the formula for computing each participant's award if such target is achieved. Payouts under the LTPIP are based on the average three-year annual base salary for the calendar year of the Named Executive Officer for the performance cycle with certain assumptions regarding increases in base salary per calendar year over the performance cycle being made. Please refer to the "Summary Compensation Table" for payouts under the LTPIP for fiscal 1995. Payments made under the LTPIP will be made in a cash portion and a stock portion. It is anticipated that the cash portion will equal 60 percent of the LTPIP award and the stock portion will equal 40 percent of the LTPIP award. The stock portion will be valued at the fair market value of the stock at the time the LTPIP award is made. (2) Mr. Lipeles resigned as an Executive Vice President effective October 1, 1995. No LTPIP Awards were established for Mr. Lipeles. The Company has entered into employment agreements with the Named Executive Officers. Each agreement continues until the death, disability, misconduct or written notice of termination by either the Company or the Named Executive Officer. The agreements provide that each Named Executive Officer is entitled to his base salary, participation in all employee benefit programs, reimbursement for business expenses and participation in the MICP, LTPIP and the Employee Plan of the Company. The agreements also contain provisions that entitle each of the Named Executive Officers to receive severance benefits which are payable if the officer's employment with the Company is terminated for various reasons, including death, disability and termination following a change of ownership or control of the Company. Under the employment agreements for Mr. Hoops and Mr. Folick, a change of ownership or control would result from: (i) any merger, consolidation or sale such that any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) acquires beneficial ownership, within the meaning of Rule 13d-3 of the Exchange Act, of 20 percent or more of the voting common stock of the Company and the ownership interest of the voting common stock owned by UniHealth is less than or equal to the ownership interest of the voting common stock of such individual, entity or group; (ii) any transaction in which the Company sells substantially all of its material assets; (iii) a dissolution or liquidation of the Company; or (iv) the Company becomes a non-publicly held company. Under Mr. Lowell's employment agreement, a change of ownership or control would result from any merger, consolidation or sale of the Company, which reduces the voting interest 51 percent, any transaction in which the Company sells substantially all of its material assets or the Company becoming non-publicly held. In the event one of the above officers is terminated by the Company (other than for incapacity, disability, habitual neglect or gross misconduct) within 24 months of a change in ownership or control, the employment agreements provide for payment of base salary and certain benefits for 36 months in the case of Mr. Hoops, 24 months in the case of Mr. Folick, and 12 months in the case of Mr. Lowell, and payment of benefits under the Company's MICP and the LTPIP which will be deemed to have accrued to the termination date. Dr. Taylor will receive severance benefits for 24 months under his employment agreement for any termination without cause, including a significant reduction in position or responsibilities, his terms of employment or relocation outside of Orange County, California and payment of the benefits under the Company's MICP and LTPIP which will be deemed to have accrued and vesting of certain of his stock options. The contingent liability for severance payments that the Company would be required to make under the employment agreements (excluding amounts which may be payable under incentive plans and the value of certain benefits) would be $1,750,204 to Mr. Hoops, $814,401 to Mr. Folick, $307,201 to Mr. Lowell and $604,421 to Dr. Taylor. NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF THE COMPANY'S PREVIOUS OR FUTURE FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THAT MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN PART, THE FOLLOWING REPORT AND THE PERFORMANCE GRAPH SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS. REPORT OF THE COMPENSATION COMMITTEE The compensation policies of PacifiCare Health Systems, Inc. (the "Company) are structured to link the compensation of the executive officers of the Company with enhanced shareholder value. Through the establishment of short- and long- term incentive plans, the Company seeks to align the financial interests of the executive officers with those of its shareholders. This linkage is evidenced by shareholder returns that have exceeded the peer group performance reported in this proxy on a one, three, and five-year interval. In designing its compensation programs, the Company follows the belief that compensation should seek to reflect the value created for shareholders while supporting the business strategies and long-range plans of the Company and the markets the Company serves. In doing so, the compensation programs reflect the following themes: A compensation program that stresses the Company's financial performance and individual performance. An annual incentive plan, which generates a portion of compensation based on the achievement of specific performance goals, with superior performance resulting in total annual cash compensation at approximately the 75th percentile of competitive levels of companies with a similar business structure, size, and marketplace orientation. A long-term incentive plan that is designed to reward and retain executive officers over the long-term and is linked to earnings per share. The Compensation Committee (the "Committee") met six times during fiscal 1995 to review and set the compensation of the executive officers of the Company consistent with the foregoing philosophy. The Committee retains the services of consulting firms which provide independent expertise on executive compensation matters to advise it on trends and issues related to the Company's executive compensation program. The Company's executive compensation program is based on four components, each of which is intended to serve the overall compensation philosophy. BASE SALARY. Base salary is intended to be set at a level equal to approximately the 50th percentile of amounts paid to executive officers of companies with a similar business structure, size, and marketplace orientation. The Committee surveys health care, service-oriented and general industry companies to provide target salaries for the Company's executive officers, which are then adjusted based on an individual's responsibilities. Salaries of executive officers in excess of $150,000 are reviewed by the Committee at least on an annual basis. ANNUAL INCENTIVE COMPENSATION. Under the Amended Management Incentive Compensation Plan, as amended (the "MICP"), annual incentive awards are granted upon the achievement by the executive officers of performance objectives established by the sub-committee of the Committee (the "Sub-Committee") and approved by the shareholders of the Company at the March 1, 1995 Annual Shareholders' Meeting (the "1995 Shareholders' Meeting"). The performance objective for fiscal 1995 was growth in earnings per share ("EPS") and was stated in terms of minimum, target and maximum goals. The Sub-Committee also established and the shareholders approved a targeted range for general and administrative costs as a percentage of revenue to adjust awards under the MICP (the "G&A Percentage of Revenue Measure"). If the G&A Percentage of Revenue Measure at the end of fiscal 1995 exceeded the targeted range, awards under the MICP would be reduced by a specified percentage. If the G&A Percentage of Revenue Measure at the end of fiscal 1995 equaled the targeted range, no adjustment would be made to awards under the MICP. If the G&A Percentage of Revenue Measure at the end of fiscal 1995 was lower than the targeted range, awards under the MICP would be increased by a specified percentage. MICP bonuses for fiscal 1995 were increased by the G&A Percentage of Revenue Measure. Business unit specific financial measures, in addition to EPS and the G&A Percentage of Revenue Measure, were established for some executive officers under the MICP. Achievement of each goal corresponds to an award equal to a specified percentage of an executive officer's salary as determined at the beginning of each fiscal year. LONG-TERM PERFORMANCE INCENTIVE PLAN. The Company provides a long-term performance incentive plan (the "LTPIP") that is aligned to the long-term performance of the Company by aiming to maximize shareholder return. The LTPIP opportunity is measured against the achievement of financial criteria established by the Sub-Committee for each three-year period and approved by the shareholders of the Company at the 1995 Shareholders' Meeting. A new performance period of three years starts each year, so that after participating in the LTPIP for three years, an executive officer is participating in three separate plans at the same time. The performance objective for the 1994 through 1996 and the 1995 through 1997 performance cycles is an increase in EPS and is stated in terms of minimum, target, and maximum goals. The financial measures for the 1993-1995 cycle were average return on equity (weighted 80 percent) and total revenue growth of non-core business (weighted 20 percent), which were stated in terms of minimum, target and maximum goals. Achievement of each goal corresponds to an award equal to a specified percentage of an executive officer's salary as determined at the beginning of each performance period. Sixty percent of the payments under the LTPIP are made in the form of cash and 40 percent are in the form of Company stock. STOCK OPTIONS. Executive officers are eligible to receive periodic grants of non-qualified stock options, incentive stock options, stock payments (in lieu of cash compensation payments other than base salary) and stock appreciation rights (collectively, the "Awards") pursuant to the Second Amended and Restated 1989 Stock Option Plan for Officers and Key Employees of PacifiCare Health Systems, Inc. (the "Employee Plan"). The Awards are intended to retain and motivate executive officers to improve long-term stock performance. Awards are granted at the fair market value of the underlying common stock at the date of grant. Stock options, generally, vest in installments over multiple years. To date, only non-qualified stock options have been granted pursuant to the Employee Plan. Prior to granting Awards, the Sub-Committee considers previous stock ownership levels of executive officers and grants of stock options by competitors to their executive officers to ensure that Awards are consistent with competitive practices. In fiscal 1995, the Committee reviewed and re-approved its charter and the Company's executive compensation philosophy. During 1995, the Committee, along with its consultants, reviewed and approved the comparative industry compensation data, to be used by the Committee for performance and compensation comparisons. The Committee has emphasized that use of comparative compensation data should be periodically reviewed and updated consistent with the Company's growth and strategic business plans. Also in 1995, the Sub-Committee and the Company's shareholders approved the performance objectives for the MICP and the LTPIP described above. EPS has been adopted as a performance objective for both the MICP and the LTPIP as the Company believes that for the managed care industry EPS is a strong indicator of shareholder value. The Sub-Committee also adopted resolutions and amended the Employee Plan to provide for the automatic acceleration of vesting of all options held for longer than six months previously granted or options to be granted in the future upon a Change of Control. See "Option Grants in Last Fiscal Year, Footnote 2" for a definition of Change of Control. The Sub-Committee and the Board of Directors also adopted an amended 1992 Non-Officer Directors Stock Option Plan (the "Amended Directors Plan"). The Amended Directors Plan is described in a separate section of this proxy statement. See "The Proposals-Approval of the Amended 1992 Non-Officer Directors Stock Option Plan." POLICY ON DEDUCTIBILITY OF COMPENSATION Section 162(m) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder ("Section 162(m)") limits the tax deduction to $1 million for compensation paid to the Company's most highly compensated executive officers, unless certain requirements are met. The Committee has established a Sub-Committee of the Compensation Committee (the "Sub-Committee") to deal with compensation issues affected by Section 162(m). In response to the requirements of Section 162(m), the Sub-Committee administers the Employee Plan, the MICP and the LTPIP and has obtained shareholder approval for each of these plans. The Sub-Committee believes that the Company is in compliance with Section 162(m) and it is the intent of the Sub-Committee to continue to comply with the requirements of Section 162(m) unless the Sub-Committee feels that required changes would not be in the best interest of the Company or its shareholders. Alan Hoops, the President and Chief Executive Officer of the Company, received an annual base salary of $450,000 in calendar year 1994. Consistent with the philosophy of the Committee to set annual base salaries of executive officers at approximately the 50th percentile of companies of similar size, organization and marketplace orientation, the Committee and its consultants conducted a survey of salaries of chief executive officers of health care, service-oriented and general industry companies comparable to the Company. As a result of this survey and as a result of a merit adjustment to reflect the overall growth of the Company, Mr. Hoops' salary was increased by the Committee to $575,000 for calendar year 1995. Mr. Hoops earned $350,000 in MICP compensation for fiscal 1995 performance, the target incentive award under the 1994 MICP, for EPS specified in the 1994 MICP as increased by the G&A Revenue Percentage Measure. For the 1993-1995 LTPIP performance cycle, Mr. Hoops earned $393,120 in LTPIP compensation of which 40 percent was paid in the form of the Company's stock and 60 percent was paid in cash. Mr. Hoops received the maximum LTPIP award for average return on equity (weighted 80 percent) and total revenue growth of non-core business (weighted 20 percent). Mr. Hoops received non-qualified stock options to purchase 30,000 shares of the Company's Class B Common Stock at $65.75 per share (the fair market value of the stock at the time of grant). The options vest 25 percent per year following the first year of grant. The foregoing report has been furnished by: The following graph demonstrates the performance of the cumulative total return to the shareholders of the Company's Class A Common Stock during the previous five years in comparison to the cumulative total return on the Standard & Poor's Health Care Composite Index and the Standard & Poor's 500 Stock Index. Comparison of Five Year Cumulative Total Return S&P Health Care Composite Index and S&P 500 Index Pursuant to the PacifiCare Health Systems, Inc. Amended Non-Employee Director Compensation and Retirement Plan (the "Compensation and Retirement Plan"), directors who are not full-time employees of the Company or UniHealth receive, as compensation for their services, an annual retainer of $20,000, $1,000 for each Board of Directors meeting attended and $1,000 for each Board Committee meeting attended not to exceed $2,000 per day on any day in which multiple Board and/or committee meetings are attended, except for the Chairman of the Board and Chairmen of Committees who receive an additional 50 percent of the amount paid for attendance at meetings for each Board Committee meeting attended, not to exceed $3,000 per day on any day in which multiple Board and/or committee meetings are attended. Terry Hartshorn, the Chairman of the Board of Directors, receives an annual base salary of $132,250 as compensation for his services. Mr. Hartshorn also receives benefits under the Company's benefit plans, including the MICP and the LTPIP, similar to those which other executive officers of the Company are entitled. In the event Mr. Hartshorn is terminated by the Company (other than for incapacity, disability, habitual neglect or gross misconduct) within 24 months of a change in ownership or control, his employment agreement provides for payment of his base salary, certain benefits and payment of benefits under the Company's MICP and LTPIP for a period equal to the longer of the remaining term of his employment agreement or 24 months following the effective date of termination. The Chairman of the Board and the Company's Directors are all entitled to reimbursement of expenses incurred in attending Board of Directors and Board Committee meetings. Retirement Benefits are also provided under the Compensation and Retirement Plan. Upon retirement, each Director, who is not a full-time employee of the Company or UniHealth, shall receive an annual amount equal to the average annual retainer for the preceding three-year period for the number of years of service accumulated by such Director at the time of retirement, provided five years of service as a Director have been completed. In the event of a Change of Control, any Retirement Benefits which such Director has accumulated under the Compensation and Retirement Plan, whether or not the Director meets the eligibility provisions for retirement benefits, shall immediately vest and be payable at the present value of such amount upon the effective date of a Change of Control. In fiscal 1995, eligible Directors were granted NQSOs pursuant to the 1992 Non-Officer Directors Stock Option Plan of PacifiCare Health Systems, Inc. (the "Directors Plan"). Non-officer Directors of the Company, who were not eligible to receive awards under the Employee Plan, were eligible to receive NQSOs under the Directors Plan. The Company's Class B Common Stock are the shares of stock subject to the Directors Plan and no more than 140,000 shares of Class B Common Stock are subject to NQSOs granted under the Directors Plan. If a NQSO granted under the Directors Plan expires or is terminated or canceled, the shares of Class B Common Stock subject to NQSOs shall be added to the shares of Class B Common Stock otherwise available for issuance pursuant to NQSOs granted under the Directors Plan. The Directors Plan provides for adjustments in the number and kind of shares subject to said plan, and to outstanding NQSOs in the event of a reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares, extraordinary cash or non- cash dividends declared on outstanding shares of Class B Common Stock or other similar transactions. The Board of Directors has adopted the Amended 1992 Non- Officer Directors Stock Option Plan (the "Amended Directors Plan") and is submitting it at the Annual Meeting for shareholder approval. A description of the Amended Directors Plan is contained in a separate section of this Proxy Statement. See "The Proposals-Approval of the Amended 1992 Non-Officer Directors Stock Option Plan." In addition, a copy of the Amended Directors Plan is attached hereto as Exhibit B. Options granted pursuant to the Amended Directors Plan are subject to the approval of the Amended Directors Plan by the Company's shareholders. Five Directors of the Company were eligible to participate in the Directors Plan during fiscal 1995. Eligible Directors are automatically granted NQSOs to purchase 2,000 shares of Class B Common Stock on December 31 of each year; provided that, during the twelve month period preceding December 31, the optionee Director served on the Board of Directors and was not eligible to receive awards under the Employee Plan. All NQSOs granted pursuant to the Directors Plan are subject to the terms of the Directors Plan. The per share exercise price of the shares of Class B Common Stock subject to any NQSO granted under the Directors Plan is 100 percent of the fair market value of the shares on the date of grant. NQSOs granted under the Directors Plan vest in four cumulative installments of 25 percent of the shares of Class B Common Stock covered by each NQSO beginning on the first anniversary of the date of the grant. NQSOs granted under the Directors Plan may not be exercised after the earlier of: (i) the expiration of ten years and one day from the date the NQSO was granted; (ii) the expiration of eight months from the time the optionee voluntarily or involuntarily ceases to serve as a Director of the Company; (iii) the expiration of one year from the date Optionee ceases to serve as a Director of the Company by reason of disability or death; or (iv) on the effective date of (a) the liquidation or dissolution of the Company, or (b) a change of control event. Messrs. Carpenter, Leary, Pinckert, Reed and Ross were each automatically granted NQSOs to purchase 2,000 shares of Class B Common Stock pursuant to the Directors Plan during fiscal 1995. The Company and its subsidiaries purchased health care services from hospitals owned and managed by UniHealth totaling $70.6 million for the fiscal year ended September 30, 1995. Under the terms of a management arrangement with UniHealth, the Company paid $0.7 million for management fees, payroll processing services and other services in the fiscal year ended September 30, 1995. At September 30, 1995, $0.3 million was payable to UniHealth. UniHealth purchased health care coverage from the Company and its subsidiaries in the amount of $12.0 million for the fiscal year ended September 30, 1995. Amounts receivable from UniHealth were $0.9 million at September 30, 1995. Joseph S. Konowiecki, the Secretary and General Counsel of the Company, is the sole shareholder of Joseph S. Konowiecki, a Professional Corporation, a California professional corporation, which is a partner of the law firm of Konowiecki & Rank. The Company purchased legal services from Konowiecki & Rank in the amount of $3.2 million for the fiscal year ended September 30, 1995. The amount payable to Konowiecki & Rank at September 30, 1995 was $0.2 million. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT Section 16(a) of the Exchange Act requires the Company's Officers and Directors, and persons who own more than 10 percent of a registered class of the Company's equity securities to file reports of ownership on Forms 3, 4 and 5 with the SEC. Officers, Directors and greater than 10 percent shareholders are required by SEC regulation to furnish the Company with copies of all Forms 3, 4 and 5 they file. Based solely on the Company's review of the copies of such forms it has received and written representations from certain reporting persons that they were not required to file Forms 5 for specified fiscal years, the Company believes that all of its Executive Officers, Directors and greater than 10 percent beneficial owners complied with all filing requirements applicable to them with respect to transactions during fiscal 1995, except for Patrick Feyen, Jeffrey Folick, Mitchell Goodstein, Mary McWilliams and Jon Wampler, who did not file their initial reports on a timely basis, Lloyd Ross and Wayne Lowell who each did not file a report for one transaction on a timely basis and UniHealth which did not file one report for eight transactions on a timely basis. APPROVAL OF THE ADOPTION OF AN AMENDMENT TO THE COMPANY'S (ITEM 2 ON PROXY CARD) The Board of Directors of the Company proposes that the shareholders approve the Amendment (as defined below) to the Certificate of Incorporation. The following is a summary of the material provisions of the Amendment; it should, however, be read in conjunction with, and is qualified in its entirety by reference to, the complete text of the Amendment which is attached hereto as Exhibit A. DESCRIPTION OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION At the Annual Meeting, the holders of Class A Common Stock of the Company are being asked to consider and act upon a proposal to approve an amendment (the "Amendment") to Article IV of the Company's Certificate of Incorporation which will increase the total number of shares of stock which the Company shall have authority to issue to 220,000,000. If the Amendment is adopted the total number of shares of Class A Common Stock which the Company will be authorized to issue will be 100,000,000, the total number of shares of Class B Common Stock which the Company will be authorized to issue will be 100,000,000 and the total number of shares of preferred stock (the "Preferred Stock") will be 20,000,000. If the Amendment is approved at the Annual Meeting, the Board of Directors will have the ability to issue shares of the Class A Common Stock, the Class B Common Stock or the Preferred Stock without any additional shareholder action. The Preferred Stock, when issued, will have such terms, including among other things, dividends, conversion and preferences, as the Board of Directors determines. The Board of Directors believes that it is desirable to have the additional authorized shares of Common Stock available for possible future financing and acquisition transactions and other general corporate purposes. Having such additional authorized shares of Common Stock available for issuance in the future will give the Company greater flexibility and may allow such shares to be issued without the expense and delay of a special shareholders' meeting. The issuance of shares of Class A Common Stock or Preferred Stock (with voting rights) could enable the Board of Directors to render more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer or other business combination transaction directed at the Company by, among other things, placing shares of Class A Common Stock or Preferred Stock (with voting rights) with investors who might align themselves with the Board of Directors or issuing new shares of Common Stock or Preferred Stock (with or without voting rights) to dilute stock ownership of a person or entity seeking control of the Company. Approval of a majority of the outstanding Class A Common Stock is required to approve the Amendment. Such approval is sufficient to affect the amendment under both Delaware law and the Company's Certificate of Incorporation. If the Amendment is adopted by the holders of the Class A Common Stock pursuant to the foregoing requirements, the Board of Directors' intent is to prepare and file a Certificate of Amendment of Incorporation with the Secretary of State of the State of Delaware, amending the Certificate of Incorporation in accordance with the Amendment. The Amendment will be effective immediately upon acceptance of filing by the Secretary of State of the State of Delaware. Although the Board of Directors presently intends to file the Amendment if it is approved by the holders of the Class A Common Stock, the Board of Directors reserves the right to abandon the Amendment and not file such Certificate of Amendment even if the Amendment is approved by a majority of the holders of Class A Common Stock. Although the Board of Directors does not anticipate exercising its right to abandon the Amendment nor does it contemplate any specific events which would trigger the abandonment of the Amendment, the Board will defer or abandon the Amendment, if in its business judgment, conditions affecting the Company are such as to make the filing of the Amendment no longer in the best interest of the Company or its shareholders. 1992 NON-OFFICER DIRECTORS STOCK OPTION PLAN (ITEM 3 ON PROXY CARD) The Board of Directors proposes that the shareholders approve the Amended 1992 Non-Officer Directors Stock Option Plan of PacifiCare Health Systems, Inc., (the "Amended Directors Plan"). The following is a summary of the material provision of the Directors Plan; it should, however, be read in conjunction with, and is qualified in its entirety by reference to, the complete text of the Amended Directors Plan which is attached hereto as Exhibit B. DESCRIPTION OF THE DIRECTORS PLAN Under the Directors Plan, which was approved by the shareholders at the 1992 Special Meeting of Shareholders, Non-officer Directors of the Company who are not eligible to receive Awards under the Employee Plan are automatically granted NQSOs to purchase 2,000 shares of Class B Common Stock on December 31 of each year; provided that, during the twelve preceding months, the Director served on the Board of Directors and was not eligible to receive awards under the Employee Plan. As of the date hereof, six Directors are eligible to participate in the Directors Plan. No more than 140,000 shares of Class B Common Stock are available for NQSOs under the Directors Plan. The per share exercise price of the shares of Class B Common Stock subject to any NQSO granted under the Directors Plan is 100 percent of the fair market value of the shares on the date of grant. NQSOs granted under the Directors Plan vest in four cumulative installments of 25 percent of the shares of Class B Common Stock covered by each NQSO beginning on the first anniversary of the date of the grant. NQSOs granted under the Directors Plan may not be exercised after the earlier of: (i) the expiration of ten years and one day from the date the NQSO was granted; (ii) the expiration of eight months from the time the optionee voluntarily or involuntarily ceases to serve as a Director of the Company; (iii) the expiration of one year from the date Optionee ceases to serve as a Director of the Company by reason of disability or death; or (iv) on the effective date of (a) liquidation or dissolution of the Company, or (b) a change of control event. The Amended Directors Plan, if adopted, will modify the effect on NQSOs granted under the Directors Plan of a liquidation or dissolution or a change of control of the Company. During fiscal 1995, Messrs. Carpenter, Leary, Pinckert, Reed and Ross were each granted NQSOs to purchase 2,000 shares of Class B Common Stock. The aggregate market value of the Class B Common Stock underlying outstanding NQSOs is $3,617,600. The Board of Directors has approved the Amended Directors Plan. Among other changes, the Amended Directors Plan would provide for an automatic and immediate acceleration of the vesting of all NQSOs granted under the Amended Directors Plan upon the occurrence of a change of control of the Company (as defined below), as long as the NQSOs have been held for at least six months. The Directors Plan, as currently in effect, provides for the expiration of the NQSOs upon a change of control, liquidation or dissolution of the Company. The Amended Directors Plan would provide Non-officer Directors with the security and assurance of knowing that they will be able to realize the full potential value of their NQSOs in the event of a Change of Control. In addition, the Amended Directors Plan would promote the best interests of the Company by enhancing the Company's ability to attract and retain the services of experienced and knowledgeable non-officer directors and providing additional incentives for such directors to continue working for the best interests of the Company and its stockholders even in case of a pending change of control. The Amended Directors Plan is being submitted to the shareholders for approval at the Annual Meeting in order to retain its exemption from Section 16(b) of the Exchange Act. Any NQSOs granted under the Amended Directors Plan, prior to shareholder approval of the Amended Directors Plan, will be subject to shareholder approval of the Amended Directors Plan. If shareholder approval is not obtained, the NQSOs granted under the Amended Directors Plan will be governed by the terms of the Directors Plan. In order to make the terms of the NQSOs, which have previously been granted under the Directors Plan, consistent with the NQSOs to be granted under the Amended Directors Plan, the Board of Directors has adopted resolutions which provide for the automatic and immediate acceleration of the vesting of all NQSOs previously granted under the Directors Plan upon the occurrence of a Change of Control of the Company, as long as the NQSOs have been held for at least six months. The Company is seeking approval from those Directors who hold such NQSOs for the modification of the NQSOs. DESCRIPTION OF THE AMENDED PLAN The Amended Directors Plan amends Section 8 of the Directors Plan and adds Section 9 to provide that upon the Change of Control, any NQSO issued under the Amended Directors Plan which has been held by an optionee for at least six months shall become exercisable immediately upon the effective date of a Change of Control. Change of Control is defined as any of the following events: (i) a business combination effectuated through the merger or consolidation of the Company with or into another entity where the Company is not the Surviving Organization; (ii) any business combination effectuated through the merger or consolidation of the Company with or into another entity where the Company is the Surviving Organization and such business combination occurred with an entity whose market capitalization prior to the transaction was greater than 50 percent of the Company's market capitalization prior to the transaction; (iii) the sale in a transaction or series of transactions of all or substantially all of the Company's assets; (iv) any "person" or "group" (within the meaning of Sections 13(d)and 14(d) of the Exchange Act) other than UniHealth, acquires beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act), directly or indirectly, of 20 percent or more of the voting common stock of the Company and the beneficial ownership of the voting common stock of the Company owned by UniHealth at that date is less than or equal to the beneficial ownership interest of voting securities attributable to such other person or group; (v) a dissolution or liquidation of the Company; or (vi) the Company ceases to be subject to the reporting requirements of the Act as a result of a "going private transaction" (within the meaning of the Exchange Act). For purposes hereof, "Surviving Organization" shall mean any entity where the majority of the members of such entity's board of directors are persons who were members of the Company's board of directors prior to the merger, consolidation or other business combination and the senior management of the surviving entity includes all of the individuals who were the Company's executive management (the Company's chief executive officer and those individuals who report directly to the Company's chief executive officer) prior to the merger, consolidation or other business combination and such individuals are in at least comparable positions with such entity. Except as described in this paragraph, the Amended Directors Plan is substantially the same as the Directors Plan. There will be no federal income tax consequences to either a Director or the Company on the grant of a NQSO. On the exercise of a NQSO, the Director will have taxable ordinary income equal to the excess of the fair market value of the shares of Class B Common Stock received on the exercise date over the option price of the shares. The Company will be entitled to a tax deduction in an amount equal to such excess, provided the Company complies with applicable reporting rules. Any ordinary income realized by the Directors upon exercise of a NQSO will increase his tax basis in the Class B Common Stock thereby acquired. Upon the sale of the Class B Common Stock acquired by exercise of a NQSO, a Director will realize long-term or short-term capital gain or loss depending upon his holding period for such stock. A Director who surrenders shares of Common Stock in payment of the exercise price of a NQSO will not recognize gain or loss on his surrender of such shares, but will recognize ordinary income on the exercise of the NQSO as described above. Of the shares received in such an exchange, that number of shares equal to the number of shares surrendered will have the same tax basis and capital gains holding period as the shares surrendered. The balance of the shares received will have a tax basis equal to their fair market value on the date of exercise and the capital gains holding period will begin on the date of exercise. If the Company delivers cash (in lieu of fractional shares) or shares of Common Stock to a Director pursuant to a cashless exercise program, the Director will recognize ordinary income equal to the cash paid and the fair market value as of the date of exercise of any shares delivered to him. An amount equal to any such ordinary income will be deductible by the Company, provided it complies with applicable reporting requirements. RELATIONSHIP OF CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors selects the independent certified public accountants for the Company each year. Ernst & Young LLP has acted in this capacity since 1984 and is expected to continue for the current fiscal year. In connection with its audit functions, Ernst & Young LLP audited the Company's consolidated financial statements for the fiscal years ended September 30, 1993, 1994 and 1995. Representatives of Ernst & Young LLP are expected to attend the Annual Meeting, may make a statement if they so desire, and will be available to respond to appropriate questions. If possible, such questions should be submitted in writing to the Company, at least 10 days prior to the Annual Meeting, at 5995 Plaza Drive, Cypress, CA 90630, Attention: Mr. Wayne Lowell, Chief Financial Officer. OTHER MATTERS TO COME BEFORE THE ANNUAL MEETING At the time this Proxy Statement was published, the Board of Directors knew of no other matters constituting a proper subject for action by the shareholders which would be presented at the Annual Meeting. However, if any other business should come before the meeting for shareholder action, the persons acting under proxies in the enclosed Proxy Card will vote thereon in accordance with their best judgment. Shareholders desiring to submit proposals for consideration by the shareholders at the 1997 Annual Meeting of Shareholders are advised that their proposals must be received by the Company no later than September 30, 1996 in order to be eligible for inclusion in the Company's Proxy Statement and form of proxy relating to that meeting. The cost of soliciting proxies in the accompanying form will be borne by the Company. In addition to solicitations by mail, directors, officers and regular employees of the Company may solicit proxies in person or by telephone. No compensation, other than their regular compensation, will be paid to them for such solicitation. The Company may reimburse banks, brokers, nominees and other fiduciaries for postage and reasonable clerical expenses incurred by them in forwarding the proxy material to principals. NOTE: UPON WRITTEN REQUEST OF ANY SHAREHOLDER ENTITLED TO RECEIVE THIS PROXY STATEMENT, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A COPY OF ITS ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SEC. ANY SUCH REQUEST SHOULD BE ADDRESSED TO THE COMPANY AT 5995 PLAZA DRIVE, CYPRESS, CALIFORNIA 90630, ATTENTION: INVESTOR RELATIONS DEPARTMENT. THE REQUEST MUST INCLUDE REPRESENTATION BY THE SHAREHOLDER THAT, AS OF JANUARY 8, 1995, SAID SHAREHOLDER WAS A SHAREHOLDER OF THE COMPANY ON SUCH DATE. By order of the Board of Directors PACIFICARE HEALTH SYSTEMS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That the Board of Directors of PacifiCare Health Systems, Inc., at a duly held meeting adopted a resolution setting forth a proposed amendment to the Certificate of Incorporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Board of Directors deems it advisable and in the best interests of the Company that paragraph "A" of Article IV of the Certificate of Incorporation be amended and restated to read in its entirety as follows: "PacifiCare Health Systems, Inc. ("Corporation") is authorized to issue three classes of shares of stock to be designated, respectively, "Class A Common Shares," "Class B Common Shares" and "Preferred Shares." The total number of shares of stock which the Corporation shall have authority to issue is two hundred twenty million (220,000,000). The total number of Class A Common Shares which the Corporation shall have authority to issue is one hundred million (100,000,000), and the par value of each such Class A Common Share shall be one cent ($0.01). The total number of Class B Common Shares which the Corporation shall have authority to issue is one hundred million (100,000,000), and the par value of each such Class B Common Share shall be one cent ($0.01). The total number of Preferred Shares which the Corporation shall have the authority to issue is twenty million (20,000,000), and the par value of each such Preferred Share shall be one dollar ($1.00)." SECOND: That the required number of stockholders of the Corporation have duly approved and adopted the foregoing amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, PacifiCare Health Systems, Inc. has caused this certificate to be signed by Alan R. Hoops, its president, and attested by Joseph S. Konowiecki, its secretary, this ______ day of _______, 199_. 1. PURPOSE. The Amended 1992 Non-Officer Directors Stock Option Plan (the "Plan") of PacifiCare Health Systems, Inc., a Delaware corporation (the "Company"), is intended to promote the best interests of the Company and its stockholders by strengthening the Company's ability to attract and retain the services of experienced and knowledgeable non-officer directors and to provide additional incentive for such directors to continue to work for the best interests of the Company and its stockholders. The options granted hereunder are not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as Incentive Stock Options. 2. AMOUNT AND SOURCE OF STOCK. The shares of stock subject to options shall be shares of the Company's Class B Common Stock, par value $0.01 per share (the "Shares"). The total number of Shares which may be the subject of options granted pursuant to the Plan shall be limited so that the total number of Shares issued upon the exercise of options granted under the Plan shall not exceed 140,000, subject to adjustment as provided in paragraph 11 of the Plan. In the event that any option granted hereunder expires or is terminated or canceled prior to its exercise in full for any reason, the Shares subject to such option shall be added to the Shares otherwise available for issuance pursuant to the exercise of options under the Plan. 3. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by a committee of the Board of Directors of the Company (the "Board") comprised of two or more members of the Board, selected by the Board (the "Committee"). It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the respective option agreements and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. The Committee shall have no authority with respect to the selection from among the eligible individuals to whom options are to be granted (any such individual being hereinafter referred to as the "optionee" or the "holder") or the number or maximum number of Shares subject to any option that is granted to an eligible individual. The selection of optionees and the number of Shares subject to each option shall be determined in accordance with paragraph 4 of the Plan. (b) The Committee shall act by a majority of its members in office. The Committee may act either by vote at a meeting or by a memorandum or other written instrument signed by a majority of the Committee. (c) Members of the Committee shall not receive compensation for their services as members but all expenses and liabilities they incur in connection with the administration of the Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and its Officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all optionees, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the options and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. 4. ELIGIBILITY. All non-officer directors of the Company, who are not eligible to receive options under the Second Amended and Restated 1989 Stock Option Plan for Officers and Key Employees of the Company, as amended (the "1989 Plan"), shall be eligible to receive options hereunder (the "Eligible Directors"). The Committee shall, subject to the applicable limits of the Plan, automatically grant each Eligible Director annually options to purchase 2,000 Shares on the 31st day of December in each calendar year (the "Date of Grant") commencing December 31, 1992; provided that the optionee shall not have been eligible to receive options under the 1989 Plan for all or any part of the preceding 12-month period and shall have served on the Board the entire preceding 12-month period. If additional Eligible Directors are hereafter appointed to the Board, the Committee shall, subject to the applicable limits of the Plan, automatically grant each such person an annual option to purchase 2,000 Shares on the 31st day of December in each calendar year (the "Date of Grant") commencing with the first December 31st following the date on which such director was appointed; so long as the director is then eligible for the granting of options pursuant to this Plan and has not been eligible to receive options under the 1989 Plan for all of the preceding 12-month period, and, such director shall have served on the Board the entire preceding 12-month period. If the number of Shares which may be the subject of options under the Plan is not sufficient to make all automatic grants required to be made pursuant to the Plan on the applicable date, the number of Shares subject to the options granted to each director shall be reduced on a pro rata basis. 5. OPTION PRICE. The exercise price for the Shares purchasable under any option granted hereunder shall be an amount equal to 100 percent of the fair market value of the Shares subject to option under the Plan on the Date of Grant. For purposes of the Plan, the "fair market value" of the Shares on a given date shall be based upon: (i) the closing price per share of the Shares on the principal exchange on which the Shares are then trading, if any, on such date, or, if the Shares were not traded on such date, then on the next preceding trading day during which a sale occurred; or (ii) if the Shares are not traded on an exchange but are quoted on the National Association of Securities Dealers Automatic Quotation System ("Nasdaq") or a successor quotation system, (1) the last sales price (if the Shares are then listed as a National Market Issue under the NASD National Market System) or (2) the mean between the closing representative bid and asked prices (in all other cases) for the Shares on such date as reported by Nasdaq or such successor quotation system; or (iii) if the Shares are not publicly traded on an exchange and not quoted on Nasdaq or a successor quotation system, the mean between the closing bid and asked prices for the Shares on such date as determined in good faith by the Committee; or (iv) if the Shares are not publicly traded, the fair market value established by the Committee acting in good faith. 6. TERMS AND CONDITIONS OF OPTIONS; VESTING. (a) Subject to paragraphs 6(b), (c) and (d), and paragraphs 8, 9 and 15, each option granted on the Date of Grant shall become exercisable in four cumulative installments as follows: (i) The first installment shall consist of 25 percent of the Shares covered by the option and shall become exercisable on the first anniversary of the Date of Grant. (ii) The second installment shall consist of 25 percent of the Shares covered by the option and shall become exercisable on the second anniversary of the Date of Grant. (iii) The third installment shall consist of 25 percent of the Shares covered by the option and shall become exercisable on the third anniversary of the Date of Grant. (iv) The fourth installment shall consist of all remaining Shares covered by the option and shall become exercisable on the fourth anniversary of the Date of Grant. (b) No portion of an option which is unexercisable at Termination of Directorship (as defined in paragraph 8) shall thereafter be exercisable. (c) The installments provided for in this paragraph 6 are cumulative. Each such installment which becomes exercisable pursuant to paragraph 6(a) shall remain exercisable until such installment becomes unexercisable under paragraph 8. (d) Subject to paragraph 15, the grant of options by the Committee shall be effective as of the Grant Date; provided, however, that no option granted hereunder shall be exercisable unless and until the holder shall enter into an individual option agreement with the Company that shall set forth the terms and conditions of such option. Each such agreement shall expressly incorporate by reference the provisions of this Plan (a copy of which shall be made available for inspection by the optionee during normal business hours at the principal office of the Company) and shall state that in the event of any inconsistency between the provisions hereof and the provisions of such agreement, the provisions of this Plan shall govern. (a) During the lifetime of the optionee, only he, his guardian or legal representative may exercise an option granted to him, or any portion thereof. After the death of the optionee, any exercisable portion of an option may, prior to the time when such option becomes unexercisable under paragraph 8, be exercised by his personal representative or by any person empowered to do so under the deceased optionee's will or under the applicable laws of descent and distribution. (b) At any time and from time to time prior to when any exercisable option or exercisable portion thereof becomes unexercisable under paragraph 8, such option or portion thereof may be exercised in whole or in part; provided, however, that the Company shall not be required to issue fractional shares and the number of shares for which an option may be partially exercised shall be not less than 100 shares. (c) An exercisable option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or Chief Financial Officer of the Company or their respective offices of all of the following prior to the time when such option or such portion becomes unexercisable under the Plan: (i) Notice in writing signed by the optionee or other person then entitled to exercise such option or portion, stating that such option or portion is exercised, such notice complying with all applicable rules (ii) (A) Full payment (in cash or by check) for the shares with respect to which such option or portion is hereby exercised; (B) With the consent of the Committee, shares of any class of the Company's stock owned by the optionee duly endorsed for transfer to the Company with a fair market value (as determinable under paragraph 5) on the date of delivery equal to the aggregate option price of the Shares with respect to which such option or portion is thereby exercised (which shares shall be owned by the optionee for more than six months at the time (C) With the consent of the Committee, any other form of cashless exercise permitted under paragraph 7(d) hereof; or (D) Any combination of the consideration provided in the foregoing subsections (A), (B) and (C); (iii) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop transfer orders to transfer (iv) In the event that the option or portion thereof shall be exercised by any person or persons other than the optionee, appropriate proof of the right of such person or persons to exercise the option or portion thereof. (d) The Company, in its sole discretion, may establish procedures whereby an optionee, to the extent permitted by and subject to the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"), Regulation T issued by the Board of Governors of the Federal Reserve System pursuant to the Exchange Act, federal income tax laws, and other federal, state and local tax and securities laws, can exercise an option or a portion thereof without making a direct payment of the option price to the Company. If the Company so elects to establish a cashless exercise program, the Company shall determine, in its sole discretion and from time to time, such administrative procedures and policies as it deems appropriate provided such procedures and policies are consistent with those of any cashless exercise program established pursuant to the 1989 Plan. Such procedures and policies shall be binding on any optionee wishing to utilize the cashless exercise program. 8. EXPIRATION OF OPTIONS. No option may be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of 10 years and one day from the date the option (b) The expiration of eight months from the time the optionee shall voluntarily or involuntarily cease to continue to serve as a director of the Company (a "Termination of Directorship"), unless such Termination of Directorship results from his death or disability; or (c) The expiration of one year from the date of the optionee's Termination of Directorship by reason of his disability; or (d) The expiration of one year from the date of optionee's death. For purposes of this paragraph 8, "disability" shall mean a medically determinable physical or mental impairment which has lasted or can be expected to last for a continuous period of not less than 12 months and which renders a director substantially unable to function as a director of the Company. Nothing contained herein or in any option agreement shall be construed to confer on any optionee any right to continue as a director of the Company. 9. ACCELERATION OF VESTING UPON A CHANGE OF CONTROL. Notwithstanding anything to the contrary in Section 8 and/or any vesting provisions of any option, any option which has been held for at least six months shall become exercisable immediately upon the effective date of a "Change of Control." As used in this Section 9, the term "Change of Control" shall mean the occurrence of any of the following: (i) a business combination effectuated through the merger or consolidation of the Company with or into another entity where the Company is not the Surviving Organization; (ii) any business combination effectuated through the merger or consolidation of the Company with or into another entity where the Company is the Surviving Organization and such business combination occurred with an entity whose market capitalization prior to the transaction was greater than 50 percent of the Company's market capitalization prior to the transaction; (iii) the sale in a transaction or series of transactions of all or substantially all of the Company's assets; (iv) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act) other than UniHealth, a California nonprofit public benefit corporation ("UniHealth"), acquires beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act), directly or indirectly, of 20 percent or more of the voting common stock of the Company and the beneficial ownership of the voting common stock of the Company owned by UniHealth at that date is less than or equal to the beneficial ownership interest of voting securities attributable to such other person or group; (v) a dissolution or liquidation of the Company; or (vi) the Company ceases to be subject to the reporting requirements of the Exchange Act as a result of a "going private transaction" (within the meaning of the Exchange Act). For purposes hereof, "Surviving Organization" shall mean any entity where the majority of the members of such entity's board of directors are persons who were members of the Company's board of directors prior to the merger, consolidation or other business combination and the senior management of the surviving entity includes all of the individuals who were the Company's executive management (the Company's chief executive officer and those individuals who report directly to the Company's chief executive officer) prior to the merger, consolidation or other business combination and such individuals are in at least comparable positions with such entity. The Committee may make such determinations and interpretations and adopt such rules and conditions as it, in its absolute discretion, deems appropriate in connection with a Change in Control and acceleration of exercisability. All such determinations and interpretations by the Committee shall be conclusive. Each optionee shall receive at least 10 days' notice prior to the effective date of the Change of Control that their options will be exercisable upon the effective date of the Change of Control and the officers of the Company shall make adequate provisions to permit all optionees to exercise their options as of the effective date of the Change of Control. 10. NON-TRANSFERABILITY OF OPTIONS. No option or interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the optionee or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law or judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this paragraph 10 shall prevent transfers by will or by the applicable laws of descent and distribution. 11. ADJUSTMENTS UPON CERTAIN EVENTS. (a) In the event that the outstanding shares of Class B Common Stock of the Company are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares, or in the event of extraordinary cash or non-cash dividends being declared with respect to the outstanding shares of Class B Common Stock or other similar transactions, proportionate adjustments shall be made by the Committee in the number and kind of shares for the purchase of which options may be granted (including adjustments of the limitation on the maximum number and kind of shares which may be issued on exercise of options), which adjustments shall be consistent with comparable adjustments made pursuant to the corresponding provision in the 1989 Plan. (b) In the event that the outstanding shares of Class B Common Stock of the Company are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares, or in the event of extraordinary cash or non-cash dividends being declared with respect to the outstanding shares of Class B Common Stock or other similar transactions, the Committee shall make proportionate adjustments in the number and kind of shares as to which all outstanding options, or portions thereof then unexercised, shall be exercisable, to the end that after such event the optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustments shall be consistent with comparable adjustments made pursuant to the corresponding provision in the 1989 Plan. Such adjustment in an outstanding option shall be made without change in the total price applicable to the option or the unexercised portion of the option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in option price per share. Any such adjustment made by the Committee shall be final and binding upon all optionees, the Company and all other interested persons. (a) The Shares issuable and deliverable upon the exercise of any option, or any portion thereof, may be either previously authorized but unissued Shares or issued Shares which have then been reacquired by the Company. The Company shall not be required to issue or deliver any certificate or certificates for Shares purchased upon the exercise of any option or portion thereof prior to fulfillment of all of the following conditions: (i) The admission of such Shares to listing on all stock exchanges on which such class of stock is then listed; (ii) The completion of any registration or other qualification of such Shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (iii) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; (iv) The payment to the Company of all amounts which it is required to withhold under federal, state or local law in connection with the exercise of the option; and (v) The lapse of such reasonable period of time following the exercise of the option as the Committee may establish from time to time for reasons of administrative convenience. (b) The holders of options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any Shares receivable upon the exercise of any part of an option unless and until certificates representing Shares have been issued by the Company to such holders. (a) A holder of an option granted hereunder may elect to deliver Shares to the Company or have the Company withhold shares otherwise issuable upon the exercise of an option in order to satisfy federal, state and local withholding tax liability (a "share withholding election"), provided: (i) the Board or, if so designated, the Committee, shall not have revoked its advance approval of the holder's share withholding election; and (ii) the share withholding election is made on or prior to the date on which the amount of withholding tax liability is determined (the "Tax Date"). Notwithstanding the foregoing, a holder whose transactions in Common Stock are subject to Section 16(b) of the Act may make a share withholding election only if the following additional conditions are met: (i) the withholding is made at least six months after the date of the grant of the option; and (ii) either (x) the share withholding election is irrevocably made at least six months in advance of the withholding, or (y) the share withholding election and the share withholding take place during the period beginning on the third business day following the date of release of the Company's quarterly or annual financial results and ending on the twelfth business day following such date. (b) A share withholding election shall be deemed made when written notice of such election, signed by the holder, has been delivered or transmitted by registered or certified mail to the Secretary or Chief Financial Officer of the Company at its then principal office. Delivery of said notice shall constitute an irrevocable election to have Shares withheld. (c) Upon exercise of an option by a holder, the Company shall transfer the total number of Shares subject to the option to the holder on the date of exercise, less any Shares the holder elects to withhold. 14. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. The Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board; provided that: (i) the Board may not amend or modify the Plan more than once in any six month period other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules promulgated thereunder; and (ii) no amendment without the approval of the stockholders of the Company shall be made if stockholder approval would be required under Section 422 of the Code, Rule 16b-3 under the Exchange Act or any other law or rule of any governmental authority, stock exchange or other self-regulatory organization to which the Company is subject. Neither the amendment, suspension nor termination of the shall, without the consent of the holder of the option, alter or impair any rights or obligations under any option theretofore granted. No option may be granted during any period of suspension nor after termination of the Plan, and in no event may any option be granted under this Plan after the expiration of 10 years from the date the Plan is approved by the Company's stockholders under paragraph 15. 15. APPROVAL OF PLAN BY STOCKHOLDERS. This Plan will be submitted for the approval of the Company's stockholders within 12 months after the date of the Board's initial adoption of the Plan. Options may be granted prior to such stockholder approval; provided, however, that such options shall not be exercisable prior to the time when the Plan is approved by the stockholders; provided, further, that if such approval has not been obtained at the end of said 12-month period, all options previously granted under the Plan shall thereupon be cancelled and become null and void. THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned holder of Class A Common Stock acknowledges receipt of a copy of the Annual Report and the Proxy Statement, dated January ____, 1996, and, revoking any proxy heretofore given, hereby constitutes and appoints Messrs. Terry Hartshorn and Alan Hoops, and each of them, as proxies, each of them with the power to appoint his substitute, and hereby authorizes each of them to represent and to vote, cumulatively or otherwise as designated below, all the shares of Class A Common Stock held of record by the undersigned on January 8, 1996, at the Annual Meeting of Shareholders to be held on March 6, 1996 or any adjournment thereof. 1. ELECTION OF DIRECTORS ____ FOR the nominees listed ____ WITHHOLD AUTHORITY (except as indicated to to vote for ALL Gary L. Leary Warren E. Pinckert II (Instruction: To withhold authority to vote for any nominee, write the nominee's name in the space provided below.) 2. APPROVAL OF THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION 3. APPROVAL OF THE AMENDED 1992 NON-OFFICER DIRECTORS STOCK OPTION PLAN 4. The proxies are authorized to vote in their discretion upon such other business as may properly come before the meeting. 5. If you plan to attend the Annual Meeting, please check here: _________. Please sign exactly as your name appears on the proxy. When shares are held by joint tenants, both must sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by authorized person. PLEASE MARK, SIGN, DATE AND RETURN PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.	PRE 14A	PRE 14A	1996-01-12T00:00:00	1996-01-12T17:16:31
0000950123-96-000094	0000950123-96-000094_0000.txt	/X/ Annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the Fiscal Year Ended October 31, 1995 / / Transition report pursuant to Section 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to A. Full title of the plan and the address of the plan, if different from that of the issuer named below: B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: New York, New York 10014 ITEMS 1 AND 2. FINANCIAL STATEMENTS PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE TRUSTEES HAVE DULY CAUSED THIS ANNUAL REPORT TO BE SIGNED BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. We have audited the accompanying statements of financial position of Bowne & Co., Inc. Employees' Stock Purchase Plan as of October 31, 1995 and 1994, and the related statements of income and changes in members' equity for each of the three years in the period ended October 31, 1995. These financial statements are the responsibility of the Plan's Trustees. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by the Trustees, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bowne & Co., Inc. Employees' Stock Purchase Plan at October 31, 1995 and 1994, and the results of its operations for each of the three years in the period ended October 31, 1995, in conformity with generally accepted accounting principles. OCTOBER 31, 1995 AND 1994 See Note to Financial Statements. STATEMENTS OF INCOME AND CHANGES IN MEMBERS' EQUITY YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 See Note to Financial Statements. Organization, operations and significant accounting policies: The Plan became effective June 21, 1973 and is a qualified plan under the Internal Revenue Code. Operations of the Plan are funded through contributions received from participating employees of Bowne & Co., Inc. and its subsidiaries which have adopted the Plan and through contributions by the participating companies equal to 50% of their employees' contributions. Participation in the Plan is voluntary. Participants may contribute up to $100 per month. As of October 31, 1995, the participating companies in the Bowne & Co., Inc. Employees' Stock Purchase Plan were as follows: Bowne of Los Angeles, Inc. Bowne of New York City, Inc. Bowne of Phoenix, Inc. Bowne Business Communications, Inc. Bowne Information Services, Inc. Bowne International, Inc. Baseline Financial Services, Inc. The assets of the Plan are recorded at market value, measured by the closing price listed by the American Stock Exchange. Dividends received by the Plan are reinvested for the benefit of the participants. The Plan provides for 100% vesting in company contributions after five years of service. The nonvested portion of a participant's account at the time of termination is returned to the contributing employer. The Plan pays its direct administrative expenses. Bowne & Co., Inc. provides administrative services to the Plan without charge. We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-35810) pertaining to the Bowne & Co., Inc. Employees' Stock Purchase Plan and in the related Prospectus of our report dated January 3, 1996, with respect to the financial statements of Bowne & Co., Inc. Employees' Stock Purchase Plan included in this Annual Report (Form 11-K) for the year ended October 31, 1995.	11-K	11-K	1996-01-12T00:00:00	1996-01-12T08:55:11
0000950009-96-000026	0000950009-96-000026_0001.txt	DATED AS OF DECEMBER 21, 1995 2.1 Revolving Credit Commitment.................................... 18 2.2 Accrual of Interest and Maturity............................... 18 2.3 Requests for Advances and Requests for Refundings and Conversions of Revolving 2.4 Disbursement of Revolving Credit Advances...................... 20 2.5 Prime-based Advance in Absence of Election 2.6 Revolving Credit Commitment Fee................................ 22 2.8 Reduction of Indebtedness; Revolving Credit 2.9 Optional Reduction or Termination of Revolving Credit Aggregate Commitment.......................... 23 2.10 Extension of Revolving Credit Maturity Date.................... 24 2.11 Use of Proceeds................................................ 25 3. LETTERS OF CREDIT..................................................... 25 3.1 Letters of Credit.............................................. 25 3.2 Conditions to Issuance......................................... 25 3.4 Letter of Credit Fees.......................................... 27 3.6 Draws and Demands for Payment Under Letters 3.8 Risk Under Letters of Credit................................... 31 3.10 Right of Reimbursement......................................... 33 4.2 Disbursement of Loan........................................... 34 4.3 Payments of Principal and Interest............................. 34 4.5 Use of Proceeds................................................ 36 5. SWING LINE CREDIT..................................................... 36 5.1 Swing Line Advances............................................ 36 5.2 Accrual of Interest; Margin Adjustments........................ 37 5.3 Requests for Swing Line Advances............................... 37 5.4 Disbursement of Swing Line Advances............................ 38 5.5 Refunding of or Participation Interest in 6.1 Prime-based Interest Payments.................................. 40 6.2 Eurocurrency-based Interest Payments........................... 40 6.3 Quoted Rate Advance Interest Payments.......................... 41 6.4 Interest Payments on Conversions............................... 41 6.6 Interest on Default............................................ 41 7.1 Execution of Notes and this Agreement.......................... 42 7.3 Company Collateral Documents................................... 42 7.4 Guarantor Collateral Documents................................. 42 7.5 Licenses, Permits, Etc......................................... 43 7.6 Representations and Warranties................................. 43 7.7 Compliance with Certain Documents and 7.8 Opinion of Counsel............................................. 44 7.11 Payment of Fees................................................ 44 7.12 Termination of Existing Credit Facility........................ 44 7.13 Other Documents and Instruments................................ 44 8. REPRESENTATIONS AND WARRANTIES........................................ 45 8.2 Due Authorization Company...................................... 45 8.3 Due Authorization - Guarantors................................. 45 8.4 Title to Collateral - Company.................................. 46 8.6 Capital Stock; Shareholders; Subsidiaries...................... 46 8.9 Enforceability of Agreement and Loan 8.10 Enforceability of Loan Documents -- 8.11 Compliance with Laws........................................... 47 8.13 Non-contravention -- Guarantors................................ 47 8.14 No Litigation -- Company....................................... 48 8.15 No Litigation -- Subsidiaries.................................. 48 8.16 Consents, Approvals and Filings, Etc........................... 49 8.17 Agreements Affecting Financial Condition....................... 49 8.18 No Investment Company or Margin Stock.......................... 49 8.20 Conditions Affecting Business or Properties.................... 50 8.21 Environmental and Safety Matters............................... 50 8.22 Accuracy of Information........................................ 51 9.1 Preservation of Existence, Etc................................. 52 9.2 Keeping of Books............................................... 52 9.4 Maintain Consolidated Cash Flow Ratio.......................... 54 9.5 Maintain Funded Debt Ratio..................................... 55 9.6 Maintain Consolidated Tangible Net Worth....................... 55 9.10 Governmental and Other Approvals............................... 56 9.12 Compliance with Laws........................................... 56 9.13 Compliance with ERISA.......................................... 57 9.15 Use of Proceeds................................................ 57 9.16 Notice of Mergers and Related Events........................... 58 10.2 Mergers or Dispositions........................................ 58 10.8 Transactions with Affiliates................................... 60 10.9 No Further Negative Pledges.................................... 60 10.10 Prepayment of Indebtedness..................................... 60 10.11 Amendment of Subordinated Debt................................. 60 11.1 Events of Default.............................................. 60 11.2 Exercise of Remedies........................................... 63 11.4 Waiver by Company of Certain Laws.............................. 63 11.5 Waiver of Defaults............................................. 64 11.6 Deposits and Accounts.......................................... 64 12. PAYMENTS, RECOVERIES AND COLLECTIONS.................................. 64 12.2 Application of Proceeds........................................ 66 12.4 Deposits and Accounts.......................................... 67 13. CHANGES IN LAW OR CIRCUMSTANCES; INCREASED COSTS...................... 67 13.1 Reimbursement of Prepayment Costs.............................. 67 13.2 Agent's Eurocurrency Lending Office............................ 68 13.4 Laws Affecting Eurocurrency-based Advance 13.5 Increased Cost of Eurocurrency-based 13.7 Other Increased Costs.......................................... 70 14.1 Appointment of Agent........................................... 71 14.2 Deposit Account with Agent..................................... 71 14.3 Scope of Agent's Duties........................................ 71 14.5 Loans by Agent................................................. 73 14.8 Authority of Agent to Enforce Notes and 14.10 Knowledge of Default........................................... 74 14.11 Agent's Authorization; Action by Banks......................... 74 14.12 Enforcement Actions by the Agent............................... 75 15.2 Consent to Jurisdiction........................................ 75 15.3 Law of Michigan................................................ 76 15.5 Closing Costs and Other Costs.................................. 76 15.8 Successors and Assigns; Participations; 15.11 Amendment and Waiver........................................... 81 15.12 Taxes and Fees................................................. 82 15.15 WAIVER OF JURY TRIAL........................................... 83 15.16 Complete Agreement; Conflicts.................................. 83 15.18 Table of Contents and Headings................................. 84 15.19 Construction of Certain Provisions............................. 84 15.20 Independence of Covenants...................................... 84 15.21 Reliance on and Survival of Various 15.22 Effective Upon Execution....................................... 84 A BORROWING BASE REPORT FORM B FORM OF COVENANT COMPLIANCE REPORT D FORM OF REQUEST FOR REVOLVING CREDIT ADVANCE E FORM OF REQUEST FOR SWING LINE ADVANCE F FORM OF REVOLVING CREDIT NOTE G FORM OF SWING LINE NOTE H FORM OF SWING LINE PARTICIPATION CERTIFICATE I FORM OF ASSIGNMENT AGREEMENT J LETTER OF CREDIT NOTICE K FORM OF TERM NOTE L SCHEDULE OF REAL ESTATE THIS CREDIT AGREEMENT ("Agreement") is made as of the 21st day of December, 1995, by and among Comerica Bank and the other financial institutions from time to time parties hereto as lenders of the Revolving Credit and as the issuer or participants in Letters of Credit (individually, "Revolving Credit Bank", and collectively "Revolving Credit Banks") and the Term Loan (individually, a Term Loan Bank, and collectively "Term Loan Banks"), Comerica Bank, as lender of the Swing Line Credit ("Swing Line Bank" and together with Revolving Credit Banks and the Term Loan Banks, collectively referred to as the "Banks") Comerica Bank, as agent for the Banks (in such capacity, "Agent"), and Jacobson Stores Inc., a Michigan corporation ("Company"). COMPANY, AGENT AND BANKS AGREE: For the purposes of this Agreement the following terms will have the following meanings: "Account(s)" shall mean Option Accounts and Thirty Day Accounts referred to collectively. "Account Debtor" shall mean the party who is obligated on or under any Account. "Advance(s)" shall mean Revolving Credit Advance(s) and Swing Line Advance(s). "Affiliate" shall mean, with respect to any Person, any other Person or group acting in concert in respect of the first Person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with such first Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person or group of Persons, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Agent" shall mean Comerica Bank, in its capacity as agent hereunder, or any successor agent appointed in accordance with Section 14.4 hereof. "Agent's Fees" shall mean those agency fees and expenses required to be paid by Company to Agent under Section 14.7 hereof. "Alternate Base Rate" shall mean, for any day, an interest rate per annum equal to the Federal Funds Effective Rate in effect on such day, plus one percent (1%). "Applicable Increase" shall mean for any given fiscal year an amount equal to the sum of (x) fifty percent (50%) of Consolidated Net Income for the fiscal year ending on such date (but in any event not less than zero), (y) one hundred percent (100%) of the net cash proceeds of the issuance of any Capital Stock during such fiscal year and (z) one hundred percent (100%) of the principal amount of securities (other than capital stock) converted into capital stock of Company after the date of this Agreement during such fiscal year. "Applicable Interest Rate" shall mean (i) in respect of a Revolving Credit Advance, the Eurocurrency-based Rate or the Prime-based Rate, applicable to such Advance (in the case of a Eurocurrency-based Advance, for the relevant Interest Period), and (ii) in respect of a Swing Line Advance, the Prime-based Rate or the Quoted Rate, applicable to such Advance, for the relevant Interest Period, as selected by Company from time to time subject to the terms and conditions of this Agreement. "Applicable L/C Fee Percentage" shall mean one and seven tenths percent (1-7/10%) per annum with respect to standby Letters of Credit and one half of one percent (1/2%) with respect to trade Letters of Credit. "Banks" shall mean Comerica Bank ("Comerica") and such other financial institutions from time to time parties hereto as lenders and shall include the Revolving Credit Banks, the Term Loan Banks and the Swing Line Bank and any assignee which becomes a Bank pursuant to Section 15.8 hereof. "Billing Date" shall mean the date on which any Account is included in a statement and rendered to the customer. In respect of any statement which designates the Billing Date, the date so designated shall be conclusively presumed to be the date on which such Account has been billed. "Borrowing Base Limitation" shall mean, as of any date of determination thereof, the sum, without duplication, of (i) ninety percent (90%) of Eligible Accounts and (ii) the fifty five percent (55%) of Net Eligible Inventory; provided, however, that the Borrowing Base Limitation shall be determined on the basis of the most current Borrowing Base Report required to be submitted by Company hereunder and provided, further, that the amount of the Borrowing Base Limitation determined pursuant to the provisions of subclause (ii) above shall not exceed the Inventory Reliance Cap. "Borrowing Base Report(s)" shall mean the monthly reports to be furnished by Company to Agent and the Banks pursuant to the provisions of Section 9.3 hereof in the form attached hereto as Exhibit "A". "Business Day" shall mean any day on which commercial banks are open for domestic and international business in Detroit and if the Business Day relates to a Eurocurrency-based Advance, London and New York. "Capitalized Lease" shall mean any lease of property (real, personal or mixed) the obligation for rent with respect to which is required to be capitalized on a balance sheet of the lessee in accordance with GAAP and liability thereunder as so capitalized should be disclosed in a note to such balance sheet. "Capital Stock" shall mean, with respect to any Person, any and all shares, share capital, interests, participations, warrants, options or other equivalents of capital stock of a corporation and any and all equivalent ownership interests in a Person (other than a corporation). "Collateral" shall mean all property or rights in which a security interest, mortgage, lien or other encumbrance for the benefit of the Banks is or has been granted or arises or has arisen, under or in connection with this Agreement or any of the Loan Documents. "Collateral Documents" shall mean the Company Collateral Documents and the Guarantor Collateral Documents. "Company" shall mean Jacobson Stores Inc., a Michigan corporation. "Company Collateral Documents" shall mean the Company Security Agreement and all other security documents executed and delivered by Company to the Agent, in accordance with the terms and conditions of this Agreement, as the same may be amended from time to time. "Company Security Agreement" shall mean that certain security agreement encumbering the Accounts now owned or hereafter acquired, executed and delivered by Company to the Agent on the date hereof, as the same may be amended from time to time. "Consolidated Adjusted Tangible Net Worth" shall mean as of any date of determination Consolidated Tangible Net Worth, plus Subordinated Debt. "Consolidated Cash Flow" shall mean, as of any date of determination, the Consolidated Net Income of Company and its Consolidated Subsidiaries for the four preceding fiscal quarters, plus, to the extent deducted in the computation of Consolidated Net Income, the amount of depreciation, amortization, interest, rental and income tax expense and any LIFO adjustment for Company and its Consolidated Subsidiaries for such period, and minus, to the extent added in the computation of Consolidated Net Income, any LIFO adjustment for Company and its Consolidated Subsidiaries all as determined in accordance with GAAP. "Consolidated Cash Flow Ratio" shall mean, as of any date of determination, a ratio, the numerator of which is Consolidated Cash Flow and the denominator of which is interest expense and cash rental expense for Company and its Consolidated Subsidiaries for the four fiscal quarters preceding such date of determination plus the current portion of all of Company's and its Consolidated Subsidiaries' long-term indebtedness (excluding the Excluded Term Debt Payment and including Capitalized Lease obligations) as of such date of determination, all (except for cash rental expense) as determined in accordance with GAAP; provided, however, in calculating the Consolidated Cash Flow Ratio no effect shall be given to the restructuring charge taken by Company in connection with its Permitted Store Closures to the extent such charge does not exceed the amount set forth in the letter referred to in the definition of Permitted Store Closures. "Consolidated Net Income" shall mean for any period, the net income from continuing operations (or the net deficit if expenses and charges exceed revenues and other proper income credits) of Company and its Consolidated Subsidiaries for such period taken as one accounting period, determined in accordance with GAAP. "Consolidated" or "Consolidating" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more Persons of the amounts signified by such term for all such Persons determined on a consolidated or consolidating basis, as the case may be, in accordance with GAAP. Unless otherwise specified herein, references to Consolidated financial statements or data of Company includes consolidation with its Subsidiaries in accordance with GAAP. "Consolidated Tangible Net Worth" shall mean as of any date of determination the excess of (x) the net book value of the assets of Company and its Consolidated Subsidiaries (excluding from assets, however, any investments and advances to unconsolidated Subsidiaries, and also excluding any goodwill, patents, patent rights, trademarks, trade names, copyrights, franchises, licenses, organizational expenses, and any other assets which, in accordance with generally accepted accounting principles, should be classified as intangible assets) after all appropriate deductions in accordance with generally accepted accounting principles consistently applied (including, without limitation, reserves for doubtful receivables, obsolescence, depreciation, and amortization) over (y) all liabilities of Company and its Consolidated Subsidiaries. "Covenant Compliance Report" shall mean the report to be furnished by Company to the Agent, in the form of attached Exhibit "B" and certified by the chief financial officer of Company and pursuant to Section 9.3, hereof (or in such officer's absence, a responsible senior officer), in which report Company shall set forth, among other things, detailed calculations and the resultant ratios or financial tests with respect to the financial covenants contained in Sections 9.4, 9.5 and 9.6 of this Agreement. "Defaulted Account" means a Thirty Day Account or an Option Account, including any additional charges by way of additional purchases or otherwise, on which less than twenty percent (20%) of the balance owing as of the Billing Date has been paid within the sixty (60) day period subsequent to such Billing Date. The determination of a Defaulted Account shall be made as of the Billing Date for each of the Accounts. Any of the Accounts determined to be in default as of any Billing Date shall be regarded as Defaulted Accounts for the purpose of this Agreement until the determination is again made at the next succeeding Billing Date. "De Minimis Matters" shall mean environmental or other matters, the existence of which and any liability which may result therefrom, would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the financial condition or businesses of the Company and its Subsidiaries (taken as a whole) or on the ability of the Company and Subsidiaries (taken as a whole) to pay their debts, as such debts become due. "Default" shall mean any event which with the giving of notice or the passage of time, or both, would constitute an Event of Default under this Agreement. "Dollars" and the sign "$" shall mean lawful money of the United States of America. "Eligible Account(s)" shall mean as of any date of determination, the aggregate amount of Accounts as of such date less the aggregate amount as of such date of Defaulted Accounts. "Eligible Inventory" shall mean Inventory which has been included in a Borrowing Base Report to determine the Borrowing Base Limitation and as to which Inventory the following is true and accurate as of the time it was utilized to determine the Borrowing Base Limitation: (a) such item of Inventory is of merchantable quality and is usable or saleable by Company in the ordinary course of its business; (b) such item of Inventory has not been sold, transferred or otherwise assigned by Company to any other Person; (c) such item of Inventory is (i) located within the continental United States of America at such location or locations as Company shall have represented in the Loan Documents, relating to (d) the value of each item of Inventory utilized to determine the Borrowing Base Limitation was determined on a FIFO basis in accordance with GAAP. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, or any successor act or code and the regulations in effect from time to time thereunder. "Eurocurrency-based Advance" shall mean a Revolving Credit Advance which bears interest at the Eurocurrency-based Rate. "Eurocurrency-based Rate" shall mean, with respect to any Eurocurrency-Interest Period, the per annum interest rate which is equal to the sum of one and seven tenths percent (1-7/10%) plus the quotient of: (A) the per annum interest rate at which deposits in eurodollars are offered to Agent's Eurocurrency Lending Office by other prime banks in the eurodollar market in an amount comparable to the relevant Eurocurrency-based Advance and for a period equal to the relevant Eurocurrency-Interest Period at approximately 11:00 A.M. Detroit time two (2) Business Days prior to the first day of such Eurocurrency-Interest Period, divided (B) an amount equal to one minus the stated maximum rate (expressed as a decimal) of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) that is specified on the first day of such Eurocurrency-Interest Period by the Board of Governors of the Federal Reserve System (or any successor agency thereto) for determining the maximum reserve requirement with respect to eurodollar funding (currently referred to as "eurocurrency liabilities" in Regulation D of such Board) maintained by a member bank all as conclusively determined (absent manifest error) by the Agent, such sum to be rounded upward, if necessary, to the nearest whole multiple of 1/16th of 1%. "Eurocurrency-Interest Period" shall mean the Interest Period applicable to a Eurocurrency-based Advance. "Eurocurrency Lending Office" shall mean, (a) with respect to the Agent, Agent's office located at Grand Cayman, British West Indies or such other branch or branches of Agent, domestic or foreign, as it may hereafter designate as a Eurocurrency Lending Office by notice to Company and the Banks, and (b) as to each of the Banks, its office, branch or affiliate located at its address set forth on the signature pages hereof (or identified thereon as a Eurocurrency Lending Office), or at such other office, branch or affiliate of such Bank as it may hereafter designate as its Eurocurrency Lending Office by notice to Company and Agent. "Event of Default" shall mean each of the Events of Default specified in Section 11.1 hereof. "Excluded Term Debt Payment" shall mean the approximately $9,300,000 principal payment due September 1, 2001 under the promissory note dated August 29, 1986 by Jacobson Stores Realty Company payable to First of America Bank - Michigan, N.A. "Facility Fee" shall mean the fees payable to Agent for distribution to the Revolving Credit Banks pursuant to Section 2.7 hereof. "Federal Funds Effective Rate" shall mean, for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Agent from three Federal funds brokers of recognized standing selected by it, all as conclusively determined by the Agent, such sum to be rounded upward, if necessary, to the nearest whole multiple of 1/16th of 1%. "Fees" shall mean the Revolving Credit Commitment Fee, the Facility Fee, the Letter of Credit Fees, the Agent's Fees, the Restructuring Fee and the other fees and charges payable by Company to the Banks or Agent hereunder. "Financial Statements" shall mean all those balance sheets, earnings statements and other financial data (whether of the Company or otherwise) which have been furnished to the Agent or the Banks for the purposes of, or in connection with, this Agreement and the transactions contemplated hereby. "Formula Debt" shall mean as of any date of determination thereof, the sum of the aggregate principal amount of outstanding Advances, the aggregate undrawn amount of outstanding Letters of Credit, the aggregate amount of unreimbursed drawings under Letters of Credit and the outstanding principal amount of the Term Loan. "Funded Debt" shall mean, for any Person, as of any date, without duplication, (a) all obligations of such Person for borrowed money, (b) all reimbursement obligations of such Person in respect of drawings and other demands for payment under letters of credit, surety bonds or similar obligations issued for the account of such Person, (c) all obligations of such Person as lessee or user under any lease of real or personal property which, in accordance with GAAP, are or should be capitalized on the books of the lessee or user, and (d) all obligations of others similar in character to those described in clauses (a) through (c) of this definition to the extent such Person is liable, contingently or otherwise, as obligor, guarantor or in any other capacity, or in respect of which obligations such Person assures a creditor against loss or agrees to take any action to prevent any such loss (other than endorsements of negotiable instruments for collection in the ordinary course of business) including without limitation all obligations of such Person to advance funds to, or to purchase property or services from, any other Person in order to maintain the financial condition of such other Person, all to the extent such obligations are required to be disclosed on the consolidated financial statements (including footnotes) of Company in accordance with GAAP. "Funded Debt Ratio" shall mean, as at the time any determination thereof is to be made, a ratio, the numerator of which shall be Funded Debt of Company and its Consolidated Subsidiaries as of such date less the outstanding principal amount of Subordinated Debt as of such date and the denominator of which shall be Consolidated Adjusted Tangible Net Worth as of such date. "GAAP" shall mean generally accepted accounting principles in the United States of America, as in effect on the date hereof, consistently applied. "Governmental Obligations" means noncallable direct general obligations of the United States of America or obligations the payment of principal of and interest on which is unconditionally guaranteed by the United States of America. "Guarantor(s)" shall mean Jacobson Stores Realty Company, a Michigan corporation and Jacobson Credit Corp., a Michigan corporation. "Guarantor Collateral Documents" shall mean the Guaranty, the Mortgages and any security documents executed by the Guarantors and delivered to Agent, pursuant to or in accordance with the provisions of this Agreement from time to time, as such collateral documents may be amended from time to time. "Guaranty" shall mean the Guaranty Agreement delivered by the Guarantors to Agent as of the date hereof, for the benefit of the Banks and Agent, as amended from time to time. "Hazardous Material" shall mean and include any hazardous, toxic or dangerous waste, substance or material defined as such in (or for purposes of) the Hazardous Material Laws. "Hazardous Material Law(s)" shall mean all laws, codes, ordinances, rules, regulations, orders, decrees and directives issued by any federal, state, provincial, local, foreign or other governmental or quasi-governmental authority or body (or any agency, instrumentality or political subdivision thereof) pertaining to Hazardous Material on or about any facilities owned, leased or operated by Company or any of its Subsidiaries, or any portion thereof including, without limitation, those relating to soil, surface, subsurface ground water conditions and the condition of the ambient air; and any state and local laws and regulations pertaining to Hazardous Material and/or asbestos; any so-called "superfund" or "superlien" law; and any other federal, state, provincial, foreign or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous material, as now or at any time hereafter in effect. "Hereof", "hereto", "hereunder" and similar terms shall refer to this Agreement in its entirety and not to any particular paragraph or provision of this Agreement. "Indebtedness" shall mean all indebtedness and liabilities (including without limitation interest, fees and other charges) arising under this Agreement or any of the other Loan Documents, whether direct or indirect, absolute or contingent, of Company to any of the Banks or to the Agent, in any manner and at any time, whether evidenced by the Notes or any of the other Loan Documents, due or hereafter to become due, now owing or that may hereafter be incurred by Company to, or acquired by, any of the Banks or by Agent, and any judgments that may hereafter be rendered on such indebtedness or any part thereof, with interest according to the rates and terms specified, or as provided by law, and any and all consolidations, amendments, renewals, replacements, substitutions or extensions of any of the foregoing. "Interest Period" shall mean (i) with respect to a Eurocurrency-based Advance, one (1), two (2), three (3) or six (6) months (or any lesser or greater number of days agreed to in advance by Company, Agent and the Revolving Credit Banks) as selected by Company pursuant to Section 2.3, provided, however, that any Eurocurrency-Interest Period which commences on the last Business Day of a calendar month (or on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month) shall end on the last Business Day of the appropriate subsequent calendar month and (ii) with respect to a Swing Line Advance, shall mean a period of one (1) to thirty (30) days agreed to in advance by Company and the Swing Line Bank as selected by Company pursuant to Section 5.3. Each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day, and no Interest Period which would end after the Revolving Credit Maturity Date shall be permitted with respect to any Advance. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder. "Inventory Reliance Cap" shall mean as of any date of determination Thirty Five Million Dollars ($35,000,000) except that for the period of time between September 1 of a year and December 31 of the same year, Inventory Reliance Cap shall mean Forty Million Dollars ($40,000,000). "Investment" shall mean any loan or advance by Company or any of its Subsidiaries to, or any other loan, advance or investment by Company or any of its Subsidiaries in, any Person (excluding any Subsidiary of Company), without offset, reduction or other adjustment, whether such loan, advance or investment shall be in the nature of an investment in shares of stock or other capital or securities, general or limited partnership or joint venture interests, evidences of indebtedness or otherwise. "Issuing Office" shall mean Agent's office located at One Detroit Center, 500 Woodward Avenue, Detroit, Michigan 48226-3289 or such other office as Agent shall designate as its Issuing Office. "Letter(s) of Credit" shall mean any standby or documentary letters of credit issued by Agent at the request of or for the account of the Company pursuant to Article 3 hereof. "Letter of Credit Agreement" shall mean, in respect of each Letter of Credit, the application and related documentation satisfactory to the Agent, as amended from time to time. "Letter of Credit Fees" shall mean the fees payable to Agent for the accounts of the Banks in connection with Letters of Credit pursuant to Section 3.4 hereof. "Letter of Credit Maximum Amount" shall mean as of any date of determination the lesser of: (a) Three Million Dollars ($3,000,000); or (b) the Revolving Credit Aggregate Commitment as of such date, minus the aggregate principal amount of Advances outstanding as of such date under the Revolving Credit Notes and Swing Line Note. "Letter of Credit Obligation(s)" shall mean the obligation of Company under each Letter of Credit Agreement to reimburse the Agent for each payment made by the Agent under the Letter of Credit issued pursuant to such Letter of Credit Agreement, together with all other sums, fees, charges and amounts which may be owing to the Agent under such Letter of Credit Agreement. "Letter of Credit Payment" shall mean any amount paid or required to be paid by the Agent in its capacity hereunder as issuer of a Letter of Credit as a result of a draft or other demand for payment under any Letter of Credit. "Lien" shall mean any pledge, hypothecation, mortgage, security interest, option to purchase securities, conditional sale or title retaining contract, lessee's interest under any Capitalized Lease, or any claim or right to receive any of the foregoing, or any other type of lien, charge or encumbrance, whether based on common law or statute. "Loan Documents" shall mean, collectively, this Agreement, the Notes, the Security Agreement, the Letter of Credit Agreements, the Letters of Credit, the Guaranty, and any other documents, certificates, instruments or agreements executed pursuant to or in connection with any such document or this Agreement, as such documents may be amended from time to time. "Minimum Amount" shall mean $72,000,000 plus an amount equal to the Applicable Increase for each fiscal year of Company ending after January 25, 1997. "Mortgages" shall mean those certain continuing collateral mortgages encumbering the real property described on attached Exhibit "L" executed and delivered by Company or a Guarantor, as applicable, to Agent, on behalf of the Banks, as of the date hereof, as the same may be amended from time to time. "Net Eligible Inventory" shall mean as of any date of determination, the amount obtained by subtracting from Eligible Inventory an amount equal to all payables with respect to such Eligible Inventory. "Notes" shall mean the Revolving Credit Notes, the Term Notes and the Swing Line Note. "Option Account" means a charge account arising out of the sale of merchandise by Company at its retail outlets pursuant to a charge account agreement by the terms of which the buyer agrees to pay the unpaid balance together with a time price differential thereon in monthly installments. For the purpose hereof, the term "Option Account" shall include any charge account which meets the foregoing definition, regardless of its designation by Company. "Pension Plan(s)" shall mean all employee pension benefit plans of Company or its Subsidiaries, as defined in Section 3(2) of ERISA. "Percentage" shall mean, with respect to any Bank, its percentage share, as set forth on Exhibit "C", hereto, of the Revolving Credit, of its risk participation in Letters of Credit and of the Term Loan, as such Exhibit may be revised from time to time by Agent in accordance with Section 15.8 hereof. "Permitted Acquisitions" shall mean any acquisition by the Company or any Subsidiary of all or substantially all of the assets of another Person, or of a division or line of business of another Person or fifty one percent (51%) or more of the shares of stock or other ownership interests of another Person (including by merger with such Person) which satisfies and/or is conducted in accordance with the following requirements: (i) on the date of any such acquisition, all necessary governmental, quasi-governmental, agency, regulatory or similar approvals of applicable jurisdictions (or the respective agencies, instrumentalities or political subdivisions, as applicable, of such jurisdictions) and all necessary non-governmental and other third-party approvals which, in each case, are material to such acquisition have been obtained and are in effect, and Company and its Subsidiaries are in full compliance thereunder, and all necessary declarations, registrations or other filings with any court, governmental or regulatory authority, securities exchange or any other Person have been made; (ii) if an acquisition of stock of an acquisition target, the acquisition shall have been approved by the Board of Directors or all of the shareholders whose stock is being acquired of such acquisition target not later than the date any Request for Advance is delivered to Agent in connection with an Advance to be used to pay a portion of the acquisition consideration and as of such date, no claim or challenge has been asserted or threatened by any shareholder, director, officer or employee of the acquisition target or by any other person which might reasonably be expected to have a material adverse effect on Company and its Consolidated Subsidiaries; (iii) not less than fifteen (15) days prior to the date of such acquisition, if the total consideration for such acquisition will exceed $2,000,000 (including, without limitation, assumption of indebtedness, covenants not to compete and contingent liabilities), the Company provides to Agent Pro Forma Combined Projected Financial Information establishing that no Default or Event of Default will occur as a result of the acquisition; and (iv) both immediately before and after such acquisition, no Default or Event of Default (whether or not related to such acquisition), has occurred and is continuing under this Agreement, or any of the other Loan Documents as evidenced by a certificate of an authorized officer of Company. "Permitted Encumbrances" shall mean, with respect to any Person: (a) the liens and encumbrances granted under or established by this Agreement or the Loan Documents; (b) liens for taxes not yet due and payable or which are being contested in good faith by appropriate proceedings diligently pursued, provided that such provision for the payment of all such taxes known to such Person has been made on the books of such Person as may be required by GAAP; (c) mechanics', materialmen's, banker's, carriers', warehousemen's and similar liens and encumbrances arising in the ordinary course of business and securing obligations of such Person that are not overdue for a period of more than 60 days or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest (i) any levy, execution or other enforcement of such liens and encumbrances shall have been duly suspended; and (ii) such provision for the payment of such liens and encumbrances has been made on the books of such Person as may be required by GAAP; (d) liens arising in connection with worker's compensation, unemployment insurance, old age pensions (except for liens resulting from a violation of the provisions of Section 9.13) and social security benefits and similar statutory obligations which are not overdue or are being contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest (i) any levy, execution or other enforcement of such liens shall have been duly suspended; and (ii) such provision for the payment of such liens has been made on the books of such Person as may be required by GAAP; (e)(i) liens incurred in the ordinary course of business to secure the performance of statutory obligations arising in connection with progress payments or advance payments due under contracts with the United States or any foreign government or any agency thereof entered into in the ordinary course of business and (ii) liens incurred or deposits made in the ordinary course of business to secure the performance of statutory obligations, bids, leases, fee and expense arrangements with trustees and fiscal agents and other similar obligations (exclusive of obligations incurred in connection with the borrowing of money, any lease-purchase arrangements or the payment of the deferred purchase price of property), provided that full provision for the payment of all such obligations set forth in clauses (i) and (ii) has been made on the books of such Person as may (f) those liens and encumbrances of the Company or its Subsidiaries identified in Schedule 1, hereto. (g) purchase money security interests in electronic data processing equipment granted in connection with the purchase or lease (h) any lien or encumbrance on any fixed assets (including machinery, equipment, land, buildings, fixtures and improvements) purchased or leased in connection with and used in the operation of any store, distribution facility or other facility acquired by Company after the date of execution of this Agreement; (i) any new liens or encumbrances or increases of existing liens and encumbrances on properties which are encumbered as of the date of execution of this Agreement; and (j) any easements, restrictions, mineral, oil, gas and mining rights and reservations and minor defects in title with respect to real property which do not individually or in the aggregate materially detract from the value of such real property. For purposes of subsection (h) above, a facility leased by Company as of the date of execution of this Agreement and subsequently purchased by Company shall be deemed to be a facility acquired after the date of execution of this Agreement. "Permitted Store Closures" shall mean the closings of the stores identified in the letter dated December 14, 1995 from Company to the Agent. "Permitted Subordinated Debt Payments" shall mean the annual sinking fund payments in the amount of $1,725,000 due December 15 of each year (commencing December 15, 1996) with respect to Company's existing Subordinated Debt. "Person" shall mean an individual, corporation, partnership, trust, incorporated or unincorporated organization, joint venture, joint stock company, or a government or any agency or political subdivision thereof or other entity of any kind. "Prime Rate" shall mean the per annum rate of interest announced by the Agent, at its main office from time to time as its "prime rate" (it being acknowledged that such announced rate may not necessarily be the lowest rate charged by the Agent, to any of its customers), which Prime Rate shall change simultaneously with any change in such announced rate. "Prime-based Advance" shall mean an Advance which bears interest at the Prime-based Rate. "Prime-based Rate" shall mean, for any day, that rate of interest which is equal to the greater of (i) the Prime Rate, or (ii) the Alternate Base Rate. "Pro Forma Combined Projected Financial Information" shall mean, as to any acquisition, pro forma combined projected financial information for the Company and its Consolidated Subsidiaries and the acquisition target, consisting of projected balance sheets as at the effective date of the acquisition and as at the end of at least the next succeeding two (2) fiscal years of Company following the acquisition and projected statements of income for each of those years, including sufficient detail to permit calculation of the financial covenants set forth in Sections 9.4, 9.5 and 9.6, as projected as of the effective date of the acquisition and for those years and accompanied by (i) a statement setting forth a calculation of the financial covenants set forth in Sections 9.4, 9.5 and 9.6, and (ii) a statement in reasonable detail specifying all material assumptions underlying the projections. "Quoted Rate" shall mean the rate of interest per annum offered by the Swing Line Bank in its sole discretion with respect to a Swing Line Advance. "Quoted Rate Advance" means any Swing Line Advance which bears interest at the Quoted Rate. "Request for Revolving Credit Advance" shall mean a Request for Revolving Credit Advance issued by Company under Section 2.3 of this Agreement in the form annexed hereto as Exhibit "D". "Request for Swing Line Advance" shall mean a Request for Swing Line Advance issued by Company under Section 5.3 of this Agreement in the form attached hereto as Exhibit "E". "Required Banks" shall mean at any time Banks holding not less than sixty six and two thirds percent (66-2/3%) of the sum of the aggregate principal amount of the Indebtedness then outstanding under the Revolving Credit Notes and the Term Notes (or, if no Indebtedness is then outstanding, Banks holding not less than sixty six and two thirds percent (66-2/3%) of the Percentages). "Restructuring Fee" shall mean a non-refundable restructuring fee in the amount of Ninety Seven Thousand Five Hundred Dollars ($97,500) which fee shall be deemed fully earned upon execution of this Agreement. "Revolving Credit" shall mean the revolving credit loan to be advanced to the Company by the Revolving Credit Banks pursuant to Article 2 hereof, in an aggregate amount (subject to the terms hereof), not to exceed, at any one time outstanding, the Revolving Credit Aggregate Commitment. "Revolving Credit Advance" shall mean a borrowing requested by Company and made by Revolving Credit Banks under Section 2.1 of this Agreement, including without limitation any readvance, refunding or conversion of such borrowing pursuant to Section 2.3 hereof, and shall include, as applicable, a Eurocurrency-based Advance and/or Prime-based Advance. "Revolving Credit Aggregate Commitment" shall mean Forty Five Million Dollars ($45,000,000) subject to reduction or termination under Section 2.9 or 11.2 hereof. "Revolving Credit Banks" shall mean Comerica Bank, and such other financial institutions from time to time parties hereto as lenders of the Revolving Credit. "Revolving Credit Commitment Fee" shall mean the fees payable to Agent for distribution to the Revolving Credit Banks pursuant to Section 2.6 hereof. "Revolving Credit Maturity Date" shall mean the earlier to occur of (i) June 30, 1998, and (ii) the date on which the Revolving Credit Aggregate Commitment shall be terminated pursuant to Section 2.9 or Section 11.2 hereof. "Revolving Credit Notes" shall mean the revolving credit notes described in Section 2.1 hereof, made by Company to each of the Revolving Credit Banks in the form annexed to this agreement as Exhibit "F", as such notes may be amended or supplemented from time to time, and any other notes issued in substitution, replacement or renewal thereof from time to time. "Settlement Date" shall mean the twelfth day of each month during the term of this Agreement. If such date shall fall on a day other than a Business Day, the Settlement Date shall be the following Business Day. "Subordinated Debt" shall mean all obligations of Company which are, and remain at all times after incurrence thereof, subordinate and junior in right and priority of payment to payment of the Indebtedness by the express terms thereof or by written agreement, in each case satisfactory in form and substance to the Required Banks. "Subsidiary(ies)" shall mean any other corporation, association, joint stock company, or business trust of which more than fifty percent (50%) of the outstanding voting stock or share capital is owned either directly or indirectly by any Person or one or more of its Subsidiaries, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by any Person and/or its Subsidiaries. Unless otherwise specified to the contrary herein, Subsidiary(ies) shall refer to the Company's Subsidiary(ies). "Swing Line Advance" shall mean a borrowing requested by Company and made by the Swing Line Bank to Company pursuant to Section 5.1 hereof. "Swing Line Bank" shall mean Comerica Bank, in its capacity as lender under Article 5 of this Agreement, and its successors and assigns. "Swing Line Note" shall mean the swing line note described in Section 5.1 hereof, made by Company to Swing Line Bank in the form annexed hereto as Exhibit "G", as such Note may be amended or supplemented from time to time, and any notes issued in substitution, replacement or renewal thereof from time to time. "Term Loan" shall mean the Twenty Million Dollars ($20,000,000) term loan to be extended by the Term Loan Banks to Company pursuant to Section 4 hereof. "Term Loan Banks" shall mean Comerica Bank and NBD Bank, and such other financial institutions from time to time parties hereto as lenders of the Term Loan. "Term Loan Maturity Date" shall mean December 31, 2002. "Term Notes" shall mean the term notes described in Section 4.1, made by Company to each of the Term Loan Banks in the form annexed to this Agreement as Exhibit "K". "Thirty Day Account" means an open charge account arising out of the sale of merchandise by Company at its retail outlets which is payable in full within thirty (30) days from the Billing Date. "UCC" shall mean the Uniform Commercial Code, as in effect from time to time in the State of Michigan. "Wholly-owned" when used in connection with any Subsidiary shall mean a Subsidiary of which all of the issued and outstanding shares of stock (except shares required as directors' qualifying shares) shall be owned by the Company and/or one or more of its Wholly-owned Subsidiaries. 2.1 Revolving Credit Commitment. Subject to the terms and conditions of this Agreement, each Revolving Credit Bank severally and for itself alone agrees to make Advances of the Revolving Credit to Company from time to time on any Business Day during the period from the effective date hereof until (but excluding) the Revolving Credit Maturity Date in an aggregate amount not to exceed at any one time outstanding each Revolving Credit Bank's Percentage of the Revolving Credit Aggregate Commitment. All of such Advances hereunder shall be evidenced by the Revolving Credit Notes, under which advances, repayments and readvances may be made, subject to the terms and conditions of this Agreement. 2.2 Accrual of Interest and Maturity. (a) The Revolving Credit Notes, and all principal and interest outstanding thereunder, shall mature and become due and payable in full on the Revolving Credit Maturity Date, and each Advance evidenced by the Revolving Credit Notes from time to time outstanding hereunder shall, from and after the date of such Advance, bear interest at its Applicable Interest Rate. The amount and date of each Revolving Credit Advance, its Applicable Interest Rate, its Interest Period, if any, and the amount and date of any repayment shall be noted on Agent's records, which records will be conclusive evidence thereof, absent manifest error; provided, however, that any failure by the Agent to record any such information shall not relieve Company of its obligation to repay the outstanding principal amount of such Advance, all interest accrued thereon and any amount payable with respect thereto in accordance with the terms of this Agreement and the Loan Documents. 2.3 Requests for Advances and Requests for Refundings and Conversions of Revolving Credit Advances. Company may request a Revolving Credit Advance, refund any Revolving Credit Advance in the same type of Revolving Credit Advance or convert any Revolving Credit Advance to any other type of Revolving Credit Advance only after delivery to Agent of a Request for Revolving Credit Advance executed by an authorized officer of Company subject to the following and to the remaining provisions hereof: (a) each such Request for Revolving Credit Advance shall set forth the information required on the Request for Revolving Credit Advance form annexed hereto as Exhibit "D", including without limitation: (i) the proposed date of such Revolving Credit Advance, which must be a Business Day; (ii) whether such Revolving Credit Advance is a refunding or conversion of an outstanding (iii) whether such Revolving Credit Advance is to be a Prime-based Advance or a Eurocurrency-based Advance, and, except in the case of a Prime-based Advance, the Interest Period applicable thereto; (b) each such Request for Revolving Credit Advance shall be delivered to Agent by 12:00 noon (Detroit time) three (3) Business Days prior to the proposed date of Revolving Credit Advance, except in the case of a Prime-based Advance, for which the Request for Revolving Credit Advance must be delivered by 12:00 noon (Detroit time) on such proposed date; (c)(i) the principal amount of such requested Revolving Credit Advance, plus the principal amount of all other Advances then outstanding hereunder, plus the aggregate undrawn portion of any Letters of Credit which shall be outstanding as of the date of the requested Revolving Credit Advance and the aggregate face amount of Letters of Credit requested but not yet issued, less the principal amount of any outstanding Advance to be refunded by the requested Revolving Credit Advance shall not exceed the then applicable Revolving Credit Aggregate Commitment and (ii) the Formula Debt shall not exceed the Borrowing Base Limitation (as determined from the most recent Borrowing Base Report which Company is required to deliver to Agent pursuant to the provisions of Section 9.3 hereof); (d) the principal amount of such Revolving Credit Advance, plus the amount of any other outstanding Indebtedness under this Agreement to be then combined therewith having the same Applicable Interest Rate and Interest Period, if any, shall be (i) in the case of a Eurocurrency-based Advance, at least Two Million Dollars ($2,000,000) or a larger integral multiple of One Hundred Thousand Dollars ($100,000), and (ii) in the case of a Prime-based Advance, at least One Million Dollars ($1,000,000) or a larger integral multiple of One Hundred Thousand Dollars ($100,000), and at any one time there shall not be in effect more than seven (7) Interest Periods; (e) each Request for Revolving Credit Advance, once delivered to Agent, shall not be revocable by Company, and shall constitute and include a certification by the Company as of the date thereof that: (i) both before and after the Revolving Credit Advance, the obligations of the Company set forth in this Agreement and the Loan Documents, as applicable, are valid, binding and enforceable obligations of (ii) to the best knowledge of Company (both before and after giving effect to such Advance) all conditions to Advances of the Revolving Credit have been (iii) both before and after such Advance, there is no Default or Event of Default in existence; and (iv) both before and after such Advance, the representations and warranties contained in this Agreement and the other Loan Documents are true and correct in all material respects. The Agent may advance funds under the Revolving Credit Notes upon telephone request made by any one of those officers or agents of Company authorized by resolution of Company's Board of Directors (or a committee thereof) to make such requests. Any such telephone request shall satisfy the time requirements set forth in Section 2.3(b) above. Company hereby authorizes Agent and each Revolving Credit Bank to disburse pursuant to the instructions of any officer or agent so identified. On the same day as such request for Revolving Credit Advance is made, the officer or agent requesting the Revolving Credit Advance shall mail to the Agent a Request for Revolving Credit Advance in form similar to that attached as Exhibit "D", executed by an authorized officer or agent of Company and, until such Request for Revolving Credit Advance is received by Agent, the telephone request itself shall constitute the requesting officer's certification of the matters set forth in Section 2.3(e) above. 2.4 Disbursement of Revolving Credit Advances. (a) Upon receiving any Request for Revolving Credit Advance (or telephone request) from Company under Section 2.3 hereof, Agent shall promptly notify each Revolving Credit Bank by wire, telecopy, telex or telephone (confirmed by wire, telecopy or telex) of the amount of such Revolving Credit Advance to be made and the date such Advance is to be made by said Revolving Credit Bank pursuant to its Percentage of such Revolving Credit Advance. Unless such Revolving Credit Bank's commitment to make Revolving Credit Advances hereunder shall have been suspended or terminated in accordance with this Agreement, each Revolving Credit Bank shall send the amount of its Percentage of Advance in same day funds in Dollars to Agent at the office of Agent located at One Detroit Center, Detroit, Michigan 48226-3289 not later than 2:00 p.m. (Detroit time) on the date of such Advance. (b) Subject to submission of an executed Request for Revolving Credit Advance by Company without exceptions noted in the compliance certification therein and to the other terms and conditions hereof, Agent shall make available to Company the aggregate of the amounts so received by it from the Revolving Credit Banks under this Section 2.4, in like funds, not later than 4:00 p.m. (Detroit time) on the date of such Revolving Credit Advance by credit to an account of Company maintained with Agent or to such other account or third party as Company may reasonably direct. (c) Unless Agent shall have been notified by any Revolving Credit Bank prior to the date of any proposed Revolving Credit Advance that such Revolving Credit Bank does not intend to make available to Agent such Revolving Credit Bank's Percentage of such Revolving Credit Advance, Agent may assume that such Revolving Credit Bank has made such amount available to Agent on such date, as aforesaid and may, in its sole discretion and without obligation to do so, in reliance upon such assumption, make available to Company a corresponding amount. If such amount is not in fact made available to Agent by such Revolving Credit Bank in accordance with Section 2.4(a), as aforesaid, Agent shall be entitled to recover such amount on demand from such Revolving Credit Bank. If such Revolving Credit Bank does not pay such amount forthwith upon Agent's demand therefor, the Agent shall promptly notify Company, and Company shall pay such amount to Agent. Agent shall also be entitled to recover from such Revolving Credit Bank or from Company, as the case may be, interest on such amount in respect of each day from the date such amount was made available by Agent to Company to the date such amount is recovered by Agent, at a rate per annum equal to: (i) in the case of such Revolving Credit Bank, the Federal Funds Effective Rate; or (ii) in the case of Company, the rate of interest then applicable to the Revolving Credit Advance. The obligation of any Revolving Credit Bank to make any Revolving Credit Advance hereunder shall not be affected by the failure of any other Revolving Credit Bank to make any Revolving Credit Advance hereunder, and no Bank shall have any liability to the Company, the Agent, any other Bank, or any other party for another Bank's failure to make any loan or Revolving Credit Advance hereunder. 2.5 Prime-based Advance in Absence of Election or Upon Default. If, as to any outstanding Eurocurrency-based Advance, Agent has not received payment on the last day of the Interest Period applicable thereto, or does not receive a timely Request for Revolving Credit Advance meeting the requirements of Section 2.3 hereof with respect to the refunding or conversion of such Advance, or, subject to Section 6.6 hereof, if on such day a Default or Event of Default shall exist, the principal amount thereof which is not then prepaid shall be converted automatically to a Prime-based Advance and the Agent shall thereafter promptly notify Company of said action. 2.6 Revolving Credit Commitment Fee. From the date hereof to (but excluding) the Revolving Credit Maturity Date, the Company shall pay to each of the Revolving Credit Banks, a Revolving Credit Commitment Fee consisting of twenty basis points per annum times the average daily amount by which such Bank's Percentage of the Revolving Credit Aggregate Commitment then in effect exceeds the sum of (i) such Bank's Percentage of the aggregate principal amount of Revolving Credit Advances and Swing Line Advances outstanding from time to time during such period, and (ii) such Bank's Percentage of the aggregate daily undrawn amount of any standby Letters of Credit during such period, calculated on a daily basis. The Revolving Credit Commitment Fee shall be payable quarterly in arrears commencing April 1, 1996, and on the first day of each calendar quarter thereafter and at the Revolving Credit Maturity Date, and shall be computed on the basis of a year of three hundred sixty (360) days and assessed for the actual number of days elapsed. Whenever any payment of the Revolving Credit Commitment Fee shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next Business Day. Such Revolving Credit Commitment Fees shall be paid by Company to the Agent. Upon receipt of such payment, Agent shall make prompt payment to each Revolving Credit Bank of its share of the Revolving Credit Commitment Fee. The Revolving Credit Commitment Fee shall not be refundable under any circumstances. 2.7 Facility Fee. From the date hereof to the Revolving Credit Maturity Date, the Company shall pay to the Agent, for distribution to the Revolving Credit Banks pro rata, a Facility Fee equal to ten basis points (.10%) per annum times the Revolving Credit Aggregate Commitment. The Facility Fee shall be payable quarterly in arrears commencing April 1, 1996, and on the first day of each calendar quarter thereafter and on the Revolving Credit Maturity Date, and shall be computed on the basis of a year of three hundred sixty (360) days and assessed for the actual numbers of days elapsed. Whenever any payment of the Facility Fee shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next Business Day. Upon receipt of such payment, Agent shall make prompt payment to each Revolving Credit Bank of its share of the Facility Fee based upon its respective Percentage. The Facility Fee shall not be refundable under any circumstances. 2.8 Reduction of Indebtedness; Revolving Credit Aggregate Commitment. If at any time and for any reason (a) the aggregate principal amount of the Formula Debt shall exceed the then applicable Borrowing Base Limitation or (b) the principal amount of Advances and the aggregate undrawn amount of any Letters of Credit outstanding at such time shall exceed the Revolving Credit Aggregate Commitment, Company shall immediately reduce any pending request for an Advance on such day by the amount of such excess and, to the extent any excess remains thereafter, immediately repay an amount of the Indebtedness equal to such excess. Any prepayment required pursuant to the provisions of this Section 2.8 shall be applied first to the outstanding Advances, then to reduce Letter of Credit Obligations (which if contingent, shall be by deposit of cash collateral with the Agent) and then to the installments of principal under the Term Loan (in inverse order of their respective maturities). Company acknowledges that, in connection with any repayment required hereunder, it shall also be responsible for the reimbursement of any prepayment or other costs required under Section 13.1 or Section 4.4 hereof; provided, however, that Company shall, in order to reduce any such prepayment costs and expenses, first prepay such portion of the Indebtedness then carried as a Prime-based Advance, if any. 2.9 Optional Reduction or Termination of Revolving Credit Aggregate Commitment. The Company may, upon at least five (5) Business Days' prior written or telegraphic notice to Agent, permanently reduce the Revolving Credit Aggregate Commitment in whole at any time, or in part from time to time, without premium or penalty, provided that: (i) each partial reduction of the Revolving Credit Aggregate Commitment shall be in an aggregate amount equal to at least Five Million Dollars ($5,000,000) or a larger integral multiple of One Million Dollars ($1,000,000); (ii) each reduction shall be accompanied by the payment of the Revolving Credit Commitment Fee, if any, accrued to the date of such reduction on the amount of the Revolving Credit Aggregate Commitments so reduced; (iii) the Company shall prepay in accordance with the terms hereof the amount, if any, by which the aggregate unpaid principal amount of Swing Line Advances and Revolving Credit Advances, plus the aggregate amount of outstanding Letters of Credit, exceeds the amount of the Revolving Credit Aggregate Commitment, taking into account the aforesaid reductions thereof, together with accrued but unpaid interest on the principal amount of such prepaid Advances to the date of prepayment; (iv) if the termination or reduction of the Revolving Credit Aggregate Commitment requires the prepayment of a Eurocurrency-based Advance or Quoted Rate Advance, the termination or reduction may be made only on the last Business Day of the then current Interest Period applicable to such Advance and (v) no reduction shall reduce the amount of the Revolving Credit Aggregate Commitment to an amount which is less than the sum of the aggregate undrawn amount of any Letters of Credit outstanding at such time. Reductions of the Revolving Credit Aggregate Commitment and any accompanying prepayments of the Revolving Credit Notes shall be distributed by Agent to each Revolving Credit Bank in accordance with such Bank's Percentage thereof, and will not be available for reinstatement by or readvance to the Company and any accompanying prepayments of the Swing Line Notes shall be distributed by Agent to the Swing Line Bank and will not be available for reinstatement by or readvance to the Company. Any reductions of the Revolving Credit Aggregate Commitment hereunder shall reduce each Revolving Credit Bank's portion thereof proportionately (based upon the applicable Percentages), and shall be permanent and irrevocable. Any payments made pursuant to this Section shall be applied first to outstanding Prime-based Advances under the Revolving Credit, next to Swing Line Advances which bear interest at the Prime-based Rate, next to Quoted Rate Advances and then to Eurocurrency-based Advances. 2.10 Extension of Revolving Credit Maturity Date. (a) Provided that no Default or Event of Default has occurred and is continuing, Company may, by written notice to Agent and each Revolving Credit Bank (which notice shall be irrevocable and which shall not be deemed effective unless actually received by Agent and each Bank) prior to March 31 but not before February 1, of each year (commencing with calendar year 1996), request that the Revolving Credit Banks extend the then applicable Revolving Credit Maturity Date to a date that is one year later than the Revolving Credit Maturity Date then in effect (each such request, a "Request"). Each Revolving Credit Bank shall, not later than ninety (90) calendar days following the date of its receipt of the Request, give written notice to the Agent stating whether such Bank is willing to extend the Revolving Credit Maturity Date as requested. If Agent has received the aforesaid written approvals of such Request from each of the Revolving Credit Banks, then, effective upon the date of Agent's receipt of all such written approvals from the Revolving Credit Banks, as aforesaid, the Revolving Credit Maturity Date shall be so extended for an additional one year period, the term Revolving Credit Maturity Date shall mean such extended date and Agent shall promptly notify the Company that such extension has occurred. (b) If (i) any Revolving Credit Bank gives the Agent written notice that it is unwilling to extend the Revolving Credit Maturity Date as requested or (ii) any Revolving Credit Bank fails to provide written approval to Agent of such a Request within ninety (90) calendar days of the date of Agent's receipt of the Request, then (w) the Banks shall be deemed to have declined to extend the Revolving Credit Maturity Date, (x) the then current Revolving Credit Maturity Date shall remain in effect (with no further right on the part of Company to request extensions thereof under this Section 2.10), and (y) the commitments of the Revolving Credit Banks to make Advances of the Revolving Credit hereunder shall terminate on the Revolving Credit Maturity Date then in effect, and Agent shall promptly notify Company thereof. 2.11 Use of Proceeds. Proceeds of Advances shall be used solely to refinance certain existing indebtedness of Company to Comerica Bank and NBD Bank and for general corporate purposes. 3.1 Letters of Credit. Subject to the terms and conditions of this Agreement, Agent shall through its Issuing Office, at any time and from time to time from and after the date hereof until thirty (30) days prior to the Revolving Credit Maturity Date, upon the written request of Company accompanied by a duly executed Letter of Credit Agreement, and such other documentation related to the requested Letter of Credit as the Agent may reasonably require, issue standby or documentary Letters of Credit for the account of Company, in an aggregate amount for all Letters of Credit issued hereunder at any one time outstanding not to exceed the Letter of Credit Maximum Amount. Each Letter of Credit shall have an expiration date not later than one (1) year from its date of issuance; provided that each Letter of Credit (including any renewal thereof) shall expire not later than three (3) Business Days prior to the Revolving Credit Maturity Date in effect on the date of issuance thereof. The submission of all applications and the issuance of each Letter of Credit hereunder shall be subject in all respects to applicable provisions of U.S. law and regulations, including without limitation, the Trading With the Enemy Act, Export Administration Act, International Emergency Economic Powers Act, and the Regulations of the Office of Foreign Assets Control of the U.S. Department of the Treasury. 3.2 Conditions to Issuance. No Letter of Credit shall be issued at the request and for the account of Company unless, as of the date of issuance of such Letter of Credit: (a) (i) the face amount of the Letter of Credit requested, plus the undrawn portion of all other outstanding Letters of Credit and the aggregate amount of all unpaid Letter of Credit Obligations, does not exceed the Letter of Credit Maximum Amount, (ii) the face amount of the Letter of Credit requested, if a trade Letter of Credit, together with the undrawn amount of all other outstanding trade Letters of Credit does not exceed Two Million Five Hundred Thousand Dollars ($2,500,000), and (iii) the face amount of the Letter of Credit requested, if a standby Letter of Credit, together with the undrawn amount of all other standby Letters of Credit does not exceed Five Hundred Thousand Dollars ($500,000); (b) (i) the face amount of the Letter of Credit requested, plus the aggregate principal amount of all Advances outstanding under the Notes, plus the aggregate undrawn portion of all other outstanding Letters of Credit, do not exceed the then applicable Revolving Credit Aggregate Commitment and (ii) the Formula Debt, taking into account the face amount of the Letter of Credit requested does not exceed the then applicable Borrowing Base (c) the obligations of Company set forth in this Agreement and the Loan Documents are valid, binding and enforceable obligations of Company and the valid, binding and enforceable nature of this Agreement and the Loan Documents has not been (d) both immediately before and immediately after issuance of the Letter of Credit requested, no Default or Event of Default exists; (e) the representations and warranties contained in this Agreement and the Loan Documents are true in all material respects as if made on such date; (f) the execution of the Letter of Credit Agreement with respect to the Letter of Credit requested will not violate the terms and conditions of any material contract, agreement or other borrowing of (g) Company shall have delivered to Agent at its Issuing Office, not less than five (5) Business Days prior to the requested date for issuance (or such shorter time as the Agent, in its sole discretion, may permit), the Letter of Credit Agreement related thereto, together with such other documents and materials as may be reasonably required pursuant to the terms thereof, and the terms of the proposed Letter of Credit shall be satisfactory to Agent and its Issuing Office in the exercise of its reasonable discretion; (h) no order, judgment or decree of any court, arbitrator or governmental authority shall purport by its terms to enjoin or restrain Agent from issuing the Letter of Credit, or any Revolving Credit Bank from taking an assignment of its Percentage thereof pursuant to Section 3.6 hereof, and no law, rule, regulation, or governmental request or directive (whether or not having the force of law) shall prohibit or request that Agent refrain from issuing, or any Revolving Credit Bank refrain from taking an assignment of its Percentage of, the Letter of Credit requested or (i) there shall have been no enactment of or change in the interpretation of any law or regulation that would make it unlawful or unduly burdensome for the Agent to issue the requested Letter of Credit, no general suspension of trading on the New York Stock Exchange or any other national securities exchange, no declaration of a general banking moratorium by banking authorities in the United States, Michigan or the respective jurisdictions in which the Banks, the Company and the beneficiary of the requested Letter of Credit are located, and no establishment of any new restrictions on transactions involving letters of credit or on banks materially affecting the extension of credit by banks; and (j) Agent shall have received the issuance fee required in connection with the issuance of such Letter of Credit pursuant to Section 3.5 hereof. Each Letter of Credit Agreement submitted to Agent pursuant hereto shall constitute the certification by the Company of the matters set forth in this Section 3.2 (a) through (f). The Agent shall be entitled to rely on such certification without any duty of inquiry. 3.3 Notice. Agent shall give notice, substantially in the form attached as Exhibit "J", to each Revolving Credit Bank of the issuance of each Letter of Credit, not later than three (3) Business Days after issuance of each Letter of Credit, specifying the amount thereof and the amount of such Bank's Percentage thereof. 3.4 Letter of Credit Fees. Company shall pay to the Agent for distribution to the Revolving Credit Banks in accordance with the Percentages, Letter of Credit Fees as follows: (a) a Letter of Credit Fee with respect to the undrawn amount of each Letter of Credit issued pursuant hereto in the amount of the Applicable L/C Fee Percentage, exclusive of the issuance fee of one-eighth of one percentage point (1/8%) per annum on the face amount of any standby Letter of Credit to be paid to Agent under Section 3.5 hereof; provided, that with respect to trade Letters of Credit for which there is a draw, the Letter of Credit Fee shall apply only to the amount drawn; and, provided further that the minimum fee payable under this Section 3.4(a) with respect to a trade Letter of Credit shall be One Hundred Dollars ($100.00). (b) If any change in any law or regulation or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof shall either (i) impose, modify or cause to be deemed applicable any reserve, special deposit, limitation or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of, Agent or any of the Banks or (ii) impose on Agent or any of the Banks any other condition regarding this Agreement or the Letters of Credit, and the result of any event referred to in clause (i) or (ii) above shall be to increase in an amount deemed material by Agent or the Banks the cost or expense to Agent or the Banks of issuing or maintaining or participating in any of the Letters of Credit (which increase in cost or expense shall be determined by the Agent's or such Bank's reasonable allocation of the aggregate of such cost increases and expense resulting from such events), then, upon demand by the Agent or such Bank, as the case may be, the Company shall, within ten days following demand for payment, pay to Agent or such Revolving Credit Bank, as the case may be, from time to time as specified by the Agent or such Bank, additional amounts which shall be sufficient to compensate the Agent or such Revolving Credit Bank for such increased cost and expense, together with interest on each such amount from ten days after the date demanded until payment in full thereof at the Prime-based Rate. A certificate as to such increased cost or expense incurred by the Agent or such Revolving Credit Bank, as the case may be, as a result of any event mentioned in clause (i) or (ii) above, shall be promptly submitted to the Company and shall be conclusive, absent manifest error, as to the amount thereof. (c) All payments by the Company to the Agent or the Revolving Credit Banks under this Section 3.4 shall be made in Dollars and in immediately available funds at the Agent's Issuing Office or such other office of the Agent as may be designated from time to time by written notice to the Company by the Agent. The aforesaid fees shall be nonrefundable under all circumstances and shall be calculated on the basis of a 360 day year and, in the case of standby Letters of Credit, assessed for the actual number of days from the date of the issuance thereof to the stated expiration thereof. The fees with respect to standby Letters of Credit shall be payable in advance. The fees with respect to each trade Letter of Credit shall be payable at the time a draw or other demand for payment thereunder is presented to the Agent. 3.5 Issuance Fees. In connection with the Letters of Credit, and in addition to the Letter of Credit Fees (including a standby letter of credit issuance fee of one eighth percentage point (1/8%) to be retained by Agent for its own account), the Company shall pay, for the sole account of the Agent, standard documentation, administration and trade Letter of Credit issuance fees assessed by Agent or its Issuing Office, at the times, in the amounts and on the terms set forth in the fee schedule dated December 21, 1995 previously provided by Agent to Company, as such schedule may be adjusted to reflect the standard fee schedule of Agent's Issuing Office in effect from time to time; provided, however, no adjustment shall become effective until sixty (60) days after written notice of such change by Agent to Company. 3.6 Draws and Demands for Payment Under Letters of Credit. (a) The Company agrees to pay to the Agent, on the day on which the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit, an amount equal to the amount paid by the Agent in respect of such draft or other demand under such Letter of Credit and all expenses paid or incurred by the Agent relative thereto. Unless the Company shall have made such payment to the Agent on such day, upon each such payment by the Agent, the Agent shall be deemed to have disbursed to the Company, and the Company shall be deemed to have elected to substitute for its reimbursement obligation, a Prime-based Advance from the Banks in an amount equal to the amount so paid by the Agent in respect of such draft or other demand under such Letter of Credit. Such Prime-based Advance shall be disbursed notwithstanding any failure to satisfy any conditions for disbursement of any Advance set forth in Article 2 hereof and, to the extent of the Prime-based Advance so disbursed, the reimbursement obligation of the Company to the Agent under this Section 3.6 shall be deemed satisfied. (b) If the Agent shall honor a draft or other demand for payment presented or made under any Letter of Credit, the Agent shall provide notice thereof to the Company on the date such draft or demand is honored, and to each Revolving Credit Bank on such date unless the Company shall have satisfied its reimbursement obligation under Section 3.6(a) by payment to the Agent on such date. The Agent shall further use reasonable efforts to provide notice to the Company prior to honoring any such draft or other demand for payment, but such notice, or the failure to provide such notice, shall not affect the rights or obligations of the Agent with respect to any Letter of Credit or the rights and obligations of the parties hereto, including without limitation the obligations of the Company under Section 3.6(a) hereof. (c) Upon issuance by the Agent of each Letter of Credit hereunder, each Revolving Credit Bank shall automatically acquire a pro rata risk participation interest in such Letter of Credit and related Letter of Credit Payment based on its respective Percentage. Each Revolving Credit Bank, on the date a draft or demand under any Letter of Credit is honored, shall make its Percentage share of the amount paid by the Agent, and not reimbursed by the Company by payment to the Agent on such day, available in immediately available funds at the principal office of the Agent for the account of the Agent. If and to the extent such Bank shall not have made such pro rata portion available to the Agent, such Bank and the Company severally agree to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date such amount was paid by the Agent until such amount is so made available to the Agent at a per annum rate equal to the interest rate applicable during such period to the related Advance disbursed under Section 3.6(a) in respect of the reimbursement obligation of the Company. If such Bank shall pay such amount to the Agent together with such interest, such amount so paid shall constitute a Prime-based Advance by such Bank disbursed in respect of the reimbursement obligation of the Company under Section 3.6(a) for purposes of this Agreement, effective as of the date such amount was paid by the Agent. The failure of any Revolving Credit Bank to make its pro rata portion of any such amount paid by the Agent available to the Agent shall not relieve any other Revolving Credit Bank of its obligation to make available its pro rata portion of such amount, but no Bank shall be responsible for failure of any other Bank to make such pro rata portion available to the Agent. (d) Nothing in this Agreement shall be construed to require or authorize any Bank to issue any Letter of Credit, it being recognized that the Agent shall be the sole issuer of Letters of Credit under this Agreement. 3.7 Obligations Irrevocable. The obligations of Company to make payments to Agent or the Revolving Credit Banks with respect to Letter of Credit Obligations under Section 3.6 hereof, shall be unconditional and irrevocable and not subject to any qualification or exception whatsoever, including, without limitation: (a) Any lack of validity or enforceability of any Letter of Credit or any documentation relating to any Letter of Credit or to any transaction related in any way to such Letter of Credit (the "Letter of Credit (b) Any amendment, modification, waiver, consent, or any substitution, exchange or release of or failure to perfect any interest in collateral or security, with respect to any of the Letter of Credit Documents; (c) The existence of any claim, setoff, defense or other right which the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), the Agent or any Bank or any other person or entity, whether in connection with any of the Letter of Credit Documents, the transactions contemplated herein or therein or any (d) Any draft or other statement or document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any (e) Payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (f) Any failure, omission, delay or lack on the part of the Agent or any Bank or any party to any of the Letter of Credit Documents to enforce, assert or exercise any right, power or remedy conferred upon the Agent, any Bank or any such party under this Agreement, any of the Loan Documents or any of the Letter of Credit Documents, or any other acts or omissions on the part of the Agent, any Bank or any such party; or (g) Any other event or circumstance that would, in the absence of this Section 3.7, result in the release or discharge by operation of law or otherwise of Company or any Account Party from the performance or observance of any obligation, covenant or agreement contained in Section 3.6. No setoff, counterclaim, reduction or diminution of any obligation or any defense of any kind or nature which Company has or may have against the beneficiary of any Letter of Credit shall be available hereunder to Company against the Agent or any Bank. Nothing contained in this Section 3.7 shall be deemed to prevent Company, after satisfaction in full of the absolute and unconditional obligations of Company hereunder, from asserting in a separate action any claim, defense, set off or other right which they (or any of them) may have against Agent or any Bank. 3.8 Risk Under Letters of Credit. (a) In assigning and the handling of Letters of Credit and any security therefor, or any documents or instruments given in connection therewith, Agent shall have the sole right to take or refrain from taking any and all actions under or upon the Letters of Credit. (b) Subject to other terms and conditions of this Agreement, Agent shall issue the Letters of Credit and shall hold the documents related thereto in its own name and shall make all collections thereunder and otherwise administer the Letters of Credit in accordance with Agent's regularly established practices and procedures and, except pursuant to Section 14.3 hereof, Agent will have no further obligation with respect thereto. In the administration of Letters of Credit, Agent shall not be liable for any action taken or omitted on the advice of counsel, accountants, appraisers or other experts selected by Agent with due care and Agent may rely upon any notice, communication, certificate or other statement from Company, beneficiaries of Letters of Credit, or any other Person which Agent believes to be authentic. Agent will, upon request, furnish the Banks with copies of Letter of Credit Agreements, Letters of Credit and documents related thereto. (c) In connection with the issuance and administration of Letters of Credit and the assignments hereunder, Agent makes no representation and shall, subject to Section 3.7 hereof, have no responsibility with respect to (i) the obligations of Company or, the validity, sufficiency or enforceability of any document or instrument given in connection therewith, (ii) the financial condition of, any representations made by, or any act or omission of Company or any other Person, or (iii) any failure or delay in exercising any rights or powers possessed by Agent in its capacity as issuer of Letters of Credit in the absence of its gross negligence or willful misconduct. Each of the Banks expressly acknowledge that they have made and will continue to make their own evaluations of Company's creditworthiness without reliance on any representation of Agent or Agent's officers, agents and employees. (d) If at any time Agent shall recover any part of any unreimbursed amount for any draw or other demand for payment under a Letter of Credit, or any interest thereon, Agent shall receive same for the pro rata benefit of the Banks in accordance with their respective Percentage interests therein and shall promptly deliver to each Revolving Credit Bank its share thereof, less such Bank's pro rata share of the costs of such recovery, including court costs and attorney's fees. If at any time any Revolving Credit Bank shall receive from any source whatsoever any payment on any such unreimbursed amount or interest thereon in excess of such Bank's Percentage share of such payment, such Bank will promptly pay over such excess to Agent, for redistribution in accordance with this Agreement. 3.9 Indemnification. (a) The Company hereby indemnifies and agrees to hold harmless the Banks and the Agent, and their respective officers, directors, employees and agents, from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever which the Banks or the Agent or any such person may incur by reason of or in connection with any Letter of Credit, and neither any Bank nor the Agent or any of their respective officers, directors, employees or agents shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or for any acts or omissions of any beneficiary in connection therewith; (ii) the validity, sufficiency or genuineness of documents or of any endorsement thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by the Agent to the beneficiary under any Letter of Credit against presentation of documents which do not comply with the terms of any Letter of Credit (unless such payment resulted from the gross negligence or willful misconduct of the Agent), including failure of any documents to bear any reference or adequate reference to such Letter of Credit; (iv) any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit; or (v) any other event or circumstance whatsoever arising in connection with any Letter of Credit; provided, however, that Company shall not be required to indemnify the Banks and the Agent and such other persons, and the Banks and Agent shall be liable to the Company to the extent, but only to the extent, of any direct, as opposed to consequential or incidental, damages suffered by Company which were caused by the Agent's gross negligence, willful misconduct or wrongful dishonor of any Letter of Credit after the presentation to it by the beneficiary thereunder of a draft or other demand for payment and other documentation strictly complying with the terms and conditions of such Letter of Credit. (b) It is understood that in making any payment under a Letter of Credit, the Agent will rely on documents presented to it under such Letter of Credit as to any and all matters set forth therein without further investigation and regardless of any notice or information to the contrary. It is further acknowledged and agreed that Company may have rights against the beneficiary or others in connection with any Letter of Credit with respect to which the Banks are alleged to be liable and it shall be a condition of the assertion of any liability of the Banks under this Section that Company shall contemporaneously pursue all remedies in respect of the alleged loss against such beneficiary and any other parties obligated or liable in connection with such Letter of Credit and any related transactions. 3.10 Right of Reimbursement. Each Revolving Credit Bank agrees to reimburse the Agent on demand, pro rata in accordance with their Percentages, for (i) the out-of-pocket costs and expenses of the Agent to be reimbursed by Company pursuant to any Letter of Credit Agreement or any Letter of Credit, to the extent not reimbursed by Company or Account Party and (ii) any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, fees, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against Agent (in its capacity as issuer of any Letter of Credit) in any way relating to or arising out of this Agreement, any Letter of Credit, any documentation or any transaction relating thereto, or any Letter of Credit Agreement, except to the extent that such liabilities, losses, costs or expenses were incurred by Agent solely as a result of Agent's gross negligence or willful misconduct. 4.1 Commitment. Subject to the terms and conditions of this Agreement, each Term Loan Bank, severally and for itself alone, agrees to loan to Company on the date of execution of this Agreement, an amount equal to its Percentage of the Term Loan. At the time of the borrowing under this Section 4.1, Company agrees to execute a separate Term Note for each Term Loan Bank with appropriate insertions (acceptable to the Banks in form and substance) as evidence of the Indebtedness under this Section 4.1. 4.2 Disbursement of Loan. Unless such Bank's commitment to make the Term Loan shall have been suspended or terminated in accordance with this Agreement, each Term Loan Bank shall, not later than 2:00 p.m. (Detroit time) on the date of execution of this Agreement, make available the amount of its Percentage of the Term Loan in immediately available funds to Agent, at the office of Agent located at 500 Woodward Avenue, Detroit, Michigan 48275. Agent shall make available to Company not later than 4:00 p.m. (Detroit time) on such date the aggregate of the amounts so received by it in like funds by credit to an account of Company maintained with Agent or to such other account or third party as Company may direct. Unless Agent shall have been notified by any Term Loan Bank that such Bank does not intend to make available to Agent such Bank's pro rata share of the Term Loan, Agent may assume that such Bank has made such amount available to Agent on such date and may, in reliance upon such assumption, make available to Company a corresponding amount. If such amount is not in fact made available to Agent by such Bank, Agent shall be entitled to recover such amount on demand from such Bank. If such Bank does not pay such amount forthwith upon Agent's demand therefor, the Agent shall promptly notify Company and Company shall pay such amount to Agent. Agent shall also be entitled to recover from such Bank or Company, as the case may be, interest on such amount in respect of each day from the date such amount was made available by Agent to Company to the date such amount is recovered by Agent, at a rate per annum equal to the highest rate of interest then applicable to the Term Loan. The obligation of any Term Loan Bank to make any advance of the Term Loan shall not be affected by the failure of any other Term Loan Bank to make any advance of the Term Loan and no Term Loan Bank shall have any liability to the Company, the Agent, or any other Term Loan Bank for another Term Loan Bank's failure to make any advance of the Term Loan hereunder. 4.3 Payments of Principal and Interest. The Term Loan shall be payable (unless sooner accelerated pursuant to the terms of this Agreement) in quarterly installments of principal each equal to One Million Dollars ($1,000,000) on the last day of each March, June, September, and December, beginning March 31, 1998. All remaining outstanding principal and accrued but unpaid interest shall be due and payable on the Term Loan Maturity Date. Each Term Loan Bank's Term Note and the Term Loan shall bear interest from the date thereof on the unpaid principal balance thereof from time to time outstanding, at a rate per annual equal to seven and ninety nine one-hundredths percent (7.99%), which interest shall be payable quarterly on the last day of each March, June, September and December, beginning March 31, 1996. Notwithstanding the foregoing, and unless waived in accordance with the provisions of Section 11.5 hereof, from and after the occurrence of any Event of Default and during the continuation thereof, the principal outstanding under the Term Notes shall bear interest payable on demand at a rate per annum equal to the greater of ten and ninety nine one-hundredths percent (10.99%) and three percent (3%) above the Prime Rate. Interest on the Term Loan shall be calculated on the basis of a 360 day year for the actual number of day elapsed. Upon receipt by the Agent of each principal and interest payment made by the Company under this Section 4.3, the Agent shall promptly remit to each Bank such Bank's Percentage thereof. (a) Agent and the Term Loan Banks shall not be required to accept any prepayment of principal under the Term Notes except as described in this Section 4.4 or as required under applicable law. The Company may prepay the outstanding principal under the Term Notes in its entirety or, with respect to partial payments, in increments of One Million Dollars ($1,000,000) at any time and from time to time so long as the Agent is provided written notice of prepayment at least three (3) Business Days prior to the date of prepayment. The notice of prepayment shall contain the following information: (i) the date of prepayment (the "Prepayment Date") and (ii) the amount of principal to be prepaid. On the Prepayment Date, the Company will pay to the Agent for pro rata distribution to each of the Term Loan Banks (in accordance with the Percentages), in addition to the other amounts then due on the Term Notes, the Prepayment Amount described below. Agent and the Term Loan Banks, in their sole discretion, may accept any prepayment of principal even if not required to do so under this Agreement and may deduct from the amount to be applied against principal the other amounts required as part of the Prepayment Amount. The Prepaid Principal Amount (as defined below) shall be applied to the Term Notes in the inverse order of maturity, such that, as opposed to prepaying the next principal payment due, the Prepaid Principal Amount will be applied beginning with the final principal payment due on the Term Notes. If the Agent and the Term Loan Banks exercise their right to accelerate the payment of the Term Notes prior to maturity under Section 11.2 of this Agreement, the Company shall also be required to pay to each of the Term Loan Banks, in addition to the other amounts then due on the Term Notes, on the date specified by the Agent as the Prepayment Date, its Percentage of the Prepayment Amount. The Agent's determination of the Prepayment Amount will be conclusive in the absence of demonstrable error. If requested in writing by the Company, the Agent will provide the Company a written statement calculating the Prepayment Amount. As used herein, the "Prepayment Amount" shall mean the sum of: (w) the amount of principal which the Company has elected to prepay or the amount of principal which Agent and the Term Loan Banks have required the Company to prepay because of acceleration, as the case may be (as used herein, the "Prepaid Principal Amount"), (x) interest accruing on the Prepaid Principal Amount up to, but not including, the Prepayment Date, plus (y) the present value, discounted at the Reinvestment Rates (as defined below), of the positive amount by which (A) the interest the Banks would have earned had the Prepaid Principal Amount been paid according to the Term Loan's amortization schedule at the fixed rate exceeds (B) the interest the Term Loan Banks would earn by reinvesting the Prepaid Principal Amount at the Reinvestment Rates; "Reinvestment Rates" shall mean the per annum rates of interest equal to one half percent (1/2%) above the rates of interest reasonably determined by the Agent to be in effect not more than two days prior to the Prepayment Date in the secondary market for United States Treasury Obligations in amount(s) and with maturity(ies) which correspond (as closely as possible) to the principal installment amount(s) and the payment date(s) against which the Prepaid Principal Amount will be applied. (b) Each prepayment under this Section 4.4 shall be made to the Agent, and promptly upon receipt thereof, the Agent shall remit to each Term Loan Bank its pro rata share thereof (based upon the Percentages). 4.5 Use of Proceeds. The proceeds of the Term Loan shall be used solely to refinance certain existing indebtedness of Company to Comerica Bank and NBD Bank under the Term Loan Agreement dated November 20, 1992, as amended. 5.1 Swing Line Advances. The Swing Line Bank shall, on the terms and subject to the conditions hereinafter set forth, make one or more advances (each such advance being a "Swing Line Advance") to Company from time to time on any Business Day during the period from the date hereof to (but excluding) the Revolving Credit Maturity Date in an aggregate amount not to exceed Three Million Dollars ($3,000,000) at any time outstanding; provided, however, that after giving effect to all Swing Line Advances and all Revolving Credit Advances requested to be made on such date, the aggregate principal amount of all outstanding Advances and the undrawn portion of all outstanding Letters of Credit shall not exceed the then applicable Revolving Credit Aggregate Commitment. All Swing Line Advances shall be evidenced by the Swing Line Note, under which advances, repayments and readvances may be made, subject to the terms and conditions of this Agreement. Each Swing Line Advance shall mature and the principal amount thereof shall be due and payable by Company on the last day of the Interest Period applicable thereto. In no event whatsoever shall any outstanding Swing Line Advance be deemed to reduce, modify or affect any Bank's commitment to make Revolving Credit Advances based upon its Percentage. 5.2 Accrual of Interest; Margin Adjustments. Each Swing Line Advance shall, from time to time after the date of such Advance, bear interest at its Applicable Interest Rate. The amount and date of each Swing Line Advance, its Applicable Interest Rate, its Interest Period, and the amount and date of any repayment shall be noted on Agent's records, which records will be conclusive evidence thereof, absent manifest error; provided, however, that any failure by the Agent to record any such information shall not relieve Company of its obligation to repay the outstanding principal amount of such Advance, all interest accrued thereon and any amount payable with respect thereto in accordance with the terms of this Agreement and the Loan Documents. 5.3 Requests for Swing Line Advances. Company may request a Swing Line Advance only after delivery to Swing Line Bank of a Request for Swing Line Advance executed by an authorized officer of Company, subject to the following and to the remaining provisions hereof: (a) each such Request for Swing Line Advance shall set forth the information required on the Request for Swing Line Advance form annexed hereto as Exhibit "E", including without limitation: (i) the proposed date of such Swing Line Advance, which must be (ii) whether such Swing Line Advance is to be a Prime-based Advance or Quoted Rate Advance; and (iii) the duration of the Interest Period applicable thereto; (b) each such Request for Swing Line Advance shall be delivered to Swing Line Bank by 12:00 noon (Detroit time) on the proposed date of the (c) the principal amount of such requested Swing Line Advance, plus the principal amount of all other Advances then outstanding hereunder, plus the aggregate undrawn portion of any Letters of Credit which shall be outstanding as of the date of the requested Swing Line Advance, plus the aggregate face amount of Letters of Credit requested but not yet issued, shall not exceed the then applicable Revolving Credit Aggregate Commitment; (d) the principal amount of such Swing Line Advance *shall be at least Two Hundred Fifty Thousand Dollars ($250,000); (e) each Request for Swing Line Advance, once delivered to Swing Line Bank, shall not be revocable by Company, and shall constitute and include a certification by the Company as of the date thereof that: (i) both before and after such Swing Line Advance, the obligations of the Company set forth in this Agreement and the Loan Documents, as applicable, are valid, binding and enforceable (ii) to the best knowledge of Company all conditions to such Swing Line Advance have been satisfied (both before and after giving (iii) both before and after the making of such Advance, there is no Default or Event of Default in existence; and (iv) both before and after the Advance, the representations and warranties contained in this Agreement and the Loan Documents are true and correct in all material respects. Swing Line Bank shall promptly deliver to Agent by telecopier a copy of any Request for Swing Line Advance received. The Swing Line Bank may advance funds under the Swing Line Note upon telephone request made by any one of those officers or agents of Company authorized by resolution of Company's Board of Directors (or any committee thereof) to make such requests. Any such telephone request shall satisfy the time requirements set forth in Section 5.3(b) above. Company hereby authorizes Swing Line Bank to disburse pursuant to the instructions of any officer or agent so identified. On the same day as such request for Swing Line Advance is made, the officer or agent requesting the Swing Line Advance shall mail to the Swing Line Bank a Request for Swing Line Advance in form similar to that attached as Exhibit "E", executed by an authorized officer or agent of Company and, until such Request for Swing Line Advance is received by Agent, the telephone request itself shall constitute the requesting officer's certification of the matters set forth in Section 5.3(e) above. 5.4 Disbursement of Swing Line Advances. Subject to submission of an executed Request for Swing Line Advance by Company without exceptions noted in the compliance certification therein and to the other terms and conditions hereof, Swing Line Bank shall make available to Company the amount so requested, in same day funds, not later than 4:00 p.m. (Detroit time) on the date of such Swing Line Advance by credit to an account of Company maintained with Swing Line Bank or to such other account or third party as Company may reasonably direct. Swing Line Bank shall promptly notify Agent of any Swing Line Advance by telephone, telex or telecopier. 5.5 Refunding of or Participation Interest in Swing Line Advances. (a) The Agent, at any time in its sole and absolute discretion, may (or, upon the request of the Swing Line Bank, shall) on behalf of the Company (which hereby irrevocably directs the Agent to act on its behalf) request each Revolving Credit Bank (including the Swing Line Bank in its capacity as a Revolving Credit Bank) to make a Revolving Credit Advance in an amount equal to such Revolving Credit Bank's Percentage of the principal amount of the Swing Line Advances (the "Refunded Swing Line Advances") outstanding on the date such notice is given; provided that (i) at any time as there shall be a Swing Line Advance outstanding for more than thirty days, the Agent shall, on behalf of the Company (which hereby irrevocably directs the Agent to act on its behalf), promptly request each Revolving Credit Bank (including the Swing Line Bank) to make a Revolving Credit Advance in an amount equal to such Revolving Credit Bank's Percentage of the principal amount of such outstanding Swing Line Advance and (ii) Swing Line Advances shall be prepaid by the Company in accordance with the provisions of Section 6.7 hereof. In the case of each Refunded Swing Line Advance, the applicable Advance of the Revolving Credit used to refund such Swing Line Advance shall be a Prime-based Advance. Unless any of the events described in Section 11.1(j) shall have occurred (in which event the procedures of paragraph (b) of this Section 5.5 shall apply) and regardless of whether the conditions precedent set forth in this Agreement to the making of a Revolving Credit Advance are then satisfied, each Revolving Credit Bank shall make the proceeds of its Revolving Credit Advance available to the Agent for the ratable benefit of the Swing Line Bank at the office of the Agent specified in Section 2.4(a) prior to 11:00 a.m. Detroit time, in funds immediately available on the Business Day next succeeding the date such notice is given. The proceeds of such Revolving Credit Advances shall be immediately applied to repay the Refunded Swing Line Advances. (b) If, prior to the making of a Revolving Credit Advance pursuant to paragraph (a) of this Section 5.5, one of the events described in Section 11.1(j) shall have occurred, each Revolving Credit Bank will, on the date such Revolving Credit Advance was to have been made, purchase from the Swing Line Bank an undivided participating interest in the Refunded Swing Line Advance in an amount equal to its Percentage of such Refunded Swing Line Advance. Each Bank will immediately transfer to the Agent, in immediately available funds, the amount of its participation and upon receipt thereof the Agent will deliver to such Bank a Swing Line Bank Participation Certificate in the form of Exhibit "H" dated the date of receipt of such funds and in such amount. (c) Each Bank's obligation to make Revolving Credit Advances and to purchase participation interests in accordance with clauses (a) and (b) above shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against Swing Line Bank, the Company or any other Person for any reason whatsoever; (ii) the occurrence or continuance of any Default or Event of Default; (iii) any adverse change in the condition (financial or otherwise) of the Company or any other Person; (iv) any breach of this Agreement by the Company or any other Person; (v) any inability of the Company to satisfy the conditions precedent to borrowing set forth in this Agreement on the date upon which such participating interest is to be purchased or (vi) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If any Bank does not make available to the Agent the amount required pursuant to clause (a) or (b) above, as the case may be, the Agent shall be entitled to recover such amount on demand from such Bank, together with interest thereon for each day from the date of non-payment until such amount is paid in full at the Federal Funds Effective Rate for the first two Business Days and at the Alternate Base Rate thereafter. 6.1 Prime-based Interest Payments. Interest on the unpaid balance of all Prime-based Advances from time to time outstanding shall accrue from the date of such Advances until paid, at a per annum interest rate equal to the Prime-based Rate, and shall be payable in immediately available funds monthly commencing on the first day of the calendar month next succeeding the calendar month during which the initial Advance is made and on the first day of each calendar month thereafter. Interest accruing at the Prime-based Rate shall be computed on the basis of a 360 day year and assessed for the actual number of days elapsed, and in such computation effect shall be given to any change in the interest rate resulting from a change in the Prime-based Rate on the date of such change in the Prime-based Rate. 6.2 Eurocurrency-based Interest Payments. Interest on the unpaid balance of each Eurocurrency-based Advance having a related Eurocurrency-Interest Period of 3 months or less shall accrue at its Eurocurrency-based Rate and shall be payable in immediately available funds on the last day of the Interest Period applicable thereto. Interest shall be payable in immediately available funds on the unpaid balance of each Eurocurrency-based Advance outstanding from time to time having a Eurocurrency-Interest Period of 6 months or longer, at intervals of 3 months after the first day of the applicable Interest Period, and shall also be payable on the last day of the Interest Period applicable thereto. Interest accruing at the Eurocurrency-based Rate shall be computed on the basis of a 360 day year and assessed for the actual number of days elapsed from the first day of the Interest Period applicable thereto to, but not including, the last day thereof. 6.3 Quoted Rate Advance Interest Payments. Interest on the unpaid balance of each Quoted Rate Advance shall accrue at its Quoted Rate and shall be payable in immediately available funds on the last day of the Interest Period applicable thereto. Interest accruing at the Quoted Rate shall be computed on the basis of a 360 day year and assessed for the actual number of days elapsed from the first day of the Interest Period applicable thereto to, but not including the last day thereof. 6.4 Interest Payments on Conversions. Notwithstanding anything to the contrary in Sections 6.1 and 6.2, all accrued and unpaid interest on any Revolving Credit Advance refunded or converted pursuant to Section 2.3 hereof shall be due and payable in full on the date such Advance is refunded or converted. 6.6 Interest on Default. Notwithstanding anything to the contrary set forth in Sections 6.1, 6.2 and 6.3, in the event and so long as any Event of Default shall exist under this Agreement, interest shall be payable daily on the principal amount of all Advances from time to time outstanding (and on all other monetary obligations of Company hereunder and under the other Loan Documents) at a per annum rate equal to in the case of Eurocurrency-based Advances and Quoted Rate Advances, the Applicable Interest Rate plus three percent (3%) per annum for the remainder of the then existing Interest Period, if any, and at all other such times and for all Prime-based Advances, at a per annum rate equal to the Prime-based Rate, plus three percent (3%). 6.7 Prepayment. Company may prepay all or part of the outstanding balance of any Prime-based Advance(s) (subject to same day notice to Agent) at any time, provided that the amount of any partial prepayment shall be at least One Hundred Thousand Dollars ($100,000). Company may prepay all or part of any Eurocurrency-based Advance (subject to not less than three (3) Business Days' notice to Agent) only on the last day of the Interest Period applicable thereto, provided that the amount of any such partial prepayment shall be at least One Hundred Thousand Dollars ($100,000). Company may prepay Quoted Rate Advances only on the last day of the Interest Period applicable thereto. Any prepayment made in accordance with this Section shall be without premium, penalty or prejudice to the right to reborrow under the terms of this Agreement. Any other prepayment of all or any portion of the Revolving Credit, whether by acceleration, mandatory or required prepayment or otherwise, shall be subject to Section 13.1 hereof, but otherwise without premium, penalty or prejudice. The obligations of Banks to make Advances, the Term Loan or issue Letters of Credit pursuant to this Agreement are subject to the following conditions: 7.1 Execution of Notes and this Agreement. Company shall have executed and delivered to Agent for the account of each Bank, the Revolving Credit Notes, the Term Notes, the Swing Line Note and this Agreement (including all schedules, exhibits, certificates, opinions, financial statements and other documents to be delivered pursuant hereto), and such Revolving Credit Notes, the Term Notes, Swing Line Note, the Loan Documents and this Agreement shall be in full force and effect. 7.2 Corporate Authority. Agent shall have received, with a counterpart thereof for each Bank: (i) certified copies of resolutions of the Board of Directors of Company evidencing approval of the form of this Agreement, the Notes and the other Loan Documents to which such Person is a party and authorizing the execution and delivery thereof and the borrowing of Advances hereunder and of the Boards of Directors of the Guarantors evidencing approval of them entering into Guarantor Collateral Documents; and (ii) (A) certified copies of Company's, and each Guarantor's articles of incorporation and bylaws or other constitutional documents certified as true and complete as of a recent date by the appropriate official of the jurisdiction of incorporation of Company; and (B) a certificate of good standing from the state or other jurisdictions of Company's and each Guarantor's incorporation, and from every state or other jurisdiction in which Company or a Guarantor is qualified to do business, if issued by such jurisdictions, subject to the limitations (as to qualification and authorization to do business) contained in Section 8.1 hereof. 7.3 Company Collateral Documents. As security for all Indebtedness of Company to the Banks hereunder, Company shall have furnished, executed and delivered to the Agent, or caused to be furnished, executed and delivered to the Agent, prior to or concurrently with the initial borrowing hereunder, in form and substance satisfactory to the Agent and the Banks and supported by appropriate resolutions in certified form authorizing same, the Company Collateral Documents. In addition, if required or advisable under applicable law to perfect the liens granted thereby, the Agent shall have received, concurrently with or prior to the making of Advances hereunder, appropriate financing statements, collateral and other documents covering such Collateral executed and delivered by the appropriate parties. 7.4 Guarantor Collateral Documents. As security for all Indebtedness of Company to the Banks hereunder, each of the Guarantors shall have furnished, executed, and delivered to the Agent, or caused to be furnished, executed and delivered to the Agent, prior to or concurrently with the initial borrowing hereunder, in form and substance satisfactory to Agent and the Banks and supported by appropriate resolutions in certified form authorizing same, the Guarantor Collateral Documents. In addition: (a) Company shall have provided at Company's expense a mortgagee's title insurance policy on each parcel of the real property described in Exhibit "L" (each a "Store Site") in the amount required by Agent. Each policy will be written on the American Land Title Association Form of Mortgagee's Policy and will include a zoning endorsement in form acceptable to the Agent and "Comprehensive Endorsement No. 1 Coverage" provided by the title insurance policy with respect to the each Store Site shall not be subject to the standard exceptions as to rights of parties in possession and matters which would be disclosed by survey, easements not shown by the public records and mechanic's liens not shown by public records. The coverage shall be subject to no exceptions other than (x) rights of way, easements and use restrictions and encroachments disclosed by survey which do not materially and adversely affect the value or marketability of the Store Site or the usefulness of the Store Site in the operations of Company or any Guarantor and (y) liens acceptable to the Banks. (b) Company shall have furnished to the Agent, at Company's expense, a survey made based on the ALTA Minimum Standard Detail Requirements for Land Title Surveys with respect to the each Store Site with an ALTA Minimum Standard Detail Certificate certified to the Agent as of a date no more than thirty (30) days prior to the date hereof. 7.5 Licenses, Permits, Etc. The Agent shall have received, with a counterpart for each Bank, copies of each authorization, license, permit, consent, order or approval of, or registration, declaration or filing with, any governmental authority or any securities exchange or other person (including without limitation any securities holder) obtained or made by the Company, any of its Subsidiaries, or any other Person (as of the relevant date of Advance or loan hereunder) in connection with the transactions contemplated by this Agreement or the Loan Documents. 7.6 Representations and Warranties. The representations and warranties made by Company or any other party to any of the Loan Documents (excluding the Agent and Banks) under this Agreement or any of the Loan Documents, and the representations and warranties of any of the foregoing which are contained in any certificate, document or financial or other statement furnished at any time hereunder or thereunder or in connection herewith or therewith shall have been true and correct in all material respects when made and shall be true and correct in all material respects on and as of the date of the making of any Advance hereunder. 7.7 Compliance with Certain Documents and Agreements. The Company and each of the Guarantors shall have each performed and complied with all agreements and conditions contained in this Agreement, the Loan Documents, or any agreement or other document executed thereunder and required to be performed or complied by each of them (as of the applicable date) and none of such parties be in default in the performance or compliance with any of the terms or provisions hereof or thereof. 7.8 Opinion of Counsel. Company shall furnish Agent prior to the initial Advance under this Agreement, and with signed copies for each Bank, an opinion of counsel to the Company and the Guarantors, dated the date hereof, and covering such matters as required by and otherwise satisfactory in form and substance to the Agent and each of the Banks. 7.9 No Default. No Default or Event of Default shall have occurred and be continuing, and there shall have been no material adverse change in the financial condition, properties, business, prospects of, results or operations of the Company and its Subsidiaries from October 28, 1995 to the date of the making of the first borrowing hereunder. 7.10 Company's Certificate. The Agent shall have received, with a signed counterpart for each Bank, a certificate of a responsible senior officer of Company dated the date of the making of the initial Advances hereunder, stating on behalf of Company that to the best of his or her knowledge after due inquiry, the conditions of paragraphs 7.1, 7.5 through 7.7, 7.9 and 7.12 hereof have been fully satisfied. 7.11 Payment of Fees. Company shall have paid to the Agent all fees, costs and expenses required hereunder to be paid to Agent upon execution of this Agreement and Company shall have paid to the Agent for pro rata distribution to the Banks the Restructuring Fee. 7.12 Termination of Existing Credit Facility. Agent shall have received evidence satisfactory to Agent of the termination of the existing credit facilities, dated November 20, 1992, of Jacobson Credit Corp. and Company with Comerica and NBD Bank and payment in full by Jacobson Credit Corp. and Company of all of their obligations thereunder. 7.13 Other Documents and Instruments. The Agent shall have received, with a photocopy for each Bank, such other instruments and documents as each of the Required Banks may reasonably request in connection with the making of loans hereunder, and all such instruments and documents shall be satisfactory in form and substance to the Required Banks. 7.14 Continuing Conditions. The obligations of the Banks to make Advances or loans under this Agreement shall be subject to the continuing conditions that all documents executed or submitted pursuant hereto shall be satisfactory in form and substance (consistent with the terms hereof) to Agent and its counsel and to each of the Banks; Agent and its counsel and each of the Banks and their respective counsel shall have received all information, and such counterpart originals or such certified or other copies of such materials, as Agent or its counsel and each of the Banks and their respective counsel may reasonably request; and all other legal matters relating to the transactions contemplated by this Agreement (including, without limitation, matters arising from time to time as a result of changes occurring with respect to any statutory, regulatory or decisional law applicable hereto) shall be satisfactory to counsel to Agent and counsel to each of the Banks. Company represents and warrants and such representations and warranties shall be deemed to be continuing representations and warranties until the later of the Revolving Credit Maturity Date and the Term Loan Maturity Date and thereafter until final payment in full of the Indebtedness and the performance by Company of all other obligations under this Agreement: 8.1 Corporate Authority. Each of Company and its Subsidiaries is a corporation duly organized and validly existing in good standing under the laws of the applicable jurisdiction of organization, charter or incorporation; it is duly qualified and authorized to do business as a corporation or foreign corporation in each jurisdiction where the character of its assets or the nature of its activities makes such qualification necessary, except where such failure to qualify and be authorized to do business will not have a material adverse impact on the Company or any of its Subsidiaries. 8.2 Due Authorization Company. Execution, delivery and performance of this Agreement and any other documents and instruments required of Company under or in connection with this Agreement or the other Loan Documents (or to be so executed and delivered), and the issuance of the Notes by Company are within its corporate powers, have been duly authorized by appropriate corporate action, do not violate any law or the terms of Company's Articles of Incorporation or Bylaws, and, except as have been previously obtained or as referred to in Section 7.5, do not require the consent or approval, material to the transactions contemplated by this Agreement or the Loan Documents, of any governmental body, agency or authority not previously delivered under Section 7.5 hereof. 8.3 Due Authorization - Guarantors. Execution, delivery and performance of the Guarantor Collateral Documents and all other documents and instruments required of Guarantors under or in connection with this Agreement or the Loan Documents (or to be so executed and delivered) are within the corporate powers of the Guarantors, have been duly authorized, do not violate any law or the terms of the Guarantor's Articles of Incorporation or Bylaws, and, except as have been previously obtained do not require the consent or approval, material to the transactions contemplated by this Agreement, and the Loan Documents, of any governmental body, agency or authority not previously obtained and delivered to Agent under Section 7.5 hereof. 8.4 Title to Collateral - Company. Company has good and valid title to the property pledged, mortgaged or otherwise encumbered or to be encumbered under the Company Collateral Documents. 8.5 Encumbrances. There are no security interests in, liens, mortgages, or other encumbrances on and no financing statements on file with respect to any of the property owned by Company or any of its Subsidiaries except for the Permitted Encumbrances. 8.6 Capital Stock; Shareholders; Subsidiaries. As of the date hereof, (a) all present Subsidiaries of Company are set forth in the attached Schedule 8.6, along with the percentage of the outstanding voting stock owned by Company or by a Subsidiary of Company (and identifying that Subsidiary); and (b) other than as disclosed on Schedule 8.6, there are no outstanding options, warrants or rights to purchase, nor any agreement for the subscription, purchase or acquisition of, any shares of the capital stock of any of Company's Subsidiaries. 8.7 Taxes. Each of Company and its Subsidiaries has filed on or before their respective due dates, all federal, state and foreign tax returns which are required to be filed or has obtained extensions for filing such tax returns and is not delinquent in filing such returns in accordance with such extensions and has paid all taxes which have become due pursuant to those returns or pursuant to any assessments received by any such party, as the case may be, to the extent such taxes have become due, except to the extent such tax payments are being actively contested in good faith by appropriate proceedings and with respect to which adequate provision has been made on the books of Company as may be required by GAAP. 8.8 No Defaults. There exists no payment default under any instrument evidencing any indebtedness of the Company or any of its Subsidiaries and there exists no other default under the provisions of any instrument evidencing any indebtedness of the Company or any of its Subsidiaries which is permitted hereunder or any Funded Debt connected with any of the Permitted Encumbrances, or of any agreement relating thereto to the extent such default with notice or the lapse of time or both, could result in the acceleration of at least $1,000,000 of such indebtedness. 8.9 Enforceability of Agreement and Loan Documents-Company. This Agreement, each of the Loan Documents to which Company is a party, and all other certificates, agreements and documents executed and delivered by Company under or in connection herewith or therewith have each been duly executed and delivered by its duly authorized officers and constitute the valid and binding obligations of Company, enforceable in accordance with their respective terms, except as enforcement thereof may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting the enforcement of creditor's rights, generally and by general principles of equity. 8.10 Enforceability of Loan Documents -- Guarantors. The Loan Documents to which each of the Guarantors is a party, and all certificates, documents and agreements executed in connection therewith by the Guarantors have each been duly executed and delivered by the respective duly authorized officers of the Guarantors and constitute the valid and binding obligations of Guarantors, enforceable in accordance with their respective terms, except as enforcement thereof may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting the enforcement of creditor's rights, generally and by general principles of equity. 8.11 Compliance with Laws. The Company and its Subsidiaries each has complied with all applicable laws, including without limitation, Environmental Laws, to the extent that failure to comply therewith would materially interfere with the conduct of the business of the Company or any of its Subsidiaries, or would have a material adverse effect upon Company or any of its Subsidiaries, or upon any property (whether personal or real) owned by any of them. 8.12 Non-contravention-Company. The execution, delivery and performance of this Agreement and the other Loan Documents and any other documents and instruments required under or in connection with this Agreement by Company do not breach, or result in a default under, the terms of any indenture, agreement or undertaking to which Company or any of its Subsidiaries is a party or by which it or its properties are bound or affected, to the extent such breach or default would materially adversely affect the validity or enforceability of any of the Loan Documents. 8.13 Non-contravention -- Guarantors. The execution, delivery and performance of those Loan Documents signed by the Guarantors, and any other documents and instruments required under or in connection with this Agreement by the Guarantors do not breach, or result in a default under, the terms of any indenture, agreement or undertaking to which any Subsidiary or Company is a party or by which it or its properties are bound or affected, to the extent such breach or default would materially adversely affect the validity or enforceability of any of the Loan Documents. 8.14 No Litigation -- Company. There is no suit, action, proceeding, including, without limitation, any bankruptcy proceeding, or governmental investigation pending against or affecting Company (other than any suit, action or proceeding in which Company is the plaintiff and in which no counterclaim or cross-claim against Company has been filed), nor has Company or any of its officers or directors been subject to any suit, action, proceeding or governmental investigation as a result of which any such officer or director is or may be entitled to indemnification by Company, except in each case as otherwise disclosed in Schedule 8.14 attached hereto and except for suits, actions and proceedings (other than suits, actions or proceedings commenced by any government or governmental authority) involving less than $100,000 in the aggregate, which suits, if resolved adversely to Company, would not in the aggregate have a material adverse effect on the Company and its Subsidiaries (taken as a whole). Except as so disclosed, there is not outstanding against Company any judgment, decree, injunction, rule, or order of any court, government, department, commission, agency, instrumentality or arbitrator nor is Company in violation of any applicable law, regulation, ordinance, order, injunction, decree or requirement of any governmental body or court where such violation would reasonably be expected to have a material adverse effect on Company and its Subsidiaries (taken as a whole). 8.15 No Litigation -- Subsidiaries. There is no suit, action, proceeding (other than any suit, action or proceeding in which any such party is the plaintiff and in which no counterclaim or cross-claim against any such party has been filed), including, without limitation, any bankruptcy proceeding, or governmental investigation pending against or affecting any of the Subsidiaries of Company, nor has any such party or any of its officers or directors been subject to any suit, action, proceeding or governmental investigation as a result of which any such officer or director is or may be entitled to indemnification by such party, except as otherwise disclosed in Schedule 8.15 attached hereto and except in each case for suits, actions and proceedings (other than suits, actions or proceedings commenced by any government or governmental authority) involving less than $100,000 in the aggregate (for all such Subsidiaries), which suits, if resolved adversely to any such Subsidiary, would not in the aggregate have a material adverse effect on Company and its Subsidiaries (taken as a whole). Except as so disclosed, there is not outstanding against any Subsidiary of Company any judgment, decree, injunction, rule, or order of any court, government, department, commission, agency, instrumentality or arbitrator nor is any such party in violation of any applicable law, regulation, ordinance, order, injunction, decree or requirement of any governmental body or court where such violation would reasonably be expected to have a material adverse effect on Company and its Subsidiaries (taken as a whole). 8.16 Consents, Approvals and Filings, Etc. Except as have been previously obtained and except for filings required under the Securities Exchange Act of 1934, as amended, no authorization, consent, approval, license, qualification or formal exemption from, nor any filing, declaration or registration with, any court, governmental agency or regulatory authority or any securities exchange or any other person or party (whether or not governmental) is required in connection with the execution, delivery and performance by Company of this Agreement, any of the Loan Documents to which it is a party, or any other documents or instruments to be executed and or delivered by Company in connection therewith or herewith. All such authorizations, consents, approvals, licenses, qualifications, exemptions, filings, declarations and registrations which have previously been obtained or made, as the case may be, are in full force and effect and are not the subject of any attack, or to the knowledge of Company threatened attack, (in any material respect) by appeal or direct proceeding or otherwise. 8.17 Agreements Affecting Financial Condition. Neither the Company nor any of its Subsidiaries is party to any agreement or instrument or subject to any charter or other corporate restriction which materially adversely affects the financial condition or operations of the Company and its Subsidiaries (taken as a whole). 8.18 No Investment Company or Margin Stock. Neither the Company nor any of its Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Neither the Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, directly or indirectly, in the business of extending credit for the purpose of purchasing or carrying margin stock. None of the proceeds of any of the Advances will be used by the Company or any of its Subsidiaries to purchase or carry margin stock or will be made available by the Company or any of its Subsidiaries in any manner to any other Person to enable or assist such Person in purchasing or carrying margin stock. Terms for which meanings are provided in Regulation U of the Board of Governors of the Federal Reserve System or any regulations substituted therefor, as from time to time in effect, are used in this paragraph with such meanings. 8.19 ERISA. Neither Company nor any of its Subsidiaries maintains or contributes to any Pension Plan subject to Title IV of ERISA, except as set forth on Schedule 8.19 hereto; and there is no accumulated funding deficiency within the meaning of ERISA, or any existing liability with respect to any of the Pension Plans owed to the Pension Benefit Guaranty Corporation or any successor thereto, and no "reportable event" or "prohibited transaction", as defined in, and to the extent prohibited by, ERISA, has occurred with respect to any Pension Plan, and all such Pension Plans are in material compliance with the requirements of the Internal Revenue Code and ERISA. 8.20 Conditions Affecting Business or Properties. Neither the respective businesses nor the properties of Company or any of its Subsidiaries is affected by any fire, explosion, accident, strike, lockout or other dispute, drought, storm, hail, earthquake, embargo, Act of God or other casualty, which materially adversely affects, or if such event or condition were to continue for more than ten (10) additional days would reasonably be expected to materially adversely affect, any such businesses or properties of Company and its Subsidiaries (taken as a whole). 8.21 Environmental and Safety Matters. (a) Each of the Company and its Subsidiaries is in compliance in all material respects with all federal, state and local laws, ordinances and regulations relating to safety and industrial hygiene or to the environmental condition, including without limitation all Hazardous Materials Laws in jurisdictions in which the Company or its Subsidiaries owns or operates, or has owned or operated, a facility or site, or arranges or has arranged for disposal or treatment of hazardous substances, solid waste, or other wastes, accepts or has accepted for transport any hazardous substances, solid wastes or other wastes or holds or has held any interest in real property, except for De Minimis Matters or as otherwise disclosed on Schedule 8.21 hereto, and as to such matters disclosed on such Schedule, none will have a material adverse effect on the financial condition or businesses of the Company and its Subsidiaries (taken as a whole). (b) No demand, claim, notice, suit, suit in equity, action, administrative action, investigation or inquiry whether brought by any governmental authority, private person or entity or otherwise, arising under, relating to or in connection with any applicable Hazardous Materials Laws is pending or, to the best knowledge of Company, after due investigation, threatened against the Company or any of its Subsidiaries, any real property in which the Company or any of its Subsidiaries holds or has held an interest or any past or present operation of the Company or any of its Subsidiaries, except as disclosed on Schedule 8.21 hereto, and as to such matters disclosed on such Schedule, none is reasonably expected to have a material adverse effect on the financial condition or business of the Company and its Subsidiaries (taken as a whole). (c) Neither the Company nor any of its Subsidiaries (i) is, to the best knowledge of Company, after due investigation, the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic substances, radioactive materials, hazardous wastes or related materials into the environment, (ii) has received any notice of any toxic substances, radioactive materials, hazardous waste or related materials in, or upon any of its properties in violation of any applicable Hazardous Materials Laws, or (iii) knows of any basis for any such investigation, notice or violation, except as disclosed on Schedule 8.21 hereto, and as to such matters disclosed on such Schedule, none is reasonably expected to have a material adverse effect on the financial condition or business of Company and its Subsidiaries (taken as a whole). (d) To the best knowledge of Company after due investigation, no release, threatened release or disposal of hazardous waste, solid waste or other wastes is occurring or has occurred on, under or to any real property in which the Company or any of its Subsidiaries holds any interest or on which Company or any of its Subsidiaries performs any of its operations, in violation of any Hazardous Material Law except as disclosed on Schedule 8.21 hereto, and as to such matters disclosed on such Schedule, none is reasonably expected to have a material adverse effect on the financial condition or business of the Company and its Subsidiaries (taken as a whole). 8.22 Accuracy of Information. Each of the Company's financial statements previously furnished to Agent and the Banks by Company prior to the date of this Agreement (other than projections), has been prepared in accordance with GAAP (subject, in the case of interim financial statements to year end audit adjustments, the lack of complete footnotes and other normal deviations from GAAP for interim statements) and is complete and correct in all material respects and fairly presents the financial condition of Company and the results of its operations for the periods covered thereby; since the date of the most recent financial statements furnished to the Agent there has been no material adverse change in the financial condition of Company or any of its Subsidiaries; to the best knowledge of Company, neither Company nor any of its Subsidiaries has any contingent obligations (including any liability for taxes) not disclosed by or reserved against in the most recent balance sheets included in the financial statements furnished to the Agent, as applicable, to the extent required by GAAP, except as set forth on Schedule 8.22 hereof, and at the present time there are no material unrealized or anticipated losses from any present commitment of Company or any of its Subsidiaries. 8.23 Accounts. As to the Accounts, the Company warrants and represents that: (a) Each of them arose out of a bona fide sale at retail in the ordinary course of business. (b) Company had unencumbered title to the property the sale of which resulted in the Accounts, and that such property has been delivered to the Account Debtor exactly as represented to him. (c) Each of them represents a claim which is valid and enforceable according to the terms of such Account against the Account Debtor, that the unpaid balance thereof is not subject to any counterclaim, setoff, credit, allowance or adjustment (except as permitted pursuant to the terms of the Company Security Agreement) and that there is no agreement for any rebate, discount, concession, or release of liability in whole or part. (d) The granting to the Agent of a security interest in the Accounts will vest in the Agent the entire benefit of all of the Accounts according to their terms. (e) The transactions leading to the creation of the Accounts comply with all applicable state and federal laws and regulations. (f) The Company has acquired and (as to future Accounts) will continue to acquire its rights, title and interest in the ordinary course of its business. Company covenants and agrees that it will, and, as applicable, it will cause each of its Subsidiaries, until the latter to occur of Revolving Credit Maturity Date and the Term Loan Maturity Date and thereafter until final payment in full of the Indebtedness and the performance by the Company of all other obligations under this Agreement and the other Loan Documents, unless the Required Banks shall otherwise consent in writing: 9.1 Preservation of Existence, Etc. Subject to the terms of this Agreement: (i) preserve and maintain its corporate existence and such of its rights, licenses, and privileges as are material to the business and operations conducted by it; (ii) qualify and remain qualified to do business in each jurisdiction in which such qualification is material to its business and operations or ownership of its properties; (iii) continue to conduct and operate an apparel, accessories and gifts for the home retail business; (iv) at all times maintain, preserve and protect all of its franchises and trade names and preserve all the remainder of its property and keep the same in good repair, working order and condition, all to the extent material to its business and operations; and (v) from time to time make, or cause to be made, all repairs, replacements, betterments and improvements thereto it deems appropriate such that the businesses carried on in connection therewith may be properly and advantageously conducted at all times. 9.2 Keeping of Books. Keep proper books of record and account in which full and correct entries shall be made of all of its financial transactions and its assets and businesses so as to permit the presentation of financial statements prepared in accordance with GAAP. 9.3 Reporting Requirements. Furnish Agent with copies for each Bank: (a) as soon as practicable, and in any event within ten days after becoming aware of the occurrence of any Default or Event of Default or any other event or occurrence which has or would reasonably be expected to have a materially adverse effect upon the business, property or financial condition of Company and its Subsidiaries (taken as a whole), or upon Company's or any Guarantor's ability to comply with its obligations hereunder or under any of the other Loan Documents, a written statement of a responsible senior officer of the Company setting forth details of such Default, Event of Default or other event or occurrence and the action which the Company has taken or has caused to be taken or proposes to take or cause to be taken with respect thereto; (b) as soon as available, and in any event within ninety (90) days after the end of each of Company's fiscal years, beginning with the fiscal year ending January 27, 1996, (i) audited consolidated financial statements of the Company and its Consolidated Subsidiaries containing the balance sheet of the Company and its Consolidated Subsidiaries as of the close of each such fiscal year, consolidated statements of income and retained earnings and a consolidated statement of cash flows for each such fiscal year, and such other comments and financial details as are usually included in similar reports, such financial statements to be prepared in accordance with GAAP and certified by independent certified public accountants of recognized standing selected by Company and acceptable to the Required Banks and containing unqualified opinions as to the fairness of the statements therein contained; (ii) unaudited consolidating financial statements of Company and its Consolidated Subsidiaries, certified as correct by an appropriate officer of Company and (iii) a (c) as soon as available, and in any event within forty five (45) days after the end of each fiscal quarter of Company (excluding the last quarter of each fiscal year), commencing with its quarter ending April 27, 1996, (i) the balance sheet of the Company and its Consolidated Subsidiaries as of the end of such quarter and related statements of income and cash flows for the portion of the fiscal year through the end of such period, certified by a responsible financial officer of Company as to the consistency with prior interim financial reports, and as to accuracy and fairness of presentation, subject to normal year-end adjustments and (ii) a Covenant Compliance (d) promptly, and in any event within ten (10) calendar days after becoming aware (i) of any material adverse change in the financial condition of the Company and its Subsidiaries (taken as a whole), a certificate of the chief financial officer of Company (or in such officer's absence, a responsible senior officer) setting forth the details of such change or (ii) of the taking by the Internal Revenue Service of a tax position (verbal or written) which could have a materially adverse effect upon the Company (or any tax position taken by the Company) setting forth the details of such position and the financial impact thereof; and (e) as soon as practical after being filed with the Federal Securities and Exchange Commission ("SEC"), the Company's 10-Q and 10-K Reports and other periodic reports filed with the SEC, and in any event, with respect to the 10-Q Report, within sixty (60) days of the end of each of the Company's first, second and third fiscal quarters, and with respect to the 10-K Report, within one hundred (100) days after the end of each of Company's fiscal years, and, as soon as practical after filing with the SEC, copies of all other documents filed by the Company with the SEC; (f) promptly as issued, all press releases, notices to shareholders and all other material communications transmitted to the general public or generally to the trade or industry in which the (g) (i) on each Settlement Date, a Borrowing Base Report as of the last day of the preceding fiscal month certifying, with supporting calculations, as of the last day of the preceding fiscal month, the amount of (A) the aggregate Borrowing Base Limitation, (B) Eligible Inventory, and (C) Eligible Accounts (with an aging of Accounts) and (ii) from time to time, such additional schedules, certificates and reports relating thereto, the items or amounts received by the Company in full or partial payment thereof, and any goods (the sale or lease of which shall have given rise to any of the Eligible Accounts) possession of which has been obtained by the Company, all to such extent as Agent may reasonably request, with each such schedule, certificate or report to be certified as accurate by a duly authorized officer of the Company and in such form and detail as Agent may reasonably specify; (h) promptly, and in form and substance reasonably satisfactory to Agent and the requesting Banks, such other information as Agent or the Required Banks (acting through Agent) may reasonably request from time to time. 9.4 Maintain Consolidated Cash Flow Ratio. Maintain as of the end of each fiscal quarter a Consolidated Cash Flow Ratio of not less than the following amounts during the periods specified below: 9.5 Maintain Funded Debt Ratio. Maintain as of the end of each fiscal quarter a Funded Debt Ratio of not more than 1.35 to 1.0. 9.6 Maintain Consolidated Tangible Net Worth. Maintain as of the end of each fiscal quarter a Consolidated Tangible Net Worth of not less than the following amounts specified below: 9.7 Taxes. Pay and discharge all taxes and other governmental charges within the time the same shall be payable without interest or penalty, unless and to the extent only that such payment is being contested in good faith by appropriate proceedings and is reserved for, to the extent required by GAAP, on its balance sheet. 9.8 Inspections. Permit Agent and each Bank, through their authorized attorneys, accountants and representatives to examine Company's and each Subsidiaries' books, accounts, records, ledgers and assets and properties of every kind and description wherever located at all reasonable times during normal business hours, upon oral or written request of Agent or such Bank. Such inspection rights are subject to reasonable limitations imposed by Company with respect to safety and shall not extend to trade secrets of Company or its Subsidiaries or to information within the attorney client privilege. 9.9 Indemnification. Indemnify and save Agent and each of the Banks harmless from all loss, cost, damage, liability or expenses, including reasonable attorneys' fees and disbursements, incurred by Agent and the Banks by reason of an Event of Default, or enforcing the obligations of Company under this Agreement or any of the other Loan Documents or in the prosecution or defense of any action or proceeding concerning any matter growing out of or connected with this Agreement or any of the Loan Documents, excluding, however, any loss, cost, damage, liability or expenses arising as a result of the gross negligence or willful misconduct of the party seeking to be indemnified under this Section 9.9. 9.10 Governmental and Other Approvals. Apply for, obtain and/or maintain in effect, as applicable, all authorizations, consents, approvals, licenses, qualifications, exemptions, filings, declarations and registrations (whether with any court, governmental agency, regulatory authority, securities exchange or otherwise) which are necessary in connection with the execution, delivery and performance by Company, of this Agreement, the Loan Documents, or any other documents or instruments to be executed and/or delivered by Company in connection therewith or herewith. 9.11 Insurance. Maintain insurance coverage on its physical assets and against other business risks in such amounts and of such types as are customarily carried by companies similar in size and nature, and in the event of acquisition of additional property, real or personal, or of occurrence of additional risks of any nature, increase such insurance coverage in such manner and to such extent as prudent business judgment and then current practice would dictate. (a) Comply in all material respects with all applicable laws, rules, regulations and orders of any governmental authority, whether federal, state, local or foreign (including without limitation Hazardous Materials Laws), in effect from time to time. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions necessary to clean-up and remove all Hazardous Materials on or affecting any premises owned or occupied by Company or any of its Subsidiaries, whether resulting from conduct of Company or any of its Subsidiaries or any other Person, if required by Hazardous Material Laws, all such actions to be taken in accordance with such laws, and the orders and directives of all applicable federal, state and local (c) Defend, indemnify and hold harmless Agent and each of the Banks, and their respective employees, agents, officers and directors from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs or expenses of whatever kind or nature arising out of or related to (i) the presence, disposal, release or threatened release of any Hazardous Materials on, from or affecting any premises owned or occupied by Company or any of its Subsidiaries, (ii) any personal injury (including wrongful death) or property damage (real or personal) arising out of or related to such Hazardous Materials, (iii) any lawsuit or other proceeding brought or threatened, settlement reached or governmental order or decree relating to such Hazardous Materials, (iv) the cost of removal of all Hazardous Materials from all or any portion of any premises owned by Company or its Subsidiaries to the extent required by Hazardous Material Laws, (v) the taking of necessary precautions to protect against the release of Hazardous Materials on or affecting any premises owned by Company or any of its Subsidiaries, (vi) complying with all Hazardous Material Laws and/or (vii) any violation of Hazardous Material Laws, including without limitation, reasonable attorneys and consultants fees, investigation and laboratory fees, environmental studies required by Agent or any Bank in connection with the violation of Hazardous Material Laws (whether before or after the occurrence of any Default or Event of Default hereunder), court costs and litigation expenses; and, if so requested by Agent or any Bank, Company shall execute separate indemnities covering the foregoing matters. The obligations of Company under this Section 9.12 shall be in addition to any and all other obligations and liabilities the Company may have to Agent or any of the Banks at common law or pursuant to any other agreement. 9.13 Compliance with ERISA. Comply in all material respects with all requirements imposed by ERISA as presently in effect or hereafter promulgated or the Internal Revenue Code, including, but not limited to, the minimum funding requirements of any Pension Plan. 9.14 ERISA Notices. Promptly notify Agent, with a copy for each of the Banks upon the occurrence of any of the following events: (a) the termination of any Pension Plan pursuant to Subtitle C of Title IV of ERISA or otherwise; (b) the appointment of a trustee by a United States District Court to administer any Pension Plan; (c) the commencement by the PBGC, or any successor thereto, of any proceeding to terminate any Pension Plan; (d) the failure of the Company or any Subsidiary to make any payment in respect of any Pension Plan required under Section 412 of (e) the withdrawal of the Company or any Subsidiary from any Pension Plan, including, without limitation, any multiemployer plan; (f) the occurrence of a reportable event which is required to be reported by the Company under the regulations, within the meaning of Title IV of ERISA or a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code) which could have a material adverse effect on Company or any of its Subsidiaries. 9.15 Use of Proceeds. The initial Advances made to the Company shall be used by Company (i) to pay the costs and expenses of the transactions contemplated by this Agreement which are due and payable on the closing date, and (ii) for the payment of any monies due in connection with the termination of the existing credit facilities, dated November 20, 1992, with Comerica and NBD Bank; and the proceeds of any subsequent Advances made hereunder shall be used by Company solely for the general corporate purposes, including working capital purposes, of Company and its Subsidiaries. Company shall not use any portion of the proceeds of any such advances for the purpose of purchasing or carrying any "margin stock" (as defined in Regulation G of the Board of Governors of the Federal Reserve System) in any manner which violates the provisions of Regulation G, T, U or X of said Board of Governors or for any other purpose in violation of (x) any applicable statute or regulation or (y) the terms and conditions of this Agreement. 9.16 Notice of Mergers and Related Events. As soon as practical, and in any event within fifteen (15) days after execution of any preliminary agreement with respect thereto, notify Agent and the Banks of any planned or proposed merger or consolidation of Company or any of its Subsidiaries with or into any other entity and of any planned or proposed sale, lease, transfer or other disposition of all, substantially all, or any material part of the assets of Company or any of its Subsidiaries. Company covenants and agrees that, until the latter to occur of the Revolving Credit Maturity Date and the Term Loan Maturity Date and thereafter until final payment in full of the Indebtedness under this Agreement and the other Loan Documents, without the prior written consent of the Required Banks it will not, and will not permit its Subsidiaries to: 10.1 Business Purposes. Engage in any line of business in which it is not currently engaged if as a result thereof the business of the Company and its Subsidiaries, taken as a whole, would be substantially different from what it was as of the date of execution of this Agreement, as described in the Company's 1994 Form 10-K. 10.2 Mergers or Dispositions. Liquidate or dissolve, or consolidate or merge with any other Person, or permit any other Person to consolidate or merge with it, or sell, lease, transfer or otherwise dispose of any of its assets required for the conduct of its business to any other Person (other than in the ordinary course of business or in connection with Permitted Store Closures), except that, subject to the last paragraph of this Section: (a) any Subsidiary may consolidate with or merge with or into the Company or any Wholly-Owned Subsidiary (if the Company or such Wholly-Owned Subsidiary shall be the continuing or surviving (b) any Subsidiary may sell, lease, transfer or otherwise dispose of its assets in their entirety to the Company, and may (c) the Company may merge with any other corporation, provided that the Company shall be the continuing or surviving corporation; (d) any Subsidiary may merge with any other corporation, provided that the surviving corporation shall be a Wholly-Owned Subsidiary. No merger, consolidation, sale, lease, transfer or other disposition under any of paragraphs (a) through (c) inclusive, above of this Section 10.2 shall be permitted if at the time thereof, or immediately after giving effect thereto, any Default or Event of Default shall have occurred and be continuing. No sale, lease, transfer or other disposition permitted by this Section 10.2 shall in any event release the Company from any of its obligations and liabilities under this Agreement or any of the Notes. 10.3 Guaranties. Guarantee, endorse, or otherwise become liable for or upon the obligations of others (other than the Company and its Subsidiaries), except (a) by endorsement of cash items for deposit in the ordinary course of business or endorsement of negotiable instruments in the ordinary course of business for collection, (b) guaranties if the liability of Company and its Subsidiaries does not exceed One Million Dollars ($1,000,000) in the aggregate at any time outstanding and (c) the Guaranty. 10.4 Liens. Permit or suffer any Lien to exist on any of its properties, real, personal or mixed, tangible or intangible, whether now owned or hereafter acquired, except Permitted Encumbrances. 10.5 Acquisitions. Purchase or otherwise acquire or become obligated for the purchase of all or substantially all or any material portion of the assets of any Person, firm or corporation (except in the ordinary course of business), or any shares of stock (or other ownership interests) of any corporation, trusteeship or association, or any business or going concern, or in any other manner effectuate or attempt to effectuate an expansion of present business by acquisition of another business, except for Permitted Acquisitions. 10.6 Investments. Make or allow to remain outstanding any Investment in, or any loans or advances to, any Person, firm, corporation or other entity or association (except to the Company or any of its Subsidiaries and sales on open account and other transactions in the ordinary course of business), other than Investments to the extent not exceeding Five Million Dollars ($5,000,000) in the aggregate at any time outstanding, guarantees permitted by Section 10.3 and asset sales financed in whole or in part by the seller and permitted by Section 10.2. 10.7 Accounts Receivable. Sell or assign any account, note or trade acceptance receivable, except to Agent on behalf of the Banks. 10.8 Transactions with Affiliates. Enter into any transaction with any of its or their stockholders, officers or Affiliates (other than the Company and its Subsidiaries), except in the ordinary course of business and on terms not materially less favorable than would be usual and customary in similar transactions between Persons dealing at arm's length. 10.9 No Further Negative Pledges. Enter into or become subject after the date of this Agreement to any agreement (other than this Agreement or the Loan Documents) (i) prohibiting the guaranteeing by the Company or any Subsidiary of any obligations, (ii) prohibiting the creation or assumption of any lien or encumbrance upon the properties or assets of the Company or any Subsidiary, whether now owned or hereafter acquired, or (iii) requiring an obligation to become secured (or further secured) if another obligation is secured or further secured. 10.10 Prepayment of Indebtedness. Make any payment with respect to the Subordinated Debt except Permitted Subordinated Debt Payments or make any payment or prepayment of principal of, or make any payment of interest on, any Subordinated Debt which would violate the subordination provisions applicable to such Subordinated Debt or redeem, purchase or defease any Subordinated Debt. 10.11 Amendment of Subordinated Debt. Amend, modify or otherwise alter (or suffer to be amended, modified or altered) any of the material terms and conditions of any Subordinated Debt, or waive (or permit to be waived) any provision thereof in any material respect, without the prior written approval of the Agent and the Required Banks. For purposes of this Section, any change in the repayment terms which would result in the advancement of the scheduled date for payment of any principal of the Subordinated Debt, any change in the definition of "senior indebtedness", any change in the default provisions thereof and any other change in the subordination provisions thereof which change shall be adverse to the interests of the Banks (as determined by the Banks, in their reasonable judgment, after notice of any proposed change), shall, without reducing the scope of this Section 10.11, be deemed to be material. 11.1 Events of Default. The occurrence of any of the following events shall constitute an Event of Default hereunder: (a) non-payment when due of (i) the principal or interest under any of the Notes issued hereunder in accordance with the terms thereof, (ii) any reimbursement obligation under Section 3.6 hereof or (iii) any Fees, and in the case of interest payments and Fees, continuance thereof for ten (10) days; (b) non-payment of any money by Company under this Agreement or by Company or any Guarantor under any of the Loan Documents, other than as set forth in subsection (a), above within ten (10) days after notice from Agent that the same is due and payable; (c) default in the observance or performance of any of the conditions, covenants or agreements of Company set forth in Sections 2.7, 9.3(a), 9.3(d), 9.3(g), 9.4, 9.5, 9.6, 9.8, 9.14, 9.16, or 10.4 to the extent Company or any Subsidiary knowingly and voluntarily creates or permits to exist any lien or encumbrance not permitted under this Agreement, or any of the other Sections in Section 10; (d) default in the observance or performance of any of the conditions, covenants or agreements of Company set forth in Sections 9.3(b), 9.3(c), 9.3(e), 9.3(f), or 9.3(h), and continuation thereof for fifteen calendar days after notice thereof to Company by Agent; or default in the observance or performance of any of the other conditions, covenants or agreements of Company set forth in this Agreement by Company and continuance thereof for a period of thirty (30) consecutive days after notice thereof to Company by Agent; (e) any representation or warranty made by Company or any Guarantor herein or in any instrument submitted pursuant hereto proves untrue or misleading in any material adverse respect when (f) default in the observance or performance of or failure to comply with any of the conditions, covenants or agreements of Company or any Guarantor set forth in any of the other Loan Documents, and the continuance thereof for a period of thirty (30) consecutive days after notice thereof to Company by Agent; (g) default in the payment of or failure to comply with the terms of any other obligation of Company or any of its Subsidiaries for Funded Debt of Company or any of its Subsidiaries in excess of Ten Million Dollars ($10,000,000) in the aggregate which with the giving of notice or passage of time or both would permit the holder or holders thereto to accelerate such Funded Debt or terminate its (h) the rendering of any judgment(s) for the payment of money in excess of the sum of One Hundred Thousand Dollars ($100,000) individually or in the aggregate against Company or any of its Subsidiaries, and such judgments shall remain unpaid, unvacated, unbonded and unstayed by appeal or otherwise for a period of sixty (60) consecutive days, except as covered by adequate insurance with a reputable carrier or an action is pending in which an active defense is being made with respect thereto; (i) the occurrence of a "reportable event", as defined in ERISA, which is determined to constitute grounds for termination by the Pension Benefit Guaranty Corporation of any Pension Plan maintained or contributed to by or on behalf of the Company or any of its Subsidiaries for the benefit of any of its employees or for the appointment by the appropriate United States District Court of a trustee to administer such Pension Plan and such reportable event is not corrected and such determination is not revoked within forty-five (45) days after notice thereof has been given to the plan administrator of such Pension Plan (without limiting any of Agent's or any Bank's other rights or remedies hereunder), or the institution of proceedings by the Pension Benefit Guaranty Corporation to terminate any such Pension Plan or to appoint a trustee by the appropriate United States District Court to administer any such (j) the Company or any of its Subsidiaries shall be dissolved or liquidated (or any judgment, order or decree therefor shall be entered) or; if a creditors' committee shall have been appointed by the Company or a court for the business of Company or any of its Subsidiaries; or if Company or any of its Subsidiaries shall have made a general assignment for the benefit of creditors or shall have been adjudicated bankrupt, or shall have filed a voluntary petition in bankruptcy or for reorganization or to effect a plan or arrangement with creditors or shall fail to pay its debts generally as such debts become due in the ordinary course of business (except as contested in good faith and for which adequate reserves are made in such party's financial statements to the extent required by GAAP); or shall file an answer to a creditor's petition or other petition filed against it, admitting the material allegations thereof for an adjudication in bankruptcy or for reorganization; or shall have applied for or permitted the appointment of a receiver or trustee or custodian for any of its property or assets; or such receiver, trustee or custodian shall have been appointed for any of its property or assets (otherwise than upon application or consent of Company or any of its Subsidiaries) and such receiver, trustee or custodian so appointed shall not have been discharged within forty-five (45) days after the date of his appointment, or if an order shall be entered, and shall not be dismissed or stayed within forty-five (45) days of its entry, approving any petition for reorganization of Company or any of its Subsidiaries; or the Company or any of its Subsidiaries shall take any action (corporate or other) authorizing or in furtherance any of the actions described above in (k) the revocation of the Guaranty by either Guarantor; or (l) if any one Person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) acquires or attains beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of greater than fifty percent (50%) of the voting power necessary for the election of directors of the Board of Directors of Company (other than current Affiliates of the 11.2 Exercise of Remedies. If an Event of Default has occurred and is continuing hereunder: (v) the Agent shall, upon being directed to do so by the Required Banks, declare the Revolving Credit Aggregate Commitment, terminated; (w) the Agent shall, upon being directed to do so by the Required Banks, declare the entire unpaid principal Indebtedness, including the Notes, immediately due and payable, without presentment, notice or demand, all of which are hereby expressly waived by Company; (x) upon the occurrence of any Event of Default specified in subsection 11.1(j), above, and notwithstanding the lack of any declaration by Agent under preceding clause (w), the entire unpaid principal Indebtedness, including the Notes, shall become automatically and immediately due and payable, and the Revolving Credit Aggregate Commitment shall be automatically and immediately terminated, (y) the Agent shall, upon being directed to do so by the Required Banks, demand immediate delivery of cash collateral, and the Company agrees to deliver such cash collateral on demand, in an amount equal to the maximum amount that may be available to be drawn at any time prior to the stated expiring date of all outstanding Letters of Credit, and (z) the Agent shall, if directed to do so by the Required Banks or the Banks, as applicable (subject to the terms hereof), exercise any remedy permitted by this Agreement, the Loan Documents or law. 11.3 Rights Cumulative. No delay or failure of Agent and/or Banks in exercising any right, power or privilege hereunder shall affect such right, power or privilege, nor shall any single or partial exercise thereof preclude any other or further exercise thereof, or the exercise of any other power, right or privilege. The rights of Agent and Banks under this Agreement are cumulative and not exclusive of any right or remedies which Banks would otherwise have. 11.4 Waiver by Company of Certain Laws. To the extent permitted by applicable law, Company hereby agrees to waive, and does hereby absolutely and irrevocably waive and relinquish the benefit and advantage of any valuation, stay, appraisement, extension or redemption laws now existing or which may hereafter exist, which, but for this provision, might be applicable to any sale made under the judgment, order or decree of any court, on any claim for interest on the Notes, or any security interest or mortgage contemplated by or granted under or in connection with this Agreement. These waivers have been voluntarily given, with full knowledge of the consequences thereof. 11.5 Waiver of Defaults. No Event of Default shall be waived by the Banks except in a writing signed by an officer of the Agent in accordance with Section 15.11 hereof. No single or partial exercise of any right, power or privilege hereunder, nor any delay in the exercise thereof, shall preclude other or further exercise of their rights by Agent or the Banks. No waiver of any Event of Default shall extend to any other or further Event of Default. No forbearance on the part of the Agent or the Banks in enforcing any of their rights shall constitute a waiver of any of their rights. Company expressly agrees that this Section may not be waived or modified by the Banks or Agent by course of performance, estoppel or otherwise. Upon the occurrence and during the continuance of any Event of Default, each Bank may at any time and from time to time, without notice to the Company (any requirement for such notice being expressly waived by the Company) set off and apply against any and all of the obligations of the Company now or hereafter existing under this Agreement, whether owing to such Bank or any other Bank or the Agent, any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Company and any property of the Company from time to time in possession of such Bank, irrespective of whether or not such deposits held or indebtedness owing by such Bank may be contingent and unmatured and regardless of whether any Collateral then held by Agent or any Bank is adequate to cover the Indebtedness. Promptly following any such setoff, such Bank shall give written notice to Agent and to Company of the occurrence thereof. The Company hereby grants to the Banks and the Agent a lien on and security interest in all such deposits, indebtedness and property as collateral security for the payment and performance of all of the obligations of the Company under this Agreement. The rights of each Bank under this Section 11.6 are in addition to the other rights and remedies (including, without limitation, other rights of setoff) which such Bank may have. 12. PAYMENTS, RECOVERIES AND COLLECTIONS. (a) All payments by Company of principal of, or interest on, the Notes, or of Fees, shall be made without setoff or counterclaim on the date specified for payment under this Agreement not later than 11:00 a.m. (Detroit time) in immediately available funds to Agent, for the ratable account of the Banks, at Agent's office located at One Detroit Center, Detroit, Michigan 48226-3289, (care of Agent's Eurocurrency Lending Office, for Eurocurrency-based Advances). Upon receipt by the Agent of each such payment, the Agent shall make prompt payment in like funds received to each Bank as appropriate, or, in respect of Eurocurrency-based Advances, to such Bank's Eurocurrency Lending Office. Company shall have no liability to any of the Banks in the event of failure by Agent to remit to the Banks payments received from Company hereunder. (b) Unless the Agent shall have been notified by Company prior to the date on which any payment to be made by Company is due that Company does not intend to remit such payment, the Agent may, in its sole discretion and without obligation to do so, assume that the Company has remitted such payment when so due and the Agent may, in reliance upon such assumption, make available to each Bank on such payment date an amount equal to such Bank's share of such assumed payment. If Company has not in fact remitted such payment to the Agent each Bank shall forthwith on demand repay to the Agent the amount of such assumed payment made available or transferred to such Bank, together with the interest thereon, in respect of each day from and including the date such amount was made available by the Agent to such Bank to the date such amount is repaid to the Agent at a rate per annum equal to (i) for Prime-based Advances, the Federal Funds Effective Rate (daily average), as the same may vary from time to time, and (ii) with respect to Eurocurrency-based Advances, Agent's aggregate marginal cost (including the cost of maintaining any required reserves or deposit insurance and of any fees, penalties, overdraft charges or other costs or expenses incurred by Agent) of carrying such amount. (c) Subject to the definition of Interest Period, whenever any payment to be made hereunder shall otherwise be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing interest, if any, in connection with such payment. (d) All payments to be made by the Company under this Agreement or any of the Notes (including without limitation payments under the Swing Line Note) shall be made without set-off or counterclaim, as aforesaid, and without deduction for or on account of any present or future withholding or other taxes of any nature imposed by any governmental authority or of any political subdivision thereof or any federation or organization of which such governmental authority may at the time of payment be a member, unless Company is compelled by law to make payment subject to such tax. In such event, Company shall: (i) pay to the Agent for Agent's own account and/or, as the case may be, for the account of the Banks (and, in the case of Swing Line Advances, pay to the Swing Line Bank which funded such Advances) such additional amounts as may be necessary to ensure that the Agent and/or such Bank or Banks receive a net amount equal to the full amount which would have been receivable had payment not been made subject to such tax; and (ii) remit such tax to the relevant taxing authorities according to applicable law, and send to the Agent or the applicable Bank (including the Swing Line Bank) or Banks, as the case may be, such certificates or certified copy receipts as the Agent or such Bank or Banks shall reasonably require as proof of the payment by the Company, of any such taxes payable by the Company. As used herein, the terms "tax", "taxes" and "taxation" include all existing taxes, levies, imposts, duties, charges, fees, deductions and withholdings and any restrictions or conditions resulting in a charge together with interest thereon and fines and penalties with respect thereto which may be imposed by reason of any violation or default by Company with respect to the law regarding such tax, assessed as a result of or in connection with the transactions hereunder, or the payment and or receipt of funds hereunder, or the payment or delivery of funds into or out of any jurisdiction other than the United States (whether assessed against Company, Agent or any of the Banks). 12.2 Application of Proceeds. Notwithstanding anything to the contrary in this Agreement, after an Event of Default, the proceeds of any offsets or voluntary payments by Company or any Guarantor or others and any other sums received or collected in respect of the Indebtedness, shall be applied, first, to the Notes on a pro rata basis (or in such order and manner as determined by the Required Banks; subject, however, to the applicable Percentages of the loans held by each of the Banks), next, to any other Indebtedness on a pro rata basis, and then, if there is any excess, to Company. The application of such proceeds and other sums to the Revolving Credit Notes shall be based on each Bank's Percentage of the aggregate of the loans. 12.3 Pro-rata Recovery. If any Bank shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise) on account of principal of, or interest on, any of the Notes in excess of its pro rata share of payments then or thereafter obtained by all Banks upon principal of and interest on all Notes, such Bank shall purchase from the other Banks such participations in the Notes held by them as shall be necessary to cause such purchasing Bank to share the excess payment or other recovery ratably in accordance with the Percentage with each of them; provided, however, that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing holder, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 12.4 Deposits and Accounts. In addition to and not in limitation of any rights of any Bank or other holder of any of the Notes under applicable law, each Bank and each other such holder shall, upon acceleration of the Indebtedness under the Notes and without notice or demand of any kind, have the right to appropriate and apply to the payment of the Notes owing to it any and all balances, credits, deposits, accounts or moneys of Company then or thereafter with such Bank or other holder; provided, however, that any such amount so applied by any Bank or other holder on any of the Notes owing to it shall be subject to the provisions of Section 12.3, hereof. 13. CHANGES IN LAW OR CIRCUMSTANCES; INCREASED COSTS. 13.1 Reimbursement of Prepayment Costs. If Company makes any payment of principal with respect to any Eurocurrency-based Advance or Quoted Rate Advance on any day other than the last day of the Interest Period applicable thereto (whether voluntarily, by acceleration, or otherwise), or converts or refunds (attempts to convert or refund) any such Advance on any day other than the last day of the applicable Interest Period, or if Company fails to borrow, or refund or convert to, any Eurocurrency-based Advance or Quoted Rate Advance after notice has been given by Company to Agent in accordance with the terms hereof requesting such Advance, Company shall reimburse Agent and Banks, as the case may be on demand for any resulting loss, cost or expense incurred by Agent and Banks, as the case may be as a result thereof, including, without limitation, any such loss, cost or expense incurred in obtaining, liquidating, employing or redeploying deposits from third parties, whether or not Agent and Banks, as the case may be shall have funded or committed to fund such Advance. Such amount payable by Company to Agent and Banks, as the case may be may include, without limitation, an amount equal to the excess, if any, of (a) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, refunded or converted, for the period from the date of such prepayment or of such failure to borrow, refund or convert, through the last day of the relevant Interest Period, at the applicable rate of interest for said Advance(s) provided under this Agreement, over (b) the amount of interest (as reasonably determined by Agent and Banks, as the case may be) which would have accrued to Agent and Banks, as the case may be on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. Calculation of any amounts payable to any Bank under this paragraph shall be made as though such Bank shall have actually funded or committed to fund the relevant Advance through the purchase of an underlying deposit in an amount equal to the amount of such Advance and having a maturity comparable to the relevant Interest Period; provided, however, that any Bank may fund any Eurocurrency-based Advance or Quoted Rate Advance, as the case may be in any manner it deems fit and the foregoing assumptions shall be utilized only for the purpose of the calculation of amounts payable under this paragraph. Agent and Banks shall deliver to Company a certificate setting forth the basis for determining such losses, costs and expenses, which certificate shall be conclusively presumed correct, absent manifest error. 13.2 Agent's Eurocurrency Lending Office. For any Advance to which the Eurocurrency-based Rate is applicable, if Agent shall designate a Eurocurrency Lending Office which maintains books separate from those of the rest of Agent, Agent shall have the option of maintaining and carrying the relevant Advance on the books of such Eurocurrency Lending Office. 13.3 Circumstances Affecting Eurocurrency-based Rate Availability. If with respect to any Interest Period, Agent or the Banks (after consultation with Agent) shall determine that, by reason of circumstances affecting the interbank markets generally, deposits in eurodollars in the applicable amounts are not being offered to the Agent for such Interest Period, then Agent shall forthwith give notice thereof to the Company. Thereafter, until Agent notifies Company that such circumstances no longer exist, the obligation of Banks to make Eurocurrency-based Advances, and the right of Company to convert an Advance to or refund an Advance as a Eurocurrency-based Advance shall be suspended, and the Company shall repay in full (or cause to be repaid in full) the then outstanding principal amount of each such Eurocurrency-based Advance covered hereby together with accrued interest thereon, any amounts payable under Section 13.1 hereof, and all other amounts payable hereunder on the last day of the then current Interest Period applicable to such Advance. Upon the date for repayment as aforesaid and unless Company notifies Agent to the contrary within two (2) Business Days after receiving a notice from Agent pursuant to this Section or the time period provided in Section 2.3, if later, such outstanding principal amount shall be converted to a Prime-based Advance as of the last day of such Interest Period. 13.4 Laws Affecting Eurocurrency-based Advance Availability. In the event that, after the date of this Agreement, the introduction of, or change in, any applicable law, rule or regulation (whether domestic or foreign) or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by the Agent or any of the Banks (or any of their respective Eurocurrency Lending Offices) with any request or directive (whether or not having the force of law) of any such authority, shall make it unlawful or impossible for any of the Banks (or any of their respective Eurocurrency Lending Offices) to honor its obligations hereunder to make or maintain any Advance with interest at the Eurocurrency-based Rate, Agent shall so notify Company and the right of Company to convert an Advance or refund an Advance as a Eurocurrency-based Advance, shall be suspended and thereafter Company may select as Applicable Interest Rates only those which remain available and which are permitted to be selected hereunder, and if any of the Banks may not lawfully continue to maintain an Advance to the end of the then current Interest Period applicable thereto as a Eurocurrency-based Advance, Company shall immediately prepay such Advance, together with interest to the date of payment, and any amounts payable under Sections 13.1 or 13.6 with respect to such prepayment and the applicable Advance shall immediately be converted to a Prime-based Advance and the Prime-based Rate shall be applicable thereto. 13.5 Increased Cost of Eurocurrency-based Advances. In the event that any applicable law, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not currently applicable to any Bank or the Agent or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Agent or any of the Banks with any request or directive (whether or not having the force of law) made by any such authority, central bank or comparable agency after the date hereof: (a) shall change the basis of taxation of payments to the Agent or any of the Banks of the principal of or interest on any Advance or any Note or any other amounts due under this Agreement in respect thereof (except for taxes on the overall net income or revenues of the Agent or of any of the Banks imposed by the United States of America or the jurisdiction, or any political subdivision or taxing authority of any such jurisdiction, in which such Bank's or Agent's principal executive office is located); or (b) shall impose, modify or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by the Agent or any of the Banks or shall impose on the Agent or any of the Banks or the interbank markets any other condition affecting any Advance or any of the Notes; and the result of any of the foregoing is to increase the costs to the Agent or any of the Banks of making, funding or maintaining any part of the Indebtedness hereunder as a Eurocurrency-based Advance or to reduce the amount of any sum received or receivable by the Agent or any of the Banks under this Agreement or under the Notes in respect of a Eurocurrency-based Advance then Agent or Bank, as the case may be, shall promptly notify the Company of such fact and demand compensation therefor and, within fifteen (15) days after such notice, Company agrees to pay to Agent or such Bank such additional amount or amounts as will compensate Agent or such Bank or Banks for such increased cost or reduction to the extent such Bank or the Agent is not compensated therefor in the computation of the interest rate applicable to such Indebtedness. A certificate of Agent or such Bank setting forth the basis for determining such additional amount or amounts necessary to compensate such Bank or Banks shall be conclusively presumed to be correct save for manifest error. 13.6 Indemnity. The Company will indemnify Agent and each of the Banks against any loss or expense which may arise or be attributable to the Agent's and each Bank's obtaining, liquidating or employing deposits or other funds acquired to effect, fund or maintain Eurocurrency-based Advances (a) as a consequence of any failure by the Company to make any payment when due of any amount due hereunder in connection with a Eurocurrency-based Advance, (b) due to any failure of the Company to borrow, refund or convert on a date specified therefor in a Request for Revolving Credit Advance for Eurocurrency-based Advances or (c) due to any payment or prepayment or conversion of any Eurocurrency-based Advance on a date other than the last day of the Interest Period for such Revolving Credit Advance, whether required by another provision of this Agreement or otherwise. The Agent's and each Bank's (as applicable) calculations of any such loss or expense shall be furnished to the Company and shall be conclusive, absent manifest error. 13.7 Other Increased Costs. In the event that after the date hereof the adoption of or any change in any applicable law, treaty, rule or regulation (whether domestic or foreign) now or hereafter in effect and whether or not presently applicable to any Bank or Agent, or any interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof, or compliance by any Bank or Agent with any guideline, request or directive of any such authority (whether or not having the force of law), including any risk based capital guidelines, affects or would affect the amount of capital required or expected to be maintained by such Bank or Agent (or any corporation controlling such Bank or Agent) and such Bank or Agent, as the case may be, determines that the amount of such capital is increased by or based upon the existence of such Bank's or Agent's obligations or Advances hereunder and such increase has the effect of reducing the rate of return on such Bank's or Agent's (or such controlling corporation's) capital as a consequence of such obligations or Advances hereunder to a level below that which such Bank or Agent (or such controlling corporation) could have achieved but for such circumstances (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank or Agent to be material, then the Company shall pay to such Bank or Agent, as the case may be, from time to time, upon request by such Bank or Agent, additional amounts sufficient to compensate such Bank or Agent (or such controlling corporation) for any increase in the amount of capital and reduced rate of return which such Bank or Agent reasonably determines to be allocable to the existence of such Bank's or Agent's obligations or Advances hereunder. A statement as to the amount of such compensation, prepared in good faith and in reasonable detail by such Bank or Agent, as the case may be, shall be submitted by such Bank or by Agent to the Company, reasonably promptly after becoming aware of any event described in this Section 13.7 and shall be conclusive, absent manifest error in computation. Notwithstanding the foregoing contained in this Section 13.7, the Agent, a Bank or such controlling corporation may not make a claim for additional amounts from Company pursuant to this Section 13.7 unless not less than 90 days before the commencement of the time period for which it claims additional amounts (which time period shall commence on a Settlement Date), the Agent, such Bank or such controlling corporation gives Company a written notice ("Potential Additional Amount Notice") stating that it may assert a claim for additional amounts pursuant to Section 13.7 in the future. 14.1 Appointment of Agent. Each Bank and the holder of each Note irrevocably appoints and authorizes the Agent to act on behalf of such Bank or holder under this Agreement and the Loan Documents and to exercise such powers hereunder and thereunder as are specifically delegated to Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto, including without limitation the power to execute or authorize the execution of financing or similar statements or notices, and other documents. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Company. Each Bank agrees (which agreement shall survive any termination of this Agreement) to reimburse Agent for all reasonable out-of-pocket expenses (including house and outside attorneys' fees and disbursements) incurred by Agent hereunder or in connection herewith or with an Event of Default or in enforcing the obligations of Company under this Agreement or the Loan Documents or any other instrument executed pursuant hereto, and for which Agent is not reimbursed by Company, pro rata according to such Bank's Percentage. Agent shall not be required to take any action under the Loan Documents, or to prosecute or defend any suit in respect of the Loan Documents, unless indemnified to its satisfaction by the Banks against loss, costs, liability and expense. If any indemnity furnished to Agent shall become impaired, it may call for additional indemnity and cease to do the acts indemnified against until such additional indemnity is given. 14.2 Deposit Account with Agent. Company hereby authorizes Agent, in Agent's sole discretion, to charge its general deposit account(s), if any, maintained with Agent for the amount of any principal, interest, or other amounts or costs due under this Agreement when the same become due and payable under the terms of this Agreement or the Notes. 14.3 Scope of Agent's Duties. The Agent shall have no duties or responsibilities except those expressly set forth herein, and shall not, by reason of this Agreement or otherwise, have a fiduciary relationship with any Bank (and no implied covenants or other obligations shall be read into this Agreement against the Agent). Neither Agent nor any of its directors, officers, employees or agents shall be liable to any Bank for any action taken or omitted to be taken by it under this Agreement or any document executed pursuant hereto, or in connection herewith or therewith with the consent or at the request of the Required Banks or in the absence of their own gross negligence or wilful misconduct, nor be responsible for or have any duties to ascertain, inquire into or verify (a) any recitals or warranties herein or therein, (b) the effectiveness, enforceability, validity or due execution of this Agreement or any document executed pursuant hereto or any security thereunder, (c) the performance by Company of its obligations hereunder or thereunder, or (d) the satisfaction of any condition hereunder or thereunder, including without limitation the making of any Advance or the issuances of any Letter of Credit. Agent shall be entitled to rely upon any certificate, notice, document or other communication (including any cable, telegraph, telex, facsimile transmission or oral communication) believed by it to be genuine and correct and to have been sent or given by or on behalf of a proper person. Agent may treat the payee of any Note as the holder thereof. Agent may employ agents and may consult with legal counsel (who may be counsel for Company), independent public accountants and other experts selected by it and shall not be liable to the Banks (except as to money or property received by them or their authorized agents), for the negligence or misconduct of any such agent selected by it with reasonable care or for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. 14.4 Successor Agent. Agent may resign as such at any time upon at least 30 days prior notice to Company and all Banks. If Agent at any time shall resign or if the office of Agent shall become vacant for any other reason, Required Banks shall, by written instrument, appoint successor agent(s) satisfactory to such Required Banks, and, so long as no Default or Event of Default has occurred and is continuing, to Company. Such successor agent shall thereupon become the Agent hereunder, as applicable, and shall be entitled to receive from the prior Agent such documents of transfer and assignment as such successor Agent may reasonably request. Any such successor Agent shall be a commercial bank organized under the laws of the United States or any state thereof and shall have a combined capital and surplus of at least $500,000,000. If a successor is not so appointed or does not accept such appointment before the resigning Agent's resignation becomes effective, the resigning Agent may appoint a temporary successor to act until such appointment by the Required Banks is made and accepted or if no such temporary successor is appointed as provided above by the resigning Agent, the Banks shall thereafter perform all of the duties of the resigning Agent hereunder until such appointment by the Required Banks is made and accepted. Such successor Agent shall succeed to all of the rights and obligations of the resigning Agent as if originally named. The resigning Agent shall duly assign, transfer and deliver to such successor Agent all moneys at the time held by the resigning Agent hereunder after deducting therefrom its expenses for which it is entitled to be reimbursed. Upon such succession of any such successor Agent, the provisions of this Article 14 shall continue in effect for the benefit of the resigning Agent in respect of any actions taken or omitted to be taken by it while it was acting as Agent. 14.5 Loans by Agent. Comerica and its successors and assigns, in its capacity as a Bank hereunder, shall have the same rights and powers hereunder as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent. Comerica and its affiliates may (without having to account therefor to any Bank) accept deposits from, lend money to, and generally engage in any kind of banking, trust, financial advisory or other business with Company (or the shareholders of Company) as if it were not acting as Agent hereunder, and may accept fees and other consideration therefor without having to account for the same to the Banks. 14.6 Credit Decisions. Each Bank acknowledges that it has, independently of Agent and each other Bank and based on the financial statements of Company and such other documents, information and investigations as it has deemed appropriate, made its own credit decision to extend credit hereunder from time to time. Each Bank also acknowledges that it will, independently of Agent and each other Bank and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any document executed pursuant hereto. 14.7 Agent's Fees. Company shall pay to Agent the annual agency fee and such other fees and charges in the amounts and at the times set forth in the letter agreement between Company and Agent dated December 21, 1995. The Agent's Fees described in this Section 14.7 shall not be refundable under any circumstances. 14.8 Authority of Agent to Enforce Notes and This Agreement. Each Bank, subject to the terms and conditions of this Agreement, authorizes the Agent with full power and authority as attorney-in-fact to institute and maintain actions, suits or proceedings for the collection and enforcement of the Notes and to file such proofs of debt or other documents as may be necessary to have the claims of the Banks allowed in any proceeding relative to Company, or any of its Subsidiaries, or their respective creditors or affecting their respective properties, and to take such other actions which Agent considers to be necessary or desirable for the protection, collection and enforcement of the Notes, this Agreement or the Loan Documents. 14.9 Indemnification. The Banks agree to indemnify the Agent (to the extent not reimbursed by Company, but without limiting any obligation of Company to make such reimbursement), ratably according to their respective Percentages, from and against any and all claims, damages, losses, liabilities, costs or expenses of any kind or nature whatsoever (including, without limitation, fees and disbursements of counsel) which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement, any of the Loan Documents or the transactions contemplated hereby or any action taken or omitted by the Agent under this Agreement or any of the Loan Documents; provided, however, that no Bank shall be liable for any portion of such claims, damages, losses, liabilities, costs or expenses resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including, without limitation, fees and expenses of counsel) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement or any of the Loan Documents, to the extent that the Agent is not reimbursed for such expenses by Company, but without limiting the obligation of Company to make such reimbursement. Each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any amounts owing to the Agent by the Banks pursuant to this Section. If the indemnity furnished to the Agent under this Section shall, in the judgment of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity from the Banks and cease, or not commence, to take any action until such additional indemnity is furnished. 14.10 Knowledge of Default. It is expressly understood and agreed that the Agent shall be entitled to assume that no Event of Default has occurred and is continuing, unless the officers of the Agent immediately responsible for matters concerning this Agreement shall have been notified in a writing specifying such Event of Default and stating that such notice is a "notice of default" by a Bank or by Company. Upon receiving such a notice, the Agent shall promptly notify each Bank of such Event of Default and provide each Bank with a copy of such notice. Agent shall also furnish the Banks, promptly upon receipt, with copies of all other notices or other information required to be provided by Company hereunder. 14.11 Agent's Authorization; Action by Banks. Except as otherwise expressly provided herein, whenever the Agent is authorized and empowered hereunder on behalf of the Banks to give any approval or consent, or to make any request, or to take any other action on behalf of the Banks (including without limitation the exercise of any right or remedy hereunder or under the other Loan Documents), the Agent shall be required to give such approval or consent, or to make such request or to take such other action only when so requested in writing by the Required Banks or the Banks, as applicable hereunder. Action that may be taken by Required Banks or all of the Banks, as the case may be (as provided for hereunder) may be taken (i) pursuant to a vote at a meeting (which may be held by telephone conference call) as to which all of the Banks have been given reasonable advance notice, or (ii) pursuant to the written consent of the requisite Percentages of the Banks as required hereunder, provided that all of the Banks are given reasonable advance notice of the requests for such consent. 14.12 Enforcement Actions by the Agent. Except as otherwise expressly provided under this Agreement or in any of the other Loan Documents and subject to the terms hereof, Agent will take such action, assert such rights and pursue such remedies under this Agreement and the other Loan Documents as the Required Banks or all of the Banks, as the case may be (as provided for hereunder), shall direct; provided, however, that the Agent shall not be required to act or omit to act if, in the judgment of the Agent, such action or omission may expose the Agent to personal liability or is contrary to this Agreement, any of the Loan Documents or applicable law. Except as expressly provided above or elsewhere in this Agreement or the other Loan Documents, no Bank (other than the Agent, acting in its capacity as agent) shall be entitled to take any enforcement action of any kind under any of the Loan Documents. 15.1 Accounting Principles. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, it shall be done, unless otherwise specified herein, in accordance with GAAP. Furthermore, all financial statements (other than projections) required to be delivered hereunder shall be prepared in accordance with GAAP (subject in the case of interim statements, to year end audit adjustments, the lack of complete footnotes and other normal deviations from GAAP for interim statements). 15.2 Consent to Jurisdiction. Company, Agent and Banks hereby irrevocably submit to the non-exclusive jurisdiction of any United States Federal or Michigan state court sitting in Detroit in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents and Company and Banks hereby irrevocably agree that all claims in respect of such action or proceeding may be heard and determined in any such United States Federal or Michigan state court. Company, Agent and Banks irrevocably consent to the service of any and all process in any such action or proceeding brought in any court in or of the State of Michigan by the delivery of copies of such process to Company, Agent or any of the Banks, as the case may be, at its address specified on the signature page hereto or by certified mail directed to such address or such other address as may be designated by Company, Agent or any of the Banks, as the case may be, in a notice to the other parties that complies as to delivery with the terms of Section 15.6. Nothing in this Section shall affect the right of the Company, the Banks and the Agent to serve process in any other manner permitted by law or limit the right of the Company, the Banks or the Agent (or any of them) to bring any such action or proceeding against Company or any Guarantor, Agent or any of the Banks, as the case may be, or any of its or their property in the courts of any other jurisdiction. Company, Agent and Banks hereby irrevocably waive any objection to the laying of venue of any such suit or proceeding in the above described courts. 15.3 Law of Michigan. This Agreement and the Notes have been delivered at Detroit, Michigan, and shall be governed by and construed and enforced in accordance with the laws of the State of Michigan, except to the extent that the Uniform Commercial Code, other personal property law or real property law of a jurisdiction where Collateral is located is applicable and except as and to the extent expressed to the contrary in any of the Loan Documents. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 15.4 Interest. In the event the obligation of Company to pay interest on the principal balance of the Notes is or becomes in excess of the maximum interest rate which Company is permitted by law to contract or agree to pay, giving due consideration to the execution date of this Agreement, then, in that event, the rate of interest applicable with respect to such Bank's Percentage shall be deemed to be immediately reduced to such maximum rate and all previous payments in excess of the maximum rate shall be deemed to have been payments in reduction of principal and not of interest. 15.5 Closing Costs and Other Costs. Company agrees to pay, or reimburse the Agent for payment of, on demand (a) all reasonable closing costs and expenses, including, by way of description and not limitation, outside attorney fees and advances, appraisal and accounting fees, and lien search fees incurred by Agent in connection with the commitment, consummation and closing of the loans contemplated hereby or any amendment, refinancing or restructuring of the credit arrangements provided under this Agreement, (b) all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing or recording of this Agreement and the Loan Documents and the consummation of the transactions contemplated hereby, and any and all liabilities with respect to or resulting from any delay in paying or omitting to pay such taxes or fees, (c) all reasonable costs and expenses of the Agent or any of the Banks (including reasonable fees and expenses of counsel and whether incurred through negotiations, legal proceedings or otherwise) in connection with any Default or Event of Default or the amendment, waiver or enforcement of this Agreement, or the Loan Documents or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement, (d) all reasonable costs and expenses of the Agent or any of the Banks (including reasonable fees and expenses of counsel) in connection with any action or proceeding relating to a court order, injunction or other process or decree restraining or seeking to restrain the Agent or any of the Bank from paying any amount under, or otherwise relating in any way to, any Letter of Credit and any and all reasonable costs and expenses which any of them may incur relative to any payment under any Letter of Credit, except to the extent arising as a result of the Agent's gross negligence or willful misconduct. All of said amounts required to be paid by Company, may, at Agent's option, be charged by Agent as a Prime-based Advance against the Indebtedness. 15.6 Notices. Except as expressly provided otherwise in this Agreement, all notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing and shall be given by personal delivery, by mail, by reputable overnight courier, by telex or by facsimile and addressed or delivered to it at its address set forth on the signature pages hereof or at such other address as may be designated by such party in a notice to the other parties that complies as to delivery with the terms of this Section 15.6. Any notice, if personally delivered or if mailed and properly addressed with postage prepaid and sent by registered or certified mail, shall be deemed given when received or when delivery is refused; any notice, if given to a reputable overnight courier and properly addressed, shall be deemed given 2 Business Days after the date on which it was sent, unless it is actually received sooner by the named addressee; and any notice, if transmitted by telex or facsimile, shall be deemed given when received (answerback confirmed in the case of telexes and receipt confirmed in the case of telecopies). Agent may, but shall not be required to, take any action on the basis of any notice given to it by telephone, but the giver of any such notice shall promptly confirm such notice in writing or by telex or facsimile, and such notice will not be deemed to have been received until such confirmation is deemed received in accordance with the provisions of this Section set forth above. If such telephonic notice conflicts with any such confirmation, the terms of such telephonic notice shall control. 15.7 Further Action. Company, from time to time, upon written request of Agent will make, execute, acknowledge and deliver or cause to be made, executed, acknowledged and delivered, all such further and additional instruments, and take all such further action as may reasonably be required to carry out the intent and purpose of this Agreement or the Loan Documents, and to provide for Advances under and payment of the Notes, according to the intent and purpose herein and therein expressed. 15.8 Successors and Assigns; Participations; Assignments. (a) This Agreement shall be binding upon and shall inure to the benefit of Company, the Agent and the Banks, and their respective successors and assigns. (b) The foregoing shall not authorize any assignment by Company of its rights or duties hereunder, and no such assignment shall be made (or effective) without the prior written approval of the Banks. (c) Each of the Banks may at any time and from time to time, subject to the terms and conditions hereof, grant participations (but not assignments, except as expressly permitted hereunder) in such Bank's rights and obligations hereunder and under the other Loan Documents to any commercial bank, savings and loan association, insurance company, pension fund, mutual fund, commercial finance company or other similar financial institution, which institution is approved in advance in writing by Agent and Company (provided, however, the consent of Company shall not be required following the occurrence and during the continuance of an Event of Default and the consent of Company shall not unreasonably be withheld), such approval not to be unreasonably withheld or delayed; provided, however, that (i) the approval of Company shall not be required upon the occurrence and during the continuance of a Default or Event of Default and (ii) the approval of Company and Agent shall not be required for the grant of a participation by a Bank to its Affiliate, to any other Bank or to any Federal Reserve Bank. The Company authorizes each Bank to disclose to any prospective participant, once approved by Company and Agent (if such approval is required), any and all financial information in such Bank's possession concerning the Company which has been delivered to such Bank pursuant to this Agreement; provided that each such prospective participant shall execute a confidentiality agreement consistent with the terms of Section 15.13, hereof. A Bank shall not be permitted to assign or otherwise transfer, sell or dispose of (except by participation according to the terms hereof) its rights and obligations hereunder, except, (x) to an Affiliate of an assigning Bank or to any Bank or (y) with the prior written consent of the Company and the Agent which shall not be unreasonably withheld, to any other financial institution; provided that any such assignment shall not be in an amount less (d) Each assignment by a Bank of any portion of its rights and obligations hereunder and under the other Loan Documents shall be made pursuant to an Assignment Agreement substantially (as determined by Agent) in the form attached hereto as Exhibit "I" (with appropriate insertions acceptable to Agent) and shall be subject to the terms and conditions hereof, and to the following restrictions: (i) each assignment shall cover all of the Notes issued by Company hereunder, and shall be for a fixed and not varying percentage thereof, with the same percentage applicable to each (ii) each assignment shall be in a minimum amount of Five Million Dollars ($5,000,000); (iii) no assignment shall violate any "blue sky" or other securities law of any jurisdiction or shall require the Company or any other Person to file a registration statement or similar application with the United States Securities and Exchange Commission (or similar state regulatory body) or to qualify under the "blue sky" or other securities laws of any (iv) no assignment shall be effective unless Agent has received from the assignee (or from the assigning Bank) an assignment fee of $3,000 for each such assignment. In connection with any assignment, Company and Agent shall be entitled to continue to deal solely and directly with the assigning Bank in connection with the interest so assigned until (x) the Agent shall have received a notice of assignment duly executed by the assigning Bank and an Assignment Agreement (with respect thereto) duly executed by the assigning Bank and each assignee; and (y) the assigning Bank shall have delivered to the Agent the original of each Note held by the assigning Bank under the Loan Agreements. From and after the date on which the Agent shall notify Company and the assigning Bank that the foregoing conditions shall have been satisfied and all consents (if any) required shall have been given, the assignee thereunder shall be deemed to be a party to this Agreement. To the extent that rights and obligations hereunder shall have been assigned to such assignee as provided in such notice of assignment (and Assignment Agreement), such assignee shall have the rights and obligations of a Bank under this Agreement and the other Loan Documents (including without limitation the right to receive fees payable hereunder in respect of the period following such assignment). In addition, the assigning Bank, to the extent that rights and obligations hereunder shall have been assigned by it as provided in such notice of assignment (and Assignment Agreement), but not otherwise, shall relinquish its rights and be released from its obligations under this Agreement and the other Loan Documents. Within five (5) Business Days following Company's receipt of notice from the Agent that Agent has accepted and executed a notice of assignment and the duly executed Assignment Agreement, Company shall, to the extent applicable, execute and deliver to the Agent in exchange for any surrendered Note, new Note(s) payable to the order of the assignee in an amount equal to the amount assigned to it pursuant to such notice of assignment (and Assignment Agreement), and with respect to the portion of the Indebtedness retained by the assigning Bank, to the extent applicable, a new Note payable to the order of the assigning Bank in an amount equal to the amount retained by such Bank hereunder shall be executed and delivered by the Company. Agent, the Banks and the Company acknowledge and agree that any such new Note(s) shall be given in renewal and replacement of the surrendered Notes and shall not effect or constitute a novation or discharge of the Indebtedness evidenced by any surrendered Note, and each such new Note shall contain a provision confirming such agreement. In addition, promptly following receipt of such Notes, Agent shall prepare and distribute to Company and each of the Banks a revised Exhibit "C" to this Agreement setting forth the applicable new Percentages of the Banks (including the assignee Bank), taking into account such assignment. (e) Each Bank agrees that any participation agreement permitted hereunder shall comply with all applicable laws and shall be subject to the following restrictions (which shall be set forth in the applicable Participation Agreement): (i) such Bank shall remain the holder of its Notes hereunder, notwithstanding any such (ii) except as expressly set forth in this Section 15.8(e) with respect to rights of setoff and the benefits of Article 11 hereof, a participant shall have no direct (iii) a participant shall not reassign or transfer, or grant any sub-participations in its participation interest hereunder or any part (iv) such Bank shall retain the sole right and responsibility to enforce the obligations of the Company relating to the Notes and Loan Documents, including, without limitation, the right to proceed against any Guaranties, or cause Agent to do so (subject to the terms and conditions hereof), and the right to approve any amendment, modification or waiver of any provision of this Agreement without the consent of the participant, except for those matters covered by Section 15.11(b), (c) and (e) hereof (provided that a participant may exercise approval rights over such matters only on an indirect basis, acting through such Bank, and Company, Agent and the other Banks may continue to deal directly with such Bank in connection with such Bank's rights and duties hereunder and provided further that no participant shall have any approval rights with respect to any release by the Banks of any mortgage interest in the Store Site located in Saginaw, Michigan), and shall otherwise be in form satisfactory to Agent. Company agrees that each participant shall be deemed to have the right of setoff under Section 12.4 hereof, in respect of its participation interest in amounts owing under this Agreement and the Loan Documents to the same extent as if the Indebtedness were owing directly to it as a Bank under this Agreement, shall be subject to the pro rata recovery provisions of Section 12.3 hereof, and that each participant shall be entitled to the benefits of Article 11 hereof. The amount, terms and conditions of any participation shall be as set forth in the participation agreement between the issuing Bank and the Person purchasing such participation, and none of the Company, the Agent and the other Banks shall have any responsibility or obligation with respect thereto, or to any Person to whom any such participation may be issued. No such participation shall relieve any issuing Bank of any of its obligations under this Agreement or any of the other Loan Documents, and all actions hereunder shall be conducted as if no such participation had been granted. (f) Nothing in this Agreement, the Loan Documents or the Notes, expressed or implied, is intended to or shall confer on any Person other than the respective parties hereto and thereto and their successors and assignees permitted hereunder and thereunder any benefit or any legal or equitable right, remedy or other claim under this Agreement, the Notes or the other Loan Documents. 15.9 Indulgence. No delay or failure of Agent and the Banks in exercising any right, power or privilege hereunder shall affect such right, power or privilege nor shall any single or partial exercise thereof preclude any other further exercise thereof, nor the exercise of any other right, power or privilege. The rights of Agent and the Banks hereunder are cumulative and are not exclusive of any rights or remedies which Agent and the Banks would otherwise have. 15.10 Counterparts. This Agreement may be executed in several counterparts, and each executed copy shall constitute an original instrument, but such counterparts shall together constitute but one and the same instrument. 15.11 Amendment and Waiver. No amendment or waiver of any provision of this Agreement or any Loan Document, or consent to any departure by Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Banks (and, with respect to any amendments to this Agreement or the other Loan Documents, by Company, if a signatory thereto) or, if this Agreement expressly so requires with respect to the subject matter thereof, by all Banks (and, with respect to any amendments to this Agreement or the other Loan Documents, by Company), and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Banks, do any of the following: (a) subject the Banks to any additional obligations, (b) reduce the principal of, or interest on, the Revolving Credit Notes or any Fees or other amounts payable hereunder, (c) postpone any date fixed for any payment of principal of, or interest on, the Revolving Credit Notes or any Fees or other amounts payable hereunder, (d) waive any Event of Default specified in Sections 11.1(a) or (b) hereof, (e) release any Guarantor or terminate or modify any indemnity provided to the Banks hereunder or under the Loan Documents or release all, substantially all or any material part of the Collateral, except as shall be otherwise expressly provided in this Agreement or any other Loan Document, (f) take any action which requires the signing of all Banks pursuant to the terms of this Agreement or any Loan Document or (g) change the definition of "Required Banks" or this Section 15.11; provided further, that no amendment, waiver or consent shall, unless in writing signed by the Swing Line Bank do any of the following: (x) reduce the principal of, or interest on, the Swing Line Note or (y) postpone any date fixed for any payment of principal of, or interest on, the Swing Line Note; and provided further, however, that no amendment, waiver, or consent shall, unless in writing and signed by the Agent in addition to all the Banks, affect the rights or duties of the Agent under this Agreement or any other Loan Document, whether in its capacity as Agent, Issuing Bank or Swing Line Bank. All references in this Agreement to "Banks" or "the Banks" shall refer to all Banks, unless expressly stated to refer to Required Banks. 15.12 Taxes and Fees. Should any documentary, stamp or similar tax (other than a tax based upon the net income of any Bank or Agent imposed by the jurisdiction in which such Bank or Agent have their respective principal executive offices), or recording or filing fee become payable in respect of this Agreement or any of the Loan Documents (or the execution, filing or recording thereof) or any amendment, modification or supplement hereof or thereof, Company agrees to pay the same together with any interest or penalties thereon and agrees to hold the Agent and the Banks harmless with respect thereto. 15.13 Confidentiality. Each Bank agrees that it will not disclose without the prior consent of Company (other than to its employees, its Affiliates, to another Bank or to its auditors or counsel) any information with respect to Company, which is furnished pursuant to this Agreement or any of the other Loan Documents; provided that any Bank may disclose any such information (a) as has become generally available to the public or has been lawfully obtained by such Bank from any third party under no duty of confidentiality to Company, (b) as may be required or appropriate in any report, statement or testimony submitted to, or in respect to any inquiry, by, any municipal, state or federal regulatory body having or claiming to have jurisdiction over such Bank, including the Board of Governors of the Federal Reserve System of the United States, the Office of the Comptroller of the Currency or the Federal Deposit Insurance Corporation or similar organizations (whether in the United States or elsewhere) or their successors, (c) as may be required or appropriate in respect to any summons or subpoena or in connection with any litigation, (d) in order to comply with any law, order, regulation or ruling applicable to such Bank, and (e) to any permitted transferee or assignee or to any approved participant of, or with respect to, the Notes, as aforesaid. Any Bank required to disclose any confidential information pursuant to clause (c) above shall use its best efforts to give Company prior notice of any required disclosure of such information. 15.14 Withholding Taxes. If any Bank is not incorporated under the laws of the United States or a state thereof, such Bank shall promptly deliver to the Agent two executed copies of (i) Internal Revenue Service Form 1001 specifying the applicable tax treaty between the United States and the jurisdiction of such Bank's domicile which provides for the exemption from withholding on interest payments to such Bank, (ii) Internal Revenue Service Form 4224 evidencing that the income to be received by such Bank hereunder is effectively connected with the conduct of a trade or business in the United States or (iii) other evidence satisfactory to the Agent that such Bank is exempt from United States income tax withholding with respect to such income. Such Bank shall amend or supplement any such form or evidence as required to insure that it is accurate, complete and non-misleading at all times. Promptly upon notice from the Agent of any determination by the Internal Revenue Service that any payments previously made to such Bank hereunder were subject to United States income tax withholding when made, such Bank shall pay to the Agent the excess of the aggregate amount required to be withheld from such payments over the aggregate amount actually withheld by the Agent. 15.15 WAIVER OF JURY TRIAL. THE BANKS, THE AGENT AND THE COMPANY AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED INSTRUMENT OR AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTION OF ANY OF THEM. NEITHER THE BANKS, THE AGENT, NOR COMPANY SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY THE BANKS AND THE AGENT OR COMPANY EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY ALL OF THEM. 15.16 Complete Agreement; Conflicts. This Agreement, the Notes, any Requests for Revolving Credit Advance and Requests for Swing Line Advance hereunder, and the Loan Documents contain the entire agreement of the parties hereto, superseding all prior agreements, discussions and understandings relating to the subject matter hereof, and none of the parties shall be bound by anything not expressed in writing. In the event of any conflict between the terms of this Agreement and the other Loan Documents, this Agreement shall govern. 15.17 Severability. In case any one or more of the obligations of Company under this Agreement, the Notes or any of the other Loan Documents shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining obligations of Company shall not in any way be affected or impaired thereby, and such invalidity, illegality or unenforceability in one jurisdiction shall not affect the validity, legality or enforceability of the obligations of Company under this Agreement, the Notes or any of the other Loan Documents in any other jurisdiction. 15.18 Table of Contents and Headings. The table of contents and the headings of the various subdivisions hereof are for convenience of reference only and shall in no way modify or affect any of the terms or provisions hereof. 15.19 Construction of Certain Provisions. If any provision of this Agreement or any of the Loan Documents refers to any action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person, whether or not expressly specified in such provision. 15.20 Independence of Covenants. Each covenant hereunder shall be given independent effect (subject to any exceptions stated in such covenant) so that if a particular action or condition is not permitted by any such covenant (taking into account any such stated exception), the fact that it would be permitted by an exception to, or would be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default. 15.21 Reliance on and Survival of Various Provisions. All terms, covenants, agreements, representations and warranties of Company or any party to any of the Loan Documents made herein or in any of the Loan Documents or in any certificate, report, financial statement or other document furnished by or on behalf of Company or any Guarantor in connection with this Agreement or any of the Loan Documents shall be deemed to have been relied upon by the Banks, notwithstanding any investigation heretofore or hereafter made by any Bank or on such Bank's behalf, and those covenants and agreements of Company set forth in Sections 9.9, 9.12(c), 13.1, 13.6, 13.7 and 15.4 hereof (together with any other indemnities of Company contained elsewhere in this Agreement or in any of the Loan Documents) and of Banks set forth in Section 15.12 hereof shall, notwithstanding anything to the contrary contained herein, survive the repayment in full of the Indebtedness and the termination of the Revolving Credit Aggregate Commitment. 15.22 Effective Upon Execution. This Agreement shall become effective upon the execution hereof by Banks, Agent and Company and the issuance by Company of the Revolving Credit Notes and the Swing Line Note hereunder, and shall remain effective until the Indebtedness has been repaid and discharged in full, all Letters of Credit have expired and no commitment to extend any credit hereunder or under any of the other Loan Documents, whether optional or obligatory, remains outstanding. WITNESS the due execution hereof as of the day and year first above written. COMERICA BANK, JACOBSON STORES INC. By: Charles L. Weddell By: Kevin C. Binkley Its: Vice President Its: Vice President-Treasurer One Detroit Center 3333 Sargent Road 500 Woodward Avenue Jackson, Michigan 49201 9th Floor MC 3268 Attn: Chief Financial Officer REVOLVING CREDIT BANKS: COMERICA BANK Eurocurrency Lending Office: By: Charles L. Weddell One Detroit Center Its: Vice President 500 Woodward Ave. One Detroit Center 9th Floor MC 3268 500 Woodward Avenue Detroit, Michigan 48226 Detroit, Michigan 48226 Attention: Charles L. Weddell Attention: Charles L. Weddell Telephone No. (313) 222-7803 Telephone: (313) 222-7803 Facsimile No. (313) 222-9514 Facsimile No. (313) 222-9514 Eurocurrency Lending Office: By: Thomas A. Gamm 611 Woodward Avenue Second Vice President Detroit, Michigan 48226 611 Woodward Avenue Attention: Thomas A. Gamm Detroit, Michigan 48226 Telephone No. (313) 225-2531 Attention: Thomas A. Gamm Facsimile No. (313) 225-2290 Telephone No. (313) 225-2531 SWING LINE BANK: COMERICA BANK Eurocurrency Lending Office: Its: Vice President Comerica Bank 500 Woodward Avenue One Detroit Center Detroit, Michigan 48226 500 Woodward Ave. Attention: Charles L. Weddell 9th Floor MC 3268 Telephone: (313) 222-7803 Detroit, Michigan 48226 Facsimile No. (313) 222-9514	8-K	EX-4.(D)	1996-01-12T00:00:00	1996-01-12T13:36:28
0000950134-96-000108	0000950134-96-000108_0001.txt	<DESCRIPTION>AMENDMENT TO SEARCH CAPITAL GROUP, INC. ESOP EMPLOYEE STOCK OWNERSHIP PLAN (THE "PLAN") Effective January 1, 1989, the Plan shall be amended as follows: 1. Section 1.15 shall be amended to read as follows: Effective Date. January 1, 1989. 2. Section 1.31 of the Plan shall be amended to read as follows: Plan. This Search Capital Group, Inc. Employee Stock Ownership Plan (As Amended and Restated Effective January 1, 1989). 3. Section 15.01(f) of the Plan shall be amended to read as follows: (f) "Employer Security" means common stock issued by the Employer (or by a corporation which is a member of the same controlled group) which is readily tradable on an established securities market. If there is no common stock which is readily tradable on an established securities market, the term "Employer Securities" means common stock issued by the Employer (or by a corporation which is a member of the same controlled group) having a combination of voting power and dividend rights equal to or in excess of - (a) that class of common stock of the Employer (or of any controlled group member) having the greatest voting (b) that class of common stock of the Employer (or of any controlled group member) having the greatest dividend rights. Noncallable preferred stock shall also be treated as Employer Securities if such stock is convertible at any time into stock which meets the above requirements and if such conversion is at a conversion price which (as of the date of the acquisition by the Plan) is reasonable. For purposes of the preceding sentence, preferred stock shall be treated as noncallable if after the call there will be a reasonable opportunity for a conversion which meets the requirements of the preceding sentence. 4. Section, 15.05 of the Plan shall be amended to read as follows: 15.05 Payment of Purchase Price. If the Employer (or the Trustee) exercises an option to purchase a Participant's Employer Securities pursuant to an offer given under Section 15.04, the purchaser(s) shall make payment in lump sum or, if the Employer Securities were distributed in a total distribution (defined below), in substantially equal installments over a period not exceeding five (5) years. The purchaser(s) shall evidence the obligation to pay the of the purchase price by executing a promissory note, delivered to the selling Participant at the Closing. The note delivered at Closing shall bear interest at one percent (1%) above the prime interest rate of a bank, selected by the Plan Administrator, in effect at the Closing Date and in effect on each subsequent principal payment date. The note shall provide for equal annual installments with interest payable with each installment, the first installment being due and payable one (1) year after the Closing Date. The note further shall provide for acceleration in the event of thirty (30) days' default of the payment of interest or principal and in whole or in part at any time or times without penalty; provided, however, the purchaser(s) shall not have the right to make any prepayment during the calendar year or fiscal year of the Participant (Beneficiary) in which the Closing Date occurs. In the event of a total distribution, the Employer must provide adequate security when the put option is paid over time. For purposes of this Section 15.05 "total distribution" shall mean a distribution within one taxable year to the recipient of the balance to the credit of the recipient's Account). Name: /s/ CAROLYN J. MALONE	10-K	EX-10.5	1996-01-12T00:00:00	1996-01-12T17:20:19
0000882135-96-000001	0000882135-96-000001_0000.txt	Pursuant to Section 13 or 15(d) of the Securities Exchange Act of (Date of earliest event reported) January 12, 1996 FORD CREDIT AUTO LOAN MASTER TRUST, SERIES 1992-1, 1992-2, 1994-1 AND 1995-1 State of (Commission File Number) IRS Employer (FORD CREDIT AUTO RECEIVABLES CORPORATION - ORIGINATOR) (Exact name of registrant as specified in its charter) The American Road, Dearborn, Michigan 48121 Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 313-322-3000 The Monthly Servicing Report relating to the Ford Credit Auto Loan Master Trust, Series 1992-1, 1992-2, 1994-1 and 1995-1 for the Collection Period ended December 31, 1995, provided to Chemical Bank, as trustee, is attached hereto as Exhibit 19 and is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION DESIGNATION DESCRIPTION METHOD OF FILING Exhibit 19 Report for the month ending Filed with this December 31, 1995 provided report. Ford Credit Auto Loan Master 1994-1 and 1995-1. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the date indicated. Ford Credit Auto Loan Master Trust, Series 1992-1, 1992-2, 1994-1 and 1995-1 Date: January 12, 1996 By: /s/Richard P. Conrad Exhibit 19 Report for the month ending December 31, 1995, provided to Chemical Bank, as trustee under the Ford Credit 1994-1 and 1995-1.	8-K	8-K	1996-01-12T00:00:00	1996-01-12T09:41:12
0000819940-96-000014	0000819940-96-000014_0000.txt	Dreyfus International Equity Allocation Fund For the twelve-month period ending October 31, 1995, the Dreyfus International Equity Allocation Fund's Class R shares and Investor shares posted total returns of .81% and .67%, respectively.* The Morgan Stanley Capital International Europe, Australasia, Far East (EAFE ) Index, the Fund's benchmark index, had a loss of .37% for that same period.** Over the past 12 months, European economies have rebounded from their previously recessionary condition. Real economic growth in the European Union was above 3% in 1994 and we believe that it will show an increase of about 2.5% for 1995. Signs of a cyclical slowdown were apparent in the third quarter of this year, yet we expect growth to remain solidly above 2% in 1996. The forthcoming European Monetary Union and its prospects for a wider economic unification with Eastern Europe play a major role in formulating the political agenda for many European governments. Reducing budget deficits and increasing the competitiveness of business are universal priorities. The large privatization programs underway all over Europe bear witness to this. While there are difficulties in gaining a political consensus on these issues -- as evidenced by the civil service strikes in France and the political instability in Italy -- the wave of economic reform seems unstoppable. The European Commission is fostering an aggressive campaign of deregulation. Local monopolies of telephone companies and utilities are primary targets. Even the sacred cow of the wasteful Common Agricultural policy is undergoing substantial reform. We believe these reforms, combined with continuing low inflation, should result in significant reductions in interest rates in most European countries, particularly in the south where real interest rates are very high. The Japanese economy suffered a series of dramatic events during the year. The recession was worsened by the Kobe earthquake, the strong yen and the troubled financial sector. During the summer, the Japanese Government and the Bank of Japan, aided by the Fed and the Bundesbank, intervened heavily to halt the yen's rise. The Bank of Japan lowered its discount rate to an all-time low (0.5% per annum). At the same time, the Japanese Government announced an unprecedented 14 trillion yen package designed to stimulate the economy. Although some uncertainty persists regarding the fate of smaller financial institutions, we believe it appears likely that the Japanese economy will recover to an above 2% growth rate in the coming year. THE PORTFOLIO AND THE MARKET As of October 31, 1995, the Fund's portfolio was invested in 235 stocks spread over 20 countries. Countries are weighted using proprietary asset allocation models that examine the risk associated with each individual market in relation to its expected returns. Additional models seek to identify stocks that have attractive valuations relative to peer companies and possess above-average growth potential. The Fund carries some exposure to Malaysia, Hong Kong and Singapore (aggregating to 6.2% of total Fund assets as of October 31, 1995) resulting in access to the southeastern Asia high-growth zone. Because of size and liquidity concerns, the Fund has so far refrained from investing in emerging economies. The Fund was most heavily weighted in Japan (42.1%), the United Kingdom (11.8%), France (9.2%), and Germany (7.6%) as of October 31, 1995. We believe that fundamentals are currently rather attractive for equity investment in Europe given low and possibly declining interest rates and the continuation of healthy corporate profit growth. In Germany and the United Kingdom the earlier export-driven recovery has become more domestically oriented and relies heavily on corporate restructuring. The stock markets of Germany and the United Kingdom managed 12-month gains of 9.0% and 8.5%, respectively, as of October 31, 1995. The Fund's overweighting in Germany (7.6%) compared to the EAFE Index (6.9%) helped performance. The Fund's U.K. holdings also helped performance. France was hampered by political uncertainty earlier in the year. Yet social security reforms paved the way for much-needed interest rate reductions which could enhance the environment for equity investors. Overweighting in France (9.2% vs. the EAFE Index's 6.5%) also benefitted the portfolio's performance as the French stock market rose 3.5% over the past year. In Italy (an underweighted sector compared to the EAFE Index - 1.9% for the Fund, 2.3% for the Index), the market was hurt by a weak lira and political worries. Despite some significant progress on the reform front, the Italian stock market declined 8.5% for the twelve months ending October 31, 1995, and the Fund's holdings hindered portfolio performance. The Japanese stock market's performance reflected the difficulties outlined above and declined 11.4% for the 12-month period ended October 31, 1995. The Fund's large position and slight overweighting (42.1%) in Japan compared to that of the EAFE Index (39.6%) retarded investment performance. We believe, however, that very low interest rates and extensive corporate restructuring (including massive investments in the low-cost areas of Asia) should help propel corporate profits higher next year. Included in this report is a series of detailed statements about your Fund's holdings and its financial condition. We hope they are informative. Please know that we appreciate greatly your continued confidence in the Fund. * Total return includes reinvestment of dividends and any capital gains paid. ** SOURCE: LIPPER ANALYTICAL SERVICES, INC. -- The Morgan Stanley Capital International Europe, Australasia, Far East (EAFE ) Index is an unmanaged index composed of a sample of companies representative of the market structure of European and Pacific Basin Countries. The return indicated includes net dividends reinvested. The Index is the property of Morgan Stanley & Co., Incorporated. Dreyfus International Equity Allocation Fund October 31, 1995 COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN DREYFUS INTERNATIONAL EQUITY ALLOCATION FUND INVESTOR SHARES AND CLASS R SHARES AND THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA, FAR EAST Fund (Investor Fund Far East Class Shares) (Class R Shares) (EAFE(R)) Index* Source: Lipper Analytical Services, Inc. Investor Class Shares Class R Shares Period ended 10/31/95 Period ended 10/31/95 1 Year 0.67% 1 Year 0.81% From Inception (9/15/94) 1.13 From Inception (9/15/94) 1.26 Past performance is not predictive of future performance. The above graph compares a $10,000 investment made in each of the Investor Class shares and Class R shares of Dreyfus International Equity Allocation Fund on 9/15/94 (Inception Date) to a $10,000 investment made in the Morgan Stanley Capital International Europe, Australasia, Far East (EAFERegistration Mark) Index on that date. For comparative purposes, the value of the Index on 8/31/94 is used as the beginning value on 9/15/94. All dividends and capital gain distributions are reinvested. The Fund's objective is to exceed the total return of the Morgan Stanley Capital International Europe, Australasia, Far East (EAFERegistration Mark) Index through active stock selection, country allocation and currency allocation. The Fund's performance shown in the line graph takes into account all applicable fees and expenses. The Index, which is the property of Morgan Stanley & Co. Incorporated, is an unmanaged index composed of a sample of companies representative of the market structure of European and Pacific Basin countries and includes net dividends reinvested. The Index does not take into account charges, fees and other expenses. Further information relating to Fund performance, including expense reimbursements, if applicable, is contained in the Financial Highlights section of the Prospectus and elsewhere in this report. Dreyfus International Equity Allocation Fund Statement of Investments October 31, 1995 Dreyfus International Equity Allocation Fund Statement of Investments (continued) October 31, 1995 Dreyfus International Equity Allocation Fund Statement of Investments (continued) October 31, 1995 Dreyfus International Equity Allocation Fund Statement of Investments (continued) October 31, 1995 Dreyfus International Equity Allocation Fund Statement of Investments (continued) October 31, 1995 Dreyfus International Equity Allocation Fund Statement of Investments (continued) October 31, 1995 Dreyfus International Equity Allocation Fund Statement of Investments (continued) October 31, 1995 Dreyfus International Equity Allocation Fund Statement of Investments (continued) October 31, 1995 See notes to financial statements. Dreyfus International Equity Allocation Fund Statement of Assets and Liabilities October 31, 1995 See notes to financial statements. Dreyfus International Equity Allocation Fund Statement of Operations Year ended October 31, 1995 See notes to financial statements. Dreyfus International Equity Allocation Fund Statement of Changes in Net Assets See notes to financial statements. Dreyfus International Equity Allocation Fund Contained below is per share performance data for a share of Capital Stock outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from the Fund's financial statements. See notes to financial statments. Dreyfus International Equity Allocation Fund The Dreyfus/Laurel Funds, Inc. (the "Company") is registered under the Investment Company Act of 1940 ("Act") as a diversified open-end management investment company and operates as a series company currently offering sixteen Series including the Dreyfus International Equity Allocation Fund (the "Fund"). The Dreyfus Corporation ("Manager") serves as the Fund's investment adviser. The Manager is a direct subsidiary of Mellon Bank, N.A. ("Mellon Bank"). Premier Mutual Fund Services, Inc. (the "Distributor") acts as the distributor of the Fund's shares. The Distributor, located at One Exchange Place, Boston, Massachusetts 02109, is a wholly-owned subsidiary of FDI Distribution Services, Inc., a provider of mutual fund administration services, which in turn is a wholly-owned subsidiary of FDI Holdings, Inc., the parent company of which is Boston Institutional Group, Inc. The Fund is currently authorized to issue two classes of shares: Investor shares and Class R shares. Investor shares are sold primarily to retail investors and bear a distribution fee. Class R shares are sold primarily to bank trust departments and other financial service providers (including Mellon Bank, N.A. and its affiliates) acting on behalf of customers having a qualified trust or investment account or relationship at such institution, and bear no distribution fee. Each class of shares has identical rights and privileges, except with respect to the distribution fee and voting rights on matters affecting a single class. The Company has the authority to issue 25 billion shares of capital stock with a par value of $.001. Investment income, net of expenses (other than class specific expenses) and realized and unrealized gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class. (a) Portfolio Valuation: Investments in securities (including options and financial futures) are valued at the last sales price on the securities exchange on which such securities are primarily traded or at the last sales price on the national securities market. Securities not listed on an exchange or the national securities market, or securities for which there were no transactions, are valued at the average of the most recent bid and asked prices, except for open short positions, where the asked priced is used for valuation purposes. Bid price is used when no asked price is available. Securities for which there are no such valuations are valued at fair value as determined in good faith under the direction of the Board of Directors. Investments denominated in foreign currencies are translated to U.S. dollars at the prevailing rates of exchange. Forward currency exchange contracts are valued at the offsetting rate. (b) Securities Transactions and Investment Income: Securities transactions are recorded on a trade date basis. Realized gain and loss from securities transactions are recorded on the identified cost basis. Dividend income is recognized on the ex-dividend date and interest income, including, where applicable, amortization of discount on investments, is recognized on the accrual basis. (c) Foreign Currency Transactions: The Fund does not isolate that portion of the results of the operations resulting from changes in foreign exchange rates on investment from the fluctuations arising from changes in the market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Dreyfus International Equity Allocation Fund NOTES TO FINANCIAL STATEMENTS (continued) Net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, sales of foreign currencies, currency gains or losses realized on securities transactions, the difference between the amount of dividends, interest, and foreign withholding taxes recorded on the Fund's books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities, resulting from changes in exchange rates. Such gains and losses are included with net realized and unrealized gain or loss on investments. (d) Forward Currency Exchange Contracts: The Fund enters into forward currency exchange contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings. When executing forward currency exchange contracts, the Fund is obligated to buy or sell a foreign currency at a specified rate on a certain date in the future. With respect to sales of forward currency exchange contracts, the Fund would incur a loss if the value of the contract increases between the date the forward contract is opened and the date the forward contract is closed. The Fund realizes a gain if the value of the contract decreases between those dates. With respect to purchases of forward currency exchange contracts, the Fund would incur a loss if the value of the contract decreases between the date the forward contract is opened and the date the forward contract is closed. The Fund realizes a gain if the value of the contract increases between those dates. The Fund is also exposed to credit risk associated with counter party nonperformance on these forward currency exchange contracts which is typically limited to the unrealized gains on such contracts that are recognized in the statement of assets and liabilities. At October 31, 1995, the following summarizes open forward currency exchange contracts: (e) Distributions to Shareholders: Dividends are recorded on the ex-dividend date. Dividends from investment income-net and dividends from net realized capital gain are normally declared and paid annually, but the Fund may make distributions on a more frequent basis to comply with the distributio n requirements of the Internal Revenue Code. To the extent that net realized capital gain can be offset by capital loss carryovers, if any, it is the policy of the Fund not to distribute such gain. (f) Federal Income Taxes: It is the policy of the Fund to continue to qualify as a regulated investment company, if such qualification is in the best interests of its shareholders, by complying with the applicable provisions of the Internal Revenue Code, and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes. Dreyfus International Equity Allocation Fund NOTES TO FINANCIAL STATEMENTS (continued) The Fund has an unused capital loss carryover of approximately $1,563,000 available for Federal income tax purposes to be applied against future net securities profits, if any, realized subsequent to October 31, 1995. The amount of this loss which can be utilized in subsequent years is subject to an annual limitation due to the Fund's merger with Dreyfus Laurel International Funds. If not applied, $1,536,000 of the carryover expires in fiscal 2000 and $27,000 expires in fiscal 2002. NOTE 2 -- Investment Management Fee and Other Transactions with Affiliates: (a) Investment Management Fee: Pursuant to an Investment Management agreement with the Manager, the Manager provides or arranges for one or more third parties to provide investment advisory, administrative, custody, fund accounting and transfer agency services to the Fund. The Manager also directs the investments of the Fund in accordance with its investment objective, policies and limitations. For these services, the Fund is contractually obligated to pay the Manager a fee, calculated daily and paid monthly, at the annual rate of 1.50% of the value of the Fund's average daily net assets. Out of its fee, the Manager pays all of the expenses of the Fund except brokerage fees, taxes, interest, Rule 12b-1 distribution fees and expenses, fees and expenses of non-interested Directors (including counsel fees) and extraordinary expenses. In addition, the Manager is required to reduce its fee in an amount equal to the Fund's allocable portion of fees and expenses of the non-interested Directors (including counsel). (b) Sub-Advisory Agreement: S.A.M. Finance, S.A. (the "Sub-Advisor"), a wholly-owned subsidiary of Credit Commercial de France, serves as the Fund's Sub-Advisor pursuant to a sub-advisory agreement among the Fund, the Sub-Advisor and the Manager. For its services, the Sub-Advisor is paid an annual fee of .25% of the value of the Fund's average daily net assets and is paid by the Manager out of its fee. (c) Distribution Plan: The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act relating to its Investor shares. Under the Plan, the Fund may pay annually up to .25% of the value of the average daily net assets attributable to its Investor shares to compensate the Distributor and Dreyfus Service Corporation, an affiliate of the Manager, for shareholder servicing activities and the Distributor for activities primarily intended to result in the sale of Investor shares. The Class R shares bear no distribution fee. For the year ended October 31, 1995, the distribution fee for the Investor shares was $5,612. Under its terms, the Plan shall remain in effect from year to year, provided such continuance is approved annually by a vote of majority of those Directors who are not "interested persons" of the Investment Company and who have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan. (d) Directors' Fees: Each director who is not an "interested person" as defined in the Act receives $27,000 per year, $1,000 for each Board meeting attended and $750 for each Audit Committee attended and is reimbursed for travel and out-of-pocket expenses. These expenses are paid in total by the following funds: the Dreyfus/Laurel Funds, Inc., the Dreyfus/Laurel Tax-Free Municipal Funds, and the Dreyfus/Laurel Funds Trust. In addition the Chairman of the Board receives an annual fee of $75,000 per year. These fees and expenses are charged and allocated to each series based on net assets. Dreyfus International Equity Allocation Fund NOTES TO FINANCIAL STATEMENTS (continued) NOTE 3 -- Securities Transactions: The aggregate amount of purchases and sales of investment securities, excluding short-term securities and forward currency exchange contracts, during the year ended October 31, 1995 amounted to $11,310,006 and $10,440,123, respectively. At October 31, 1995, accumulated net unrealized depreciation on investments and foreign currency contracts was $95,964, consisting of $1,368,906 gross unrealized appreciation and $1,272,942 gross unrealized depreciation, excluding foreign currency transactions. At October 31, 1995, the cost of investments for Federal income tax purposes was substantially the same as the cost for financial reporting purposes (see the Statement of Investments). On April 19, 1995, the Dreyfus/Laurel International Equity Allocation Fund, acquired the assets and certain liabilities of the Dreyfus Laurel International Fund, in exchange for shares of the Dreyfus/Laurel International Equity Allocation Fund, pursuant to a plan of reorganization approved by Dreyfus/Laurel International Fund shareholders on May 1, 1995. Total shares issued by Dreyfus/Laurel International Equity Allocation Fund and the total net asets of Dreyfus International Fund acquired are set forth in the Statement of changes in net assets. Dreyfus International Equity Allocation Fund The Board of Directors and Shareholders The Dreyfus/Laurel Funds, Inc.: We have audited the accompanying statement of assets and liabilities of the Dreyfus International Equity Allocation Fund of The Dreyfus/Laurel Funds, Inc., including the statement of investments, as of October 31, 1995, and the related statement of operations for the year then ended, the statement of changes in net assets for the year ended October 31, 1995 and for the period from August 12, 1994 (commencement of operations) to October 31, 1994, and the financial highlights for each of the periods indicated herein. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Dreyfus International Equity Allocation Fund of The Dreyfus/Laurel Funds, Inc., as of October 31, 1995, and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods indicated herein, in conformity with generally accepted accounting principles. Dreyfus International Equity Allocation Fund In accordance with Federal tax law, the Fund elects to provide each shareholder with their portion of the Fund's foreign taxes and the income sourced from foreign countries. Accordingly, the Fund hereby makes the following designations regarding its fiscal year ended October 31, 1995: the total amount of taxes paid to foreign countries was $38,500 and * the total amount of income sourced from foreign countries was $76,451. As required by Federal tax law rules, shareholders will receive notification of their proportionate share of foreign taxes paid and foreign source income for the 1995 calendar year with Form 1099-DIV which will be mailed by January 31, 1996. First Data Investor Services Group, Inc. Further information is contained in the Prospectus, which must precede or accompany this report.	N-30D	N-30D	1996-01-12T00:00:00	1996-01-12T11:27:00
0000950130-96-000108	0000950130-96-000108_0009.txt	You have advised us that Lockheed Martin Corporation ("LMC" or the "Company") proposes to raise up to $10,000,000,000 in new senior bank financing for the purchase of the common stock of "Wings" and for general corporate purposes. It is also our understanding that the Company's current revolving credit facility will be canceled and replaced with the bank financing referred to above. In connection with this transaction, Morgan Guaranty Trust Company of New York ("Morgan") is pleased to propose (i) a $5,000,000,000, 364-day revolving credit facility and (ii) a $5,000,000,000, five-year revolving credit facility (collectively the "Credit Facilities") under the terms and conditions described in the attached Summary of Terms and Conditions (the "Term Sheet") for the Credit Facilities. Morgan hereby commits to provide an aggregate of up to $1,375,000,000 comprised of (i) up to $687,500,000 in a five-year Credit Facility and (ii) at least $687,500,000 in a 364-day Credit Facility. This commitment is subject to (i) acceptance by you as set forth in the last paragraph of this letter by 5:00 p.m. (EST) on January 9, 1996, (ii) acceptance by you of a commitment for $1,375,000,000 to the Credit Facilities from Bank of America National Trust and Savings Association ("Bank of America") on the same terms and conditions and (iii) negotiation, execution and delivery of mutually acceptable definitive loan documentation (to be prepared by Morgan's counsel, Davis Polk & Wardwell) on or before April 30, 1996 or May 31, 1996 if Morgan's commitment is extended pursuant to the next sentence. In addition, Morgan's commitment will expire if your tender offer for the common stock of "Wings" does not close on or before April 30, 1996, unless such failure is due solely to the failure to have obtained any clearance which may be necessary under the Hart-Scott-Rodino Antitrust Improvements Act, in which case such expiration date shall be extended to May 31, 1996. It is J.P. Morgan Securities Inc.'s ("JPMSI") intention to use best efforts to syndicate the Credit Facilities with BA Securities, Inc. ("BASI") to a group of leaders acceptable to Morgan, Bank of America and LMC (Morgan and such other lenders herein being called the "Banks"). LMC agrees to provide such assistance in the syndication effort as may be reasonably requested, including making members of management of the Company and its subsidiaries available to meet with prospective syndicate members, and assisting JPMSI and BASI in the preparation of a financing memorandum. It is our further expectation that no fewer than 50 banks will be invited to participate in the general syndication of these facilities and that the general syndication will be launched in approximately 2 weeks from the date of your acceptance. By signing below, LMC acknowledges its obligation to pay Morgan and JPMSI the fees set forth in the Fee Letter dated January 5, 1996 (the "Fee Letter") among the Company, Morgan and JPMSI. In addition, by signing below, LMC agrees to indemnify and defend Morgan and JPMSI and each other Bank and their respective directors, officers, agents, employees and affiliates from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or reasonable expenses incurred by any of them arising out of or by reason of any investigation, litigation or other proceeding brought or threatened relating to any loan made or proposed to be made to LMC or any of its affiliates in connection with the matters herein referred to (including, but without limitation, any use made or proposed to be made by LMC or any of its affiliates of the proceeds of such loans, but excluding any such losses, liabilities, claims, damages or expenses relating to the relationships of, between or among each of, or any of,the Banks, the Co- Arranger (as defined in the Term Sheet) and any assignees or participants thereof after the loan agreements have been executed by all parties thereto and excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the indemnitee), including, without limitation, amounts paid in settlement (approved in writing by LMC), court costs, and reasonable fees and disbursements of counsel incurred in connection with any such pending or threatened investigation, litigation or other proceeding. If you accept and agree to this proposal, please so indicate by signing in the space provided below and returning a copy of this letter to us. This offer will expire at 5:00 p.m. (EST) on January 9, 1996, if this letter and the Fee Letter have not been accepted by you by that time. MORGAN GUARANTY TRUST COMPANY J.P. MORGAN SECURITIES INC. By: /s/ Robert M. Osieski By: /s/ Michael C. Marcer Name: Robert M. Osieski Name: Michael C. Marcer Title: Vice President Title: Vice President 60 Wall Street 60 Wall Street New York, New York 10260 New York, New York 10260 this 7th day of January, 1996: By: /s/ Walter E. Skowronski Title: Vice President and Treasurer SUMMARY OF TERMS AND CONDITIONS BORROWER: Lockheed Martin Corporation ("Company"), directly or indirectly through LAC Acquisition Corp. PURPOSE: The purchase of the common stock of "Wings" and general corporate purposes including commercial paper backup. ARRANGER AND SYNDICATION AGENT: J.P. Morgan Securities Inc. DOCUMENTATION AGENT: Morgan Guaranty Trust Company of New York. ADMINISTRATIVE AGENT: Bank of America National Trust and Savings Association. FACILITY DESCRIPTION: 364-day facility on a fully revolving basis. BORROWING OPTIONS: Committed Loans consisting of Base Rate Loans, CD Loans and LIBOR Loans. Uncommitted Money Market bid rate options ("Money Market Loans"). LENDERS: Syndicate of lenders acceptable to Company and Arranger ("Banks"). TIMING: Closing to occur by May 1996. GUARANTORS: Lockheed Corporation, Martin Marietta Corporation or the Company if LAC Acquisition Corp. is the Borrower. COMMITMENT: With respect to Committed Loans, each Bank will fund each draw in proportion to its Commitment. With respect to Money Market Loans, each Bank may, but shall have no obligation to, make offers to make such Loans pursuant to requests submitted by January 4, 1996 Page 1 Market Loans will be deemed a use of Commitments of all Banks on pro rata basis. COMMITMENTS: Commitments cancelable in whole or in part (ratably reduced in amounts of at least $25,000,000 and multiples of $5,000,000 in excess thereof) at election of Company upon not less than three business days' notice. TERMINATION OF BANKS/REPLACING BANKS: Company may terminate the entire Commitment of any Bank upon 10 business days' notice if a Bank demands increased costs or capital adequacy payments from Company or if the commitment of a Bank to make LIBOR Loans is suspended due to its inability to make such Loans. Company may replace such Bank with a new or existing Bank. FACILITY FEE: To be paid quarterly in arrears on the daily average of the total Commitments at a rate determined by reference to attached Pricing Schedule. Facility Fee will increase if ratings downgraded and decrease if ratings upgraded. Facility Fee computed on the basis of a year of 365 or 366 days over the actual number of days elapsed. Any change in Facility Fee shall become effective the day on which a rating agency shall have announced a ratings change. INTEREST RATE OPTIONS: LIBOR, CD Rate or Base Rate at the election of Company. LIBOR INTEREST PERIOD OPTIONS: One, two, three or six months, as selected by Company. Twelve-month LIBOR option available upon request of Company and consent of all Banks. CD RATE INTEREST PERIOD OPTIONS: 30, 60, 90 or 180 days, as selected by Company. CD Rate - Adjusted CD Rate. 3 LIBOR/CD Reference Banks to be appointed. Base Rate - higher of Reference Rate as announced by Administrative Agent or federal funds rate plus .5%. Any change in Base Rate effective on the day change is announced by Administrative Agent. January 4, 1996 Page 2 INTEREST PAYMENT: Interest on LIBOR Loans, CD Loans and Base Rate Loans (if federal funds rate is effective rate) shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed. Interest on Base Rate Loans (if Reference Rate is effective rate) shall be computed on the basis of a year of 365 or 366 days, as the case may be, and paid for the actual number of days elapsed. Interest accrued on Base Rate Loans shall be paid quarterly. Interest accrued on LIBOR Loans shall be paid on the last day of the Interest Period, on the date of any prepayment or conversion thereof, together with breakage costs, if any, and in the case of a LIBOR Loan with an Interest Period of twelve-months, on the six-month anniversary of the making of the LIBOR Loan. Interest accrued on CD Loans shall be paid on the last day of the Interest Period and on the date of any prepayment or conversion thereof, together with breakage costs, if any. If any CD Loan or portion thereof shall have an Interest Period of less than 30 days, such portion shall bear interest at the Base Rate during such period. Interest obligations accrue from the day funds are received through the day before principal is repaid. RATE SPREAD: For Base Rate Loans, Base Rate. For LIBOR Loans, LIBOR plus LIBOR Margin. For CD Loans, Adjusted CD Rate plus CD Margin. LIBOR Margin and CD Margin determined by reference to attached Pricing Schedule. LIBOR Margin and CD Margin will increase if ratings downgraded and decrease if ratings upgraded. Any change in the LIBOR Margin or CD Margin shall become effective for LIBOR Loans or CD Loans, as applicable, the day on which a rating agency shall have announced a ratings change. POST DEFAULT RATE: 2% per annum above the Base Rate for such date. MINIMUM DRAW: $10,000,000 with additional increments of $1,000,000. No per draw limit up to total unused Commitments. NOTIFICATION/TIMING: Base Rate: To Administrative Agent, by 11:00 a.m. New York City time on day of draw. LIBOR: To Administrative Agent, by 1:00 p.m. New York City time, 3 business days before draw or, in the case of an Interest Period of twelve-months, by 1:00 p.m. New York City time, 4 business days before draw. January 4, 1996 Page 3 CD Rate: To Administrative Agent, by 1:00 p.m. New York City time, 2 business days before draw. An officer or a Designated Representative (certain designated employees) to provide notice to Administrative Agent. An officer or Designated Representative may provide telephonic notice, to be followed notice. FUND DELIVERY: Banks to deliver funds to Administrative Agent by 1:00 p.m. New York City time. Administrative Agent to wire transfer loan principal (U.S. Dollars) in immediately available funds to an account to be designated by Company immediately upon receipt, but not later than 4:00 p.m. New York City time. Administrative Agent may make up a shortfall of funds received. Any Bank not making its pro rata share of any Loan available to Administrative Agent and Company, if it does not repay such share of any Loan, at the required date and time severally agree to repay Administrative Agent such shortfall, with interest (at the federal funds rate). If a Bank fails to fund a Loan, amounts received by Administrative Agent will be deemed to have been paid to Bank and made available to Administrative Agent for the Loan. CONVERSION/CONTINUATION: Company may (i) convert all or any portion of outstanding Base Rate Loans equal to $10,000,000 and multiples of $1,000,000 in excess thereof to LIBOR Loans or CD Loans, (ii) convert all or any portion of outstanding LIBOR Loans equal to $10,000,000 and multiples of $1,000,000 in excess thereof to Base Rate Loans or CD Loans, and (iii) convert all or any portion of outstanding CD Loans equal to $10,000,000 and multiples of $1,000,000 in excess thereof to Base Rate Loans or LIBOR Loans. Upon the expiration of any Interest Period applicable to a LIBOR Loan or a CD Loan, Company may continue all or any portion of such Loans equal to $10,000,000 and multiples of $1,000,000 in excess thereof as LIBOR Loans or CD Loans, as applicable. Written or telephonic notice of such delivered to Administrative Agent no later than (i) 1:00 p.m. New York City time (a) at least 3 business days in advance of the proposed date of conversion to or continuation of LIBOR Loans or (b) at least 2 business days in advance of the proposed date of conversion to or continuation of CD Loans and (ii) 11:00 a.m. New York City time on the day of the proposed conversion to a Base Rate Loan. Telephonic notice of followed by a written notice thereof. If not provided by Company as to any LIBOR loan or CD Loan and such Loan is not January 4, 1996 Page 4 Company at the end of the applicable Interest Period thereof, such Loan shall be converted to a Base Rate Loan. PREPAYMENTS: Base Rate Loans can be repaid in whole or in part on any day without penalty or premium. CD Loans can be repaid with 1 business day's notice. LIBOR Loans can be repaid with 3 business days' notice. Each partial prepayment shall be in an aggregate amount of not less than $10,000,000 and shall include interest accrued on the Loans to the prepayment date and any breakage costs (excluding loss of Margin). PAYMENTS TO BANKS: All payments by Company to Banks under Loan Agreement are to be in U.S. Dollars, free of taxes, and wire transferred to available funds no later than 2:00 p.m. New York City time. PARTICIPATIONS/ASSIGNMENTS: Assignments may be made to Eligible Institutions with the prior notification to the Administrative Agent and prior written consent of Company, which shall not be unreasonably withheld, in minimum amounts of $15,000,000. Withholding of consent is not unreasonable if based solely on desire to manage loan exposures to proposed assignee or avoid payment of additional increased costs of taxes payable by Company by reason of such assignment. No Company consent required for assignment to an affiliate of a Bank. Each Bank must retain at least permitted without consent of Company upon prior written notification to Company (no prior notification required in the case of participations of Money Market Loans). Transferability of voting rights limited to change in principal, rate, fees and term. "Eligible Institution" means any commercial bank having total assets in excess of $3,000,000,000 or the equivalent amount of local currency of such bank or affiliates of such bank that are financial institutions. (A) Effectiveness of Loan Agreement: customary for this type of transaction, including: 1) termination of, and payment of amounts due under, existing revolving credit agreements. 2) execution and delivery of: a) opinion of General Counsel or Company and opinion of special January 4, 1996 Page 5 b) opinion of Bank counsel; c) certified copies of charters, d) note for each Bank, if requested; signing Loan Agreement and those to give notice of borrowing; and f) LAC and Wings shall have entered into a merger agreement in form and substance satisfactory to the acquisition to be effected by a cash tender offer for at least 66% of Wing's common stock and subsequent merger. (g) terms and conditions of the tender offer shall be in substance as disclosed to the Banks prior to their commitments but shall in all events include that LAC shall own and control the number of shares of Wing's common stock as shall be necessary to approve the merger without the affirmative vote or the consummation of the tender offer shall have been satisfied and shall not have been waived, except for conditions (x) not material to the combined entity or the prospects and timing of the consummation of the merger and (y) not relating to the effect of the financing; and tendered shares shall have been accepted for payment pursuant to the tender offer in accordance with the terms of the tender offer. (h) evidence satisfaction to the for the acquisition and merger have been made or obtained and remain in full force and effect, except for those (x) not material to the combined entity or the prospects and timing of the consummation of the merger and (y) not relating to the legality, validity or legal effect of the financing; and the tender offer and the financing thereof shall be in compliance with all laws regulations). January 4, 1996 Page 6 (B) All Loans: (i) accuracy of Representations and Warranties, with the exception, for Loans other than the tender offer funding, of the taxes, ERISA, no Material Adverse Effect since date of pro forma financial statements delivered to Banks and environmental matters and (ii) no Event of Default. CORPORATE EXISTENCE & POWER: Company and its Significant Subsidiaries duly organized, validly existing and in good standing in respective state of incorporation and qualified to do business where necessary, except where failure to be so qualified would not be reasonably likely to have a Material Adverse Effect. Company has all necessary corporate power to enter into and perform under Loan Agreement and Notes. "Material Adverse Effect" means a material adverse effect on (a) ability of Company to perform obligations under Agreement or Notes, (b) validity or enforceability of Agreement or Notes, (c) rights and remedies of any Bank or Agents or (d) timely payment of principal of or interest on the Loans or other amounts paid in connection therewith. Subsidiary with total assets, net of depreciation and amortization and after intercompany eliminations, in excess of $100,000,000. "Subsidiary" as defined does not include any Exempt Subsidiary, but otherwise means any entity of which Company owns a sufficient number of securities having ordinary voting power to elect a majority of the board of directors or other governing body. that has substantially all of its property located in the United States and that owns a Principal Property and any other Subsidiary designated from time to time by the Company as a "Restricted Subsidiary." Subsidiaries of a Restricted Subsidiaries solely by virtue of such Subsidiary status. If at the end of any fiscal quarter, the aggregate net assets of the Company and all of its Restricted Subsidiaries are less than a specified percentage of the total net assets of the Company and its Subsidiaries taken as a whole, as reported in the Company's financial statements (the "Total Net Assets") , the Company shall designate another Subsidiary or Subsidiaries as Restricted Subsidiaries such that the net assets of such Subsidiary or Subsidiaries that are not encumbered to secure Debt, plus the net assets of the Company and the other Restricted Subsidiaries, equals or exceeds a specified percentage of the Total Net Assets. January 4, 1996 Page 7 Thereafter, the Company may designate a Subsidiary or Subsidiaries (other than a Restricted Subsidiary as defined without regard to any prior such designations by the Company) as no longer a Restricted Subsidiary, provided that the aggregate net assets of the Company and all of its effect thereto shall equal or exceed a specified percentage of the Total Net Assets. "Exempt Subsidiary" means Lockheed Martin Materials, Inc. and any other entity of which Company owns a sufficient number of securities having ordinary voting power to elect a majority of the board of directors or other governing body, the book value, net of depreciation, eliminations, of the assets of which, when aggregated with the book values, net intercompany eliminations, of the assets of any other Exempt Subsidiary other than Lockheed Martin Finance Corporation or Martin Marietta Materials, Inc., do not exceed a specified percentage of the value of total assets of Company and its consolidated subsidiaries, and which are designated as such by Company. "Principal Property" defined as any manufacturing property with a book value, net of depreciation and amortization, in excess of $5,000,000 . NO CONTRAVENTION: Execution, delivery and performance of Loan Agreement and Notes do not contravene, or constitute a default under, Company's or Guarantors' charter documents or any applicable laws or regulations or any agreements or instruments to which Company is a party which would be reasonably likely to have a Material Adverse Effect. CORPORATE AUTHORIZATION: Company and Guarantors have taken all corporate action necessary for entering into Loan Agreement and Notes and Agreement and Notes are valid, binding and enforceable against Company and Guarantors, subject to bankruptcy and equity exceptions. FINANCIAL INFORMATION: Pro forma financial statements delivered to Banks fairly present financial position as of date of such financial statements on a pro forma basis consistent with the assumptions stated therein; includes representation that no Material Adverse Effect has occurred since date of such financial statements. LITIGATION; TAXES: No litigation exists against Company or any Subsidiary, an adverse determination of which is reasonably likely to occur and if so adversely determined would be reasonably likely to have a January 4, 1996 Page 8 Material Adverse Effect and, at the time of the tender offer closing, there shall be (i) no injunction against consummation of the tender offer, (ii) no litigation pending or threatened which gives rise to a material likelihood that the merger will not be consummated or will be subject to the undue delay and (iii) no litigation pending or threatened, other than that as to which there is not a challenging the legality, validity or legal effect of the financing. Company and each Subsidiary have filed all material tax returns and paid all taxes due thereunder when due, except for those not delinquent, those the nonpayment of which would not be reasonably likely to result in a Material Adverse Effect and those contested in good faith. GOVERNMENTAL APPROVALS: No governmental consents or approvals required in connection with Loan Agreement and Notes, except routine filings under Securities Exchange Act of 1934 and the filing of International Capital Form CQ-1's. MARGIN REGULATIONS: No part of proceeds of Loans will be used in violation of Federal Reserve Regulation U, G, T and X. PARI PASSU OBLIGATIONS: Claims of other parties to Loan Agreement against Company will not be subordinate to, and will rank at least pari passu with, claims of other unsecured creditors of Company, except as may be provided for under applicable bankruptcy laws. NO DEFAULTS: No payment default in respect of Material Debt. "Material Debt" defined as debt of Company and/or one or more of its Subsidiaries exceeding $100,000,000 in an aggregate principal amount. ERISA: Company and related ERISA entities (the "ERISA Group") have fulfilled their standards of ERISA and the Internal Revenue Code and are in substantial compliance with all material provisions of ERISA and Internal Revenue Code with respect to each ERISA plan. ERISA Group has not (i) sought a waiver of minimum funding standards, (ii) failed to make a contribution to any plan or made any amendment to any plan which could result in material lien or posting of material bonds or (iii) incurred material liability under Title IV of ERISA (other than for payment of premiums under ERISA). DISCLOSURE: Written information provided to the Banks in connection with Loan Agreement, collectively, does not contain any misstatement of a material fact or omit to state a fact necessary to make the statements contained therein, in light of January 4, 1996 Page 9 which they were made, not misleading in any material respect on and as of the date of Loan Agreement. ENVIRONMENTAL: Based upon Company's periodic review of its ongoing operations (and those of its Restricted Subsidiaries), to the best knowledge of Company, ongoing operations at the Principal Properties are currently being conducted in substantial compliance except to the extent that noncompliance would not be reasonably likely to result in a material adverse change in the subsidiaries. COVENANTS Covenants customary for this type of --------- transaction, including: ACCOUNTING: Except as otherwise specified, accounting measurements will be per GAAP as in effect from time to time. Company or Required Banks have ability to request covenant change if change in GAAP affects covenant; effect of change in GAAP then suspended until new covenant negotiated. INFORMATION/REPORTING/DISTRIBUTION: 60 day delivery for quarterly financial reports and 120 day delivery for annual financial reports; delivery of such statements as filed with the SEC distributed to shareholders or filed with the SEC (with certain exceptions) to be distributed to the Banks promptly after becoming available. Company to provide prompt notice of (i) the occurrence of any Default and (ii) certain litigation. COMPUTATION OF COVENANTS: Company to provide with each distribution of annual and quarterly financial ratio. MAINTENANCE OF EXISTENCE: Company and Significant Subsidiaries will existence. Company may terminate business or corporate existence of a Subsidiary which in Company's judgment is no longer consolidations and transfers of assets permitted as set forth below. No prohibition on merger of a Subsidiary into Company, or merger or consolidation of a Subsidiary with or into another entity if surviving corporation is a Subsidiary and no Default shall have occurred and be continuing. SALES OF ASSETS: Merger, consolidation, transfer or conveyance of substantially all Company's corporation is Company or a consolidated subsidiary that is a domestic corporation that expressly assumes payment of indebtedness and performance of covenants under Loan Agreement, no Default shall have occurred and be continuing after January 4, 1996 Page 10 and if Company is not surviving corporation, there has been delivered an Officer's Certificate and legal opinion of its counsel stating that such transaction complies with Loan Agreement. Upon any such transaction, the entity formed by such transaction shall succeed to and be substituted for Company under Loan Agreement. This covenant shall not apply to any sale of Wing's stock, so long as it is margin stock, for value. LIMITATION ON LIENS: No liens on assets of the Company or any Restricted Subsidiary to secure Debt allowed except (i) liens existing on the date of Loan Agreement, (ii) liens on property of a corporation existing at the time the corporation is merged or consolidated with Company or a Restricted Subsidiary, (iii) liens securing debt owing to Company or another Restricted Subsidiary, (iv) mechanic's liens, (v) liens on property of a corporation existing at the time the corporation becomes a Restricted Subsidiary, (vi) liens on property at time of acquisition of property and purchase money liens, including liens incurred in connection with industrial revenue bonds, to secure payment of purchase price or indebtedness incurred or guaranteed prior to, at the time of or within one year after acquisition, completion of full operation of property if indebtedness incurred or guaranteed to pay purchase price of property or improvements, (vii) liens in favor of any customer (including any partial, progress, advance or other payments or performance pursuant to any contract or statute or to secure any related indebtedness or to secure Debt guaranteed by a governmental authority, (viii) liens on cash or certificates of deposit or other bank obligations principal amount not in excess of $200,000,000 (which may be in a different currency) of an amount substantially equal in value (at the time the lien is created) to such cash, certificates of deposit or other obligations, (ix) any extension, renewal, replacement of the foregoing, (x) liens equally and ratably severing this credit facility and such Debt and (xi) liens not otherwise referred to securing Debt that does not in the aggregate exceed the greater of 10% of stockholders' equity at the end of the preceding fiscal quarter or $1,000,000,000. Liens described in (ii), (v) and (vi) shall not include any liens on stock or assets of "Wings" or its subsidiaries incurred in contemplation of the merger. This covenant shall not apply to margin stock in excess of 25% in value of the assets covered by this covenant. PAYMENT OF OBLIGATIONS: Company and each Significant Subsidiary will pay all material taxes, assessments, and governmental charges imposed upon it and all lawful material claims prior to date any penalty accrues or lien imposed except for (i) those contested in good faith, (ii) those not delinquent and (iii) those the nonpayment of which would not be reasonably likely to result in a Material Adverse Effect. January 4, 1996 Page 11 COMPLIANCE WITH LAWS: Company and each Significant Subsidiary shall comply with all laws, a breach of which would be reasonably likely to have a Material Adverse Effect, except where contested in good faith and by proper proceedings. INSURANCE: Company and each Significant Subsidiary will maintain insurance as is customarily carried by owners of similar businesses and properties (or to the customary extent, self-insurance). MAINTENANCE OF PROPERTIES: Company and its Significant Subsidiaries will keep all properties necessary in its business in good working order, normal wear and tear excepted; Company or any and/or maintenance of such properties if discontinuance is in Company's (or such Subsidiary's) judgment desirable. LEVERAGE RATIO: Ratio of Debt (as defined) as of the last day of any fiscal quarter to the sum of (i) Debt (as defined) and (ii) Stockholders' Equity (as defined) at levels to be determined. STOCKHOLDERS' EQUITY AS DEFINED: Consolidated Stockholders' Equity of Company and consolidated Subsidiaries as reported. DEBT AS DEFINED: Debt shall mean, without duplication: (i) all debt, including ESOP guarantees reported as debt in the of the Company and its consolidated (ii) all indebtedness for borrowed money guaranteed by Company and its otherwise reported as debt in the of the Company and its consolidated Subsidiaries. USE OF LOANS: Proceeds of the Loans may be used for any lawful corporate purpose. WAIVERS: Required Banks may waive compliance with any covenant (other than certain payments, fees, interest rate, due dates and guarantees, which require consent of all Banks). PRINCIPAL PAYMENTS: Failure to pay when due. January 4, 1996 Page 12 INTEREST AND FACILITY FEE PAYMENTS: Failure to pay within 5 days of due date. OTHER FEES: Failure to pay within 30 days after written request for payment thereof. BREACH OF CERTAIN COVENANTS: Failure to perform under the following covenants: BREACH OF OTHER COVENANTS: Failure to perform within 30 days after written notice. REPRESENTATIONS: 5 days to correct after written notice. ACCELERATION OF DEBT: Any Material Debt shall be accelerated by reasons of default thereunder or not paid when due and corrective action shall not have been taken within 5 days after written notice thereof. BANKRUPTCY: Company or any Significant Subsidiary shall commence voluntary proceeding under bankruptcy laws, or seek appointment of receiver or trustee, or shall consent to any of the foregoing; or makes a general assignment for benefit of creditors; or fails generally to pay its debts as they become due; or takes any corporate action to authorize the foregoing. Involuntary case or proceeding commenced against Company or any Significant bankruptcy laws or seeking appointment of trustee or receiver, and such proceeding shall remain undismissed and unstayed for a period of 90 days; or an order for relief shall be entered against Company or any Significant Subsidiary under federal bankruptcy laws. FINAL JUDGMENTS: Final judgment requiring payment of $150,000,000 or more that has not been satisfied or stayed within 60 days and such failure to satisfy or stay is unremedied for 5 days after notice. ERISA: A final judgment either (1) requiring termination or imposing liability under Title IV of ERISA (other than for premiums) in respect of, or requiring a trustee to be appointed pursuant to Title IV of ERISA to administer, any plan or plans having unfunded liabilities in excess of $150,000,000 or (2) in an action relating to a Multiemployer Plan involving a current payment obligation in excess of $150,000,000, which judgment in either case has not been satisfied or stayed within 60 days and such failure to satisfy or stay is unremedied for 5 days after notice. January 4, 1996 Page 13 CHANGE IN OWNERSHIP OF STOCK: Any person or group of persons (other than employee benefit or stock ownership plan of Company) has acquired shares of capital stock having ordinary voting power to elect a majority of the Board of Directors of Company or change in majority of Board of Directors within a two-year period. GUARANTY INVALIDATED: Revocation or invalidation of guaranty of the Loan Agreement and the Notes. REMEDIES: Commitments terminate and loan/interest become due and payable upon the receipt of notice from Documentation Agent (automatic in case of bankruptcy). NOTICES OF DEFAULT: All notices or requests specified in Events of Default provisions to be given by Documentation Agent at the request of the Required Banks. TO JURISDICTION: New York law governs. Parties submit to the jurisdiction of New York courts for all legal proceedings and waive any objection to the laying of venue of any such proceeding brought in such a court and claim of inconvenient forum. WAIVER OF JURY TRIAL: Company, Agents and Banks each waive rights to trial by jury. REQUIRED BANKS: Banks holding in excess of 50% of outstanding Commitments. illegality provisions to be included and will generally provide that no increased cost or capital adequacy payment may be claimed if allocable to periods prior to 30 days prior to date Company is notified of claim by a Bank; no compensation for increases in capital not occasioned by a Change in Law or beyond that required by a Change in Law. Any Bank requesting additional compensation shall designate a different lending office if such designation will avoid the need for, or reduce the amount of, such compensation or permit the Bank to make or maintain any LIBOR Loan, so long as such designation is not disadvantageous to such Bank. Any Regulation D charges shall be billed through Administrative Agent. "Change in Law" as defined is the adoption of any law, rule or regulation, or any change therein, or any change in thereof, after Closing Date, by any governmental authority, central bank or January 4, 1996 Page 14 compliance with any directive (whether or not having the force of law) of any such entity. INDEMNITY: Company to indemnify Banks for (i) funding costs and/or losses (excluding loss of margin) if prepayment or conversion of a LIBOR Loan or a CD Loan occurs prior to the end of an Interest Period or if Company fails to consummate a LIBOR Loan or a CD Loan because conditions precedent to borrowing or conversion not satisfied and (ii) reasonable costs and expenses of litigation in response to or in defense of any proceeding brought or threatened against a Bank relating to the Agreement or Company's use of proceeds of the Loans. EXPENSES: In connection with preparing Loan Agreement, Company will pay reasonable fees and disbursements of special counsel to Agents and reasonable out-of-pocket expenses incurred by Agents. In connection with an Event of Default and enforcement proceedings, Company will pay Agents and Banks, including reasonable fees and expenses of counsel (including in-house counsel). DOCUMENT PREPARATION: Loan Agreement to be prepared by Davis Polk & Wardwell. January 4, 1996 Page 15 The LIBOR Margin, the CD Margin and the Facility Fee shall be as specified below (in basis points per annum). SUMMARY OF TERMS AND CONDITIONS BORROWER: Lockheed Martin Corporation ("Company"), directly or indirectly through LAC Acquisition Corp. PURPOSE: The purchase of the common stock of "Wings" and general corporate purposes including commercial paper backup. ARRANGER AND SYNDICATION AGENT: J.P. Morgan Securities Inc. DOCUMENTATION AGENT: Morgan Guaranty Trust Company of New York. ADMINISTRATIVE AGENT: Bank of America National Trust and Savings Association. FACILITY DESCRIPTION: Five-year facility on a fully revolving basis. BORROWING OPTIONS: Committed Loans consisting of Base Rate Loans, CD Loans and LIBOR Loans. Uncommitted Money Market bid rate options ("Money Market Loans"). LENDERS: Syndicate of lenders acceptable to Company and Arranger ("Banks"). TIMING: Closing to occur by May 1996. GUARANTORS: Lockheed Corporation, Martin Marietta Corporation or the Company if LAC Acquisition Corp. is the Borrower . COMMITMENT: With respect to Committed Loans, each Bank will fund each draw in proportion to its Commitment. With respect to Money Market Loans, each Bank may, but shall have no obligation to, make offers to make such Loans pursuant to requests submitted by January 4, 1996 Page 1 Market Loans will be deemed a use of Commitments of all Banks on pro rata basis. COMMITMENTS: Commitments cancelable in whole or in part (ratably reduced in amounts of at least $25,000,000 and multiples of $5,000,000 in excess thereof) at election of Company upon not less than three business days' notice. TERMINATION OF BANKS/REPLACING BANKS: Company may terminate the entire Commitment of any Bank upon 10 business days' notice if a Bank demands increased costs or capital adequacy payments from Company or if the commitment of a Bank to make LIBOR Loans is suspended due to its inability to make such Loans. Company may replace such Bank with a new or existing Bank. FACILITY FEE: To be paid quarterly in arrears on the daily average of the total Commitments at a rate determined by reference to attached Pricing Schedule. Facility Fee will increase if ratings downgraded and decrease if ratings upgraded. Facility Fee computed on the basis of a year of 365 or 366 days over the actual number of days elapsed. Any change in Facility Fee shall become effective the day on which a rating agency shall have announced a ratings change. INTEREST RATE OPTIONS: LIBOR, CD Rate or Base Rate at the election of Company. LIBOR INTEREST PERIOD OPTIONS: One, two, three or six months, as selected by Company. Twelve-month LIBOR option available upon request of Company and consent of all Banks. CD RATE INTEREST PERIOD OPTIONS: 30, 60, 90 or 180 days, as selected by Company. CD Rate - Adjusted CD Rate. 3 LIBOR/CD Reference Banks to be appointed. Base Rate - higher of Reference Rate as announced by Administrative Agent or federal funds rate plus .5%. Any change in Base Rate effective on the day change is announced by Administrative Agent. January 4, 1996 Page 2 INTEREST PAYMENT: Interest on LIBOR Loans, CD Loans and Base Rate Loans (if federal funds rate is effective rate) shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed. Interest on Base Rate Loans (if Reference Rate is effective rate) shall be computed on the basis of a year of 365 or 366 days, as the case may be, and paid for the actual number of days elapsed. Interest accrued on Base Rate Loans shall be paid quarterly. Interest accrued on LIBOR Loans shall be paid on the last day of the Interest Period, on the date of any prepayment or conversion thereof, together with breakage costs, if any, and in the case of a LIBOR Loan with an Interest Period of twelve- months, on the six-month anniversary of the making of the LIBOR Loan. Interest accrued on CD Loans shall be paid on the last day of the Interest Period and on the date of any prepayment or conversion thereof, together with breakage costs, if any. If any CD Loan or portion thereof shall have an Interest Period of less than 30 days, such portion shall bear interest at the Base Rate during such period. Interest obligations accrue from the day funds are received through the day before principal is repaid. RATE SPREAD: For Base Rate Loans, Base Rate. For LIBOR Loans, LIBOR plus LIBOR Margin. For CD Loans, Adjusted CD Rate plus CD Margin. LIBOR Margin and CD Margin determined by reference to attached Pricing Schedule. LIBOR Margin and CD Margin will increase if ratings downgraded and decrease if ratings upgraded. Any change in the LIBOR Margin or CD Margin shall become effective for LIBOR Loans or CD Loans, as applicable, the day on which a rating agency shall have announced a ratings change. POST DEFAULT RATE: 2% per annum above the Base Rate for such date. MINIMUM DRAW: $10,000,000 with additional increments of $1,000,000. No per draw limit up to total unused Commitments. NOTIFICATION/TIMING: Base Rate: To Administrative Agent, by 11:00 a.m. New York City time on day of draw. LIBOR: To Administrative Agent, by 1:00 p.m. New York City time, 3 business days before draw or, in the case of an Interest Period of twelve-months, by 1:00 p.m. New York City time, 4 business days before draw. January 4, 1996 Page 3 CD Rate: To Administrative Agent, by 1:00 p.m. New York City time, 2 business days before draw. An officer or a Designated employees) to provide notice to Administrative Agent. An officer or telephonic notice, to be followed by appropriately authorized written notice. FUND DELIVERY: Banks to deliver funds to Administrative Agent by 1:00 p.m. New York City time. Administrative Agent to wire transfer loan principal (U.S. Dollars) in immediately available funds to an account to be designated by Company immediately upon receipt, but not later than 4:00 p.m. New York City time. Administrative Agent may make up a shortfall of funds received. Any Bank not making its pro rata share of any Loan available to Administrative Agent and Company, if it does not repay such share of any Loan, at the required date and time severally agree to repay with interest (at the federal funds rate). If a Bank fails to fund a Loan, amounts received by Administrative Agent will be deemed to have been paid to Bank and made available to Administrative Agent for the Loan. CONVERSION/CONTINUATION: Company may (i) convert all or any portion of outstanding Base Rate Loans equal to $10,000,000 and multiples of $1,000,000 in excess thereof to LIBOR Loans or CD Loans, (ii) convert all or any portion of outstanding LIBOR Loans equal to $10,000,000 and multiples of $1,000,000 in excess thereof to Base Rate Loans or CD Loans, and (iii) convert all or any portion of outstanding CD Loans equal to $10,000,000 and multiples of $1,000,000 in excess thereof to Base Rate Loans or LIBOR Loans. Upon the expiration of any Interest Period applicable to a LIBOR Loan or a CD Loan, Company may continue all or any portion of such Loans equal to $10,000,000 and multiples of $1,000,000 in excess thereof as LIBOR Loans or CD Loans, as applicable. Written or telephonic notice of such delivered to Administrative Agent no later than (i) 1:00 p.m. New York City time (a) at least 3 business days in advance of the proposed date of conversion to or continuation of LIBOR Loans or (b) at least 2 business days in advance of the proposed date of conversion to or continuation of CD Loans and (ii) 11:00 a.m. New York City time on the day of the proposed conversion to a Base Rate Loan. followed by a written notice thereof. If not provided by Company as to any LIBOR loan or CD Loan and such Loan is not January 4, 1996 Page 4 Company at the end of the applicable Interest Period thereof, such Loan shall be converted to a Base Rate Loan. PREPAYMENTS: Base Rate Loans can be repaid in whole or in part on any day without penalty or premium. CD Loans can be repaid with 1 business day's notice. LIBOR Loans can be repaid with 3 business days' notice. Each partial prepayment shall be in an aggregate amount of not less than $10,000,000 and shall include interest accrued on the Loans to the prepayment date and any breakage costs (excluding loss of Margin). PAYMENTS TO BANKS: All payments by Company to Banks under Loan Agreement are to be in U.S. Dollars, free of taxes, and wire transferred to Administrative Agent in immediately available funds no later than 2:00 p.m. New York City time. PARTICIPATIONS/ASSIGNMENTS: Assignments may be made to Eligible Institutions with the prior notification to the Administrative Agent and prior written consent of Company, which shall not be unreasonably withheld, in minimum amounts of $15,000,000. Withholding of consent is not unreasonable if based solely on desire to manage loan exposures to proposed assignee or avoid payment of additional increased costs of taxes payable by Company by reason of such assignment. No Company consent required for assignment to an affiliate of a Bank. Each Bank must retain at least $15,000,000 commitment. of Company upon prior written notification to Company (no prior notification required in the case of participations of Money Market Loans). Transferability of voting rights limited to change in principal, rate, fees and term. "Eligible Institution" means any commercial bank having total assets in excess of $3,000,000,000 or the equivalent amount of local currency of such bank or affiliates of such bank that are financial institutions. (A) Effectiveness of Loan Agreement: customary for this type of transaction, including: 1) termination of, and payment of amounts due under, existing revolving credit agreements. 2) execution and delivery of: a) opinion of General Counsel or Company and opinion of special January 4, 1996 Page 5 b) opinion of Bank counsel; c) certified copies of charters, d) note for each Bank, if and those officers and employees authorized to give notice of f) LAC and Wings shall have entered into a merger agreement in form the Banks providing for the acquisition to be effected by a cash tender offer for at least 66% of Wing's common stock and subsequent merger. (g) terms and conditions of the tender offer shall be in substance as disclosed to the Banks prior to their commitments but shall in all events include that LAC shall own and control the number of shares of Wing's common stock as shall be necessary to approve the merger without the affirmative vote or the consummation of the tender offer shall have been satisfied and shall not have been waived, except for conditions (x) not material to the combined entity or the prospects and timing of the consummation of the merger and (y) not relating to the effect of the financing; and tendered shares shall have been accepted for payment pursuant to the tender offer in accordance with the terms of the tender offer. (h) evidence satisfaction to the acquisition and merger have been made or obtained and remain in full force and effect, except for those (x) not material to the combined entity or the prospects and timing of the consummation of the merger and (y) not relating to the effect of the financing; and the tender offer and the financing thereof shall be in compliance with all laws and regulations the margin regulations). January 4, 1996 Page 6 (B) All Loans: (i) accuracy of Representations and Warranties, with the exception, for Loans other than the tender offer funding, of the taxes, ERISA, no Material Adverse Effect since date of pro forma financial statements delivered to Banks and environmental matters and (ii) no Event of Default. CORPORATE EXISTENCE & POWER: Company and its Significant Subsidiaries duly organized, validly existing and in good standing in respective state of incorporation and qualified to do business where necessary, except where failure to be so qualified would not be reasonably likely to have a Material Adverse Effect. Company has all necessary corporate power to enter into and perform under Loan Agreement and Notes. "Material Adverse Effect" means a material adverse effect on (a) ability of Company to perform obligations under Agreement or Notes, (b) validity or enforceability of Agreement or Notes, (c) rights and remedies of any Bank or Agents or (d) timely payment of principal of or interest on the Loans or other amounts paid in connection therewith. Subsidiary with total assets, net of depreciation and amortization and after intercompany eliminations, in excess of $100,000,000. "Subsidiary" as defined does not include any Exempt Subsidiary, but otherwise means any entity of which Company owns a sufficient number of securities having ordinary voting power to elect a majority of the board of directors or other governing body. that has substantially all of its property located in the United States and that owns a Principal Property and any other Subsidiary designated from time to time by the Company as a a Restricted Subsidiary are not Restricted Subsidiaries solely by virtue of such Subsidiary status. If at the end of any fiscal quarter, the aggregate net assets of the Company and all of its Restricted Subsidiaries are less than a specified percentage of the total net assets of the Company and its Subsidiaries taken as a whole, as reported in the Company's financial statements (the "Total Net Assets") , the Company shall designate another Subsidiary or Subsidiaries as Restricted Subsidiaries such that the net assets of such Subsidiary or Subsidiaries that are not encumbered to secure Debt, plus the net assets of the Company and the other exceeds a specified percentage of the Total Net Assets. January 4, 1996 Page 7 Thereafter, the Company may designate a Subsidiary or Subsidiaries (other than a Restricted Subsidiary as defined without regard to any prior such designations by the Company) as no longer a Restricted Subsidiary, provided that the aggregate net assets of the Company and all of its effect thereto shall equal or exceed a specified percentage of the Total Net Assets. Marietta Materials, Inc. and any other entity of which Company owns a sufficient number of securities having ordinary voting power to elect a majority of the board of directors or other governing body, the book value, net of depreciation, amortization and intercompany eliminations, of the assets of which, when aggregated with the book eliminations, of the assets of any other Exempt Subsidiary other than Lockheed Martin Finance Corporation or Martin Marietta Materials, Inc., do not exceed a specified percentage of the value of total assets of Company and its consolidated subsidiaries, and which are designated as such by Company. "Principal Property" defined as any manufacturing property with a book value, net of depreciation and amortization, in excess of $5,000,000. NO CONTRAVENTION: Execution, delivery and performance of Loan Agreement and Notes do not contravene, or constitute a default under, Company's or Guarantors' charter documents or any applicable laws or regulations or any agreements or instruments to which Company is a party which would be reasonably likely to have a Material Adverse Effect. CORPORATE AUTHORIZATION: Company and Guarantors have taken all corporate action necessary for entering into Loan Agreement and Notes and Loan Agreement and Notes are valid, binding and enforceable against Company and Guarantors, subject to bankruptcy and equity exceptions. FINANCIAL INFORMATION: Pro forma financial statements delivered to Banks fairly present financial position as of date of such financial statements on a pro forma basis consistent with the assumptions stated therein; includes representation that no Material Adverse Effect has occurred since date of such financial statements. LITIGATION; TAXES: No litigation exists against Company or any Subsidiary, an adverse determination of which is reasonably likely to occur and if so adversely determined would be reasonably likely to have a January 4, 1996 Page 8 Material Adverse Effect and, at the time of the tender offer closing, there shall be (i) no injunction against consummation of the tender offer, (ii) no litigation pending or threatened which gives rise to a material likelihood that the merger will not be consummated or will be subject to the undue delay and (iii) no litigation pending or threatened, other than that as to which there is not a material likelihood of success, challenging the legality, validity or legal effect of the financing. Company and each Subsidiary have filed all material tax returns and paid all taxes due thereunder when due, except for those not delinquent, those the nonpayment of which would not be reasonably likely to result in a Material Adverse Effect and those contested in good faith. GOVERNMENTAL APPROVALS: No governmental consents or approvals required in connection with Loan Agreement and Notes, except routine filings under Securities Exchange Act of 1934 and the filing of International Capital Form CQ-1's. MARGIN REGULATIONS: No part of proceeds of Loans will be used in violation of Federal Reserve Regulation U, G, T and X. PARI PASSU OBLIGATIONS: Claims of other parties to Loan Agreement against Company will not be subordinate to, and will rank at least pari passu with, claims of other unsecured creditors of Company, except as may be provided for under applicable bankruptcy laws. NO DEFAULTS: No payment default in respect of Material Debt. "Material Debt" defined as debt of Company and/or one or more of its an aggregate principal amount. ERISA: Company and related ERISA entities (the "ERISA Group") have fulfilled their standards of ERISA and the Internal Revenue Code and are in substantial compliance with all material provisions of ERISA and Internal Revenue Code with respect to each ERISA plan. ERISA Group has not (i) sought a waiver of minimum funding standards, (ii) failed to make a contribution to any plan or made any amendment to any plan which could result in material lien or posting of material bonds or (iii) incurred material liability under Title IV of ERISA (other than for payment of premiums under ERISA). DISCLOSURE: Written information provided to the Banks in connection with Loan Agreement, collectively, does not contain any misstatement of a material fact or omit to state a fact necessary to make the statements contained therein, in light January 4, 1996 Page 9 which they were made, not misleading in any material respect on and as of the date of Loan Agreement. ENVIRONMENTAL: Based upon Company's periodic review of its ongoing operations (and those of its Restricted Subsidiaries), to the best knowledge of Company, ongoing operations at the Principal Properties are currently being conducted in substantial laws, except to the extent that noncompliance would not be reasonably likely to result in a material adverse change in the consolidated financial conditions of Company and its consolidated subsidiaries. COVENANTS Covenants customary for this type of --------- transaction, including: ACCOUNTING: Except as otherwise specified, accounting measurements will be per GAAP as in effect from time to time. Company or Required Banks have ability to request covenant change if change in GAAP affects covenant; effect of change in GAAP then suspended until new covenant negotiated. INFORMATION/REPORTING/DISTRIBUTION: 60 day delivery for quarterly financial reports and 120 day delivery for annual financial reports; delivery of such statements as filed with the SEC distributed to shareholders or filed with the SEC (with certain exceptions) to be distributed to the Banks promptly after becoming available. Company to provide prompt notice of (i) the occurrence of any Default and (ii) certain litigation. COMPUTATION OF COVENANTS: Company to provide with each distribution of annual and quarterly leverage ratio. MAINTENANCE OF EXISTENCE: Company and Significant Subsidiaries will preserve and maintain corporate business or corporate existence of a Subsidiary which in Company's judgment is no longer necessary or desirable. Mergers, consolidations and transfers of assets permitted as set forth below. No prohibition on merger of a Subsidiary into Company, or merger or consolidation of a Subsidiary with or into another entity if surviving corporation is a Subsidiary and no Default shall have occurred and be continuing. SALES OF ASSETS: Merger, consolidation, transfer or resulting corporation is Company or a consolidated subsidiary that is a assumes payment of indebtedness and performance of covenants under Loan Agreement, no Default shall have occurred and be continuing after giving January 4, 1996 Page 10 and if Company is not surviving corporation, there has been delivered an Officer's Certificate and legal opinion of its counsel stating that such Agreement. Upon any such transaction, the entity formed by such transaction shall succeed to and be substituted for Company under Loan Agreement. This covenant shall not apply to any sale of Wing's stock, so long as it is margin stock, for value. LIMITATION ON LIENS: No liens on assets of the Company or any Restricted Subsidiary to secure Debt allowed except (i) liens existing on the date of Loan Agreement, (ii) liens on property of a corporation existing at the time the corporation is merged or consolidated with Company or a securing debt owing to Company or mechanic's liens, (v) liens on property of a corporation existing at the time the corporation becomes a Restricted Subsidiary, (vi) liens on property at time of acquisition of property and purchase money liens, including liens incurred in connection with industrial revenue bonds, to secure payment of purchase price or indebtedness incurred or guaranteed prior to, at the time of or within one year after acquisition, completion of full operation of property if indebtedness incurred or guaranteed to pay purchase price of property or improvements, (vii) liens in favor of any customer (including any governmental authority) to secure partial, progress, advance or other payments or performance pursuant to any contract or statute or to secure any related indebtedness or to secure Debt guaranteed by a governmental authority, (viii) liens on cash or certificates of deposit or other bank aggregate principal amount not in excess of $200,000,000 (which may be in a different currency) of an amount substantially equal in value (at the time the lien is created) to such cash, certificates of deposit or other renewal, replacement of the foregoing, (x) liens equally and ratably severing this credit facility and such Debt and (xi) liens not otherwise referred to securing Debt that does not in the aggregate exceed the greater of 10% of stockholders' equity at the end of the $1,000,000,000. Liens described in (ii), (v) and (vi) shall not include any liens on stock or assets of "Wings" or its of the merger. This covenant shall not apply to margin stock in excess of 25% in value of the assets covered by this covenant. PAYMENT OF OBLIGATIONS: Company and each Significant Subsidiary will pay all material taxes, imposed upon it and all lawful material claims prior to date any penalty accrues or lien imposed except for (i) those contested in good faith, (ii) those not delinquent and (iii) those the nonpayment of which would not be reasonably likely to result in a Material Adverse Effect. January 4, 1996 Page 11 COMPLIANCE WITH LAWS: Company and each Significant Subsidiary shall comply with all laws, a breach of which would be reasonably likely to have a Material Adverse Effect, except where contested in good faith and by proper proceedings. INSURANCE: Company and each Significant Subsidiary will maintain insurance as is customarily carried by owners of similar businesses and properties (or to the customary extent, self-insurance). MAINTENANCE OF PROPERTIES: Company and its Significant Subsidiaries will keep all properties necessary in its business in good working order, normal wear and tear excepted; Company or any Subsidiary may discontinue operation and/or maintenance of such properties if discontinuance is in judgment desirable. LEVERAGE RATIO: Ratio of Debt (as defined) as of the last day of any fiscal quarter to the sum of (i) Debt (as defined) and (ii) Stockholders' Equity (as defined) at levels to be determined. STOCKHOLDERS' EQUITY AS DEFINED: Consolidated Stockholders' Equity of Company and consolidated Subsidiaries as reported. DEBT AS DEFINED: Debt shall mean, without duplication: (i) all debt, including ESOP obligations, reported as debt in statements of the Company and its (ii) all indebtedness for borrowed parties guaranteed by Company and otherwise reported as debt in the of the Company and its consolidated Subsidiaries. USE OF LOANS: Proceeds of the Loans may be used for any lawful corporate purpose. WAIVERS: Required Banks may waive compliance with any covenant (other than certain payments, fees, interest rate, due dates and guarantees, which require consent of all Banks). PRINCIPAL PAYMENTS: Failure to pay when due. January 4, 1996 Page 12 INTEREST AND FACILITY FEE PAYMENTS: Failure to pay within 5 days of due date. OTHER FEES: Failure to pay within 30 days after written request for payment thereof. BREACH OF CERTAIN COVENANTS: Failure to perform under the following covenants: BREACH OF OTHER COVENANTS: Failure to perform within 30 days after written notice. REPRESENTATIONS: 5 days to correct after written notice. ACCELERATION OF DEBT: Any Material Debt shall be accelerated by reasons of default thereunder or not paid when due and corrective action shall not have been taken within 5 days after written notice thereof. BANKRUPTCY: Company or any Significant Subsidiary under bankruptcy laws, or seek appointment of receiver or trustee, or shall consent to any of the foregoing; or makes a general assignment for benefit of creditors; or fails generally to pay its debts as they become due; or takes any corporate action to authorize the foregoing. Involuntary case or proceeding commenced against Company or any Significant bankruptcy laws or seeking appointment of trustee or receiver, and such proceeding shall remain undismissed and unstayed for a period of 90 days; or an order for relief shall be entered against Company or any Significant laws. FINAL JUDGMENTS: Final judgment requiring payment of $150,000,000 or more that has not been satisfied or stayed within 60 days and such failure to satisfy or stay is unremedied for 5 days after notice. ERISA: A final judgment either (1) requiring termination or imposing liability under Title IV of ERISA (other than for premiums) in respect of, or requiring a trustee to be appointed pursuant to Title IV of ERISA to administer, any plan or plans having unfunded liabilities in excess of $150,000,000 or (2) in an action relating to a Multiemployer Plan involving a current payment obligation in excess of $150,000,000, which judgment in either case has not been satisfied or stayed within 60 days and such failure to satisfy or stay is unremedied for 5 days after notice. January 4, 1996 Page 13 CHANGE IN OWNERSHIP OF STOCK: Any person or group of persons (other than employee benefit or stock ownership plan of Company) has acquired shares of capital stock having ordinary voting power to elect a majority of the Board of Directors of Company or change in majority of Board of Directors within a two-year period. GUARANTY INVALIDATED: Revocation or invalidation of guaranty of the Loan Agreement and the Notes. REMEDIES: Commitments terminate and loan/interest become due and payable upon the receipt of notice from Documentation Agent (automatic in case of bankruptcy). NOTICES OF DEFAULT: All notices or requests specified in Events of Default provisions to be given by Documentation Agent at the request of the Required Banks. TO JURISDICTION: New York law governs. Parties submit to the jurisdiction of New York courts for all legal proceedings and waive any objection to the laying of venue of any such proceeding brought in such a court and claim of inconvenient forum. WAIVER OF JURY TRIAL: Company, Agents and Banks each waive rights to trial by jury. REQUIRED BANKS: Banks holding in excess of 50% of outstanding Commitments. illegality provisions to be included and will generally provide that no increased cost or capital adequacy payment may be claimed if allocable to periods prior to 30 days prior to date Company is notified of claim by a Bank; no compensation for increases in capital not occasioned by a Change in Law or beyond that required by a Change in Law. compensation shall designate a different lending office if such designation will avoid the need for, or reduce the amount of, such compensation or permit the Bank to make or maintain any LIBOR Loan, so long as such designation is not disadvantageous to such Bank. Any Regulation D charges shall be billed through Administrative Agent. "Change in Law" as defined is the adoption of any law, rule or regulation, or any change therein, or any change in thereof, after Closing Date, by any governmental authority, central bank or January 4, 1996 Page 14 compliance with any directive (whether or not having the force of law) of any such entity. INDEMNITY: Company to indemnify Banks for (i) funding costs and/or losses (excluding loss of margin) if prepayment or conversion of a LIBOR Loan or a CD Loan occurs prior to the end of an Interest Period or if Company fails to consummate a LIBOR Loan or a CD Loan because conditions precedent to borrowing or conversion not satisfied and (ii) reasonable costs and expenses of litigation in response to or in defense of any proceeding brought or threatened against a Bank relating to the Agreement or Company's use of proceeds of the Loans. EXPENSES: In connection with preparing Loan Agreement, Company will pay reasonable fees and disbursements of special counsel to Agents and reasonable out-of- pocket expenses incurred by Agents. In connection with an Event of Default and pay reasonable out-of-pocket expenses of Agents and Banks, including reasonable fees and expenses of counsel (including in-house counsel). DOCUMENT PREPARATION: Loan Agreement to be prepared by Davis Polk & Wardwell. January 4, 1996 Page 15 The LIBOR Margin, the CD Margin and the Facility Fee shall be as specified below (in basis points per annum).	SC 14D1	EX-99.(B)(1)	1996-01-12T00:00:00	1996-01-12T17:26:30
0000950130-96-000108	0000950130-96-000108_0019.txt	<DESCRIPTION>LORAL CORPORATION EMPLOYMENT PROTECTION PLAN Loral Corporation (the "Company") believes that the best interests of the Company and its shareholders will be served if certain key employees of the Company are provided with certain rights upon a Change of Control (as hereinafter defined). Accordingly, the Company hereby establishes this "Loral Corporation Employment Protection Plan" (the "Plan") for the benefit of such key employees. In addition to the terms defined in the preceding paragraph, the following definitions shall apply for purposes of the Plan. 1.1. "Annual Bonus" means the greater of the two most recent fiscal year bonuses (annualized, if awarded in respect of a partial year) awarded to an Eligible Employee prior to a Change of Control under the bonus program of any Loral Company applicable to such Executive. 1.2. "Annual Salary" means an Eligible Employee's annual rate of regular salary as in effect immediately prior to the Change of Control. 1.3. "Board" means the Board of Directors of the Company. 1.4. "Cause" means any of the following, other than due to an Eligible Employee's Permanent Disability or death: (a) an Eligible Employee's gross misconduct which is demonstrably willful and deliberate and which results in material damage to the Company's (b) an Eligible Employee's repeated willful and deliberate neglect of, or refusal to perform, the duties required or associated with the Eligible Employee's employment. 1.5. "Change of Control" means the occurrence of any of the following events: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act"), and as used in Sections 13(d) and 14(d) thereof)), excluding the Company, any majority owned subsidiary of the Company (a "Subsidiary") and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), but including a "group" as defined in Section 13(d)(3) of the Exchange Act (a "Person"), becomes the beneficial owner of shares of the Company having at least 50% of the total number of votes that may be cast for the election of directors of the Company (the "Voting Shares") provided, however, that such an event shall not constitute a Change of Control if such acquisition has been approved by a majority of the Incumbent Directors (as defined in subsection 1.4 (iii)); (ii) the shareholders of the Company shall approve any merger or other business combination of the Company, sale of the Company's assets or combination of the foregoing transactions (a "Transaction") other than a Transaction involving only the Company and one or more of its Subsidiaries, a Transaction approved by a majority of the Incumbent Directors, or a Transaction immediately following which the shareholders of the Company immediately prior to the Transaction, excluding for this purpose any shareholder owning directly or indirectly more than 10% of the shares of the other company involved in the Transaction, continue to have a majority of the voting power in the resulting entity, or (iii) within any 24-month period beginning on or after January 7, 1996, the persons who were directors of the Company immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that any director who was not a director as of January 7, 1996 shall be deemed to be an Incumbent Director if such director was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this subsection 1.4 (iii); provided, however, that no Change of Control shall be deemed to occur as a result of the successful consummation of the "Offer" (as defined in Section 1.1(a) of the Agreement and Plan of Merger Dated as of January 7, 1996 By and Among the Company, Lockheed Martin Corporation and LAC Acquisition Corporation), or upon the successful consummation of any transaction which is approved by the Incumbent Directors and as a result of which Lockheed Martin Corporation or any wholly owned subsidiary thereof acquires substantially all of the Company's defense businesses (the "Lockheed Martin Merger"). 1.6. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.7. "Committee" means the Compensation Committee of the Board. 1.8. "Common Stock" means the common stock of the Company, $.25 par value per share. 1.9. "Company" means the Loral Corporation and any successor or successors thereto. 1.10. "Eligible Employee" means each full-time employee of either the Company or another Loral Company whose name appears on Schedule A hereto. 1.11. "Eligible Termination" means an involuntary termination of employment without Cause, or a resignation for Good Reason, which occurs as of or within the three-year period following a Change of Control; provided, however, that the transfer of employment to another employer that is a member of the Loral Companies shall not in itself constitute an Eligible Termination (but any such transfer will not preclude another or accompanying event or reason from constituting or causing an Eligible Termination, and the protections of the Plan and corresponding obligations of the Company will remain in effect following any such transfer of employment). 1.12. "Good Reason" means any one or more of the following events, which occurs without an Eligible Employee's express prior written consent or approval, other than due to an Eligible Employee's Permanent Disability or death: (i) a good faith determination by the Eligible Employee that the Company or any of its officers has taken or failed to take any action (including, without limitation, (A) exclusion of the Eligible Employee from consideration of material matters within his area of responsibility, other than an insubstantial or inadvertent exclusion remedied by the Company promptly after receipt of notice thereof from the Eligible Employee, (B) statements or actions which undermine the Eligible Employee's authority with respect to persons under his supervision or reduce his standing with his peers, other than an insubstantial or inadvertent statement or action which is remedied by the Company promptly after receipt of the notice thereof from the Eligible Employee, (C) a pattern of discrimination against or harassment of the Eligible Employee or persons under his supervision and (D) the subjection of the Eligible Employee to procedures not generally applicable to other similarly situated executives) which changes the Eligible Employee's position (including titles), authority or responsibilities under Section 4 of this Agreement or reduces the Eligible Employee's ability to carry out his duties and responsibilities under Section 4 of this Agreement; (ii) any reduction in an Eligible Employee's Annual Salary or any material reduction in his annual bonus opportunity or employee benefits from the level in effect immediately prior to the Change of Control, other than an insubstantial or inadvertent failure remedied by the Company promptly after receipt of notice thereof from the Eligible Employee; or (iii) the Company's requiring the Eligible Employee to be employed at any location more than 35 miles further from his principal residence than the location at which the Eligible Employee was employed immediately preceding the Effective Date. 1.13. "Permanent Disability" means an Eligible Employee's inability, by reason of any physical or mental impairment, to substantially perform the significant aspects of his or her regular duties, which inability is reasonably contemplated to continue for at least one (1) year from its incurrence. 1.14. "Plan" means the Loral Corporation Employment Protection Plan, as set forth herein and as amended from time to time. 1.15. "Severance Period" means the period commencing on the date of an Eligible Employee's Eligible Termination and continuing for a period of twenty-four months. 1.16. "Loral Companies" means the Company and its subsidiaries and affiliates, and any successor or successors thereto. SECTION 2. EFFECT OF AN ELIGIBLE TERMINATION 2.1. If an Eligible Employee incurs an Eligible Termination, the Eligible Employee shall be entitled to all applicable benefits provided hereafter in this Section 2 or as otherwise set forth in this Plan. (a) Salary and Bonus: Within two (2) business days after the date of his or her Eligible Termination, the Company shall pay or cause to be paid to the Eligible Employee a single lump sum amount, in cash, equal to two times the sum (1) the Eligible Employee's Annual Salary, (2) the Eligible Employee's Annual Bonus, and (3) an amount equal to the average annual compensation received by the Eligible Employee (determined as the sum of the amount includable as current income to the Eligible Employee for tax purposes plus any amount which would have been so includable but for a deferral election) under the Company's restricted stock plan over the three fiscal years prior to the Change of Control. (b) Continued Welfare Benefits: Until the earlier of the end of an Eligible Employee's Severance Period or the date on which such Eligible Employee becomes employed by a new employer, the Company shall, at its expense, provide such Eligible Employee with medical, dental, life insurance, disability and accidental death and dismemberment benefits at the highest level provided to such Eligible Employee during the period beginning immediately prior to the Change of Control and ending on the date of such Eligible Employee's Eligible Termination; provided, however, that if the Eligible Employee becomes employed by a new employer which maintains a major medical plan (or its equivalent) that either (i) does not cover the Eligible Employee with respect to a pre-existing condition which was covered under the Company's major medical plan, or (ii) does not cover the Eligible Employee for a designated waiting period, the Eligible Employee's coverage under the Company's major medical plan shall continue (but shall be limited in the event of noncoverage due to a preexisting condition, to the preexisting condition itself) until the earlier of the end of the applicable period of noncoverage under the new employer's plan or the end of the Severance Period. Following such Severance Period or the date of new employment, if earlier, the regular rights of an Eligible Employee to continuation of benefits under COBRA coverage, if any, shall apply. (c) Payment of Accrued But Unpaid Amounts: Within two (2) business days after the date of his or her Eligible Termination, the Company shall pay the Eligible Employee (i) any unpaid portion of the Eligible Employee's bonus accrued with respect to the full calendar year ended prior to the date of the Eligible Termination, and (ii) all compensation earned or previously deferred by such Eligible Employee but not yet paid (including cash compensation for vacation days accrued but not taken as of the date of the Eligible Termination, based on the Annual Salary amount converted to a per diem equivalent in accordance with the Company's normal payroll practices as in effect prior to the change of Control). (d) Payment for Other Reduced Severance Benefits. The amounts payable to an Eligible Employee under this Section 2 are supplemental to any other severance benefits to which the Eligible Employee is entitled under any severance plan or Plan of the Loral Companies in effect as of the Change of Control (collectively, "Other Severance Benefits"). In the event that an Eligible Employee's Other Severance Benefits are reduced or eliminated after the Change of Control, the amount otherwise payable to an Eligible Employee hereunder upon an Eligible Termination shall be increased by the amount of such reduction or elimination. 2.2. Maximum Benefits: Anything in Section 2.1 to the contrary notwithstanding, payments under Section 2.1 shall not exceed the maximum amount which can be paid to an Eligible Employee without causing such payments to be treated as "excess parachute payments" for purposes of Section 280G of the Code taking into account all payments made to the Eligible Employee which constitute "parachute payments" for purposes of Section 280G. 2.3. Mitigation: An Eligible Employee shall not be required to mitigate damages or the amount of any payment provided for under this Plan by seeking other employment or otherwise, and compensation earned from such employment or otherwise shall not reduce the amounts otherwise payable under this Plan. No amounts payable under this Plan shall be subject to reduction or offset in respect of any claims which the Company or any member of the Loral Companies (or any other person or entity) may have against the Eligible Employee. 2.4. Withholding: The Company may, to the extent required by law, withhold applicable federal and state income, employment and other taxes from any payments due to any Eligible Employee hereunder. SECTION 3. LIMITS ON AMENDMENT OR TERMINATION; EFFECT ON 3.1. This Plan shall terminate automatically and without further action by the Board upon the successful consummation of the Lockheed Martin Merger. 3.2. The Board may amend or terminate this Plan at any time; provided, however, that upon occurrence of a Change of Control, this Plan (expressly including, but not limited to, this Section 3) shall remain in effect, and may not be altered or amended in any way which would adversely affect the rights of any Eligible Employee hereunder, for at least three (3) years following the Change of Control, and for such additional time as may be necessary to give effect to the terms of the Plan as in effect at the Change of Control. Thereafter, the Board may amend or terminate this Plan in any manner which does not adversely affect the rights of any Eligible Employee who has incurred an Eligible Termination. 3.3 An Eligible Employee shall, after the date of his or her Eligible Termination, retain all rights (to the extent any such rights existed at any time prior to the Change of Control) to indemnification under applicable law or under the applicable Loral Companies' Certificate of Incorporation or By-Laws, as they may be amended or restated from time to time. In addition, to the extent coverage had been otherwise available to the Eligible Employee prior to the Change of Control, the Company shall maintain Director's and Officer's liability insurance on behalf of the Eligible Employee, at the level in effect immediately prior to the date of his or her Eligible Termination. SECTION 4. ADMINISTRATION OF THE PLAN 4.1 The Committee shall be the Administrator of this Plan and shall have the exclusive right, power and authority to: (a) interpret, in its sole discretion, any and all of the (b) establish a claims review procedure, if necessary and (c) consider and decide conclusively any questions (whether of fact or otherwise) arising in connection with the administration of the Plan or any claim for a benefit arising under the Plan. Any decision or action of the Committee pursuant to this Section 4.1 shall be conclusive and binding. 4.2. The Company shall pay all costs and expenses, including attorneys' fees and disbursements, at least monthly, of any Eligible Employee in connection with any legal proceeding (including arbitration), whether or not instituted by a member of the Loral Companies or an Eligible Employee, relating to the interpretation or enforcement of any provision of this Plan, except that if such Eligible Employee instituted the proceeding and the judge, arbitrator or other individual presiding over the proceeding affirmatively finds that the Eligible Employee instituted the proceeding in bad faith, the Eligible Employee shall pay all costs and expenses, including attorney's fees and disbursements, of such Eligible Employee. 5.1 Neither the establishment of the Plan nor any action of the Company, any other member of the Loral Companies, the Committee, or any fiduciary shall be held or construed to confer upon any person any legal right to continued employment with the Company or with any member of the Loral Companies. Nothing in the Plan shall be construed to prevent the Company or any member of the Loral Companies from terminating an Eligible Employee's employment for Cause. If an Eligible Employee is terminated for Cause, the Company shall have no obligation to make any payments under this Plan, except for payments that may otherwise be payable under then existing Employee benefit plans, Plans and arrangements of the Company or of any other member of the Loral Companies. 5.2. Benefits payable under the Plan shall be paid out of the general assets of the Company. The Company is not required to fund the benefits payable under this Plan; provided, however, nothing in this Section 5.2 shall be interpreted as precluding the Company from funding or setting aside amounts in anticipation of paying any such benefits. 5.3. Benefits payable under the Plan shall not be subject to assignment, alienation, transfer, pledge, encumbrance, commutation or anticipation by any Eligible Employee. Any attempt to assign, alienate, transfer, pledge, encumber, commute or anticipate Plan benefits shall be void. In addition, no rights or interest under the Plan shall be in any manner subject to levy, attachment or other legal process to enforce payment of any claim against any Eligible Employee except to the extent required by law. 5.4. Except as otherwise provided herein, this Plan shall be binding upon, inure to the benefit of and be enforceable by the Company and the Eligible Employees and their respective heirs, legal representatives, successors and assigns. If the Company shall be merged into or consolidated with another entity, the provisions of this Plan shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation, and such provisions shall also be binding upon and inure to the benefit of any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, and such successor shall assume and perform the obligations, responsibilities and liabilities to which the Company or any member of the Loral Companies is subject under this Plan in the same manner and to the same extent that the Company or any member of the Loral Companies would be required to perform if no such succession had taken place. The provisions of this Section 5.4 shall continue to apply to each subsequent employer of any Eligible Employee in the event of any subsequent merger, consolidation or transfer of assets of any such subsequent employer. 5.5. This Plan shall be governed by and construed in accordance with the laws of the State of New York (without reference to rules relating to conflicts of laws), except to the extent superseded by applicable federal law. 5.6. Any action required or permitted to be taken by the Company under this Plan shall be taken by the Board or by the Committee, or any designee of the Committee pursuant to Section 4, in each case subject to the limits on amendment and termination contained in Section 3 hereof. 5.7. Entitlement to any benefits under this Plan is expressly subject to and conditioned upon the Eligible Employee agreeing to and signing (i) a customary exit letter that may contain confidentiality, future cooperation and other provisions, if requested, and (ii) the Company's standard form general release of employment and other claims that the Eligible Employee may have.	SC 14D1	EX-99.(C)(7)	1996-01-12T00:00:00	1996-01-12T17:26:30
0000950130-96-000108	0000950130-96-000108_0005.txt	OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK A WHOLLY OWNED SUBSIDIARY OF THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, FEBRUARY 9, 1996, UNLESS THE OFFER IS EXTENDED. LAC ACQUISITION CORPORATION HAS AGREED, SUBJECT TO THE TERMS AND CONDITIONS OF THE OFFER, TO EXTEND THE OFFER UNTIL IMMEDIATELY AFTER THE TIME OF THE SPIN- OFF RECORD DATE (AS DEFINED IN THE OFFER TO PURCHASE). Enclosed for your consideration are the Offer to Purchase, dated January 12, 1996 (the "Offer to Purchase"), and the related Letter of Transmittal (which together constitute the "Offer") and other materials relating to the Offer by LAC Acquisition Corporation (the "Purchaser"), a New York corporation and a wholly owned subsidiary of Lockheed Martin Corporation, a Maryland corporation (the "Parent"), to purchase all outstanding shares of common stock, par value $0.25 per share (including the associated Rights (as defined in the Offer to Purchase)) (collectively, the "Shares"), of Loral Corporation, a New York corporation (the "Company"), at $38.00 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer. This material is being sent to you as the beneficial owner of Shares held by us for your account but not registered in your name. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL ACCOMPANYING THIS LETTER IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. We request instructions as to whether you wish to have us tender any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer. Your attention is directed to the following: 1. The tender price is $38.00 per Share, net to the seller in cash, without interest. 2. The Offer and withdrawal rights will expire at 12:00 Midnight, New York City time, on Friday, February 9, 1996 unless the Offer is extended. LAC Acquisition Corporation has agreed, subject to the terms and conditions of the Offer, to extend the Offer until immediately after the time of the Spin-Off Record Date (as defined in the Offer to Purchase). 3. The Offer is being made as part of a series of transactions that are expected to result in (i) the distribution to the stockholders of the Company of shares of stock in Loral Space & Communications Ltd., a newly-formed Bermuda company that will own and manage substantially all of the Company's space and satellite telecommunications interests, including Globalstar, L.P. ("Globalstar") and Space Systems/ Loral, Inc. ("SS/L") and certain other assets of the Company (the "Spin-Off") and (ii) the acquisition of the Company's defense electronics and systems integration businesses by the Parent pursuant to the Offer and the Merger (as defined in the Offer to Purchase). 4. The Board of Directors of the Company has unanimously approved the Offer, the Merger and the Spin-Off, determined that the Offer, the Merger and the Spin-Off are fair to the stockholders of the Company and are in the best interests of the stockholders of the Company, and recommends acceptance of the Offer and approval and adoption of the Merger Agreement and the Merger by the stockholders of the Company. 5. The Offer is conditioned upon, among other things, there being validly tendered and not withdrawn prior to the Expiration Date (as defined in the Offer to Purchase) a number of Shares which, when added to the number of shares then beneficially owned by Parent and its affiliates, represents at least two-thirds of the total number of Shares outstanding and two-thirds of the voting power of the Shares outstanding on a fully diluted basis. 6. Any stock transfer taxes applicable to the sale of Shares to the Purchaser pursuant to the Offer will be paid by the Purchaser, except as otherwise provided in Instruction 6 of the Letter of Transmittal. The Company has advised the Purchaser that, prior to the time notice of the Spin-Off Record Date is given and at least ten days prior to the Expiration Date, it expects to distribute to holders of Shares and holders of other equity securities of the Company an Information Statement with respect to the Spin-Off (each as defined in the Offer to Purchase). The Offer is being made to all holders of Shares. The Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of Shares in any jurisdiction in which the making of the Offer or acceptance thereof would not be in compliance with the laws of such jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Purchaser by Bear, Stearns & Co. Inc. or one or more registered brokers or dealers licensed under the laws of such jurisdictions. If you wish to have us tender any or all of the Shares held by us for your account, please so instruct us by completing, executing and returning to us the instruction form set forth below. Please forward your instructions to us in ample time to permit us to submit a tender on your behalf prior to the expiration of the Offer. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified on the instruction form set forth below. OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase, dated January 12, 1996, and the related Letter of Transmittal, in connection with the offer by LAC Acquisition Corporation, a New York corporation and a wholly owned subsidiary of Lockheed Martin Corporation, a Maryland corporation, to purchase for cash all outstanding shares of common stock, par value $0.25 per share (including the associated Rights (as defined in the Offer to Purchase)) (collectively, the "Shares"), of Loral Corporation, a New York corporation. This will instruct you to tender the number of Shares indicated below (or if no number is indicated below, all Shares) that are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer. NUMBER OF SHARES TO BE TENDERED: Area Code and Telephone Number(s) *I (We) understand that if I (we) sign this instruction form without indicating a lesser number of Shares in the space above, all Shares held by you for my (our) account will be tendered.	SC 14D1	EX-99.(A)(5)	1996-01-12T00:00:00	1996-01-12T17:26:30
0000882377-96-000005	0000882377-96-000005_0000.txt	Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): December 28, 1995 (as depositor under a Pooling and Servicing Agreement, dated as of December 1, 1995, providing for, among other things, the issuance of Mortgage Pass-Through (Exact name of registrant as specified in its charter) (State or Other Jurisdiction (Commission (I.R.S. Employer of Incorporation) File Number) Identification No.) NEW YORK, NEW YORK 10005 (Address of Principal (Zip Code) Registrant's telephone number, including area code, is (212) 504-3000 Item 2. ACQUISITION OR DISPOSITION OF ASSETS. For a description of the Certificates and the Mortgage Pool, refer to the Pooling and Servicing Agreement. Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. 4.1 Pooling and Servicing Agreement, dated as of December 1, 1995, among DLJ Mortgage master servicer, and Bankers Trust Company, Certificates, Series 1995-Q10. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. 4.1 Pooling and Servicing Agreement, dated as of P* December 1, 1995, among DLJ Mortgage Acceptance Corp., as depositor, Temple-Inland Mortgage Corporation, as master servicer, and Bankers Trust Company, as trustee, Mortgage Pass-Through Certificates, Series 1995-Q10. * The Mortgage Loan Schedule attached as an exhibit to the Pooling and Servicing Agreement has been filed on paper pursuant to a continuing hardship exemption from certain electronic filing requirements.	8-K	8-K	1996-01-12T00:00:00	1996-01-12T12:47:54
0000950130-96-000109	0000950130-96-000109_0000.txt	Under the Securities Exchange Act of 1934 (Title of Class of Securities) (Title of Class of Securities) (Title of Class of Securities) (Name, address and telephone number of persons authorized to receive notices and communications) (Date of Event which requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b) (3) or (4), check the following box: ____ Check the following box if a fee is being paid with this statement: x CUSIP NO. 559177 20 9 CUSIP NO. 559177 30 8 CUSIP NO. 559177 40 7 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person 2. Check the Appropriate Box if a Member of a Group 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 6. Citizenship or Place of Organization Number of 7. Sole Voting Power Beneficially 8. Shared Voting Power Owned by 51,000,596 Common Shares Each Reporting 9. Sole Dispositive Power Person With 51,000,596 Common Shares Convertible Preferred Stock Series D Convertible Preferred Stock Series D 11. Aggregate Amount Beneficially Owned by Each Reporting 1,248,462 Series D Preferred Shares 1,443,232 Series E Preferred Shares See Item 5 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares 13. Percent of Class Represented by Amount in Row (11) 93.1% Series D Preferred Shares 90.3% Series E Preferred Shares See Item 5 14. Type of Reporting Person CUSIP NO. 559177 20 9 CUSIP NO. 559177 30 8 CUSIP NO. 559177 40 7 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person BHP Holdings (USA) Inc. 13-3197779 2. Check the Appropriate Box if a Member of a Group 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 6. Citizenship or Place of Organization Number of 7. Sole Voting Power Beneficially 8. Shared Voting Power Owned by 51,000,596 Common Shares Each Reporting 9. Sole Dispositive Power Person With 51,000,596 Common Shares Convertible Preferred Stock, Series D Convertible Preferred Stock, Series D 11. Aggregate Amount Beneficially Owned by Each Reporting 1,248,462 Series D Preferred Shares 1,443,232 Series E Preferred Shares See Item 5 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares 13. Percent of Class Represented by Amount in Row (11) 93.1% Series D Preferred Shares 90.3% Series E Preferred Shares See Item 5 14. Type of Reporting Person CUSIP NO. 559177 20 9 CUSIP NO. 559177 30 8 CUSIP NO. 559177 40 7 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person BHP Peru Holdings Inc. 51-0371136 the Appropriate Box if a Member of a Group 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 6. Citizenship or Place of Organization Number of 7. Sole Voting Power Beneficially 8. Sole Voting Power Owned by 51,000,596 Common Shares Each Reporting 9. Sole Dispositive Power Person With 51,000,596 Common Shares Convertible Preferred Stock Series D Convertible Preferred Stock Series D 11. Aggregate Amount Beneficially Owned by Each Reporting 1,248,462 Series D Preferred Shares 1,443,232 Series E Preferred Shares See Item 5 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares 13. Percent of Class Represented by Amount in Row (11) 93.1% Series D Preferred Shares 90.3% Series E Preferred Shares See Item 5 14. Type of Reporting Person CUSIP NO. 559177 20 9 CUSIP NO. 559177 30 8 CUSIP NO. 559177 40 7 1. Name of Reporting Person S.S. or I.R.S. Identification No. of Above Person Not Applicable The Broken Hill Proprietary Company Limited 2. Check the Appropriate Box if a Member of a Group 5. Check Box if Disclosure of Legal Proceedings is Required Pursuant to Items 6. Citizenship or Place of Organization Number of 7. Sole Voting Power Beneficially 8. Shared Voting Power Owned by 51,000,596 Common Shares Each Reporting 9. Sole Dispositive Power Person With 51,000,596 Common Shares Convertible Preferred Stock, Series D Convertible Preferred Stock Series D 11. Aggregate Amount Beneficially Owned by Each Reporting 1,248,462 Series D Preferred Shares 1,443,232 Series E Preferred Shares See Item 5 12. Check if the Aggregate Amount in Row (11) Excludes Certain Shares 13. Percent of Class Represented by Amount in Row (11) 93.1% Series D Preferred Shares 90.3% Series E Preferred Shares See Item 5 14. Type of Reporting Person 5-5/8% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES D 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES E Item 1. Security and Issuer. This Schedule 13D relates to the (i) Common Stock, $0.01 par value (the "Common Shares"), (ii) 5-5/8% Cumulative Convertible Preferred Stock, Series D, $0.01 par value (the "Series D Preferred Shares") and (iii) 6% Cumulative Convertible Preferred Stock, Series E, $0.01 par value (the "Series E Preferred Shares", together with the Series D Preferred Shares and the Common Shares, the "Shares") each of Magma Copper Company (the "Issuer"). The principal executive office of the Company is located at 7400 North Oracle Road, Suite 200 Tucson, Arizona 85704. Item 2. Identity and Background. BHP Sub Inc. ("Purchaser") is a Delaware Corporation, with its principal place of business at 550 California Street, San Francisco, California 94104. To date, Purchaser has not, and is not expected to, conduct any business other than incident to the formation, the execution and delivery of the Merger Agreement (as defined below) and the consumation of the Offer (as defined below) and the Merger (as defined below). Purchaser is a direct wholly owned subsidiary of BHP Peru Holdings Inc. ("New Sub"), a Delaware corporation, with its principal place of business at 550 California Street, San Francisco, California 94104. New Sub is a direct wholly owned subsidiary of BHP Holdings (USA) Inc. ("Sub"), a Delaware corporation, with its principal business address at 900 Market Street, Suite 200, Wilmington, Delaware 19801. Each of New Sub and Sub is a holding company and conducts no operations other than holding the securities of other operating companies. Sub is a subsidiary of The Broken Hill Proprietary Company Limited ("BHP"), a Victoria Australia corporation, with its principal business at BHP Tower, Bourke Place, 600 Bourke Street, Melbourne, Victoria 3000 Australia. BHP is a major international resources company which has its headquarters in Australia and operations in over 20 countries. BHP's three principal areas of business are minerals exploration and production (principally coal, iron ore, copper concentrate and manganese ore), hydrocarbon exploration, production and refining and steel production. Item 3. Source and Amount of Funds or Other Consideration. Purchaser has estimated that the total amount of funds required by Purchaser to purchase the Shares pursuant to the Offer (as defined below) and the Merger (as defined below) and to pay related fees and expenses will be approximately U.S.$1.83 billion, of which approximately $1.64 billion was paid to purchase the Shares that are the subject of this report. BHP has obtained such funds through intercompany funding arrangements. The cash needs of the BHP group of companies (the "BHP Group") are generally financed through arrangements with BHP Finance Limited ("BFL"), a wholly owned subsidiary of BHP. BFL in turn may, from time to time, borrow funds pursuant to its general corporate financing program. BFL has access to a variety of sources of financing including a number of credit agreements and standby facilities. BFL has access to additional financing through a number of major banks with whom it has working relationships. In order to meet the forecasted general corporate cash needs of the BHP Group (including cash which may be used to purchase the Shares pursuant to the Offer), BFL has recently entered into additional loan agreements in an aggregate amount of approximately Australian Dollars ("A$") $2 billion. The maturities of BFL's borrowings generally vary from one to ten years and the interest rates are generally linked to LIBOR or Australian Bank Bill Rates, and generally are payable at periods of one, three or six months. All current and anticipated borrowings of BFL are unsecured; however, the payment obligations of BFL are guaranteed by BHP. It is expected that the cash flow of the BHP Group, in the ordinary course of business, will be sufficient to enable BFL to repay its borrowings. Item 4. Purpose of Transaction. The Shares that are the subject of this filing were acquired by Purchaser in furtherance of the purposes of the Agreement and Plan of Merger dated as of November 30, 1995 (the "Merger Agreement") by and among BHP, Sub, Purchaser and the Issuer, which provides for the acquisition by Purchaser of all of the issued and outstanding capital stock of the Issuer and the merger (the "Merger") of Purchaser with and into the Issuer. The Purchaser, having acquired at least 90% of the outstanding Shares of each class of capital stock of the Issuer, intends to consummate a merger with and into the Issuer in accordance with Section 253 of the Delaware General Corporation Law. Upon comsummation of the Merger, the Issuer would be an indirect wholly owned subsidiary of BHP. The Merger Agreement is filed hereunder as Exhibit 1 and is incorporated herein by reference. Item 5. Interest in Securities of the Issuer. (a) Each of the reporting persons beneficially owns 51,000,596 Common Shares, 1,248,462 Series D Preferred Shares and 1,443,232 Series E Preferred Shares which shares represent 99.2%, 93.1% and 90.3%, respectively, of the shares of each such class of stock outstanding. In the aggregate, the Shares that are the subject of this filing represent approximately 97.9% of the Common Shares on a fully diluted basis, assuming full conversion of the Preferred Shares into the Common Shares. (b) Each of the reporting persons has the sole power to vote and dispose of all of the Shares listed in item (a). (c) On December 5, 1995 the Purchaser commenced, in accordance with the Merger Agreement, a tender offer (the "Offer") for all of the (i) Common Shares at a price of $28.00 per Share (ii) Series D Preferred Shares at a price of $96.544 per Share and (iii) Series E Preferred Shares at a price of $100.646 per Share. The Offer expired at 12:00 a.m. on January 4, 1996. On January 5, 1996, Purchaser announced that it would accept for payment all Shares validly tendered pursuant to the Offer. The Shares that are the subject of this report include all of the Shares that were tendered and accepted pursuant to the Offer and additional Shares consisting of 17,500 Series D Preferred Shares (representing 1.31% of such Shares) and 25,800 Series E Preferred Shares (representing 1.76% of such Shares) which were offered by a single holder on January 10, 1996 and purchased at the same price and on the same terms as Shares timely tendered. Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer. Purchaser, Sub, BHP and the Issuer entered into the Merger Agreement, which provides, among other things, that as soon as practical after the purchase of the Shares pursuant to the Offer and the satisfaction of the other conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Issuer. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as Exhibit 1, and is incorporated by reference. Item 7. Material to be Filed as Exhibits 1. Merger Agreement, dated as of November 30, 1995, by and among Purchaser, Sub, BHP and the Issuer. After reasonable inquiry and to the best of the knowledge and belief of each reporting person named below, each such reporting person certifies that the information set forth in this statement is true, complete and correct. Each of the undersigned reporting persons hereby agrees that this statement be and hereby is filed on behalf of each such reporting person. By: /s/ T. Rognald Dankmeyer By: /s/ T. Rognald Dankmeyer Name: By: /s/ T. Rognald Dankmeyer By: /s/ T. Rognald Dankmeyer Set forth below is the name, position and present principal occupation of each of the directors and executive officers of BHP Sub Inc. ("Purchaser"), BHP Peru Holdings Inc. ("New Sub"), BHP Holdings (USA) Inc. ("Sub") and The Broken Hill Proprietary Company Limited ("BHP"). A. DIRECTORS AND EXECUTIVE OFFICERS OF BHP The following table sets forth the name, citizenship, present principal occupation or employment, and material occupations, positions, offices or employment for the past five years of each director and executive officer of BHP. All of the Executive Directors, with the exception of Mr. O'Connor, and the executive officers who are not directors, have been employed by BHP for more than five years. The business address of each such person, unless otherwise indicated, is BHP Tower, 600 Bourke Street, Melbourne 3000, Victoria, Australia. Brian T. Loton Mr. Loton, an Australian citizen, has been a director of BHP since 1976, and has been Chairman of the Board since 1992. He served as Deputy Chairman from 1989 to 1992 and was Managing Director and Chief Executive Officer from 1984 to 1991. He is also Vice Chairman of National Australia Bank Ltd., a director of Amcor Ltd., and a director of Australian Foundation Investment Company Ltd. John B. Prescott Mr. Prescott, an Australian citizen, has been a director of BHP since 1989. He has also served as Managing Director and Chief John B. Reid Mr. Reid, an Australian citizen, has served as a director of BHP since 1972. He has served for the past five years as Chairman of James Hardie Industries Ltd., a manufacturing company. He is also a director of Focus Publications Ltd. His business address is 65 York Street, Sydney 2000, New South Wales, Australia. John B. Gough Mr. Gough, an Australian citizen, has been a director of BHP since 1984. For the past five years he has served as Chairman of Pacific Dunlop Limited, a marketing and distribution company. He is also Chairman of Australia & New Zealand Banking Group Ltd. and a director of CSR Ltd. His business address is 101 Collins Street, Melbourne 3000, Victoria, Australia. David W. Rogers Mr. Rogers, an Australian citizen, has been a director of BHP since 1987. From 1984 to 1993, Mr. Rogers was a Senior Partner at Arthur Robinson & Hedderwicks, Solicitors, and since 1993 has been a Consultant to Arthur Robinson & Hedderwicks. For the past five years, Mr. Rogers has been a director of the AMP Society, a life insurance company, and of Amcor Paper Group, a division of Amcor Limited, a paper manufacturer. He is also the Chairman of Woodside Petroleum Limited. His business address is 550 Collins Street, Melbourne 3000, Victoria, Australia. Geoffrey E. Heeley Mr. Heeley, an Australian citizen, has been an Executive Director of BHP since 1988 and Executive General Manager, Finance, of BHP since 1984. He is also a director of Metal Manufactures Ltd., a director of ICI Australia Ltd. and a director of Victorian Clinical Genetics Services Ltd. David J. Asimus Mr. Asimus, an Australian citizen, has been a director of BHP since 1988. He has been Chancellor of Charles Sturt University, an educational institution, since 1990. For the past five years he has been a director of Rural Press Limited, a publishing company, Australia Bank, a banking institution. Mr. Asimus has also been a director of Wesfarmers Limited, an industrial company, since 1990. His business address is Alabama, Tumbarumba Road, Wagga Wagga 2650, New South Wales, Australia. Jeremy K. Ellis Mr. Ellis, an Australian citizen, has served as an Executive Director of BHP and Executive General Manager of BHP Minerals since 1991. He is also Chairman of Sandvik Australia Pty. Ltd. Ronald J. McNeilly Mr. McNeilly, an Australian citizen, has been an Executive Director of BHP and Executive General Manager of BHP Steel since 1991. He is also a director of BHP New Zealand Steel Ltd. and of Tubemakers of Australia Ltd. Margaret A. Jackson Ms. Jackson, an Australian citizen, has been a director of BHP since 1994. Ms. Jackson has served for the past five years as Chairman of the Transport Accident Commission, a government insurance body. She is also a director of Australia & New Zealand Banking Group Ltd., of Pacific Dunlop Ltd., of Qantas Airways Ltd., and of the Playbox Theatre. Her business address is 222 Exhibition Street, Melbourne 3000, Victoria, Australia. David A. Crawford Mr. Crawford, an Australian citizen, has been a director of BHP since 1994. Mr. Crawford has served during the past five years as a Chartered Accountant at KPMG Peat Marwick, a chartered accounting firm. His business address is 161 Collins Street, Melbourne 3000, Victoria, Australia. John J. O'Connor Mr. O'Connor, an Irish citizen, has been an Executive Director of BHP and Executive General Manager of BHP Petroleum since 1994. Prior to that time, he held various executive positions with Mobil Oil Company. His business address is 120 Collins Street, Melbourne 3000, Victoria, Australia. John C. Conde Mr. Conde, an Australian citizen, has been a director of BHP since March 1995. From 1988 to 1995 he served as Chairman of Pacific the Electricity Commission of New South Wales. He is also Chairman and Managing Director of Broadcast Investments Pty. Ltd., Chairman of the Australia Technology Park Sydney Ltd., Chairman of Radio 2UE Sydney Pty. Ltd., and a director of Lumley General Insurance Ltd. His business address is 176 Pacific Highway, Greenwich 2065, New South Wales, Australia. Michael A. Chaney Mr. Chaney, an Australian citizen, has been a director of BHP since May 1995. He also currently serves as Managing Director of Wesfarmers Ltd., which provides services and merchandise to the rural community. Mr. Chaney was a deputy Managing Director of Wesfarmers Ltd. from 1990 to 1992. He is also a director of Gresham Partners Holdings Ltd. His business address is 40 The Esplanade, Perth 6000, Western Australia, Australia. 2. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS Timothy J. Knott Mr. Knott, an Australian citizen, has been Corporate Treasurer of BHP since 1995. From 1991 to 1995 he was Corporate General Manager and Company Secretary of BHP. Mr. Knott served as Corporate General Manager, Taxation, of BHP from 1987 to 1991. Richard A. St. John Mr. St. John, an Australian citizen, has been General Counsel to BHP since 1988. Michael W. Gillian Mr. Gillian, a British citizen, has been Corporate General Manager, Accounting, of BHP since 1992. From 1983 to 1992, Mr. Gillian served as Finance Director, coated products division, of BHP Steel. Graeme W. McGregor Mr. McGregor, an Australian citizen, has been Executive General Manager of BHP Service Companies since September 1992. From September 1989 to September 1992, Mr. McGregor served as Group General Manager, Finance, of BHP Steel. James E. Lewis Mr. Lewis, an Australian citizen, has been Corporate Planning and Administration, of BHP, since December 1993. He is also a director of the Foster's Brewing Group Ltd. John R. McGregor Mr. McGregor, an Australian citizen, has been a Corporate General Manager, Investor Relations, and Company Secretary of BHP since February 1995. From 1993 to 1995 he served as Assistant Secretary and Corporate Manager, Investor Relations, of BHP. Mr. McGregor served as Group Manager of BHP Steel from 1987 to 1993. Ian C. Edney Mr. Edney, an Australian citizen, has served since 1995 as Corporate General Manager, Taxation, of BHP. He served from 1993 to 1995 as General Manager, Taxation, and Corporate Taxation Manager for BHP. Robert J. Flew Mr. Flew, an Australian citizen, has been Corporate General Manager, International, of BHP since June 1995. Until June 1995, he was Group General Manager, Australian Coal Division, of BHP. Until October 1994, Mr. Flew served as a director of Tubemakers of Australia, a steel pipe and merchandising company. B. DIRECTORS AND EXECUTIVE OFFICERS OF SUB The following table sets forth the name, citizenship, business address, present principal occupation, positions, offices or employment for the past five years of each director and executive officer of Sub. The business address of each such person, unless otherwise indicated, is 900 Market Street, Suite 200, Wilmington, Delaware 19801. Daryl F. Collins Mr. Collins, an Australian citizen, is a director and the President of Sub. Since 1993 he has been Group General Manager, Finance, for BHP Minerals. He served as General Commercial Manager of BHP Iron Ore from 1987 to 1993. He is currently a director of Ok Tedi Mining Ltd., a BHP subsidiary, and a director of various other BHP subsidiaries. T. Rognald Dankmeyer Mr. Dankmeyer, a U.S. citizen, is a Vice President of Sub. He has been Senior Vice President and General Counsel of BHP than five years. Timothy J. Knott Mr. Knott is the Treasurer of Sub. See above for additional information. D.W. Loughridge Mr. Loughridge, a U.S. citizen, is a Vice President and a director of Sub and the President of BHP Power. From 1991 to 1994 he was Group General Manager for BHP Petroleum (Americas). From 1990 to 1991 he served as Group General Manager for Finance and Planning for BHP Petroleum. E.W. Parker II Mr. Parker, a U.S. citizen, is a Vice President and a director of Sub. He is currently Vice President, Legal and Administration, of and prior to that was General Counsel to BHP Petroleum (Americas). Daniel H. Payne Mr. Payne, a U.S. citizen, is a director of Sub and several other BHP subsidiaries. He has been the Vice President, Taxation, of BHP Minerals for the last five years. Barbara A. Steen Ms. Steen, a U.S. citizen, is a director of Sub and several other BHP subsidiaries. She is currently Assistant Vice President and Secretary of Griffin Corporate Services, Inc. From 1994 to 1995 she was Assistant Vice President of Delaware Trust Capital Management, Inc. From 1992 to 1994 she served as Relationship Officer, Delaware Trust Capital Management, Inc., prior to which she was Assistant Vice President of the Bank of New York, Delaware. Her business address is 900 Market Street, Suite 200, Wilmington, Delaware 19801. C. DIRECTORS AND EXECUTIVE OFFICERS OF NEW SUB The following table sets forth the name, citizenship, business address,present principal occupation, positions, offices or employment for the past five years of each director and executive officer of New Sub. The business address of each such person, unless otherwise indicated, is 550 California Street, San Francisco, California 94104. Daryl F. Collins Mr. Collins, an Australian citizen, is a director and the President of Sub. Since 1993 he has been Group General Manager, Finance, for BHP Minerals. He served as General Commercial Manager of BHP Iron Ore from 1987 to 1993. He is currently a director of Ok Tedi Mining Ltd., a BHP subsidiary, and a director of various other BHP subsidiaries. T. Rognald Dankmeyer Mr. Dankmeyer, a U.S. citizen, is a Vice President of Sub. He has been Senior Vice President and General Counsel of BHP Minerals for more than five years. Timothy J. Knott Mr. Knott is the Treasurer of Sub. See above for additional information. D.W. Loughridge Mr. Loughridge, a U.S. citizen, is a Vice President and a director of Sub and the President of BHP Power. From 1991 to 1994 he was Group General Manager for BHP Petroleum (Americas). From 1990 to 1991 he served as Group General Manager for Finance and Planning for BHP Petroleum. E.W. Parker II Mr. Parker, a U.S. citizen, is a Vice President and a director of Sub. He is currently Vice President, Legal and Administration, of and prior to that was General Counsel to BHP Petroleum (Americas). Daniel H. Payne Mr. Payne, a U.S. citizen, is a director of Sub and several other BHP subsidiaries. He has been the Vice President, Taxation, of BHP Minerals for the last five years. Barbara A. Steen Ms. Steen, a U.S. citizen, is a director of Sub and several other BHP subsidiaries. She is currently Assistant Vice President and Secretary of Griffin Corporate Services, Inc. From 1994 to 1995 she was Assistant Vice President of Delaware Trust Capital Management, Inc. From 1992 to 1994 she served as Relationship Officer, Delaware Trust Capital Management, Inc., prior to which she was Assistant Vice President of the Bank of New York, Delaware. Her business address is 900 Market Street, Suite 200, Wilmington, Delaware 19801. D. DIRECTORS AND EXECUTIVE OFFICERS OF PURCHASER The following table sets forth the name, present principal occupation, position, offices or employment for the past five years of each director and executive officer of BHP Sub Inc., ("Purchaser"). The business address of each such person is 550 California Street, San Francisco, California 94104. NAME EMPLOYMENT HISTORY AND CITIZENSHIP T. Rognald Dankmeyer Mr. Dankmeyer is a director and Vice President of Purchaser. See above for more information. Donald E. Egan Mr. Egan, a U.S. citizen, is a director and President of Purchaser. He has been Manager of Planning and Development of BHP Copper since January 1995. From 1993 to 1995 he served as Manager of Strategic Planning at BHP Minerals. From 1992 to 1993, Mr. Egan served as Vice President, Finance, of Minera Chilean mining company and subsidiary of BHP. From 1990 to 1992, Mr. Egan was Escondida. Stefano Giorgini Mr. Giorgini, an Australian citizen, is a director and Vice President of Purchaser. He has been Manager of Finance, New Business Development, of BHP Minerals since February 1995. From 1991 to 1995 he served as Manager of Finance of Long Products, a division of BHP Steel. From 1989 to 1991, he was a Senior Financial Analyst of BHP Steel. Since 1991, Mr. Giorgini has served as the director of several BHP subsidiaries.	SC 13D	SC 13D	1996-01-12T00:00:00	1996-01-12T17:19:10
0000897101-96-000008	0000897101-96-000008_0002.txt	AMENDMENT NO. 6 TO THE GRIST MILL CO. NON-QUALIFIED STOCK OPTION PLAN This amendment No. 6 to the Grist Mill Co. Non-Qualified Stock Option Plan, dated as of November 1, 1986, is made by Grist Mill Co., a Delaware corporation (the "Company"). WHEREAS, the Grist Mill Co. Non-Qualified Stock Option Plan (the "Plan") was adopted by the Company Board of Directors on November 1, 1986. WHEREAS, the Company's Board of Directors on September 26, 1995, approved an amendment to the Plan providing for an increase in the number of shares which may be awarded thereunder from 1,700,000 to 2,500,000 shares. WHEREAS, the provisions of the Tax Reform Act of 1986 permit amendments to plans for options, including the Plan, which amendments are favorable to grantees under the plans. WHEREAS, the Plan is expiring on November 1, 1996, and the Company wishes to extend the expiration date. NOW, THEREFORE, in consideration of the foregoing and in order to reflect the approval of the Board of Directors of the Company: 1. The first sentence of Paragraph 2 of the Plan is hereby amended in its entirety to read: "There will be reserved for issue upon the exercise of options granted under the Plan of 2,500,000 shares of the Corporation's Common Stock $0.10 par value, subject to adjustment as provided in Paragraph 7, which may be unissued shares or reacquired shares." 2. The second sentence of Paragraph 9 of the Plan is hereby amended in its entirety to read as follows: "The Plan, unless sooner terminated, shall terminate on November 1, 2001." 3. Except as expressly amended and supplemented by this Amendment, the Plan is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the Company has caused its President and Secretary to execute this Amendment No. 6 to the Plan as of the 28th day of September, 1995. By: /s/ Glen S. Bolander Charles H. Perlman, Assistant Secretary	10-Q	EX-10	1996-01-12T00:00:00	1996-01-12T13:44:52
0000950134-96-000096	0000950134-96-000096_0000.txt	SUPPLEMENT DATED JANUARY 2, 1996 TO THE PROSPECTUS DATED MAY 1, 1995, AS PREVIOUSLY SUPPLEMENTED, AND THE Effective January 1, 1996, BZW Barclays Global Fund Advisors ("BGFA") replaced Wells Fargo Nikko Investment Advisors ("WFNIA") as sub-investment adviser to the Asset Allocation Fund and the U.S. Government Allocation Fund (the "Allocation Funds") of Life & Annuity Trust. BGFA was created by the reorganization of WFNIA with and into an affiliate of Wells Fargo Institutional Trust Company, N.A. Pursuant to a Sub-Advisory Contract with each Allocation Fund and subject to the overall supervision of Wells Fargo Bank, the investment adviser to each Allocation Fund, BGFA is responsible for the day-to-day portfolio management of each Allocation Fund. BGFA will continue to employ substantially the same personnel and will continue to use the computer-based investment model developed and previously used by WFNIA to determine the recommended mix of assets in each Allocation Fund's portfolio. BGFA is entitled to receive monthly fees at the annual rate of 0.20% and 0.15% of the average daily net assets of the Asset Allocation and U.S. Government Allocation Fund, respectively, as compensation for its sub-advisory services. BGFA is an indirect subsidiary of Barclays Bank PLC and is located at 45 Fremont Street, San Francisco, CA 94105. As of January 1, 1996, BGFA and its affiliates provide investment advisory services for approximately $220 billion of assets under management. As of January 1, 1996, Wells Fargo Bank provides investment adviory services for approximately $33 billion of assets. Effective January 1, 1996, WFITC, due to a change in control of its outstanding voting securities, became a wholly owned subsidiary of BZW Barclays Global Investors Holdings Inc. and WFITC was renamed BZW Barclays Global Investors, N.A. ("BGI"). BGI currently acts as custodian to each Allocation Fund. BGFA is a subsidiary of BGI. BGI will not be entitled to receive compensation for its custodial services to the Allocation Funds so long as BGFA is entitled to receive fees for providing investment advisory services to such Funds. The principal business address of BGI is 45 Fremont Street, San Francisco, California 94105. The Prospectus and Statement of Additional Information describing each Allocation Fund, the Growth and Income Fund and the Money Market Fund is amended accordingly.	497	497	1996-01-12T00:00:00	1996-01-12T14:15:07
0000935886-96-000003	0000935886-96-000003_0000.txt	<DESCRIPTION>TURKEY VULTURE FUND XIII, LTD. SC 13D/A Under the Securities and Exchange Act of 1934 First Union Real Estate Equity and Mortgage Investments (Title of Class of Securities) Marc C. Krantz, Kohrman Jackson & Krantz, 1375 East 9th Street, Cleveland, Ohio 44114, 216-736-7204 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with the statement [ ]. (A fee is not required only if the reporting person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities described in Item 1; and (2) has filed no amendment subsequent thereto reporting beneficial ownership of five percent or less of such class.) Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. *The remainder of this cover page shall be filled out for a reporting person s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). This Amendment No. 8 to Schedule 13D Statement is filed on behalf of TURKEY VULTURE FUND XIII, LTD., an Ohio limited liability company (the "Fund"), for the purpose of reporting the disposition by it of 950,000 shares of beneficial interest, par value $1.00 per share (the "Stock"), of First Union Real Estate Equity and Mortgage Investments, an Ohio business trust ("First Union"), on January 10, 1996. Item 5. Interest in Securities of the Issuer. Item 5 is amended and supplemented as follows: (a) According to the most recently available filing with the Securities and Exchange Commission by First Union, there were 18,435,057 shares of Stock outstanding. On January 10, 1996, First Union acquired 950,000 shares of Stock from the Fund. Following the Stock repurchase by First Union, there are 17,485,057 shares of Stock outstanding. The Fund beneficially owns 740,500 shares of Stock, or approximately 4.2% of the outstanding Stock after the repurchase. (b) The Fund and Richard M. Osborne ("RMO"), sole managing member thereof, have the sole power to dispose, or to direct the disposition of, the 740,500 shares of Stock owned by the Fund. Under the Settlement and Standstill Agreement (the "Settlement Agreement"), dated as of December 13, 1995, among First Union, the Fund and RMO, the Fund agreed that it will, except with the prior written consent of the Board of Trustees of First Union, vote all Stock (and other voting securities of First Union, if any) beneficially owned by it in the manner recommended by the management of First Union. (c) Pursuant to the Settlement Agreement, on January 10, 1996, the Fund sold to First Union 950,000 shares of Stock at a price of $7.50 per share. (d) The Fund ceased to be the beneficial owner of more than five percent of the issued and outstanding shares of Stock on January 10, 1996. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. TURKEY VULTURE FUND XIII, LTD. Dated: January 12, 1996 /s/ Richard M. Osborne	SC 13D/A	SC 13D/A	1996-01-12T00:00:00	1996-01-12T16:42:24
0000950115-96-000013	0000950115-96-000013_0017.txt	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES For the fiscal year ended: September 30, 1995 Commission File (Exact name of registrant as specified in its charter) (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 9 Blackburn Drive, Gloucester, Massachusetts 01930 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 283-1800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value of the registrant's voting stock held by nonaffiliates (based upon the closing price of $9.50) on December 1, 1995 was approximately $36,700,000. As of December 1, 1995, there were 8,519,952 shares of Common Stock, par value $.001 per share, outstanding. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held in 1996 are incorporated by reference into Part III. The Index to Exhibits begins on page 25. NutraMax Products, Inc. (the "Company") is a private label health and personal care products company. The Company's strategy is to offer a line of quality products equivalent to national brands at lower cost to consumers while providing greater profit potential to retailers than the national brands. National brands dominate health and personal care product categories. However, in recent years private label products have captured increased market share by appealing to value conscious consumers seeking lower cost products of comparable quality. The Company received the 1993 Retail Excellence Award as the Private Label Company of the Year, with the selection based on a survey conducted by a major trade journal. The Company was incorporated on April 20, 1987 under the laws of the State of Delaware. Feminine Needs -- The Company manufactures disposable douches for sale under its value brands Sweetn FreshR and Sweet LoveR and on a private label basis. As a result of the growth of the Company's other product lines, sales of douche products in fiscal 1995 were 24% of net sales, as compared to 25% in 1994 and 56% in 1993. The Company also markets private label feminine yeast infection medication products containing the active ingredient clotrimazole. Cough/Cold Products -- In December 1993, the Company acquired the leading manufacturer and distributor of private label cough drops and throat lozenges, which also manufactures cough drops on a contract basis for national branded companies. The acquisition enabled the Company to offer an extensive line of solid dosage cough/cold products, including cough drops, throat lozenges, sugar-free products, vitamin C drops and liquid center items. Sales of cough/cold products represented 34% and 33% of net sales in fiscal 1995 and 1994, respectively. Baby Care -- The Company manufactures disposable baby bottle liners on a private label basis and under its value brand Freshn EasyR. The Company manufactures pediatric electrolyte oral maintenance solution, a product which is used to replace minerals lost by children who suffer from diarrhea and vomiting, for sale under its value brand NutraMax Baby Care Pediatric Electrolyte and on a private label basis. During fiscal years 1995, 1994 and 1993, sales of baby care products represented 19%, 21% and 28% of net sales, respectively. Ophthalmics -- In June 1993, the Company acquired a manufacturer of private label over-the-counter and prescription ophthalmic products for retail and industrial customers, enabling the Company to offer a broad line of eye care products, including over-the-counter contact lens solutions, artificial tears and eye drops, as well as generic prescription eye care products. Sales of ophthalmic products represented 10% and 11% of net sales in fiscal 1995 and 1994, respectively. Adult Nutrition Products -- In March 1995, the Company introduced a new line of adult high calorie liquid nutrition products which are sold under its value brand NutraMax Plus High Calorie Liquid Nutrition and on a private label basis. This product is the Company's entry into the growing adult nutrition category. The products are manufactured by a third party and marketed by the Company through its distribution channels. Personal Care -- The Company manufactures ready-to-use disposable enemas for sale under its value brand Pure & Gentle, on a private label basis and for the institutional market. Other Products -- The Company's other products consist principally of a patented line of sterile, prefilled, disposable dilution bottles used in laboratory testing of water, waste water, foods, drug products, pharmaceuticals and cosmetics. The Company's growth strategy includes the acquisition and development of new products, and the extension or modification of existing product lines to correspond with national branded products and product variations. The Company expects to add new product lines through internal development, acquisition and joint venture or partnership agreements. The Company contemplates that product line expansion will enable the Company to capitalize on its established distribution channels and manufacturing and marketing expertise. New products will most likely focus on consumer packaged goods, including health and personal care products. The Company has recently expanded its product lines to include the following: Oral Care -- In October 1995, the Company acquired the assets and assumed certain liabilities of Mi-Lor Corporation, Professional Brushes, Inc. and Codent Dental Products, Inc., companies engaged in the manufacturing and marketing of toothbrushes, dental floss and related products for the store brand market. The acquisition is the Company's entry into the private label oral care segment. These products are manufactured in an 88,000 square foot manufacturing facility located in Florence, Massachusetts which was acquired by the Company as part of the transaction. Oral care products are being marketed by the Company through its existing distribution channels. The Company utilizes national brand marketing methods to meet the specific needs of its customers. Such marketing methods include designing contemporary packaging to improve point-of-purchase impact and increase consumer appeal. The Company also uses price, display, packaging, bonus and multi-pack promotions to increase sales and retailer support. Sales are made through the Company's sales representatives and independent brokers. For fiscal years 1995 and 1994, American Home Products, Inc. accounted for 14% and 17% of net sales, respectively. For fiscal year 1993, no individual customer represented in excess of 10% of the Company's net sales. While the Company is continually expanding its distribution and customer base, the loss of one or more of its largest customers, if not replaced with other comparable business, could have a material adverse effect on the Company's results of operations. The markets in which the Company competes are dominated by nationally advertised brand name products marketed by established consumer packaged goods companies, most of which have greater marketing, financial and human resources than the Company. The Company also competes with several other private label manufacturers and marketers. Competition for consumer health and personal care products is based primarily on product reliability, price, customer service, and the ability to provide tamper resistant/evident packaging. Growth in sales of private label products is also dependent on increasing the amount of shelf space available at retail stores in order to maximize brand awareness and consumer trial. The Company experiences aggressive price competition from time to time from branded and other private label competitors. There can be no assurance that such price competition will not have a material adverse effect on the Company's results of operations. Governmental Regulation and Health Issues The Company is registered with the Food & Drug Administration ("FDA") as a manufacturer for certain of its products. The primary forms of governmental regulation are the current "good manufacturing practices" and "good laboratory practices" guidelines administered by the FDA, which set forth the protocols to be followed in the manufacture, storage, packaging and distribution of medical products for human use. Certain of the Company's ophthalmic products are subject to additional FDA regulations relating to pre-market approval of products. The Company's operations are also subject to periodic inspections by the FDA. Promotional claims made with respect to health and personal care products are also subject to regulation by the FDA, and by the Federal Trade Commission. The use of health and personal care products may result in allergic or other adverse reactions in users. Since 1952, a number of studies have been published in medical journals concerning the relationship of douching to the incidence of pelvic inflammatory disease. These studies provide no conclusive results on the issue of whether douching causes this disease. A 1990 study showed an association between douching and the disease and concluded that further studies were needed. A 1993 study stated that the results of the study lend support to the hypothesis that douching can predispose a woman to pelvic inflammatory disease. Although the Company believes its douche products are safe when used in accordance with instructions accompanying the product package, negative publicity resulting from such studies and any future studies may affect sales of douche products. In such event there could be a material adverse impact on the Company's results of operations. The Company has approximately 580 full-time employees engaged in quality control, marketing and sales, general corporate and administrative positions and manufacturing operations. The Company believes that relations with its employees are satisfactory. The Company currently operates the following facilities (which are owned unless otherwise indicated): (1) Consists of four facilities, of which three are leased. (2) Acquired in October 1995. The Company believes that its present facilities will be adequate for all of its reasonably foreseeable manufacturing, warehousing and distribution requirements, or that alternative facilities can be obtained at a reasonable cost. The Company, like other companies in the store brand industry, has been the subject of claims and litigation brought by national brand name companies based on packaging alleged to be similar to competing brand name products. The Company is also subject to certain claims and informal complaints relating to its products which are incidental and routine to its business and for which the Company maintains insurance coverage. The Company knows of no litigation, either pending or threatened, which is likely to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1995. ITEM 5. Market for the Registrant's Common Stock and Related Security Holder The following table sets forth, for the periods indicated, the high and low prices for the common stock as reported by The Nasdaq Stock Market. The Company's common stock is traded on The Nasdaq Stock Market's National Market System under the symbol "NMPC". The Company believes there are approximately 2,500 holders of common stock, including shares held in street name by brokers. The Company has never declared or paid any cash dividends. The declaration of dividends by the Company in the future will at all times be subject to the sole discretion of the Company's Board of Directors, and will depend upon operating results, capital requirements and financial position. See notes to the consolidated financial statements included elsewhere herein. ITEM 6. Selected Consolidated Financial Data The selected consolidated financial data presented below has been derived from the audited financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements included elsewhere herein. (1) In December 1993, the Company acquired a manufacturer and distributor of private label cough/cold products for $13,500,000 which was financed with proceeds from a revolving credit facility. (2) In June 1993, the Company acquired a manufacturer of private label over-the-counter and prescription ophthalmic products, for approximately 202,000 shares of the Company's common stock with a market value of $2,846,000. (3) In August 1991, the Company completed a public stock offering consisting of 2,150,000 shares of common stock. ITEM 7. Management's Discussion and Analysis of Financial Condition and The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto, contained elsewhere herein. The Consolidated Statements of Operations include the results of operations of acquired companies from the dates acquired: Optopics Laboratories Corporation ("Optopics") (June 1993) and Powers Pharmaceutical Corporation ("Powers") (December 1993). The following table sets forth, for all periods indicated, the percentage relationship that items in the Consolidated Statements of Operations bear to net sales. Fiscal Year 1995 Compared to Fiscal Year 1994 Net sales for 1995 were $63,111,000, an increase of $7,153,000, or 13%, over 1994 net sales of $55,958,000. The increase in net sales was primarily attributable to sales of Cough/Cold products resulting from the acquisition of Powers in December 1993 and the introduction of the Adult Nutrition product line in March 1995, in addition to increased volume in other product categories. Gross profit for 1995 was $17,195,000, or 27% of net sales, as compared to $17,206,000, or 31% in 1994. The decrease in the gross margin reflects the impact of lower production levels for Cough/Cold products, competitive pressure on the Company's Feminine Needs and Personal Care products and changes in product mix. In addition, the Company experienced higher raw material costs in 1995, which are not expected to continue through 1996. Selling, general and administrative expenses for 1995 were $8,694,000 or 14% of net sales, as compared to $9,281,000, or 17% of net sales in 1994. The decrease in selling, general and administrative expenses was primarily attributable to a decrease in bad debt expense and professional fees partially offset by commissions and freight expenses associated with the increase in sales. The decrease, as a percentage of net sales, resulted from decreased costs allocated over higher net sales. Interest expense for 1995 was $1,427,000, as compared to $928,000 in the prior year. This increase was primarily attributable to debt incurred in connection with the acquisition of Powers and increases in interest rates. Fiscal Year 1994 Compared to Fiscal Year 1993 Net sales for 1994 were $55,958,000, an increase of $24,814,000, or 80%, over 1993 net sales of $31,144,000. The increase in net sales was primarily attributable to sales of cough/cold products which represented 33% of net sales in 1994. The increase in net sales was also attributable to increased unit sales of ophthalmics and baby care products, partially offset by a decrease in sales of certain feminine needs products. Sales of certain feminine needs products decreased as a result of lower average sale prices in response to continued competitive pressure, while unit sales for the year stabilized. The timing, frequency and nature of promotional activities in this category by brand manufacturers and other private label companies have had the effect of decreasing sale prices. Gross profit for 1994 increased to $17,206,000, or 31% of net sales, as compared to $11,546,000, or 37% in 1993. The decrease in the gross margin reflected changes in product mix and the impact of competitive pricing pressure relating to certain of the Company's feminine needs products. The Company also incurred an increase in manufacturing overhead expenses in connection with anticipated higher sales of ophthalmics products. Selling, general and administrative expenses for 1994 were $9,281,000, or 17% of net sales, as compared to $5,928,000, or 19% of net sales in 1993. Fiscal 1994 included ten months of Powers' operations which accounted for a significant portion of the increase in selling, general and administrative expenses. As a percentage of net sales, selling, general and administrative expenses decreased as a result of the allocation of these costs over substantially higher net sales. Interest expense of $928,000 for 1994 was attributable to debt incurred in connection with the acquisition of Powers. Other income for 1994 was $95,000, as compared to $251,000 in 1993. The decrease was primarily attributable to lower interest income as a result of the use of investments to fund, in part, acquisitions. During the last four months of the calendar year, retailers focus their merchandising efforts on and devote more shelf space to seasonal and holiday merchandise. As a result, sales of certain of the Company's products tend to be weaker in the Company's first quarter (ending in December), and normally strengthen in the second quarter as retailers replenish their shelves with health and personal care products. Sales of pediatric electrolyte and cough/cold products may help mitigate weaker sales in the Company's first quarter, as the Company's customers purchase such products to stock inventories in anticipation of the winter months. Consequently, the results of any one quarter may not necessarily be indicative of results of future quarters. As of September 30, 1995, the Company's working capital increased to $14,152,000, as compared to $13,172,000 on October 1, 1994. Net cash provided by operating activities increased to $7,605,000 in 1995 from $5,400,000 in the prior year. This increase was primarily attributable to improved operating results and changes in working capital. The change in working capital was primarily attributable to increased collections of accounts receivable and stabilization of inventory levels partially offset by increased payments for income taxes. Net cash used in investing activities was $4,306,000 in 1995 and consisted primarily of capital expenditures for additional capacity. The Company anticipates capital expenditures of approximately $5,800,000 in fiscal 1996 for additional manufacturing capacity at the Company's existing facilities and the facility acquired in October 1995. See "Recent Developments". Net cash used in financing activities for 1995 consisted primarily of debt repayments of $3,174,000. In December 1994, the Company converted its $20,000,000 credit facility into an $8,000,000 revolving credit facility, two term loans aggregating $9,000,000 and a mortgage of $1,000,000, all of which are secured by substantially all of the Company's assets. The revolving credit facility bears interest at prime and/or, at the Company's option, LIBOR plus 2%, and expires in January 1997. The average amount outstanding under this facility during the year amounted to $6,452,000, and the weighted average interest rate computed on the monthly outstanding balance was 8.14%. At September 30, 1995, $5,118,000 was outstanding under this facility. The amount of available credit fluctuates based upon the amount of eligible accounts receivable and inventory. As of September 30, 1995, $2,800,000 of credit was available. The term loans bear interest at prime plus .5% and/or, at the Company's option, LIBOR plus 2.5%, and are payable in quarterly principal installments of $450,000 through November 1999. The mortgage bears interest at prime plus .5% and/or, at the Company's option, LIBOR plus 2.5%, and is payable in quarterly principal installments of $17,000, with a final payment of approximately $680,000 in November 1999. The interest rates on the term loans and the mortgage ranged from 8.25% to 9% during 1995. The Company believes that its existing working capital, anticipated funds to be generated from future operations and funds available under the revolving credit facility will be sufficient to meet all of the Company's operating and capital needs for the foreseeable future. However, depending upon future growth of the business, additional financing may be required. In October 1995, the Company acquired substantially all of the assets and assumed certain liabilities of Mi-Lor Corporation, Professional Brushes, Inc. and Codent Dental Products, Inc., which manufacture and market toothbrushes, dental floss and related products for the store brand market. The purchase price consisted of $1,800,000 in cash, obtained under the Company's revolving credit facility, liabilities assumed of $225,000 and related expenses of approximately $375,000. The Board of Directors of MEDIQ Incorporated ("MEDIQ"), a 47% owner of the Company, is currently in the process of exploring alternative ways to maximize MEDIQ's shareholder value, which could include the disposition of its holdings in the Company. In connection with MEDIQ's activities, the Company formed a Special Committee of its Board of Directors to explore strategic alternatives for the Company. The Committee has retained Wasserstein Perella & Co. as financial advisors to seek opportunities for the Company to enhance shareholder value. However there can be no assurances that a transaction will occur. Item 8. Financial Statements And Supplemental Data Board of Directors and Stockholders NutraMax Products, Inc. We have audited the accompanying consolidated balance sheets of NutraMax Products, Inc. and subsidiaries as of September 30, 1995 and October 1, 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended September 30, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of NutraMax Products, Inc. and subsidiaries as of September 30, 1995 and October 1, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES See notes to consolidated financial statements. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES See notes to consolidated financial statements. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (1) 180 stock options were exercised in 1995. See notes to consolidated financial statements. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS See notes to consolidated financial statements. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Summary of Significant Accounting Policies Principles of Consolidation -- The consolidated financial statements include the accounts of NutraMax Products, Inc. and its subsidiaries (the "Company"). In consolidation, all significant intercompany transactions and balances have been eliminated. Inventories -- Inventories are stated at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment -- Property, plant and equipment are stated at cost. The Company's policy of providing for depreciation and amortization is as follows: Buildings 20 years on a straight-line basis Liquid packaging machines 32,000 to 48,000 machine hours which approximate a five to eight Machinery, equipment, molds 5 to 10 years on a straight-line and furniture and fixtures basis Leasehold improvements The terms of the related lease Vehicles 3 to 5 years on a straight-line Goodwill -- The purchase price in excess of net assets acquired is amortized on a straight-line basis over periods from thirty to forty years. The Company evaluates the carrying value of goodwill based upon current and anticipated net income and undiscounted cash flows, and recognizes an impairment when it is probable that such estimated future net income and/or cash flows will be less than the carrying value of goodwill. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value. Other Assets -- Other assets include intangible assets which are amortized on a straight-line basis over the estimated periods of related benefit, ranging from three to fifteen years. Accumulated amortization was $213,000 and $187,000 as of September 30, 1995 and October 1, 1994, respectively. Other assets also include external costs deferred in connection with tools, dies and the design of packaging materials for the Company's products which are amortized on a straight-line basis over four years. Income Taxes -- Effective October 3, 1993, the Company adopted on a prospective basis the provisions of Statement of Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which supersedes SFAS No. 96. The effect of adopting SFAS No. 109 was not significant. Earnings Per Share -- Earnings per share computations are based upon the weighted average number of common shares outstanding. Stock options have been excluded from the calculation of weighted average shares outstanding since the dilutive effect is less than 3%. Reclassification of Accounts -- Certain reclassifications have been made to conform prior years' balances to the current year presentation. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Powers Pharmaceutical Corporation -- In December 1993, the Company acquired all of the outstanding common stock of Certified Corporation, parent of Powers Pharmaceutical Corporation ("Powers"), for $13,500,000 in cash and related expenses of $236,000. Powers, based in Brockton, Massachusetts, is the nation's leading manufacturer and distributor of private label cough drops and throat lozenges, and also manufactures cough drops on a contract basis. The transaction was accounted for by the purchase method of accounting. The excess of the purchase price over the fair values of the net assets acquired of $6,206,000 is amortized over thirty years. Optopics Laboratories Corporation -- In June 1993, the Company acquired all of the assets and assumed all of the liabilities of Optopics Laboratories Corporation ("Optopics") for approximately 202,000 shares of the Company's common stock, with a market value of $2,846,000, and related transaction costs of $245,000. Additionally, the Company acquired Optopics' manufacturing facility for $800,000 in cash, which was previously leased from the former stockholders of Optopics. Optopics is a manufacturer of private label over-the-counter and prescription ophthalmics products. The acquisition was accounted for by the purchase method of accounting. The excess of the purchase price over the estimated fair value of the net assets acquired of $4,325,000 is amortized over thirty years. Note D - Property, Plant and Equipment Depreciation and amortization expense for property, plant and equipment for 1995, 1994 and 1993 was $2,725,000, $2,390,000 and $1,177,000, respectively. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note E - Long-Term Debt Maturities of long-term debt are as follows: The revolving credit facility bears interest at prime (8.75% at September 30, 1995) and/or, at the Company's option, LIBOR plus 2% (7.875% at September 30, 1995), and expires in January 1997. The average amount outstanding under this facility during the year amounted to $6,452,000, and the weighted average interest rate computed on the monthly outstanding balance was 8.14%. The amount of available credit fluctuates based upon eligible accounts receivable and inventory. As of September 30, 1995, $2,800,000 of credit was available. The term loans bear interest at prime plus .5% (9.25% at September 30, 1995) and/or, at the Company's option, LIBOR plus 2.5% (8.375% at September 30, 1995), and are payable in quarterly principal installments of $450,000 through November 1999. The mortgage bears interest at prime plus .5% and/or, at the Company's option, LIBOR plus 2.5%, and is payable in quarterly principal installments of $17,000, with a final payment of approximately $680,000 in November 1999. The interest rates on the term loans and the mortgage ranged from 8.25% to 9% during 1995 and were 8.375% at September 30, 1995. The Company has an additional mortgage which bears interest at 7% and is payable in monthly installments of $7,000 including interest, with a final payment of approximately $670,000 due in February 1997. The revolving credit facility and term loans, which are collateralized by substantially all of the Company's assets, require the maintenance of certain balance sheet and operating ratios and impose certain dividend limitations. The most restrictive of these provisions limits the payment of cash dividends to approximately $8,900,000 as of September 30, 1995. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note F - Commitments and Contingencies Leases -- The Company leases certain of its administrative, manufacturing, distribution and warehouse facilities under operating leases. The Company also leases certain equipment under operating and capital leases. Future minimum payments under noncancelable operating and capital leases are as follows: Rental expense for operating leases was $387,000, $413,000 and $456,000 for 1995, 1994 and 1993, respectively. Litigation -- The Company has pending certain legal actions and claims incurred in the normal course of business and is actively pursuing the defense thereof. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial statements. Note G - Income Taxes Income tax expense consisted of the following: NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note G - Income Taxes (Continued) The difference between the Company's income tax and the statutory federal tax is reconciled below: As of September 30, 1995, the Company had Federal net operating loss carryforwards of $2,418,000 which are available to offset future taxable income. The Company also has investment tax credit carryforwards of $208,000. Utilization of the operating loss carryforwards, which expire in fiscal years 1997 to 2007, is limited to $1,049,000 annually. Significant components of the Company's deferred tax assets and liabilities are as follows: Under the provisions of SFAS No. 96, the deferred tax provision for fiscal year 1993 of $545,000 resulted principally from utilization of acquired net operating loss carryforwards of $436,000 and depreciation of $189,000, partially offset by the allowance for doubtful accounts of $58,000. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note H - Selected Quarterly Financial Data (Unaudited) Selected quarterly financial data for fiscal years 1995 and 1994 is as follows: (1) Includes the results of operations of Powers from the date of acquisition. Note I - Related Party Transactions Services Agreement -- The Company obtains certain legal, accounting, tax, insurance and human resource services from MEDIQ Incorporated ("MEDIQ"), the owner of approximately 47% of the outstanding common stock. Costs for such services were $100,000 for each of the three years ended September 30, 1995. The Company believes that MEDIQ's charges for such services are on terms no less favorable to the Company than those that could be obtained from unaffiliated third parties for comparable services. Insurance -- The Company obtains certain insurance coverages through programs administered by MEDIQ. Insurance expense under these programs was $409,000, $464,000 and $213,000 for fiscal years 1995, 1994 and 1993, respectively. Pledge of Stock -- A portion of the shares of the Company's stock owned by MEDIQ is subject to exchange for outstanding MEDIQ debentures and a portion secures certain MEDIQ indebtedness. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note J - Stock Options The Company maintains a Stock Option Plan which includes an Incentive Stock Option Program and a Non-Qualified Stock Option Program. Incentive stock options may be granted to key employees, including the Company's officers, at the discretion of the Stock Option Plan Committee, until termination of the Plan. Non-qualified stock options may be granted to employees, non-employee directors, advisors and independent consultants at the discretion of the Committee. No options may be granted under the programs for a term in excess of five years from the date of grant. As of September 30, 1995, 401,000 stock options were exercisable under such plans. The stock option prices listed below represent the quoted market value of the common stock at dates of grant. A summary of stock option activity for the three years ended September 30, 1995 follows: (1) 180 stock options were exercised in 1995. Note K - Major Customers American Home Products, Inc. accounted for 14% and 17% of net sales in 1995 and 1994, respectively. No individual customer represented in excess of 10% of the Company's net sales for 1993. Note L - Special Committee The Board of Directors of MEDIQ Incorporated ("MEDIQ"), a 47% owner of the Company, is currently in the process of exploring alternative ways to maximize MEDIQ's shareholder value, which could include the disposition of its holdings in the Company. In connection with MEDIQ's activities, the Company formed a Special Committee of its Board of Directors to explore strategic alternatives for the Company. The Committee has retained Wasserstein Perella & Co. as financial advisors to seek opportunities for the Company to enhance shareholder value. NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note M - Subsequent Event In October 1995, the Company acquired substantially all of the assets and assumed certain liabilities of Mi-Lor Corporation, Professional Brushes, Inc. and Codent Dental Products, Inc., which manufacture and market toothbrushes, dental floss and related products for the store brand market. The purchase price consisted of $1,800,000 in cash, liabilities assumed of $225,000 and related expenses of approximately $375,000. The information required to be included herein has been incorporated herein by reference to the Registrant's proxy statement relating to the annual meeting of its stockholders scheduled to be held in 1996. ITEM 14. Exhibits, Financial Statement Schedules and Reports on (a) (1) The response to this portion of Item 14 is submitted as a separate section of this report commencing on page 11. (a) (2) Financial Statement Schedules Schedule II Valuation and Qualifying Accounts and Reserves Other schedules are omitted because of the absence of conditions under which they are required. (a) (3) and (c) Exhibits (numbered in accordance with Item 601 of Regulation S-K). (1) Filed as an Exhibit to the Company's Registration Statement on Form S-1 on July 5, 1991, and incorporated herein by reference. (2) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1992, and incorporated herein by reference. (3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1994, and incorporated herein by reference. (5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1990, and incorporated herein by reference. (6) Filed as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 on August 15, 1991, and incorporated herein by reference. (7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1991, and incorporated herein by reference. (8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal 1993, and incorporated herein by reference. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of fiscal 1995. Pursuant to requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 8, 1995 NUTRAMAX PRODUCTS, INC. By: /s/ Donald E. Lepone By: /s/ Robert F. Burns Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, which include at least a majority of the Board of Directors on behalf of the Registrant and in the capacities and on the dates indicated. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FISCAL YEARS 1995, 1994 AND 1993 (1) Includes allowance from acquisition of Optopics in 1993 and Powers in 1994. (2) Represents accounts directly written-off net of recoveries.	10-K405	EX-99.2	1996-01-12T00:00:00	1996-01-12T11:57:13
0000950130-96-000108	0000950130-96-000108_0004.txt	OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK A WHOLLY OWNED SUBSIDIARY OF THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, FEBRUARY 9, 1996, UNLESS THE OFFER IS EXTENDED. LAC ACQUISITION CORPORATION HAS AGREED, SUBJECT TO THE TERMS AND CONDITIONS OF THE OFFER, TO EXTEND THE OFFER UNTIL IMMEDIATELY AFTER THE TIME OF THE SPIN- OFF RECORD DATE (AS DEFINED IN THE OFFER TO PURCHASE). To Brokers, Dealers, Commercial Banks, January 12, 1996 Trust Companies and Other Nominees: We have been appointed by LAC Acquisition Corporation (the "Purchaser"), a New York corporation and a wholly owned subsidiary of Lockheed Martin Corporation, a Maryland corporation, to act as Dealer Manager in connection with its offer to purchase all outstanding shares of common stock, par value $0.25 per share (including the associated Rights (as defined in the Offer to Purchase referred to below)) (collectively, the "Shares"), of Loral Corporation, a New York corporation (the "Company"), at $38.00 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Purchaser's Offer to Purchase, dated January 12, 1996 (the "Offer to Purchase"), and the related Letter of Transmittal (which together constitute the "Offer"). For your information and for forwarding to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, we are enclosing the following documents: 1. Offer to Purchase, dated January 12, 1996; 2. Letter of Transmittal for your use and for the information of your clients, together with Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 providing information relating to backup federal income tax withholding; 3. Notice of Guaranteed Delivery to be used to accept the Offer if the Shares and all other required documents cannot be delivered to the Depositary by the Expiration Date (as defined in the Offer to Purchase); 4. A form of letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard 5. Solicitation/Recommendation Statement on Schedule 14D-9 issued by the 6. Return envelope addressed to First Chicago Trust Company of New York, the Depositary. The Company has advised the Parent and Purchaser that, prior to the time notice of the Spin-Off Record Date (as defined in the Offer to Purchase) is given and at least ten days prior to the Expiration Date, it expects to distribute to holders of Shares and holders of other equity securities of the Company an Information Statement with respect to the Spin-Off (as defined in the Offer to Purchase). Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Purchaser will be deemed to have accepted for payment, and will pay for, all Shares validly tendered and not properly withdrawn prior to the Expiration Date (as defined in the Offer to Purchase) when, as and if the Purchaser gives oral or written notice to the Depositary of the Purchaser's acceptance of such Shares for payment pursuant to the Offer. Payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for such Shares (or confirmation of a book- entry transfer of such Shares into the Depositary's account at one of the Book-Entry Transfer Facilities (as defined in the Offer to Purchase)), a properly completed and duly executed Letter of Transmittal (or facsimile thereof) (unless, in the case of a book-entry transfer, an Agent's Message (as defined in the Offer to Purchase) is utilized) and any other documents required by the Letter of Transmittal. In order to take advantage of the Offer, a duly executed and properly completed Letter of Transmittal, with any required signature guarantees and any other required documents, should be sent to the Depositary, and certificates representing the tendered Shares should be delivered, all in accordance with the instructions set forth in the Letter of Transmittal and the Offer to Purchase. If holders of Shares wish to tender their Shares, but it is impracticable for them to deliver their certificates on or prior to the Expiration Date or to comply with the book-entry transfer procedures on a timely basis, a tender may be effected by following the guaranteed delivery procedures specified in Section 3 of the Offer to Purchase. The Purchaser will not pay any fees or commissions to any broker, dealer or other person (other than the Dealer Manager or the Information Agent as described in the Offer to Purchase) for soliciting tenders of Shares pursuant to the Offer. The Purchaser will, however, upon request, reimburse brokers, dealers, commercial banks and trust companies for reasonable and necessary costs and expenses incurred by them in forwarding materials to their customers. The Purchaser will pay all stock transfer taxes applicable to its purchase of Shares pursuant to the Offer, subject to Instruction 6 of the Letter of Transmittal. YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, FEBRUARY 9, 1996, UNLESS THE OFFER IS EXTENDED. LAC ACQUISITION CORPORATION HAS AGREED, SUBJECT TO THE TERMS AND CONDITIONS OF THE OFFER, TO EXTEND THE OFFER, UNTIL IMMEDIATELY AFTER THE TIME OF THE SPIN-OFF RECORD DATE. Any inquiries you may have with respect to the Offer should be addressed to, and additional copies of the enclosed materials may be obtained from, the Information Agent or the undersigned at the addresses and telephone numbers set forth on the back cover of the Offer to Purchase. Bear, Stearns & Co. Inc. New York, New York 10167 Call Toll Free: (800) 726-9849 NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF THE PURCHASER, THE COMPANY, ANY AFFILIATE OF THE COMPANY, LOCKHEED MARTIN CORPORATION, THE DEALER MANAGER, THE INFORMATION AGENT OR THE DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN.	SC 14D1	EX-99.(A)(4)	1996-01-12T00:00:00	1996-01-12T17:26:30
0000950134-96-000101	0000950134-96-000101_0000.txt	<DESCRIPTION>SUPPLEMENT DATED JANUARY 2, 1996 SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. Stephens Inc. -- Sponsor, Administrator and Distributor Wells Fargo Bank, N.A. -- Investment Adviser, Transfer and Dividend Disbursing Overland Express Funds, Inc. (the "Company") is a professionally managed, open-end, series investment company. This Prospectus contains information about one of the funds in the Overland Express Family of Funds -- the CALIFORNIA TAX-FREE BOND FUND (the "Fund"). The CALIFORNIA TAX-FREE BOND FUND seeks to provide investors with a high level of income exempt from federal income taxes and from California personal income taxes, while preserving capital, by investing in medium- to long-term, investment-grade municipal securities. Under ordinary market conditions, this Fund's assets will consist exclusively of securities the interest on which is exempt from federal and California personal income taxes. This Prospectus describes two classes of shares of the Fund -- Class A Shares and Class D Shares. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Fund. A Statement of Additional Information dated May 1, 1995, containing additional and more detailed information about the Fund (the "SAI"), has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. The SAI is available without charge and can be obtained by writing the Company at P.O. Box 63084, San Francisco, CA 94163, or by calling the Company at the telephone number printed above. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUND, FOR WHICH IT IS COMPENSATED. STEPHENS INC. ("STEPHENS"), WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 The Company, as an open-end investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Fund and its investment objective. Q. WHAT IS THE FUND'S INVESTMENT OBJECTIVE? A. The CALIFORNIA TAX-FREE BOND FUND seeks to provide investors with a high level of income exempt from federal income taxes and from California personal income taxes, while preserving capital, by investing in medium-to long-term, investment-grade municipal securities. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. See "Investment Objective and Policies." Q. WHAT ARE PERMISSIBLE INVESTMENTS? A. The Fund invests in medium- to long-term, investment-grade municipal securities, the interest on which is exempt from federal income taxes and from California personal income taxes. Under ordinary market conditions, (i) 100% of the Fund's investment portfolio consists of municipal securities, the interest on which is exempt from California personal income taxes, and (ii) at least 80% of the Fund's investment portfolio consists of municipal securities, the interest on which is exempt from federal income taxes. Certain additional risks may arise due to the Fund's concentration of investments in California municipal securities. See "Special Factors Affecting the California Tax-Free Bond Fund" in the Fund's SAI. Shares of the Fund may not be suitable investments for tax-exempt institutions or tax-exempt retirement plans, since such investors would not benefit from the exempt status of the Fund's dividends. See "Federal Income Taxes -- Special Tax Considerations for the California Tax-Free Bond Fund" in the SAI. Q. WHO IS THE INVESTMENT ADVISER? A. Wells Fargo Bank serves as the investment adviser of the Fund. Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. See "Advisory, Administration and Distribution Arrangements." Q. WHO IS THE SPONSOR, ADMINISTRATOR AND DISTRIBUTOR? A. Stephens serves as the sponsor, administrator and distributor for the Company. Stephens is entitled to receive a monthly administration fee at the annual rate of 0.15% of the average daily net assets of the Fund; decreasing to 0.10% of the average daily net assets of the Fund in excess of $200 million. See "Advisory, Administration and Distribution Arrangements." Q. HOW MAY I PURCHASE SHARES? A. Shares of the Fund may be purchased on any day the New York Stock Exchange (the "Exchange") is open for trading. There is a maximum sales load of 4.50% (4.71% of the net amount invested) for purchasing Class A Shares of the Fund. Class D Shares are subject to a maximum contingent deferred sales charge of 1.00% of the lesser of net asset value at purchase or net asset value at redemption. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for shares purchased through the Systematic Purchase Plan and $250 for shares purchased through qualified retirement plans. The minimum subsequent purchase amount is $100 or more. You may purchase shares of the Fund through Stephens, Wells Fargo Bank, as transfer agent (the "Transfer Agent"), or any authorized broker/dealer or financial institution. Purchases of shares of the Fund may be made by wire directly to the Transfer Agent. The Fund may pay to its distributor annually up to the greater of 0.05% of the average daily net assets attributable to Class A Shares or $100,000, and a monthly fee at an annual rate of up to 0.50% of the Fund's average daily net assets attributable to Class D Shares to defray the cost of preparing and printing prospectuses and other promotional materials and of delivering those materials to prospective shareholders of the Fund. See "Purchase of Shares" and "Distribution Plans." The Fund also may pay servicing agents a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class D Shares to compensate them for certain services. See "Servicing Plan." Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on shares of the Fund are declared daily and paid monthly. Dividends are automatically reinvested in additional shares of the same class of the Fund, unless you elect to receive dividends by check. Any capital gains will be distributed annually and may be reinvested in Fund shares of the same class or paid by check at your election. All reinvestments of dividends and/or capital gain distributions in shares of the Fund are effected at the then current net asset value free of any sales load. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of the same class of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The Fund's net investment income available for distribution to holders of the Fund's Class D Shares is reduced by the amount of servicing fees payable to servicing agents under the Servicing Plan (as defined below). See "Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. On any day the Exchange is open, shares may be redeemed upon request to Stephens or the Transfer Agent directly or through any authorized broker/dealer or financial institution. You may redeem shares by a request in good form in writing or through telephone direction. Proceeds are payable by check. Accounts of less than the applicable minimum initial purchase amount may be redeemed at the option of the Company. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, the Company does not charge for redeeming its shares. However, the Company reserves the right to impose charges for wiring redemption proceeds. See "Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND? A. An investment in the Fund is not insured against loss of principal. When the value of the securities that the Fund owns declines, so does the value of your Fund shares. The portfolio securities of the Fund are subject to interest rate risk. Interest rate risk is the risk that increases in market interest rates may adversely affect the value of the long-term and medium-term municipal securities in which the Fund invests and hence the value of your investment in the Fund. The values of such securities generally change inversely to changes in market interest rates. The Fund also is subject to credit risk. Credit risk is the risk that the issuers of the debt securities in which the Fund invests may default on the payment of principal and/or interest. In addition, certain of the municipal securities in which the Fund invests may be considered to have speculative characteristics. Since the Fund invests primarily in securities issued by California, its agencies and municipalities, events in California are more likely to affect the Fund's investments. See "Investment Objective and Policies." Also, the Fund is non-diversified, which means the Fund is subject to concentration risk, which is the risk that events impacting a single issuer may have a significant effect on the value of the Fund's portfolio. You should be prepared to accept some risk with the money you invest in the Fund. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. Q. WHAT ARE DERIVATIVES AND DOES THE FUND USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. Some of the permissible investments described in this Prospectus, such as variable-rate instruments which have an interest rate that is reset periodically based on an index, can be considered derivatives. Some derivatives may be more sensitive than direct securities to changes in interest rates or sudden market moves. Some derivatives also may be susceptible to fluctuations in yield or value due to their structure or contract terms. Q. WHAT STEPS DOES THE FUND TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser to the Fund, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with the Fund's investment objective, does not expose the Fund to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by the Fund also is subject to broadly applicable investment policies. For example, the Fund may not invest more than a specified percentage of its assets in "illiquid securities," including those derivatives that do not have active secondary markets. Nor may the Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) After any waivers or reimbursements. * See "Contingent Deferred Sales Charge." ** As further described in the Prospectus under the caption "Advisory, Administration and Distribution Arrangements," Stephens and Wells Fargo Bank each has agreed to waive or reimburse all or a portion of its respective fees in circumstances where Fund expenses that are subject to limitations imposed under state securities laws and regulations exceed such limitations. In addition, Stephens and Wells Fargo Bank each may elect, in its sole discretion, to otherwise waive its respective fees or reimburse expenses. Any such waivers or reimbursements with respect to the Fund reduces the total expenses of the Fund. The percentages shown above with respect to Class A and Class D Shares under "Total Other Expenses" and "Total Fund Operating Expenses" are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Absent waivers and reimbursements, "Total Other Expenses" and "Total Fund Operating Expenses" with respect to Class A Shares would have been 0.40% and 0.95%, respectively. Absent waivers and reimbursements, these percentages with respect to Class D Shares would have been 0.82% and 1.82%, respectively. Long-term shareholders of the Fund could pay more in distribution related charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers, Inc. ("NASD"). There can be no assurances that the voluntary fee waivers and expense reimbursements will continue. The purpose of the foregoing tables is to assist you in understanding the various costs and expenses that an investor in the Fund will bear directly or indirectly. There are no other sales loads, redemption fees or exchange fees charged by the Fund. However, the Company reserves the right to impose charges for wiring redemption proceeds. The Examples should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. See Prospectus sections captioned "Advisory, Administration and Distribution Arrangements," "Distribution Plans" and "Purchase of Shares" for more complete descriptions of the various costs and expenses applicable to the Fund. The following information has been derived from the Financial Highlights in the Fund's 1994 annual financial statements. The financial statements are incorporated by reference into the SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Fund's 1994 annual financial statements and the notes thereto. The SAI has been incorporated by reference into this Prospectus. FOR A CLASS A SHARE OUTSTANDING AS SHOWN * The Fund commenced operations on October 6, 1988. ** The Fund sold no securities during this period. + Total returns do not include any sales charges. FOR A CLASS D SHARE OUTSTANDING AS SHOWN * This class commenced operations on July 1, 1993. + Total returns do not include the 1% contingent deferred sales charge. Set forth below is a description of the investment objective and related policies of the Fund. As with all mutual funds, there can be no assurance that the Fund, which is a non-diversified portfolio, will achieve its investment objective. INVESTMENT OBJECTIVE. The California Tax-Free Bond Fund seeks to provide investors with a high level of income exempt from federal income taxes and from California personal income taxes, while preserving capital, by investing in medium- to long-term, investment-grade municipal securities. As a matter of fundamental policy, the Fund, under normal market conditions, invests at least 80% of its net assets in municipal securities, the interest on which is exempt from federal income taxes and not subject to the alternative minimum tax. Under ordinary market conditions, at least 65% of the value of the total assets of the Fund will be invested in municipal bonds, as opposed to municipal notes or commercial paper. In addition, under normal market conditions, the Fund intends to invest all of its assets in securities issued by the State of California, and its cities, municipalities and other public authorities. As described further in the SAI, this Fund may purchase certain securities on a when-issued basis. The municipal securities which the California Tax-Free Bond Fund may purchase include: Municipal Bonds. The municipal bonds in which the Fund invests generally have a maturity at the time of issuance of up to thirty years. The California Tax-Free Bond Fund may invest in municipal bonds that are rated at the date of purchase "Baa" or better by Moody's Investors Service, Inc. ("Moody's") or "BBB" or better by Standard & Poor's Corporation ("S&P"), or bonds that are not rated but that are considered by Wells Fargo Bank, as investment adviser, to be of comparable quality. Bonds rated at the minimum permitted level have speculative characteristics and are more likely than higher rated bonds to have a weakened capacity to pay principal and interest in times of adverse economic conditions; all are considered investment grade. A description of the ratings is contained in the Appendix to the SAI. Municipal Notes. The municipal notes in which the Fund invests generally have maturities at the time of issuance of three years or less. The Fund may invest in municipal notes that are rated at the date of purchase "MIG 3" (or "VMIG 3" in the case of an issue having a variable rate demand feature) or better by Moody's or "SP-2" or better by S&P, or notes that are not rated but that are considered by Wells Fargo Bank, as investment adviser, to be of comparable quality. Municipal notes generally are issued in anticipation of the receipt of tax funds, of the proceeds of bond placements or of other revenues. The ability of an issuer to make payments is, therefore, dependent on such tax receipts, proceeds from bond sales or other revenues, as the case may be. Municipal Commercial Paper. Municipal commercial paper is a debt obligation with a stated maturity of 270 days or less that is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. The Fund may invest in municipal commercial paper that is rated at the date of purchase "P-1" or "P-2" by Moody's or "A-1+," "A-1" or "A-2" by S&P, or municipal commercial paper that is not rated but is considered by Wells Fargo Bank, as investment adviser, to be of comparable quality. The Fund also may invest in certain "private activity" bonds or notes, such as pollution control bonds; provided that such investments will be made only to the extent they are consistent with the Fund's fundamental policy, described above, of investing, under normal market conditions, at least 80% of its net assets in municipal securities the interest on which is exempt from federal income taxes and not subject to the alternative minimum tax. Because the Fund will "concentrate," i.e., invest at least 25% of its total assets, in securities issued by or on behalf of the State of California, its cities, municipalities and other public authorities, this Fund is particularly dependent on, and may be adversely affected by, general economic conditions in California. See "Special Factors Affecting the California Tax-Free Bond Fund" in the SAI. California is experiencing recurring budget deficits caused by lower than anticipated tax-revenues and increased expenditures for certain programs. These budget deficits have depleted the state's available cash resources, and the state has recently had to use a series of external borrowings to meet its cash needs. In addition, since 1992 some of the credit rating agencies have assigned their third highest rating to certain of the state's debt obligations. On July 15, 1994, three of the ratings agencies rating California's long-term debt lowered their ratings of the state's general obligation bonds. Moody's lowered its rating from "Aa" to "A1," S&P lowered its rating from "A+" to "A" and termed its outlook as "stable," and Fitch Investors Service lowered its rating from "AA" to "A." The Fund's investment adviser continues to monitor and evaluate the Fund's investments in light of the events in California and the Fund's investment objective and investment policies. The rating agencies also continue to monitor events in the state and the state and local governments' responses to budget shortfalls. From time to time the California Tax-Free Bond Fund also may concentrate its investments in municipal securities that are related in such a way that an economic, business or political development or change affecting one such security would also affect the other securities -- for example, municipal securities the interest on which is paid from revenues of similar type projects. The Fund, pending the investment of proceeds from the sale of Fund shares or proceeds from the sale of portfolio securities, in anticipation of redemptions or to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of market conditions, may elect to invest temporarily up to 20% of the current value of its net assets in cash reserves or in taxable securities in which the U.S. Government Income Fund, another fund in the Overland Express Family of Funds, may invest, or in instruments the interest on which is exempt from federal income taxes, but not from California personal income taxes. Certain of the debt instruments that the Fund may purchase bear interest at rates that are not fixed, but vary with changes in specified market rates or indices or at specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The floating- and variable-rate instruments that the Fund may purchase include certificates of participation in floating- and variable-rate obligations purchased from banks; with respect to the tax-exempt status of these certificates, the investment adviser may rely upon either the opinion of counsel or Internal Revenue Service rulings issued with respect thereto. Wells Fargo Bank, as investment adviser, monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events occurring between the date the Fund elects to demand payment on a floating- or variable-rate instrument and the date payment is due may affect the ability of the issuer of the instrument to make payment when due, and unless such demand instruments permits same-day settlement, may affect the Fund's right to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The Fund's investment objective, as set forth in the first paragraph of the subsection describing the Fund's objective and policies, is fundamental; that is, the investment objective may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. If the Board of Directors determines, however, that the Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will disclose any such material changes in the then current prospectus. In addition, as matters of fundamental policy, the Fund may: (i) borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased while any such borrowing exists); (ii) make loans of portfolio securities; (iii) invest up to 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, restricted securities and illiquid securities; and (iv) invest up to 10% of the current value of its net assets in fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days. The Board of Directors, in addition to supervising the actions of the investment adviser, administrator and distributor, as set forth below, decides upon matters of general policy. Pursuant to an Advisory Contract, the Fund is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company (other than those structured as "feeder funds"), and to six other registered open-end management investment companies, each of which consist of several separately managed investment portfolios. The Advisory Contract provides that Wells Fargo Bank shall furnish to the Fund investment guidance and policy direction in connection with the daily portfolio management of the Fund. Pursuant to the Advisory Contract, Wells Fargo Bank furnishes to the Board of Directors periodic reports on the investment strategy and performance of the Fund. Purchase and sale orders of the securities held by the Fund may be combined with those of other accounts that Wells Fargo Bank manages, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for the Fund and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, the Fund, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contract, Wells Fargo Bank is entitled to monthly advisory fees at the annual rates of 0.50% of the average daily net assets of the Fund. From time to time Wells Fargo Bank may waive such fees in whole or in part. Any such waiver would reduce expenses of the Fund and, accordingly, have a favorable impact on the yield or return of the Fund. For the year ended December 31, 1994, Wells Fargo Bank was paid 0.28% of the average daily net assets of the Fund as compensation for its services as investment adviser. Mr. David Klug is responsible for the day-to-day management of the California Tax-Free Bond Fund. Mr. Klug has managed municipal bond portfolios for Wells Fargo Bank for over nine years. Prior to joining Wells Fargo Bank, he managed the municipal bond portfolio for a major property and casualty insurance company. His investment experience exceeds 20 years and includes all aspects of tax-exempt fixed-income investments. He holds an M.B.A. from the University of Chicago and is a member of The National Federation of Municipal Analysts and its California Chapter. Mr. Klug has co-managed the Fund since October 1988. Mr. David Wines is also responsible for the day-to-day management of the California Tax-Free Bond Fund. Mr. Wines, has managed tax-exempt fixed-income portfolios for over a decade. Prior to joining Wells Fargo Bank in 1990, he held senior investment management positions for both Matson Navigation Company, Inc. and The Electric Power Research Institute, a research consortium for the electric power industry. He holds a B.S. in finance from the University of Oregon, an M.B.A. from Golden Gate University and is a member of the Security Analysts of San Francisco. Mr. Wines has co-managed the Fund since September 1992. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into an agreement with the Fund under which Stephens acts as administrator for the Funds. For these administrative services, Stephens is entitled to receive from the Fund a monthly administrative fee at an annual rate of 0.15% of its average daily net assets; decreasing to 0.10% of the average daily net assets of the Fund in excess of $200 million. From time to time Stephens may waive fees from the Fund in whole or in part. Any such waiver will reduce expenses of the Fund and, accordingly, have a favorable impact on the yield or return of the Fund. The Administration Agreement between Stephens and the Fund states that Stephens shall provide as administrative services, among other things, general supervision (i) of the operation of the Fund, including coordination of the services performed by the Fund's investment adviser, transfer agent, custodian, independent auditors and legal counsel; (ii) in connection with regulatory compliance, including the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions; and preparation of proxy statements and shareholder reports for the Funds; and (iii) to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors. Stephens also furnishes office space and certain facilities required for conducting the business of the Fund and pays the compensation of the Company's Directors, officers and employees who are affiliated with Stephens. Stephens, as the principal underwriter of the Fund within the meaning of the Investment Company Act of 1940 (the "1940 Act"), has also entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing Class A Shares and Class D Shares of the Fund. The Distribution Agreement provides that Stephens shall act as agent for the Fund for the sale of Class A Shares and Class D Shares and may enter into selling agreements with broker/dealers or financial institutions to market and make available Class A Shares and Class D Shares to their respective customers. Under the Distribution Agreement, Stephens is entitled to receive from the Fund a monthly fee at an annual rate of up to the greater of $100,000 or 0.05% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at an annual rate of up to 0.50% of the average daily net assets of the Class D Shares of the Fund. The actual fee payable to Stephens is determined, within such limits, from time to time by mutual agreement between the Company and Stephens, and may not exceed the maximum amount payable under the Rules of Fair Practice of the NASD. With respect to the Class D Shares of the Fund, Stephens may enter into selling agreements with one or more selling agents under which such agents may receive from Stephens compensation for sales support services. Such compensation may include, but is not limited to, commissions or other payments to such agents based on the average daily net assets of Class D Shares of the Fund attributable to them. Services provided by selling agents in exchange for commissions and other payments to selling agents are the principal sales support services provided to the Fund. Stephens may retain any portion of the total distribution fee payable under the Distribution Agreement to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. Since the Distribution Agreement provides for fees that are used by Stephens to pay for distribution services, a plan of distribution for each class of shares (individually a "Plan", collectively the "Plans") and the Distribution Agreement are approved and reviewed in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in which an investment company may, directly or indirectly, bear the expense of distributing its shares. See Prospectus section captioned "Distribution Plans" for a more complete description of the Plans. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. The Fund may enter into servicing agreements with one or more servicing agents on behalf of Class D Shares of the Fund. Under such agreements, servicing agents provide shareholder liaison services, which may include responding to customer inquiries and providing information on shareholder investments, and provide such other related services as the Fund or a Class D shareholder may reasonably request. For these services, a servicing agent receives a fee which will not exceed, on an annualized basis for the Fund's then current fiscal year, 0.25% of the average daily net assets of the Class D Shares of the Fund represented by Class D Shares owned by investors with whom the servicing agent maintains a servicing relationship, or an amount which equals the maximum amount payable to the servicing agent under applicable laws, regulations or rules, whichever is less. DETERMINATION OF NET ASSET VALUE Net asset value per share for the Fund is determined by Wells Fargo Bank on each day that the Exchange is open for trading. The net asset value of a share of a class of the Fund is the value of total net assets attributable to each class divided by the number of outstanding shares of that class. The value of net assets per class is determined daily by adjusting the net assets per class at the beginning of the day by the value of each class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each class by attributing to each class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each class as appropriate. The net asset value of each class is expected to fluctuate daily. The value of assets of the Fund (other than debt obligations maturing in 60 days or less) is determined as of the close of regular trading on the Exchange (referred to hereafter as the "close of the Exchange"), which is currently 4:00 p.m. New York time. Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, assets are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the Board of Directors. Prices used for such valuations may be provided by independent pricing services. From time to time, the Company may advertise yield and total return information with respect to a class of shares of the Fund. Total return and yield information of a class of shares are based on the historical earnings and performance of such class of shares and should not be considered representative of future performance. The total return of a class of shares of the Fund is calculated by subtracting (i) the public offering price of the class of shares (which includes the maximum sales charge for the class of shares) of one share of the class of shares at the beginning of the period, from (ii) the net asset value of all shares of the class of shares an investor would own at the end of the period for the share held at the beginning of the period (assuming reinvestment of all dividends and capital gain distributions), and dividing by (iii) the public offering price per share of the class of shares at the beginning of the period. The resulting percentage indicates the positive or negative rate of return that an investor would have earned from reinvested dividends and capital gain distributions and changes in share price during the period for the class of shares. The Fund may also, at times, calculate total return of a class of shares based on net asset value per share of a class of shares (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the class of shares or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that total return data derived pursuant to the calculation described above are also presented. The yield of a class of shares will be computed by dividing its net investment income per share of the class earned during a specified period by its public offering price per share (which includes the maximum sales charge) on the last day of such period and annualizing the result. Tax-equivalent yield for the Fund, which assumes that a stated income tax rate has been applied to non-exempt income to derive the tax- exempt portion of the Fund's yield, also may be advertised. For purposes of sales literature, these yields may also, at times, be calculated on the basis of the net asset value per share of the class (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the class of shares, or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that yield data derived pursuant to the calculation described above are also presented. Because of differences in the fees and/or expenses borne by Class D Shares of the Fund, the net yield on such shares can be expected, at any given time, to differ from the net yield on Class A Shares. Performance information will be computed separately for Class A Shares and Class D Shares. Additional information about the performance of each Fund is contained in the Annual Report for each Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. Shares of the Fund may be purchased on any day the Exchange is open for trading through Stephens, the Transfer Agent, or any authorized broker/dealers or financial institutions with which Stephens has entered into agreements. Such broker/dealers or financial institutions are responsible for the prompt transmission of purchase, exchange or redemption orders, and may independently establish and charge additional fees to their clients for such services, other than services related to purchase orders, which would reduce the clients' overall yield or return. The Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for shares purchased through the Systematic Purchase Plan and $250 for shares purchased through a retirement plan qualified under the Internal Revenue Code of 1986, as amended (the "Code"). The minimum subsequent purchase amount is $100. The minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. The Company reserves the right to reject any purchase order. All funds, net of sales loads, will be invested in full and fractional shares. Checks will be accepted for the purchase of the Fund's shares subject to collection at full face value in U.S. dollars. Inquiries may be directed to the Company at the address or telephone number on the front cover of the Prospectus. Shares of the Fund are offered continuously at the applicable offering price (including any sales load) next determined after a purchase order is received. Payment for shares purchased through a broker/dealer will not be due from the broker/dealer until the settlement date, currently five business days after the order is placed. Effective June 7, 1995, the settlement date will normally be three business days after the order is placed. It is the broker/dealer's responsibility to forward payment for shares being purchased to the Fund promptly. Payment for orders placed directly through the Transfer Agent must accompany the order. When payment for shares of the Fund through the Transfer Agent is by a check that is drawn on any member bank of the Federal Reserve System, federal funds normally become available to the Fund on the business day after the day the check is deposited. Checks drawn on a non-member bank or a foreign bank may take substantially longer to be converted into federal funds and, accordingly, may delay the execution of an order. When shares of the Fund are purchased through a broker/dealer or financial institution, Stephens reallows that portion of the sales load designated below as the Dealer Allowance. Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Fund may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. If all sales charges are paid or reallowed to a broker/dealer or financial institution, it may be deemed an "underwriter" under the Securities Act of 1933. When shares are purchased directly through the Transfer Agent and no broker/dealer or financial institution is involved with the purchase, the entire sales load is paid to Stephens. Sales loads relating to the purchase of Class A Shares in the Fund are as follows: Class D Shares are not subject to a front-end sales load. However, Class D Shares which are redeemed within one year from the receipt of a purchase order will be subject to a contingent deferred sales charge equal to 1% of the dollar amount equal to the lesser of the net asset value at the time of purchase of the shares being redeemed or the net asset value of such shares at the time of redemption. A selling agent or servicing agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class D Shares. REDUCED SALES CHARGE -- CLASS A SHARES The above Volume Discounts are also available to you based on the combined dollar amount being invested in Class A Shares of the Fund or of Class A Shares of other portfolios of the Company which assess a sales load (the "Load Funds"). Because Class D Shares are not subject to a front-end sales charge, the amount of Class D shares you hold is not considered in determining any volume discount. The Right of Accumulation allows you to combine the amount being invested in Class A Shares of the Fund with the total net asset value of Class A Shares in any of the Load Funds already owned in accordance with the above sales load schedule to reduce the sales load. For example, if you own Class A Shares of the Load Funds with an aggregate net asset value of $90,000 and invest an additional $20,000 in Class A Shares of the Fund, the sales load on the entire additional amount would be 4.00% of the offering price. To obtain such discount, you must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the reduced sales load, and confirmation of the order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time with respect to all Class A Shares purchased thereafter. A Letter of Intent allows you to purchase Class A Shares of the Fund over a 13-month period at reduced sales loads based on the total amount intended to be purchased plus the total net asset value of Class A Shares in any of the Load Funds already owned. Each investment made during the period receives the reduced sales load applicable to the total amount of the intended investment. If such amount is not invested within the period, you must pay the difference between the sales loads applicable to the purchases made and the charges previously paid. You may Reinvest proceeds from a redemption of Class A Shares of the Fund in Class A Shares of the Fund or in Class A Shares of another of the Company's investment portfolios that offers Class A Shares at net asset value, without a sales load, within 120 days after such redemption. However, if the other investment portfolio charges a sales load that is higher than the sales load that you have paid in connection with the Class A Shares you have redeemed, you pay the difference. In addition, the Class A Shares of the investment portfolio to be acquired must be registered for sale in your state of residence. The amount that may be so reinvested may not exceed the amount of the redemption proceeds, and a written order for the purchase of the Class A Shares must be received by the Fund or the Transfer Agent within 120 days after the effective date of the redemption. If you realized a gain on your redemption, the reinvestment will not alter the amount of any federal capital gains tax payable on the gain. If you realized a loss on your redemption, the reinvestment may cause some or all of the loss to be disallowed as a tax deduction, depending on the number of Class A Shares purchased by reinvestment and the period of time that has elapsed after the redemption, although for tax purposes, the amount disallowed is added to the cost of the Class A Shares acquired upon the reinvestment. Reductions in front-end sales loads apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife, and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Reductions in front-end sales loads also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of Class A Shares purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the 1940 Act, which has been in existence for more than six months and which has a primary purpose other than acquiring shares of the Fund at a reduced sales load, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote five percent or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote five percent of more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by Directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and other broker-dealers that have entered into agreements with Stephens to sell such shares. Class A Shares of the Fund also may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by present and retired Directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo Bank and its affiliates if Wells Fargo Bank and/or the respective affiliates agree. Such shares also may be purchased at such price by employee benefit and thrift plans for such persons and by any investment advisory, trust or other fiduciary account (other than an individual retirement account) that is maintained, managed or advised by Wells Fargo Bank or Stephens or their affiliates. In addition, Class A Shares also may be purchased at net asset value by pension, profit sharing or other employee benefit plans established under Section 401 of the Code. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by the following types of investors that place trades through an omnibus account maintained at the Fund by a discount broker/dealer: trust companies; investment advisers and financial planners on behalf of their clients; retirement and deferred compensation plans and the trusts used to fund these plans. By investing in the Fund, you appoint the Transfer Agent, as agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional shares. See "Dividends and Distributions." Although most shareholders elect not to receive stock certificates, certificates for full shares of the Fund can be obtained on request. It is more complicated to redeem shares held in certificated form, and the expedited redemption described below is not available with respect to certificated shares. CONTINGENT DEFERRED SALES CHARGE -- CLASS D SHARES Class D Shares which are redeemed within one year of receipt of a purchase order for such shares will be subject to a contingent deferred sales charge equal to 1.00% of an amount equal to the lesser of the net asset value at the time of purchase for the Class D Shares being redeemed or the net asset value of such shares at the time of redemption. Accordingly, a contingent deferred sales charge will not be imposed on amounts representing increases in net asset value above the net asset value at the time of purchase. In addition a charge will not be assessed on Class D Shares purchased through reinvestment of dividends or capital gains distributions. In determining whether a contingent deferred sales charge is applicable to a redemption, Class D Shares are considered redeemed on a first-in, first-out basis so that Class D Shares held for a longer period of time are considered redeemed prior to more recently acquired shares. The contingent deferred sales charge is waived on redemptions of Class D Shares (i) following the death or disability (as defined in the Code) of a shareholder, (ii) to the extent that the redemption represents a minimum required distribution from an individual retirement account or other retirement plan to a shareholder who has reached age 70 1/2, (iii) effected pursuant to the Company's right to liquidate a shareholder's account if the aggregate net asset value of the shareholder's account is less than the minimum account size, or (iv) in connection with the combination of the Company with any other registered investment company by a merger, acquisition of assets, or by any other reorganization transaction. Investors who are entitled to purchase Class A Shares at net asset value without a sales load should not purchase Class D Shares. Other investors, including those who are entitled to purchase Class A Shares of the Fund at a reduced sales load, should compare the fees assessed on Class A Shares against those assessed on Class D Shares (including potential contingent deferred sales charges and higher Rule 12b-1 fees) in light of the amount to be invested and the anticipated time that the shares will be owned. Shares of the Fund may be purchased by any of the methods described below. INITIAL PURCHASES OF FUND SHARES BY WIRE 1. Telephone toll free (800) 572-7797. Give the name of the Fund in which the investment is to be made, the class of shares to be purchased, the name(s) in which the shares are to be registered, the address, social security or tax identification number (where applicable) of the person or entity in whose name(s) the shares are to be registered, dividend payment election, amount to be wired, name of the wiring bank and name and telephone number of the person to be contacted in connection with the order. An account number will be assigned. 2. Instruct the wiring bank, which may charge a separate fee, to transmit the specified amount in federal funds ($1,000 or more) to: Wire Purchase Account Number: 4068-000462 Attention: Overland Express California Tax-Free Bond Fund (designate Account Name(s): (name(s) in which to be registered) Account Number: (as assigned by telephone) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price, or, in the case of Class D Shares, the net asset value next determined after the Account Application is received and accepted. INITIAL PURCHASES OF FUND SHARES BY MAIL 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $1,000 or more, payable to "Overland Express California Tax-Free Bond Fund (designate Class A or D)" at its mailing address set forth above. Additional purchases of $100 or more may be made by instructing the Fund's Transfer Agent to debit an approved account designated in your Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Overland Express California Tax-Free Bond Fund (designate Class A or D)" to the above address. Write the Fund account number on the check and include the detachable stub from a Statement of Account or a letter providing the account number. The Company's Systematic Purchase Plan provides you with a convenient way to establish and automatically add to your existing accounts on a monthly basis. If you elect to participate in this plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a designated bank account (provided your bank is a participant in the automated clearing house system). The Transfer Agent withdraws and uses this amount to purchase shares of the designated Fund on or about the fifth business day of each month. There are no additional fees charged for participating in this plan. You may change the investment amount, suspend purchases or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to any scheduled transaction. An election will be terminated automatically if the designated bank account balance is insufficient to make a scheduled withdrawal, or if either the designated bank account or your account is closed. PURCHASES THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Purchase orders for shares in the Fund placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale, including orders for which payment is to be made from free cash credit balances in securities accounts held by a dealer, will be effective on the same day the order is placed if received by the Transfer Agent before the close of business. Purchase orders that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of purchase orders to the Transfer Agent. Payment for Fund shares is not due until settlement date. Broker/dealers and financial institutions may benefit from temporary use of payments to the Fund during the settlement period. A broker/dealer or financial institution that is involved in a purchase transaction may charge separate account, service or transaction fees. Financial institutions may be required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. You may exchange Class A Shares of the Fund for shares of the same class of the Company's other investment portfolios or for shares of the California Tax-Free Money Market Fund, the Money Market Fund or the U.S. Treasury Money Market Fund in an identically registered account at respective net asset values, provided that, if the other investment portfolio charges a sales load on the purchase of the class of shares being exchanged that is higher than the sales load that you have paid in connection with the shares you are exchanging, you pay the difference. Class D Shares of the Fund may be exchanged for Class D Shares of one of the Company's other investment portfolios that offer Class D Shares or for Class A Shares of the Money Market Fund in an identically registered account at respective net asset values. You are not charged a contingent deferred sales charge on exchanges of Class D Shares for shares of the same class of another of the Company's investment portfolios or for Class A Shares of the Money Market Fund. If you exchange Class D Shares for shares of the same class of another investment portfolio, or for Class A Shares of the Money Market Fund, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of the initial purchase of the previously held shares. Accordingly, if you exchange Class D Shares for Class A Shares of the Money Market Fund, and redeem the shares of the Money Market Fund within one year of the receipt of the purchase order for the exchanged Class D Shares, you will have to pay a deferred sales charge equal to the contingent deferred sales charge applicable to the previously exchanged Class D Shares. If you exchange Class D Shares of an investment portfolio for Class A Shares of the Money Market Fund, you may subsequently re-exchange the acquired Class A Shares only for Class D Shares. If you re-exchange the Class A Shares of the Money Market Fund for Class D Shares, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of your initial purchase of Class D Shares. In addition, shares of the investment portfolio to be acquired must be registered for sale in your state of residence. You should obtain, read and retain the Prospectus for the investment portfolio which you desire to exchange into before submitting an exchange order. You may exchange shares by writing the Transfer Agent as indicated below under Redemption by Mail, or by calling the Transfer Agent or your authorized broker/dealer or financial institution or servicing agent, unless you have elected not to authorize telephone exchanges in the Account Application (in which case you may subsequently authorize such telephone exchanges by completing a Telephone Exchange Authorization Form and submitting it to the Transfer Agent in advance of the first such exchange). Shares held in certificated form may not be exchanged by telephone. The Transfer Agent's number for exchanges is (800) 572-7797. Procedures applicable to redemption of the Fund's shares are also applicable to exchanging shares, except that, with respect to an exchange transaction between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. The Company reserves the right to limit the number of times shares may be exchanged between Funds, or to reject in whole or in part any exchange request into a fund when management believes that such action would be in the best interest of the fund's other shareholders, such as when management believes that such action would be appropriate to protect such fund against disruptions in portfolio management resulting from frequent transactions by those seeking to time market fluctuations. Any such rejection will be made by management on a prospective basis only, upon notice to the shareholder given not later than 10 days following such shareholder's most recent exchange. The Company reserves the right to modify or discontinue exchange privileges at any time. Under SEC rules, 60 days prior notice of any amendments or termination of exchange privileges will be given to shareholders, except under certain extraordinary circumstances. A capital gain or loss for tax purposes may be realized upon an exchange, depending upon the cost or other basis of shares redeemed. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you decline such privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine. If the Transfer Agent does not follow such procedures, the Company and the Transfer Agent may be liable for any losses attributable to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Shares may be redeemed at their next determined net asset value after receipt of a request in proper form by the Transfer Agent directly or through any authorized broker/dealer or financial institution. Except for any contingent deferred sales charge, which may be applicable upon redemption of Class D Shares, as described under "Purchase of Shares," the Company does not charge for redemption transactions. However, a broker/dealer or financial institution that is involved in a redemption transaction may charge separate account, service or transaction fees. On a day the Fund is open for business, redemption orders received by an authorized broker/dealer or financial institution before the close of the Exchange and received by the Transfer Agent before the close of business on the same day will be executed at the net asset value per share determined at the close of the Exchange on that day. Redemption orders received by authorized broker/dealers or financial institutions after the close of the Exchange, or not received by the Transfer Agent prior to the close of business, will be executed at the net asset value determined at the close of the Exchange on the next business day. Redemption proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, ordinarily will be remitted within seven days after the order is received in proper form, except proceeds may be remitted over a longer period to the extent permitted by the SEC under extraordinary circumstances. If an expedited redemption is requested, redemption proceeds will be distributed only if the check used for investment is deemed to be cleared for payment by your bank, currently considered by the Company to be a period of 15 days after investment. The proceeds, of course, may be more or less than cost. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. 1. Write a letter of instruction. Indicate the dollar amount of or number of shares to be redeemed. Refer to your Fund account number and provide either a social security or a tax identification number (as applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more, or redemption proceeds are to be paid to someone other than you at your address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the Federal Deposit Insurance Corporation, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation will be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. If shares to be redeemed are held in certificated form, enclose the certificates with the letter. Do not sign the certificates and for protection use registered mail. 5. Mail the letter to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchase of Fund Shares by Wire." Unless other instructions are given in proper form, a check for the proceeds of redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be sent to your address of record. The Company's Systematic Withdrawal Plan provides a way for you to have shares redeemed from your account and the proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, distributed to you on a monthly basis. You may elect to participate in this plan if you have a shareholder account valued at $10,000 or more as of the date of your election to participate, and are not also a participant in the Company's Systematic Purchase Plan at any time while participating in this plan. To participate in the plan you must specify an amount ($100 or more) to be distributed by check to your address of record or deposited in a designated bank account. The Transfer Agent redeems sufficient shares and mails or deposits the proceeds of the redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, as instructed, on or about the fifth business day prior to the end of each month. There are no additional fees charged for participating in this plan. You may change the withdrawal amount, suspend withdrawals or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to a scheduled transaction. An election will be terminated automatically if your account balance is insufficient to make a scheduled withdrawal or if your account is closed. If shares are not held in certificated form, you may request an expedited redemption of shares by letter or telephone (unless you have elected not to authorize telephone redemptions on your Account Application or other form that is on file with the Transfer Agent) on any day the Fund is open for business. See "Exchange Privileges" for additional information regarding telephone redemption privileges. You may request expedited redemption by telephone by calling the Transfer Agent at (800) 572-7797. You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchase of Fund Shares by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be wired or credited to the bank indicated in your Account Application or wired to an authorized broker/dealer or financial institution designated in your Account Application. The Company reserves the right to impose charges for wiring redemption proceeds. When proceeds of an expedited redemption are to be paid to someone other than yourself, to an address other than that of record, or to a bank, broker/dealer or other financial institution that has not been predesignated, the expedited redemption request must be made by letter and the signature(s) on the letter must be guaranteed, regardless of the amount of the redemption. If an expedited redemption request is received by the Transfer Agent by the close of business on any day the Fund is open for business, the redemption proceeds will be transmitted to your bank or predesignated broker/dealer or financial institution on the next business day (assuming the investment check has cleared as described above), absent extraordinary circumstances. A check for proceeds of less than $5,000 will be mailed to your address of record, except that, in the case of investments in the Company that have been effected through broker/dealers, banks and other institutions that have entered into special arrangements with the Company, the full amount of the redemption proceeds may be transmitted by wire or credited to a designated account. REDEMPTIONS THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Redemption requests placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale will be effective on the same day the request is placed if received by the Transfer Agent before the close of business. Redemption requests that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of redemption requests to the Transfer Agent. Unless you have made other arrangements, and have informed the Transfer Agent of such arrangements, proceeds of redemptions made through authorized broker/dealers and financial institutions will be credited to your account with such broker/dealer or institution. You may request from the broker/dealer or financial institution or may elect to retain the redemption proceeds in your account. The broker/dealer or financial institution may benefit from the use of the redemption proceeds prior to the clearance of a check issued to you for such proceeds or prior to disbursement or reinvestment of such proceeds on your behalf. The proceeds of redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. Due to the high cost of maintaining small accounts, the Company reserves the right to redeem accounts that fall below $1,000. Prior to such a redemption, you will be notified in writing and permitted 30 days to make additional investments to raise the account balance to the specified minimum. The Company's Board of Directors has adopted a Plan on behalf of each class of shares of the Fund. Under the Plans and pursuant to the Distribution Agreement, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective shareholders of the Fund, by paying on an annual basis up to the greater of $100,000 or 0.05% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at an annual rate of 0.50% of the average daily net assets of the Class D Shares of the Fund to the distributor. Under the Plan for the Class D Shares of the Fund, the distributor may enter into selling agreements with one or more selling agents under which such agents may receive compensation for distribution-related services from the distributor, including, but not limited to, commissions or other payments to such agents based on the average daily net assets of Class D Shares attributable to them. The distributor may retain any portion of the total distribution fee payable under the Plans to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. The Plans provide only for the reimbursement of actual expenses. The Fund may participate in joint distribution activities with any other portfolios and classes of the Company, in which event expenses reimbursed out of the assets of the Fund may be attributable, in part, to the distribution-related activities of another portfolio. Generally, the expenses attributable to joint distribution activities will be allocated among the Fund and any other portfolio of the Company in proportion to their relative net asset sizes, although the Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. The Company's Board of Directors has adopted a servicing plan ("Servicing Plan") on behalf of the Class D Shares of the Fund. Pursuant to the Servicing Plan the Fund may enter into servicing agreements with one or more servicing agents who agree to provide administrative support services to their customers who are the record or beneficial owners of Class D Shares. Such servicing agents will be compensated at an annual rate of up to 0.25% of the average daily net asset value of the Class D Shares held of record or beneficially by such customers. The Fund intends to declare as a dividend to all shareholders of record substantially all of its net investment income at the close of each business day to shareholders of record at 4:00 p.m. (New York time) on the day of declaration. Shares purchased in the Fund will begin earning dividends on the business day following the date the purchase order settles and shares redeemed will earn dividends through the date of redemption. Net investment income for a Saturday, Sunday or holiday will be declared as a dividend to shareholders of record at 4:00 p.m. (New York time) on the prior business day. Dividends of the Fund declared in, and attributable to, any month will be paid early in the following month. Shareholders of the Fund who redeem shares prior to a dividend payment date will be entitled to all dividends declared but unpaid prior to redemption on such shares on the next dividend payment date. Net capital gains of the Fund, if any, will be distributed annually (or more frequently to the extent permitted to avoid imposition of the 4% excise tax described in the SAI). Dividends and/or capital gain distributions paid by the Fund will be invested in additional shares of the same class of the Fund at net asset value (without any sales load) and credited to your account on the reinvestment date or, at your election, paid by check. Dividend checks and Statements of Account will be mailed within approximately three business days after the payment date. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The Fund's net investment income available for distribution to the holders of Class D Shares will be reduced by the amount of shareholder servicing fees payable to shareholder servicing agents under the Servicing Plan and by the incremental distribution fees payable under the Distribution Plan. There may be certain other differences in fees (e.g., transfer agent fees) between Class A Shares and Class D Shares that would affect their relative dividends. By complying with the applicable provisions of the Code, the Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to shareholders, and the Fund's shareholders will not be subject to federal income taxes on any dividends of the Fund attributable to interest from tax-exempt securities. However, dividends attributable to interest from taxable securities, accretion of market discount on certain bonds and capital gains (if any) will be taxable to shareholders. Generally, dividends of taxable income are taxable to shareholders at the time they are paid. However, dividends declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends are actually paid no later than January 31 of the following year. The Fund intends to pay out all its net investment income and net realized capital gains (if any) for each year. In addition, by complying with the applicable provisions of the California Revenue and Taxation Code, dividends of the Fund also will be exempt from California personal income tax to the extent such dividends attributable to instruments that pay interest which would be exempt from California personal income taxes were such instruments held directly by an individual. The Fund does not make any representation regarding the taxation of corporate shareholders with respect to Fund distributions and recommends that they consult their tax advisors. The Fund will inform you of the amount and nature of Fund dividends and capital gain distributions. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Fund if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. You should consult your individual tax advisor with respect to your particular tax situation as well as the state and local tax status of investments in shares of the Fund. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank has been retained to act as the Fund's custodian and transfer and dividend disbursing agent. Its principal place of business is 420 Montgomery Street, San Francisco, California 94163 and its transfer and dividend disbursing agency activities are managed at 525 Market Street, San Francisco, California 94105. The Company, an open-end investment company, was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. The Company currently offers twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Money Market Fund, the Municipal Income Fund, the Overland Sweep Fund, the Short-Term Government-Corporate Income Fund, the Short-Term Municipal Income Fund, the Strategic Growth Fund, the U.S. Government Income Fund, the U.S. Treasury Money Market Fund and the Variable Rate Government Fund. The Board of Directors may, in the future, authorize the issuance of other series of capital stock representing shares of additional investment portfolios or funds. All shares of the Company have equal voting rights and will be voted in the aggregate, and not by series or class, except where voting by series or class is required by law or where the matter involved affects only one series or class. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required by the 1940 Act to elect Directors; however, shareholders are entitled to call a meeting of shareholders for purposes of voting on removal of a Director or Directors. A more detailed statement of the voting rights of shareholders is contained in the SAI. All shares of the Company, when issued, will be fully paid and nonassessable. DIVIDEND DISBURSING AGENT AND CUSTODIAN Wells Fargo Bank, N.A. FOR MORE INFORMATION ABOUT THE FUND, OR WRITE: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. Stephens Inc. -- Sponsor, Administrator and Distributor Wells Fargo Bank, N.A. -- Investment Adviser, Transfer and Dividend Disbursing Overland Express Funds, Inc. (the "Company") is a professionally managed, open-end, series investment company. This Prospectus contains information about three of the funds in the Overland Express Family of Funds -- the CALIFORNIA TAX-FREE MONEY MARKET FUND, the MONEY MARKET FUND and the U.S. TREASURY MONEY MARKET FUND (each, a "Fund," and collectively, the "Funds"). The CALIFORNIA TAX-FREE MONEY MARKET FUND seeks to provide investors with a high level of current income exempt from federal income taxes, a portion of which is also exempt from California personal income taxes, while preserving capital and liquidity, by investing in high-quality instruments, principally municipal securities. Under normal market conditions, a substantial majority of the Fund's total assets will consist of securities the interest on which is exempt from California personal income taxes. In any event, at the close of each calendar quarter at least 50% of the Fund's total assets will consist of such securities. The MONEY MARKET FUND seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in high-quality, short-term securities. The U.S. TREASURY MONEY MARKET FUND seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in U.S. Treasury bonds, notes and bills with short remaining terms. Each of the Funds seeks to maintain a net asset value of $1.00 per share. This Prospectus sets forth concisely the information a prospective investor should know before investing in any of the Funds. A Statement of Additional Information dated May 1, 1995 (the "SAI"), containing additional and more detailed information about each of the Funds has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. The SAI is available without charge and can be obtained by writing the Company at P.O. Box 63084, San Francisco, CA 94163 or by calling the Company at the telephone number printed above. AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A CONSTANT $1.00 NET ASSET VALUE PER SHARE. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 This Prospectus describes the shares of the California Tax-Free Money Market Fund and the Class A Shares of the Money Market Fund and the U.S. Treasury Money Market Fund. Each of the Money Market Fund and the U.S. Treasury Money Market Fund also offers a class of shares known as the Institutional Class (shares of the Institutional Class are referred to hereinafter as the "Institutional Shares"). Institutional Shares of these Funds require a minimum initial investment of $150,000. Additional information about the Institutional Shares and a free copy of the current Prospectus describing the Institutional Shares is available from the Company at the telephone number printed above. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS, FOR WHICH IT IS COMPENSATED. STEPHENS INC. ("STEPHENS"), WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUNDS. The Company, as an open-end management investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Funds, each of which has its own investment objective. Q. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? A. The CALIFORNIA TAX-FREE MONEY MARKET FUND seeks to provide investors with a high level of current income exempt from federal income taxes, a portion of which is also exempt from California personal income taxes, while preserving capital and liquidity, by investing in high-quality instruments, principally municipal securities. The MONEY MARKET FUND seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in high-quality, short-term securities. The U.S. TREASURY MONEY MARKET FUND seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in U.S. Treasury bonds, notes and bills with short remaining terms. Each Fund seeks to maintain a net asset value of $1.00 per share; however, there is no assurance that this will be achieved. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. Q. WHAT ARE PERMISSIBLE INVESTMENTS? A. THE CALIFORNIA TAX-FREE MONEY MARKET FUND invests in high-quality instruments, primarily municipal securities, the income from which is exempt from federal income taxes, a portion of which is also exempt from California personal income taxes. Under normal market conditions, a substantial majority of the total assets of this Fund will consist of securities the interest on which is exempt from California personal income taxes. In all events, at the close of each calendar quarter, at least 50% of the Fund's total assets will consist of such securities. Income exempt from federal income tax may be of benefit to investors who pay federal income taxes, whether or not they are residents of California. See "Investment Objectives, Policies and Activities." The MONEY MARKET FUND invests in high-quality money market instruments, including obligations of the U.S. Government, its agencies and instrumentalities (including government-sponsored enterprises), certain debt obligations such as corporate debt, certain obligations of U.S. banks and certain repurchase agreements. See "Investment Objectives, Policies and Activities." The U.S. TREASURY MONEY MARKET FUND invests primarily in U.S. Treasury bonds, notes and bills with short remaining terms. See "Investment Objectives, Policies and Activities." Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the investment adviser of each Fund, manages your investments. Wells Fargo Bank also provides the Funds with transfer agency, dividend disbursing agency and custodial services. Stephens Inc. is the sponsor, administrator and distributor for the Company. See "Advisory, Administration and Distribution Arrangements" and "Distribution Plan." Q. HOW MAY I PURCHASE SHARES? A. Shares of the Funds may be purchased on any day the New York Stock Exchange (the "Exchange") is open for trading. There is no sales load for purchasing shares of any of the Funds. In most cases, the minimum initial purchase amount for shares of any of the Funds is $1,000. The minimum initial purchase amount is $100 for shares purchased through the Systematic Purchase Plan. The minimum subsequent purchase amount is $100 or more. However, certain exceptions may apply. You may purchase shares of the Funds through Stephens, Wells Fargo Bank, as transfer agent (the "Transfer Agent"), or any authorized broker/dealer or financial institution. Purchases of Shares of the Funds may be made by wire directly to the Transfer Agent. See "Purchase of Shares." Investors intending to invest at least $150,000 in either the Money Market Fund or the U.S. Treasury Money Market Fund should purchase Institutional Shares rather than Class A Shares. A free copy of the current Prospectus for the Institutional Shares is available from the Company at the telephone number set forth on the cover page. Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on shares of the Funds are declared daily and paid monthly. Dividends are automatically reinvested in additional shares, unless you elect to receive dividends in cash. All reinvestments in shares of the Funds are at net asset value. See "Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. On any day the Exchange is open for trading, shares may be redeemed upon request to Stephens or the Transfer Agent directly, or through any authorized broker/dealer or financial institution. Shares may be redeemed by a request in good form in writing or through telephone direction. Proceeds are payable by check or, for shareholders who make prior arrangements, by wire. Accounts of less than the applicable minimum initial purchase amount may be redeemed at the option of the Company. The Company does not charge for redeeming its shares. However, the Company reserves the right to impose charges for wiring redemption proceeds. See "Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUNDS? A. Shares of the Funds are not guaranteed or insured against loss of principal or interest, although certain of the Funds' portfolio securities may be insured or guaranteed as to repayments of principal and/or the payment of interest. Although each of the Funds seeks to maintain a stable net asset value of $1.00 per share, there is no assurance that it will be able to do so. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. Since the California Tax-Free Money Market Fund will invest primarily in securities issued by California, its agencies and municipalities, events in California are more likely to affect this Fund's investments. Also, the California Tax-Free Money Market Fund is non-diversified, which means that its assets may be invested in fewer issuers and therefore the value of its assets may be subject to greater impact by events affecting one of its investments. See "Investment Objectives, Policies and Activities -- Municipal Securities" in this Prospectus and "Special Factors Affecting the California Tax-Free Money Market Fund" in the SAI. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) After any waivers or reimbursements. * The percentages shown above are based on amounts incurred during the most recent fiscal year, and, with respect to "Other Expenses" and "Total Fund Operating Expenses" for the California Tax-Free Money Market Fund and Class A Shares of the Money Market Fund, reflect voluntary waivers and reimbursements. With respect to "Other Expenses" and "Total Fund Operating Expenses" for the Class A Shares of U.S. Treasury Money Market Fund, the percentages have been restated to reflect voluntary waivers and reimbursements that are expected to continue during the current fiscal year. Absent waivers and reimbursements, the percentages shown above under "Other Expenses" and "Total Fund Operating Expenses" would have been 0.20% and 0.70%, respectively, for the California Tax Free Money Market Fund; 0.22% and 0.72% for the Class A Shares of Money Market Fund; and 0.30% and 0.80% for the Class A Shares of U.S. Treasury Money Market Fund. As further described in the Prospectus under the caption "Advisory, Administration and Distribution Arrangements," Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees in circumstances where a Fund's expenses that are subject to limitations imposed under state securities laws and regulations exceed such limitations. In addition, Wells Fargo Bank and Stephens each may elect, in its sole discretion, to otherwise waive its respective fees or reimburse expenses. Stephens and Wells Fargo Bank each has agreed to waive all or a portion of its respective fees, through at least the current fiscal year, to the extent Total Fund Operating Expenses for Class A Shares of either the Money Market Fund or the U.S. Treasury Money Market Fund exceed 0.70% of average net assets. Any such waivers, limits or reimbursements of fees with respect to a Fund would reduce the total expenses of such Fund. There can be no assurances that voluntary fee waivers, limits and reimbursements will continue. The purpose of the foregoing table is to assist you in understanding the various costs and expenses that investors in shares of the Funds will bear directly or indirectly. There are no sales loads, redemption fees or exchange fees charged by the Funds. However, the Company reserves the right to impose charges for wiring redemption proceeds. See Prospectus sections captioned "Advisory, Administration and Distribution Arrangements," "Purchase of Shares" and "Distribution Plans" for more complete descriptions of the various costs and expenses applicable to the Funds. The Example should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. The following information has been derived from the Financial Highlights in the Funds' 1994 annual financial statements. The financial statements are incorporated by reference into the SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Funds' 1994 annual financial statements and the notes thereto. The SAI has been incorporated by reference into this Prospectus. CALIFORNIA TAX-FREE MONEY MARKET FUND FOR A SHARE OUTSTANDING AS SHOWN * The Fund commenced operations on April 7, 1988. ** Annualized. FOR A CLASS A SHARE OUTSTANDING AS SHOWN U.S. TREASURY MONEY MARKET FUND FOR A CLASS A SHARE OUTSTANDING AS SHOWN INVESTMENT OBJECTIVES, POLICIES AND ACTIVITIES Set forth below is a description of the investment objectives and related policies of each of the Funds. As with all mutual funds, there can be no assurance that the Funds will achieve their respective investment objectives. The Funds invest only in U.S. dollar-denominated "Eligible Securities" with remaining maturities not exceeding thirteen months, as defined in Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), and maintain a dollar-weighted average portfolio maturity of 90 days or less. An Eligible Security is a security that is determined to present minimal credit risks and is rated in one of the two highest rating categories by the required number of nationally recognized statistical rating organizations or, if unrated, is determined to be of comparable quality to such rated securities. These determinations are made by the investment adviser under guidelines adopted by the Company's Board of Directors, although in certain instances the Board of Directors must approve or ratify the Funds' investments. The Board of Directors of the Company (or Wells Fargo Bank, under authority delegated to it as investment adviser to the Funds) will determine on an ongoing basis that any Eligible Securities purchased by the Funds presents minimal credit risks. The Funds will endeavor to maintain a constant net asset value of $1.00 per share; however, there is no assurance that this objective will be achieved. CALIFORNIA TAX-FREE MONEY MARKET FUND Investment Objective. The California Tax-Free Money Market Fund seeks to provide investors with a high level of current income exempt from federal income taxes, a portion of which is also exempt from California personal income taxes, while preserving capital and liquidity, by investing in high-quality instruments, principally municipal securities. As a matter of fundamental policy, the Fund under normal circumstances invests at least 80% of its net assets in municipal securities that are exempt from federal income taxes and are not subject to the alternative minimum tax (or in other open-end tax-free money market funds with a similar fundamental policy). Under normal market conditions, a substantial majority of the Fund's total assets will consist of securities, the interest on which is exempt from both federal income taxes and California personal income taxes. Under normal market conditions, at least 65% of the Fund's total assets will consist of such securities. In addition, as a matter of fundamental policy, at the close of each quarter of the Fund's taxable year, at least 50% of its total assets will consist of such securities. Securities, the income on which is exempt from both federal income taxes and the personal income taxes of California, include municipal obligations issued by or on behalf of the State of California, its cities, municipalities and other public authorities. See "Investments and Activities -- Municipal Securities" and "Taxes." Pending the investment of proceeds from the sale of Fund shares or proceeds from sales of portfolio securities or in anticipation of redemptions, or to maintain a "defensive" posture when, in the opinion of the Investment Adviser, it is advisable to do so because of market conditions, the Fund may elect to invest temporarily up to 20% of the current value of its net assets in cash reserves, high-quality taxable Money Market Instruments (discussed below) and high-quality municipal obligations, the income from which may or may not be exempt from federal income taxes. Some portion of the income received by the Fund shareholders may be subject to federal income taxes and California personal income taxes. The Fund is a non-diversified portfolio, which means that its assets may be invested in fewer issuers than a diversified portfolio and therefore the value of its assets may be subject to greater impact by events affecting one of its investments. Since the Fund will invest primarily in securities issued by California, its agencies and municipalities, events in California are more likely to affect this Fund's investments. For a further discussion of factors affecting investments by the California Tax-Exempt Money Market Fund, see "Investments and Activities -- Municipal Securities" and "Special Factors Affecting the California Tax-Free Money Market Fund" below. Investment Objective. The Money Market Fund seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in high-quality, short-term securities. Under normal market circumstances, this Fund invests its assets exclusively in Money Market Instruments (discussed below). This Fund is a diversified portfolio. U.S. TREASURY MONEY MARKET FUND Investment Objective. The U.S. Treasury Money Market Fund seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in short-term U.S. Treasury bonds, notes and bills ("U.S. Treasury Securities"). The Fund will invest exclusively in U.S. Treasury Securities. U.S. Treasury Securities are debt obligations issued by the U.S. Government, of which the payment of interest and repayment of principal are secured by the full faith and credit of the U.S. Treasury. Treasury bonds, notes and bills differ mainly in the length of their maturities: Treasury bonds are long-term debt instruments with original maturities of ten years or more; Treasury notes are medium-term debt instruments with original maturities of one to ten years; and Treasury bills are short-term debt obligations with original maturities of one year or less and are issued on a discounted basis. The U.S. Treasury Money Market Fund may only purchase U.S. Treasury Securities with remaining maturities of 13 months or less. This Fund is a diversified portfolio. The municipal securities in which the California Tax-Free Money Market Fund may invest are: Long-term municipal bonds rated at the date of purchase "Aa" or better by Moody's Investors Service, Inc. ("Moody's") or "AA" or better by Standard & Poor's Corporation ("S&P"); Medium-term municipal notes rated at the date of purchase "MIG 1" or "MIG 2" (or "VMIG 1" or "VMIG 2" in the case of an issue having a variable rate with a demand feature) by Moody's or "SP-1+" or "SP-1" by S&P; and Short-term municipal commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P. Medium-term municipal notes are generally issued in anticipation of the receipt of tax funds, of the proceeds of bond placements or of other revenues. The ability of an issuer to make payments on notes is therefore especially dependent on such tax receipts, proceeds from bond sales or other revenues, as the case may be. Municipal commercial paper is a debt obligation with a stated maturity of 270 days or less that is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. From time to time, the Fund may invest 25% or more of the current value of its total assets in municipal obligations that are related in such a way that an economic, business or political development or change affecting one such obligation also would affect the other obligations; for example, municipal obligations the interest on which is paid from revenues of similar type projects. Furthermore, from time to time, the Fund may invest 25% or more of the current value of its total assets in certain "private activity bonds," such as pollution control bonds; provided, however, that such investments will be made only to the extent they are consistent with the Fund's fundamental policy, described above, of investing, under normal circumstances, at least 80% of its net assets in municipal obligations that are exempt from federal income taxes and are not subject to the alternative minimum tax. In addition, because the Fund intends to invest at least 25% of its total assets in obligations issued by or on behalf of the State of California, its cities, municipalities and other public authorities, the Fund is particularly dependent on, and may be adversely affected by, general economic conditions in California. In this regard, certain of the municipal securities in which the California Tax-Free Money Market Fund may invest may be bonds or other types of obligations of California issuers that rely in whole or in part, directly or indirectly, on ad valorem real property taxes as a source of revenue. The California Constitution limits the powers of municipalities to impose and collect ad valorem taxes on real property, which, in turn, restricts the ability of municipalities to service their debt or lease obligations from such taxes. Money Market Instruments consist of: (a) short-term securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises) ("U.S. Government obligations") (discussed below); (b) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other short-term obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of the investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"); (c) commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of comparable quality as determined by the Investment Adviser; (d) certain repurchase agreements (discussed below); and (e) short-term U.S. dollar- denominated obligations of foreign banks (including U.S. branches) that at the time of investment: (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) are among the 75 largest foreign banks in the world as determined on the basis of assets; and (iii) have branches or agencies in the United States. The U.S. Treasury Money Market Fund invests exclusively in U.S. Treasury Securities. The California Tax-Free Money Market Fund and the Money Market Fund may invest in various types of U.S. Government obligations. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. Certain of the debt instruments in which the Funds may invest bear interest at rates that are not fixed, but float or vary with, for example, changes in specified market rates or indices or at specified intervals. Certain of these floating- and variable-rate instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The floating- and variable-rate instruments that the Funds may purchase include certificates of participation in such floating- and variable- rate obligations. The investment adviser may rely upon either the opinion of counsel or Internal Revenue Service rulings regarding the tax-exempt status of these securities purchased by the California Tax-Free Money Market Fund. The Funds may invest in floating- and variable-rate obligations even if they carry stated maturities in excess of thirteen months, upon compliance with certain conditions of the SEC, in which case such obligations will be treated, in accordance with these conditions, as having maturities not exceeding thirteen months. Wells Fargo Bank, as investment adviser to each of the Funds, monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events occurring between the date a Fund elects to demand payment on a floating- or variable-rate instrument and the time payment is due may affect the ability of the issuer of the instrument to make payment when due, and unless such demand instrument permits same-day settlement, may affect a Fund's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The California Tax-Free Money Market Fund and the Money Market Fund may enter into repurchase agreements wherein the seller of a security to the Fund agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. These Funds may enter into repurchase agreements only with respect to U.S. Government obligations and other securities which are permissible investments for the Funds. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction may be greater than thirteen months. However, the term of any repurchase agreement on behalf of the Fund will always be less than thirteen months. If the seller defaults and the value of the underlying securities has declined, the Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the Fund's disposition of the security may be delayed or limited. These Funds may not enter into a repurchase agreement with a maturity of more than seven days if, as a result, more than 10% of the market value of the Fund's total net assets would be invested in repurchase agreements with maturities of more than seven days and illiquid securities and, with respect to the California Tax-Free Money Market Fund, restricted securities. The Funds only will enter into repurchase agreements with registered broker/dealers and commercial banks that meet guidelines established by the Company's Board of Directors and are not affiliated with the investment adviser. The Funds may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. The California Tax-Free Money Market Fund and the Money Market Fund may invest less than 25% of their assets in high-quality, short-term debt obligations of foreign branches of U.S. banks or U.S. branches of foreign banks that are denominated in and pay interest in U.S. dollars. Investments in foreign obligations involve certain considerations that are not typically associated with investing in domestic obligations. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not subject to the same accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic development that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries. The California Tax-Free Money Market Fund may invest in shares of other open-end investment companies that invest exclusively in high-quality, short-term securities, provided, however, that such company is a tax-free money market fund with a fundamental policy of investing, under normal circumstances, at least 80% of its net assets in obligations that are exempt from federal income taxes and are not subject to the alternative minimum tax. Such investment companies can be expected to charge management fees and other operating expenses that would be in addition to those charged to the Fund. However, the investment adviser has undertaken to waive its advisory fees with respect to assets so invested. In no event may this Fund, together with any company or companies controlled by it, own more than 3% of the total outstanding voting stock of any such company, nor may the Fund, together with any such company or companies, invest more than 5% of its assets in any one such company or invest more than 10% of its assets in securities of all such companies combined. Special Factors Affecting the California Tax-Free Money Market Fund California is experiencing recurring budget deficits caused by lower than anticipated tax-revenues and increased expenditures for certain programs. These budget deficits have depleted the state's available cash resources, and the state has recently had to use a series of external borrowings to meet its cash needs. In addition, since 1992 some of the credit rating agencies have assigned their third highest rating to certain of the state's debt obligations. On July 15, 1994, three of the ratings agencies rating California's long-term debt lowered their ratings of the state's general obligation bonds. Moody's lowered its rating from "Aa" to "A1," S&P lowered its rating from "A+" to "A" and termed its outlook as "stable," and Fitch Investors Service lowered its rating from "AA" to "A." The California Tax-Free Money Market Fund may invest only in securities rated in the top two rating categories. Any further rating downgrade of the state's debt obligations may impact the availability of securities that meet the Funds' investment policies and restrictions. The Fund's investment adviser will continue to monitor and evaluate the investments of the Fund in light of the events in California and the Fund's investment objective and investment policies. The rating agencies will also continue to monitor events in the state and the state and local governments' responses to budget shortfalls. Each of the Funds must comply with certain investment criteria (noted in the first paragraph of this section) pursuant to the 1940 Act, each of which is designed to provide liquidity, reduce risk and allow the Funds to maintain a stable net asset value of $1.00 per share. Of course, the Funds cannot guarantee a $1.00 share price. Debt securities purchased by the Funds may be subject to fluctuations in market value due to fluctuations in market interest rates; however, as noted under "Determination of Net Asset Value," the use of amortized cost valuation attempts to minimize the impact of such market interest rate fluctuations. In addition, certain types of these securities are subject to fluctuations in yield due to early prepayments on mortgages underlying such securities. While the California Tax-Free Money Market Fund will seek to reduce risk by investing its assets in securities of various issuers, the Fund will be considered to be non-diversified for purposes of the 1940 Act. However, the Fund will comply with Internal Revenue Code of 1986, as amended, (the "Code") diversification requirements. See "Taxes" below. Since their inception, the Funds have emphasized safety of principal and high credit quality. In particular, the internal investment policies of the Funds' investment adviser, Wells Fargo Bank have always prohibited the purchase for the Funds of many types of floating-rate derivative securities that are considered potentially volatile. The Board of Directors of the Company has adopted the following policies on behalf of each of the Funds: The following types of derivative securities ARE NOT permitted investments for the Funds: - capped floaters (on which interest is not paid when market rates move - leveraged floaters (whose interest rate reset provisions are based on a formula that magnifies changes in interest rates); - range floaters (which do not pay any interest if market interest rates move outside of a specified range); - dual index floaters (whose interest rate reset provisions are tied to more than one index so that a change in the relationship between these indexes may result in the value of the instrument falling below face - inverse floaters (which reset in the opposite direction of their index). Additionally, the Funds may not invest in securities whose interest rate reset provisions are tied to an index that materially lags short-term interest rates, such as "COFI floaters." The Funds may only invest in floating rate securities that bear interest at a rate that resets quarterly or more frequently, and which resets based on changes in standard money market rate indices such as U.S. Treasury bills, London Interbank Offered Rate, the prime rate, published commercial paper rates or federal funds rates Each of the Funds' investment objectives, as set forth in the first paragraph of the subsection describing each Fund above, is fundamental; that is, the investment objective may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. If the Board of Directors determines, however, that a Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will disclose any such material changes in the then current prospectus. As matters of fundamental policy, the following apply: (i) each of the Funds may borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased by the California Tax-Free Money Market Fund or the Money Market Fund while any such outstanding borrowing exists and investments may not be purchased by the U.S. Treasury Money Market Fund while any such outstanding borrowing in excess of 5% of its net assets exists); (ii) only the California Tax-Free Money Market Fund may make loans of portfolio securities in accordance with its investment policies; and (iii) none of the Funds may purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Fund's investment in that industry would exceed 25% of the current value of such Fund's total assets, provided that there is no limitation with respect to investments in (a) U.S. Government obligations (which includes U.S. Treasury Securities), (b) obligations of domestic banks (for purpose of this restriction, domestic bank obligations do not include obligations of U.S. branches of foreign banks or obligations of foreign branches of U.S. banks), and (c) with respect to the California Tax-Free Money Market Fund, municipal securities (for the purpose of this restriction, private activity bonds shall not be deemed municipal securities if the payments of principal and interest on such bonds are the ultimate responsibility of non-governmental users). With respect to fundamental investment restriction (ii) above, the California Tax-Free Money Market Fund does not intend to make loans of its portfolio securities during the coming year. In addition, as a matter of non-fundamental investment policy, the California Tax-Free Money Market Fund may invest up to 5% of its net assets in when-issued securities. See "Investment Restrictions" and "Additional Permitted Investment Activities" in the SAI. The Board of Directors, in addition to supervising the actions of the investment adviser, administrator and distributor, as set forth below, decides upon matters of general policy. Pursuant to Advisory Contracts, each of the Funds is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company (other than those structured as "feeder funds") and to six other registered open-end management investment companies, each of which consist of several separately managed investment portfolios. The Advisory Contracts provide that Wells Fargo Bank shall furnish to the Funds investment guidance and policy direction in connection with the daily portfolio management of the Funds. Pursuant to the Advisory Contracts, Wells Fargo Bank furnishes to the Board of Directors periodic reports on the investment strategy and performance of each Fund. Purchase and sale orders of the securities held by each of the Funds may be combined with those of other accounts that Wells Fargo Bank manages, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for any of the Funds and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, each of the Funds, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contracts, Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rates of 0.45% of the average daily net assets of the California Tax-Free Money Market Fund, and 0.25% of the average daily net assets of each of the Money Market Fund and the U.S. Treasury Money Market Fund. From time to time, Wells Fargo Bank may waive such fees in whole or in part. In this regard, Wells Fargo Bank has agreed to waive its fees, through at least the current fiscal year, to the extent Total Fund Operating Expenses for Class A Shares of the Money Market Fund or the U.S. Treasury Money Market Fund would exceed 0.70% of average net assets. Any such waiver will reduce expenses of the Fund involved and, accordingly, have a favorable impact on the yield of such Fund. For the fiscal year ended December 31, 1994, Wells Fargo Bank received 0.45%, 0.25% and 0.18% of the average daily net assets of the California Tax-Free Money Market Fund, Money Market Fund and U.S. Treasury Money Market Fund, respectively, as compensation for its services as investment adviser. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into an agreement with each of the Funds under which Stephens acts as administrator for the Funds. For providing these administrative services, Stephens is entitled to receive a monthly fee from each Fund at the annual rate of 0.10% of its average daily net assets. For each of the California Tax-Free Money Market Fund and the U.S. Treasury Money Market Fund, such annual rate shall decrease to 0.05% of such average daily value of net assets of the Fund in excess of $200 million. From time to time, Stephens may waive fees from any or all of the Funds in whole in part. Any such waiver will reduce expenses of the Fund involved and, accordingly, have a favorable impact on the yield of such Fund. The Administration Agreements between Stephens and the Funds state that Stephens shall provide as administrative services, among other things, general supervision: (i) of the operation of the Funds, including coordination of the services performed by the Funds' investment adviser, transfer agent, custodian, independent auditors and legal counsel; (ii) in connection with regulatory compliance, including the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions, and preparation of proxy statements and shareholder reports for the Funds; and (iii) relative to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors. Stephens also furnishes office space and certain facilities required for conducting the business of the Funds and pays the compensation of the Company's Directors, officers and employees who are affiliated with Stephens. Stephens, as the principal underwriter of the Funds within the meaning of the 1940 Act, has entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing shares of the Funds. Stephens bears the cost of printing and mailing prospectuses to potential investors and any advertising expenses incurred by it in connection with the distribution of shares, subject to the terms of the distribution plans described below. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. It currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. DETERMINATION OF NET ASSET VALUE Net asset value per share of each Fund is determined by Wells Fargo Bank on each day that the Exchange is open for trading. The net asset value of a share of a class of the Money Market Fund and the U.S. Treasury Money Market Fund is the value of total net assets attributable to each class divided by the number of outstanding shares of that class. The value of net assets per class is determined daily by adjusting the net assets per class at the beginning of the day by the value of each class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each class by attributing to each class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each class as appropriate. The net asset value per share of the California Tax Free Money Market Fund is determined by dividing the value of the total assets of the Fund less all of its liabilities by the total number of outstanding shares of the Fund. The net asset value per share of each Fund is determined at 12:00 noon (New York time). Each of the Funds uses the amortized cost method to value its portfolio securities and attempts to maintain a constant net asset value of $1.00 per share. The amortized cost method involves valuing a security at its cost and amortizing any discount or premium over the period until maturity, regardless of the impact of fluctuating interest rates on the market value of the security. From time to time, the Company may advertise yield information with respect to a class of shares of the Funds. Yield information will be based on the historical earnings and performance of a class of shares of a Fund and should not be considered representative of future performance. From time to time, each of the Funds may advertise its current yield and its effective yield for a class of shares, and the California Tax-Free Money Market Fund also may advertise its current tax-equivalent yield and its effective tax-equivalent yield. Current yield for each class of shares of a Fund will be computed by dividing its net investment income per share of a class of shares earned during a specified period by its net asset value per share on the last day of such period and annualizing the result. The current yield of each class of shares of a Fund will show the annualized income per share generated by an investment in such a class of shares of the Fund over a stated period. The current tax-equivalent yield of the California Tax-Free Money Market Fund will be calculated in a similar manner, but will assume that a stated income tax rate has been applied to non- exempt income to derive the tax-exempt portion of this Fund's yield. The effective yield and effective tax-equivalent yield are calculated similarly but, when annualized, the income earned, or the tax-equivalent income assumed to have been earned, per share of a class of shares will be assumed to have been reinvested. The effective yield and effective tax-equivalent yield will be slightly higher than the current yield and current tax-equivalent yield, respectively, because of the compounding effect of this assumed reinvestment. Additional information about the performance of each Fund is contained in the Annual Report for each Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. Shares of any of the Funds may be purchased on any day the Exchange is open for trading through Stephens, the Transfer Agent, or any authorized broker/dealer or financial institution with which Stephens has entered into agreements. Such broker/dealers or financial institutions are responsible for the prompt transmission of purchase, exchange or redemption orders, and may independently establish and charge additional fees to their clients for such services, other than services related to purchase orders, which would reduce the clients' overall yield or return. The Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. In most cases, the minimum initial purchase amount for shares of any of the Funds is $1,000. The minimum initial purchase amount is $100 for shares purchased through the Systematic Purchase Plan. The minimum subsequent purchase amount is $100. The minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. In addition, the minimum initial purchase amount does not apply to investors who purchase shares of the Money Market Fund as customers of a financial institution which has established a cash sweep arrangement with respect to the Money Market Fund. The Company reserves the right to reject any purchase order. All funds will be invested in full and fractional shares. Checks will be accepted for the purchase of any Fund's shares subject to collection at full face value in U.S. dollars. Inquiries may be directed to the Company at the address or telephone number on the front cover of the Prospectus. A salesperson or any other person or entity entitled to receive compensation for selling or servicing Shares of any of the Funds may receive different compensation with respect to one class of Shares over another. Shares of the Funds are offered continuously at the net asset value next determined after a purchase order is effective. No sales load is imposed. Account Applications for shares of any of the Funds will become effective when an investor's bank wire order or check is converted into federal funds. If payment is transmitted by the Federal Reserve Wire System, the Account Application will become effective upon receipt. In addition, if investors, with the prior approval of the Company, notify the Company at or before 12:00 noon (New York time) on any business day that they intend to wire federal funds to purchase shares of any of the Funds, the Account Application will be executed at the net asset value per share determined at 12:00 noon (New York time) the same day. Wire transmissions may, however, be subject to delays of several hours, in which event the effectiveness of the order will be delayed. Payments transmitted by a bank wire other than the Federal Reserve Wire System may take longer to be converted into federal funds. When payment for shares of any of the Funds is by a check that is drawn on any member bank of the Federal Reserve System, federal funds normally become available to the Fund on the business day after the day the check is deposited. Checks drawn on a non-member bank or a foreign bank may take substantially longer to be converted into federal funds and, accordingly, may delay the execution of an order. By investing in shares of any of the Funds, you appoint the Transfer Agent, as agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional shares. See "Dividends and Distributions." Stock certificates for the Funds will not be issued. Shares of any of the Funds may be purchased by any of the methods described below. INITIAL PURCHASES OF FUND SHARES BY WIRE 1. Telephone toll free (800) 572-7797. Give the name of the Fund in which the investment is to be made, the name(s) in which the shares are to be registered, the address, social security or tax identification number (where applicable) of the person or entity in whose name(s) the shares will be registered, dividend payment election, amount to be wired, name of the wiring bank and name and telephone number of the person to be contacted in connection with the order. An account number will be assigned. 2. Instruct the wiring bank, which may charge a separate fee, to transmit the specified amount in federal funds ($1,000 or more) to: Wire Purchase Account Number: 4068-000462 Attention: Overland Express (designate Fund and Class, if any) Account Name(s): (name(s) in which to be registered) Account Number: (as assigned by telephone) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price next determined after the Account Application is received and accepted. INITIAL PURCHASES OF FUND SHARES BY MAIL 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and, subject to limited exceptions, a check for $1,000 or more, payable to "Overland Express (designate Fund and Class, if any)" at its mailing address set forth above. Additional purchases of $100 or more may be made by instructing the Funds' Transfer Agent to debit an approved account designated in your Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Overland Express (designate Fund and Class, if any)" sent to the above address. Write the Fund account number on the check and include the detachable stub from a Statement of Account or a letter providing the account number. The Company's Systematic Purchase Plan provides you with a convenient way to establish and add to your existing accounts on a monthly basis. If you elect to participate in this plan, specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a designated bank account (provided your bank is a participant in the automated clearing house system). The Transfer Agent withdraws and uses this amount to purchase shares of the designated Fund on or about the fifth business day of each month. There are no additional fees charged for participating in this plan. You may change the investment amount, suspend purchases or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to any scheduled transaction. An election will be terminated automatically if the designated bank account balance is insufficient to make a scheduled withdrawal, or if either the designated bank account or your account is closed. PURCHASES THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Purchase orders for Shares of any of the Funds placed through broker/dealers and financial institutions by 12:00 noon (New York time) on any business day that the Exchange is open for trading, including orders for which payment is to be made from free cash credit balances in securities accounts, generally will be executed on the same day the order is placed if notice is provided to the Transfer Agent by 12:00 noon (New York time) and federal funds are received by the Transfer Agent before the close of business. Purchase orders that are received by a broker/dealer or financial institution after 12:00 noon (New York time) on any business day that the Exchange is open for trading or that are not received by the Transfer Agent before the close of business, generally will be executed on the next business day following the day the order is placed. The broker/dealer or financial institution is responsible for the prompt transmission of purchase orders to the Transfer Agent. A broker/dealer or financial institution that is involved in a purchase transaction may charge separate account, service or transaction fees. Financial institutions may be required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. Shares of any of the Funds may be exchanged for shares of another Fund or for Class A Shares of any other investment portfolio of the Company in an identically registered account (provided that shares of the investment portfolio to be acquired are registered for sale in your state of residence) at respective net asset values if the shares being acquired carry no sales load or the shares being exchanged were acquired in exchange for shares on which an equivalent sales load was paid. Otherwise, applicable sales loads or sales load differentials will be charged on an exchange. You may exchange shares by writing the Transfer Agent as indicated below under Redemption by Mail, or by calling the Transfer Agent or your authorized broker/dealer or financial institution, unless you have elected not to authorize telephone exchanges in your Account Application (in which case you may subsequently authorize such telephone exchanges by completing a Telephone Exchange Authorization Form and submitting it to the Transfer Agent in advance of the first such exchange). The Transfer Agent's number for exchanges is (800) 572-7797. Procedures applicable to redemption of the Funds' shares also are applicable to exchanging shares, except that, with respect to an exchange transaction between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. The Company reserves the right to limit the number of times shares may be exchanged between portfolios, or to reject in whole or in part any exchange request into a fund when management believes that such action would be in the best interest of the fund's other shareholders, such as when management believes that such action would be appropriate to protect such fund against disruptions in portfolio management resulting from frequent transactions by those seeking to time market fluctuations. Any such rejection will be made by management on a prospective basis only, upon notice to the shareholder given not later than 10 days following such shareholder's most recent exchange. The Company reserves the right to modify or discontinue exchange privileges at any time. Under SEC rules, 60 days prior notice of any amendments or termination of exchange privileges will be given to shareholders, except under certain extraordinary circumstances. The exchange privilege is not an option or a right to purchase shares, but is permitted under the current policies of the respective Funds and portfolios of the Company. A capital gain or loss for tax purposes may be realized upon an exchange, depending upon the cost or other basis of shares redeemed. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you decline such privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine. If the Transfer Agent does not follow such procedures, the Company and the Transfer Agent may be liable for any losses attributable to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Shares may be redeemed at their next determined net asset value after receipt of a request in proper form by the Transfer Agent directly or through any authorized broker/dealer or financial institution. The Company does not charge for redemption transactions. However, a broker/dealer or financial institution that is involved in a redemption transaction may charge separate account, service or transaction fees. Redemption orders for shares of any of the Funds received by an authorized broker/dealer or financial institution on any day that the Fund is open and received by the Transfer Agent before 12:00 noon (New York time) on the same day will be executed at the net asset value determined at 12:00 noon (New York time) on that day. Redemption orders for any of the Funds received by authorized broker/dealers or financial institutions on any day that the Fund is open and received by the Transfer Agent after 12:00 noon (New York time) will be executed at the net asset value determined at 12:00 noon (New York time) on the next day that the Fund is open. Redemption proceeds ordinarily will be remitted within seven days after the order is received in proper form, except proceeds may be remitted over a longer period to the extent permitted by the SEC under extraordinary circumstances. If an expedited redemption is requested, redemption proceeds will be distributed only if the check used for investment is deemed to be cleared for payment by your bank, currently considered by the Company to be a period of 15 days after of course, may be more or less than cost. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. 1. Write a letter of instruction. Indicate the dollar amount of or number of shares to be redeemed. Refer to your Fund account number and provide either a social security or a tax identification number (where applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more or redemption proceeds are to be made to someone other than yourself at your address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the FDIC, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation may be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. Mail the letter to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchases of Fund Shares by Wire." Unless other instructions are given in proper form, a check for the proceeds of redemption will be sent to your address of record. The Company's Systematic Withdrawal Plan provides a way for you to have shares redeemed from your accounts and the proceeds distributed to you on a monthly basis. You may elect to participate in this plan if you have a shareholder account valued at $10,000 or more as of your date of the election to participate, and are not also a participant in the Company's Systematic Purchase Plan at any time while participating in this plan. To participate in the plan you must specify an amount ($100 or more) to be distributed by check to your address of record or deposited in a designated bank account. The Transfer Agent redeems sufficient shares and mails or deposits the proceeds of the redemption as instructed on or about the fifth business day prior to the end of each month. There are no additional fees charged for participating in this plan. You may change the withdrawal amount, suspend withdrawals or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to any scheduled transaction. An election will be terminated automatically if your account balance is insufficient to make a scheduled withdrawal or if your account is closed. If shares are not held in certificated form, you may request an expedited redemption of shares by letter or telephone (unless you have elected not to authorize telephone redemptions on your Account Application or other form that is on file with the Transfer Agent) on any day the Funds are open for business. See "Exchange Privileges" for additional information regarding telephone redemption privileges. To request expedited redemption by telephone call the Transfer Agent at (800) 572-7797. To request expedited redemption by mail, mail the expedited redemption request to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchases of Fund Shares by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more will be wired or credited to your bank indicated in your Account Application or wired to an authorized broker/dealer or financial institution designated in your Account Application. The Company reserves the right to impose charges for wiring redemption proceeds. When proceeds of an expedited redemption are to be paid to someone other than yourself, to an address other than that of record, or to a bank, broker/dealer or other financial institution that has not been predesignated, the expedited redemption request must be made by letter and the signature(s) on the letter must be guaranteed, regardless of the amount of the redemption. If an expedited redemption request is received by the Transfer Agent by 12:00 noon (New York time) on a day the Funds are open for business, the redemption proceeds will be transmitted to your bank or predesignated broker/dealer or financial institution on the same day (assuming the investment check has cleared as described above), absent extraordinary circumstances. A check for proceeds of less than $5,000 will be mailed to your address of record, except that, in the case of investments in the Company that have been effected through broker/dealers, banks and other institutions that have entered into special arrangements with the Company, the full amount of the redemption proceeds may be transmitted by wire or credited to a designated account. The Company reserves the right to impose charges for wiring redemption proceeds. REDEMPTIONS THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Unless you have made other arrangements, and have informed the Transfer Agent of such arrangements, proceeds of redemptions made through authorized broker/dealers and financial institutions will be credited to your account with such broker/dealer or institution. You may request a check from the broker/dealer or financial institution or may elect to retain the redemption proceeds in your account. The broker/dealer or financial institution may benefit from the use of the redemption proceeds prior to the clearance of a check issued to you for such proceeds or prior to disbursement or reinvestment of such proceeds on your behalf. The proceeds of redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. Due to the high cost of maintaining small accounts, the Company reserves the right to redeem accounts that fall below $1,000. Prior to such a redemption, you will be notified in writing and permitted 30 days to make additional investments to raise the account balance to the applicable minimum. The Company's Board of Directors has adopted a Distribution Plan on behalf of each Fund. Under the Plan for the California Tax-Free Money Market Fund, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective shareholders of the Fund, by paying on an annual basis up to the greater of $100,000 or 0.05% of the Fund's average daily net assets. The Plan for the California Tax-Free Money Market Fund provides only for the reimbursement of actual expenses. Under the Plans for the Class A Shares of the Money Market Fund and the Class A Shares of the U.S. Treasury Money Market Fund, Stephens is entitled to receive, as compensation for distribution-related services, a monthly fee at an annual rate of up to 0.25% of each Fund's average daily net assets attributable to Class A Shares. The actual fee payable to Stephens is determined, within such limit, from time to time by mutual agreement between the Company and Stephens, and may not exceed the maximum amount payable under the Rules of Fair Practice of the National Association of Securities Dealers, Inc. Stephens may enter into selling agreements with one or more selling agents under which such agents may receive compensation for distribution-related services from Stephens, including, but not limited to, commissions or other payments to such agents based on the average daily net assets of the Class A Shares of the Money Market Fund and/or the Class A Shares of the U.S. Treasury Money Market Fund attributable to them. Stephens may retain any portion of the total distribution fee payable under the Plans for these Funds to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. Each of the Funds may participate in joint distribution activities with any of the other Funds or portfolios of the Company, in which event, expenses reimbursed out of the assets of one of the Funds may be attributable, in part, to the distribution-related activities of the other Funds or another portfolio. Generally, the expenses attributable to joint distribution activities will be allocated among the Funds and the other portfolios of the Company in proportion to their relative net asset sizes, although the Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. Each of the Funds intends to declare as a dividend substantially all of its net investment income for each class at the close of each business day to shareholders of record at 12:00 noon (New York time) on the day of declaration. Shares purchased will begin earning dividends on the day the purchase order settles and shares redeemed will earn dividends through the day prior to the date of redemption. Net investment income for a Saturday, Sunday or holiday will be declared as a dividend to shareholders of record at 12:00 noon (New York time) on the previous business day. Dividends of each Fund declared in, and attributable to, any month will be paid early in the following month. Shareholders of any of the Funds who redeem shares prior to a dividend payment date will be entitled to all dividends declared but unpaid prior to redemption on such shares on the next dividend payment date. Net capital gains of each class of each Fund, if any, will be distributed annually (or more frequently to the extent permitted to avoid imposition of the 4% excise tax described in the SAI or in order to maintain the net asset value of the Fund's shares at $1.00 per share). Dividends and/or capital gain distributions paid by each of the Funds will be invested in additional Shares of the same Fund at net asset value and credited to your account on the payment date or, at your election, paid by check. Dividend checks and Statements of Account will be mailed approximately three business days after the payment date. The net investment income of the Money Market Fund and the U.S. Treasury Money Market Fund available for distribution to the holders of the Class A Shares will be reduced by the amount of the distribution-related expenses payable under the Plans. There may be certain other differences in fees (e.g. transfer agent fees) between Class A Shares and Institutional Shares of the Money Market Fund and the U.S. Treasury Money Market Fund that would affect their relative dividends. By complying with the applicable provisions of the Code, the Funds will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to their shareholders. However, dividends from taxable investment income (which includes net short-term capital gains, if any) declared and paid by each Fund will be taxable as ordinary income to Fund shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional shares, they will be taxable. Generally, dividends of taxable income are taxable to shareholders at the time they are paid. However, dividends of taxable income declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends are actually paid no later than January 31 of the following year. You may be eligible to defer the taxation of taxable dividend and capital gain distributions on shares of a Fund which are held under a qualified tax-deferred retirement plan. The Funds intend to pay out all their net investment income and net realized capital gains (if any) for each year. The Funds' dividends will not qualify for the dividends received deduction allowed to corporate shareholders. By complying with the applicable provisions of the Code, that portion of the California Tax-Free Money Market Fund's net investment income that is attributable to interest from tax-exempt securities and that is distributed as dividends to shareholders will be designated by the Company as an "exempt-interest dividend," and, as such, will be exempt from federal income taxes. However, dividends attributable to interest from taxable securities, accretion of market discount on certain bonds and capital gains (if any) will be taxable to shareholders. Also, as long as the California Tax-Free Money Market Fund complies with applicable provisions of the California Revenue and Taxation Code, it will be entitled to pay its shareholders dividends that are exempt from California personal income tax. The Funds may be required to pay withholding and other taxes imposed by foreign countries generally at rates from 10% to 40%, which would reduce such Funds' investment income. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is not anticipated that shareholders will be entitled to take a foreign tax credit or deduction for such foreign taxes. The Funds will inform you of the amount and nature of such Fund dividends and capital gains. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Funds if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes -- Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. You should consult your individual tax advisor with respect to your particular tax situation as well as the state and local tax status of investments in shares of the Funds. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank has been retained to act as the Funds' custodian and transfer and dividend disbursing Agent. Wells Fargo Bank performs the custodial services at its address above. The transfer and dividend disbursing agency activities are performed at 525 Market Street, San Francisco, California 94105. The Company, an open-end, management investment company, was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. The Company currently offers twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Money Market Fund, the Municipal Income Fund, the Overland Sweep Fund, the Short-Term Government-Corporate Income Fund, the Short-Term Municipal Income Fund, the Strategic Growth Fund, the U.S. Government Income Fund, the U.S. Treasury Money Market Fund and the Variable Rate Government Fund. The Board of Directors may, in the future, authorize the issuance of shares of capital stock representing additional series or investment portfolios. All shares of the Company have equal voting rights and will be voted in the aggregate, and not by series or class, except where voting by series or class is required by law or where the matter involved affects only one series or class. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required to elect Directors under the 1940 Act; however, shareholders are entitled to call a meeting of shareholders for purposes of voting on removal of a Director or Directors. A more detailed statement of the voting rights of shareholders is contained in the SAI. All shares of the Company, when issued, will be fully paid and nonassessable. In addition to the Class A Shares, the Money Market Fund and the U.S. Treasury Money Market Fund each offers an Institutional Class of Shares. The Institutional Shares, which require a minimum initial investment of at least $150,000, are not subject to fees imposed under the Distribution Plans (Rule 12b-1 fees) applicable to Class A Shares. For more information about this class of shares, see a current prospectus for the Institutional Shares, available from the Company at the telephone number set forth on the cover page. DIVIDEND DISBURSING AGENT AND CUSTODIAN Wells Fargo Bank, N.A. FOR MORE INFORMATION ABOUT THE FUNDS, OR WRITE: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. Overland Express Funds, Inc. (the "Company") is an open-end, series management investment company. This Prospectus contains information about two of the funds in the Overland Express Family of Funds -- the SHORT-TERM MUNICIPAL INCOME FUND (formerly the 1-3 Year Duration Municipal Income Fund) and the SHORT-TERM GOVERNMENT-CORPORATE INCOME FUND (formerly the 1-3 Year Duration Full Faith and Credit Government Income Fund) (each, a "Fund," and together, the "Funds"). EACH FUND INVESTS ALL OF ITS ASSETS IN A SEPARATE PORTFOLIO (EACH, A "MASTER PORTFOLIO") OF MASTER INVESTMENT TRUST (THE "TRUST"), AN OPEN-END, MANAGEMENT INVESTMENT COMPANY, RATHER THAN IN A PORTFOLIO OF SECURITIES. EACH MASTER PORTFOLIO HAS THE SAME INVESTMENT OBJECTIVE AS THE FUND BEARING THE CORRESPONDING NAME. THEREFORE, EACH FUND'S INVESTMENT EXPERIENCE CORRESPONDS DIRECTLY WITH THE RELEVANT MASTER PORTFOLIO'S INVESTMENT EXPERIENCE. SHARES OF THE MASTER PORTFOLIOS MAY BE PURCHASED ONLY BY OTHER INVESTMENT COMPANIES OR SIMILAR ACCREDITED INVESTORS. The investment objective of the SHORT-TERM MUNICIPAL INCOME FUND is to provide investors with a high level of income exempt from federal income taxes, while managing principal volatility. The Fund seeks to achieve its investment objective by investing all of its assets in the Short-Term Municipal Income Master Portfolio of the Trust, which has the same investment objective as the Fund. The investment objective of the SHORT-TERM GOVERNMENT-CORPORATE INCOME FUND is to provide investors with current income, while managing principal volatility. The Fund seeks to achieve its investment objective by investing all of its assets in the Short-Term Government-Corporate Income Master Portfolio of the Trust, which has the same investment objective as the Fund. THE INVESTMENT POLICIES OF EACH MASTER PORTFOLIO ARE SUMMARIZED ON THE NEXT PAGE AND IN THE "INVESTMENT OBJECTIVES AND POLICIES" SECTION OF THE PROSPECTUS. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Funds and should be read and retained for future reference. A Statement of Additional Information dated May 1, 1995, containing additional and more detailed information about the Funds (the "SAI"), has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. It is available without charge and can be obtained by calling the Company at the telephone number printed above or writing the Company at P.O. Box 63084, San Francisco, CA 94163. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 The SHORT-TERM MUNICIPAL INCOME MASTER PORTFOLIO seeks to achieve its investment objective by investing primarily in investment-grade municipal securities. The SHORT-TERM GOVERNMENT-CORPORATE INCOME MASTER PORTFOLIO seeks to achieve its investment objective by investing primarily in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises) and in investment-grade corporate obligations. Each Master Portfolio's investments include fixed-, variable- and floating-rate instruments. Except during temporary defensive periods, the Short-Term Municipal Income Master Portfolio and the Short-Term Government-Corporate Income Master Portfolio each seeks to maintain a portfolio of securities with an average weighted maturity of 90 days to 2 years. Each Master Portfolio seeks to manage principal volatility by diversifying its assets among permissible investments based, in part, on maturity, duration or other characteristics that affect such securities' sensitivity to changes in market interest rates. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS AND MASTER PORTFOLIOS, FOR WHICH IT IS COMPENSATED. STEPHENS INC., ("STEPHENS") WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUNDS. The Company, as an open-end management investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Funds and the Master Portfolios. Q. WHAT ARE THE INVESTMENT OBJECTIVES AND PERMISSIBLE INVESTMENTS OF THE FUNDS AND THE MASTER PORTFOLIOS? A. The investment objective of the SHORT-TERM MUNICIPAL INCOME FUND is to provide investors with a high level of income exempt from federal income taxes, while managing principal volatility. The Fund seeks to achieve its investment objective by investing all of its assets in the Short-Term Municipal Income Master Portfolio of the Trust, which is a professionally managed, open-end series investment company. The Short-Term Municipal Income Master Portfolio has the same investment objective as the Fund. The Short-Term Municipal Income Master Portfolio, a diversified portfolio, seeks to achieve its investment objective by investing primarily in investment-grade municipal securities. The Short-Term Municipal Income Master Portfolio also may invest in certain U.S. Government obligations and money market instruments. The investment objective of the SHORT-TERM GOVERNMENT-CORPORATE INCOME FUND is to provide investors with current income, while managing principal volatility. The Fund seeks to achieve its investment objective by investing all of its assets in the Short-Term Government-Corporate Income Master Portfolio of the Trust, which has the same investment objective as the Fund. The Short-Term Government-Corporate Income Master Portfolio, a diversified portfolio, seeks to achieve its investment objective by investing primarily in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises) and in investment-grade corporate obligations. The securities that the Master Portfolio may purchase include U.S. Treasury bonds, notes and bills; obligations of the U.S. Government, its agencies or instrumentalities; investment-grade corporate bonds and notes, asset-backed securities and money market instruments. Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the investment adviser of each Master Portfolio, manages the investments of each Fund in the corresponding Master Portfolio. The Company has not retained the services of a separate investment adviser for the Funds because each Fund invests all of its assets in the corresponding Master Portfolio. Wells Fargo Bank also provides the Funds and the Master Portfolios with transfer agency, dividend disbursing agency and custodial services. Stephens is the sponsor, administrator and distributor for the Company and the Trust. See "Management of the Funds and the Master Portfolios." Q. HOW MAY I PURCHASE SHARES? A. You may purchase shares of each Fund on any day the New York Stock Exchange (the "Exchange") is open for trading. There is a maximum sales load of 3.00% (3.09% of the net amount invested) for purchasing shares of each Fund. If you make a combined investment in any of the Funds of $1,000,000 or more you do not pay a sales load. See "Purchase of Shares" and "Reduced Sales Loads." Generally, the minimum initial purchase amount for a Fund is $1,000 with minimum subsequent purchase amounts per account of $100 or more. You may purchase shares of a Fund through Stephens, Wells Fargo Bank as transfer agent (the "Transfer Agent"), or any authorized broker/dealer or financial institution. Purchases of Fund shares may be made by wire directly to the Transfer Agent. Each Fund may pay the distributor a monthly fee at an annual rate of up to 0.25% of such Fund's average daily net assets to compensate the distributor for distribution-related services provided by it or to reimburse it for other distribution-related expenses. See "Purchase of Shares" and "Distribution Plans." Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on shares of each Fund are declared daily and are paid monthly. Monthly dividends are automatically reinvested in additional shares of the Fund which paid such dividends, unless you elect to receive dividends by check. Any capital gains are distributed annually and may be reinvested in Fund shares or paid by check at your election. All reinvestments of dividends and/or capital gain distributions in Fund shares are effected at the then current net asset value free of any sales load. In addition to the above options for receiving dividends and capital gain distributions, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of another fund in the Overland Express Family of Funds with which you have an established account. See "Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. On any day the Exchange is open shares may be redeemed upon request to Stephens or the Transfer Agent directly or through any authorized broker/dealer or financial institution. Shares may be redeemed by a request in good form in writing or by telephone direction. Proceeds are payable by check. Accounts of less than the applicable minimum initial purchase amount may be redeemed at the option of the Company. The Company does not charge for redeeming your shares. However, the Company reserves the right to impose charges for wiring your redemption proceeds. See "Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUNDS? A. An investment in a Fund is not insured against loss of principal. The market value of the securities held by each Master Portfolio is subject to interest rate risk. Interest rate risk is the risk that increases in market interest rates may adversely affect the value of the securities in which each Master Portfolio invests, and hence the value of your investment in a Fund. The values of such securities generally change inversely to changes in market interest rates. The portfolio investments of the Master Portfolios are also subject to credit risk. Credit risk is the risk that the issuers of securities in which the Master Portfolio invests may default in the payment of principal and/or interest. Any such defaults may adversely affect the value of the securities in which the Master Portfolio invests and, hence, the value of your investment in the Fund. Given the relatively novel nature of the master/feeder structure, accounting and operational difficulties could arise. The Funds and the Master Portfolios were formed in 1994, and have a limited operating history. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. For further information see "Additional Information About Permitted Investment Activities." Q. WHAT ARE DERIVATIVES AND DO THE FUNDS USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. Some of the permissible investments described in this Prospectus, such as variable-rate instruments which have an interest rate that is reset periodically based on an index, can be considered derivatives. Some derivatives may be more sensitive than direct securities to changes in interest rates or sudden market moves. Some derivatives also may be susceptible to fluctuations in yield or value due to their structure or contract terms. Q. WHAT STEPS DO THE FUNDS TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser to each Fund, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with each Fund's investment objective, does not expose the Funds to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by each Fund also is subject to broadly applicable investment policies. For example, the Funds may not invest more than a specified percentage of their assets in "illiquid securities," including those derivatives that do not have active secondary markets. Nor may a Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. The following table is a standard format required for all mutual funds to help you understand the various costs and expenses you will bear directly or indirectly as a shareholder of the Funds. The expenses and fees set forth include each Fund's proportionate share of the expenses of the corresponding Master Portfolio. (1) After any waivers or reimbursements. * Other mutual funds may invest in a Master Portfolio; such other funds' expenses and, accordingly, investment returns may differ from those of the corresponding Fund. ** The percentages shown above state the basis on which payments will be made (except "Other Expenses," which is an estimate), and reflect waivers and reimbursements that are expected to continue during the current fiscal year. As further described in the Prospectus under "Management of the Funds and the Master Portfolios," Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees if certain Fund expenses exceed limits set by state securities laws or regulations. In addition, Stephens and Wells Fargo Bank at their sole discretion may waive or reimburse all or a portion of their respective fees charged to, or expenses paid by a Fund. Any waivers or reimbursements would reduce a Fund's total expenses. Stephens and Wells Fargo Bank each has agreed to waive its fees for each Fund and the corresponding Master Portfolio, through at least the current fiscal year, to the extent that a Fund's Total Fund Operating Expenses would exceed 0.50% of average net assets. There can be no assurance that waivers or reimbursements will continue. Absent waivers and reimbursements, the percentages shown above under "Management Fee," "Other Expenses" and "Total Fund Operating Expenses" would have been 0.50%, 0.10% and 0.85%, respectively, for each of the Short-Term Municipal Income Fund and the Short-Term Government-Corporate Income Fund. Long-term shareholders of a Fund could pay more in distribution-related charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers, Inc. ("NASD"). The purpose of the foregoing table is to assist you in understanding the various costs and expenses that an investor in a Fund will bear directly or indirectly. There are no redemption fees charged by the Funds. As noted above, these fee and expense amounts summarize the fees and expenses of both a Fund and its corresponding Master Portfolio. The Example should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. With regard to the combined fees and expenses of each Fund and the corresponding Master Portfolio, the Board of Directors of the Company has considered whether various costs and benefits of investing all of a Fund's assets in the corresponding Master Portfolio rather than directly in portfolio securities would be more or less than if the Fund invested in portfolio securities directly. The Board of Directors has determined that the aggregate fees assessed by each Fund and its corresponding Master Portfolio should be less than those expenses that would be incurred had the Fund invested directly in the securities held by the Master Portfolio. See Prospectus sections captioned "Management of the Funds and the Master Portfolios," "Custodian, Transfer and Dividend Disbursing Agent," "Distribution Plans" and "Purchase of Shares" for more complete descriptions of the various costs and expenses applicable to investors in each Fund. In addition, if a Fund were to no longer invest in the corresponding Master Portfolio, these expenses may change. The following information has been derived from the Financial Highlights included in the Funds' 1994 annual financial statements. The financial statements are incorporated by reference into the SAI for each Fund and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Funds' 1994 annual financial statements and notes thereto. The SAI for each Fund has been incorporated by reference into the Prospectus. FOR A FUND SHARE OUTSTANDING AS SHOWN (1) The Fund commenced operations on June 3, 1994 as the 1-3 Year Duration Municipal Income Fund. (2) This ratio does not include expenses incurred by the Master Portfolio. (3) This ratio includes expenses incurred by the Master Portfolio. (4) The portfolio turnover rate represents investment activity by the Master Portfolio. FOR A FUND SHARE OUTSTANDING AS SHOWN (1) The Fund commenced operations on September 19, 1994 as the 1-3 Year Duration Full Faith and Credit Government Income Fund. (2) This ratio does not include expenses incurred by the Master Portfolio. (3) This ratio includes expenses incurred by the Master Portfolio. (4) The portfolio turnover rate represents investment activity by the Master Portfolio. Set forth below is a description of the investment objective and related policies of each Fund and its corresponding Master Portfolio. As with all mutual funds, there can be no assurance that a Fund or its corresponding Master Portfolio will achieve its investment objective. Each Fund seeks to achieve its investment objective by investing all of its assets in the corresponding Master Portfolio, which has the same investment objective as the Fund. Each Fund may withdraw its investment in the corresponding Master Portfolio only if the Board of Directors of the Company determines that such action is in the best interests of the Fund and its shareholders. Upon such withdrawal, the Company's Board would consider alternative investments, including investing all of a Fund's assets in another investment company with the same investment objective as the Fund or hiring an investment adviser to manage the Fund's assets in accordance with the investment policies described below with respect to the corresponding Master Portfolio. The investment objectives and policies of each Master Portfolio are described below in this section. For a description of the management and expenses of each Master Portfolio, see the Prospectus section "Management of the Funds and the Master Portfolios." Since the investment characteristics of each Fund correspond to those of the respective Master Portfolio, the following is a discussion of the various investments of and techniques employed by each Master Portfolio. SHORT-TERM MUNICIPAL INCOME MASTER PORTFOLIO INVESTMENT OBJECTIVE -- The investment objective of the Short-Term Municipal Income Master Portfolio is to provide investors with a high level of income exempt from federal income taxes, while managing principal volatility. Wells Fargo Bank, as investment adviser to the Short-Term Municipal Income Master Portfolio, pursues the objective of the Master Portfolio by investing (under normal market conditions) substantially all of the assets of the Master Portfolio in the following types of municipal obligations that pay interest which is exempt from federal income tax: bonds, notes and commercial paper issued by or on behalf of states, territories, and possessions of the United States, the District of Columbia, and their political subdivisions, agencies, instrumentalities (including government-sponsored enterprises) and authorities, the interest on which, in the opinion of counsel to the issuer or bond counsel, is exempt from federal income tax. These municipal obligations and the taxable investments described below may bear interest at rates that are not fixed (floating- and variable-rate instruments). The Master Portfolio seeks to manage principal volatility by diversifying its assets among permissible investments based, in part, on their duration, maturity or other characteristics that affect their sensitivity to changes in market interest rates. As with all mutual funds, there can be no assurance that the Master Portfolio, which is a diversified portfolio, will achieve its investment objective. As a fundamental policy, at least 80% of the net assets of the Master Portfolio are invested (under normal market conditions) in municipal obligations that pay interest that is exempt from federal income taxes. However, as a matter of general operating policy, the Master Portfolio seeks to have substantially all of its assets invested in such municipal obligations. The Master Portfolio's investment adviser may rely either on an opinion of counsel to the issuer of the municipal obligations or bond counsel or on Internal Revenue Service ("IRS") rulings regarding the tax treatment of these obligations. In addition, the Master Portfolio may invest 25% or more of its assets in municipal obligations that are related in such a way that an economic, business or political development or change affecting one such obligation could also affect the other obligations. For example, the Master Portfolio may own different municipal obligations which pay interest based on the revenues of similar types of projects. The Master Portfolio may also invest in U.S. Government obligations and money market instruments. SHORT-TERM GOVERNMENT-CORPORATE INCOME MASTER PORTFOLIO INVESTMENT OBJECTIVE -- The investment objective of the Short-Term Government-Corporate Income Master Portfolio is to provide investors with current income, while managing principal volatility. The Master Portfolio seeks to achieve its objective by investing primarily in obligations issued by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises) and investment-grade corporate obligations. The securities that the Master Portfolio may purchase include U.S. Treasury bonds, notes and bills; obligations of the U.S. Government, its agencies or instrumentalities; investment-grade corporate bonds and notes, asset-backed securities and money market instruments. The Short-Term Government-Corporate Income Master Portfolio seeks to manage principal volatility by diversifying assets among permissible investments based, in part, on their maturity, duration or other characteristics that affect the sensitivity of such investments to changes in market interest rates. There can be no assurance that the Master Portfolio, which is a diversified portfolio, will achieve its investment objective. Under normal market conditions, the Master Portfolio will invest substantially all of its assets in U.S. Government obligations and corporate securities, and at least 65% of its assets in income-producing securities. The Master Portfolio is a flexible portfolio, in that there is no minimum level of assets that will be invested in either category of investments. The investment adviser intends, as a general matter, to keep at least 20% of its assets invested in U.S. Government obligations and at least 20% of its assets invested in corporate securities. The allocation of assets between these investment categories will vary, depending primarily on their relative yields. Until the Master Portfolio achieves a certain asset size (approximately $10 million), the investment adviser intends to invest substantially all of the Master Portfolio's assets in U.S. Treasury bonds, notes and bills, and repurchase agreements. ADDITIONAL INFORMATION ABOUT PERMITTED INVESTMENT ACTIVITIES U.S. GOVERNMENT OBLIGATIONS -- Certain of the debt instruments purchased by the Master Portfolios may be U.S. Government obligations. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market interest rates increase, and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. BONDS -- Certain of the debt instruments purchased by the Master Portfolios may be bonds. A bond is an interest-bearing security issued by a company or governmental unit. The issuer of a bond has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal (the bond's face value) periodically or on a specified maturity date. An issuer may have the right to redeem or "call" a bond before maturity, in which case the investor may have to reinvest the proceeds at lower market rates. Most bonds bear interest income at a "coupon" rate that is fixed for the life of the bond. The value of a fixed rate bond usually rises when market interest rates fall, and falls when market interest rates rise. Accordingly, a fixed rate bond's yield (income as a percent of the bond's current value) may differ from its coupon rate as its value rises or falls. Other types of bonds bear income at an interest rate that is adjusted periodically. Because of their adjustable interest rates, the value of "floating-rate" or "variable-rate" bonds fluctuates much less in response to market interest rate movements than the value of fixed rate bonds. Also, the Master Portfolios may treat some of these bonds as having a shorter maturity for purposes of calculating the weighted average maturity of their investment portfolios. Bonds may be senior or subordinated obligations. Senior obligations generally have the first claim on a corporation's earnings and assets and, in the event of liquidation, are paid before subordinated debt. Bonds may be unsecured (backed only by the issuer's general creditworthiness) or secured (also backed by specified collateral). ASSET-BACKED SECURITIES -- The Short-Term Government-Corporate Income Master Portfolio may invest in various types of asset-backed securities. Asset-backed securities are typically backed by an underlying pool of assets (such as credit card or automobile trade receivables or corporate loans or bonds) which provides the interest and principal payments to investors. Credit quality depends primarily on the quality of the underlying assets and the level of credit support, if any, provided by the issuer. The underlying assets may be subject to prepayment which can shorten the life of asset-backed securities and may lower their return. Asset-backed securities are subject to interest rate risk, which means that this value typically declines when interest rates increase. The value of asset-backed securities may also change because of actual or perceived changes in the creditworthiness of the originator, servicing agent, or of the financial institution providing any credit support. FLOATING- AND VARIABLE-RATE INSTRUMENTS -- Certain of the debt instruments that the Master Portfolios may purchase bear interest at rates that are not fixed, but vary with changes in specified market rates or indices or at specified intervals. Certain of these instruments may carry a demand feature that permits the holder to tender them back to the issuer at par value prior to maturity. The Master Portfolios may purchase certificates of participation in pools of floating- and variable-rate instruments from banks or other financial institutions. With respect to the pass-through tax status of these certificates, Wells Fargo Bank may rely upon either an opinion of counsel to the issuer or IRS rulings issued with respect thereto. Wells Fargo Bank, as the Master Portfolios' investment adviser, monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of a demand instrument to make payment when due may occur between the date the Master Portfolio elects to demand payment and the date payment is due. Such events may affect the ability of the issuer of the instrument to make payment when due, thereby affecting the Master Portfolio's ability to obtain payment at par, except when such demand instruments permit same-day settlement. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The Short-Term Municipal Income Master Portfolio may invest in variable-rate instruments with a maximum final maturity of up to 30 years, provided the period remaining until the next readjustment of the instrument's interest rate, or the period remaining until the principal amount can be recovered through demand, is less than 5 years. REPURCHASE AGREEMENTS -- Each Master Portfolio may enter into repurchase agreements wherein the seller of a security to such Master Portfolio agrees to repurchase that security from the Master Portfolio at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. A Master Portfolio may enter into repurchase agreements only with respect to U.S. Government obligations and other securities that are permissible investments for the Master Portfolio. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction may be greater than one year although the maximum term of a repurchase agreement will be one year or less. If the seller defaults and the value of the underlying securities has declined, a Master Portfolio may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, a Master Portfolio's disposition of the security may be delayed or limited. A Master Portfolio may not enter into a repurchase agreement with a maturity of more than seven days, if, as a result, more than 15% of the market value of the Master Portfolio's total net assets will be invested in repurchase agreements with maturities of more than seven days and other securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale. A Master Portfolio will only enter into repurchase agreements with registered broker/dealers that report to the New York Federal Reserve Bank or their affiliates and commercial banks that meet guidelines established by the Board of Trustees and are not affiliated with Wells Fargo Bank. The Master Portfolio may enter into pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. MUNICIPAL SECURITIES -- This section describes certain instruments in which the Short-Term Municipal Income Master Portfolio may invest. Municipal securities are issued by states and municipalities to raise money for various public purposes, including general purpose financing for state and local governments as well as financing for specific projects or public facilities. Municipal securities may be backed by the full taxing power of a state or municipality, by the revenues from a specific project or the credit of a private organization. In addition, certain municipal securities may be supported by letters of credit furnished by domestic or foreign banks. Yields on municipal securities generally depend on a variety of factors, including: the general conditions of the municipal note and municipal bond markets; the size and maturity of the particular offering; the maturity of the obligations; and the rating of the issue or issuer. Furthermore, any adverse economic conditions or developments affecting a particular state or municipality could impact the municipal securities issued by such entities. The two principal classifications of municipal securities are "general obligation" securities and "revenue" securities. General obligation securities are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as the user of the facility being financed. Private activity bonds held by the Short-Term Municipal Income Master Portfolio are in most cases revenue securities and are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved. The highest rating assigned by Standard & Poor's Corporation ("S&P") is "AAA" for state and municipal bonds, "SP-1" for state and municipal notes, and "A-1" for state and municipal paper. The highest rating assigned by Moody's Investors Service, Inc. ("Moody's") is "Aaa," "MIG 1," and "P-1" for state and municipal bonds, notes and commercial paper, respectively. These instruments are judged to be the best quality and present minimal risks and a strong capacity for repayment of principal and interest. If a municipal security ceases to be rated or is downgraded below an investment grade rating after purchase by the Master Portfolio, the Master Portfolio may retain or dispose of such security. In any event, the Short-Term Municipal Income Master Portfolio does not intend to purchase or retain any municipal security that is rated below the top four rating categories by a nationally recognized statistical rating organization ("NRSRO"), or, if unrated, is considered by the investment adviser to be of comparable quality. Securities rated in the fourth highest category are considered to have speculative characteristics. A description of ratings is contained in the Appendix to the SAI. Municipal securities may include "moral obligation" bonds, which are normally issued by special purpose public authorities. If the issuer of moral obligation bonds is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer. An issuer's obligation to pay principal or interest on an instrument may be backed by an unconditional bank letter or line of credit, guarantee, or commitment to lend. Municipal securities may include variable- or floating-rate instruments issued by industrial development authorities and other governmental entities. While there may not be an active secondary market with respect to a particular instrument purchased by the Short-Term Municipal Income Master Portfolio, the Master Portfolio may demand payment of the principal and accrued interest on the instrument or may resell it to a third party as specified in the instruments. The absence of an active secondary market, however, could make it difficult for the Master Portfolio to dispose of the instrument if the issuer defaulted on its payment obligation or during periods the Master Portfolio is not entitled to exercise its demand rights, and the Master Portfolio could, for these or other reasons, suffer a loss. Municipal securities also may include participations in privately arranged loans to municipal borrowers, some of which may be referred to as "municipal leases," and units of participation in trusts holding pools of tax-exempt leases. Such loans in most cases are not backed by the taxing authority of the issuers and may have limited marketability or may be marketable only by virtue of a provision requiring repayment following demand by the lender. Any such loans made by the Short-Term Municipal Income Master Portfolio may have a demand provision permitting the Master Portfolio to require payment within seven days. Participations in such loans, however, may not have such a demand provision and may not be otherwise marketable. To the extent these securities are illiquid, they will be subject to the Master Portfolio's limitation on investments in illiquid securities. As it deems appropriate, Wells Fargo Bank will establish procedures to monitor the credit standing of each such municipal borrower, including its ability to meet contractual payment obligations. The Short-Term Municipal Income Master Portfolio will not purchase any unrated municipal leases unless the investment adviser, following procedures approved by the Trust's Board of Trustees, determines that such leases are of comparable quality to municipal securities that are rated in the top four rating categories by an NRSRO. Municipal participation interests, which give the purchaser an undivided interest in one or more underlying municipal securities, may be purchased from financial institutions. To the extent that municipal participation interests are considered to be "illiquid securities" such instruments are subject to the Master Portfolio's limitation on the purchase of illiquid securities. In addition, the Short-Term Municipal Income Master Portfolio may acquire "stand-by commitments" from banks or broker/dealers with respect to municipal securities held in its portfolios. Under a stand-by commitment, a dealer agrees to purchase at the Master Portfolio's option specified municipal securities at a specified price. The Master Portfolio acquires stand-by commitments solely to facilitate portfolio liquidity and without intending to exercise its rights thereunder for trading purposes. Certain of the securities in which the Short-Term Municipal Income Master Portfolio invests will be purchased on a when-issued basis, in which case delivery and payment normally take place within 120 days after the date of the commitment to purchase. The Master Portfolio will make commitments to purchase securities on a when-issued basis with the intention of actually acquiring the securities, but may sell them before the settlement date if it is deemed advisable. When-issued securities are subject to market fluctuation, and no income accrues to the purchaser during the period prior to issuance. The purchase price and the interest rate that will be received on debt securities are fixed at the time the purchaser enters into the commitment. Purchases on a when-issued basis are subject to the risk that the market price at the time of delivery may be lower than the agreed-upon purchase price, in which case there could be an unrealized loss at the time of delivery. The Short-Term Municipal Income Master Portfolio will establish a segregated account in which it will maintain cash, U.S. Government obligations or other high-grade debt securities in an amount at least equal in value to its commitments to purchase when-issued securities. If the value of these assets declines, the Master Portfolio will place additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments. TEMPORARY INVESTMENTS OF THE SHORT-TERM MUNICIPAL INCOME MASTER PORTFOLIO The Short-Term Municipal Income Master Portfolio may elect to invest temporarily up to 20% of its net assets in: U.S. Government obligations; negotiable certificates of deposit, bankers' acceptance and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; commercial paper rated at the date of purchase "P-1" by Moody's or "A-1+" or "A-1" by S&P; high quality taxable municipal obligations; shares of taxable or tax-free money market mutual funds; and repurchase agreements. Finally, the Short-Term Municipal Income Master Portfolio may invest temporarily in shares of other open-end, management investment companies, subject to the limitations of Sections 12(d)(1) of the Investment Company Act of 1940 (the "1940 Act"). Purchases of shares of other investment companies will be limited to temporary investments in shares of unaffiliated investment companies, and the Master Portfolio's investment adviser will waive its fee for that portion of the Master Portfolio's assets so invested. Such temporary investments would most likely be made for cash management purposes or when there is an unexpected or abnormal level of investor purchases or redemptions of shares of the Master Portfolio or because of unusual market conditions. The income from these temporary investments and investment activities may be subject to federal income taxes. However, as stated above, Wells Fargo Bank seeks to invest substantially all of the Short-Term Municipal Income Master Portfolio's assets in securities exempt from such taxes. A more complete description of tax-free municipal obligations, taxable money market instruments, and other investment activities is contained in the "Additional Information About Permitted Investment Activities" section. Portfolio turnover generally involves some expenses to the Master Portfolio, including dealer mark-ups and other transaction costs on the sale of securities and the reinvestment in other securities. A high portfolio turnover rate should not result in the Master Portfolio paying substantially more brokerage commissions, since most transactions in municipal securities are effected on a principal basis. Portfolio turnover can also generate short-term capital gains tax consequences. Each Fund's investment objective and its investment policy of investing all of its assets in the corresponding Master Portfolio, as set forth above, are fundamental. Accordingly, they may not be changed without approval by the vote of the holders of a majority of a Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. However, if the Company's Board of Directors determines that a Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will make appropriate disclosure of any such material change in the Fund's prospectus. The investment objective of a Master Portfolio may not be changed without approval of the investors in the Master Portfolio. The classification of each Fund and each Master Portfolio as "diversified" may not be changed, in the case of a Fund, without the approval of the Fund's shareholders, or, in the case of a Master Portfolio, without the approval of the Fund and any other investors in such Master Portfolio. In addition, as a matter of fundamental policy, each Fund and Master Portfolio may borrow from banks up to 10% of the current value of its net assets for temporary purposes in order to meet redemptions. These borrowings may be secured by the pledge of up to 10% of the current value of such Fund's or Master Portfolio's net assets (but investments may not be purchased while any such outstanding borrowing exceeds 5% of the respective Fund's or Master Portfolio's net assets). As a matter of fundamental policy, each Master Portfolio and its corresponding Fund may not invest more than 25% of its assets (i.e., concentrate) in any particular industry, excluding U.S. Government obligations. As a matter of non-fundamental policy, each Master Portfolio (and the corresponding Fund) may invest up to 15% of the current value of its net assets in securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days, provided that this restriction does not affect a Fund's ability to invest a portion or all of its assets in its corresponding Master Portfolio. Disposing of illiquid or restricted securities may involve additional costs and require additional time. Except during temporary defensive periods, each Master Portfolio seeks to maintain a portfolio of securities with an average weighted maturity of between 90 days and 2 years. The maximum final maturity of the Short-Term Municipal Income Master Portfolio's investments will not exceed 5 years, excluding certain variable rate instruments described above. The Short-Term Government-Corporate Income Master Portfolio may invest in obligations of any maturity. The Short-Term Government Corporate-Income Master Portfolio will not invest in the shares of other open-end, management investment companies. MANAGEMENT OF THE FUNDS AND THE MASTER PORTFOLIOS The Company has retained the services of Stephens as administrator and distributor for the Funds, but has not retained the services of an investment adviser for the Funds since the Company seeks to achieve the investment objective of each Fund by investing all of a Fund's assets in the corresponding Master Portfolio of the Trust. The Company's Board of Directors supervises the actions of the Funds' administrator and distributor, as set forth below, and decides upon matters of general policy. As noted above, a Fund may withdraw its investment in its corresponding Master Portfolio only if the Board of Directors of the Company determines that it is in the best interests of the Fund and its shareholders to do so. Upon any such withdrawal, the Board of Directors of the Company would consider what action might be taken, including the investment of all the assets of a Fund in another pooled investment entity having the same investment objective as the Fund or the hiring of an investment adviser to manage the Fund's assets in accordance with the investment policies described above with respect to the corresponding Master Portfolio. Each Master Portfolio has retained the services of Wells Fargo Bank as investment adviser and Stephens as administrator and distributor. The Board of Trustees of the Trust is responsible for the general management of each Master Portfolio and supervising the actions of Wells Fargo Bank and Stephens in these capacities. Additional information regarding the Officers and Directors of the Company and the Officers and Trustees of the Trust is included in the Funds' SAI under "Management." Each Fund, a series of the Company which is an open-end management investment company, invests all of its assets in the corresponding Master Portfolio of the Trust which has the same investment objective as the Fund. See "Investment Objectives and Policies." The Trust is organized as a trust under the laws of the State of Delaware. See "Organization and Capital Stock." In addition to selling its shares to the corresponding Fund, each Master Portfolio may sell its shares to certain other mutual funds or accredited investors. The expenses and, correspondingly, the returns of other investment options in a Master Portfolio may differ from those of a Fund. The Board of Directors believes that, if other mutual funds or accredited investors invest their assets in the Master Portfolios of the Trust, certain economies of scale may be realized with respect to each Master Portfolio. For example, fixed expenses that otherwise would have been borne solely by a Fund would be spread among a larger asset base provided by more than one fund investing in the corresponding Master Portfolio. A Fund and other entities investing in a particular Master Portfolio are each liable for all obligations of the Master Portfolio. However, the risk of a Fund incurring financial loss on account of such liability is limited to circumstances in which both inadequate insurance existed and the Trust itself is unable to meet its obligations. Accordingly, the Company's Board of Directors believes that the Funds and their shareholders will not be adversely affected by investing Fund assets in the corresponding Master Portfolio. However, if a mutual fund or institutional investor with a larger pro rata ownership of a Master Portfolio's securities than the corresponding Fund withdraws its investment from such Master Portfolio, the economies of scale (e.g., spreading fixed expenses among a larger asset base) that the Company's Board believes should be available through investment in the Master Portfolio may not be fully achieved. In addition, given the relative novelty of the master/feeder structure, accounting or operational difficulties could arise. The investment objective and other fundamental policies of each Master Portfolio, which are identical to those of the corresponding Fund, cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of such Master Portfolio's outstanding voting shares. Whenever a Fund, as a shareholder of the corresponding Master Portfolio, is requested to vote on any matter submitted to shareholders of the Master Portfolio, the Fund will hold a meeting of its shareholders to consider such matters. The Fund will cast its votes in proportion to the votes received from its shareholders. Shares for which a Fund receives no voting instructions will be voted in the same proportion as the votes received from the other Fund shareholders. Certain policies of each Master Portfolio which are non-fundamental may be changed by vote of a majority of the Trust's Trustees without shareholder approval. If a Master Portfolio's investment objective or fundamental or non-fundamental policies are changed, the corresponding Fund may elect to change its objective or policies to correspond to those of the Master Portfolio. The Fund may also elect to redeem its shares of the Master Portfolio and either seek a new investment company with a matching objective in which to invest or retain its own investment adviser to manage the Fund's portfolio in accordance with its objective. In the latter case, a Fund's inability to find a substitute investment company in which to invest or equivalent management services could adversely affect shareholders' investments in such Fund. A Fund will provide shareholders with 30 days' written notice prior to the implementation of any change in the investment objective of the Fund or the Master Portfolio, to the extent possible. Information regarding additional options, if any, for investment in shares of a Master Portfolio is available from Stephens and may be obtained by calling (800) 643-9691. Pursuant to separate Advisory Contracts, each Master Portfolio is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company and the Trust and to six other registered open-end management investment companies, that consist of several separately managed investment portfolios. Under the Advisory Contracts with the Master Portfolios Wells Fargo Bank has agreed to furnish to each Master Portfolio investment guidance and policy direction in connection with the daily portfolio management of the Master Portfolios. Pursuant to the Advisory Contracts, Wells Fargo Bank has also agreed to furnish to the Board of Trustees of the Trust periodic reports on the investment strategy and performance of each Master Portfolio. Mr. Mark Kraschel, portfolio manager for the Short-Term Government-Corporate Income Master Portfolio, has specialized in short-term bond investment applications for over a decade. He joined Wells Fargo Bank in 1988 after five years in fixed-income management at First Boston Corporation. Mr. Kraschel holds a B.S. in business administration from the University of Oregon and an M.B.A. in finance from the University of San Francisco. Mr. Kraschel assumed sole responsibility for management of the Government-Corporate Income Master Portfolio on February 1, 1995. Prior to this time, Mr. Kraschel had co-managed the Short-Term Government-Corporate Bond Master Portfolio since its inception in May 1994. Ms. Laura L. Milner, portfolio co-manager for the Short-Term Municipal Income Master Portfolio, joined Wells Fargo Bank in 1988. Her background includes over seven years experience specializing in short- and long-term municipal securities with Salomon Brothers. She is a member of the National Federation of Municipal Analysts and its California chapter. Mr. David Klug, portfolio co-manager for the Short-Term Municipal Income Master Portfolio, has managed municipal bond portfolios for Wells Fargo Bank for over nine years. Prior to joining Wells Fargo Bank, he managed the municipal bond portfolio for a major property and casualty insurance company. His investment experience exceeds 20 years and includes all aspects of tax-exempt fixed-income investments. He holds an M.B.A. from the University of Chicago and is a member of The National Federation of Municipal Analysts and its California Chapter. Mr. Klug and Ms. Milner have co-managed the Short-Term Municipal Income Master Portfolio since its inception in May 1994. Purchase and sale orders of the securities held by each Master Portfolio may be combined with those of other accounts that Wells Fargo Bank manages or advises, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for a Master Portfolio and other accounts managed by Wells Fargo Bank, Wells Fargo Bank has undertaken to allocate those transactions among the participants equitably. From time to time, each Master Portfolio, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contracts with the Master Portfolios, Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of each Master Portfolio. From time to time, Wells Fargo Bank may waive such fees in whole or in part. Any such waiver will reduce expenses of the corresponding Master Portfolio and, accordingly, have a favorable impact on the yield of the Master Portfolio and, in turn, the Fund. For the fiscal year ended December 31, 1994, Wells Fargo Bank waived all advisory fees payable by each of the Short-Term Municipal Income Master Portfolio and Short-Term Government-Corporate Income Master Portfolio. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into agreements with the Company and the Trust under which Stephens acts as administrator for the Funds and the Master Portfolios. For providing administrative services, Stephens is entitled to receive from each Fund a monthly fee at the annual rate of 0.15% of its respective average daily net assets. This fee decreases to 0.10% of the average daily net assets of each Fund in excess of $200 million. From time to time, Stephens may waive its fees from a Fund in whole or in part. Any such waivers will reduce expenses of a Fund and, accordingly, have a favorable impact on the yield and return of the Fund. Under the respective Administration Agreements with the Funds and the Master Portfolios Stephens has agreed to provide as administrative services, among other things: (i) general supervision of the operation of the Funds and the Master Portfolios, including coordination of the services performed by the investment adviser (in the case of the Master Portfolios), transfer agent, shareholder servicing agents (in the case of the Funds), custodian, independent auditors and legal counsel; regulatory compliance, including the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions; and preparation of proxy statements and shareholder or investor reports for the Funds and the Master Portfolios, as applicable; and (ii) general supervision relative to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors and the Trust's officers and Board of Trustees. Stephens also furnishes office space and certain facilities required for conducting the business of the Funds and the Master Portfolios and pays the compensation of the directors, officers and employees of the Company and of the Trust who are affiliated with Stephens. In addition, Stephens, as the principal underwriter of the Funds within the meaning of the 1940 Act and in accordance with plans of distribution ("Plans"), has entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing shares of the Funds. The Distribution Agreement provides that Stephens shall act as agent for each Fund for the sale of its shares. See "Distribution Plan" below. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years, including discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. The Master Portfolios' Advisory Contracts and the Administration Agreements with the Master Portfolios and the Funds provide that if, in any fiscal year, the total aggregate expenses of a Master Portfolio and a Fund incurred by, or allocated to, the Master Portfolio and the Fund (excluding taxes, interest, brokerage commissions and other portfolio transaction expenses, expenditures that are capitalized in accordance with generally accepted accounting principles, extraordinary expenses and amounts accrued or paid under a Plan) exceed the most restrictive expense limitation applicable to a Fund imposed by the securities laws or regulations of the states in which the Fund's shares are registered for sale, Wells Fargo Bank and Stephens shall waive their fees proportionately under the Advisory Contracts and the Administration Agreements, respectively, for the fiscal year to the extent of the excess, or reimburse the excess, but only to the extent of their respective fees. The Advisory Contracts and the Administration Agreements further provide that the total expenses shall be reviewed monthly so that, to the extent the annualized expenses for such month exceed the most restrictive applicable annual expense limitation, the monthly fees under the Advisory Contracts and the Administration Agreements shall be reduced as necessary. Currently, the most stringent applicable state expense ratio limitation is 2.50% of the first $30 million of a Fund's average net assets for its current fiscal year, 2% of the next $70 million of such assets, and 1.50% of such assets in excess of $100 million. Except for the expenses borne by Wells Fargo Bank and Stephens, the Company and the Trust bear all costs of their respective operations, including the compensation of the Company's directors and the Trust's trustees who are not officers or employees of Wells Fargo Bank or Stephens or any of their affiliates; advisory (in the case of the Master Portfolios), shareholder servicing (in the case of the Funds), and administration fees; payments pursuant to any Plans (in the case of the Funds); interest charges; taxes; fees and expenses of independent auditors, legal counsel, transfer agent and dividend disbursing agent; expenses of redeeming Fund shares or interests in the Master Portfolios; expenses of preparing and printing prospectuses (except the expense of printing and mailing prospectuses used for promotional purposes, unless otherwise payable pursuant to a Plan), shareholders' or investors' reports, notices, proxy statements and reports to regulatory agencies; insurance premiums and certain expenses relating to insurance coverage; trade association membership dues; brokerage and other expenses connected with the execution of portfolio transactions; fees and expenses of the custodian, including those for keeping books and accounts and calculating the net asset value of the Funds and the Master Portfolios; expenses of shareholders' or investors' meetings; expenses relating to the issuance, registration and qualification of shares of the Funds; pricing services; organizational expenses; and any extraordinary expenses. Expenses attributable to each Fund and/or each Master Portfolio are charged against the respective assets of the Fund and/or the Master Portfolio. DETERMINATION OF NET ASSET VALUE Net asset value per share for each Fund is determined by Wells Fargo Bank on each day that the Fund is open for trading ("Business Day"). Each Fund's net asset value per share is determined by dividing the value of the total assets of the Fund (i.e., the value of its investments in the corresponding Master Portfolio and any cash instruments held for liquidity needs) less all of its liabilities by the total number of outstanding shares of the Fund. The net asset value of each Fund is determined as of the close of business of the Exchange (currently 4:00 p.m. New York time). The value of the assets of each Master Portfolio (other than debt obligations maturing in 60 days or less) is determined as of the close of regular trading on the Exchange (referred to hereafter as "the close of the Exchange"), which is currently 4:00 p.m. New York time. Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, assets are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the Board of Trustees. Prices used for such valuations may be provided by independent pricing services. From time to time, the Company may advertise yield and total return information of each Fund. Total return and yield information of a Fund is based on the historical earnings and performance of the Fund and should not be considered representative of future performance. The total return of a Fund is calculated by subtracting (i) the public offering price of the Fund (which includes the maximum sales charge) of one share of the Fund at the beginning of the period, from (ii) the net asset value of all shares an investor would own at the end of the period for the share held at the beginning of the period (assuming reinvestment of all dividends and capital gain distributions), and dividing by (iii) the public offering price per share of the Fund at the beginning of the period. The resulting percentage indicates the positive or negative rate of return that an investor would have earned from reinvested dividends and capital gain distributions and changes in share price during the period for a Fund. A Fund may also, at times, calculate total return based on net asset value per share (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the Fund, or by assuming that a sales charge less than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that total return data derived pursuant to the calculation described above are also presented. A Fund's yield is computed by dividing its net investment income per share earned during a specified period by the Fund's public offering price per share (which includes the maximum sales charge) on the last day of such period and annualizing the result. For purposes of sales literature, these yields may also, at times, be calculated on the basis of the net asset value per share (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in a Fund, or by assuming that a sales charge less than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that yield data derived pursuant to the calculation described above are also presented. The Funds' annual report will contain additional performance information. Additional information about the performance of each Fund is contained in the Annual Report for each Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. Shares of each Fund may be purchased on any day the Exchange is open for trading through Stephens, any authorized broker/dealers or financial institutions with which Stephens has entered into agreements, or through the Transfer Agent. Such broker/dealers or financial institutions are responsible for the prompt transmission of purchase, exchange or redemption orders, and may independently establish and charge additional fees to their clients for such services, other than services related to purchase orders, which would reduce their clients' overall yield or return. The Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. In most cases, the minimum initial purchase amount for each Fund is $1,000. The minimum initial purchase amount is $100 for purchases through the Systematic Purchase Plan and $250 for an investment by a retirement plan qualified under the Internal Revenue Code of 1986, as amended (the "Code"). The minimum subsequent purchase amount is $100. The minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. The Company reserves the right to reject any purchase order. All funds, net of sales loads, are invested in full and fractional shares. Checks are accepted for the purchase of a Fund's shares subject to collection at full face value in U.S. dollars. Inquiries may be directed to the Company at the address and telephone number on the front cover of the Prospectus or at the address set forth in the Prospectus under "Initial Purchases of Fund Shares by Wire." Shares of each Fund are offered continuously at the applicable offering price (including any sales load) next determined after a purchase order is received. Payment for shares purchased through a broker/dealer is not due from the broker/dealer until the settlement date, currently five business days after the order is placed. Effective June 7, 1995, the settlement date will normally be three business days after the order is placed. It is the broker/dealer's responsibility to forward payment for shares being purchased to a Fund promptly. Payment for orders placed directly through the Transfer Agent must accompany the order. When payment for shares of the Fund purchased through the Transfer Agent is by a check that is drawn on any domestic bank, federal funds normally become available to the Fund on the business day after the day the check is deposited. Checks drawn on a non-member bank or a foreign bank may take substantially longer to be converted into federal funds and, accordingly, may delay execution of an order. When shares of a Fund are purchased through a broker/dealer or financial institution, Stephens reallows that portion of the sales load designated below as Dealer Allowance. Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. If all sales charges are paid or reallowed to a broker/dealer or financial institution, it may be deemed an "underwriter" under the Securities Act of 1933. When shares are purchased directly through the Transfer Agent and no broker/dealer or financial institution is involved with the purchase, the entire sales load is paid to Stephens. Sales loads relating to orders for the purchase of shares in each Fund are as follows: For the sole purpose of determining the availability of a reduced sales charge through one of the methods discussed below, the term "Funds" refers to the Funds of the Company described in this Prospectus. The above sales load schedule shows the Volume Discounts that are available to you based on the combined dollar amount being invested in the Funds or in Class A shares of one or more of the portfolios of the Company which assess a sales load (the "Load Funds"). The Right of Accumulation allows you to combine the amount being invested in shares of the Funds with the total net asset value of Class A Shares in any of the Load Funds in accordance with the above sales load schedule to reduce the sales load. For example, if you own Class A Shares of one of the Company's other investment portfolios with an aggregate net asset value of $90,000 and invest an additional $20,000 in the Funds, the sales load on the entire additional amount would be 2.00%. To obtain such discount, you must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the reduced sales load, and confirmation of your order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time with respect to all shares purchased thereafter. A Letter of Intent allows you to purchase shares of the Funds over a 13-month period at reduced sales loads based on the total amount you intend to purchase plus the total net asset value of Class A Shares in any of the Load Funds you already own. Each investment made during the period receives the reduced sales load applicable to the total amount of the intended investment. If such amount is not invested within the period, you must pay the difference between the sales loads applicable to the purchases when made and the charges previously paid. You may Reinvest proceeds from a redemption of Fund shares on which a load was paid in shares of the Funds or in Class A Shares of another of the Company's Load Funds at net asset value, without paying a sales load, within 120 days after the redemption, provided that, if the investment portfolio being purchased charges a sales load that is higher than the sales load that you paid in connection with the Fund shares redeemed, you must pay the difference. In addition, the Class A Shares of the other Load Funds to be acquired must be registered for sale in your state of residence. The amount that may be so reinvested may not exceed the amount of the redemption proceeds, and a written order for the purchase of the Class A Shares must be received by a Fund or the Transfer Agent within 120 days after the effective date of the redemption. If you realized a gain on your redemption, the reinvestment will not alter the amount of any federal capital gains tax payable on the gain. If you realized a loss on your redemption, the reinvestment may cause some or all of such loss to be disallowed as a tax deduction, depending on the number of shares purchased by reinvestment and the period of time that has elapsed after the redemption, although for tax purposes, the amount disallowed is added to the cost of the shares acquired upon the reinvestment. Reductions in front-end sales loads apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife, and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Reductions in front-end sales loads also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of Fund shares purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the 1940 Act, which has been in existence for more than six months and which has a primary purpose other than acquiring shares of a Fund at a reduced sales load, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote five percent or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote five percent of more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Shares of a Fund may be purchased at a purchase price equal to the net asset value, without a sales load, by (i) directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and other broker/dealers that have entered into agreements with Stephens to sell such shares; (ii) present and retired directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo if Wells Fargo Bank and/or the respective affiliates agree; (iii) employee benefit and thrift plans for such persons; and (iv) any investment advisory, trust or other fiduciary account (other than an individual retirement account) maintained, managed or advised by Wells Fargo Bank or Stephens or their affiliates. In addition, shares of the Funds also may be purchased at net asset value by pension, profit sharing or other employee benefit plans established under Section 401 of the Code. Shares of the Funds may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by the following types of investors that place trades through an omnibus account maintained at the Fund by a discount broker/dealer: trust companies; investment advisers and financial planners on behalf of their clients; retirement and deferred compensation plans and the trusts used to fund these plans. By investing in a Fund, you appoint the Transfer Agent, as your agent, to establish an open account to which all shares purchased are credited, together with any dividends and capital gain distributions that are paid in additional shares. See "Dividends and Distributions." Although most shareholders elect not to receive stock certificates, certificates for full shares of a Fund can be obtained on request. If you hold share certificates, it is more complicated to redeem shares, and the expedited redemption described below is not available. Shares of a Fund may be purchased in accordance with procedures described below. INITIAL PURCHASES OF FUND SHARES BY WIRE 1. If you wish to order Fund shares by wire, please call (800) 572-7797. You will be asked to specify the Fund in which you wish to invest and the name(s) in which the shares are to be registered. You will also be asked to provide your address, social security number (or tax identification number where applicable), dividend payment election, amount to be wired, name of the wiring bank and name and telephone number of the person to be contacted in connection with the order. An account number will be assigned. 2. Instruct the wiring bank, which may charge a separate fee, to transmit the specified amount in federal funds ($1,000 or more) to: Wire Purchase Account Number: 4068-000462 Attention: Overland Express (Name of Fund) Account Name(s): (name(s) in which to be registered) Account Number: (as assigned by telephone) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price, next determined after the Account Application is received and accepted. INITIAL PURCHASES OF FUND SHARES BY MAIL If you wish to purchase Fund shares by mail: 1. Complete an Account Application; and 2. Mail the Account Application and a check for $1,000 or more, payable to "Overland Express (Name of Fund)" to the mailing address set forth above. Additional purchases of Fund shares in amounts of $100 or more may be made (i) by instructing the Funds' Transfer Agent to debit an approved account designated in your Account Application, (ii) by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases by wire, or (iii) by mail with a check payable to "Overland Express (Name of Fund)" delivered to the address above. Write your Fund account number on the check and include the detachable stub from a Statement of Account or a letter providing the account number. The Company's Systematic Purchase Plan provides a convenient way for you to add to your existing accounts on a monthly basis. You may elect to participate in this plan by specifying an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a bank account designated by you (provided your bank is a participant in the automated clearing house system). The Transfer Agent withdraws and uses this amount to purchase shares of a Fund for you on or about the fifth business day of each month. There are no additional fees charged for participating in this plan. You may change the investment amount, suspend purchases or terminate your election to participate in this plan at any time by providing written notice to the Transfer Agent at least five business days prior to any scheduled transaction. An election will be terminated automatically if the designated bank account balance is insufficient to make a scheduled withdrawal, or if either your designated bank account or your Fund account is closed. PURCHASES THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Purchase orders for shares of a Fund placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale, including orders for which payment is to be made from free cash credit balances in securities accounts held by a dealer, are effective on the same day the order is placed if the order is received by the Transfer Agent before the close of business. Purchase orders that are received by a broker/dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally are effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of purchase orders to the Transfer Agent. Payment for Fund shares is not due until settlement date. Broker/dealers and financial institutions may benefit from the temporary use of payments to the Funds during the settlement period. A broker/dealer or financial institution that is involved in a purchase transaction may charge separate account, service or transaction fees. Financial institutions may be required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. Shares of each Fund may be exchanged for shares of any other Overland Express Fund with a single class of shares, or for Class A Shares of any Overland Express Fund with more than one class of shares, in an identically registered account at respective net asset values, provided that, if the other investment portfolio charges a sales load on the purchase of the class of shares being exchanged that is higher than the sales load that you have paid in connection with the shares you are exchanging, you pay the difference. In addition, shares of the investment portfolio to be acquired must be registered for sale in your state of residence. You should obtain, read and retain the Prospectus for the investment portfolio which you desire to exchange into before submitting an exchange order. You may exchange shares by calling the Transfer Agent or your authorized broker/dealer, financial institution or servicing agent, unless you have elected not to authorize telephone exchanges in your Account Application (in which case you may subsequently authorize such telephone exchanges by completing a Telephone Exchange Authorization Form and submitting it to the Transfer Agent). If share certificates are held, your shares may not be exchanged by telephone. The Transfer Agent's number for exchanges is (800) 572-7797. Procedures for redemption of shares below also apply to exchanges of shares, except that, with exchanges between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. (See "Redemption by Mail" below for information on signature guarantees.) The Company reserves the right to limit the number of times shares may be exchanged between Funds or to reject in whole or in part any exchange request into a fund when management believes that such action would be in the best interest of the fund's other shareholders. For example, management believes that such action would be appropriate to protect a fund against disruptions in portfolio management resulting from frequent transactions by those seeking to time market fluctuations. Any such rejection is made by management on a prospective basis only, upon notice to the shareholder, given not later than 10 days following such shareholder's most recent exchange. The Company reserves the right to modify or discontinue exchange privileges at any time. Under SEC rules, 60 days' prior notice of any amendments or termination of exchange privileges will be given to shareholders, except under certain extraordinary circumstances. A capital gain or loss for tax purposes may be realized upon an exchange, depending upon the cost or other basis of shares redeemed. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you elect not to authorize the privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company requires the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Company and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Shares of a Fund may be redeemed at their next determined net asset value after receipt of a request in proper form by the Transfer Agent directly or through any authorized broker/dealer or financial institution. The Company does not charge for redemption transactions. However, a broker/dealer or financial institution that is involved in a redemption transaction may charge separate account, service or transaction fees. On a day the Funds are open for business, redemption orders received by an authorized broker/dealer or financial institution before the close of the Exchange and received by the Transfer Agent before the close of the Exchange on the same day are executed at the net asset value per share determined at the close of the Exchange on that day. Redemption orders received by authorized broker/dealers or financial institutions after the close of the Exchange, or not received by the Transfer Agent prior to the close of the Exchange, are generally executed at the net asset value determined at the close of the Exchange on the next business day. Redemption proceeds ordinarily are remitted within seven days after the order is received in proper form, except that proceeds may be remitted over a longer period to the extent permitted by the SEC under extraordinary circumstances. If you request an expedited redemption, redemption proceeds are distributed only if the check used for investment is deemed to be cleared for payment by your bank, currently considered by the Company to be a period of up to 15 days after investment. The proceeds, of course, may be more or less than your investment cost. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. If you wish to redeem Fund shares by mail please do the following: 1. Write a letter of instruction naming the Fund and the dollar amount of or number of shares to be redeemed. Refer to your Fund account number and give either your social security or tax identification number (as applicable). 2. Sign the letter in exactly the same way your account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $25,000 or more or redemption proceeds are to be paid to someone other than you at your address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the Federal Deposit Insurance Corporation, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation will be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. If you hold share certificates, enclose the certificates with the letter. Do not sign the certificates, and for your protection use registered mail. 5. Mail the letter (and any share certificates) to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchases of Fund Shares by Wire." Unless other instructions are given in proper form, a check for the proceeds of redemption will be sent to your address of record. The Company's Systematic Withdrawal Plan provides a way for you to have shares redeemed from your account and the proceeds distributed to you on a monthly basis. To elect to participate in this plan, you must have a shareholder account valued at $10,000 or more as of the date you elect to participate, and you must not also be a participant in the Company's Systematic Purchase Plan at any time while participating in this plan. You may specify an amount ($100 or more) to be distributed by check to your address of record or deposited in a bank account designated by you. The Transfer Agent redeems sufficient shares and mails or deposits the proceeds of the redemption as instructed on or about the fifth business day prior to the end of each month. You are not charged a fee for participating in this plan. If you participate in this plan you may change the withdrawal amount, suspend withdrawals or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to a scheduled transaction. Your election will be terminated automatically if your account balance is insufficient to make a scheduled withdrawal or if your Fund account is closed. If you do not hold share certificates and you have elected to authorize telephone redemptions on the Account Application or other form that is on file with the Transfer Agent, you may request an expedited redemption of shares by letter or telephone on any day the Funds are open for business. See "Exchange Privileges" for additional information regarding telephone redemption privileges. 1. Telephone the expedited redemption request to the Transfer Agent at 2. Mail the expedited redemption request to the Transfer Agent at the mailing address set forth above under "Purchase of Shares -- Initial Purchases of Fund Shares by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more will be wired or credited to your bank indicated in the Account Application or wired to an authorized broker/dealer or financial institution designated in the Account Application. The Company reserves the right to impose charges for wiring redemption proceeds. When proceeds of an expedited redemption are to be paid to someone other than the shareholder, to an address other than that of record, or to a bank, broker/dealer or other financial institution that has not been predesignated, the expedited redemption request must be made by letter and the signature(s) on the letter must be guaranteed, regardless of the amount of the redemption. If an expedited redemption request is received by the Transfer Agent by the close of business on any day the Funds are open for business, the redemption proceeds will be transmitted to your bank or predesignated broker/dealer or financial institution on the next Business Day (assuming the investment check has cleared as described above), absent extraordinary circumstances. A check for proceeds of less than $5,000 will be mailed to your address of record, except that, in the case of investments in the Company that have been effected through broker/dealers, banks and other institutions that have entered into special arrangements with the Company, the full amount of the redemption proceeds may be transmitted by wire or credited to a designated account. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you elect not to authorize the privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company requires the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine and, if it does not follow such procedures, the Company and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. REDEMPTIONS THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Redemption requests placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Funds' shares are offered for sale will be effective on the same day the request is placed if received by the Transfer Agent before the close of business. Redemption requests that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of redemption requests to the Transfer Agent. Unless you have made other arrangements and have informed the Transfer Agent of such arrangements, proceeds of redemptions made through authorized broker/dealers and financial institutions are credited to your account with such broker/dealer or institution. You may request a check from the broker/dealer or financial institution or may elect to retain the redemption proceeds in your account. The broker/dealer or financial institution may benefit from the use of the redemption proceeds prior to the clearance of a check issued to you for such proceeds or prior to disbursement or reinvestment of such proceeds on your behalf. The proceeds of redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. Due to the high cost of maintaining small accounts, the Company reserves the right to redeem accounts that fall below $1,000 because of a shareholder redemption. Prior to such a redemption, you will be notified in writing and permitted 30 days to make additional investments to raise the account balance to the specified minimum. The Company's Board of Directors has adopted Distribution Plans pursuant to Rule 12b-1 under the Act on behalf of each Fund. Under the Plans and pursuant to the Distribution Agreement, each Fund may pay Stephens, as compensation for distribution-related services, a monthly fee at the annual rate of up to 0.25% of the average daily net assets of such Fund or the maximum amount payable under applicable laws, regulations and rules, whichever is less. The actual fee payable to Stephens is determined, within the applicable limit, from time to time by mutual agreement between the Company and Stephens. Stephens may enter into selling agreements with one or more Selling Agents under which such agents may receive compensation for distribution-related services from Stephens, including, but not limited to, commissions or other payments to such agents based on the average daily net assets of Fund shares attributable to them. Payments under the Distribution Plans also may be used to compensate or reimburse servicing agents for shareholder liaison services provided by entities that are dealers of record or which have a servicing relationship with the beneficial owners of shares. Stephens may retain any portion of the total distribution fee payable under the Distribution Agreement to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. Since the fee payable to Stephens under the Distribution Agreement is not based upon the actual expenditures of Stephens, the expenses of Stephens (which may include overhead expenses) may be more or less than the fees received by it under the Distribution Agreement. Stephens has entered into a Selling Agreement with Wells Fargo Bank, pursuant to which Wells Fargo Bank receives periodic payments based on the average daily net assets of a Fund's shares attributable to its customers. Each Fund intends to declare as a dividend to all shareholders of record as of 4:00 p.m (New York time) substantially all of its net investment income at the close of each business day to shareholders of record. Shares purchased in a Fund begin earning dividends on the business day following the date the purchase order settles, and shares redeemed earn dividends through the date of redemption. Net investment income for a Saturday, Sunday or holiday is declared as a dividend to shareholders of record at 4:00 p.m. (New York time) on the prior business day. Dividends of a Fund declared in, and attributable to, any month are paid early in the following month. Shareholders of a Fund who redeem shares prior to a dividend payment date are entitled to all dividends declared but unpaid prior to their redemption of such shares on the next dividend payment date. Any net capital gains of a Fund are distributed annually (or more frequently to the extent permitted to avoid imposition of the 4% excise tax described in the SAI). Dividends and/or capital gain distributions paid by a Fund are invested in additional shares of the Fund at net asset value (without any sales load) and credited to your account on the reinvestment date unless you have elected payment by check. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of another fund in the Overland Express Family of Funds with which you have an established account. By complying with the applicable provisions of the Code, the Funds will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to their shareholders. Dividends from net investment income (including net short-term capital gains, if any) declared and paid by the Short-Term Government-Corporate Income Fund will be taxable as ordinary income to Fund shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional shares in the Funds, they will be taxable. Generally, dividends are taxable to shareholders at the time they are paid. However, dividends declared payable in October, November and December are made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends are actually paid no later than January 31 of the following year. The Funds intend to pay out substantially all of their net investment income and net realized capital gains (if any) for each year. The Funds' dividends will not qualify for the dividends-received deduction allowed to corporate shareholders. By complying with the applicable provisions of the Code, the Short-Term Municipal Income Fund's shareholders will not be subject to federal income taxes on any Fund dividends attributable to interest from tax-exempt securities. However, dividends of the Fund attributable to interest from taxable securities, accretion of market discount on certain bonds and capital gains (if any) will be taxable to shareholders. Each Fund seeks to comply with the applicable provisions of the Code by investing all of its assets in the corresponding Master Portfolio. The Trust intends to qualify for federal income tax purposes as a partnership. As such, each Fund will be deemed to own directly its proportionate share of the Trust's assets. Therefore, any interest, dividends and gains or losses of a Master Portfolio will be deemed to have been "passed through" to the corresponding Fund and other investors in the Master Portfolio, regardless of whether such interest, dividends or gains have been distributed by such Master Portfolio or losses have been realized by such Fund and other investors. Accordingly, if a Master Portfolio were to accrue but not distribute any interest, dividends or gains, the corresponding Fund would be deemed to have realized and recognized its proportionate share of interest, dividends, gains or losses without receipt of any corresponding distribution. However, each Master Portfolio will seek to minimize recognition by investors of interest, dividends, gains or losses without a corresponding distribution. The Funds will inform you of the amount and nature of such Fund dividends and capital gains. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Funds if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes -- Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. All investors should consult their individual tax advisors with respect to their particular tax situations as well as the state and local tax status of investments in shares of the Funds. CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank has been retained to act as the custodian and transfer and dividend disbursing agent for the Funds and the Master Portfolios. Wells Fargo Bank's principal place of business is 420 Montgomery Street, San Francisco, California 94163, and its transfer and dividend disbursing agency activities are managed at 525 Market Street, San Francisco, California 94105. The Company was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. Currently, the Company has twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Money Market Fund, the Asset Allocation Fund, the U.S. Government Income Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Variable Rate Government Fund, the Municipal Income Fund, the Overland Sweep Fund, the U.S. Treasury Money Market Fund, the Strategic Growth Fund, the Short-Term Government-Corporate Income Fund and the Short-Term Municipal Income Fund. The Board of Directors may, in the future, authorize the issuance of other series of capital stock. All shares of the Company, when issued, will be fully paid and nonassessable. The Trust was established on August 14, 1991, as a Delaware business trust. The Trust's Declaration of Trust permits the Board of Trustees to issue beneficial interests in the Trust to investors based on their proportionate investments in the Trust. The Trust currently has three series of beneficial interests -- the Cash Investment Trust Master Portfolio, the Short-Term Government-Corporate Income Master Portfolio and the Short-Term Municipal Income Master Portfolio. The Trust is no longer offering units of the 1-3 Year Duration Government Income Master Portfolio. All shares of the Company have equal voting rights and are voted in the aggregate, and not by series, except where voting by series is required by law or where the matter involved affects only one series. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required to elect Directors under the Act; however, at the written request of 10% or more of the holders of the Company's shares, the Board of Directors will call a meeting of shareholders for purposes of voting on removal of a Director or Directors of the Company. In addition, whenever a Fund is requested to vote on matters pertaining to the corresponding Master Portfolio of the Trust, the Company will hold a meeting of the Fund's shareholders and will cast its vote as instructed by Fund shareholders. The Directors of the Company will vote shares for which they receive no voting instructions in the same proportion as the shares for which they do receive voting instructions. A more detailed statement of the voting rights of shareholders is contained in the SAI. As of February 23, 1995, Swedcom Corporation owned 38.75%, and Herman and Raymond Christensen owned 28.61%, of the outstanding shares of the Short-Term Municipal Income Fund. As of February 23, 1995, Prudential Securities held 50.55% and 49.45% of the outstanding shares of the Short-Term Government-Corporate Income Fund for the benefit of Coben Inc. and Beatrice L. Rosenstein, respectively. For more information about the Funds, simply call (800) 552-9612, or write: THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. STEPHENS INC. -- SPONSOR, ADMINISTRATOR AND DISTRIBUTOR WELLS FARGO BANK, N.A. -- INVESTMENT ADVISER, TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN Overland Express Funds, Inc. (the "Company") is a professionally managed, open-end, series investment company. This Prospectus contains information about one of the funds in the Overland Express Family of Funds -- the STRATEGIC GROWTH FUND (the "Fund"). The Strategic Growth Fund seeks to attain an above-average level of capital appreciation. It seeks to achieve this objective through the active management of a broadly-diversified portfolio of equity securities of companies expected to experience strong growth in revenues, earnings and assets. This Prospectus describes two classes of shares of the Fund -- Class A Shares and Class D Shares. This Prospectus sets forth concisely the information should know before investing in the Fund. A Statement of Additional Information dated May 1, 1995, containing additional and more detailed information about the Fund (the "SAI"), has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. The SAI is available without charge and can be obtained by writing the Company at P.O. Box 63084, San Francisco, CA 94163 or by calling the Company at the telephone number printed above. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUND, FOR WHICH IT IS COMPENSATED. STEPHENS INC. ("STEPHENS"), WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 The Company, as an open-end investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Fund and its investment objective. Q. WHAT IS THE FUND'S INVESTMENT OBJECTIVE? A. The STRATEGIC GROWTH FUND seeks to attain an above-average level of capital appreciation. It seeks to achieve this objective through the active management of a broadly-diversified portfolio of equity securities of companies expected to experience strong growth in revenues, earnings and assets. The Fund is designed to provide above-average capital growth for investors willing to assume above-average risk. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. Q. WHAT ARE PERMISSIBLE INVESTMENTS? A. The Fund invests primarily in common stocks that are expected by Wells Fargo Bank to have above-average prospects for appreciation. In pursuing its investment objective, the Fund may invest in the common stocks of companies with small or medium-sized capitalizations and in securities acquired through initial public offerings. The Fund also may temporarily invest in preferred stock or investment-grade debt securities. In addition, the Fund may purchase or sell options on securities and on indices of securities, may purchase warrants, and may purchase privately issued securities which may be resold only in accordance with Rule 144A under the Securities Act of 1933. See "Investment Objective and Policies" and "Additional Permitted Investment Activities." Q. WHO IS THE INVESTMENT ADVISER? A. Wells Fargo Bank serves as the investment adviser of the Fund. Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. See "Advisory, Administration and Distribution Arrangements." Q. WHO IS THE SPONSOR, ADMINISTRATOR AND DISTRIBUTOR? A. Stephens serves as the sponsor, administrator and distributor for the Company. Stephens is entitled to receive a monthly administration fee at the annual rate of 0.15% of the average daily net assets of the Fund; decreasing to 0.10% of the average daily net assets of the Fund in excess of $200 million. See "Advisory, Administration and Distribution Arrangements." Q. HOW MAY I PURCHASE SHARES? A. Shares of the Fund may be purchased on any day the New York Stock Exchange (the "Exchange") is open for trading. There is a maximum sales load of 4.50% (4.71% of the net amount invested) for purchasing Class A Shares of the Fund. Class D Shares are subject to a maximum contingent deferred sales charge of 1.00% of the lesser of net asset value at purchase or net asset value at redemption. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for shares purchased through the Systematic Purchase Plan and $250 for shares purchased through qualified retirement plans. The minimum subsequent purchase amount is $100 or more. You may purchase shares of the Fund through Stephens, Wells Fargo Bank, as transfer agent (the "Transfer Agent"), or any authorized broker/dealer or financial institution. Purchases of shares of the Fund may be made by wire directly to the Transfer Agent. The Strategic Growth Fund may pay the Distributor a monthly fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A Shares and a monthly fee at an annual rate of up to 0.75% of the Fund's average daily net assets attributable to Class D Shares to compensate the distributor for distribution-related services provided by it or to reimburse it for other distribution-related expenses. See "Purchase of Shares" and "Distribution Plans." The Fund also may pay servicing agents a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class D Shares to compensate them for certain services. See "Servicing Plan." Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on shares of the Fund are declared quarterly and automatically reinvested in additional shares of the same class of the Fund. You may elect to receive dividends by check. Any capital gains will be distributed annually and may be reinvested in Fund shares of the same class or paid by check at your election. All reinvestments of dividends and/or capital gain distributions in shares of the Fund are effected at the then current net asset value free of any sales load. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of the same class of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The Fund's net investment income available for distribution to holders of the Fund's Class D Shares is reduced by the amount of servicing fees payable to servicing agents under the Servicing Plan (as defined below). See "Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. On any day the Exchange is open, shares may be redeemed upon request to Stephens or the Transfer Agent directly or through any authorized broker/dealer or financial institution. Shares may be redeemed by a request in good form in writing or through telephone direction. Proceeds are payable by check. Accounts of less than the applicable minimum initial purchase amount may be redeemed at the option of the Company. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, the Company does not charge for redeeming its shares. However, the Company reserves the right to impose charges for wiring redemption proceeds. See "Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND? A. The Fund's portfolio investments are subject to market risk. Market risk is the possibility that stock prices will decline over short or even extended periods. The U.S. stock market experiences periods when stock prices rise and periods when stock prices decline. In addition, investments in the Fund are not bank deposits or obligations of Wells Fargo Bank and are not insured by the Federal Deposit Insurance Corporation ("FDIC"). Therefore, you should be prepared to accept some risk with the money invested in the Fund. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. Because the Fund engages in active portfolio management, the Fund may experience relatively high turnover and transaction (i.e., brokerage commission) costs. Portfolio turnover also can generate short-term capital gains tax consequences. You should consult your individual tax advisor with respect to your particular tax situation. The Fund may invest a significant portion of its assets in the securities of smaller and newer issuers. Investments in such companies may present opportunities for capital appreciation because of high potential earnings growth. However, such investments may present greater risks than investments in larger-size companies with more established operating histories, diverse product lines and financial capacity. Securities of small and new companies generally trade less frequently or in limited volume, or only in the over-the-counter market or on a regional securities exchange. As a result, the prices of such securities may be more volatile than those of larger, more established companies and, as a group, these securities may suffer more severe price declines during periods of generally declining equity prices. See "Investment Objective and Policies" and "Additional Permitted Investment Activities." Q. WHAT ARE DERIVATIVES AND DOES THE FUND USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. The Fund uses derivatives only to a limited extent in ways that are incidental to its overall strategy of investing directly in common stocks. For example, the Fund may, from time to time, hold options, warrants or debt instruments that are convertible into (and whose value is, therefore, "derived from") common stocks. Q. WHAT STEPS DOES THE FUND TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser to the Fund, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with the Fund's investment objective, does not expose the Fund to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by the Fund also is subject to broadly applicable investment policies. For example, the Fund may not invest more than a specified percentage of its assets in "illiquid securities," including those derivatives that do not have active secondary markets. Nor may the Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) After any waivers or reimbursements. * See "Contingent Deferred Sales Charge." ** As further described in the Prospectus under the caption "Advisory, Administration and Distribution Arrangements," Stephens and Wells Fargo Bank each has agreed to waive or reimburse all or a portion of its respective fees in circumstances where Fund expenses that are subject to limitations imposed under state securities laws and regulations exceed such limitations. In addition, Stephens and Wells Fargo Bank each may elect, in its sole discretion, to otherwise waive its respective fees or reimburse expenses. Any such waivers or reimbursements with respect to the Fund would reduce the total expenses of the Fund. The percentages shown above with respect to Class A Shares and Class D Shares under "Management Fees", "Total Other Expenses", and "Total Fund Operating Expenses" are based on amounts incurred during the most recent fiscal year, reflecting voluntary fee waivers and expense reimbursements. Absent waivers and reimbursements, "Management Fees," "Total Other Expenses" and "Total Fund Operating Expenses," with respect to the Class A Shares would have been 0.50%, 0.80% and 1.55%, respectively. Absent waivers and reimbursements, these percentages, with respect to Class D Shares, would have been 0.50%, 0.98% and 2.23%, respectively. Long-term shareholders of the Fund could pay more in distribution related charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers, Inc. ("NASD"). There can be no assurance that voluntary fee waivers and reimbursements will continue. The purpose of the foregoing tables is to assist you in understanding the various costs and expenses that an investor in the Fund will bear directly or indirectly. There are no other sales loads, redemption fees or exchange fees charged by the Fund. However, the Company reserves the right to impose charges for wiring redemption proceeds. The Examples should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. See Prospectus sections captioned "Advisory, Administration and Distribution Arrangements," "Distribution Plan" and "Purchase of Shares" for more complete descriptions of the various costs and expenses applicable to the Fund. The following information has been derived from the Financial Highlights in the Fund's 1994 annual financial statements. The financial statements are incorporated by reference into the SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Fund's 1994 annual financial statements and the notes thereto. The SAI has been incorporated by reference into this Prospectus. FOR A CLASS A SHARE OUTSTANDING AS SHOWN FOR A CLASS D SHARE OUTSTANDING AS SHOWN The Strategic Growth Fund seeks to attain an above-average level of capital appreciation. It seeks to achieve this objective through the active management of a broadly-diversified portfolio of equity securities of companies expected to experience strong growth in revenues, earnings and assets. The Fund is designed to provide above-average capital growth for investors willing to assume above-average risk. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. The Fund invests primarily in common stocks that Wells Fargo Bank, as the Fund's investment adviser, believes have better-than-average prospects for appreciation. These stocks may have some of the following characteristics: - Low or no dividends - Relatively short operating histories - Aggressive capitalization structures (including high debt levels) - Involvement in rapidly growing/changing industries and/or new Under normal market conditions, the Fund will hold at least 20 common stock issues spread across multiple industry groups, with the majority of these holdings consisting of established growth companies, turnaround or acquisition candidates, or attractive larger capitalization companies. Additionally, it is expected that the Fund will from time to time acquire securities through initial public offerings, and will acquire and hold common stocks of smaller and newer issuers. It is expected that no more than 40% of the Fund's assets will be invested in these highly aggressive issues at one time. There may be some additional risks associated with investments in smaller and/or newer companies because their shares tend to be less liquid than securities of larger companies. Further, shares of small and new companies are generally more sensitive to purchase and sale transactions and changes in the issuer's financial condition and, therefore, the prices of such stocks may be more volatile than those of larger company stocks. From time to time Wells Fargo Bank may determine that conditions in the securities markets make pursuing the Fund's basic investment strategy inconsistent with the best interests of the Fund's investors. At such times, Wells Fargo Bank may use temporary alternative strategies, primarily designed to reduce fluctuations in the value of the Fund's assets. In implementing these temporary "defensive" strategies, the Fund may invest in preferred stock or that are convertible into common stock and in money market securities. It is expected that these temporary "defensive" investments will not exceed 30% of the Fund's total assets. The Fund pursues an active trading investment strategy, and the length of time the Fund has held a particular security is not generally a consideration in investment decisions. Accordingly, the Fund's portfolio turnover rate may be higher than that of other funds that do not pursue an active trading investment strategy. Portfolio turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transactions costs on the sale of securities and the reinvestment in other securities. Portfolio turnover also can generate short-term capital gains tax consequences. Though the Fund will hold a number of larger capitalization stocks, under normal market conditions, and subject to the additional risks described above, more than 50% of the Fund's total assets will be invested in companies with smaller to medium capitalizations. The Fund will invest primarily in companies with a market capitalization of $50 million or greater, but may invest in companies with a market capitalization under $50 million if the investment adviser to the Fund believes such investments to be in the best interests of the Fund. It is currently expected that the majority of the Fund's investments will be in companies with market capitalizations, at the time of acquisition, of up to $750 million. Under ordinary market conditions, at least 65% of the value of the total assets of the Fund will be invested in common stocks and in securities which are convertible into common stocks that Wells Fargo Bank, as investment adviser, believes have better-than-average prospects for appreciation. The Fund also may invest in convertible debt securities. At most, 5% of the Fund's net assets will be invested in convertible debt securities that are not either rated in the four highest rating categories by one or more nationally recognized statistical rating organizations ("NRSROs"), such as Moody's Investor Service, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P"), or unrated securities determined by Wells Fargo Bank to be of comparable quality. Securities rated in the fourth lowest rating category (i.e., rated BBB by S&P or Baa by Moody's) are regarded by S&P as having an adequate capacity to pay interest and repay principal, but changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make such repayments. Moody's considers such securities as having speculative characteristics. PRIVATELY ISSUED SECURITIES (RULE 144A) The Fund may invest in privately issued securities which may be resold in accordance with Rule 144A under the Securities Act of 1933 ("Rule 144A Securities"). Rule 144A Securities are restricted securities which are not publicly traded. Accordingly, the liquidity of the market for specific Rule 144A Securities may vary. Wells Fargo Bank, using guidelines approved by the Board of Directors of the Company, will evaluate the liquidity characteristics of each Rule 144A Security proposed for purchase by the Fund on a case-by-case basis and will consider the following factors, among others, in their evaluation: (1) the frequency of trades and quotes for the Rule 144A Security; (2) the number of dealers willing to purchase or sell the Rule 144A Security and the number of potential purchasers; (3) dealer undertakings to make a market in the Rule 144A Security; and (4) the nature of the Rule 144A Security and the nature of the marketplace trades (e.g., the time needed to dispose of the Rule 144A Security, the method of soliciting offers and the mechanics of transfer). The Fund may invest in securities for which a tender or exchange offer has been made or announced, and in securities of companies for which a merger, consolidation, liquidation or similar reorganization proposal has been announced if, in the judgment of Wells Fargo Bank, there is a reasonable prospect of capital appreciation significantly greater than the added portfolio turnover expenses inherent in the short term nature of such transactions. The principal risk associated with such investments is that such offers or proposals may not be consummated within the time and under the terms contemplated at the time of the investment, in which case, unless such offers or proposals are replaced by equivalent or increased offers or proposals which are consummated, the Fund may sustain a loss. The Fund may purchase or sell options on individual securities and options on indices of securities as a means of achieving additional return or of hedging the value of the Fund's portfolio. If the Fund has sold an option, it may terminate its obligation by effecting a closing purchase transaction. This is accomplished by purchasing an option of the same series as the option previously sold. There can be no assurance that a closing purchase transaction can be effected when the Fund so desires. The purchaser of an option risks a total loss of the premium paid for the option if the price of the underlying security does not increase or decrease sufficiently to justify exercise. The seller of an option, on the other hand, will recognize the premium as income if the option expires unrecognized but foregoes any capital appreciation in excess of the exercise price in the case of a call option and may be required to pay a price in excess of current market value in the case of a put option. Options purchased and sold other than on an exchange in private transactions also impose on the Fund the credit risk that the counterparty will fail to honor its obligations. All investments by the Fund in off-exchange options will be treated as "illiquid" and will therefore be subject to the Fund's policy of not investing more than 15% of its net assets in illiquid securities and the Fund will establish a segregated account with its Custodian in which it will maintain liquid assets in an amount at least equal in value to the Fund's commitments under off-exchange options. The Fund may invest no more than 5% of its net assets at the time of purchase in warrants (other than those that have been acquired in units or attached to other securities) and not more than 2% of its net assets in warrants which are not listed on the New York or American Stock Exchange. Warrants represent rights to purchase securities at a specific price valid for a specific period of time. The prices of warrants do not necessarily correlate with the prices of the underlying securities. The Fund may only purchase warrants on securities in which the Fund may invest directly. The Fund may enter into repurchase agreements wherein the seller of a security to the Fund agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Fund may enter into repurchase agreements only with respect to obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises) ("U.S. Government obligations") and other securities that could otherwise be purchased by the Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. If the seller defaults and the value of the underlying securities has declined, the Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the Fund's disposition of the security may be delayed or limited. The Fund will only enter into repurchase agreements with registered broker/dealers and commercial banks that meet guidelines established by the Board of Directors and are not affiliated with the investment adviser. The Fund may also participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. The Fund may invest in securities of foreign governmental and private issuers that are denominated in and pay interest in U.S. dollars. These securities may take the form of American Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are receipts issued in Europe typically by non-United States banks and trust companies that evidence ownership of either foreign or domestic securities. Generally, ADRs in registered form are designed for use in the United States securities markets and EDRs and CDRs in bearer form are designed for use in Europe. Investments in foreign securities involve certain considerations that are not typically associated with investing in domestic securities. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not generally subject to the same accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic developments that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries. The Fund may invest in the following types of money market instruments that have remaining maturities not exceeding one year: (i) U.S. Government obligations; (ii) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the FDIC; and (iii) commercial paper rated at the date of purchase "P-1" by Moody's or "A-1" or "A-1+ by S&P. The Fund also may invest in short-term U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that at the time of investment: (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) are among the 75 largest foreign banks in the world as determined on the basis of assets; and (iii) have branches or agencies in the United States. The Fund may invest in shares of other open-end, management investment companies, subject to the limitations of Section 12(d)(1) of the Investment Company Act of 1940 (the "1940 Act"), and provided that (i) any such purchases will be limited to temporary investments in shares of unaffiliated investment companies and (ii) the investment adviser will waive its advisory fees for that portion of the Fund's assets so invested, except when such purchase is part of a plan of merger, consolidation, reorganization or acquisition. Subject to the limitations of the Act, the Fund may purchase shares of exchange-listed closed-end funds consistent with pursuing its investment objective. The Fund does not intend to invest more than 5% of its net assets in such securities during the coming year. Notwithstanding any other investment policy or limitation (whether or not fundamental), as a matter of fundamental policy, the Fund may invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objective, policies and limitations as the Fund. A decision to so invest all of its assets may, depending on the circumstances applicable at the time, require the approval of shareholders. The Fund's investment objective, as set forth in the first paragraph of the section describing the Fund's objective and policies, is fundamental; that is, the investment objective may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. If the Board of Directors determines, however, that the Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will disclose any such material changes in the then current prospectus. In addition, as matters of fundamental policy, the Fund may: (i) not purchase securities of any issuer (except U.S. Government obligations) if as a result, with respect to 75% of the Fund's assets, more than 5% of the value of the Fund's total assets would be invested in the securities of such issuer or the Fund would own more than 10% of the outstanding voting securities of such issuer; (ii) borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased while any such outstanding borrowings exceed 5% of its net assets); (iii) make loans of portfolio securities in accordance with its investment policies; and (iv) not invest 25% or more of its assets (i.e., concentrate) in any particular industry, except that the Fund may invest 25% or more of its assets in U.S. Government obligations. With respect to fundamental investment policy (iii) above, the Fund does not intend to make loans of its portfolio securities during the coming year. As a matter of non-fundamental policy, the Fund may invest up to 15% of the current value of its net assets in illiquid securities. For this purpose, illiquid securities include, among others, (a) securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale, (b) fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days, and (c) repurchase agreements not terminable within seven days. Disposing of illiquid or restricted securities may involve additional costs and require additional time. ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS The Board of Directors, in addition to supervising the actions of the investment adviser, administrator and distributor, as set forth below, decides upon matters of general policy. Pursuant to an Advisory Contract, the Fund is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company (other than those structured as "feeder funds"), and to six other registered open-end management investment companies, each of which consist of several separately managed investment portfolios. The Advisory Contract provides that Wells Fargo Bank shall furnish to the Fund investment guidance and policy direction in connection with the daily portfolio management of the Fund. Pursuant to the Advisory Contract, Wells Fargo Bank furnishes to the Board of Directors periodic reports on the investment strategy and performance of the Fund. Purchase and sale orders of the securities held by the Fund may be combined with those of other accounts that Wells Fargo Bank manages, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for the Fund and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, the Fund, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contract, Wells Fargo Bank is entitled to a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. From time to time Wells Fargo Bank may waive such fee in whole or in part. Any waiver would reduce expenses of the Fund involved and, accordingly, have a favorable impact on the yield or return of the Fund. For the ended December 31, 1994, Wells Fargo Bank was paid 0.40% of the average daily net assets of the Fund as compensation for its services as investment adviser. Mr. Jon Hickman is responsible for the day-to-day management of the Strategic Growth Fund. In addition to managing equity and balanced portfolios for individuals and employee benefit plans, Mr. Hickman has responsibility for the Wells Fargo Strategic Growth Fund. He has approximately ten years of experience in the investment management field and is a member of Wells Fargo's Equity Strategy Committee. Mr. Hickman has a B.A. and an M.B.A. in finance from Brigham Young University and has been with Wells Fargo Bank since the merger with Crocker National Bank in 1986. Mr. Robert Bissell is also responsible for the day-to-day management of the Strategic Growth Fund. Mr. Bissell joined Wells Fargo Bank at the time of the merger with Crocker Bank and has been with the combined organization for over 20 years. Prior to joining Wells Fargo Bank, he was a vice president and investment counselor with M.H. Edie Investment Counseling, where he managed institutional and high-net-worth portfolios. Mr. Bissell holds a finance degree from the University of Virginia. He is a chartered financial analyst and a member of the Los Angeles Society of Financial Analysts. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into an agreement with the Fund under which Stephens acts as administrator for the Fund. For these administrative services, Stephens is entitled to receive from the Fund a monthly fee at the annual rate of 0.15% of its average daily net assets; decreasing to 0.10% of the average daily net assets of the Fund in excess of $200 million. From time to time Stephens may waive fees from the Fund in whole or in part. Any such waiver will reduce expenses of the Fund and, accordingly, have a favorable impact on the yield or return of the Fund. The Administration Agreement between Stephens and the Fund states that Stephens shall provide as administrative services, among other things, general supervision (i) of the operation of the Fund, including coordination of the services performed by the Fund's investment adviser, transfer agent, custodian, independent auditors and legal counsel; (ii) in connection with regulatory compliance, including the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions, and the preparation of proxy statements and shareholder reports for the Fund; and (iii) relative to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors. Stephens also furnishes office space and certain facilities required for conducting the business of the Fund and pays the compensation of the Company's directors, officers and employees who are affiliated with Stephens. Stephens, as the principal underwriter of the Fund within the meaning of the 1940 Act, has also entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing Class A Shares and Class D Shares of the Fund. The Distribution Agreement provides that Stephens shall act as agent for the Fund for the sale of its Class A Shares and Class D Shares and may enter into selling agreements with broker/dealers or financial institutions to market and make available Class A Shares and Class D Shares to their respective customers. Under the Distribution Agreement, Stephens is entitled to receive from the Fund a monthly fee at an annual rate of up to 0.25% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at an annual rate of up to 0.75% of the average daily net assets of the Class D Shares of the Fund. The actual fee payable to Stephens is determined, within such limits, from time to time by mutual agreement between the Company and Stephens, and may not exceed the maximum amount payable under the Rules of Fair Practice of the NASD. Stephens may enter into selling agreements with one or more selling agents under which such agents may receive from Stephens compensation for sales support services. Such compensation may include, but is not limited to, commissions or other payments to such agents based on the average daily net assets of Fund shares attributable to them. Services provided by selling agents in exchange for commissions and other payments to selling agents are the principal sales support services provided to the Fund. Stephens may retain any portion of the total distribution fee payable under the Distribution Agreement to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. Since the Distribution Agreement provides for fees that are used by Stephens to pay for distribution services, a plan of distribution for each class of shares (individually a "Plan," collectively the "Plans") and the Distribution Agreement are approved and reviewed in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in which an investment company may, directly or indirectly, bear the expense of distributing its shares. See Prospectus section captioned "Distribution Plans" for a more complete description of the Plans. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. The Fund may enter into servicing agreements with one or more servicing agents on behalf of Class D Shares of the Fund. Under such agreements, servicing agents provide shareholder liaison services, which may include responding to customer inquiries and providing information on shareholder investments, and provide such other related services as the Fund or a Class D Shareholder may reasonably request. For these services, a servicing agent receives a fee which will not exceed, on an annualized basis for the Fund's then current fiscal year, 0.25% of the average daily net assets of the Class D Shares of the Fund represented by Class D Shares owned by investors with whom the servicing agent maintains a servicing relationship, or an amount which equals the maximum amount payable to the servicing agent under applicable laws, regulations or rules, whichever is less. DETERMINATION OF NET ASSET VALUE Net asset value per share for the Fund is determined by Wells Fargo Bank on each day that the Exchange is open for trading as of the close of regular trading on the Exchange (referred to hereafter as the "close of the Exchange"), which is currently 4:00 p.m. New York time. The net asset value of a share of a class of a Fund is the value of total net assets attributable to each class divided by the number of outstanding shares of that class. The value of net assets per class is determined daily by adjusting the net assets per class at the beginning of the day by the value of each class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each class by attributing to each class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each class as appropriate. The net asset value of each class is expected to fluctuate daily. Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, assets are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the Board of Directors. Prices used for such valuations may be provided by independent pricing services. From time to time, the Company may advertise various total return information with respect to a class of shares of the Fund. Total return information is based on the historical earnings and performance of such class of shares of the Fund and should not be considered representative of future performance. The total return of a class of shares of the Fund is calculated by subtracting (i) the public offering price of the class of shares (which includes the maximum sales charge for the class of shares) of one share at the beginning of the period, from (ii) the net asset value of all shares of a class of shares an investor would own at the end of the period for the share held at the beginning of the period (assuming reinvestment of all dividends and capital gain distributions), and dividing by (iii) the public offering price per share of a class of shares at the beginning of the period. The resulting percentage indicates the positive or negative rate of return that an investor would have earned from reinvested dividends and capital gain distributions and changes in share price during the period for the class of shares. The Fund may also, at times, calculate total return of a class of shares based on net asset value per share of a class of shares (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the class of shares, or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that total return data derived pursuant to the calculation described above are also presented. Because of differences in the fees and/or expenses borne by Class D Shares of the Fund, the total return on such shares can be expected, at any given time, to differ from the total return on Class A Shares. Performance information will be computed separately for Class A Shares and Class D Shares. Additional information about the performance of the Fund is contained in the Annual Report for the Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. Shares of the Fund may be purchased on any day the Exchange is open for trading through Stephens, the Transfer Agent, or any authorized broker/dealers or financial institutions with which Stephens has entered into agreements. Such broker/dealers or financial institutions are responsible for the prompt transmission of purchase, exchange or redemption orders, and may independently establish and charge additional fees to their clients for such services, other than services related to purchase orders, which would reduce the clients' overall yield or return. The Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for purchases through the Systematic Purchase Plan and $250 for purchases through a retirement plan qualified under the Internal Revenue Code of 1986, as amended (the "Code"). The minimum subsequent purchase amount is $100. The minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. The Company reserves the right to reject any purchase order. All funds, net of sales loads, will be invested in full and fractional shares. Checks will be accepted for the purchase of the Fund's shares, subject to collection at full face value in U.S. dollars. Inquiries may be directed to the Company at the telephone number on the front cover of the Prospectus. Shares of the Fund are offered continuously at the applicable offering price (including any sales load) next determined after a purchase order is received. Payment for shares purchased through a broker/dealer will not be due from the broker/dealer until the settlement date, currently five business days after the order is placed. Effective June 7, 1995, the settlement date normally will be three business days after the order is placed. It is the broker/dealer's responsibility to forward payment for shares being purchased to the Fund promptly. Payment for orders placed directly through the Transfer Agent must accompany the order. When payment for shares of the Fund through the Transfer Agent is by a check that is drawn on any member bank of the Federal Reserve System, federal funds normally become available to the Fund on the business day after the day the check is deposited. Checks drawn on a non-member bank or a foreign bank may take substantially longer to be converted into federal funds and, accordingly, may delay execution of an order. When shares of the Fund are purchased through a broker/dealer or financial institution, Stephens reallows that portion of the sales load designated below as the Dealer Allowance. Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Fund may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. If all sales charges are paid or reallowed to a broker/dealer or financial institution, it may be deemed an "underwriter" under the Securities Act of 1933. When shares are purchased directly through the Transfer Agent and no broker/dealer or financial institution is involved with the purchase, the entire sales load is paid to Stephens. Sales loads relating to orders for the purchase of Class A Shares in the Fund are as follows: Class D Shares are not subject to a front-end sales load. However, Class D Shares which are redeemed within one year from the receipt of a purchase order will be subject to a contingent deferred sales charge equal to 1% of the dollar amount equal to the lesser of the net asset value at the time of purchase of the shares being redeemed or the net asset value of such shares at the time of redemption. A selling agent or servicing agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class D Shares. REDUCED SALES CHARGE -- CLASS A SHARES The above Volume Discounts are available to you based on the combined dollar amount being invested in Class A Shares of the Fund or of Class A Shares of one or more of the other portfolios of the Company which assess a sales load (the "Load Funds"). Because Class D Shares are not subject to a front-end sales charge, the amount of Class D Shares you hold is not considered in determining any volume discount. The Right of Accumulation allows you to combine the amount being invested in Class A Shares of the Fund with the total net asset value of Class A Shares in any of the Load Funds already owned in accordance with the above sales load schedule to reduce the sales load. For example, if you own Class A Shares of the Load Funds with an aggregate net asset value of $90,000 and invest an additional $20,000 in the Class A Shares of the Fund, the sales load on the entire additional amount would be 4.00% of the offering price. To obtain such discount, you must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the reduced sales load, and confirmation of the order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time with respect to all Class A Shares purchased thereafter. A Letter of Intent allows you to purchase Class A Shares of the Fund over a 13-month period at reduced sales loads based on the total amount intended to be purchased plus the total net asset value of Class A Shares in any of the Load Funds already owned. Each investment made during the period receives the reduced sales load applicable to the total amount of the intended investment. If such amount is not invested within the period, you must pay the difference between the sales loads applicable to the purchases made and the charges previously paid. You may Reinvest proceeds from a redemption of Class A Shares of the Fund in the Class A Shares of the Fund or in Class A Shares of another of the Company's investment portfolios that offers Class A Shares at net asset value, without a sales load, within 120 days after such redemption. However, if the other investment portfolio charges a sales load that is higher than the sales load you have paid in connection with the Class A Shares you have redeemed, you pay the difference. In addition, the Class A Shares of the other investment portfolio to be acquired must be registered for sale in your state of residence. The amount that may be so reinvested may not exceed the amount of the redemption proceeds, and a written order for the purchase of the Class A Shares must be received by the Fund or the Transfer Agent within 120 days after the effective date of the redemption. If you realized a gain on your redemption, the reinvestment will not alter the amount of any federal capital gains tax payable on the gain. If you realized a loss on your redemption, the reinvestment may cause some or all of such loss on the redemption to be disallowed as a tax deduction, depending on the number of Class A Shares purchased by reinvestment and the period of time that has elapsed after the redemption, although for tax purposes, the amount disallowed is added to the cost of the Class A Shares acquired upon the reinvestment. Reductions in front-end sales loads apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife, and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Reductions in front-end sales loads also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of Class A Shares purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the 1940 Act, which has been in existence for more than six months and which has a primary purpose other than acquiring shares of the Fund at a reduced sales load, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote five percent or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote five percent or more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by Directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and other broker/dealers that have entered into agreements with Stephens to sell such shares. Class A Shares of the Fund also may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by present and retired Directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo Bank and its affiliates if Wells Fargo Bank and/or the respective affiliates agree. Such shares also may be purchased at such price by employee benefit and thrift plans for such persons and by any investment advisory, trust or other fiduciary account (other than an individual retirement account) that is maintained, managed or advised by Wells Fargo Bank or Stephens or their affiliates. In addition, Class A Shares may be purchased at net asset value by pension, profit sharing or other employee benefit plans established under Section 401 of the Code. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by the following types of investors that place trades through an omnibus account maintained at the Fund by a discount broker/dealer: trust companies; investment advisers and financial planners on behalf of their clients; retirement and deferred compensation plans and the trusts used to fund these plans. By investing in the Fund, a shareholder appoints the Transfer Agent, as agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional shares. See "Dividends and Distributions." Although most shareholders elect not to receive stock certificates, certificates for full shares of the Fund can be obtained on request. It is more complicated to redeem shares held in certificated form, and the expedited redemption described below is not available with respect to certificated shares. CONTINGENT DEFERRED SALES CHARGE -- CLASS D SHARES Class D Shares which are redeemed within one year of the receipt of a purchase order for such shares will be subject to a contingent deferred sales charge equal to 1.00% of an amount equal to the lesser of the net asset value at the time of purchase for the Class D Shares being redeemed or the net asset value of such shares at the time of redemption. Accordingly, a contingent deferred sales charge will not be imposed on amounts representing increases in net asset value above the net asset value at the time of purchase. In addition a charge will not be assessed on Class D Shares purchased through reinvestment of dividends or capital gains distributions. In determining whether a contingent deferred sales charge is applicable to a redemption, Class D Shares are considered redeemed on a first-in, first-out basis so that Class D Shares held for a longer period of time are considered redeemed prior to more recently acquired shares. The contingent deferred sales charge is waived on redemptions of Class D Shares (i) following the death or disability (as defined in the Code) of a shareholder, (ii) to the extent that the redemption represents a minimum required distribution from an individual retirement account or other retirement plan to a shareholder who has reached age 70 1/2, (iii) effected pursuant to the Company's right to liquidate a shareholder's account if the aggregate net asset value of the shareholder's account is less than the minimum account size, or (iv) in connection with the combination of the Company with any other registered investment company by a merger, acquisition of assets, or by any other reorganization transaction. Investors who are entitled to purchase Class A Shares of the Fund at net asset value without a sales load should not purchase Class D Shares. Other investors, including those who are entitled to purchase Class A Shares of the Fund at a reduced sales load, should compare the fees assessed on Class A Shares against those assessed on Class D Shares (including potential contingent deferred sales charges and higher Rule 12b-1 Fees) in light of the amount to be invested and the anticipated time that the shares will be owned. Shares of the Fund may be purchased by any of the methods described below. INITIAL PURCHASE OF FUND SHARES BY WIRE 1. Telephone toll free (800) 572-7797. Give the name of the Fund, the class of shares to be purchased, the name(s) in which the shares are to be registered, the address, social security or tax identification number (where applicable) of the person or entity in whose name(s) the shares are to be registered, dividend payment election, amount to be wired, name of the wiring bank and name and telephone number of the person to be contacted in connection with the order. An account number will be assigned. 2. Instruct the wiring bank, which may charge a separate fee, to transmit the specified amount in federal funds ($1,000 or more) to: Wire Purchase Account Number: 4068-000462 Attention: Overland Express Strategic Growth Fund (designate Class A Account Name(s): (name(s) in which to be registered) Account Number: (as assigned by telephone) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price, or, in the case of Class D Shares, at the net asset value, next determined after the Account Application is received and accepted. INITIAL PURCHASE OF FUND SHARES BY MAIL 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $1,000 or more, payable to "Overland Express Strategic Growth Fund (designate Class A or D)" to its mailing address set forth above. Additional purchases of $100 or more may be made by instructing the Fund's Transfer Agent to debit an approved account designated in your Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Overland Express Strategic Growth Fund (designate Class A or D)" to the above address. Write the Fund account number on the check and include the detachable stub from a Statement of Account or a letter providing the account number. The Company's Systematic Purchase Plan provides you with a convenient way to establish and automatically add to your existing accounts on a monthly basis. If you elect to participate in this plan you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a designated bank account (provided your bank is a participant in the automated clearing house system). The Transfer Agent withdraws and uses this amount to purchase shares of the Fund on or about the fifth business day of each month. There are no additional fees charged for participating in this plan. You may change the investment amount, suspend purchases or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to any scheduled transaction. An election will be terminated automatically if the designated bank account balance is insufficient to make a scheduled withdrawal, or if either the designated bank account or your account is closed. PURCHASES THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Purchase orders for shares of the Fund placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale, including orders for which payment is to be made from free cash credit balances in securities accounts held by a dealer, will be effective on the same day the order is placed if received by the Transfer Agent before the close of business. Purchase orders that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of purchase orders to the Transfer Agent. Payment for Fund shares is not due until settlement date. Broker/dealers and financial institutions may benefit from temporary use of payments to the Fund during the settlement period. A broker/dealer or financial institution that is involved in a purchase transaction may charge separate account, service or transaction fees. Financial institutions may be required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. You may exchange Class A Shares of the Fund for shares of the same class of the Company's other investment portfolios or for shares of the California Tax-Free Money Market Fund, the Money Market Fund or the U.S. Treasury Money Market Fund in an identically registered account at respective net asset values, provided that, if the other investment portfolio changes a sales load on the purchase of the class of shares being exchanged that is higher than the sales load that you have paid in connection with the shares you are exchanging, you pay the difference. Class D Shares of the Fund may be exchanged for Class D Shares of one of the Company's other investment portfolios that offer Class D Shares or for Class A Shares of the Money Market Fund in an identically registered account at respective net asset values. You are not charged a contingent deferred sales charge on exchanges of Class D Shares for shares of the same class of another of the Company's investment portfolios or for Class A Shares of the Money Market Fund. If you exchange Class D Shares for shares of the same class of another investment portfolio, or for Class A Shares of the Money Market Fund, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of the initial purchase of the previously held shares. Accordingly, if you exchange Class D Shares for Class A Shares of the Money Market Fund, and redeem the shares of the Money Market Fund within one year of the receipt of the purchase order for the exchanged Class D Shares, you will have to pay a deferred sales charge equal to the contingent deferred sales charge applicable to the previously exchanged Class D Shares. If you exchange Class D Shares of an investment portfolio for Class A Shares of the Money Market Fund, you may subsequently re-exchange the acquired Class A Shares only for Class D Shares. If you re-exchange the Class A Shares of the Money Market Fund for Class D Shares, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of your initial purchase of Class D Shares. In addition, shares of the other investment portfolio to be acquired must be registered for sale in your state of residence. You should obtain, read and retain the Prospectus for the portfolio which you desire to exchange into before submitting an exchange order. You may exchange shares by writing the Transfer Agent as indicated below under Redemption by Mail, or by calling the Transfer Agent or your authorized broker/dealer or financial institution or servicing agent, unless you have elected not to authorize telephone exchanges in the Account Application (in which case you may subsequently authorize such telephone exchanges by completing a Telephone Exchange Authorization Form and submitting it to the Transfer Agent in advance of the first such exchange). Shares held in certificated form may not be exchanged by telephone. The Transfer Agent's number for exchanges is (800) 572-7797. Procedures applicable to redemption of the Fund's shares are also applicable to exchanging shares, except that, with respect to an exchange transaction between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. The Company reserves the right to limit the number of times shares may be exchanged between investment portfolios, or to reject in whole or in part any exchange request into a fund when management believes that such action would be in the best interest of the Fund's other shareholders, such as when management believes that such action would be appropriate to protect such fund against disruptions in portfolio management resulting from frequent transactions by those seeking to time market fluctuations. Any such rejection will be made by management on a only, upon notice to the shareholder given not later than 10 days following such shareholder's most recent exchange. The Company reserves the right to modify or discontinue exchange privileges at any time. Under SEC rules, 60 days prior notice of any amendments or termination of exchange privileges will be given to shareholders, except under certain extraordinary circumstances. A capital gain or loss for tax purposes may be realized upon an exchange, depending upon the cost or other basis of shares redeemed. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you decline such privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine. If the Transfer Agent does not follow such procedures, the Company and the Transfer Agent may be liable for any losses attributable to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Shares may be redeemed at their next determined net asset value after receipt of a request in proper form by the Transfer Agent directly or through any authorized broker/dealer or financial institution. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, as described under "Purchase of Shares," the Company does not charge for redemption transactions. However, a broker/dealer or financial institution that is involved in a redemption transaction may charge separate account, service or transaction fees. On a day the Fund is open for business, redemption orders received by an authorized broker/dealer or financial institution before the close of the Exchange, and received by the Transfer Agent before the close of business on the same day will be executed at the net asset value per share determined at the close of the Exchange on that day. Redemption orders received by authorized broker/dealers or financial institutions after the close of the Exchange, or not received by the Transfer Agent prior to the close of business, will be executed at the net asset value determined at the close of the Exchange on the next business day. Redemption proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, ordinarily will be remitted within seven days after the order is received in proper form, except proceeds may be remitted over a longer period to the extent permitted by the SEC under extraordinary circumstances. If an expedited redemption is requested, redemption proceeds will be distributed only if the check used for investment is deemed to be cleared for payment by the your bank, currently considered by the Company to be a period of 15 days after investment. The proceeds, of course, may be more or less than cost. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. 1. Write a letter of instruction. Indicate the dollar amount of or number of shares to be redeemed. Refer to your Fund account number and provide either a social security or a tax identification number (as applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more, or redemption proceeds are to be paid to someone other than you at your address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the Federal Deposit Insurance Corporation, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation will be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. If shares to be redeemed are held in certificated form, enclose the certificates with the letter. Do not sign the certificates and for protection use registered mail. 5. Mail the letter to the Transfer Agent at the mailing address set forth under "Purchase of Shares." Unless other instructions are given in proper form, a check for the proceeds of redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be sent to your address of record. The Company's Systematic Withdrawal Plan provides a way for you to have shares redeemed from your accounts and the proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, distributed to you on a monthly basis. You may elect to participate in this plan if you have a shareholder account valued at $10,000 or more as of the date of your election to participate, and are not a participant in the Company's Systematic Purchase Plan at any time while participating in this plan. To participate in the plan, specify an amount ($100 or more) to be distributed by check to your address of record or deposited in a designated bank account. The Transfer Agent redeems sufficient shares and mails or deposits the proceeds of the redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, as instructed on or about the fifth business day prior to the end of each month. There are no additional fees charged for participating in this plan. You may change the withdrawal amount, suspend withdrawals or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to a scheduled transaction. An election will be terminated automatically if your account balance is insufficient to make a scheduled withdrawal or if your account is closed. If shares are not held in certificated form, you may request an expedited redemption of shares by letter or telephone (unless you have elected not to authorize telephone redemptions on your Account Application or other form that is on file with the Transfer Agent) on any day the Fund is open for business. See "Exchange Privileges" for additional information regarding telephone redemption privileges. You may request expedited redemption by telephone by calling the Transfer Agent at (800) 572-7797. You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchase of Fund Shares by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be wired or credited to the bank indicated in your Account Application or wired to an authorized broker/dealer or financial institution designated in your Account Application. The Company reserves the right to impose charges for wiring redemption proceeds. When proceeds of an expedited redemption are to be paid to someone other than yourself, to an address other than that of record, or to a bank, broker/dealer or other financial institution that has not been predesignated, the expedited redemption request must be made by letter and the signature(s) on the letter must be guaranteed, regardless of the amount of the redemption. If an expedited redemption request is received by the Transfer Agent by the close of business on any day the Fund is open for business, the redemption proceeds will be transmitted to your bank or predesignated broker/dealer or financial institution on the next business day (assuming the investment check has cleared as described above), absent extraordinary circumstances. A check for proceeds of less than $5,000 will be mailed to your address of record, except that, in the case of investments in the Company that have been effected through broker/dealers, banks and other institutions that have entered into special arrangements with the Company, the full amount of the redemption proceeds may be transmitted by wire or credited to a designated account. REDEMPTIONS THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Redemption requests placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale will be effective on the same day the request is placed if received by the Transfer Agent before the close of business. Redemption requests that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of redemption requests to the Transfer Agent. Unless you have made other arrangements, and have informed the Transfer Agent of such arrangements, proceeds of redemptions made through authorized broker/dealers and financial institutions will be credited to your account with such broker/dealer or institution. You may request a check from the broker/dealer or financial institution or may elect to retain the redemption proceeds in your account. The broker/dealer or financial institution may benefit from the use of the redemption proceeds prior to the check issued to you for such proceeds or prior to disbursement or reinvestment of such proceeds on your behalf. The proceeds of redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. Due to the high cost of maintaining small accounts, the Company reserves the right to redeem accounts that fall below $1,000. Prior to such a redemption, you will be notified in writing and permitted 30 days to make additional investments to raise the account balance to the specified minimum. The Company's Board of Directors has adopted a Plan on behalf of each class of shares of the Fund. Under the Plans and pursuant to the Distribution Agreement, the Fund may pay certain distribution-related expenses. As discussed above, under the Distribution Agreement, Stephens is entitled to receive from the Fund, as compensation for distribution-related services, a monthly fee at the annual rate of up to 0.25% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at the annual rate of up to 0.75% of the average daily net assets of the Class D Shares of the Fund. Since the fee payable to Stephens under the Distribution Agreement is based upon a percentage of the average daily net assets of a class of shares of the Fund and not upon the actual expenditures of Stephens, the expenses of Stephens (which may include overhead expenses) may be more or less than the fees received by it under the Distribution Agreement. All or a portion of these fees may be paid by Stephens to broker-dealers or financial institutions who have entered into selling agent agreements with Stephens, as compensation for sales support services. The Company's Board of Directors has adopted a servicing plan ("Servicing Plan") on behalf of the Class D Shares of the Fund. Pursuant to the Servicing Plan the Fund may enter into servicing agreements with one or more servicing agents who agree to provide administrative support services to their customers who are the record or beneficial owners of Class D Shares. Such servicing agents will be compensated at an annual rate of up to 0.25% of the average daily net asset value of the Class D Shares held of record or beneficially by such customers. The Fund intends to declare as a dividend substantially all of its net investment income annually to shareholders of record at 4:00 p.m. (New York time) on the day of declaration. Net capital gains of the Fund, if any, will be distributed annually (or more frequently to the extent permitted to avoid imposition of the 4% excise tax described in the SAI). Dividends and/or capital gain distributions will have the effect of reducing the net asset value per share by the amount distributed on the record date. Although a distribution paid to an investor on newly issued shares shortly after purchase would represent, in substance, a return of capital, the distribution would consist of net investment income and, accordingly, would be taxable as ordinary income. Dividends and/or capital gain distributions paid by the Fund will be invested in additional shares of the same class of the Fund at net asset value (without any sales load) and credited to your account on the reinvestment date or, at your election, paid by check. Dividend checks and Statements of Account will be mailed approximately three business days after the payment date. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The Fund's net investment income available for distribution to the holders of Class D Shares will be reduced by the amount of shareholder servicing fees payable to shareholder servicing agents under the Servicing Plan and by the incremental distribution fees payable under the Distribution Plan. There may be certain other differences in fees (e.g., transfer agent fees) between Class A Shares and Class B Shares that would affect their relative dividends. By complying with applicable provisions of the Code, the Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to their shareholders. Dividends from the investment income (which includes net short-term capital gains, if any) declared and paid by the Fund will be taxable as ordinary income to the Fund's shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional shares, they will be taxable. Generally, dividends are taxable to shareholders at the time they are paid. However, dividends declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends are actually paid no later than January 31 of the following year. You may be eligible to defer the taxation of dividend and capital gain distributions on shares of a Fund which are held under a qualified tax-sheltered retirement plan. The Fund intends to pay out all its net investment income and net realized capital gains (if any) for each year. Corporate shareholders may be eligible for the dividends-received deduction on the dividends (excluding the net capital gain dividends) paid by the Fund to the extent the Fund's income is derived from certain dividends received from domestic corporations. In order to qualify for the dividends-received deduction, a corporate shareholder must hold the Fund shares paying the dividends upon which a dividend-received deduction is based for at least 46 days. The Fund will inform you of the amount and nature of such dividends and capital gains. You should keep all statements you receive to assist in your personal record keeping. The Company is required to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Fund if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. You should consult your individual tax advisor with respect to your particular tax situation as well as the state and local tax status of investments in shares of the Fund. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank has been retained to act as the Fund's custodian and transfer and dividend disbursing agent. Its principal place of business is 420 Montgomery Street, San Francisco, California 94163 and its transfer and dividend disbursing agency activities are managed at 525 Market Street, San Francisco, California 94105. The Company, an open-end investment company, was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. The Company currently offers twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Money Market Fund, the Municipal Income Fund, the Overland Sweep Fund, the Short-Term Government-Corporate Income Fund, the Short-Term Municipal Income Fund, the Strategic Growth Fund, the U.S. Government Income Fund, the U.S. Treasury Money Market Fund and the Variable Rate Government Fund. The Board of Directors may, in the future, authorize the issuance of other series of capital stock representing shares of additional investment portfolios or funds. All shares of the Company have equal voting rights and will be voted in the aggregate, and not by series or class, except where voting by series is required by law or where the matter involved affects only one series. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required by the 1940 Act to elect Directors; however, shareholders are entitled to call a meeting of shareholders for purposes of voting on removal of a director or directors. A more detailed statement of the voting rights of shareholders is contained in the SAI. All shares of the Company, when issued, will be fully paid and nonassessable. 7. AUTHORIZATION FOR TRUSTS AND ORGANIZATIONS (If Applicable.) CORPORATIONS, TRUSTS, PARTNERSHIPS OR OTHER ORGANIZATIONS MUST COMPLETE THIS SECTION. The following named persons are currently officers/trustees/general partners/other authorized signatories of the Registered Owner; this(these) Authorized Person(s) is(are) currently authorized under the applicable governing document to act with full power to sell, assign or transfer securities of Overland Express Funds, Inc. for the Registered Owner and to execute and deliver any instrument necessary to effectuate the authority hereby conferred: Overland Express Funds, Inc., Stephens Inc. and Wells Fargo Bank, N.A. may, without inquiry, act upon the instruction of ANY PERSON(S) purporting to be (an) Authorized Person(s) as named in the Authorization Form last received by you, and shall not be liable for any claims, expenses (including legal fees) or losses resulting from acting upon any instructions reasonably believed to be genuine. FOR CORPORATIONS AND INCORPORATED ASSOCIATIONS: I, , Secretary of the above-named Registered Owner, do hereby certify that at a meeting on at which a quorum was present throughout, the Board of Directors of the corporation/the officers of the association duly adopted a resolution, which is in full force and effect and in accordance with the Registered Owner's charter and by-laws, which resolution: (1) empowered the above-named Authorized Person(s) to effect securities transactions for the Registered Owner on the terms described above; (2) authorized the Secretary to certify, from time to time, the names and titles of the officers of the Registered Owner and to notify you when changes in the office occur; and (3) authorized the Secretary to certify that such a resolution has been duly adopted and will remain in full force and effect until you receive a duly executed amendment to the Authorization Form. Witness my hand on behalf of the corporation/association on this AND DIVIDEND DISBURSING AGENT AND Wells Fargo Bank, N.A. FOR MORE INFORMATION ABOUT THE FUND, OR WRITE: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. Stephens Inc. -- Sponsor, Administrator and Distributor Wells Fargo Bank, N.A. -- Investment Adviser, Transfer and Dividend Disbursing Overland Express Funds, Inc. (the "Company") is a professionally managed, open-end, series investment company. This Prospectus describes the Institutional Class of two of the funds in the Overland Express Family of Funds -- the MONEY MARKET FUND and the U.S. TREASURY MONEY MARKET FUND (each, a "Fund," and collectively, the "Funds"). The MONEY MARKET FUND seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in high-quality, short-term securities. The U.S. TREASURY MONEY MARKET FUND seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in U.S. Treasury bonds, notes and bills with short remaining terms. Each of the Funds seeks to maintain a net asset value of $1.00 per share. This Prospectus sets forth concisely the information a prospective investor should know before investing in any of the Funds. A Statement of Additional Information (the "SAI") dated May 1, 1995, containing additional and more detailed information about each of the Funds, has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. The SAI is available without charge and can be obtained by writing the Company at P.O. Box 63084, San Francisco, CA 94163 or by calling the Company at the telephone number printed above. AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO MAINTAIN A CONSTANT $1.00 NET ASSET VALUE PER SHARE. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 This Prospectus describes one class of shares of the Funds -- the Institutional Class (shares of the Institutional Class are also referred to hereinafter as the "Institutional Shares" or the "Shares"). The Funds also offer a class of shares known as the Class A Shares. Investors who are not eligible to invest in the Institutional Class may be eligible to invest in the Class A Shares. Additional information about Class A Shares, and a free copy of the current prospectus describing the Class A shares, is available from the Company at the telephone number printed above. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUNDS, FOR WHICH IT IS COMPENSATED. STEPHENS INC. ("STEPHENS"), WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUNDS. The Company, as an open-end management investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Funds, each of which has its own investment objective. Q. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES? A. The MONEY MARKET FUND seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in high-quality, short-term securities. The U.S. TREASURY MONEY MARKET FUND seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in U.S. Treasury bonds, notes and bills ("U.S. Treasury Securities") with short remaining terms. Each Fund seeks to maintain a net asset value of $1.00 per Share; however, as with all mutual funds, there is no assurance that this objective will be achieved. Q. WHAT ARE PERMISSIBLE INVESTMENTS? A. The MONEY MARKET FUND invests in high-quality money market instruments, including obligations of the U.S. Government, its agencies and instrumentalities (including government-sponsored enterprises), certain debt obligations, including corporate debt, certain obligations of U.S. banks and certain repurchase agreements. See "Investment Objectives, Policies and Activities." The U.S. TREASURY MONEY MARKET FUND invests in short-term U.S. Treasury bonds, notes and bills. See "Investment Objectives, Policies and Activities." Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, as the investment adviser of each Fund, manages your investments. Wells Fargo Bank also provides the Funds with transfer agency, dividend disbursing agency and custodial services. Stephens is the sponsor, administrator and distributor for the Company. See "Advisory, Administration and Distribution Arrangements" and "Distribution Plan." Q. HOW MAY I PURCHASE SHARES? A. Institutional Shares of the Funds may be purchased on any day the New York Stock Exchange (the "Exchange") is open for trading. There is no sales load for purchasing Shares of either of the Funds. The minimum initial purchase amount for Shares of either of the Funds is $150,000 with minimum subsequent purchase amounts of $25,000 or more in each account. You may purchase Institutional Shares of the Funds through Stephens, Wells Fargo Bank, as transfer agent (the "Transfer Agent"), or any authorized broker/dealer or financial institution. Purchases of Shares of the Funds may be made by wire directly to the Transfer Agent. See "Purchase of Shares." Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on Shares of the Funds are declared daily and paid monthly. Dividends are automatically reinvested in additional Shares, unless you elect to receive dividends in cash. All reinvestments in Shares of the Funds are at net asset value. See "Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. On any day the Exchange is open for trading, Shares may be redeemed upon request to Stephens or the Transfer Agent directly, or through any authorized broker/dealer or financial institution. Shares may be redeemed by a request in good form in writing or, by prior arrangement, through telephone direction. Proceeds are payable by check or, for shareholders who make prior arrangements, by wire. Accounts of less than the applicable minimum initial purchase amount may be redeemed at the option of the Company. The Company does not charge for redeeming its Shares. However, the Company reserves the right to impose charges for wiring redemption proceeds. See "Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND? A. Shares of the Funds are not guaranteed or insured against loss of principal or interest, although certain of the Funds' portfolio securities may be insured or guaranteed as to repayments of principal and/or the payment of interest. Although each of the Funds seeks to maintain a stable net asset value of $1.00 per Share, there is no assurance that it will be able to do so. As with all mutual funds, there can be no assurance that the Funds will achieve their investment objectives. AS A PERCENTAGE OF AVERAGE NET ASSETS (1) After any waivers or reimbursements. * The percentages shown above state the basis on which payments will be made (except "Other Expenses," which is an estimate), and reflect fee waivers and reimbursements that are expected to continue during the current fiscal year. Absent waivers and reimbursements, "Other Expenses" and "Total Fund Operating Expenses" with respect to the Money Market Fund would have been 0.30% and 0.55%, respectively. Absent waivers and reimbursements, these percentages with respect to the U.S. Treasury Money Market Fund would have been 0.32% and 0.57%, respectively. As further described in the Prospectus under the caption "Advisory, Administration and Distribution Arrangements," Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees in circumstances where a Fund's expenses that are subject to limitations imposed under state securities laws and regulations exceed such limitations. In addition, Wells Fargo Bank and Stephens each may elect, in its sole discretion, to otherwise waive all or a portion of its respective fees or reimburse expenses. Wells Fargo Bank and Stephens each has agreed to waive its fees, through at least the current fiscal year, to the extent Total Fund Operating Expenses for Institutional Shares of either Fund would exceed 0.45% of average net assets. Any such waivers, limits or reimbursements of fees with respect to a Fund would reduce the total expenses of such Fund. Of course, there can be no assurances that voluntary fee waivers, limits and reimbursements will continue. The purpose of the foregoing table is to assist an investor in understanding the various costs and expenses that investors in Institutional Shares of the Funds will bear directly or indirectly. There are no sales loads, redemption fees or exchange fees charged by the Funds. However, the Company reserves the right to impose charges for wiring redemption proceeds. See Prospectus sections captioned "Advisory, Administration and Distribution Arrangements" and "Purchase of Shares" for more complete descriptions of the various costs and expenses applicable to the Funds. The Example should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. See Prospectus Sections captioned "Advisory, Administration and Distribution Arrangements," "Distribution Plans" and "Purchase of Shares" for more complete descriptions of the various costs and expenses applicable to the Fund. The following information has been derived from the Financial Highlights in the Funds' 1994 annual financial statements. The financial statements are incorporated by reference into the SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Funds' 1994 annual financial statements and the notes thereto. The SAI has been incorporated by reference into this Prospectus. FOR AN INSTITUTIONAL CLASS SHARE OUTSTANDING AS SHOWN U.S. TREASURY MONEY MARKET FUND FOR AN INSTITUTIONAL CLASS SHARE OUTSTANDING AS SHOWN INVESTMENT OBJECTIVES, POLICIES AND ACTIVITIES Set forth below is a description of the investment objectives and related policies of each of the Funds. As with all mutual funds, there can be no assurance that the Funds, each of which is a diversified portfolio, will achieve their respective investment objectives. The Funds invest only in U.S. dollar-denominated "Eligible Securities" with remaining maturities not exceeding thirteen months, as defined in Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), and maintain a dollar-weighted average portfolio maturity of 90 days or less. An Eligible Security is a security that is determined to present minimal credit risks and is rated in one of the two highest rating categories by the required number of nationally recognized statistical rating organizations or, if unrated, is determined to be of comparable quality to such rated securities. These determinations are made by the investment adviser under guidelines adopted by the Company's Board of Directors, although in certain instances the Board of Directors must approve or ratify the Funds' investments. The Board of Directors of the Company (or Wells Fargo Bank, under authority delegated to it as investment adviser to the Funds) will determine on an ongoing basis that any Eligible Securities purchased by the Funds present minimal credit risks. The Funds will endeavor to maintain a constant net asset value of $1.00 per Share; however, there is no assurance that this objective will be achieved. Investment Objective. The Money Market Fund seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in high-quality, short-term securities. Under normal market circumstances, this Fund invests its assets exclusively in Money Market Instruments (discussed below). U.S. TREASURY MONEY MARKET FUND Investment Objective. The U.S. Treasury Money Market Fund seeks to provide investors with a high level of current income, while preserving capital and liquidity, by investing in short-term U.S. Treasury bonds, notes and bills ("U.S. Treasury Securities"). The Fund will invest exclusively in U.S. Treasury Securities. U.S. Treasury Securities are debt obligations issued by the U.S. Government, of which the payment of interest and repayment of principal are secured by the full faith and credit of the U.S. Treasury. Treasury bonds, notes and bills differ mainly in the length of their maturities. Treasury bonds are long-term debt instruments with original maturities of ten years or more. Treasury notes are medium-term debt instruments with original maturities of one to ten years. Treasury bills are short-term debt obligations with original maturities of one year or less and are issued on a discounted basis. The U.S. Treasury Money Market Fund may only purchase U.S. Treasury Securities with remaining maturities of 13 months or less. Money Market Instruments consist of: (a) short-term securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including ernment obligations") (discussed below); (b) negotiable certificates of deposit, bankers' acceptances and fixed time deposits and other short-term obligations of domestic banks (including foreign branches) that have more than $1 billion in total assets at the time of the investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"); (c) commercial paper rated at the date of purchase "P-1" by Moody's Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by Standard & Poor's Corporation ("S&P"), or, if unrated, of comparable quality as determined by the investment adviser; (d) certain repurchase agreements (discussed below); and (e) short-term U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that at the time of investment: (i) have more than $10 billion, or the equivalent in other currencies, in total assets; (ii) are among the 75 largest foreign banks in the world as determined on the basis of assets; and (iii) have branches or agencies in the United States. The U.S. Treasury Money Market Fund invests exclusively in U.S. Treasury Securities. The Money Market Fund may invest in various types of U.S. Government obligations. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. Certain of the debt instruments in which the Funds may invest bear interest at rates that are not fixed, but float or vary with, for example, changes in specified market rates or indices or at specified intervals. Certain of these floating- and variable-rate instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The floating- and variable-rate instruments that the Funds may purchase include certificates of participation in floating- and variable-rate obligations. The Funds may invest in floating- and variable-rate obligations even if they carry stated maturities in excess of thirteen months, upon compliance with certain conditions of the SEC, in which case such obligations will be treated, in accordance with these conditions, as having maturities not exceeding thirteen months. Wells Fargo Bank, as investment adviser to each of the Funds, will monitor on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events affecting the ability of the issuer of the demand instrument to make payment when due may occur between the time a Fund elects to demand payment and the time payment is due. Such events may affect the ability of the issuer of the instrument to make payment when due, and unless such demand instrument permits same-day settlement, may affect a Fund's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The Money Market Fund may enter into repurchase agreements wherein the seller of a security to the Fund agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Money Market Fund may enter into repurchase agreements only with respect to U.S. Government obligations and other securities that are permissible investments for the Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction may be greater than thirteen months. However, the term of any repurchase agreement on behalf of the Fund will always be less than thirteen months. If the seller defaults and the value of the underlying securities has declined, the Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the Fund's disposition of the security may be delayed or limited. The Money Market Fund may not enter into a repurchase agreement with a maturity of more than seven days if, as a result, more than 10% of the market value of the Fund's total net assets would be invested in repurchase agreements with maturities of more than seven days and illiquid securities. The Fund only will enter into repurchase agreements with registered broker/dealers and commercial banks that meet guidelines established by the Company's Board of Directors and are not affiliated with the investment adviser. The Fund may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. The Money Market Fund may invest up to 25% of its assets in high-quality, short-term debt obligations of foreign branches of U.S. banks or U.S. branches of foreign banks that are denominated in and pay interest in U.S. dollars. Investments in foreign obligations involve certain considerations that are not typically associated with investing in domestic obligations. There may be less publicly available information about a foreign issuer than about a domestic issuer. Foreign issuers also are not subject to the same accounting, auditing and financial reporting standards or governmental supervision as domestic issuers. In addition, with respect to certain foreign countries, interest may be withheld at the source under foreign income tax laws, and there is a possibility of expropriation or confiscatory taxation, political or social instability or diplomatic development that could adversely affect investments in, the liquidity of, and the ability to enforce contractual obligations with respect to, securities of issuers located in those countries. Each of the Funds must comply with certain investment criteria (noted in the first paragraph of this section) pursuant to the 1940 Act, each of which is designed to provide liquidity, reduce risk and allow the Funds to maintain a stable net asset value of $1.00 per Share. Of course, the Funds cannot guarantee a $1.00 Share price. Debt securities purchased by the Funds may be subject to fluctuations in market value due to fluctuations in market interest rates; however, as noted under "Determination of Net Asset Value," the use of amortized cost valuation attempts to minimize the impact of such market interest rate fluctuations. In addition, certain types of these securities are subject to fluctuations in yield due to early prepayments on mortgages underlying such securities. Since its inception, the Funds have emphasized safety of principal and high credit quality. In particular, the internal investment policies of the Funds' investment adviser, Wells Fargo Bank have always prohibited the purchase for the Funds of many types of floating-rate derivative securities that are considered potentially volatile. The Board of Directors of the Company has formally adopted the following policies on behalf of the Funds. The following types of derivative securities ARE NOT permitted investments for the Funds: - capped floaters (on which interest is not paid when market rates move - leveraged floaters (whose interest rate reset provisions are based on a formula that magnifies changes in interest rates); - range floaters (which do not pay any interest if market interest rates move outside of a specified range); - dual index floaters (whose interest rate reset provisions are tied to more than one index so that a change in the relationship between these indexes may result in the value of the instrument falling below face - inverse floaters (which reset in the opposite direction of their index). Additionally, the Funds may not invest in securities whose interest rate reset provisions are tied to an index that materially lags short-term interest rates, such as "COFI floaters." The Funds may only invest in floating rate securities that bear interest at a rate that resets quarterly or more frequently, and which resets based on changes in standard money market rate indices such as U.S. Treasury bills, London Interbank Offered Rate, the prime rate, published commercial paper rates or federal funds rates. Each of the Funds' investment objectives, as set forth in the first paragraph of the relevant section describing each Fund's objective and policies, is fundamental; that is, the investment objective may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. If the Board of Directors determines, however, that a Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will disclose any such material changes in the then current prospectus. As matters of fundamental policy, the following apply: (i) each of the Funds may borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased by the Money Market Fund while any such outstanding borrowing exists and investments may not be purchased by the U.S. Treasury Money Market Fund while any such outstanding borrowing in excess of 5% of its net assets exists); (ii) the Money Market Fund may invest up to 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days and illiquid securities; (iii) none of the Funds may purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Fund's investment in that industry would exceed 25% of the current value of such Fund's total assets, provided that there is no limitation with respect to investments in (a) U.S. Government obligations (which includes U.S. Treasury Securities), and (b) obligations of domestic banks (for purpose of this restriction, domestic bank obligations do not include obligations of U.S. branches of foreign banks or obligations of foreign branches of U.S. banks). See "Investment Restrictions" and "Additional Permitted Investment Activities" in the SAI. The Board of Directors, in addition to supervising the actions of the investment adviser, administrator and distributor, as set forth below, decides upon matters of general policy. Pursuant to Advisory Contracts, each of the Funds is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company (other than those structured as "feeder funds") and to six other registered investment companies, each of which consist of several separately managed investment portfolios. The Advisory Contracts provide that Wells Fargo Bank shall furnish to the Funds investment guidance and policy direction in connection with the daily portfolio management of the Funds. Pursuant to the Advisory Contracts, Wells Fargo Bank furnishes to the Board of Directors periodic reports on the investment strategy and performance of each Fund. Purchase and sale orders of the securities held by each of the Funds may be combined with those of other accounts that Wells Fargo Bank manages, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for any of the Funds and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, each of the Funds, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contracts, Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.25% of the average daily net assets of each of the Money Market Fund and the U.S. Treasury Money Market Fund. From time to time, Wells Fargo Bank may waive such fees in whole or in part. In this regard, Wells Fargo Bank has agreed to waive its fees, through at least the current fiscal year, to the extent Total Fund Operating Expenses for the Institutional Class of either Fund would exceed 0.45% of average net assets. Any such waiver will reduce expenses of the Fund involved and, accordingly, have a favorable impact on the yield of such Fund. For the year ended December 31, 1994, Wells Fargo Bank received 0.25% of the Money Market Fund's average daily net assets and 0.18% of the U.S. Treasury Money Market Fund's average daily net assets as compensation for its advisory services. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into an agreement with each of the Funds under which Stephens acts as administrator for the Funds. For providing these administrative services, Stephens is entitled to receive a monthly fee from each Fund at the annual rate of 0.10% of its average daily net assets. From time to time, Stephens may waive fees from any or all of the Funds in whole or in part. Any such waiver will reduce expenses of the Fund involved and, accordingly, have a favorable impact on the yield of such Fund. The Administration Agreements between Stephens and the Funds state that Stephens shall provide as administrative services, among other things, general supervision: (i) of the operation of the Funds, including coordination of the services performed by the Funds' investment adviser, transfer agent, custodian, independent auditors and legal counsel; (ii) in connection with regulatory compliance, the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions, and preparation of proxy statements and shareholder reports for the Funds; and (iii) relative to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors. Stephens also furnishes office space and certain facilities required for conducting the business of the Funds and pays the compensation of the Company's Directors, officers and employees who are affiliated with Stephens. Stephens, as the principal underwriter of the Funds within the meaning of the 1940 Act, has entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing shares of the Funds. Stephens bears the cost of printing and mailing prospectuses to potential investors and any advertising expenses incurred by it in connection with the distribution of shares. In addition, Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Funds may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. It currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. DETERMINATION OF NET ASSET VALUE Net asset value per class of Shares of each Fund is determined by Wells Fargo Bank on each day that the Exchange is open for trading. The net asset value of a Share of a class of a Fund is the value of total net assets attributable to each class divided by the number of outstanding shares of that class. The value of net assets per class is determined daily by adjusting the net assets per class at the beginning of the day by the value of each class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each class by attributing to each class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each class as appropriate. The net asset value per class of Shares of each Fund is determined at 12:00 noon (New York time). Each of the Funds uses the amortized cost method to value its portfolio securities and attempts to maintain a constant net asset value of $1.00 per share. The amortized cost method involves valuing a security at its cost and amortizing any discount or premium over the period until maturity, regardless of the impact of fluctuating interest rates on the market value of the security. From time to time, the Company may advertise yield information with respect to a class of Shares of the Funds. Yield information is based on the historical earnings and performance of a class of Shares of a Fund and should not be considered representative of future performance. From time to time, each of the Funds may advertise its current yield and its effective yield for a class of Shares. Current yield for each class of Shares of a Fund is computed by dividing its net investment income per Share of a class of Shares earned during a specified period by its net asset value per share on the last day of such period and annualizing the result. The current yield of each class of Shares of a Fund shows the annualized income per Share generated by an investment in such a class of Shares of the Fund over a stated period. In calculating the annualized effective yield, the income earned per Share of a class of Shares is assumed to have been reinvested. The effective yield is slightly higher than the current yield because of the compounding effect of this assumed reinvestment. Additional information about the performance of each Fund is contained in the Annual Report for each Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. Investors may purchase Institutional Shares of either of the Funds on any day the Exchange is open for trading through Stephens, the Transfer Agent, or any authorized broker/dealer or financial institution with which Stephens has entered into agreements. Such broker/dealers or financial institutions are responsible for the prompt transmission of purchase, exchange or redemption orders, and may independently establish and charge additional fees to their clients for such services, other than services related to purchase orders, which would reduce the clients' overall yield or return. The Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. Institutional Shares of each Fund are only offered to investors that meet certain minimum purchase requirements. The initial minimum investment by a single investor in Institutional Shares of a Fund is $150,000. Once an account balance of $150,000 in Institutional Shares of a single Fund is established, an investor may only make subsequent additional purchases of Institutional Shares of such Fund in increments of $25,000. There is no minimum purchase requirement for reinvestment of dividends or capital gains. Investments in Institutional Shares of more than one Fund, or Institutional Shares held in more than one account, may not be aggregated for purposes of determining whether a particular investor meets the minimum purchase requirements. There is no limitation on the amount that can be redeemed at one time, although a Fund may limit new purchases of Institutional Shares if an investor attempts to avoid the minimum initial purchase requirements by making partial redemptions shortly following an initial purchase of $150,000. The Company reserves the right to reject any purchase order. All funds will be invested in full and fractional Shares. Checks will be accepted for the purchase of either Fund's Shares subject to collection at full face value in U.S. dollars. Inquiries may be directed to the Company at the address or telephone number on the front cover of the Prospectus. A salesperson or any other person or entity entitled to receive compensation for selling or servicing shares of any of the Funds may receive different compensation with respect to one class of Shares over another. Shares of the Funds are offered continuously at the net asset value next determined after a purchase order is effective. No sales load is imposed. Account Applications for Shares of either of the Funds will become effective when an investor's bank wire order or check is converted into federal funds. If payment is transmitted by the Federal Reserve Wire System, the Account Application will become effective upon receipt. In addition, if investors, with the prior approval of the Company, notify the Company at or before 12:00 noon (New York time) on any business day that they intend to wire federal funds to purchase Shares of either of the Funds, the Account Application will be executed at the net asset value per Share determined at 12:00 noon (New York time) the same day. Wire transmissions may, however, be subject to delays of several hours, in which event the effectiveness of the order will be delayed. Payments transmitted by a bank wire other than the Federal Reserve Wire System may take longer to be converted into federal funds. When payment for Shares of either of the Funds is by a check that is drawn on any member bank of the Federal Reserve System, federal funds normally become available to the Fund on the business day after the day the check is deposited. Checks drawn on a non-member bank or a foreign bank may take substantially longer to be converted into federal funds and, accordingly, may delay the execution of an order. By investing in Institutional Shares of either of the Funds, a shareholder appoints the Transfer Agent, as agent, to establish an open account to which all Shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional Shares. See "Dividends and Distributions." Stock certificates for the Funds will not be issued. Shares of either of the Funds may be purchased in accordance with the following procedures: INITIAL PURCHASES OF FUND SHARES BY WIRE 1. Telephone toll free (800) 572-7797. Give the name of the Fund in which the investment is to be made and the name(s) in which the Shares are to be registered, the address, social security or tax identification number (where applicable) of the person or entity in whose name(s) the Shares are to be registered, dividend payment election, amount to be wired, name of the wiring bank and name and telephone number of the person to be contacted in connection with the order. An account number will be assigned. 2. Instruct the wiring bank, which may charge a separate fee, to transmit the specified amount in federal funds ($150,000 or more) to: Wire Purchase Account Number: 4068-000462 Attention: Overland Express (Name of Fund -- Institutional Shares) Account Name(s): (name(s) in which to be registered) Account Number: (as assigned by telephone) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price next determined after the Account Application is received and accepted. INITIAL PURCHASES OF FUND SHARES BY MAIL 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $150,000 or more, payable to "Overland Express (Name of Fund -- Institutional Shares)" at its mailing address set forth above. Additional purchases of $25,000 or more may be made by instructing the Funds' Transfer Agent to debit an approved account designated in the Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail by mailing a check payable to "Overland Express (Name of Fund -- Institutional Shares)" to the above address. Write the Fund account number on the check and include the detachable stub from a Statement of Account or a letter providing the account number. PURCHASES THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Purchase orders for Institutional Shares of either of the Funds placed through broker/dealers and financial institutions by 12:00 noon (New York time) on any business day that the Exchange is open for trading, including orders for which payment is to be made from free cash credit balances in securities accounts held by a dealer, will be effective on the same day the order is placed if notice is provided to the Transfer Agent by 12:00 noon (New York time) and federal funds are received by the Transfer Agent before the close of business. Purchase orders that are received by a broker/dealer or financial institution after 12:00 noon (New York time) on any business day that the Exchange is open for trading or that are not received by the Transfer Agent before the close of business, generally will be effective on the next business day following the day the order is placed. The broker/dealer or financial institution is responsible for the prompt transmission of purchase orders to the Transfer Agent. A broker/dealer or financial institution that is involved in a purchase transaction may charge separate account, service or transaction fees. Financial institutions may be required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. Institutional Shares of either of the Funds may be exchanged for Institutional Shares of the other Fund (as well as Class A Shares of any other investment portfolio of the Company) in an identically registered account (provided that shares of the investment portfolio to be acquired are registered for sale in your state of residence) at respective net asset values if the shares being acquired carry no sales load or the shares being exchanged were acquired in exchange for shares on which an equivalent sales load was paid. Otherwise, applicable sales loads or sales load differentials will be charged on an exchange. A shareholder may exchange Shares by writing the Transfer Agent as indicated below under Redemption by Mail, or by calling the Transfer Agent or the shareholder's authorized broker/dealer or financial institution, unless the shareholder has elected not to authorize telephone exchanges in the Account Application (in which case the shareholder may subsequently authorize such telephone exchanges by completing a Telephone Exchange Authorization Form and submitting it to the Transfer Agent in advance of the first such exchange). The Transfer Agent's number for exchanges is (800) 572-7797. Procedures applicable to redemption of the Funds' Shares also are applicable to exchanging Shares, except that, with respect to an exchange transaction between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. The Company reserves the right to limit the number of times Shares may be exchanged between portfolios, or to reject in whole or in part any exchange request into a fund when management believes that such action would be in the best interest of the fund's other shareholders, such as when management believes that such action would be appropriate to protect such fund against disruptions in portfolio management resulting from frequent transactions by those seeking to time market fluctuations. Any such rejection will be made by management on a prospective basis only, upon notice to the shareholder given not later than 10 days following such shareholder's most recent exchange. The Company reserves the right to modify or discontinue exchange privileges at any time. Under SEC rules, 60 days prior notice of any amendments or termination of exchange privileges will be given to shareholders, except under certain extraordinary circumstances. The exchange privilege is not an option or a right to purchase shares, but is permitted under the current policies of the respective Funds and portfolios of the Company. A capital gain or loss for tax purposes may be realized upon an exchange, depending upon the cost or other basis of shares redeemed. Telephone redemption or exchange privileges are made available to the shareholder automatically upon opening an account, unless the shareholder declines such privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine. If the Transfer Agent does not follow such procedures, the Company and the Transfer Agent may be liable for any losses attributable to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Institutional Shares of a Fund may be redeemed at their next determined net asset value after receipt of a request in proper form by the Transfer Agent directly or through any authorized broker/dealer or financial institution. The Company does not charge for redemption transactions. However, a broker/dealer or financial institution that is involved in a redemption transaction may charge separate account, service or transaction fees. Redemption orders for Institutional Shares of any of the Funds received by an authorized broker/dealer or financial institution on any day that the Fund is open and received by the Transfer Agent before 12:00 noon (New York time) on the same day will be executed at the net asset value determined at 12:00 noon (New York time) on that day. Redemption orders for any of the Funds received by authorized broker/dealers or financial institutions on any day that the Fund is open and received by the Transfer Agent after 12:00 noon (New York time) will be executed at the net asset value determined at 12:00 noon (New York time) on the next day that the Fund is open. Redemption proceeds ordinarily will be remitted within seven days after the order is received in proper form, except proceeds may be remitted over a longer period to the extent permitted by the SEC under extraordinary circumstances. If an expedited redemption is requested, redemption proceeds will be distributed only if the check used for investment is deemed to be cleared for payment by the shareholder's bank, currently considered by the Company to be a period of 15 days after investment. The redemption proceeds, of course, may be more or less than cost. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. 1. Write a letter of instruction. Indicate the dollar amount of or number of Shares to be redeemed. Refer to the shareholder's Fund account number and provide either a social security or a tax identification number (where applicable) of the person or entity in whose name(s) the Shares are registered. 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the Shares, all must sign. 3. If Shares to be redeemed have a value of $5,000 or more, or redemption proceeds are to be made to someone other than the shareholder at its address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the FDIC, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation may be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. Mail the letter to the Transfer Agent at the mailing address set forth under "Purchase of Shares." Unless other instructions are given in proper form, a check for the proceeds of redemption will be sent to the shareholder's address of record. A shareholder may request an expedited redemption of Shares by letter or telephone (unless the shareholder has elected not to authorize telephone redemptions on the Account Application or other form that is on file with the Transfer Agent) on any day the Funds are open for business. See "Exchange Privileges" for additional information regarding telephone redemption privileges. To request expedited redemption by telephone, please call the Transfer Agent at (800) 572-7797. To request expedited redemption by mail, mail your request for expedited redemption to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchases of Fund Shares by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more will be wired or credited to the shareholder's bank indicated in the Account Application or wired to an authorized broker/dealer or financial institution designated in the Account Application. The Company reserves the right to impose charges for wiring redemption proceeds. When proceeds of an expedited redemption are to be paid to someone other than the shareholder, to an address other than that of record, or to a bank, broker/dealer or other financial institution that has not been predesignated, the expedited redemption request must be made by letter and the signature(s) on the letter must be guaranteed, regardless of the amount of the redemption. If an expedited redemption request is received by the Transfer Agent by 12:00 noon (New York time) on a day the Funds are open for business, the redemption proceeds will be transmitted to the shareholder's bank or predesignated broker/dealer or financial institution on the same day (assuming the investment check has cleared as described above), absent extraordinary circumstances. A check for proceeds of less than $5,000 will be mailed to the shareholder's address of record, except that, in the case of investments in the Company that have been effected through broker/dealers, banks and other institutions that have entered into special arrangements with the Company, the full amount of the redemption proceeds may be transmitted by wire or credited to a designated account. The Company reserves the right to impose charges for wiring redemption proceeds. REDEMPTIONS THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Unless an investor has made other arrangements, and informed the Transfer Agent of such arrangements, proceeds of redemptions made through authorized broker/dealers and financial institutions will be credited to the shareholder's account with such broker/dealer or institution. A redeeming shareholder may request a check from the broker/dealer or financial institution or may elect to retain the redemption proceeds in such shareholder's account. The broker/dealer or financial institution may benefit from the use of the redemption proceeds prior to the clearance of a check issued to a redeeming shareholder for such proceeds or prior to disbursement or reinvestment of such proceeds on behalf of the shareholder. The proceeds of redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. Due to the high cost of maintaining small accounts, the Company reserves the right to redeem accounts that fall below $1,000. Prior to such a redemption, a shareholder will be notified in writing and permitted 30 days to make additional investments to raise the account balance to the specified minimum. Each of the Funds intends to declare as a dividend substantially all of its net investment income for each class at the close of each business day to shareholders of record at 12:00 noon (New York time) on the day of declaration. Shares purchased will begin earning dividends on the day the purchase order settles and shares redeemed will earn dividends through the day prior to the date of redemption. Net investment income for a Saturday, Sunday or holiday will be declared as a dividend to shareholders of record at 12:00 noon (New York time) on the previous business day. Dividends of each Fund declared in, and attributable to, any month will be paid early in the following month. Shareholders of any of the Funds who redeem Shares prior to a dividend payment date will be entitled to all dividends declared but unpaid prior to redemption on such Shares on the next dividend payment date. Net capital gains of each Fund, if any, will be distributed annually (or more frequently to the extent permitted to avoid imposition of the 4% excise tax described in the SAI or in order to maintain the net asset value of the Fund's Shares at $1.00 per Share). Dividends and capital gain distributions paid by each of the Funds will be invested in additional Shares of the same Fund at net asset value and credited to the shareholder's account on the payment date or, at the shareholder's election, paid by check. Dividend checks and Statements of Account will be mailed approximately three business days after the payment date. There may be certain differences in fees (e.g. transfer agent fees) between Class A Shares and Institutional Shares of the Funds that would affect their relative dividends. By complying with the applicable provisions of the Code, the Funds will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to their shareholders. Dividends from the investment income (which includes net short-term capital gains, if any) declared and paid by the Funds will be taxable as ordinary income to their shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional Shares, they will be taxable. Generally, dividends are taxable to shareholders at the time they are paid. However, dividends declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends are actually paid no later than January 31 of the following year. You may be eligible to defer the taxation of dividend and capital gain distributions on shares of the Fund which are held under a qualified tax-deferred retirement plan. The Funds intend to pay out all their net investment income and net realized capital gains (if any) for each year. The Funds' dividends will not qualify for the dividends-received deduction allowed to corporate shareholders. The Funds may be required to pay withholding and other taxes imposed by foreign countries generally at rates from 10% to 40%, which would reduce such Funds' investment income. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. It is not anticipated that shareholders will be entitled to take a foreign tax credit or deduction for such foreign taxes. The Funds will inform you of the amount and nature of Fund dividends and capital gain distributions. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Fund if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. All investors should consult their individual tax advisors with respect to their particular tax situations as well as the state and local tax status of investments in Shares of the Funds. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank has been retained to act as the Funds' custodian and transfer and dividend disbursing agent. Wells Fargo Bank performs the custodial services at its address above. The transfer and dividend disbursing agency activities are performed at 525 Market Street, San Francisco, California 94105. The Company, an open-end, management investment company, was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. The Company's Board of Directors currently offers twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Money Market Fund, the Municipal Income Fund, the Overland Sweep Fund, the Short-Term Government-Corporate Income Fund, the Short-Term Municipal Income Fund, the Strategic Growth Fund, the U.S. Treasury Money Market Fund, and the Variable Rate Government Fund. The Board of Directors may, in the future, authorize the issuance of shares of capital stock representing additional series or investment portfolios. All shares of the Company have equal voting rights and will be voted in the aggregate, and not by series or class, except where voting by series or class is required by law or where the matter involved affects only one series or class. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required to elect Directors under the 1940 Act; however, shareholders are entitled to call a meeting of shareholders for purposes of voting on removal of a Director or Directors. A more detailed statement of the voting rights of shareholders is contained in the SAI. All shares of the Company, when issued, will be fully paid and nonassessable. In addition to the Institutional Class of Shares, each Fund also offers a second class of shares -- the Class A Shares -- to retail investors. Unlike the Institutional Shares, the Class A Shares are subject to a Distribution Plan (Rule 12b-1 fees). For more information about this class of shares, see a current prospectus for the Class A Shares, available from the Company at the telephone number set forth on the cover page. DIVIDEND DISBURSING AGENT AND CUSTODIAN Wells Fargo Bank, N.A. FOR MORE INFORMATION ABOUT THE FUND, OR WRITE: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. Stephens Inc. -- Sponsor, Administrator and Distributor Wells Fargo Bank, N.A. -- Investment Adviser, Transfer and Dividend Disbursing Overland Express Funds, Inc. (the "Company") is a professionally managed, open-end, series investment company. This Prospectus contains information about one of the funds in the Overland Express Family of Funds -- the MUNICIPAL INCOME FUND (THE "FUND"). The Fund seeks to provide investors with a high level of income, consistent with the preservation of capital, by investing primarily in a diversified portfolio of high quality, medium- to long-term municipal securities issued by or on behalf of states, territories and possessions or commonwealths of the United States and District of Columbia or their political subdivisions, authorities, agencies and instrumentalities, the income of which is exempt from federal income tax, but subject to the federal alternative minimum tax. This Prospectus describes two classes of shares of the Fund -- Class A Shares and Class D Shares. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Fund. A Statement of Additional Information dated May 1, 1995, containing additional and more detailed information about the Fund (the "SAI"), has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. The SAI is available without charge and can be obtained by writing the Company at P.O. Box 63084, San Francisco, CA 94163 or by calling the Company at the telephone number printed above. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUND, FOR WHICH IT IS COMPENSATED. STEPHENS INC. ("STEPHENS"), WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK IS THE SPONSOR AND DISTRIBUTOR FOR THE FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 The Company, as an open-end investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Fund and its investment objective. Q. WHAT IS THE FUND'S INVESTMENT OBJECTIVE? A. The MUNICIPAL INCOME FUND seeks to provide investors with a high-level of income, consistent with the preservation of capital, by investing primarily in a diversified portfolio of high-quality, medium- to long-term municipal securities issued by or on behalf of states, territories, and possessions or commonwealths of the United States and the District of Columbia or their political subdivisions, authorities, agencies and instrumentalities, the income of which is exempt from federal income tax, but subject to the federal alternative minimum tax ("tax-advantaged"). As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. Q. WHAT ARE PERMISSIBLE INVESTMENTS? A. Under normal market conditions, the Fund invests at least 80% of its net assets in tax-advantaged municipal securities that at the time of purchase are assigned the highest rating by a nationally recognized statistical rating organization ("NRSRO") or, if unrated, are of comparable quality as determined by Wells Fargo Bank, the Fund's investment adviser. The Fund may invest in mortgage revenue bonds. The Fund also may invest in shorter-term municipal notes and municipal commercial paper. In addition, pending investment of funds, in anticipation of redemption or to maintain a "defensive" posture when determined appropriate, the Fund may invest temporarily in cash or taxable securities. See "Investment Objectives and Policies" and "Additional Permitted Investment Activities." Q. WHO IS THE INVESTMENT ADVISER? A. Wells Fargo Bank serves as the investment adviser of the Fund. Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. See "Advisory, Administration and Distribution Arrangements." Q. WHO IS THE SPONSOR, ADMINISTRATOR AND DISTRIBUTOR? A. Stephens serves as the sponsor, administrator and distributor for the Company. Stephens is entitled to receive a monthly administration fee at the annual rate of 0.10% of the average daily net assets of the Fund. See "Advisory, Administration and Distribution Arrangements." Q. HOW MAY I PURCHASE SHARES? A. Shares of the Fund may be purchased on any day the New York Stock Exchange (the "Exchange") is open for trading. There is a maximum sales load of 3.00% (3.09% of the net amount invested) for purchasing Class A Shares of the Fund. Class D Shares are subject to a maximum contingent deferred sales charge of 1.00% of the lesser of net asset value at purchase or net asset value at redemption. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for shares purchased through the Systematic Purchase Plan and $250 for shares purchased through qualified retirement plans. The minimum subsequent purchase amounts is $100 or more. You may purchase shares of the Fund through Stephens, Wells Fargo Bank, as transfer agent (the "Transfer Agent"), or any authorized broker/dealer or financial institution. Purchases of shares of the Fund may be made by wire directly to the Transfer Agent. The Fund may pay to the distributor a monthly fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A Shares and a monthly fee at an annual rate of up to 0.50% of the Fund's average daily net assets attributable to Class D Shares to compensate the Distributor for distribution-related services provided by it or to reimburse it for other distribution-related expenses. See "Purchase of Shares" and "Distribution Plans." The Fund also may pay servicing agents a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class D Shares to compensate them for certain services. See "Servicing Plan." Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on shares of the Fund are declared daily and paid monthly. Dividends are automatically reinvested in additional shares of the same class of the Fund unless you elect to receive dividends by check. Any capital gains will be distributed annually and may be reinvested in Fund shares of the same class or paid by check at the shareholder's election. All reinvestments of dividends and/or capital gain distributions in shares of the Fund are effected at the then current net asset value free of any sales load. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of the same class of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The Fund's net investment income available for distribution to holders of the Fund's Class D Shares is reduced by the amount of servicing fees payable to servicing agents under the Servicing Plan (as defined below). See "Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. On any day the Exchange is open, shares may be redeemed upon request to Stephens or the Transfer Agent directly or through any authorized broker/dealer or financial institution. Shares may be redeemed by a request in good form in writing or through telephone direction. Proceeds are payable by check. Accounts of less than the applicable minimum initial purchase amount may be redeemed at the option of the Company. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, the Company does not charge for redeeming its shares. However, the Company reserves the right to impose charges for wiring redemption proceeds. See "Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND? A. An investment in the Fund is not insured against loss of principal. When the value of the securities that the Fund owns declines, so does the value of your Fund shares. The portfolio securities of the Fund are subject to interest rate risk. Interest rate risk is the risk that increases in market interest rates may adversely affect the value of the municipal securities in which the Fund invests and hence the value of your investment in the Fund. The values of such securities generally change inversely to changes in market interest rates. The Fund, although it invests primarily in high-quality municipal securities, is subject to credit risk. Credit risk is the risk that the issuers of the debt securities in which the Fund invests may default on the payment of principal and/or interest. The mortgage-revenue bonds in which the Fund invests may be redeemed prior to maturity. Such redemptions tend to increase when interest rates decline, and may present the Fund with more principal to invest at lower rates. You should be prepared to accept some risk with the money you invest in the Fund. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. Q. WHAT ARE DERIVATIVES AND DOES THE FUND USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. Some of the permissible investments described in this Prospectus, such as variable-rate instruments which have an interest rate that is reset periodically based on an index, can be considered derivatives. Some derivatives may be more sensitive than direct securities to changes in interest rates or sudden market moves. Some derivatives also may be susceptible to fluctuations in yield or value due to their structure or contract terms. Q. WHAT STEPS DOES THE FUND TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser to the Fund, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with the Fund's investment objective, does not expose the Fund to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by the Fund also is subject to broadly applicable investment policies. For example, the Fund may not invest more than a specified percentage of its assets in "illiquid securities," including those derivatives that do not have active secondary markets. Nor may the Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) After any waivers and reimbursements * See "Contingent Deferred Sales Charge." ** As further described in the Prospectus under the caption "Advisory, Administration and Distribution Arrangements," Stephens and Wells Fargo Bank each has agreed to waive or reimburse all or a portion of its respective fees in circumstances where Fund expenses that are subject to limitations imposed under state securities laws and regulations exceed such limitations. In addition, Stephens and Wells Fargo Bank each may elect, in its sole discretion, to waive its respective fees or reimburse expenses. Also, the Company and its Distributor have agreed to limit the Fund's payment of 12b-1 fees relating to Class A Shares, at least through the end of the current fiscal year, to a maximum of 0.15% of the average daily net assets attributable to Class A Shares. The maximum permissible 12b-1 fee relating to Class A Shares is 0.25% of such assets. Any such waivers, limits or reimbursements would reduce the total expenses of the Fund. There can be no assurance that waivers and reimbursements will continue. The percentages shown above with respect to Class A Shares and Class D Shares under "Total Other Expenses" and "Total Fund Operating Expenses" are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Absent waivers and reimbursements, "Total Other Expenses" and "Total Fund Operating Expenses" with respect to the Class A Shares would have been 0.23% and 0.98%, respectively. Absent waivers and reimbursements, these percentages, with respect to Class D Shares, would have been 0.74% and 1.74%, respectively. Long-term shareholders of the Fund could pay more in distribution related charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers, Inc. ("NASD"). There can be no assurances that the waivers, limits and reimbursements will continue. The purpose of the foregoing tables is to assist you in understanding the various costs and expenses that an investor in the Fund will bear directly or indirectly. There are no other sales loads, redemption fees or exchange fees charged by the Fund. However, the Company reserves the right to impose charges for wiring redemption proceeds. The Examples should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. See Prospectus sections captioned "Advisory, Administration and Distribution Arrangements," "Distribution Plan" and "Purchase of Shares" for more complete descriptions of the various costs and expenses applicable to the Fund. The following information has been derived from the Financial Highlights in the Fund's 1994 annual financial statements. The financial statements are incorporated by reference into the SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Fund's 1994 annual financial statements and the notes thereto. The SAI has been incorporated by reference into this Prospectus. FOR A CLASS A SHARE OUTSTANDING AS SHOWN FOR A CLASS D SHARE OUTSTANDING AS SHOWN INVESTMENT OBJECTIVE -- The Fund seeks to provide investors with a high level of income, consistent with the preservation of capital, by investing primarily in a diversified portfolio of high quality, medium- to long-term municipal securities issued by or on behalf of states, territories, and possessions or commonwealths of the United States and the District of Columbia or their political subdivisions, authorities, agencies and instrumentalities, the income of which is exempt from federal income tax, but subject to the federal alternative minimum tax ("tax-advantaged"). The investment adviser may rely either on the opinion of counsel to the issuer of the municipal securities or on Internal Revenue Service rulings regarding the tax treatment of the securities. Since a significant portion of the Fund's income is expected to be subject to the alternative minimum tax, investors who may be subject to such tax should consult their tax advisors prior to investing in the Fund. As with all mutual funds, there can no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. As a matter of fundamental policy, the Fund will, under normal market conditions, invest at least 80% of its net assets in tax-advantaged municipal securities that, at the time of purchase, are assigned the highest rating by an NRSRO or, if unrated, are considered by Wells Fargo Bank, as the Fund's investment adviser and under the supervision of the Board of Directors, to be of comparable quality. In addition, under normal market conditions, the Fund will seek to invest substantially all of its net assets in the highest rated, medium- to long-term, tax-advantaged municipal securities, except that it will maintain that portion of its net assets in short-term, high quality investments reasonably considered necessary to meet redemption requests and liquidity needs and may maintain a higher portion in such investments for temporary defensive purposes. The highest rating assigned by Standard & Poor's Corporation ("S&P") is "AAA" for state and municipal bonds, "SP-1" for state and municipal notes, and "A-1" for state and municipal commercial paper. The highest rating assigned by Moody's Investors Service, Inc. ("Moody's") is "Aaa," "MIG 1," and "P-1" for state and municipal bonds, notes and commercial paper, respectively. Instruments assigned these ratings by S&P or Moody's are judged by such organizations to be high quality instruments which present minimal risks and offer a strong capacity for repayment of principal and interest. If a municipal security ceases to be rated or is downgraded below the highest quality rating after purchase by the Fund, the Fund may retain or dispose of such security. In any event, the Fund does not intend to purchase or retain any municipal security that is rated below the top two ratings assigned by an NRSRO, or, if unrated, is considered by the investment adviser to be of comparable quality. A description of ratings is contained in the Appendix to the SAI. Under normal market conditions, the Fund may not invest more than 25% of its assets in securities of any one industry or in municipal securities of any single state, territory, possession, commonwealth, or the District of Columbia. MUNICIPAL BONDS -- Municipal bonds generally have a maturity at the time of issuance of up to thirty years. They are principally classified either as "general obligation" bonds or "revenue" bonds. General Obligation bonds are secured by the pledge of the municipality's full faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable only from the revenues derived from a particular project or facility, or in some cases, from the proceeds of special excise tax, and generally are dependent solely on a specific revenue source. The Fund may invest in Mortgage Revenue Bonds ("MRBs"), a specific type of municipal bond. MRBs are usually limited obligations issued by a municipality, its instrumentality or its special purpose authority. MRBs do not represent indebtedness of these issuers, but are payable from and secured by certain revenues and assets pledged as collateral. MRBs may be collateralized by a pool of mortgage-backed securities ("MBSs") that are either: (i) guaranteed as to timely payment of principal and interest by the Government National Mortgage Association ("GNMA"), a wholly owned corporate instrumentality of the United States; (ii) guaranteed as to timely payment of principal and interest by the Federal National Mortgage Association ("FNMA"), a publicly owned, government sponsored corporation; or (iii) guaranteed as to full and timely payment of interest and ultimate payment of principal by the Federal Home Loan Mortgage Corporation ("FHLMC"), a publicly chartered corporation. GNMA guarantees are backed by the full faith and credit of the United States. FNMA and FHLMC guarantees are not backed by the full faith and credit of the United States. However, because FNMA and FHLMC are instrumentalities of the U.S. Government, the MBSs backed by their guarantees are high quality instruments that present minimal credit risks. The MBSs, in turn, are collateralized by pools of first-lien mortgage loans ("Mortgage Loans") made to persons of low-to-moderate income to purchase new and existing one- to four-family residences located in the applicable municipality or state or to developers for the acquisition and construction of multi-family housing for low-to-moderate income residents or senior citizens. The Mortgage Loans underlying the MBSs may themselves be insured or guaranteed by the Federal Housing Administration or the Veterans Administration. MRBs purchased by the Fund generally have an initial scheduled maturity of between 30 and 40 years. MRBs are subject to the risk of redemption prior to maturity. Such redemption is more likely to occur during periods of declining interest rates. If an MRB is redeemed prior to maturity, the Fund may have to reinvest the proceeds at a rate of interest which is lower than the rate on the MRB that was redeemed. The Fund may also invest in municipal bonds which are covered by insurance guaranteeing the scheduled payment of principal and interest until their maturity ("Insured Municipal Bonds"). This insurance feature minimizes the risks to the Fund and its shareholders associated with payment delays or defaults in these portfolio securities, but does not guarantee the market value of these portfolio securities or the value of the shares of the Fund. The price paid or received for an Insured Municipal Bond may be higher than the price that would otherwise be paid or received for the municipal bond absent the insurance. In addition, an Insured Municipal Bond is likely to receive a higher rating by an NRSRO than it would receive without the insurance. Pending the investment of proceeds from the sale of Fund shares or portfolio securities, in anticipation of redemptions, to maintain liquidity or for temporary defensive purposes, the Fund will invest in other municipal securities, which include: MUNICIPAL NOTES -- Municipal notes purchased by the Fund generally have maturities at the time of issuance of three years or less. Subject to its investment objective and policies, the Fund may invest in municipal notes that are rated at the date of purchase "MIG 2" (or "VMIG 2" in the case of an issue a variable rate demand feature) or better by Moody's, or "SP-2" or better by S&P, or notes that are not rated but that are considered by the investment adviser to be of comparable quality. Municipal notes generally are issued in anticipation of the receipt of tax funds, of the proceeds of bond placements or of other revenues. The ability of an issuer to make payments is, therefore, dependent on such tax receipts, proceeds from bond sales or other revenues, as the case may be. The Fund also may invest in certain "private activity" bonds or notes, such as pollution control bonds, the interest on which also may be subject to the alternative minimum tax. See discussion in "Taxes" below. MUNICIPAL COMMERCIAL PAPER -- Municipal commercial paper is a debt obligation with a stated maturity of 270 days or less that is issued to finance seasonal working capital needs or as short-term financing in anticipation of longer-term debt. Subject to its investment objective and policies, the Fund may invest in municipal commercial paper that is rated at the date of purchase "P-1" or "P-2" by Moody's or "A-1+," "A-1" or "A-2" by S&P, or municipal commercial paper that is not rated but is considered by the Investment Adviser to be of comparable quality. The value of the Fund's portfolio of municipal securities will vary as a result of interest changes and the issuer's ability, or the market's perception of the issuer's ability, to meet its principal and interest obligations. Pending the investment of proceeds from the sale of Fund shares or proceeds from the sale of portfolio securities, in anticipation of redemptions or to maintain a "defensive" posture when, in the opinion of Wells Fargo Bank, as investment adviser, it is advisable to do so because of market conditions, the Fund may elect to invest temporarily up to 20% of the current value of its net assets in cash reserves or in taxable securities, including (i) direct obligations of the U.S. Treasury; (ii) commercial paper rated at the date of purchase "P-1" by Moody's or "A-1" or "A-1+" by S&P; and (iii) shares of unaffiliated open-end, management investment companies that invest primarily in high-quality, short-term securities, and that have a fundamental policy of investing, under normal market circumstances, at least 80% of their net assets in obligations that are exempt from federal income taxes and are not subject to the alternative minimum tax. Such investment companies can be expected to charge management fees and other operating expenses that would be in addition to those charged by the Fund. However, the investment adviser has undertaken to waive its advisory fees with respect to Fund assets so invested (except when such purchase is part of a plan of merger, consolidation, reorganization or acquisition). In no event may the Fund, together with any company or companies controlled by it, own more than 3% of the total outstanding voting stock of any such investment company, nor may the Fund, together with any controlled company or companies, invest more than 5% of its assets in any one such investment company or invest more than 10% of its assets in securities of all such investment companies combined. The Fund may purchase portfolio securities on a when-issued basis, in which case delivery and payment normally take place within 45 days after the date of the commitment to purchase. The Fund will only make commitments to purchase securities on a when-issued basis with the intention of actually acquiring the securities, but may sell them before the settlement date if it is deemed securities are subject to market fluctuation, and no income accrues to the purchaser during the period prior to issuance. Certain of the debt instruments that the Fund may purchase bear interest at rates that are not fixed, but vary with changes in specified market rates or indices or at specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The floating- and variable-rate instruments that the Fund may purchase include certificates of participation in floating- and variable-rate obligations purchased from banks. With respect to the tax-exempt status of these certificates, the investment adviser may rely upon either the opinion of counsel or Internal Revenue Service rulings issued with respect thereto. Wells Fargo Bank, as investment adviser, monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events occurring between the date the Fund elects to demand payment on a floating- or variable-rate instrument and the date payment is due may affect the ability of the issuer of the instrument to make payment when due, and unless such demand instrument permits same-day settlement, may affect the Fund's right to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided an active secondary market exists. The Fund may purchase debt obligations, including municipal securities, certificates of participation, commercial paper and other short-term obligations, backed by an irrevocable letter of credit of a bank, savings and loan association or insurance company which assumes the obligation for payment of principal and interest in the event of default by the issuer. Letter of credit-backed investments must, in the opinion of Wells Fargo Bank, as investment adviser, be of investment quality comparable to other permitted investments of the Fund. The Fund's investment objective, as set forth in the first paragraph of the section describing the Fund's investment objective and policies, is fundamental; that is, the investment objective may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. If the Board of Directors determines, however, that the Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will disclose any such material changes in the then current prospectus. In addition, as a matter of fundamental policy, the Fund may borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased while any such outstanding borrowing exceeds 5% of the Fund's net assets). As a matter of non-fundamental policy, the Fund may invest up to 10% of the current value of its net assets in restricted securities and other illiquid securities. ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS The Board of Directors, in addition to supervising the actions of the investment adviser, administrator and distributor, as set forth below, decide upon matters of general policy. Pursuant to an Advisory Contract, the Fund is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets for individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company (other than those structured as "feeder funds"), and to six other registered open-end management investment companies, which consist of several separately managed investment portfolios. The Advisory Contract provides that Wells Fargo Bank shall furnish to the Fund investment guidance and policy direction in connection with the daily portfolio management of the Fund. Pursuant to the Advisory Contract, Wells Fargo Bank furnishes to the Board of Directors periodic reports on the investment strategy and performance of the Fund. Purchase and sale orders of the securities held by the Fund may be combined with those of other accounts that Wells Fargo Bank manages, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for the Fund and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, the Fund, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contract, Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. From time to time, Wells Fargo Bank may waive such fee in whole or in part. Any waiver would reduce expenses of the Fund and, accordingly, have a favorable impact on the yield or return of the Fund. For the year ended December 31, 1994, Wells Fargo Bank was paid 0.40% of the average daily net assets of the Fund as compensation for its services as investment adviser. Mr. David Wines is responsible for the day-to-day management of the Municipal Income Fund. Mr. Wines has managed tax-exempt fixed-income portfolios for over a decade. Prior to joining Wells Fargo Bank in 1990, he held senior investment management positions for both Matson Navigation Company, Inc. and The Electric Power Research Institute, a research consortium for the electric power industry. He holds a B.S. in finance from the University of Oregon, an M.B.A. from Golden Gate University and is a member of the Security Analysts of San Francisco. Mr. Wines has co-managed the Fund since July 1991. Ms. Mary Sebrell is also responsible for the day-to-day management of the Municipal Income Fund. Ms. Sebrell has managed municipal bond portfolios at Wells Fargo Bank for 13 years; her total municipal investment experience exceeds 20 years. Prior to joining Wells Fargo Bank, she worked at John Nuveen and Company, a firm specializing in municipal investments. She holds a B.A. from a member of the National Federation of Municipal Analysts and has served as the program chairperson for the California Chapter's meeting presentations. Ms. Sebrell has co-managed the Fund since July 1991. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into an agreement with the Fund under which Stephens acts as Administrator for the Fund. For these administrative services, Stephens is entitled to receive from the Fund a monthly fee at the annual rate of 0.10% of its average daily net assets. From time to time, Stephens may waive fees from the Fund in whole or in part. Any such waiver will reduce expenses of the Fund and, accordingly, have a favorable impact on the yield and total return of the Fund. The Administration Agreement between Stephens and the Fund states that Stephens shall provide as administrative services, among other things, general supervision (i) of the operation of the Fund, including coordination of the services performed by the Fund's investment adviser, transfer agent, custodian, independent auditors and legal counsel; (ii) in connection with regulatory compliance, including the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions, and preparation of proxy statements and shareholder reports for the Fund; and (iii) relative to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors. Stephens also furnishes office space and certain facilities required for conducting the business of the Fund and pays the compensation of the Company's directors, officers and employees who are affiliated with Stephens. Stephens, as the principal underwriter of the Fund within the meaning of the Investment Company Act of 1940 (the "1940 Act"), has also entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing Class A Shares and Class D Shares of the Fund. The Distribution Agreement provides that Stephens shall act as agent for the Fund for the sale of its Class A Shares and Class D Shares and may enter into selling agreements with broker/dealers or financial institutions to market and make available Class A Shares and Class D Shares to their respective customers. Under the Distribution Agreement, Stephens is entitled to receive from the Fund a monthly fee at an annual rate of up to 0.25% of the average daily net assets of the Class A Shares Fund and a monthly fee at an annual rate of up to 0.50% of the daily net assets of the Class D Shares of the Fund. The actual fee payable to Stephens is determined, within such limits, from time to time by mutual agreement between the Company and Stephens, and may not exceed the maximum amount payable under the Rules of Fair Practice of the NASD. With respect to Class A Shares, the Company and Stephens have mutually agreed to limit the fee to 0.15% of the Fund's average daily net assets attributable to Class A Shares. Stephens may enter into selling agreements with one or more selling agents under which such agents may receive from Stephens compensation for sales support services. Such compensation may include, but is not limited to, commissions or other payments to such agents based on the average daily net assets of Fund shares attributable to them. Services provided by selling agents in exchange for commissions and other payments to selling agents are the principal sales support services provided to the Fund. Stephens may retain any portion of the total distribution fee payable under the Distribution Agreement to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. Since the Distribution Agreement provides for fees that are used by Stephens to pay for distribution services, a plan of distribution for each class of shares (individually a "Plan", collectively the "Plans") and the Distribution Agreement are approved and reviewed in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in which an investment company may, directly or indirectly, bear the expense of distributing its shares. See Prospectus section captioned "Distribution Plans" for a more complete description of the Plans. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. The Fund may enter into servicing agreements with one or more servicing agents on behalf of Class D Shares of the Fund. Under such agreements, servicing agents provide shareholder liaison services, which may include responding to customer inquiries and providing information on shareholder investments, and provide such other related services as the Fund or a Class D Shareholder may reasonably request. For these services, a servicing agent receives a fee which will not exceed, on an annualized basis for the Fund's then current fiscal year, 0.25% of the average daily net assets of the Class D Shares of the Fund represented by Class D Shares owned by investors with whom the servicing agent maintains a servicing relationship, or an amount which equals the maximum amount payable to the servicing agent under applicable laws, regulations or rules, whichever is less. DETERMINATION OF NET ASSET VALUE Net asset value per share for the Fund is determined by Wells Fargo Bank on each day that the Exchange is open for trading. The net asset value of a share of a class of a Fund is the value of total net assets attributable to each class divided by the number of outstanding shares of that class. The value of net assets per class is determined daily by adjusting the net assets per class at the beginning of the day by the value of each class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each class by attributing to each class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each class as appropriate. The net asset value of each class is expected to fluctuate daily. The value of assets of the Fund (other than debt obligations maturing in 60 days or less) is determined as of the close of regular trading on the Exchange (referred to hereafter as "the close of the Exchange"), which is currently 4:00 p.m. New York time. Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, assets are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the Board of Directors. Prices used for such valuations may be provided by independent pricing services. From time to time, the Company may advertise various yield and total return information with respect to a class of shares of the Fund. Total return and yield information of a class of shares are based on the historical earnings and performance of such class of shares and should not be considered representative of future performance. The total return of a class of shares of the Fund is calculated by comparing the value of a hypothetical investment made at the public offering price of the class of shares (which includes the maximum sales charge for the class of shares) at the beginning of a specified period with the net asset value of such investment in a class of shares at the end of the specified period (assuming reinvestment of all dividends and capital gain distributions). The resulting percentage will be used to determine the positive or negative rate of return that an investor would have earned from reinvested dividends and capital gain distributions and changes in share price during the period for the class of shares. The Fund may also, at times, calculate total return of a class of shares based on the net asset value per share of a class of shares (rather than the public offering price), in which case the figures would not reflect the applicability of any sales charges that would have been paid by an investor in the class of shares, or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that total return data derived pursuant to the calculation described above are also presented. The yield of a class of shares will be computed by dividing its net investment income per share of the class earned during a specified period by its public offering price per share (which includes the maximum sales charge) on the last day of such period and annualizing the result. The Fund also may advertise tax-equivalent yield, which assumes that a stated income tax rate has been applied to non-exempt income to derive the same yield as that of the Fund (which may not reflect the applicability of the alternative minimum tax). For purposes of sales literature, these yields may also, at times, be calculated on the basis of the net asset value per share of the class (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the class of shares, or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that yield data derived pursuant to the calculation described above also are presented. Because of differences in the fees and/or expenses borne by Class D Shares of the Fund, the net yield on such shares can be expected, at any given time, to differ from the net yield on Class A Shares. Performance information will be computed separately for Class A Shares and Class D Shares. Additional information about the performance of the Fund is contained in the Annual Report for the Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. Shares of the Fund may be purchased on any day the Exchange is open for trading through Stephens, the Transfer Agent, or any authorized broker/dealers or financial institutions with which Stephens has entered into agreements. Such broker/dealers or financial institutions are responsible for the prompt transmission of purchase, exchange or redemption orders, and may independently establish and charge additional fees to their clients for such services, other than services related to purchase orders, which would reduce the clients' overall yield or return. The Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for shares purchased through the Systematic Purchase Plan and $250 for shares purchased through a retirement plan qualified under the Internal Revenue Code of 1986, as amended (the "Code"). The minimum subsequent purchase amount is $100. The minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. The Company reserves the right to reject any purchase order. All funds, net of sales loads, will be invested in full and fractional Shares. Checks will be accepted for the purchase of the Fund's shares subject to collection at full face value in U.S. dollars. Inquiries may be directed to the Company at the address and telephone number on the front cover of the Prospectus. Shares of the Fund are offered continuously at the applicable offering price (including any sales load) next determined after a purchase order is received. Payment for shares purchased through a broker/dealer will not be due from the broker/dealer until the settlement date, currently five business days after the order is placed. Effective June 7, 1995, the settlement date normally will be three business days after the order is placed. It is the broker/dealer's responsibility to forward payment for shares being purchased to the Fund promptly. Payment for orders placed directly through the Transfer Agent must accompany the order. When payment for shares of the Fund through the Transfer Agent is by a check that is drawn on any member bank of the Federal Reserve System, federal funds normally become available to the Fund on the business day after the day the check is deposited. Checks drawn on a non-member bank or a foreign bank may take substantially longer to be converted into federal funds and, accordingly, may delay execution of an order. When shares of the Fund are purchased through a broker/dealer or financial institution, Stephens reallows that portion of the sales load designated below as the Dealer-Allowance. Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Fund may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. If all sales charges are paid or reallowed to a broker/dealer or financial institution, it may be deemed an "underwriter" under the Securities Act of 1933. When shares are purchased directly through the Transfer Agent and no broker/dealer or financial institution is involved with the purchase, the entire sales load is paid to Stephens. Sales loads relating to the purchase of Class A Shares of the Fund are as follows: Class D Shares are not subject to a front-end sales load. However, Class D Shares which are redeemed within one year from the receipt of a purchase order will be subject to a contingent deferred sales charge equal to 1% of the dollar amount equal to the lesser of the net asset value at the time of purchase of the shares being redeemed or the net asset value of such shares at the time of redemption. A selling agent or servicing agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class D Shares. REDUCED SALES CHARGE -- CLASS A SHARES The above Volume Discounts are available to you based on the combined dollar amount being invested in Class A Shares of the Fund or of Class A Shares of one or more of the portfolios of the Company which assess a sales load (the "Load Funds"). Because Class D Shares are not subject to a front-end sales charge, the amount of Class D Shares you hold is not considered in determining any volume discount. The Right of Accumulation allows you to combine the amount being invested in Class A Shares of the Fund with the total net asset value of Class A Shares in any of the Load Funds already owned in accordance with the above sales load schedule to reduce the sales load. For example, if you own Class A Shares of the Company's other investment portfolios with an aggregate net asset value of $90,000 and invest an additional $20,000 in Class A Shares of the Fund, the sales load on the entire additional amount would be 2.00% of the offering price. To obtain such discount, you must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the reduced sales load, and confirmation of the order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time with respect to all Class A Shares purchased thereafter. A Letter of Intent allows you to purchase Class A Shares of the Fund over a 13-month period at reduced sales loads based on the total amount intended to be purchased plus the total net asset value of Class A Shares in any of the Load Funds already owned. Each investment made during the period receives the reduced sales load applicable to the total amount of the intended investment. If such amount is not invested within the period, you must pay the difference between the sales loads applicable to the purchases made and the charges previously paid. You may Reinvest proceeds from a redemption of Class A Shares of the Fund in Class A Shares of the Fund or in Class A Shares of another of the Company's investment portfolios that offers Class A Shares at net asset value, without a sales load, within 120 days after such redemption. However, if the other investment portfolio charges a sales load that is higher than the sales load that you have paid in connection with the Class A Shares you have redeemed, you pay the difference. In addition, the Class A Shares of the other investment portfolio to be acquired must be registered for sale in your state of residence. The amount that may be so reinvested may not exceed the amount of the redemption proceeds, and a written order for the purchase of the Class A Shares must be received by the Fund or the Transfer Agent within 120 days after the effective date of the redemption. If you realized a gain on your redemption, the reinvestment will not alter the amount of any federal capital gains tax payable on the gain. If you realized a loss on your redemption, the reinvestment may cause some or all of such loss to be disallowed as a tax deduction, depending on the number of Class A Shares purchased by reinvestment and the period of time that has elapsed after the redemption, although for tax purposes, the amount disallowed is added to the cost of the Class A Shares acquired upon the reinvestment. Reductions in front-end sales loads apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife, and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Reductions in front-end sales loads also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of Class A Shares purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the 1940 Act, which has been in existence for more than six months and which has a primary purpose other than acquiring shares of the Fund at a reduced sales load, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote five percent or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote five percent or more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by Directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and other broker/dealers that have entered into agreements with Stephens to sell such shares. Class A Shares of the Fund also may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by present and retired Directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo Bank and its affiliates if Wells Fargo Bank and/or the respective affiliates agree. Such shares also may be purchased at such price by employee benefit and thrift plans for such persons and to any investment advisory, trust or other fiduciary account (other than an individual retirement account) maintained, managed or advised by Wells Fargo Bank or Stephens or their affiliates. In addition, Class A Shares also may be purchased at net asset value by pension, profit sharing or other employee benefit plans established under Section 401 of the Code. Class A Shares of the Fund may be purchased at a price equal to the net asset value of such shares, without a sales load, by the following types of investors that place trades through an omnibus account maintained at the Fund by a discount broker/dealer: trust companies; investment advisers and financial planners on behalf of their clients; retirement and deferred compensation plans and the trusts used to fund these plans. By investing in the Fund, you appoint the Transfer Agent, as agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional shares. See "Dividends and Distributions." Although most shareholders elect not to receive stock certificates, certificates for full shares of the Fund can be obtained on request. It is more complicated to redeem shares held in certificated form, and the expedited redemption described below is not available with respect to certificated shares. CONTINGENT DEFERRED SALES CHARGE -- CLASS D SHARES Class D Shares which are redeemed within one year of the receipt of a purchase order for such shares will be subject to a contingent deferred sales charge equal to 1.00% of an amount equal to the lesser of the net asset value at the time of purchase for the Class D Shares being redeemed or the net asset value of such shares at the time of redemption. Accordingly, a contingent deferred sales charge will not be imposed on amounts representing increases in net asset value above the net asset value at the time of purchase. In addition a charge will not be assessed on Class D Shares purchased through reinvestment of dividends or capital gains distributions. In determining whether a contingent deferred sales charge is applicable to a redemption, Class D Shares are considered redeemed on a first-in, first-out basis so that Class D Shares held for a longer period of time are considered redeemed prior to more recently acquired shares. The contingent deferred sales charge is waived on redemptions of Class D Shares (i) following the death or disability (as defined in the Code) of a shareholder, (ii) to the extent that the redemption represents a minimum required distribution from an individual retirement account or other retirement plan to a shareholder who has reached age 70 1/2, (iii) effected pursuant to the Company's right to liquidate a shareholder's account if the aggregate net asset value of the shareholder's account is less than the minimum account size, or (iv) in connection with the combination of the Company with any other registered investment company by a merger, acquisition of assets, or by any other reorganization transaction. Investors who are entitled to purchase Class A Shares of the Fund at net asset value without a sales load should not purchase Class D Shares. Other investors, including those who are entitled to purchase Class A Shares of the Fund at a reduced sales load, should compare the fees assessed on Class A Shares against those assessed on Class D Shares (including potential contingent deferred sales charges and higher Rule 12b-1 fees) in light of the amount to be invested and the anticipated time that the shares will be owned. Shares of the Fund may be purchased by any of the methods described below. INITIAL PURCHASES OF FUND SHARES BY WIRE 1. Telephone toll free (800) 572-7797. Give the name of the Fund in which the investment is to be made, the class of shares to be purchased, the name(s) in which the shares are to be registered, the address, social security or tax identification number (where applicable) of the person or entity in whose name(s) the shares are to be registered, dividend payment election, amount to be wired, name of the wiring bank and name and telephone number of the person to be contacted in connection with the order. An account number will be assigned. 2. Instruct the wiring bank, which may charge a separate fee, to transmit the specified amount in federal funds ($1,000 or more) to: Wire Purchase Account Number: 4068-000462 Attention: Overland Express Municipal Income Fund (designate Class A or D) Account Name(s): (name(s) in which to be registered) Account Number: (as assigned by telephone) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price, or, in the case of Class D Shares, at the net asset value, next determined after the Account Application is received and accepted. INITIAL PURCHASES OF FUND SHARES BY MAIL 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $1,000 or more, payable to "Overland Express Municipal Income Fund (designate Class A or D)" to its mailing address set forth above. Additional purchases of $100 or more may be made by instructing the Fund's Transfer Agent to debit an approved account designated in the Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Overland Express Municipal Income Fund (designate Class A or D)" to the above address. Write the Fund account number on the check and include the detachable stub from a Statement of Account or a letter providing the account number. The Company's Systematic Purchase Plan provides you with a convenient way to establish and automatically add to your existing accounts on a monthly basis. If you elect to participate in this plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a designated bank account (provided your bank is a participant in the automated clearing house system). The Transfer Agent withdraws and uses this amount to purchase shares of the Fund on or about the fifth business day of each month. There are no additional fees charged for participating in this plan. You may change the investment amount, suspend purchases or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to any scheduled transaction. An election will be terminated automatically if the designated bank account balance is insufficient to make a scheduled withdrawal, or if either the designated bank account or your account is closed. PURCHASES THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Purchase orders for shares of the Fund placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale, including orders for which payment is to be made from free cash credit balances in securities accounts held by a dealer, will be effective on the same day the order is placed if received by the Transfer Agent before the close of business. Purchase orders that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of purchase orders to the Transfer Agent. Payment for Fund shares is not due until settlement date. Broker/dealers and financial institutions may benefit from the temporary use of payments to the Fund during the settlement period. A broker/dealer or financial institution that is involved in a purchase transaction may charge separate account, service or transaction fees. Financial institutions may be required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. You may exchange Class A Shares of the Fund for shares of the same class of the Company's other investment portfolios or for shares of the California Tax-Free Money Market Fund, the Money Market Fund or the U.S. Treasury Money Market Fund in an identically registered account at respective net asset values, provided that, if the other investment portfolio charges a sales load on the purchase of the class of shares being exchanged that is higher than the sales load that you have paid in connection with the shares you are exchanging, you pay the difference. Class D Shares of the Fund may be exchanged for Class D Shares of one of the Company's other investment portfolios that offer Class D Shares or for Class A Shares of the Money Market Fund in an identically registered account at respective net asset values. You are not charged a contingent deferred sales charge on exchanges of Class D Shares for shares of the same class of another of the Company's investment portfolios or for Class A Shares of the Money Market Fund. If you exchange Class D Shares for shares of the same class of another investment portfolio, or for Class A Shares of the Money Market Fund, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of the initial purchase of the previously held shares. Accordingly, if you exchange Class D Shares for Class A Shares of the Money Market Fund, and redeem the shares of the Money Market Fund within one year of the receipt of the purchase order for the exchanged Class D Shares, you will have to pay a deferred sales charge equal to the contingent deferred sales charge applicable to the previously exchanged Class D Shares. If you exchange Class D Shares of an investment portfolio for Shares of the Money Market Fund, you may subsequently re-exchange the acquired Class A Shares only for Class D Shares. If you re-exchange the Class A Shares of the Money Market Fund for Class D Shares, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of your initial purchase of Class D Shares. In addition, shares of the investment portfolio to be acquired must be registered for sale in your state of residence. You should obtain, read and retain the Prospectus for the investment portfolio which you desire to exchange into before submitting an exchange order. You may exchange shares by writing the Transfer Agent as indicated below under Redemption by Mail, or by calling the Transfer Agent or your authorized broker/dealer or financial institution or servicing agent, unless you have elected not to authorize telephone exchanges in your Account Application (in which case you may subsequently authorize such telephone exchanges by completing a Telephone Exchange Authorization Form and submitting it to the Transfer Agent in advance of the first such exchange). Shares held in certificated form may not be exchanged by telephone. The Transfer Agent's number for exchanges is (800) 572-7797. Procedures applicable to redemption of the Fund's shares are also applicable to exchanging shares, except that, with respect to an exchange transaction between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. The Company reserves the right to limit the number of times shares may be exchanged between Funds, or to reject in whole or in part any exchange request into a fund when management believes that such action would be in the best interest of the Fund's other shareholders, such as when management believes that such action would be appropriate to protect such fund against disruptions in portfolio management resulting from frequent transactions by those seeking to time market fluctuations. Any such rejection will be made by management on a prospective basis only, upon notice to the shareholder given not later than 10 days following such shareholder's most recent exchange. The Company reserves the right to modify or discontinue exchange privileges at any time. Under SEC rules, 60 days prior notice of any amendments or termination of exchange privileges will be given to shareholders, except under certain extraordinary circumstances. A capital gain or loss for tax purposes may be realized upon an exchange, depending upon the cost or other basis of shares redeemed. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you decline such privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine. If the Transfer Agent does not follow such procedures, the Company and the Transfer Agent may be liable for any losses attributable to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Shares may be redeemed at their next determined net asset value after receipt of a request in proper form by the Transfer Agent directly or through any authorized broker/dealer or financial institution. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, as described under "Purchase of Shares," the Company does not charge for redemption transactions. However, a broker/dealer or financial institution that is involved in a redemption transaction may charge separate account, service or transaction fees. On a day the Fund is open for business, redemption orders received by an authorized broker/dealer or financial institution before the close of the Exchange and received by the Transfer Agent before the close of business on the same day will be executed at the net asset value per share determined at the close of the Exchange on that day. Redemption orders received by authorized broker/dealers or financial institutions after the close of the Exchange, or not received by the Transfer Agent prior to the close of business, will be executed at the net asset value determined at the close of the Exchange on the next business day. Redemption proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, ordinarily will be remitted within seven days after the order is received in proper form, except proceeds may be remitted over a longer period to the extent permitted by the SEC under extraordinary circumstances. If an expedited redemption is requested, redemption proceeds will be distributed only if the check used for investment is deemed to be cleared for payment by your bank, currently considered by the Company to be a period of up to 15 days after investment. The proceeds, of course, may be more or less than cost. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. 1. Write a letter of instruction. Indicate the dollar amount of or number of shares to be redeemed. Refer to your Fund account number and provide either a social security or a tax identification number (as applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more, or redemption proceeds are to be paid to someone other than you at your address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the Federal Deposit Insurance Corporation, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation will be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. If shares to be redeemed are held in certificated form, enclose the certificates with the letter. Do not sign the certificates and for protection use registered mail. 5. Mail the letter to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchase of Fund Shares by Wire." Unless other instructions are given in proper form, a check for the proceeds of redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be sent to your address of record. The Company's Systematic Withdrawal Plan provides a way for you to have shares redeemed from your account and the proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, distributed to you on a monthly basis. You may elect to participate in this plan if you have a shareholder account valued at $10,000 or more as of the date of your election to participate, and are not also a participant in the Company's Systematic Purchase Plan at any time while participating in this plan. To participate in the plan you must specify an amount ($100 or more) to be distributed by check to your address of record or deposited in a designated bank account. The Transfer Agent redeems sufficient shares and mails or deposits the proceeds of the redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, as instructed on or about the fifth business day prior to the end of each month. There are no additional fees charged for participating in this plan. You may change the withdrawal amount, suspend withdrawals or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to a scheduled transaction. An election will be terminated automatically if your account balance is insufficient to make a scheduled withdrawal or if your account is closed. If shares are not held in certificated form, you may request an expedited redemption of shares by letter or telephone (unless you have elected not to authorize telephone redemptions on your Account Application or other form that is on file with the Transfer Agent) on any day the Fund is open for business. See "Exchange Privileges" for additional information regarding telephone redemption privileges. You may request expedited redemption by telephone by calling the Transfer Agent at (800) 572-7797. You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchase of Fund Shares by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be wired or credited to the bank indicated in your Account Application or wired to an authorized broker/dealer or financial institution designated in your Account Application. The Company reserves the right to impose charges for wiring redemption proceeds. When proceeds of an expedited redemption are to be paid to someone other than yourself, to an address other than that of record, or to a bank, broker/dealer or financial institution that has not been predesignated, the expedited redemption must be made by letter and the signature(s) on the letter must be guaranteed, regardless of the amount of the redemption. If an expedited redemption request is received by the Transfer Agent by the close of business on any day the Fund is open for business, the redemption proceeds will be transmitted to your bank or predesignated broker/dealer or financial institution on the next business day (assuming the investment check has cleared as described above), absent extraordinary circumstances. A check for proceeds of less than $5,000 will be mailed to your address of record, except that, in the case of investments in the Company that have been effected through broker/dealers, banks and other institutions that have entered into special arrangements with the Company, the full amount of the redemption proceeds may be transmitted by wire or credited to a designated account. REDEMPTIONS THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Redemption requests placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale will be effective on the same day the request is placed if received by the Transfer Agent before the close of business. Redemption requests that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of redemption requests to the Transfer Agent. Unless you have made other arrangements, and have informed the Transfer Agent of such arrangements, proceeds of redemptions made through authorized broker/dealers and financial institutions will be credited to your account with such broker/dealer or institution. You may request a check from the broker/dealer or financial institution or may elect to retain the redemption proceeds in your account. The broker/dealer or financial institution may benefit from the use of the redemption proceeds prior to the clearance of a check issued to you for such proceeds or prior to disbursement or reinvestment of such proceeds on your behalf. The proceeds of redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. Due to the high cost of maintaining small accounts, the Company reserves the right to redeem accounts that fall below $1,000. Prior to such a redemption, you will be notified in writing and permitted 30 days to make additional investments to raise the account balance to the specified minimum. The Company's Board of Directors has adopted a Plan on behalf of each class of shares of the Fund. Under the Plans and pursuant to the Distribution Agreement, the Fund may pay certain distribution-related expenses. As discussed above, under the Distribution Agreement, the Fund may pay Stephens, as compensation for distribution-related services, a monthly fee at the annual rate of up to 0.25% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at the annual rate of up to 0.50% of the average daily net assets of the Class D Shares of the Fund. Since the fee payable to Stephens under the Distribution Agreement is based upon a percentage of the average daily net assets of a class of shares of the Fund and not upon the actual expenditures of Stephens, the expenses of Stephens (which may include overhead expenses) may be more or less than the fees received by it under the Distribution Agreement. All or a portion of the fees may be paid by Stephens to broker-dealers or financial institutions who have entered into selling agent agreements with Stephens, as compensation for sales support services. The Company's Board of Directors has adopted a servicing plan ("Servicing Plan") on behalf of the Class D Shares of the Fund. Pursuant to the Servicing Plan the Fund may enter into servicing agreements with one or more servicing agents who agree to provide administrative support services to their customers who are the record or beneficial owners of Class D Shares. Such servicing agents will be compensated at an annual rate of up to 0.25% of the average daily net asset value of the Class D Shares held of record or beneficially by such customers. The Fund intends to declare as a dividend to all shareholders of record substantially all of its net investment income at the close of each business day to shareholders of record at 4:00 p.m. (New York time) on the day of declaration. Shares purchased in the Fund will begin earning dividends on the business day following the date the purchase order settles and shares redeemed will earn dividends through the date of redemption. Net investment income for a Saturday, Sunday or holiday will be declared as a dividend to shareholders of record at 4:00 p.m. (New York time) on the prior business day. Dividends of the Fund declared in, and attributable to, any month will be paid early in the following month. Shareholders of the Fund who redeem shares prior to a dividend payment date will be entitled to all dividends declared but unpaid prior to redemption on such shares on the next dividend payment date. Net capital gains of the Fund, if any, will be distributed annually (or more frequently to the extent permitted to avoid imposition of the 4% excise tax described in the SAI). Dividends and/or capital gain distributions paid by the Fund may be invested in additional shares of the same class of shares of the Fund at net asset value (without any sales load) and credited to your account on the reinvestment date or, at your election, paid by check. Dividend checks and Statements of Account will be mailed within approximately three business days after the payment date. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The Fund's net investment income available for distribution to the holders of Class D Shares will be reduced by the amount of shareholder servicing fees payable to shareholder servicing agents under the Servicing Plan and by the incremental distribution fees payable under the Distribution Plan. There may be certain other differences in fees (e.g. transfer agent fees) between Class A Shares and Class D Shares that would affect their relative dividends. By complying with the applicable provisions of the Code, the Fund will not be subject to Federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders, and its shareholders will not be subject to Federal income taxes on any dividends of the Fund attributable to interest from tax-exempt securities. However, dividends attributable to interest from taxable securities, accretion of market discount on certain bonds and capital gains (if any) will be taxable to shareholders. Generally, dividends of taxable income are taxable to shareholders at the time they are paid. However, dividends declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends are actually paid no later than January 31 of the following year. The Fund intends to pay out all its net investment income and net realized capital gains (if any) for each year. The Fund's dividends will not qualify for the dividends-received deduction allowed to corporate shareholders. Interest on indebtedness incurred or continued to purchase or carry shares of the Fund will not be deductible to the extent that the Fund's distributions are exempt from federal income tax. In addition, the portion of the Fund's exempt-interest dividend that is attributable to investments in MRBs and certain other municipal bond investments is expected to be treated as a preference item for purposes of the federal alternative minimum tax imposed on both individuals and corporations. Persons who may be subject to the federal alternative minimum tax or who may be "substantial users" (or "related persons" of substantial users) of facilities financed by private activity bonds should consult their tax advisors before purchasing shares of the Fund. The Fund will inform you of the amount and nature of Fund dividends and capital gain distributions. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Fund if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. You should consult your individual tax advisor with respect to your particular tax situation as well as the state and local tax status of investments in shares of the Fund. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank has been retained to act as the Fund's custodian and transfer and dividend disbursing agent. Its principal place of business is 420 Montgomery Street, San Francisco, California 94163 and its transfer and dividend disbursing agency activities are managed at 525 Market Street, San Francisco, California 94105. The Company, an open-end investment company, was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. The Company currently offers twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Money Market Fund, the Municipal Income Fund, the Overland Sweep Fund, the Short-Term Government-Corporate Income Fund, the Short-Term Municipal Income Fund, the Strategic Growth Fund, the U.S. Government Income Fund, the U.S. Treasury Money Market Fund and the Variable Rate Government Fund. The Board of Directors may, in the future, authorize the issuance of other series of capital stock representing shares of additional investment portfolios or funds. All shares of the Company have equal voting rights and will be voted in the aggregate, and not by series or class, except where voting by series or class is required by law or where the matter involved affects only one series or class. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required by the 1940 Act to elect Directors; however, shareholders are entitled to call a meeting of shareholders for purposes of voting on removal of a Director or Directors. A more detailed statement of the voting rights of shareholders is contained in the SAI. All shares of the Company, when issued, will be fully paid and nonassessable. DIVIDEND DISBURSING AGENT AND CUSTODIAN Wells Fargo Bank, N.A. FOR MORE INFORMATION ABOUT THE FUND, SIMPLY CALL (800) 572-9612, OR WRITE: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. Overland Express Funds, Inc. (the "Company") is an open-end, series management investment company. This Prospectus contains information about one of the funds in the Overland Express Family of Funds -- the OVERLAND SWEEP FUND (the "Fund"). The Fund's investment objective is to provide investors with a high level of current income, while preserving capital and liquidity. The Fund seeks to achieve its investment objective by investing all of its assets in the Cash Investment Trust Master Portfolio (the "CIT Master Portfolio") a professionally managed diversified portfolio having the same investment objective as the Fund and offered by Master Investment Trust (formerly Cash Investment Trust) (the "Trust"), a professionally managed, open-end investment company. As a result, the performance of the Fund will correspond with the investment experience of the CIT Master Portfolio. The CIT Master Portfolio seeks to achieve this investment objective by investing in high-quality, short-term instruments. Wells Fargo Bank, N.A. ("Wells Fargo Bank") serves as the investment adviser of the CIT Master Portfolio, and serves as the transfer and dividend disbursing agent and custodian for the Fund and the CIT Master Portfolio. Stephens Inc. ("Stephens") serves as the sponsor and administrator of the Fund and the CIT Master Portfolio and serves as the distributor of Fund shares and of CIT Master Portfolio interests. Shares of the Fund are offered only to customers of certain financial institutions which have entered into Shareholder Servicing Agreements with the Company on behalf of the Fund ("Servicing Agents"). Servicing Agents will automatically invest, or "sweep," customer funds into shares of the Fund. As further described below, Wells Fargo Bank will serve as a Servicing Agent, and will receive certain fees pursuant to a Shareholder Servicing Agreement. Wells Fargo Bank also has entered into a Selling Agreement with Stephens pursuant to which it will receive certain fees. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Fund. A Statement of Additional Information dated May 1, 1995, containing additional and more detailed information about the Fund (the "SAI"), has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. The SAI is available without charge and can be obtained by writing the Company at P.O. Box 63084, San Francisco, CA 94163 or by calling the Company at the telephone number printed above. The Fund and the CIT Master Portfolio seek to maintain a net asset value of $1.00 per share; however, there is no assurance that this objective will be achieved. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. WELLS FARGO BANK, N.A. IS THE INVESTMENT ADVISER TO THE CIT MASTER PORTFOLIO. STEPHENS, WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK IS THE SPONSOR AND DISTRIBUTOR FOR THE FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 The Company, as an open-end management investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Fund and the CIT Master Portfolio. Q. WHAT IS THE INVESTMENT OBJECTIVE OF THE FUND AND THE CIT MASTER PORTFOLIO? A. The Fund's seeks to provide investors with a high level of current income, while preserving capital and liquidity. The Fund seeks to achieve its investment objective by investing all of its assets in the CIT Master Portfolio, which has the same investment objective as the Fund. Both the Fund and the CIT Master Portfolio seek to maintain a stable net asset value of $1.00 per share. As with all mutual funds, there is no assurance that the Fund will achieve its investment objective. See "Investment Objective and Policies." Q. WHAT ARE PERMISSIBLE INVESTMENTS? A. The Fund invests all of its assets in the CIT Master Portfolio, a professionally managed portfolio of the Trust, an open-end investment company. The CIT Master Portfolio invests in high-quality, short-term instruments including obligations of the U.S. Government, its agencies, or instrumentalities (including government-sponsored enterprises), certain short-term debt obligations of U.S. banks and the U.S. branches of foreign banks, high-quality commercial paper, and certain repurchase agreements and floating- and variable-rate instruments. See "Investment Objective and Policies." Q. WHO MANAGES MY INVESTMENTS? A. Wells Fargo Bank, N.A. ("Wells Fargo Bank"), as investment adviser of the CIT Master Portfolio, manages the investments of the Fund in the CIT Master Portfolio. The Company has not retained the services of a separate investment adviser for the Fund because the Fund invests all of its assets in the CIT Master Portfolio. Wells Fargo Bank also provides the Fund and the CIT Master Portfolio with transfer agency, dividend disbursing agency and custodial services. In addition, Wells Fargo Bank is a Selling Agent and a Servicing Agent with respect to the Fund. Stephens is the Sponsor, Administrator and Distributor for the Company and the Trust. See "Management of the Fund and the CIT Master Portfolio." Q. HOW MAY I PURCHASE SHARES? A. Shares of the Fund may be purchased on any day the Fund is open through a Servicing Agent that has entered into a Shareholder Servicing Agreement with the Company. There is no sales load for purchasing shares of the Fund. There is no minimum initial purchase or subsequent purchase amount. See "Purchase and Redemption of Shares." Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on shares of the Fund are declared daily once each Business Day (as defined below) and are paid in cash monthly. See "Determination of Net Asset Value, Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. Shares may be redeemed on any day the Fund is open for trading upon request to a Servicing Agent. Proceeds of redemptions are credited to the Servicing Agent's shareholder account with the Fund. The Fund imposes no charge for redeeming its shares. See "Purchase and Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND? A. Shares of the Fund and the CIT Master Portfolio are not guaranteed or insured against loss of principal or interest, although certain of the CIT Master Portfolio's debt instruments may be insured or guaranteed a to repayments of principal and/or the payment of interest. Although both the Fund and the CIT Master Portfolio seek to maintain a stable net asset value of $1.00 per share, there is no assurance that they will be able to do so. As with all mutual funds, there can be no assurance that the Fund and the CIT Master Portfolio will achieve their respective investment objectives. The following table provides: (i) the aggregate annual operating expenses of the Fund and the CIT Master Portfolio, after waivers and reimbursements, as a percentage of average net assets of the Fund, and (ii) an example illustrating the dollar cost of such expenses on a $1,000 investment in the Fund. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) After any waivers or reimbursements. * As further described in the Prospectus under the caption "Management of the Fund and the CIT Master Portfolio," Wells Fargo Bank and Stephens each has agreed to waive or reimburse all or a portion of its respective fees in circumstances where Fund expenses that are subject to limitations imposed under state securities laws and regulations exceed such limitations. In addition, Stephens and Wells Fargo Bank each may elect, in its sole discretion, to otherwise waive its respective fees or reimburse such expenses. In this regard, Wells Fargo Bank has undertaken to waive a portion or all of its fees and/or reimburse the Fund or the CIT Master Portfolio, to the extent the total operating expenses exceed 1.25%, but only to the extent of its fees. Any waivers or reimbursements of fees with respect to the Fund would reduce the total expenses of the Fund. There can be no assurance waivers and reimbursements will continue. The percentages shown above under "Total Other Expenses" and "Total Operating Expenses" are based on amounts incurred during the most recent fiscal year, restated to include voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Absent waivers and reimbursements, the percentages shown above under "Total Other Expenses" and "Total Operating Expenses" would have been 0.52% and 1.32%, respectively. Long-term shareholders of the Fund could pay more in distribution related charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers, Inc. ("NASD"). The purpose of the foregoing table is to assist you in understanding the various costs and expenses that an investor in the Fund will bear directly or indirectly. There are no sales loads or redemption fees charged by the Fund. You may, however, be separately charged other fees by Servicing Agents for services related to those provided under Shareholder Servicing Agreements. The Example should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. With regard to the combined fees and expenses of the Fund and CIT Master Portfolio, the Board of Directors of the Company has considered whether various costs and benefits of investing all the Fund's assets in the CIT Master Portfolio rather than directly in portfolio securities would be more or less than if the Fund invested in portfolio securities directly and believes that the Fund should achieve economies of scale by investing in the CIT Master Portfolio. Additionally, the Board of Directors has determined that the aggregate fees assessed by the Fund and the CIT Master Portfolio should be less than those expenses that the Directors believe would be incurred had the Fund invested directly in the securities held by the CIT Master Portfolio. See Prospectus sections captioned "Management of the Fund and the CIT Master Portfolio," "Custodian, Transfer and Dividend Disbursing Agent, Servicing Agent," "Distribution Plan" and "Purchase and Redemption of Shares" for more complete descriptions of the various costs and expenses applicable to investors in the Fund. In addition, if the Fund were to change its fundamental investment strategy and no longer invest in the CIT Master Portfolio, these expenses may change. The following information has been derived from the Financial Highlights in the Fund's 1994 annual financial statements. The financial statements are incorporated by reference into the SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Fund's 1994 annual financial statements and the notes thereto. The SAI has been incorporated by reference into this Prospectus. FOR A SHARE OUTSTANDING AS SHOWN * The Fund commenced operations on October 1, 1991. Set forth below is a description of the investment objective and related policies of the Fund and the CIT Master Portfolio. As with all mutual funds, there can be no assurance that the Fund or the CIT Master Portfolio, which is a diversified portfolio, will achieve their investment objectives. The Fund's investment objective is to provide investors with a high level of current income, while preserving capital and liquidity. The Fund seeks to achieve its investment objective by investing all of its assets in the CIT Master Portfolio, which has the same investment objective as the Fund. The Fund may withdraw its investment in the CIT Master Portfolio only if the Board of Directors of the Company determines that such action is in the best interests of the Fund and its shareholders, and the Fund shareholders approve such withdrawal. Upon such withdrawal, the Company's Board would consider alternative investments, including investing all of the Fund's assets in another investment company with the same investment objective as the Fund or hiring an investment adviser to manage the Fund's assets in accordance with the investment policies described below with respect to the CIT Master Portfolio. Since the investment characteristics of the Fund will correspond to those of the CIT Master Portfolio, the following is a discussion of the various investments of and techniques employed by the CIT Master Portfolio, including the investment objective and policies of the CIT Master Portfolio. For a description of the management and expenses of the CIT Master Portfolio, see the Prospectus section "Management of the Fund and the CIT Master Portfolio." The CIT Master Portfolio seeks to achieve its investment objective by investing only in U.S. dollar-denominated "Eligible Securities" with remaining maturities not exceeding thirteen months, as defined in Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), and maintains a dollar-weighted average portfolio maturity of 90 days or less. An Eligible Security is a security that is determined to present minimal credit risks and is rated in one of the two highest rating categories by the required number of nationally recognized statistical rating organizations or, if unrated, is determined to be of comparable quality to such rated securities. These determinations are made by the investment adviser, under guidelines adopted by the Trust's Board of Trustees, although in certain instances, the Board of Trustees must approve or ratify the CIT Master Portfolio's investments. The Board of Trustees of the Trust (or Wells Fargo Bank, under authority delegated to it as investment adviser to the CIT Master Portfolio) will determine on an ongoing basis that any Eligible Securities purchased present minimal credit risks. The CIT Master Portfolio and the Fund will endeavor to maintain a constant net asset value of $1.00 per share of the Fund. As with all mutual funds, there can be no assurance that this investment objective will be achieved. The Eligible Securities in which the CIT Master Portfolio may invest are: (i) obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises) (ii) negotiable certificates of deposit, fixed time deposits, bankers' acceptances or other short-term obligations of U.S. banks (including foreign branches) that have more than $1 billion in total assets at the time of investment and are members of the Federal Reserve System or are examined by the Comptroller of the Currency or whose deposits are insured by the Federal Deposit Insurance Corporation; (iii) commercial paper rated at the date of purchase P-1 by Moody's Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by Standard (iv) commercial paper unrated at the date of purchase but secured by a letter of credit from a U.S. bank that meets the above criteria for (v) certain floating- and variable-rate instruments (discussed below); (vi) certain repurchase agreements (discussed below); and (vii) short-term, U.S. dollar-denominated obligations of U.S. branches of foreign banks that at the time of investment have more than $10 billion, or the equivalent in other currencies, in total assets. Under the 1940 Act, the Fund and the CIT Master Portfolio are each classified as "diversified," even though, in the case of the Fund, all of its assets are invested in the CIT Master Portfolio. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Treasury obligations differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government securities, have a maturity of up to one year and are issued on a discount basis. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market interest rates increase, and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. Certain of the debt instruments in which the CIT Master Portfolio may invest may bear interest at rates that are not fixed, but float or vary with, for example, changes in specified market rates or indices or at specified intervals. Such changes in interest rates tend to reduce fluctuations that would normally occur in the market value of the securities as market rates change. Certain of these floating-and variable-rate instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The CIT Master Portfolio may, in accordance with SEC rules, account for these instruments as maturing at the next interest rate readjustment date or the date at which the CIT Master Portfolio may tender the instrument back to the issuer, whichever is later. The floating- and variable-rate instruments that the CIT Master Portfolio may purchase include certificates of participation in floating- and variable-rate obligations purchased from banks. Wells Fargo Bank, as investment adviser to the CIT Master Portfolio, monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events occurring between the time the CIT Master Portfolio elects to demand payment on a floating- or variable-rate instrument and the time payment is due may affect the ability of the issuer to make payment when due, and unless such demand instrument permits same-day settlement, may affect the CIT Master Portfolio's ability to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided that an active secondary market exists. The CIT Master Portfolio may enter into repurchase agreements wherein the seller of a security to the CIT Master Portfolio agrees to repurchase that security from the CIT Master Portfolio at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The CIT Master Portfolio may enter into repurchase agreements only with respect to U.S. Government obligations and other securities that are permissible investments for the CIT Master Portfolio. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction may be greater than thirteen months. However, the term of any repurchase agreement on behalf of the CIT Master Portfolio will always be less than thirteen months. If the seller defaults and the value of the underlying securities has declined, the CIT Master Portfolio may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the CIT Master Portfolio's disposition of the security may be delayed or limited. The CIT Master Portfolio may not enter into a repurchase agreement with a maturity of more than seven days if, as a result, more than 10% of the market value of the CIT Master Portfolio's total net assets would be invested in repurchase agreements with maturities of more than seven days, restricted securities and illiquid securities. The CIT Master Portfolio only will enter into repurchase agreements with registered broker/dealers and commercial banks that meet guidelines established by the Board of Trustees of the Trust and that are not affiliated with Wells Fargo Bank. The CIT Master Portfolio, subject to the conditions described above, may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. Certain of the debt obligations, certificates of participation, commercial paper and other short-term obligations which the CIT Master Portfolio is permitted to purchase may be backed by an unconditional and irrevocable letter of credit of a bank, savings and loan association or insurance company which assumes the obligation for payment of principal and interest in the event of default by the issuer. Letter of credit-backed investments must, in the opinion of Wells Fargo Bank, be of investment quality comparable to other permitted high-quality investments of the CIT Master Portfolio. The Fund's investment objective and its investment policy of investing all of its assets in the CIT Master Portfolio, as set forth above, are fundamental. Accordingly, they may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. If the Company's Board of Directors determines, however, that the Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will make appropriate disclosure of any such material change in the Fund's prospectus. The investment objective of the CIT Master Portfolio may not be changed without approval of a majority vote of the investors in the CIT Master Portfolio. The classification of the Fund and the CIT Master Portfolio as "diversified" may not be changed, in the case of the Fund, without the approval of the Fund's shareholders, or, in the case of the CIT Master Portfolio, without the approval of a majority vote of the investors in the CIT Master Portfolio. In addition, as a matter of fundamental policy, the CIT Master Portfolio (and the Fund) may borrow from banks up to 10% of the current value of its net assets only for temporary purposes in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased while any such outstanding borrowing in excess of 5% of its net assets exists). As a matter of fundamental policy, neither the CIT Master Portfolio nor the Fund may invest more than 25% of its assets (i.e., concentrate) in any particular industry, excluding U.S. Government obligations and obligations of domestic banks. (Foreign branches of U.S. banks and U.S. branches of foreign banks are not domestic banks for purposes of this exclusion.) As a matter of non-fundamental policy, the CIT Master Portfolio (and the Fund) may invest up to 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, illiquid securities, and fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days, provided that this restriction does not affect the Fund's ability to invest a portion or all of its assets in the CIT Master Portfolio. MANAGEMENT OF THE FUND AND THE CIT MASTER PORTFOLIO The Company has retained the services of Stephens as administrator and distributor for the Fund, but has not retained the services of an investment adviser for the Fund since the Company seeks to achieve the investment objective of the Fund by investing all of the Fund's assets in the CIT Master Portfolio. The Company's Board of Directors supervises the actions of the Fund's administrator and distributor, as set forth below, and decides upon matters of general policy. As noted above, the Fund may withdraw its investment in the CIT Master Portfolio only if the Board of Directors of the Company determines that it is in the best interests of the Fund and its shareholders to do so, and the Fund shareholders approve such withdrawal. Upon any such withdrawal, the Board of Directors of the Company would consider what action might be taken, including the investment of all the assets of the Fund in another pooled investment entity having the same investment objective as the Fund or the hiring of an investment adviser to manage the Fund's assets in accordance with the investment policies described above with respect to the CIT Master Portfolio. The Trust, on behalf of the CIT Master Portfolio, has retained the services of Wells Fargo Bank as investment adviser to the CIT Master Portfolio, and Stephens as administrator and distributor of the CIT Master Portfolio. The Board of Trustees of the Trust is responsible for the general management of the Trust and supervising the actions of Wells Fargo Bank and Stephens in these capacities. STRUCTURE OF THE FUND AND THE CIT MASTER PORTFOLIO The investment objective of the Fund, and its policy of investing all of its assets in the CIT Master Portfolio, may not be changed without approval of a majority of the Fund's outstanding securities. Similarly, the investment objective of the CIT Master Portfolio may not be changed without the approval of the investors in the CIT Master Portfolio. The investment objectives, policies and restrictions of the CIT Master Portfolio and the Fund are described in the Prospectus section "Investment Objective and Policies". Additionally, a description of the management and expenses of the CIT Master Portfolio is located below under subsections "Investment Adviser" and "Sponsor, Administrator and Distributor". In addition, other investment companies may in the future also invest a portion of their assets in the CIT Master Portfolio. Such other investment companies may have different expenses and, accordingly, may experience different investment returns and yields compared to the Fund. The Fund's investment policy and the fact that other funds may invest in the CIT Master Portfolio may entail greater risks than those incurred by a fund which holds portfolio securities directly. Such risks may include the risk that another investment company that invests in the CIT Master Portfolio may make a large scale redemption. Such a redemption could negatively impact on the operating expenses of the CIT Master Portfolio and/or its ability to hold a diverse portfolio of investments. Furthermore, should the CIT Master Portfolio's unitholders vote to change the investment objective of the CIT Master Portfolio, the Fund would either have to change its investment objective in response thereto or seek to find another investment company with the same investment objective in which to invest. For information on whether it may be possible to invest in the CIT Master Portfolio through another investment company, an investor should contact the Fund's Transfer Agent by writing to the address on the back of the Prospectus or by calling (800) 552-9612. Additional information regarding the Officers and Directors of the Company and the Officers and Trustees of the Trust is included in the Fund's SAI under "Management." Pursuant to an Advisory Contract, the CIT Master Portfolio is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company and the Trust and to five other registered open-end management investment companies, that consist of several separately managed investment portfolios. The Advisory Contract with the Trust on behalf of the CIT Master Portfolio, provides that Wells Fargo Bank shall furnish to the CIT Master Portfolio investment guidance and policy direction in connection with the daily portfolio management of the CIT Master Portfolio. Pursuant to the Advisory Contract, Wells Fargo Bank furnishes to the Board of Trustees of the Trust periodic reports on the investment strategy and performance of the CIT Master Portfolio. Purchase and sale orders of the securities held by the CIT Master Portfolio may be combined with those of other accounts that Wells Fargo Bank manages or advises, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for the CIT Master Portfolio and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, the CIT Master Portfolio, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contract with the Trust, Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.25% of the average daily net assets of the CIT Master Portfolio. For the year ended December 31, 1994 Wells Fargo Bank was paid 0.25% of the average daily net assets of the Fund as compensation for its services as investment adviser. From time to time, Wells Fargo Bank may waive such fees in whole or in part. In this regard, Wells Fargo Bank has undertaken to waive a portion or all of its fees and/or reimburse the Fund or the CIT Master Portfolio, to the extent the Fund's total operating expenses exceed 1.25%, but only to the extent of its fees. Any such waiver will reduce expenses of the CIT Master Portfolio and, accordingly, have a favorable impact on the yield of the CIT Master Portfolio and, in turn, the Fund. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into agreements with the Company and the Trust, on behalf of the CIT Master Portfolio, under which Stephens acts as administrator for the Fund and the CIT Master Portfolio, respectively. For providing administrative services, Stephens is entitled to receive from each of the Fund and the CIT Master Portfolio a fee at the annual rate of 0.025% of its respective average daily net assets. From time to time, Stephens may waive its fees from the Fund or the CIT Master Portfolio in whole or in part. Any such waivers will reduce expenses of the Fund and/or of the CIT Master Portfolio and, accordingly, have a favorable impact on the yield or return of the Fund and/or the CIT Master Portfolio. The respective Administration Agreements with the Fund and the CIT Master Portfolio state that Stephens shall provide as administrative services, among other things general supervision: (i) of the operation of the Fund and the CIT Master Portfolio, including coordination of the services performed by the investment adviser (in the case of the CIT Master Portfolio), transfer agent, shareholder servicing agents (in the case of the Fund), custodian, independent accountants and legal counsel; (ii) in connection with regulatory compliance, including the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions; and preparation of proxy statements and shareholder or investor reports for the Fund and the CIT Master Portfolio, as applicable; and (iii) relative to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors and the Trust's officers and Board of Trustees. Stephens also furnishes office space and certain facilities required for conducting the business of the Fund and the CIT Master Portfolio and pays the compensation of the directors, officers and employees of the Company and of the Trust who are affiliated with Stephens. In addition, Stephens, as the principal underwriter of the Fund within the meaning of the Act and in accordance with a plan of distribution ("Plan"), has entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing shares of the Fund. The Distribution Agreement provides that Stephens shall act as agent for the Fund for the sale of its shares. See "Distribution Plan" below. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years, including discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. The Advisory Contract and the Administration Agreements with the CIT Master Portfolio and the Fund provide that if, in any fiscal year, the total aggregate expenses of the CIT Master Portfolio and the Fund incurred by, or allocated to, the CIT Master Portfolio and the Fund (excluding taxes, interest, brokerage commissions and other portfolio transaction expenses, expenditures that are capitalized in accordance with generally accepted accounting principles, extraordinary expenses and amounts accrued or paid under a Plan) exceed the most restrictive expense limitation applicable to the Fund imposed by the securities laws or regulations of the states in which the Fund's shares are registered for sale, Wells Fargo Bank and Stephens shall waive their fees and reimburse expenses proportionately under the Advisory Contract and the Administration Agreements, respectively, for the fiscal year to the extent of the excess, or reimburse the excess, but only to the extent of their respective fees. In this regard, Wells Fargo Bank has undertaken to waive a portion or all of its fees and/or reimburse expenses to the Fund and the CIT Master Portfolio, to the extent the total operating expenses exceed 1.25%, but only to the extent of its fees. The Advisory Contract and the Administration Agreements further provide that the total expenses shall be reviewed monthly so that, to the extent the annualized expenses for such month exceed the most restrictive applicable annual expense limitation, the monthly fees under the Advisory Contract and the Administration Agreements shall be reduced as necessary. Currently, the most stringent applicable state expense ratio limitation is 2.50% of the first $30 million of the Fund's average net assets for its current fiscal year, 2% of the next $70 million of such assets, and 1.50% of such assets in excess of $100 million. Except for the expenses borne by Wells Fargo Bank and Stephens, the Company and the Trust bear all costs of their respective operations, including the compensation of the Company's directors and the Trust's trustees who are not officers or employees of Wells Fargo Bank or Stephens or any of their affiliates; advisory (in the case of the CIT Master Portfolio), shareholder servicing (in the case of the Fund), and administration fees; payments pursuant to any Plan (in the case of the Fund); interest charges; taxes; fees and expenses of independent auditors, legal counsel, transfer agent and dividend disbursing agent; expenses of redeeming Fund shares or interests in the CIT Master Portfolio; expenses of preparing and printing prospectuses (except the expense of printing and mailing prospectuses used for promotional purposes, unless otherwise payable pursuant to a Plan), shareholders' or investors' reports, notices, proxy statements and reports to regulatory agencies; insurance premiums and certain expenses relating to insurance coverage; trade association membership dues; brokerage and other expenses connected with the execution of portfolio transactions; fees and expenses of the custodian, including those for keeping books and accounts and calculating the net asset value of the Fund and the CIT Master Portfolio; expenses of shareholders' or investors' meetings; expenses relating to the issuance, registration and qualification of shares of the Fund; pricing services; organizational expenses; and any extraordinary expenses. Expenses attributable to the Fund and/or the CIT Master Portfolio are charged against the respective assets of the Fund and/or the CIT Master Portfolio. DETERMINATION OF NET ASSET VALUE, Net asset value per share for the Fund is determined by Wells Fargo Bank on each day that the Fund is open for trading ("Business Day"). The net asset value per share of the Fund is determined by dividing the value of the total assets of the Fund (i.e., the value of its investments in the CIT Master Portfolio and other assets) less all of its liabilities by the total number of outstanding shares of the Fund. The net asset value of the Fund is determined as of 12:00 noon (New York time). It is anticipated that the net asset value of each share of the Fund will remain constant at $1.00, although no assurance can be given that the Fund will maintain a stable net asset value on a continuing basis. The CIT Master Portfolio uses the amortized cost method to value its portfolio securities. The amortized cost method involves valuing a security at its cost and amortizing any discount or premium over the period until maturity, generally without regard to the impact of fluctuating interest rates on the market value of the security. The Net Income of the CIT Master Portfolio, as defined below, is determined, declared and paid as a dividend once each Business Day as of 12:00 noon (New York time). All the Net Income of the CIT Master Portfolio so determined is allocated pro rata among the Fund and the other investors in the CIT Master Portfolio at the time of such determination. For this purpose, the Net Income of the CIT Master Portfolio (from the time of the immediately preceding determination thereof) consists of (i) all income accrued, less the amortization of any premium, on the assets of the CIT Master Portfolio, less (ii) all actual and accrued expenses of the CIT Master Portfolio determined in accordance with generally accepted accounting principles. Interest income includes discount earned (including both original issue and market discount) on discount paper accrued ratably to the date of maturity and any net realized gains or losses on the assets of the CIT Master Portfolio. The Net Income of the Fund, as defined below, is determined at the same time and on the same days as the Net Income of the CIT Master Portfolio is determined. All the Net Income of the Fund so determined is declared as a dividend to shareholders of record at the time of such determination. Net Income for a Saturday, Sunday or Holiday (as defined below) will be declared as a dividend to shareholders of record as of 12:00 noon (New York time) on the previous Business Day. Dividends of the Fund declared in, and attributable to, any month will be paid in cash once a month, early in the following month. Shareholders of the Fund who redeem shares prior to a dividend payment date will be entitled to all dividends declared but unpaid prior to redemption on such shares on the next dividend payment date. For this purpose, the Net Income of the Fund (from the time of the immediately preceding determination thereof) consists of (i) all income accrued on the assets of the Fund (i.e., the Fund's share of the Net Income of the CIT Master Portfolio), less (ii) all actual and accrued expenses of the Fund determined in accordance with generally accepted accounting principles. Since the Net Income of the Fund is declared as a dividend each time the Net Income of the Fund is determined, the net asset value per share of the Fund is expected to remain constant at $1.00 per share immediately after each such determination and dividend declaration. From time to time, the Company may advertise yield information with respect to shares of the Fund. Yield information is based on the historical earnings and performance of the Fund and should not be considered representative of future performance. From time to time, the Fund may advertise its current yield and/or its effective yield. Current yield for the Fund is computed by dividing its net investment income per share earned during a specified period by its net asset value per share on the last day of such period and annualizing the result. The current yield of the Fund will show the annualized income per share generated by an investment in the Fund over a stated period. The effective yield is calculated similarly but, when annualized, the income earned per share will be assumed to have been reinvested. The effective yield will be slightly higher than the current yield because of the compounding effect of this assumed reinvestment. Additional information about the performance of the Fund is contained in the Annual Report for the Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. PURCHASE AND REDEMPTION OF SHARES Shares of the Fund are offered exclusively to customers of Servicing Agents who have entered into a Shareholder Servicing Agreement with the Company on behalf of the Fund. However, other open-end investment companies that offer their shares to the public, including other series of the Company, also may invest all or substantially all of their assets in the CIT Master Portfolio. Accordingly, there may be other investment companies through which public investors can invest indirectly in the CIT Master Portfolio. The fees charged by such other investment companies may be higher or lower than those charged by the Fund, which may reflect, among other things, differences in the nature and level of the services and features offered by such companies to their shareholders. The Shareholder Servicing Agreements contemplate that customers of a Servicing Agent will have entered into agency agreements with such Servicing Agent whereby the Servicing Agent is authorized to invest certain amounts maintained by the customer in an account with the Servicing Agent in shares of the Fund through a single account in the name of the Servicing Agent on behalf of its customers. Fund shares are offered continuously at the net asset value next determined after a purchase order is received by the Servicing Agent. The Servicing Agent is responsible for the prompt transmission of the purchase order to the Fund. The net asset value is expected to remain constant at $1.00. No sales load is imposed. Shares of the Fund may be purchased on any day the Fund is open. The Fund is open on the same days as the New York Stock Exchange (the "Exchange"). Currently, the Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. There is no minimum initial or subsequent purchase amount applicable to Fund shares. The Company reserves the right to reject any purchase order for shares of the Funds. All amounts accepted will be invested in full and fractional shares. Inquiries may be directed to the Company at the address or telephone number on the front cover of the Prospectus. Shares may be redeemed at their next determined net asset value after the Servicing Agent has received a redemption order. The Servicing Agent is responsible for the prompt transmission of the redemption order to the Fund. The Company makes no charge for redemption transactions. Proceeds of redemptions will be credited to the Servicing Agent's shareholder account with the Fund. The Company's Board of Directors has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act on behalf of the Fund, and shareholder approval has been obtained with respect to the Plan. Under the Plan and pursuant to the Distribution Agreement, the Fund pays Stephens, as compensation for distribution-related services, a monthly fee at the annual rate of up to 0.55% of the average daily net assets of the Fund or the maximum amount payable under applicable laws, regulations and rules, whichever is less. The actual fee payable to Stephens is determined, within the applicable limit, from time to time by mutual agreement between the Company and Stephens. Stephens may enter into selling agreements with one or more Selling Agents under which such agents may receive compensation for distribution-related services from Stephens, including, but not limited to, commissions or other payments to such agents based on the average daily net assets of Fund shares attributable to them. Stephens may retain any portion of the total distribution fee payable under the Distribution Agreement to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. Since the fee payable to Stephens under the Distribution Agreement is not based upon the actual expenditures of Stephens, the expenses of Stephens (which may include overhead expenses) may be more or less than the fees received by it under the Distribution Agreement. The Plan contemplates further that, to the extent any fees payable pursuant to a Shareholder Servicing Agreement (discussed below) are deemed to be for distribution-related services, rather than shareholder services, such payments are approved and payable pursuant to the Plan. Stephens has entered into a Selling Agreement with Wells Fargo Bank, pursuant to which Wells Fargo Bank will receive periodic payments based on the average daily net assets of Fund shares attributable to its customers. Wells Fargo Bank has been retained to act as the custodian and transfer and dividend disbursing agent for the Fund and the CIT Master Portfolio. Wells Fargo Bank's principal place of business is 420 Montgomery Street, San Francisco, California 94163, and its transfer and dividend disbursing agency activities are managed at 525 Market Street, San Francisco, California 94105. The Company has entered into a Shareholder Servicing Agreement on behalf of the Fund with Wells Fargo Bank, and may enter into such Shareholder Servicing Agreements with one or more other financial institutions which desire to act as Servicing Agents. Pursuant to each such Shareholder Servicing Agreement, the Servicing Agent, as agent for its customers, will, among other things: automatically invest cash balances maintained in customer accounts with the Servicing Agent into the Fund, and redeem shares out of the Fund, in the amounts specified pursuant to agency agreements between the Servicing Agent and its customers; maintain a single shareholder account for the benefit of its customers with the Fund; provide subaccounting services to monitor and account for its customers' beneficial ownership of shares of the Fund held in the Servicing Agent's shareholder account; answer customer inquiries regarding account status and history, purchases and redemptions of shares of the Fund, Fund yield and certain other matters pertaining to the Fund or the CIT Master Portfolio; assist its customers in designating and changing account designations and addresses; process Fund purchase and redemption transactions; forward and receive funds in connection with purchases or redemptions of shares of the Fund; provide periodic statements showing a customer's subaccount balance; furnish (either separately or on an integrated basis with other reports sent to a customer by the Servicing Agent) monthly statements and confirmations of purchases and redemptions of Fund shares in the Servicing Agent's shareholder account on behalf of the customer; forward to its customers proxy statements, annual reports, updated prospectuses and other communications from the Fund or the CIT Master Portfolio to shareholders of the Fund as required; receive, tabulate and forward to the Company proxies executed by or on behalf of its customers with respect to meetings of shareholders of the Fund; and provide such other related services, and necessary personnel and facilities to provide all of the shareholder services contemplated by the Shareholder Servicing Agreement, in each case, as the Company or a customer of the Servicing Agent may reasonably request. All purchases and redemptions are effected through Stephens as the Fund's Distributor. For providing these services, each Servicing Agent is entitled to receive a fee from the Fund, which may be paid periodically, of up to 0.35%, on an annualized basis, of the average daily net assets of the Fund represented by shares owned of record by the Servicing Agent on behalf of its customers, or an amount which, when considered in conjunction with amounts payable pursuant to the Fund's Distribution Agreement, equals the maximum amount payable to the Servicing Agent under applicable laws, regulations or rules, whichever is less. A Servicing Agent also may impose certain conditions on its customers, subject to the terms of this Prospectus, in addition to or different from those imposed by the Fund, such as requiring a minimum initial investment or the payment of additional fees for additional services offered to the customer. The exercise of voting rights and the delivery to customers of shareholder communications will be governed by the customers' agency agreements with the Servicing Agent. The Servicing Agent has agreed to forward to its customers who are shareholders of the Fund appropriate prior written disclosure of any fees that it may charge them directly and to provide written notice at least 30 days prior to imposition of any transaction fees. The Company intends to continue to qualify the Fund as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund will be treated as a separate entity from the other portfolios of the Company for tax purposes and thus the provisions of the Code applicable to regulated investment companies generally will be applied to the Fund separately, rather than to the Company as a whole. In addition, net capital gains, if any, net investment income and operating expenses will be determined separately for the Fund. By complying with the applicable provisions of the Code, the Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders. The Fund seeks to comply with the applicable provisions by investing all of its assets in the CIT Master Portfolio. The CIT Master Portfolio intends to qualify for federal income tax purposes as a partnership. As such, the Fund will be deemed to own directly its proportionate share of the CIT Master Portfolio assets. Therefore, any interest, dividends and gains or losses of the CIT Master Portfolio will be deemed to have been "passed through" to the Fund and other investors in the CIT Master Portfolio, regardless of whether such interest, dividends or gains have been distributed by the CIT Master Portfolio. Accordingly, if the CIT Master Portfolio were to accrue but not distribute any interest, dividends or gains, the Fund would be deemed to have realized and recognized its proportionate share of interest, dividends, gains or losses without receipt of any corresponding distribution. However, the CIT Master Portfolio will seek to minimize recognition by investors of interest, dividends, gains or losses without a corresponding distribution. Dividends from net investment income (including net short-term capital gains, if any) declared and paid by the Fund will be taxable as ordinary income to Fund shareholders. Shareholders of record will receive information for tax purposes following the end of each calendar year. No part of the distributions to shareholders of the Fund is expected to qualify for the dividends-received deduction allowed to corporate shareholders. The Company will be required to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds paid or credited to individual shareholders of the Fund if a correct taxpayer identification number, certified when required, is not on file with the Company or the Transfer Agent. Under the Code, dividends and distributions paid to a non-resident alien or other foreign shareholder may be subject to U.S. withholding tax (at a rate of up to 30%). See "Federal Income Taxes -- Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. You should consult your tax advisor with respect to your particular tax situation as well as the state and local tax status of investments in shares of the Fund. The Company was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. Currently, the Company offers twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Money Market Fund, the Municipal Income Fund, the Overland Sweep Fund, the Short-Term Government-Corporate Income Fund, the Short-Term Municipal Income Fund, the Strategic Growth Fund, the U.S. Government Income Fund, the U.S. Treasury Money Market Fund and the Variable Rate Government Fund. The Board of Directors may, in the future, authorize the issuance of other series of capital stock. All shares of the Company, when issued, will be fully paid and nonassessable. The Trust was established on August 14, 1991, as a Delaware business trust and was formerly known as the Cash Investment Trust. The Trust is a "series fund", which is a mutual fund divided into separate portfolios, offering three diversified portfolios, including the CIT Master Portfolio. The Trust's Declaration of Trust permits the Board of Trustees to issue beneficial interests in its separate series to investors based on their proportionate investments in such series. All shares of the Company have equal voting rights and will be voted in the aggregate, and not by series or class, except where voting by series or class is required by law or where the matter involved affects only one series or class. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required to elect Directors under the 1940 Act; however, shareholders are entitled to call a meeting of shareholders for purposes of voting on removal of a Director or Directors of the Company. In addition, whenever the Fund is requested to vote on matters pertaining to the CIT Master Portfolio, the Company will hold a meeting of the Fund's shareholders and will cast its vote as instructed by Fund shareholders. The Directors of the Company will vote shares for which they receive no voting instructions in the same proportion as the shares for which they do receive voting instructions. A more detailed statement of the voting rights of shareholders is contained in the SAI. OF THE FUND AND THE CIT MASTER PORTFOLIO Stephens Inc. AGENT AND CUSTODIAN OF THE FUND AND THE CIT MASTER PORTFOLIO; INVESTMENT ADVISER OF THE CIT MASTER PORTFOLIO Wells Fargo Bank, N.A. FOR MORE INFORMATION ABOUT THE FUND, OR WRITE: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. Stephens Inc. -- Sponsor, Administrator and Distributor Wells Fargo Bank, N.A. -- Investment Adviser, Transfer and Dividend Disbursing Overland Express Funds, Inc. (the "Company") is a professionally managed, open-end, series investment company. This Prospectus contains information about one of the funds in the Overland Express Family of Funds -- the U.S. GOVERNMENT INCOME FUND (the "Fund"). The U.S. GOVERNMENT INCOME FUND primarily seeks to provide investors with current income, while preserving capital, by investing in a portfolio consisting of securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. This Prospectus describes two classes of shares of the Fund -- Class A Shares and Class D Shares. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Fund. A Statement of Additional Information dated May 1, 1995, containing additional and more detailed information about the Fund (the "SAI"), has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. The SAI is available without charge and can be obtained by writing the Company at P.O. Box 63084, San Francisco, CA or by calling the Company at the telephone number printed above. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUND, FOR WHICH IT IS COMPENSATED. STEPHENS INC. ("STEPHENS"), WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 The Company, as an open-end investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Fund and its investment objective. Q. WHAT IS THE FUND'S INVESTMENT OBJECTIVE? A. The U.S. GOVERNMENT INCOME FUND primarily seeks to provide investors with current income, while preserving capital, by investing in a portfolio consisting of securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities (U.S. Government obligations). As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. See "Investment Objective and Policies." Q. WHAT ARE PERMISSIBLE INVESTMENTS? A. The Fund invests in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, including government-sponsored enterprises ("U.S. Government obligations"). The Fund may, subject to the restrictions described herein and in the SAI, employ interest rate futures contracts and options thereon, and may invest in certain put and call options. Transactions in futures contracts and put and call options bear the risk that commodity exchange limitations or market conditions may adversely affect the Fund's ability to liquidate its positions. See "Additional Permitted Investment Activities." Q. WHO IS THE INVESTMENT ADVISER? A. Wells Fargo Bank serves as the investment adviser to the Fund. Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. See "Advisory, Administration and Distribution Arrangements." Q. WHO IS THE SPONSOR, ADMINISTRATOR AND DISTRIBUTOR? A. Stephens serves as the sponsor, administrator and distributor for the Company. Stephens is entitled to receive a monthly administration fee at the annual rate of 0.10% of the average daily net assets of the Fund; decreasing to 0.05% of the average daily net assets of the Fund in excess of $200 million. See "Advisory, Administration and Distribution Arrangements." Q. HOW MAY I PURCHASE SHARES? A. Shares of the Fund may be purchased on any day the New York Stock Exchange (the "Exchange") is open for trading. There is a maximum sales load of 4.50% (4.71% of the net amount invested) for purchasing Class A Shares of the Fund. Class D Shares are subject to a maximum contingent deferred sales charge of 1.00% of the lesser of net asset value at purchase or net asset value at redemption. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for shares purchased through the Systematic Purchase Plan and $250 for shares purchased through qualified retirement plans. The minimum subsequent purchase amount is $100 or more. You may purchase shares of the Fund through Stephens, Wells Fargo Bank, as transfer agent (the "Transfer Agent"), or any authorized broker/dealer or financial institution. Purchases of shares of the Fund may be made by wire directly to the Transfer Agent. The Fund may pay to its distributor annually up to the greater of 0.05% of its average daily net assets attributable to Class A Shares or $100,000, and a monthly fee at an annual rate of up to 0.50% of the Fund's average daily net assets attributable to Class D Shares to defray the cost of preparing and printing prospectuses and other promotional materials and of delivering those materials to prospective shareholders of the Fund. See "Purchase of Shares" and "Distribution Plans." The Fund also may pay servicing agents a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class D Shares to compensate them for certain services. See "Servicing Plan." Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on shares of the Fund are declared daily and paid monthly. Dividends are automatically reinvested in additional shares of the same class of the Fund, unless you elect to receive dividends by check. Any capital gains will be distributed annually and may be reinvested in Fund shares of the same class or paid by check at your election. All reinvestments of dividends and/or capital gain distributions in shares of the Fund are effected at the then current net asset value free of any sales load. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of the same class of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The net investment income available for distribution to holders of the Fund's Class D Shares is reduced by the amount of servicing fees payable to servicing agents under the Servicing Plan (as defined below). See "Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. On any day the Exchange is open, shares may be redeemed upon request to Stephens or the Transfer Agent directly or through any authorized broker/dealer or financial institution. Shares may be redeemed by a request in good form in writing or through telephone direction. Proceeds are payable by check. Accounts of less than the applicable minimum initial purchase amount may be redeemed at the option of the Company. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, the Company does not charge for redeeming your shares. However, the Company reserves the right to impose charges for wiring your redemption proceeds. See "Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND? A. An investment in the Fund is not insured against loss of principal. When the value of the securities that the Fund owns declines, so does the value of your Fund shares. Therefore, you should be prepared to accept some risk with the money you invest in the Fund. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. The Fund invests primarily in U.S. Government obligations. U.S. Government obligations include securities issued or guaranteed as to principal and interest by the U.S. Government and supported by the full faith and credit of the U.S. Treasury. U.S. Government obligations also include securities issued or guaranteed by federal agencies or instrumentalities, including government-sponsored enterprises. Some obligations of agencies or instrumentalities of the U.S. Government are supported by the full faith and credit of the United States or U.S. Treasury guarantees; others, by the right of the issuer or guarantor to borrow from the U.S. Treasury; still others, by the discretionary authority of the U.S. Government to purchase certain obligations of the agency or instrumentality; and others, only by the credit of the agency or instrumentality issuing the obligation. In the case of obligations not backed by the full faith and credit of the United States, the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, which agency or instrumentality may be privately owned. There can be no assurance that the U.S. Government will provide financial support to its agencies or instrumentalities where it is not obligated to do so. In addition, U.S. Government obligations are subject to fluctuations in market value due to fluctuations in market interest rates. As a general matter, the value of debt instruments, including U.S. Government obligations, declines when market interest rates increase and rises when market interest rates decrease. Certain types of U.S. Government obligations are subject to fluctuations in yield or value due to their structure or contract terms. Moreover, principal on the mortgages underlying certain of the securities in which the Fund may invest may be prepaid in advance of maturity; these prepayments tend to increase when interest rates decline, presenting the Fund with more principal to invest at lower rates. Q. WHAT ARE DERIVATIVES AND DOES THE FUND USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. Some of the permissible investments described in this Prospectus, such as adjustable rate mortgage-backed securities which have an interest rate that is reset periodically based on an index, are considered derivatives. Some derivatives may be more sensitive than direct securities to changes in interest rates or sudden market moves. Some derivatives also may be susceptible to fluctuations in yield or value due to their structure or contract terms. Q. WHAT STEPS DOES THE FUND TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser to the Fund, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with the Fund's investment objective, does not expose the Fund to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by the Fund also is subject to broadly applicable investment policies. For example, the Fund may not invest more than a specified percentage of its assets in "illiquid securities," including those derivatives that do not have active secondary markets. Nor may the Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) After any waivers or reimbursements. * See "Contingent Deferred Sales Charge -- Class D Shares." ** As further described in the Prospectus under the caption "Advisory, Administration and Distribution Arrangements," Stephens and Wells Fargo Bank each has agreed to waive or reimburse all or a portion of their respective fees in circumstances where Fund expenses that are subject to limitations imposed under state securities laws and regulations exceed such limitations. In addition, Stephens and Wells Fargo Bank each may elect, in its sole discretion, to otherwise waive all or a portion of its respective fees or reimburse expenses. Any such waivers or reimbursements with respect to the Fund would reduce the total expenses of the Fund. The percentages shown above with respect to the Class A and Class D Shares under "Total Other Expenses" and "Total Fund Operating Expenses" are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and reimbursements that are expected to continue during the current fiscal year. Absent waivers and reimbursements, "Total Other Expenses" and "Total Operating Expenses" with respect to Class D Shares, would have been 0.87% and 1.87%. Long-term shareholders of the Fund could pay more in distribution related charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers, Inc. ("NASD"). There can be no assurances that the voluntary fee waivers and expense reimbursements will continue. The purpose of the foregoing tables is to assist you in understanding the various costs and expenses that an investor in the Fund will bear directly or indirectly. There are no other sales loads, redemption fees or exchange fees charged by the Fund. However, the Company reserves the right to impose charges for wiring redemption proceeds. The Examples should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. See Prospectus sections captioned "Advisory, Administration and Distribution Arrangements," "Distribution Plans" and "Purchase of Shares" for more complete descriptions of the various costs and expenses applicable to the Fund. The following information has been derived from the Financial Highlights in the Fund's 1994 annual financial statements. The financial statements are incorporated by reference into the SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Fund's 1994 annual financial statements and the notes thereto. The SAI has been incorporated by reference into this Prospectus. FOR A CLASS A SHARE OUTSTANDING AS SHOWN + Total returns do not include the one-time sales charge. FOR A CLASS D SHARE OUTSTANDING AS SHOWN * This class commenced operations on July 1, 1993. + Total returns do not include the 1% contingent deferred sales charge. Set forth below is a description of the investment objective and related policies of the Fund. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. INVESTMENT OBJECTIVE. The U.S. Government Income Fund primarily seeks to provide investors with current income, while preserving capital, by investing in a portfolio consisting of securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities ("U.S. Government obligations"). As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. The Fund may invest in obligations of any maturity. Under ordinary circumstances, the weighted average maturity of the portfolio is generally expected to be between 20 and 30 years. However, under unusual market circumstances, it may be shorter than 20 years. Wells Fargo Bank will seek to preserve the stability of the net asset value of Fund shares during periods when it believes that the bond markets are vulnerable to decline by reducing the weighted average maturity of the Fund's portfolio, by purchasing or retaining securities with a lower expected volatility and/or by engaging in hedging activities as more fully described below. Substantially all, and, in any event, at least 65%, of the total assets of the Fund will under normal circumstances be invested in income-producing U.S. Government obligations. Not all U.S. Government obligations are direct obligations of the U.S. Treasury. Payment of their principal and interest may be backed by the full faith and credit of the United States (e.g., U.S. Treasury bills and Government National Mortgage Association certificates) or solely by the issuing or guaranteeing agency or instrumentality itself (including government-sponsored enterprises) (e.g., Federal National Mortgage Association notes). In the latter case, investors must look to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment. In addition, the Fund may invest cash balances temporarily in money market instruments rated at the date of purchase "P-1" or "P-2" by Moody's Investors Service, Inc. ("Moody's") or "A-1+," "A-1" or "A-2" by Standard & Poor's Corporation ("S&P"), or if not rated, which are of comparable quality in the opinion of Wells Fargo Bank, under the Direction of the Board of Directors. Certificates of the Government National Mortgage Association represent ownership interests in pools of mortgages and the resulting cash flow from those mortgages. The stated maturities of these obligations may be shortened by unscheduled prepayments of principal and interest on the underlying mortgages, thereby affecting the Fund's yield. The Fund may also purchase securities which represent the interest portion or the principal portion (sometimes referred to as "STRIPs") of securities in which the Fund may otherwise invest. STRIPs may have different investment characteristics than the instruments from which they derive. Certain of the debt instruments that the Fund may purchase bear interest at rates that are not fixed, but vary with changes in specified market rates or indices or at specified intervals. Certain of these instruments may carry a demand feature that would permit the holder to tender them back to the issuer at par value prior to maturity. The floating- and variable-rate instruments that the Fund may purchase include certificates of participation in floating- and variable-rate obligations purchased from banks; with respect to the tax-exempt status of these certificates, the investment adviser may rely upon either the opinion of counsel or Internal Revenue Service rulings issued with respect thereto. Wells Fargo Bank, as investment adviser, monitors on an ongoing basis the ability of an issuer of a demand instrument to pay principal and interest on demand. Events occurring between the date the Fund elects to demand payment on a floating- or variable-rate instrument and the date payment is due may affect the ability of the issuer of the instrument to make payment when due, and unless such demand instrument permits same-day settlement, may affect the Fund's right to obtain payment at par. Demand instruments whose demand feature is not exercisable within seven days may be treated as liquid, provided an active secondary market exists. The Fund may enter into repurchase agreements wherein the seller of a security to the Fund agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Fund may enter into repurchase agreements only with respect to U.S. Government obligations and other securities that are permissible investments for the Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. The maturities of the underlying securities in a repurchase agreement transaction may be greater than one year. If the seller defaults and the value of the underlying securities has declined, the Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the Fund's disposition of the security may be delayed or limited. The Fund may not enter into a repurchase agreement with a maturity of more than seven days, if, as a result, more than 10% of the market value of the Fund's total net assets would be invested in repurchase agreements with maturities of more than seven days, restricted securities and illiquid securities. The Fund will only enter into repurchase agreements with registered broker/dealers and commercial banks that meet guidelines established by the Board of Directors and are not affiliated with the investment adviser. The Fund may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. The Fund's investment objective, as set forth in the first paragraph of the subsection discussing the Fund's objective and policies, is fundamental; that is, the investment objective may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. If the Board of Directors determines, however, that the Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will disclose any such material changes in the then current prospectus. In addition, as matters of fundamental policy, the Fund may: (i) borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased while any such borrowing exists); (ii) make loans of portfolio securities; (iii) invest up to 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, restricted securities and illiquid securities; and (iv) invest up to 10% of the current value of its net assets in fixed time deposits that are subject to withdrawal penalties and that have maturities of more than seven days. The Board of Directors, in addition to supervising the actions of the investment adviser, administrator and distributor, as set forth below, decides upon matters of general policy. Pursuant to an Advisory Contract, the Fund is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company (other than those structured as "feeder funds"), and to six other registered open-end management investment companies, each of which consist of several separately managed investment portfolios. The Advisory Contract provides that Wells Fargo Bank shall furnish to the Fund investment guidance and policy direction in connection with the daily portfolio management of the Fund. Pursuant to the Advisory Contract, Wells Fargo Bank furnishes to the Board of Directors periodic reports on the investment strategy and performance of the Fund. Purchase and sale orders of the securities held by the Fund may be combined with those of other accounts that Wells Fargo Bank manages, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for the Fund and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, the Fund, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contract, Wells Fargo Bank is entitled to monthly advisory fees at the annual rates of 0.50% of the average daily net assets of the Fund. From time to time Wells Fargo Bank may waive such fees in whole or in part. Any such waiver would reduce expenses of the Fund and, accordingly, have a favorable impact on the yield or return of the Fund. For the year ended December 31, 1994, Wells Fargo Bank was paid .50% of the average daily net assets of the Fund as compensation for its services as investment adviser. Mr. Michael Niedermeyer is responsible for the day-to-day management of the U.S. Government Income Fund. Mr. Niedermeyer, executive vice president, is the chief fixed-income investment officer for the Asset Management Division and chairman of the Fixed-Income Strategy Committee. He joined Wells Fargo Bank's Asset Management Division in 1987. Prior to joining Wells Fargo Bank, he was a portfolio manager at U.S. National Bank of Oregon responsible for the bank's bond portfolio and was manager of the municipal trading and underwriting department. He received a B.A. in business administration from Carroll College in 1975 and an M.B.A. in finance from the University of Oregon in 1977. Mr. Neidermeyer has co-managed the Fund since April 1988. Mr. Paul Single has been responsible for the day-to-day management of the U.S. Government Income Fund portfolio since May 1, 1995. Mr. Single has managed taxable bond portfolios for over a decade, and has specific expertise in mortgage-backed securities. Prior to joining Wells Fargo Bank, in early 1988, he was a senior portfolio manager for Benham Capital Management Group. Mr. Single received his B.S. from Springfield College. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into an agreement with the Fund under which Stephens acts as administrator for the Fund. For these administrative services, Stephens is entitled to receive from the Fund a monthly fee at the annual rate of 0.10% of its average daily net assets; decreasing to 0.05% of the average daily net assets of the Fund in excess of $200 million. From time to time Stephens may waive fees from the Fund in whole or in part. Any such waiver will reduce expenses of the Fund and, accordingly, have a favorable impact on the yield or return of the Fund. The Administration Agreement between Stephens and the Fund states that Stephens shall provide as administrative services, among other things, general supervision (i) of the operation of the Fund, including coordination of the services performed by the Fund's investment adviser, transfer agent, custodian, independent auditors and legal counsel, (ii) in connection with regulatory compliance, including the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions and the preparation of proxy statements and shareholder reports for the Fund; and (iii) general supervision relative to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors. Stephens also furnishes office space and certain facilities required for conducting the business of the Fund and pays the compensation of the Company's directors, officers and employees who are affiliated with Stephens. Stephens, as the principal underwriter of the Fund within the meaning of the Investment Company Act of 1940 (the "1940 Act"), has also entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing Class A Shares and Class D Shares of the Fund. The Distribution Agreement provides that Stephens shall act as agent for the Fund for the sale of its Class A Shares and Class D Shares and may enter into selling agreements with broker/dealers or financial institutions to market and make available Class A Shares and Class D Shares to their respective customers. Under the Distribution Agreement, Stephens is entitled to receive from the Fund a monthly fee at an annual rate of up to the greater of $100,000 or 0.05% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at an annual rate of up to 0.50% of the average daily net assets of the Class D Shares of the Fund. The actual fee payable to Stephens is determined, within such limits, from time to time by mutual agreement between the Company and Stephens, and may not exceed the maximum amount payable under the Rules of Fair Practice of the NASD. With respect to the Class D Shares of the Fund, Stephens may enter into selling agreements with one or more selling agents under which such agents may receive from Stephens compensation for sales support services. Such compensation may include, but is not limited to, commissions or other payments based on the average daily net assets of Class D Shares of the Fund attributable to such agents. The principal sales support services provided to the Fund are services provided by selling agents in exchange for commissions and other payments to selling agents. Stephens may retain any portion of the total distribution fee payable under the Distribution Agreement to compensate it for distribution-related services provided by Stephens or to reimburse it for expenses. Since the Distribution Agreement provides for fees that are used by Stephens to pay for distribution services, a plan of distribution for each class of shares (individually a "Plan", collectively the "Plans") and the Distribution Agreement are approved and reviewed in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in which an investment company may, directly or indirectly, bear the expense of distributing its shares. See Prospectus section captioned "Distribution Plans" for a more complete description of the Plans. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. The Company will not purchase securities from Stephens, Wells Fargo Bank, or their respective affiliates, as principal, without an exemptive order from the SEC. The Fund may enter into servicing agreements with one or more servicing agents on behalf of Class D Shares of the Fund. Under such agreements, servicing agents provide shareholder liaison services, which may include responding to customer inquiries and providing information on shareholder investments, and provide such related services as the Fund or a Class D Shareholder may reasonably request. For these services, a servicing agent receives a fee which will not exceed, on an annualized basis for the Fund's then current fiscal year, 0.25% of the average daily net assets of the Class D Shares of the Fund represented by Class D Shares owned by investors with whom the servicing agent maintains a servicing relationship, or an amount which equals the maximum amount payable to the servicing agent under applicable laws, regulations or rules, whichever is less. DETERMINATION OF NET ASSET VALUE Net asset value per share for the Fund is determined by Wells Fargo Bank on each day that the Exchange is open for trading. The net asset value of a class of the Fund is the value of total net assets attributable to each class divided by the number of outstanding shares of that class. The value of net assets per class is determined daily by adjusting the net assets per class at the beginning of the day by the value of each class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each class by attributing to each class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each class as appropriate. The net asset value of each class is expected to fluctuate daily. The value of assets of the Fund (other than debt obligations maturing in 60 days or less) is determined as of the close of regular trading on the Exchange (referred to hereafter as the "close of the Exchange"), which is currently 4:00 p.m. New York time. Except for debt obligations with remaining maturities of 60 days or less, which are valued at amortized cost, assets are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the Board of Directors. Prices used for such valuations may be provided by independent pricing services. From time to time, the Company may advertise yield and total return information with respect to a class of shares of the Fund. Total return and yield information of a class of shares are based on the historical earnings and performance of such class of shares and should not be considered representative of future performance. The total return of a class of shares of the Fund is calculated by subtracting (i) the public offering price of the class of shares (which includes the maximum sales charge of the class of shares) of one share of the class of shares at the beginning of the period, from (ii) the net asset value of all shares for the class of shares an investor would own at the end of the period for the share held at the beginning of the period (assuming reinvestment of all dividends and capital gain distributions), and dividing by (iii) the public offering price per share of the class of shares at the beginning of the period. The resulting percentage indicates the positive or negative rate of return that an investor would have earned from reinvested dividends and capital gain distributions and changes in share price during the period for the class of shares. The Fund may also, at times, calculate total return of a class of shares based on net asset value per share of a class of shares (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the class of shares, or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that total return data derived pursuant to the calculation described above are also presented. The yield of a class of shares will be computed by dividing its net investment income per share of the class earned during a specified period by its public offering price per share (which includes the maximum sales charge) on the last day of such period and annualizing the result. For purposes of sales literature, these yields may also, at times, be calculated on the basis of the net asset value per share of the class (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the class of shares, or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that yield data derived pursuant to the calculation described above are also presented. The Fund's Annual Report contains additional performance information and is available upon request without charge from the Fund. Because of differences in the fees and/or expenses borne by Class D Shares of the Fund, the net yield on such shares can be expected, at any given time, to differ from the net yield on Class A Shares. Performance information quotations will be computed separately for Class A Shares and Class D Shares. Additional information about the performance of the Fund is contained in the Annual Report for the Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. Shares of the Fund may be purchased on any day the Exchange is open for trading through Stephens, the Transfer Agent, or any authorized broker/dealers or financial institutions with which Stephens has entered into agreements. Such broker/dealers or financial institutions are responsible for the prompt transmission of purchase, exchange or redemption orders, and may independently establish and charge additional fees to their clients for such services, other than services related to purchase orders, which would reduce the clients' overall yield or return. The Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for purchases through the Systematic Purchase Plan and $250 for an investment by a retirement plan qualified under the Internal Revenue Code of 1986, as amended (the "Code"). The minimum subsequent purchase amount is $100. The minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. The Company reserves the right to reject any purchase order. All funds, net of sales loads, will be invested in full and fractional shares. Checks will be accepted for the purchase of the Fund's shares subject to collection at full face value in U.S. dollars. Inquiries may be directed to the Company at the address or telephone number on the front cover of the Prospectus. Shares of the Fund are offered continuously at the applicable offering price (including any sales load) next determined after a purchase order is received. Payment for shares purchased through a broker/dealer will not be due from the broker/dealer until settlement date, currently five business days after the order is placed. Effective June 7, 1995, the settlement date will normally be three days after the order is placed. It is the broker/dealer's responsibility to forward payment for shares being purchased to the Fund promptly. Payment for orders placed directly through the Transfer Agent must accompany the order. When payment for shares of the Fund purchased through the Transfer Agent is by a check that is drawn on any domestic bank, federal funds normally become available to the Fund on the business day after the day the check is deposited. Checks drawn on a non-member bank or a foreign bank may take substantially longer to be converted into federal funds and, accordingly, may delay the execution of an order. When shares of the Fund are purchased through a broker/dealer or financial institution, Stephens reallows that portion of the sales load designated below as the Dealer Allowance. Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Fund may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. If all sales charges are paid or reallowed to a broker/dealer or financial institution, it may be deemed an "underwriter" under the Securities Act of 1933. When shares are purchased directly through the Transfer Agent and no broker/dealer or financial institution is involved with the purchase, the entire sales load is paid to Stephens. Sales loads relating to the purchase of Class A Shares in the Fund are as follows: Class D Shares are not subject to a front-end sales load. However, Class D Shares which are redeemed within one year from the receipt of a purchase order will be subject to a contingent deferred sales charge equal to 1% of the dollar amount equal to the lesser of the net asset value at the time of purchase of the shares being redeemed or the net asset value of such shares at the time of redemption. A selling agent or servicing agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class D Shares. REDUCED SALES CHARGE -- CLASS A SHARES The above Volume Discounts are also available to you based on the combined dollar amount being invested in Class A Shares of the Fund or of Class A Shares of other portfolios of the Company which assess a sales load (the "Load Funds"). Because Class D Shares are not subject to a front-end sales charge, the amount of Class D Shares you hold is not considered in determining any volume discount. The Right of Accumulation allows you to combine the amount being invested in Class A Shares in the Fund with the total net asset value of Class A Shares in any of the Load Funds to determine reduced sales loads in accordance with the above sales load schedule. For example, if you own Class A Shares of the Load Funds with an aggregate net asset value of $90,000 and invest an additional $20,000 in Class A Shares of the Fund, the sales load on the entire additional amount would be 4.00% of the offering price. To obtain such discount, you must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the reduced sales load, and confirmation of the order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time with respect to all Class A Shares purchased thereafter. A Letter of Intent allows you to purchase Class A Shares of the Fund over a 13-month period at reduced sales loads based on the total amount intended to be purchased plus the total net asset value of Class A Shares in any of the Load Funds already owned. Each investment made during the period receives the reduced sales load applicable to the total amount of the intended investment. If such within the period, you must pay the difference between the sales loads applicable to the purchases made and the charges previously paid. You may Reinvest proceeds from a redemption of Class A Shares of the Fund in Class A Shares of the Fund or in Class A Shares of another of the Company's investment portfolios that offers Class A Shares at net asset value, without a sales load, within 120 days after such redemption. However, if the other investment portfolio charges a sales load that is higher than the sales load that you have paid in connection with the Class A Shares you have redeemed, you pay the difference. In addition, the Class A Shares of the investment portfolio to be acquired must be registered for sale in your state of residence. The amount that may be so reinvested may not exceed the amount of the redemption proceeds, and a written order for the purchase of the Class A Shares must be received by the Fund or the Transfer Agent within 120 days after the effective date of the redemption. If you realized a gain on your redemption, the reinvestment will not alter the amount of any federal capital gains tax payable on the gain. If you realized a loss on your redemption, the reinvestment may cause some or all of the loss to be disallowed as a tax deduction, depending on the number of Class A Shares purchased by reinvestment and the period of time that has elapsed after the redemption, although for tax purposes, the amount disallowed is added to the cost of the Class A Shares acquired upon the reinvestment. Reductions in front-end sales loads apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife, and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Reductions in front-end sales loads also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of Class A Shares purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the 1940 Act, which has been in existence for more than six months and which has a primary purpose other than acquiring shares of the Fund at a reduced sales load, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote five percent or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote five percent of more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by Directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and other broker-dealers that have entered into agreements with Stephens to sell such shares. Class A Shares of the Fund also may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by present and retired Directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo Bank and its affiliates if Wells Fargo Bank and/or the respective affiliates agree. Such shares also may be purchased at such price by employee benefit and thrift plans for such persons and by any investment advisory, trust or other fiduciary account (other than an individual retirement account) maintained, managed or advised by Wells Fargo Bank or Stephens or their affiliates. In addition, Class A Shares also may be purchased at net asset value by pension, profit sharing or other employee benefit plans established under Section 401 of the Code. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by the following types of investors that place trades through an omnibus account maintained at the Fund by a discount broker/dealer: trust companies; investment advisers and financial planners on behalf of their clients; retirement and deferred compensation plans and the trusts used to fund these plans. By investing in the Fund, you appoint the Transfer Agent, as agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional shares. See "Dividends and Distributions." Although most shareholders elect not to receive stock certificates, certificates for full shares of the Fund can be obtained on request. It is more complicated to redeem shares held in certificated form, and the expedited redemption described below is not available with respect to certificated shares. CONTINGENT DEFERRED SALES CHARGE -- CLASS D SHARES Class D Shares which are redeemed within one year of receipt of a purchase order for such shares will be subject to a contingent deferred sales charge equal to 1.00% of an amount equal to the lesser of the net asset value at the time of purchase for the Class D Shares being redeemed or the net asset value of such shares at the time of redemption. Accordingly, a contingent deferred sales charge will not be imposed on amounts representing increases in net asset value above the net asset value at the time of purchase. In addition a charge will not be assessed on Class D Shares purchased through reinvestment of dividends or capital gains distributions. In determining whether a contingent deferred sales charge is applicable to a redemption, Class D Shares are considered to be redeemed on a first-in, first-out basis so that Class D Shares held for a longer period of time are considered redeemed prior to more recently acquired shares. The contingent deferred sales charge is waived on redemptions of Class D Shares (i) following the death or disability (as defined in the Code) of a shareholder, (ii) to the extent that the redemption represents a minimum required distribution from an individual retirement account or other retirement plan to a shareholder who has reached age 70 1/2, (iii) effected pursuant to the Company's right to liquidate a shareholder's account if the aggregate net asset value of the shareholder's account is less than the minimum account size, or (iv) in connection with the combination of the Company with any other registered investment company by a merger, acquisition of assets, or by any other reorganization transaction. Investors who are entitled to purchase Class A Shares of the Fund at net asset value without a sales load should not purchase Class D Shares. Other investors, including those who are entitled to purchase Class A Shares of the Fund at a reduced sales load, should compare the fees assessed on Class A Shares against those assessed on Class D Shares (including potential contingent deferred sales charges and higher Rule 12b-1 fees) in light of the amount to be invested and the anticipated time that the shares will be owned. Shares of the Fund may be purchased by any of the methods described below. INITIAL PURCHASES OF FUND SHARES BY WIRE 1. Telephone toll free (800) 572-7797. Give the name of the Fund in which the investment is to be made, the class of shares to be purchased, the name(s) in which the shares are to be registered, the address and social security or tax identification number (where applicable) of the person or entity in whose name(s) the shares are to be registered, dividend payment election, amount to be wired, name of the wiring bank and name and telephone number of the person to be contacted in connection with the order. An account number will be assigned. 2. Instruct the wiring bank to transmit the specified amount in federal funds ($1,000 or more) to: Wire Purchase Account Number: 4068-000462 Attention: Overland Express U.S. Government Income Fund (designate Class Account Name(s): (name(s) in which to be registered) Account Number: (as assigned by telephone) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price, or, in the case of Class D Shares, the net asset value, next determined after the Account Application is received and accepted. INITIAL PURCHASES OF FUND SHARES BY MAIL 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $1,000 or more, payable to "Overland Express U.S. Government Income Fund (designate Class A or D)" at its mailing address set forth above. Additional purchases of $100 or more may be made by instructing the Funds' Transfer Agent to debit an approved account designated in the Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Overland Express U.S. Government Income Fund (designate Class A or D)" to the above address. Write the Fund account number on the check and include the detachable stub from a Statement of Account or a letter providing the account number. The Company's Systematic Purchase Plan provides you with a convenient way to establish and add to your existing accounts on a monthly basis. If you elect to participate in this plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a designated bank account (provided your bank is a participant in the automated clearing house system). The Transfer Agent withdraws and uses this amount to purchase shares of the Fund on or about the fifth business day of each month. There are no additional fees charged for participating in this plan. You may change the investment amount, suspend purchases or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to any scheduled transaction. An election will be terminated automatically if the designated bank account balance is insufficient to make a scheduled withdrawal, or if either the designated bank account or your account is closed. PURCHASES THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Purchase orders for shares in the Fund placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale, including orders for which payment is to be made from free cash credit balances in securities accounts held by a dealer, will be effective on the same day the order is placed if received by the Transfer Agent before the close of business. Purchase orders that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of purchase orders to the Transfer Agent. Payment for Fund shares is not due until settlement date. Broker/dealers and financial institutions may benefit from the temporary use of payments to the Fund during the settlement period. A broker/dealer or financial institution that is involved in a purchase transaction may charge separate account, service or transaction fees. Financial institutions may be required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. You may exchange Class A Shares of the Fund for shares of the same class of the Company's other investment portfolios or for shares of the California Tax-Free Money Market Fund, the Money Market Fund or the U.S. Treasury Money Market Fund in an identically registered account at respective net asset values, provided that, if the other investment portfolio charges a sales load on the purchase of the class of shares being exchanged that is higher than the sales load that you have paid in connection with the shares you are exchanging, you pay the difference. Class D Shares of the Fund may be exchanged for Class D Shares of one of the Company's other investment portfolios that offer Class D Shares or for Class A Shares of the Money Market Fund in an identically registered account at respective net asset values. You are not charged a contingent deferred sales charge on exchanges of Class D Shares for shares of the same class of another of the Company's investment portfolios or for Class A Shares of the Money Market Fund. If you exchange Class D Shares of an investment portfolio for shares of the same class of another investment portfolio, or for Class A Shares of the Money Market Fund, the remaining period of time (if any) contingent deferred sales charge is in effect will be computed from the time of the initial purchase of the previously held shares. Accordingly, if you exchange Class D Shares of an investment portfolio for Class A Shares of the Money Market Fund, and redeem the shares of the Money Market Fund within one year of the receipt of the purchase order for the exchanged Class D Shares, you will have to pay a deferred sales charge equal to the contingent deferred sales charge applicable to the previously exchanged Class D Shares. If you exchange Class D Shares of an investment portfolio for Class A Shares of the Money Market Fund, you may subsequently re-exchange the Class A Shares of the Money Market Fund only for Class D Shares. If you re-exchange the Class A Shares of the Money Market Fund for Class D Shares of an investment portfolio, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of your initial purchase of Class D Shares. In addition, shares of the investment portfolio to be acquired must be registered for sale in your state of residence. You should obtain, read and retain the Prospectus for the investment portfolio which you desire to exchange into before submitting an exchange order. You may exchange shares by writing the Transfer Agent as indicated below under Redemption by Mail, or by calling the Transfer Agent or your authorized broker/dealer or financial institution or Servicing Agent, unless you have elected not to authorize telephone exchanges in the Account Application (in which case you may subsequently authorize such telephone exchanges by completing a Telephone Exchange Authorization Form and submitting it to the Transfer Agent in advance of the first such exchange). Shares held in certificated form may not be exchanged by telephone. The Transfer Agent's number for exchanges is (800) 572-7797. Procedures applicable to redemption of the Fund's shares are also applicable to exchanging shares, except that, with respect to an exchange transaction between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. The Company reserves the right to limit the number of times shares may be exchanged between Funds, or to reject in whole or in part any exchange request into a fund when management believes that such action would be in the best interest of the fund's other shareholders, such as when management believes that such action would be appropriate to protect such fund against disruptions in portfolio management resulting from frequent transactions by those seeking to time market fluctuations. Any such rejection will be made by management on a prospective basis only, upon notice to the shareholder given not later than 10 days following such shareholder's most recent exchange. The Company reserves the right to reject any telephone exchange order or otherwise to modify or discontinue exchange privileges at any time. Under SEC rules, 60 days prior notice of any amendments or termination of exchange privileges will be given to shareholders, except under certain extraordinary circumstances. A capital gain or loss for tax purposes may be realized upon an exchange, depending upon the cost or other basis of shares redeemed. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you decline such privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine. If the Transfer Agent does not follow such procedures, the Company and the Transfer Agent may be liable for any losses attributable to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Shares may be redeemed at their next determined net asset value after receipt of a request in proper form by the Transfer Agent directly or through any authorized broker/dealer or financial institution. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, as described under "Purchase of Shares," the Company does not charge for redemption transactions. However, a broker/dealer or financial institution that is involved in a redemption transaction may charge separate account, service or transaction fees. On a day the Fund is open for business, redemption orders received by an authorized broker/dealer or financial institution before the close of the Exchange and received by the Transfer Agent before the close of business on that day will be executed at the net asset value per share determined at the close of the Exchange on that day. Redemption orders received by authorized broker/dealers or financial institutions after the close of the Exchange, or not received by the Transfer Agent prior to the close of business, will be executed at the net asset value determined at the close of the Exchange on the next business day. Redemption proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, ordinarily will be remitted within seven days after the order is received in proper form, except proceeds may be remitted over a longer period to the extent permitted by the SEC under extraordinary circumstances. If an expedited redemption is requested, redemption proceeds will be distributed only if the check used for investment is deemed to be cleared for payment by your bank, currently considered by the Company to be a period of 15 days after investment. The proceeds, of course, may be more or less than cost. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. 1. Write a letter of instruction. Indicate the dollar amount of or number of shares to be redeemed. Refer to your Fund account number and provide either a social security or a tax identification number (as applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more, or redemption proceeds are to be paid to someone other than you at your address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the Federal Deposit Insurance Corporation, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation will be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. If shares to be redeemed are held in certificated form, enclose the certificates with the letter. Do not sign the certificates and for protection use registered mail. 5. Mail the letter to the Transfer Agent at the mailing address set forth under "Purchase of Shares." Unless other instructions are given in proper form, a check for the proceeds of redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be sent to your address of record. The Company's Systematic Withdrawal Plan provides a way for you to have shares redeemed from your account and the proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, distributed to you on a monthly basis. You may elect to participate in this plan if you have a shareholder account valued at $10,000 or more as of the date of your election to participate, and are not also a participant in the Company's Systematic Purchase Plan at any time while participating in this plan. To participate in the plan, specify an amount ($100 or more) to be distributed by check to your address of record or deposited in a designated bank account. The Transfer Agent redeems sufficient shares and mails or deposits the proceeds of the redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, as instructed, on or about the fifth business day prior to the end of each month. There are no additional fees charged for participating in this plan. You may change the withdrawal amount, suspend withdrawals or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to a scheduled transaction. An election will be terminated automatically if your account balance is insufficient to make a scheduled withdrawal or if your account is closed. If shares are not held in certificated form, you may request an expedited redemption of shares by letter or telephone (unless you have elected not to authorize telephone redemptions on your Account Application or another form that is on file with the Transfer Agent) on any day the Fund is open for business. See "Exchange Privileges" for additional information regarding telephone redemption privileges. You may request expedited redemption by telephone by calling the Transfer Agent at (800) 572-7797. You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchases of Fund Shares by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be wired or credited to the bank indicated in your Account Application or wired to an authorized broker/dealer or financial institution designated in your Account Application. The Company reserves the right to impose charges for wiring redemption proceeds. When proceeds of an expedited redemption are to be paid to someone other than yourself, to an address other than that of record, or to a bank, broker/dealer or other financial institution that has not been predesignated, the expedited redemption request must be made by letter and the signature(s) on the letter must be guaranteed, regardless of the amount of the redemption. If an expedited redemption request is received by the Transfer Agent by the close of business on any day the Fund is open for business, the redemption proceeds will be transmitted to your bank or predesignated broker/dealer or financial institution on the next business day (assuming the investment check has cleared as described above), absent extraordinary circumstances. A check for proceeds of less than $5,000 will be mailed to your record, except that, in the case of investments in the Company that have been effected through broker/dealers, banks and other institutions that have entered into special arrangements with the Company, the full amount of the redemption proceeds may be transmitted by wire or credited to a designated account. REDEMPTIONS THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Redemption requests placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale will be effective on the same day the request is placed if received by the Transfer Agent before the close of business. Redemption requests that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of redemption requests to the Transfer Agent. Unless you have made other arrangements, and have informed the Transfer Agent of such arrangements, proceeds of redemptions made through authorized broker/dealers and financial institutions will be credited to your account with such broker/dealer or institution. You may request a check from your broker/dealer or financial institution or may elect to retain the redemption proceeds in your account. The broker/dealer or financial institution may benefit from the use of the redemption proceeds prior to the clearance of a check issued to you for such proceeds or prior to disbursement or reinvestment of such proceeds on your behalf. The proceeds of redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. Due to the high cost of maintaining small accounts, the Company reserves the right to redeem accounts that fall below $1,000. Prior to such a redemption, you will be notified in writing and permitted 30 days to make additional investments to raise the account balance to the specified minimum. The Company's Board of Directors has adopted a Plan on behalf of each class of shares of the Fund. Under the Plans and pursuant to the Distribution Agreement, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials, and of delivering prospectuses and those materials to prospective shareholders of the Fund, by paying on an annual basis up to the greater of $100,000 or 0.05% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at an annual rate of 0.50% of the average daily net assets of the Class D Shares of the Fund to the distributor. Under the Plan for the Class D Shares of the Fund, the distributor may enter into selling agreements with one or more selling agents under which such agents may receive compensation for distribution-related services from the distributor, including, but not limited to, commissions or other payments to such agents based on the average daily net assets of Class D Shares attributable to them. The distributor may retain any portion of the total distribution fee payable under the Plans to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. The Plans provide only for the reimbursement of actual expenses. The Fund may participate in joint distribution activities with any other class or portfolio of the Company, in which event expenses reimbursed out of the assets of the Fund may be attributable, in part, to the distribution-related activities of another portfolio. Generally, the expenses attributable to joint distribution activities will be allocated among the Fund, and any other portfolio of the Company in proportion to their relative net asset sizes, although the Board of Directors may allocate such expenses in any other manner that it deems fair and equitable. The Company's Board of Directors has adopted a servicing plan ("Servicing Plan") on behalf of the Class D Shares of the Fund. Pursuant to the Servicing Plan the Fund may enter into servicing agreements with one or more servicing agents who agree to provide administrative support services to their customers who are the record or beneficial owners of Class D Shares. Such servicing agents will be compensated at an annual rate of up to 0.25% of the average daily net asset value of the Class D Shares held of record or beneficially by such customers. The Fund intends to declare as a dividend to all shareholders of record substantially all of its net investment income at the close of each business day to shareholders of record at 4:00 p.m. (New York time) on the day of declaration. Shares purchased in the Fund will begin earning dividends on the business day following the date the purchase order settles and shares redeemed will earn dividends through the date of redemption. Net investment income for a Saturday, Sunday or holiday will be declared as a dividend to shareholders of record at 4:00 p.m. (New York time) on the prior business day. Dividends of the Fund declared in, and attributable to, any month will be paid early in the following month. Shareholders of the Fund who redeem shares prior to a dividend payment date will be entitled to all dividends declared but unpaid prior to redemption on such shares on the next dividend payment date. Net capital gains of the Fund, if any, will be distributed annually (or more frequently to the extent permitted to avoid imposition of the 4% excise tax described in the SAI). Dividends and/or capital gain distributions paid by the Fund will be invested in additional shares of the same class of the Fund at net asset value (without any sales load) and credited to your account on the reinvestment date or, at your election, paid by check. Dividend checks and Statements of Account will be mailed within approximately three business days after the payment date. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The Fund's net investment income available for distribution to the holders of Class D Shares will be reduced by the amount of shareholder servicing fees payable to shareholder servicing agents under the Servicing Plan and by the incremental distribution fees payable under the Distribution Plan. There may be certain other differences in fees (e.g. audit fees, transfer agent fees) between Class A Shares and Class D Shares that would affect their relative dividends. By complying with the applicable provisions of the Code, the Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders. However, dividends from the investment income (which includes net short-term capital gains, if any) declared and paid by the Fund will be taxable as ordinary income to Fund shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional shares, they will be taxable. Generally, dividends are taxable to shareholders at the time they are paid. However, dividends declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends are actually paid no later than January 31 of the following year. You may be eligible to defer the taxation of dividend and capital gain distributions on shares of the Fund which are held under a qualified tax-deferred retirement plan. The Fund intends to pay out substantially all of its net investment income and net realized capital gains (if any) for each year. The Fund's dividends will not qualify for the dividends-received deduction allowed to corporate shareholders. The Fund, or your Shareholder Servicing Agent on its behalf, will inform you of the amount and nature of Fund dividends and capital gains. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Fund if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes -- Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. All investors should consult their individual tax advisors with respect to their particular tax situations as well as the state and local tax status of investments in shares of the Fund. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank, N.A. has been retained to act as the Fund's custodian and transfer and dividend disbursing agent. Its principal place of business is 420 Montgomery Street, San Francisco, California 94163 and its transfer and dividend disbursing agency activities are managed at 525 Market Street, San Francisco, California 94105. The Company, an open-end investment company, was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. The Company currently offers twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Money Market Fund, the Municipal Income Fund, the Overland Sweep Fund, the Short-Term Government-Corporate Income Fund, the Short-Term Municipal Income Fund, the Strategic Growth Fund, the U.S. Government Income Fund, the U.S. Treasury Money Market Fund and the Variable Rate Government Fund. The Board of Directors may, in the future, authorize the issuance of other series of capital stock representing shares of additional investment portfolios or funds. All shares of the Company have equal voting rights and will be voted in the aggregate, and not by series or class, except where voting by series or class is required by law or where the matter involved affects only one series or class. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required by the 1940 Act to elect Directors; however, shareholders are entitled to call a meeting of shareholders for purposes of voting on removal of a Director or Directors. A more detailed statement of the voting rights of shareholders is contained in the SAI. All shares of the Company, when issued, will be fully paid and nonassessable. DIVIDEND DISBURSING AGENT AND CUSTODIAN Wells Fargo Bank, N.A. FOR MORE INFORMATION ABOUT FUNDS, OR WRITE: SUPPLEMENT DATED JANUARY 2, 1996 TO THE CURRENT PROSPECTUS, AS PREVIOUSLY SUPPLEMENTED, AND STATEMENT OF ADDITIONAL INFORMATION OF EACH FUND OF OVERLAND EXPRESS FUNDS, INC. As of January 1, 1996, Wells Fargo Bank, N.A. provides investment advisory services for approximately $33 billion of assets. Each Fund's current Prospectus, as supplemented, and Statement of Additional Information are hereby amended accordingly. Stephens Inc. -- Sponsor, Administrator and Distributor Wells Fargo Bank, N.A. -- Investment Adviser, Transfer and Dividend Disbursing Overland Express Funds, Inc. (the "Company") is a professionally managed, open-end, series investment company. This Prospectus contains information about one of the funds in the Overland Express Family of Funds -- the VARIABLE RATE GOVERNMENT FUND (the "Fund"). The Fund seeks to earn a high level of current income, while reducing principal volatility, by investing primarily in adjustable rate mortgage securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities. This Prospectus describes two classes of shares of the Fund -- Class A Shares and Class D Shares. This Prospectus sets forth concisely the information a prospective investor should know before investing in the Fund. A Statement of Additional Information dated May 1, 1995, containing additional and more detailed information about the Fund (the "SAI"), has been filed with the Securities and Exchange Commission (the "SEC") and is hereby incorporated by reference into this Prospectus. The SAI is available without charge and can be obtained by writing the Company at P.O. Box 63084, San Francisco, CA 94163 or by calling the Company at the telephone number printed above. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. FUND SHARES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR ISSUED, ENDORSED OR GUARANTEED BY, WELLS FARGO BANK, N.A. ("WELLS FARGO BANK") OR ANY OF ITS AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN A FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. WELLS FARGO BANK IS THE INVESTMENT ADVISER AND PROVIDES CERTAIN OTHER SERVICES TO THE FUND, FOR WHICH IT IS COMPENSATED. STEPHENS INC. V("STEPHENS"), WHICH IS NOT AFFILIATED WITH WELLS FARGO BANK, IS THE SPONSOR AND DISTRIBUTOR FOR THE FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS DATED MAY 1, 1995 The Company, as an open-end investment company, provides a convenient way for you to invest in portfolios of securities selected and supervised by professional management. The following provides information about the Fund and its investment objective. Q. WHAT IS THE FUND'S INVESTMENT OBJECTIVE? A. The VARIABLE RATE GOVERNMENT FUND seeks to earn a high level of current income, while reducing principal volatility, by investing primarily in adjustable rate mortgage securities ("ARMS") issued or guaranteed by the U.S. Government, its agencies and instrumentalities. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. See "Investment Objective and Policies." Q. WHAT ARE PERMISSIBLE INVESTMENTS? A. This Fund invests primarily in adjustable rate mortgage securities ("ARMS") issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises), including the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). The Fund also may invest in the adjustable rate portions of collateralized mortgage obligations ("CMOs") issued by government agencies or instrumentalities, including primarily FNMA and FHLMC, and collateralized by pools of mortgage loans. Q. WHO IS THE INVESTMENT ADVISER? A. Wells Fargo Bank serves as the investment adviser of the Fund. Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. See "Advisory, Administration and Distribution Arrangements." Q. WHO IS THE SPONSOR, ADMINISTRATOR AND DISTRIBUTOR? A. Stephens serves as the sponsor, administrator and distributor for the Company. Stephens is entitled to receive a monthly administration fee at the annual rate of 0.15% of the first $200 million of the average daily net assets of the Fund and 0.10% of the average daily net assets of the Fund in excess of $200 million. See "Advisory, Administration and Distribution Arrangements." Q. HOW MAY I PURCHASE SHARES? A. Shares of the Fund may be purchased on any day the New York Stock Exchange (the "Exchange") is open for trading. There is a maximum sales load of 3.00% (3.09% of the net amount invested) for purchasing Class A Shares of the Fund. Class D Shares are subject to a maximum contingent deferred sales charge of 1.00% of the lesser of net asset value at purchase or net asset value at redemption. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum purchase amount is $100 for shares purchased through the Systematic Purchase Plan and $250 for shares purchased through qualified retirement plans. The minimum subsequent purchase amount is $100 or more. You may purchase shares of the Fund through Stephens, Wells Fargo Bank, as transfer agent (the "Transfer Agent"), or any authorized broker/dealer or financial institution. Purchases of shares of the Fund may be made by wire directly to the Transfer Agent. The Fund pays the distributor a monthly fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class A Shares and a monthly fee at an annual rate of up to 0.50% of the Fund's average daily net assets attributable to Class D Shares to compensate the distributor for distribution- related services provided by it or to reimburse it for other distribution-related expenses. See "Purchase of Shares" and "Distribution Plans." The Fund may also pay servicing agents a fee at an annual rate of up to 0.25% of the Fund's average daily net assets attributable to Class D Shares to compensate them for certain services. See "Servicing Plan." Q. HOW WILL I RECEIVE DIVIDENDS? A. Dividends on shares of the Fund are declared daily and paid quarterly. Dividends are automatically reinvested in additional shares of the same class of the Fund unless you elect to receive dividends by check. Any capital gains will be distributed annually and may be reinvested in Fund shares of the same class or paid by check at your election. All reinvestments of dividends and/or capital gain distributions in shares of the Fund are effected at the then current net asset value free of any sales load. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of the same class of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The net investment income available for distribution to holders of the Fund's Class D Shares is reduced by the amount of servicing fees payable to servicing agents under the Servicing Plan (as defined below). See "Dividends and Distributions." Q. HOW MAY I REDEEM SHARES? A. On any day the Exchange is open, shares may be redeemed upon request to Stephens or the Transfer Agent directly or through any authorized broker/dealer or financial institution. Shares may be redeemed by a request in good form in writing or through telephone direction. Proceeds are payable by check. Accounts of less than the applicable minimum initial purchase amount may be redeemed at the option of the Company. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, the Company does not charge for redeeming its shares. However, the Company reserves the right to impose charges for wiring redemption proceeds. See "Redemption of Shares." Q. WHAT ARE SOME OF THE POTENTIAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND? A. An investment in the Fund is not insured against loss of principal. Although the ARMS in the Fund's portfolio are guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises), the market value of these securities, upon which the Fund's daily net asset value is based, will fluctuate, because the Fund is subject to interest rate risk. Interest rate risk is the risk that increases in market interest rates may adversely affect the value of the securities in which the Fund invests, and hence the value of your investment in the Fund. The values of such securities generally change inversely to changes in market interest rates. However, the adjustable rate feature of the mortgages underlying the ARMS and the CMOs in which the Fund invests should reduce, but not eliminate, price fluctuations in such securities. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored enterprises such as FNMA and FHLMC in the event of a default in payment on the underlying mortgages which such entity is unable to satisfy. Some of the Fund's investments may be subject to credit risks, which is the risk that an issuer may default on the payment of principal and/or interest. As with all mutual funds, there can be no assurance that the Fund will achieve its investment objective. You should be prepared to accept some risk with the money you invest in the Fund. Q. WHAT ARE DERIVATIVES AND DOES THE FUND USE THEM? A. Derivatives are financial instruments whose value is derived, at least in part, from the price of another security or a specified asset, index or rate. Many of the permissible investments described in this Prospectus, such as ARMS which have an interest rate that is reset periodically based on an index, are considered derivatives. Some derivatives may be more sensitive than direct securities to changes in interest rates or sudden market moves. Some derivatives also may be susceptible to fluctuations in yield or value due to their structure or contract terms. Q. WHAT STEPS DOES THE FUND TAKE TO CONTROL DERIVATIVES-RELATED RISKS? A. Wells Fargo Bank, as investment adviser to the Fund, uses a variety of internal risk management procedures to ensure that derivatives use is consistent with the Fund's investment objective, does not expose the Fund to undue risks and is closely monitored. These procedures include providing periodic reports to the Board of Directors concerning the use of derivatives. Derivatives use by the Fund also is subject to broadly applicable investment policies. For example, the Fund may not invest more than a specified percentage of its assets in "illiquid securities," including those derivatives that do not have active secondary markets. Nor may the Fund use certain derivatives without establishing adequate "cover" in compliance with SEC rules limiting the use of leverage. (AS A PERCENTAGE OF AVERAGE NET ASSETS) (1) After any waivers or reimbursements. * See "Contingent Deferred Sales Charge." ** As further described in the Prospectus under the caption "Advisory, Administration and Distribution Arrangements," Stephens and Wells Fargo Bank each has agreed to waive all or a portion of its respective fees in circumstances where Fund expenses that are subject to limitations imposed under state securities laws and regulations exceed such limitations. In addition, Stephens and Wells Fargo Bank each may elect, in its sole discretion, to otherwise waive all or a portion of its respective fees or reimburse expenses. Any such waivers or reimbursements would reduce the total expenses of the Fund. The percentages shown above with respect to Class A and Class D Shares under "Management Fees," "Total Other Expenses" and "Total Fund Operating Expenses" are based on amounts incurred during the most recent fiscal year, restated to reflect voluntary fee waivers and expense reimbursements that are expected to continue during the current fiscal year. Absent waivers and reimbursements, "Management Fees", "Total Other Expenses" and "Total Fund Operating Expenses" with respect to Class A Shares would have been 0.50%, 0.19% and 0.94%, respectively. Absent waivers and reimbursements, these percentages, with respect to Class D Shares, would have been 0.50%, 0.55% and 1.55% respectively. Long-term Class A or Class D Shareholders of the Fund could pay more in distribution related charges than the economic equivalent of the maximum front-end sales charges applicable to mutual funds sold by members of the National Association of Securities Dealers, Inc. ("NASD"). There can be no assurances that waivers and reimbursements will continue. The purpose of the foregoing tables is to assist you in understanding the various costs and expenses that an investor in the Fund will bear directly or indirectly. There are no other sales loads, redemption fees or exchange fees charged by the Fund. However, the Company reserves the right to impose charges for wiring redemption proceeds. The Examples should not be considered a representation of past or future expenses; actual expenses may be greater or lesser than those shown. See Prospectus sections captioned "Advisory, Administration and Distribution Arrangements," "Distribution Plan" and "Purchase of Shares" for more complete descriptions of the various costs and expenses applicable to the Fund. The following information has been derived from the Financial Highlights in the Fund's 1994 annual financial statements. The financial statements are incorporated by reference into the SAI and have been audited by KPMG Peat Marwick LLP, independent auditors, whose report dated February 17, 1995 also is incorporated by reference in the SAI. This information should be read in conjunction with the Fund's 1994 annual financial statements and the notes thereto. The SAI has been incorporated by reference into this Prospectus. FOR A CLASS A SHARE OUTSTANDING AS SHOWN + Total Returns do not include any sales charges. * The Fund commenced operations on November 1, 1990. ** The Fund sold no securities during the period. FOR CLASS D SHARE OUTSTANDING AS SHOWN * The Class commenced operations on July 1, 1993. + Total Returns do not include the 1% contingent deferred sales charge. INVESTMENT OBJECTIVE -- The Fund seeks to earn a high level of current income, while reducing principal volatility, by investing primarily in adjustable rate mortgage securities ("ARMS") issued or guaranteed by the U.S. Government, its agencies and instrumentalities. As with all mutual funds, there can be no assurance that the Fund, which is a diversified portfolio, will achieve its investment objective. The Fund may invest in obligations of any maturity. Under ordinary circumstances, the dollar weighted average maturity of the Fund's portfolio is expected to be between 20 and 30 years. However, under unusual circumstances, the weighted average maturity of the portfolio may be shorter than 20 years. At least 65% of the value of the total assets of the Fund will, under normal circumstances, be invested in ARMS issued or guaranteed by the U.S. Government, its agencies or instrumentalities (including government-sponsored enterprises). The annual portfolio turnover rate for the Fund is not expected to exceed 250%. Portfolio turnover generally involves some expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and the reinvestment in other securities. Portfolio turnover also can generate short-term capital gains tax consequences. ARMS are pass-through certificates representing ownership interests in a pool of adjustable rate mortgages and the resulting cash flow from those mortgages. The ARMS in which the Fund may invest are issued and guaranteed by GNMA, FNMA or FHLMC. Unlike conventional debt securities, which provide for periodic (usually semi-annual) payments of interest and payments of principal at maturity or on specified call dates, ARMS provide for monthly payments based on a pro-rata share of both periodic interest and principal payments and prepayments of principal on the underlying mortgage pool (less GNMA's, FNMA's or FHLMC's fees and applicable loan servicing fees). The full and timely payment of principal and interest on GNMA ARMS is guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. FNMA also guarantees full and timely payment of both interest and principal, while FHLMC guarantees full and timely payment of interest and ultimate payment of principal. FNMA and FHLMC ARMS are not backed by the full faith and credit of the United States. However, because FNMA and FHLMC are government-sponsored enterprises, these securities are high quality investments that present minimal credit risks. The yields provided by these ARMS have historically exceeded the yields on other types of U.S. Government securities with comparable maturities, although there can be no assurance that this historical performance will continue. The mortgages underlying ARMS guaranteed by GNMA are fully insured or guaranteed by the Federal Housing Administration, the Veterans Administration or the Farmers Home Administration, while those underlying ARMS issued by FNMA or FHLMC are typically conventional residential mortgages which are not so insured or guaranteed, but which conform to specific underwriting, size and maturity standards. The Fund also may invest in the adjustable rate portions of CMOs issued by government agencies, instrumentalities or government-sponsored enterprises including, primarily, FNMA and FHLMC, and collateralized by pools of mortgage loans. Payments of principal and interest on the collateral mortgages are used to pay debt service on the CMO. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a "tranche," is issued at a specified coupon rate and has a stated maturity or final distribution date. The principal and interest payment on the underlying mortgages may be allocated among the classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages would be applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal will be made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full. One or more classes of CMOs may have coupon rates that reset periodically based on an index, such as the London Interbank Offered Rate ("LIBOR"). All CMOs purchased by the Fund will be rated, at the time of purchase, AAA by Standard & Poor's Corporation ("S&P") or Aaa by Moody's Investors Service, Inc. ("Moody's"). The Fund will not invest in CMOs that, at the time of purchase, are "high-risk mortgage securities" as defined in the then current Federal Financial Institutions Examination Council ("FFIEC") Supervisory Policy Statement on Securities Activities. The interest rates on the mortgages underlying the ARMS and the CMOs in which the Fund may invest generally are readjusted at intervals of one year or less in response to changes in a predetermined interest rate index. There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost-of-funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury note rates, the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities, the National Median Cost of Funds, the one-month, three-month, six-month or one-year LIBOR, a published prime rate, or commercial paper rates. Certain of these indices follow overall market interest rates more closely than others. Adjustable rate mortgages, an increasingly common form of residential financing, generally are originated by banks, mortgage banks and thrift institutions and have a specified maturity date. Most provide for amortization of principal in a manner similar to fixed-rate mortgages, but have interest payment amounts that change in response to changes in a specified interest rate index. The rate of interest due on such a mortgage is calculated by adding an agreed-upon "margin" to the specified index, although there generally are limitations or "caps" on interest rate movements in any given period or over the life of the mortgage. To the extent that the interest rates on adjustable rate mortgages that back the ARMS or the CMOs in which the Fund may invest cannot be adjusted in response to interest rate changes because of such caps, the ARMS or CMOs are likely to respond to changes in market rates more like fixed rate securities. In other words, interest rate increases in excess of such caps can be expected to cause the CMOs or ARMS backed by mortgages that have such caps to decline in value to a greater extent than would be the case in the absence of such caps. Conversely, interest rate decreases below such floors can be expected to cause the CMOs or ARMS backed by mortgages that have such floors to increase in value to a greater extent than would be the case in the absence of such floors. The adjustable rate feature of the mortgages underlying the ARMS and the CMOs in which the Fund may invest should reduce, but will not eliminate, price fluctuations in such securities, particularly during periods of extreme fluctuations in market interest rates. Since the interest rates on many mortgages underlying ARMS and CMOs are reset on an annual basis and generally are subject to caps, it can be expected that the prices of such ARMS and CMOs will fluctuate to the extent prevailing market interest rates are not reflected in the interest rates payable on the underlying adjustable rate mortgages or the CMO. In this regard, the net asset value of the Fund's shares could fluctuate to the extent interest rates on underlying mortgages differ from prevailing market interest rates during interim periods between interest rate reset dates. Accordingly, investors could experience some principal loss or less gain than might otherwise be achieved if they redeem their shares of the Fund before the interest rates on the mortgages underlying the Fund's portfolio securities are adjusted to reflect prevailing market interest rate. The holder of ARMS and certain CMOs receives not only monthly scheduled payments of principal and interest, but also may receive unscheduled principal payments representing prepayments on the underlying mortgages. An investor, therefore, may have to reinvest the periodic payments and any unscheduled prepayments of principal it receives at a rate of interest which is lower than the rate on the ARMS and CMOs held by it. The Fund also may invest cash balances in U.S. Treasury securities with remaining maturities of two years or less. As described further in the SAI, certain securities in which the Fund may otherwise invest may be purchased on a when-issued basis, but the Fund does not presently intend to invest more than 5% of its net assets in when-issued securities during the coming year. The Fund will not invest in the shares of other open-end, management investment companies. The Fund may enter into repurchase agreements wherein the seller of a security to the Fund agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, often overnight or a few days, although it may extend over a number of months. The Fund may enter into repurchase agreements only with respect to U.S. Government obligations and other securities that could otherwise be purchased by the Fund. All repurchase agreements will be fully collateralized based on values that are marked to market daily. If the seller defaults and the value of the underlying securities has declined, the Fund may incur a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, the Fund's disposition of the security may be delayed or limited. The Fund will only enter into repurchase agreements with registered broker/dealers and commercial banks that meet guidelines established by the Board of Directors and are not affiliated with the investment adviser. The Fund may participate in pooled repurchase agreement transactions with other funds advised by Wells Fargo Bank. The Fund's investment objective, as set forth in the first paragraph of the section describing the Fund's objective and policies, is fundamental; that is, the investment objective may not be changed without approval by the vote of the holders of a majority of the Fund's outstanding voting securities, as described under "Capital Stock" in the SAI. If the Board of Directors determines, however, that the Fund's investment objective can best be achieved by a substantive change in a non-fundamental investment policy or strategy, the Company may make such change without shareholder approval and will disclose any such material changes in the then current prospectus. In addition, as matters of fundamental policy, the Fund may: (i) borrow from banks up to 10% of the current value of its net assets for temporary purposes only in order to meet redemptions, and these borrowings may be secured by the pledge of up to 10% of the current value of its net assets (but investments may not be purchased while any such borrowing exists); (ii) make loans of portfolio securities; and (iii) invest up to 10% of the current value of its net assets in repurchase agreements having maturities of more than seven days, restricted securities and illiquid securities. With respect to fundamental investment policy (ii), the Fund does not intend to make loans of its portfolio securities during the coming year. Additionally, the Fund does not intend to invest in repurchase agreements having maturities of more than seven days or illiquid securities during the coming year. ADVISORY, ADMINISTRATION AND DISTRIBUTION ARRANGEMENTS The Board of Directors, in addition to supervising the actions of the investment adviser, sponsor, administrator and distributor, as set forth below, decides upon matters of general policy. Pursuant to an Advisory Contract, the Fund is advised by Wells Fargo Bank, 420 Montgomery Street, San Francisco, California 94163, a wholly owned subsidiary of Wells Fargo & Company. Wells Fargo Bank, one of the ten largest banks in the United States, was founded in 1852 and is the oldest bank in the western United States. As of December 31, 1994, various divisions and affiliates of Wells Fargo Bank provided investment advisory services for approximately $200 billion of assets of individuals, trusts, estates and institutions. Wells Fargo Bank is the investment adviser to the other separately managed series of the Company (other than those structured as "feeder funds"), and to six other registered open-end management investment companies, each of which consist of several separately managed investment portfolios. The Advisory Contract provides that Wells Fargo Bank shall furnish to the Fund investment guidance and policy direction in connection with the daily portfolio management of the Fund. Pursuant to the Advisory Contract, Wells Fargo Bank furnishes to the Board of Directors periodic reports on the investment strategy and performance of the Fund. Purchase and sale orders of the securities held by the Fund may be combined with those of other accounts that Wells Fargo Bank manages, and for which it has brokerage placement authority, in the interest of seeking the most favorable overall net results. When Wells Fargo Bank determines that a particular security should be bought or sold for the Fund and other accounts managed by Wells Fargo Bank, Wells Fargo Bank undertakes to allocate those transactions among the participants equitably. From time to time, the Fund, to the extent consistent with its investment objective, policies and restrictions, may invest in securities of companies with which Wells Fargo Bank has a lending relationship. For its services under the Advisory Contract, Wells Fargo Bank is entitled to receive a monthly advisory fee at the annual rate of 0.50% of the average daily net assets of the Fund. From time to time Wells Fargo Bank may waive such fee in whole or in part. Any waiver would reduce expenses of the Fund involved and, accordingly, have a favorable impact on the yield or return of the Fund. For the year ended December 31, 1994, Wells Fargo Bank was paid 0.41% of the average daily net assets of the Fund as compensation for its services as investment adviser. Mr. Paul Single is responsible for the day-to-day management of the Variable Rate Government Fund. Mr. Single has managed taxable bond portfolios for over a decade with specific expertise in mortgage-backed securities. Prior to joining Wells Fargo Bank in early 1988, he was a senior portfolio manager for Benham Capital Management Group. Mr. Single received his B.S. from Springfield College. Mr. Scott Smith also is responsible for the day-to-day management of the portfolio of the Variable Rate Government Fund. He joined Wells Fargo Bank in 1988 as a taxable money market portfolio specialist. His experience includes a position with a private money management firm with mutual fund investment operations. Mr. Smith holds a B.A. degree from the University of San Diego. Stephens, 111 Center Street, Little Rock, Arkansas 72201, has entered into an agreement with the Fund under which Stephens acts as administrator for the Fund. For these administrative services, Stephens is entitled to receive from the Fund a monthly fee at the annual rate of 0.15% of its average daily net assets; decreasing to 0.10% of the average daily net assets of the Fund in excess of $200 million. From time to time Stephens may waive fees from the Fund in whole or in part. Any such waiver will reduce expenses of the Fund and, accordingly, have a favorable impact on the yield or return of the Fund. The Administration Agreement between Stephens and the Fund states that Stephens shall provide as administrative services, among other things, general supervision of (i) the operation of the Fund, including coordination of the services performed by the Fund's investment adviser, transfer agent, custodian, independent auditors and legal counsel; (ii) regulatory compliance, including the compilation of information for documents such as reports to, and filings with, the SEC and state securities commissions; and the preparation of proxy statements and shareholder reports for the Fund; and (iii) general supervision relative to the compilation of data required for the preparation of periodic reports distributed to the Company's officers and Board of Directors. Stephens also furnishes office space and certain facilities required for conducting the business of the Fund and pays the compensation of the Company's Directors, officers and employees who are affiliated with Stephens. Stephens, as the principal underwriter of the Fund within the meaning of the Investment Company Act of 1940 (the "1940 Act"), has also entered into a Distribution Agreement with the Company pursuant to which Stephens has the responsibility for distributing Class A Shares and Class D Shares of the Fund. The Distribution Agreement provides that Stephens shall act as agent for the Fund for the sale of its Class A Shares and Class D Shares and may enter into selling agreements with broker/dealers or financial institutions to market and make available Class A Shares and Class D Shares to their respective customers. Under the Distribution Agreement, Stephens is entitled to receive from the Fund a monthly fee at an annual rate of up to 0.25% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at an annual rate of up to 0.50% of the average daily net assets of the Class D Shares of the Fund. The actual fee payable to Stephens is determined, within such limits, from time to time by mutual agreement between the Company and Stephens, and may not exceed the maximum amount payable under the Rules of Fair Practice of the NASD. Stephens may enter into selling agreements with one or more selling agents under which such agents may receive from Stephens compensation for sales support services. Such compensation may include, but is not limited to, commissions or other payments to such agents based on the average daily net assets of Fund shares attributable to them. Services provided by selling agents in exchange for commissions and other payments to selling agents are the principal sales support services provided to the Fund. Stephens may retain any portion of the total distribution fee payable under the Distribution Agreement to compensate it for distribution-related services provided by it or to reimburse it for other distribution-related expenses. Since the Distribution Agreement provides for fees that are used by Stephens to pay for distribution services, a plan of distribution for each class of shares (individually a "Plan," collectively the "Plans") and the Distribution Agreement are approved and reviewed in accordance with Rule 12b-1 under the 1940 Act, which regulates the manner in which an investment company may, directly or indirectly, bear the expense of distributing its shares. See Prospectus section captioned "Distribution Plans" for a more complete description of the Plans. Stephens is a full service broker/dealer and investment advisory firm. Stephens and its predecessor have been providing securities and investment services for more than 60 years. Additionally, they have been providing discretionary portfolio management services since 1983. Stephens currently manages investment portfolios for pension and profit sharing plans, individual investors, foundations, insurance companies and university endowments. The Fund may enter into servicing agreements with one or more servicing agents on behalf of Class D Shares of the Fund. Under such agreements, servicing agents provide shareholder liaison services, which may include responding to customer inquiries and providing information on their investments, and provide such other related services as the Fund or a Class D Shareholder may reasonably request. For these services, a servicing agent receives a fee which will not exceed, on an annualized basis for the Fund's then current fiscal year, 0.25% of the average daily net assets of the Class D Shares of the Fund represented by Class D Shares owned by investors with whom the servicing agent maintains a servicing relationship, or an amount which equals the maximum amount payable to the servicing agent under applicable laws, regulations or rules, whichever is less. DETERMINATION OF NET ASSET VALUE Net asset value per share for the Fund is determined by Wells Fargo Bank on each day that the Exchange is open for trading. The net asset value of a share of a class of a Fund is the value of total net assets attributable to each class divided by the number of outstanding shares of that class. The value of net assets per class is determined daily by adjusting the net assets per class at the beginning of the day by the value of each class's shareholder activity, net investment income and net realized and unrealized gains or losses for that day. Net investment income is calculated each day for each class by attributing to each class a pro rata share of daily income and common expenses, and by assigning class-specific expenses to each class as appropriate. The net asset value of each class is expected to fluctuate daily. The value of assets of the Fund (other than debt obligations maturing in 60 days or less) is determined as of the close of regular trading on the Exchange (referred to hereafter as "the close of the Exchange"), which is currently 4:00 p.m. New York time. Except for debt instruments with remaining maturities of 60 days or less, which are valued at amortized cost, assets are valued at current market prices, or if such prices are not readily available, at fair value as determined in good faith by the Board of Directors. Prices used for such valuations may be provided by independent pricing services. From time to time, the Company may advertise yield and total return information with respect to a class of shares of the Fund. Total return and yield information of a class of shares are based on the historical earnings and performance of such class of shares and should not be considered representative of future performance. The total return of a class of shares of the Fund is calculated by subtracting (i) the public offering price of the class of shares (which includes the maximum sales charge for the class of shares) of one share of the class of shares at the beginning of the period, from (ii) the net asset value of all shares of the class of shares an investor would own at the end of the period for the share held at the beginning of the period (assuming reinvestment of all dividends and capital gain distributions), and dividing by (iii) the public offering price per share of the class of shares at the beginning of the period. The resulting percentage indicates the positive or negative rate of return that an investor would have earned from reinvested dividends and capital gain distributions and changes in share price during the period for the class of shares. The Fund may also, at times, calculate total return of a class of shares based on net asset value per share of a class of shares (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the class of shares, or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that total return data derived pursuant to the calculation described above are also presented. The yield of a class of shares will be computed by dividing its net investment income per share of the class earned during a specified period by its public offering price per share (which includes the maximum sales charge) on the last day of such period and annualizing the result. For purposes of sales literature, these yields may also, at times, be calculated on the basis of the net asset value per share of the class (rather than the public offering price), in which case the figures would not reflect the effect of any sales charges that would have been paid by an investor in the class of shares, or by assuming that a sales charge other than the maximum sales charge (reflecting the Volume Discounts set forth below) is assessed, provided that yield data derived pursuant to the calculation described above are also presented. Because of differences in the fees and/or expenses borne by Class D Shares of the Fund, the net yield on such shares can be expected, at any given time, to be lower than the net yield on Class A Shares. Performance information quotations will be computed separately for Class A Shares and Class D Shares. Additional information about the performance of the Fund is contained in the Annual Report for the Fund. The Annual Report may be obtained free of charge by calling the Company at 800-552-9612. Shares of the Fund may be purchased on any day the Exchange is open for trading through Stephens, the Transfer Agent, any authorized broker/dealers or financial institutions with which Stephens has entered into agreements. Such broker/dealers or financial institutions are responsible for the prompt transmission of purchase, exchange or redemption orders, and may independently establish and charge additional fees to their clients for such services, other than services related to purchase orders, which would reduce the clients' overall yield or return. The Exchange is closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (each, a "Holiday"). When any Holiday falls on a Saturday, the Exchange usually is closed the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is closed the following Monday. In most cases, the minimum initial purchase amount for the Fund is $1,000. The minimum initial purchase amount is $100 for purchases through the Systematic Purchase Plan and $250 for an investment by a retirement plan qualified under the Internal Revenue Code of 1986, as amended (the "Code"). The minimum subsequent purchase amount is $100. The minimum initial or subsequent purchase amount requirements may be waived or lowered for investments effected on a group basis by certain entities and their employees, such as pursuant to a payroll deduction or other accumulation plan. The Company reserves the right to reject any purchase order. All funds, net of sales loads, will be invested in full and fractional shares. Checks will be accepted for the purchase of the Fund's shares subject to collection at full face value in U.S. dollars. Inquiries may be directed to the Company at the address and telephone number on the front cover of the Prospectus. Shares of the Fund are offered continuously at the applicable offering price (including any sales load) next determined after a purchase order is received. Payment for shares purchased through a broker/dealer will not be due from the broker/dealer until the settlement date, currently five business days after the order is placed. Effective June 7, 1995, the settlement date will normally be three business days after the order is placed. It is the broker/dealer's responsibility to forward payment for shares being purchased to the Fund promptly. Payment for orders placed directly through the Transfer Agent must accompany the order. When payment for shares of the Fund purchased through the Transfer Agent is by a check that is drawn on any domestic bank, federal funds normally become available to the Fund on the business day after the day the check is deposited. Checks drawn on a non-member bank or a foreign bank may take substantially longer to be converted into federal funds and, accordingly, may delay execution of an order. When shares of the Fund are purchased through a broker/dealer or financial institution, Stephens reallows that portion of the sales load designated below as the Dealer Allowance. Stephens has established a non-cash compensation program, pursuant to which broker/dealers or financial institutions that sell shares of the Fund may earn additional compensation in the form of trips to sales seminars or vacation destinations, tickets to sporting events, theater or other entertainment, opportunities to participate in golf or other outings and gift certificates for meals or merchandise. If all sales charges are paid or reallowed to a broker/dealer or financial institution, it may be deemed an "underwriter" under the Securities Act of 1933. When shares are purchased directly through the Transfer Agent and no broker/dealer or financial institution is involved with the purchase, the entire sales load is paid to Stephens. Sales loads relating to orders for the purchase of Class A Shares in the Fund are as follows: Class D Shares are not subject to a front-end sales load. However, Class D Shares which are redeemed within one year from the receipt of a purchase order will be subject to a contingent deferred sales charge equal to 1% of the dollar amount equal to the lesser of the net asset value at the time of purchase of the shares being redeemed or the net asset value of such shares at the time of redemption. A selling agent or servicing agent and any other person entitled to receive compensation for selling or servicing shares may receive different compensation for selling or servicing Class A Shares as compared with Class D Shares. REDUCED SALES CHARGE -- CLASS A SHARES The above Volume Discounts are available to you based on the combined dollar amount being invested in Class A Shares of the Fund or of Class A Shares of one or more of the portfolios of the Company which assess a sales load (the "Load Funds"). Because Class D Shares are not subject to a front-end sales charge, the amount of Class D Shares you hold is not considered in determining any volume discount. The Right of Accumulation allows an investor to combine the amount being invested in Class A Shares of the Fund with the total net asset value of Class A Shares in any of the Load Funds in accordance with the above sales load schedule to reduce the sales load. For example, if you own Class A Shares of the Company's other investment portfolios with an aggregate net asset value of $90,000 and invest an additional $20,000 in Class A Shares of the Fund, the sales load on the entire additional amount would be 2.00% of the offering price. To obtain such discount, you must provide sufficient information at the time of purchase to permit verification that the purchase qualifies for the reduced sales load, and confirmation of the order is subject to such verification. The Right of Accumulation may be modified or discontinued at any time with respect to all Class A Shares purchased thereafter. A Letter of Intent allows you to purchase Class A Shares of the Fund over a 13-month period at reduced sales loads based on the total amount intended to be purchased plus the total net asset value of Class A Shares in any of the Load Funds already owned. Each investment made during the period receives the reduced sales load applicable to the total amount of the intended investment. If such amount is not invested within the period, you must pay the difference between the sales loads applicable to the purchases when made and the charges previously paid. The reductions in sales loads effected by the Fund's adoption of the revised sales load schedule shown above are available with respect to investments made on or after July 15, 1991, even if they are made pursuant to a Letter of Intent entered into prior to such date. You may Reinvest proceeds from a redemption of Class A Shares of the Fund in Class A Shares of the Fund or in Class A Shares of another of the Company's investment portfolios that offers Class A Shares at net asset value, without a sales load, within 120 days after such redemption. However, if the other investment portfolio charges a sales load that is higher than the sales load that you have paid in connection with the Class A Shares you have redeemed, you pay the difference. In addition, the Class A Shares of the other investment portfolio to be acquired must be registered for sale in your state of residence. The amount that may be so reinvested may not exceed the amount of the redemption proceeds, and a written order for the purchase of the Class A Shares must be received by the Fund or the Transfer Agent within 120 days after the effective date of the redemption. If you realized a gain on your redemption, the reinvestment will not alter the amount of any federal capital gains tax payable on the gain. If you realized a loss on your redemption, the reinvestment may cause some or all of such loss to be disallowed as a tax deduction, depending on the number of Class A Shares purchased by reinvestment and the period of time that has elapsed after the redemption, although for tax purposes, the amount disallowed is added to the cost of the Class A Shares acquired upon the reinvestment. Reductions in front-end sales loads apply to purchases by a single "person," including an individual, members of a family unit, consisting of a husband, wife, and children under the age of 21 purchasing securities for their own account, or a trustee or other fiduciary purchasing for a single fiduciary account or single trust estate. Reductions in front-end sales loads also apply to purchases by individual members of a "qualified group." The reductions are based on the aggregate dollar amount of Class A Shares purchased by all members of the qualified group. For purposes of this paragraph, a qualified group consists of a "company," as defined in the 1940 Act, which has been in existence for more than six months and which has a primary purpose other than acquiring shares of the Fund at a reduced sales load, and the "related parties" of such company. For purposes of this paragraph, a "related party" of a company is: (i) any individual or other company who directly or indirectly owns, controls or has the power to vote five percent or more of the outstanding voting securities of such company; (ii) any other company of which such company directly or indirectly owns, controls or has the power to vote five percent of more of its outstanding voting securities; (iii) any other company under common control with such company; (iv) any executive officer, director or partner of such company or of a related party; and (v) any partnership of which such company is a partner. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by Directors, officers and employees (and their spouses and children under the age of 21) of the Company, Stephens, its affiliates and other broker/dealers that have entered into agreements with Stephens to sell such shares. Class A Shares of the Fund also may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by present and retired Directors, officers and employees (and their spouses and children under the age of 21) of Wells Fargo Bank and its affiliates if Wells Fargo Bank and/or the respective affiliates agree. Such shares also may be purchased at such price by employee benefit and thrift plans for such persons and by any investment advisory, trust or other fiduciary account (other than an individual retirement account) maintained, managed or advised by Wells Fargo Bank or Stephens or their affiliates. In addition, Class A Shares also may be purchased at net asset value by pension, profit sharing or other employee benefit plans established under Section 401 of the Code. Class A Shares of the Fund may be purchased at a purchase price equal to the net asset value of such shares, without a sales load, by the following types of investors that place trades through an omnibus account maintained at the Fund by a discount broker/dealer: trust companies; investment advisers and financial planners on behalf of their clients; retirement and deferred compensation plans and the trusts used to fund these plans. By investing in the Fund, you appoint the Transfer Agent, as agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions that are paid in additional shares. See "Dividends and Distributions." Although most shareholders elect not to receive stock certificates, certificates for full shares of the Fund can be obtained on request. It is more complicated to redeem shares held in certificated form, and the expedited redemption described below is not available with respect to certificated shares. CONTINGENT DEFERRED SALES CHARGE -- CLASS D SHARES Class D Shares which are redeemed within one year of receipt of a purchase order for such shares will be subject to a contingent deferred sales charge equal to 1.00% of an amount equal to the lesser of the net asset value at the time of purchase for the Class D Shares being redeemed or the net asset value of such shares at the time of redemption. Accordingly, a contingent deferred sales charge will not be imposed on amounts representing increases in net asset value above the net asset value at the time of purchase. In addition a charge will not be assessed on Class D Shares purchased through reinvestment of dividends or capital gains distributions. In determining whether a contingent deferred sales charge is applicable to a redemption, Class D Shares are considered redeemed on a first-in, first-out basis so that Class D Shares held for a longer period of time are considered redeemed prior to more recently acquired shares. The contingent deferred sales charge is waived on redemptions of Class D Shares (i) following the death or disability (as defined in the Code) of a shareholder, (ii) to the extent that the redemption represents a minimum required distribution from an individual retirement account or other retirement plan to a shareholder who has reached age 70 1/2, (iii) effected pursuant to the Company's right to liquidate a shareholder's account if the aggregate net asset value of the shareholder's account is less than the minimum account size, or (iv) in connection with the combination of the Company with any other registered investment company by a merger, acquisition of assets, or by any other reorganization transaction. Investors who are entitled to purchase Class A Shares of the Fund at net asset value without a sales load should not purchase Class D Shares. Other investors, including those who are entitled to purchase Class A shares of the Fund at a reduced sales load, should compare the fees assessed on Class A Shares against those assessed on Class D Shares (including potential contingent deferred sales charges and higher Rule 12b-1 fees) in light of the amount to be invested and the anticipated time that the shares will be owned. Shares of the Fund may be purchased by any of the methods described below. INITIAL PURCHASES OF FUND SHARES BY WIRE 1. Telephone toll free (800) 572-7797. Give the name of the Fund in which the investment is to be made, the class of shares to be purchased, the name(s) in which the shares are to be registered, the address, social security or tax identification number (where applicable) of the person or entity in whose name(s) the shares are to be registered, dividend payment election, amount to be wired, name of the wiring bank and name and telephone number of the person to be contacted in connection with the order. An account number will be assigned. 2. Instruct the wiring bank, which may charge a separate fee, to transmit the specified amount in federal funds ($1,000 or more) to: Wire Purchase Account Number: 4068-000462 Attention: Overland Express Variable Rate Government Fund (designate Account Name(s): (name(s) in which to be registered) Account Number: (as assigned by telephone) 3. A completed Account Application should be mailed, or sent by telefacsimile with the original subsequently mailed, to the following address immediately after the funds are wired and must be received and accepted by the Transfer Agent before an account can be opened: 4. Share purchases are effected at the public offering price, or, in the case of Class D Shares, at the net asset value, next determined after the Account Application is received and accepted. INITIAL PURCHASES OF FUND SHARES BY MAIL 1. Complete an Account Application. Indicate the services to be used. 2. Mail the Account Application and a check for $1,000 or more, payable to "Overland Express Variable Rate Government Fund (designate Class A or D)" to its mailing address set forth above. Additional purchases of $100 or more may be made by instructing the Fund's Transfer Agent to debit an approved account designated in the Account Application, by wire by instructing the wiring bank to transmit the specified amount as directed above for initial purchases, or by mail with a check payable to "Overland Express Variable Rate Government Fund (designate Class A or D)" to the above address. Write the Fund account number on the check and include the detachable stub from a Statement of Account or a letter providing the account number. The Company's Systematic Purchase Plan provides you with a convenient way to establish and automatically add to your existing accounts on a monthly basis. If you elect to participate in this plan, you must specify an amount ($100 or more) to be withdrawn automatically by the Transfer Agent on a monthly basis from a designated bank account (provided your bank is a participant in the automated clearing house system). The Transfer Agent withdraws and uses this amount to purchase shares of the Fund on or about the fifth business day of each month. There are no additional fees charged for participating in this plan. You may change the investment amount, suspend purchases or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to any scheduled transaction. An election will be terminated automatically if the designated bank account balance is insufficient to make a scheduled withdrawal, or if either the designated bank account or your account is closed. PURCHASES THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Purchase orders for shares of the Fund placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale, including orders for which payment is to be made from free cash credit balances in securities accounts held by a dealer, will be effective on the same day the order is placed if received by the Transfer Agent before the close of business. Purchase orders that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of purchase orders to the Transfer Agent. Payment for Fund shares is not due until settlement date. Broker/dealers and financial institutions may benefit from the temporary use of payments to the Fund during the settlement period. A broker/dealer or financial institution that is involved in a purchase transaction may charge separate account, service or transaction fees. Financial institutions may be required to register as dealers pursuant to applicable state securities laws, which may differ from federal law and any interpretations expressed herein. You may exchange Class A Shares of the Fund for shares of the same class of the Company's other investment portfolios or for shares of the California Tax-Free Money Market Fund, the Money Market Fund or the U.S. Treasury Money Market Fund in an identically registered account at respective net asset values, provided that, if the other investment portfolio charges a sales load on the purchase of the class of shares being exchanged that is higher than the sales load that you have paid in connection with the shares you are exchanging, you pay the difference. Class D Shares of the Fund may be exchanged for Class D Shares of one of the Company's other investment portfolios that offer Class D Shares or for Class A Shares of the Money Market Fund in an identically registered account at respective net asset values. You are not charged a contingent deferred sales charge on exchanges of Class D Shares for shares of the same class of another of the Company's investment portfolios or for Class A Shares of the Money Market Fund. If you exchange Class D Shares for shares of the same class of another investment portfolio, or for Class A Shares of the Money Market Fund, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of the initial purchase of the previously held shares. Accordingly, if you exchange Class D Shares for Class A Shares of the Money Market Fund, and redeem the shares of the Money Market Fund within one year of the receipt of the purchase order for the exchanged Class D Shares, you will have to pay a deferred sales charge equal to the contingent deferred sales charge applicable to the previously exchanged Class D Shares. If you exchange Class D Shares of an investment portfolio for Class A Shares of the Money Market Fund you may subsequently re-exchange the acquired Class A Shares only for Class D Shares. If you re-exchange the Class A Shares of the Money Market Fund for Class D Shares, the remaining period of time (if any) that the contingent deferred sales charge is in effect will be computed from the time of your initial purchase of Class D Shares. In addition, shares of the investment portfolio to be acquired must be registered for sale in your state of residence. You should obtain, read and retain the Prospectus for the investment portfolio which you desire to exchange into before submitting an exchange order. You may exchange shares by writing the Transfer Agent as indicated below under Redemption by Mail, or by calling the Transfer Agent or your authorized broker/dealer or financial institution or Servicing Agent, unless you have elected not to authorize telephone exchanges in your Account Application (in which case you may subsequently authorize such telephone exchanges by completing a Telephone Exchange Authorization Form and submitting it to the Transfer Agent in advance of the first such exchange). Shares held in certificated form may not be exchanged by telephone. The Transfer Agent's number for exchanges is (800) 572-7797. Procedures applicable to redemption of the Fund's shares are also applicable to exchanging shares, except that, with respect to an exchange transaction between accounts registered in identical names, no signature guarantee is required unless the amount being exchanged exceeds $25,000. The Company reserves the right to limit the number of times shares may be exchanged between Funds, or to reject in whole or in part any exchange request into a fund when management believes that such action would be in the best interest of the fund's other shareholders, such as when management believes that such action would be appropriate to protect such fund against disruptions in portfolio management resulting from frequent transactions by those seeking to time market fluctuations. Any such rejection will be made by management on a prospective basis only, upon notice to the shareholder given not later than 10 days following such shareholder's most recent exchange. The Company reserves the right to modify or discontinue exchange privileges at any time. Under SEC rules, 60 days prior notice of any amendments or termination of exchange privileges will be given to shareholders, except under certain extraordinary circumstances. A capital gain or loss for tax purposes may be realized upon an exchange, depending upon the cost or other basis of shares redeemed. Telephone redemption or exchange privileges are made available to you automatically upon opening an account, unless you decline such privileges. These privileges authorize the Transfer Agent to act on telephone instructions from any person representing himself or herself to be the investor and reasonably believed by the Transfer Agent to be genuine. The Company will require the Transfer Agent to employ reasonable procedures, such as requiring a form of personal identification, to confirm that instructions are genuine. If the Transfer Agent does not follow such procedures, the Company and the Transfer Agent may be liable for any losses attributable to unauthorized or fraudulent instructions. Neither the Company nor the Transfer Agent will be liable for following telephone instructions reasonably believed to be genuine. Shares may be redeemed at their next determined net asset value after receipt of a request in proper form by the Transfer Agent directly or through any authorized broker/dealer or financial institution. Except for any contingent deferred sales charge which may be applicable upon redemption of Class D Shares, as described under "Purchase of Shares," the Company does not charge for redemption transactions. However, a broker/dealer or financial institution that is involved in a redemption transaction may charge separate account, service or transaction fees. On a day the Fund is open for business, redemption orders received by an authorized broker/dealer or financial institution before the close of the Exchange and received by the Transfer Agent before the close of business on the same day will be executed at the net asset value per share determined at the close of the Exchange on that day. Redemption orders received by authorized broker/dealers or financial institutions after the close of the Exchange, or not received by the Transfer Agent prior to the close of business, will be executed at the net asset value determined at the close of the Exchange on the next business day. Redemption proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, ordinarily will be remitted within seven days after the order is received in proper form, except proceeds may be remitted over a longer period to the extent permitted by the SEC under extraordinary circumstances. If an expedited redemption is requested, redemption proceeds will be distributed only if the check used for investment is deemed to be cleared for payment by your bank, currently considered by the Company to be a period of up to 15 days after investment. The proceeds, of course, may be more or less than cost. Payment of redemption proceeds may be made in securities, subject to regulation by some state securities commissions. 1. Write a letter of instruction. Indicate the dollar amount of or number of shares to be redeemed. Refer to your Fund account number and provide either a social security or a tax identification number (as applicable). 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the shares, all must sign. 3. If shares to be redeemed have a value of $5,000 or more, or redemption proceeds are to be paid to someone other than you at your address of record, the signature(s) must be guaranteed by an "eligible guarantor institution," which includes a commercial bank that is a member of the Federal Deposit Insurance Corporation, a trust company, a member firm of a domestic stock exchange, a savings association, or a credit union that is authorized by its charter to provide a signature guarantee. Signature guarantees by notaries public are not acceptable. Further documentation will be requested from corporations, administrators, executors, personal representatives, trustees or custodians. 4. If shares to be redeemed are held in certificated form, enclose the certificates with the letter. Do not sign the certificates and for protection use registered mail. 5. Mail the letter to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchase of Fund Shares by Wire." Unless other instructions are given in proper form, a check for the proceeds of redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be sent to your address of record. The Company's Systematic Withdrawal Plan provides a way for you to have shares redeemed from your account and the proceeds, net of any contingent deferred sales charge applicable with respect to Class D Shares, distributed to you on a monthly basis. You may elect to participate in this plan if you have a shareholder account valued at $10,000 or more as of the date of your election to participate, and are not also a participant in the Company's Systematic Purchase Plan at any time while participating in this plan. To participate in the plan you must specify an amount ($100 or more) to be distributed by check to your address of record or deposited in a designated bank account. The Transfer Agent redeems sufficient shares and mails or deposits the proceeds of the redemption, net of any contingent deferred sales charge applicable with respect to Class D Shares, as instructed, on or about the fifth business day prior to the end of each month. There are no additional fees charged for participating in this plan. You may change the withdrawal amount, suspend withdrawals or terminate the election at any time by providing written notice to the Transfer Agent at least five business days prior to a scheduled transaction. An election will be terminated automatically if your account balance is insufficient to make a scheduled withdrawal or if your account is closed. If shares are not held in certificated form, you may request an expedited redemption of shares by letter or telephone (unless you have elected not to authorize telephone redemptions on your Account Application or other form that is on file with the Transfer Agent) on any day the Fund is open for business. See "Exchange Privileges" for additional information regarding telephone redemption privileges. You may request expedited redemption by telephone by calling the Transfer Agent at (800) 572-7797. You may request expedited redemption by mail by mailing your expedited redemption request to the Transfer Agent at the mailing address set forth under "Purchase of Shares -- Initial Purchase of Fund Shares by Wire." Upon request, proceeds of expedited redemptions of $5,000 or more, net of any contingent deferred sales charge applicable with respect to Class D Shares, will be wired or credited to the bank indicated in your Account Application or wired to an authorized broker/dealer or financial institution designated in your Account Application. The Company reserves the right to impose charges for wiring redemption proceeds. When proceeds of an expedited redemption are to be paid to someone other than yourself, to an address other than that of record, or to a bank, broker/dealer or other financial institution that has not been predesignated, the expedited redemption request must be made by letter and the signature(s) on the letter must be guaranteed, regardless of the amount of the redemption. If an expedited redemption request is received by the Transfer Agent by the close of business on any day the Fund is open for business, the redemption proceeds will be transmitted to your bank or predesignated broker/dealer or financial institution on the next business day (assuming the investment check has cleared as described above), absent extraordinary circumstances. A check for proceeds of less than $5,000 will be mailed to your address of record, except that, in the case of investments in the Company that have been effected through broker/dealers, banks and other institutions that have entered into special arrangements with the Company, the full amount of the redemption proceeds may be transmitted by wire or credited to a designated account. REDEMPTIONS THROUGH AUTHORIZED BROKER/DEALERS AND FINANCIAL INSTITUTIONS Redemption requests placed through authorized broker/dealers and financial institutions by the close of the Exchange on any day that the Fund's shares are offered for sale will be effective on the same day the request is placed if received by the Transfer Agent before the close of business. Redemption requests that are received by a dealer or financial institution after the close of the Exchange or by the Transfer Agent after the close of business generally will be effective on the next day that shares are offered. The broker/dealer or financial institution is responsible for the prompt transmission of redemption requests to the Transfer Agent. Unless you have made other arrangements, and have informed the Transfer Agent of such arrangements, proceeds of redemptions made through authorized broker/dealers and financial institutions will be credited to your account with such broker/dealer or institution. You may request a check from the broker/dealer or financial institution or may elect to retain the redemption proceeds in your account. The broker/dealer or financial institution may benefit from the use of the redemption proceeds prior to the clearance of a check issued to you for such proceeds or prior to disbursement or reinvestment of such proceeds on your behalf. The proceeds of redemption may be more or less than the amount invested and, therefore, a redemption may result in a gain or loss for federal and state income tax purposes. Due to the high cost of maintaining small accounts, the Company reserves the right to redeem accounts that fall below $1,000 because of a shareholder redemption. Prior to such a redemption, you will be notified in writing and permitted 30 days to make additional investments to raise the account balance to the specified minimum. The Company's Board of Directors has adopted a Plan on behalf of each class of shares of the Fund. Under the Plans, the Fund may defray all or part of the cost of preparing and printing prospectuses and other promotional materials and of delivering prospectuses and those materials to prospective shareholders of the Fund, by paying a monthly fee at the annual rate of up to 0.25% of the average daily net assets of the Class A Shares of the Fund and a monthly fee at the annual rate of up to 0.50% of the average daily net assets of the Class D Shares of the Fund. Since the fee payable to Stephens under the Distribution Agreement is based upon a percentage of the average daily net assets of a class of shares of the Fund and not upon the actual expenditures of Stephens, the expenses of Stephens (which may include overhead expenses) may be more or less than the fees received by it under the Distribution Agreement. All or a portion of these fees may be paid by Stephens to broker-dealers or financial institutions who have entered into selling agent agreements with Stephens, as compensation for sales support services. The Company's Board of Directors has adopted a servicing plan ("Servicing Plan") on behalf of the Class D Shares of the Fund. Pursuant to the Servicing Plan the Fund may enter into servicing agreements with one or more servicing agents who agree to provide administrative support services to their customers who are the record or beneficial owners of Class D Shares. Such servicing agents will be compensated at an annual rate of up to 0.25% of the average daily net asset value of the Class D Shares held of record or beneficially by such customers. The Fund intends to declare as a dividend to all shareholders of record substantially all of its net investment income at the close of each business day to shareholders of record at 4:00 p.m. (New York time) on the day of declaration. Shares purchased in the Fund will begin earning dividends on the business day following the date the purchase order settles and shares redeemed will earn dividends through the date of redemption. Net investment income for a Saturday, Sunday or holiday will be declared as a dividend to shareholders of record at 4:00 p.m. (New York time) on the prior business day. Dividends of the Fund declared in, and attributable to, any month will be paid early in the following month. Shareholders of the Fund who redeem shares prior to a dividend payment date will be entitled to all dividends declared but unpaid prior to redemption on such shares on the next dividend payment date. Net capital gains of the Fund, if any, will be distributed annually (or more frequently to the extent permitted to avoid imposition of the 4% excise tax described in the SAI). Dividends and/or capital gain distributions paid by the Fund will be invested in additional shares of the same class of the Fund at net asset value (without any sales load) and credited to your account on the reinvestment date or, at your election, paid by check. In addition, you may elect to reinvest Fund dividends and/or capital gain distributions in shares of another fund in the Overland Express Family of Funds with which you have an established account that has met the applicable minimum initial investment requirement. The Fund's net investment income available for distribution to the holders of Class D Shares will be reduced by the amount of servicing fees payable to servicing agents under the Servicing Plan and by the incremental distribution fees payable under the Distribution Plan. There may be certain other differences in fees (e.g. audit fees, transfer agent fees) between Class A Shares and Class D Shares that would affect their relative dividends. By complying with the applicable provisions of the Code, the Fund will not be subject to federal income taxes with respect to net investment income and net realized capital gains distributed to its shareholders. However, dividends attributable to investment income (which includes net short-term capital gains, if any) declared and paid by the Fund will be taxable as ordinary income to Fund shareholders. Whether you take dividend payments in cash or have them automatically reinvested in additional shares, they will be taxable. Generally, dividends are taxable to shareholders at the time they are paid. However, dividends declared payable in October, November and December and made payable to shareholders of record in such a month are treated as paid and are thereby taxable as of December 31, provided that such dividends are actually paid no later than January 31 of the following year. You may be eligible to defer the taxation of dividend and capital gain distributions on shares of the Fund which are held under a qualified tax-deferred retirement plan. The Fund intends to pay out all its net investment income and net realized capital gains (if any) for each year. The Fund's dividends will not qualify for the dividends-received deduction allowed to corporate shareholders. The Fund will inform you of the amount and nature of Fund dividends and capital gains. You should keep all statements you receive to assist in your personal recordkeeping. The Company is required by federal law to withhold, subject to certain exemptions, at a rate of 31% on dividends paid and redemption proceeds (including proceeds from exchanges) paid or credited to individual shareholders of the Fund if a correct Taxpayer Identification Number, certified when required, is not on file with the Company or the Transfer Agent. In connection with this withholding requirement, you will be asked to certify on your Account Application that the social security or taxpayer identification number you provide is correct and that you are not subject to 31% backup withholding for previous underreporting to the IRS. Foreign shareholders may be subject to different tax treatment, including a withholding tax. See "Federal Income Taxes - Foreign Shareholders" in the SAI. Further federal tax considerations are discussed in the SAI. All investors should consult their individual tax advisors with respect to their particular tax situations as well as the state and local tax status of investments in shares of the Fund. CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT Wells Fargo Bank has been retained to act as the Fund's custodian and transfer and dividend disbursing agent. Its principal place of business is 420 Montgomery Street, San Francisco, California 94163 and its transfer and dividend disbursing agency activities are managed at 525 Market Street, San Francisco, California 94105. The Company, an open-end investment company, was incorporated in Maryland on April 27, 1987. The authorized capital stock of the Company consists of 20,000,000,000 shares having a par value of $.001 per share. The Company currently offers twelve series of shares, each representing an interest in one of the funds in the Overland Express Family of Funds -- the Asset Allocation Fund, the California Tax-Free Bond Fund, the California Tax-Free Money Market Fund, the Money Market Fund, the Municipal Income Fund, the Overland Sweep Fund, the Short-Term Government-Corporate Income Fund, the Short-Term Municipal Income Fund, the Strategic Growth Fund, the U.S. Government Income Fund, the U.S. Treasury Money Market Fund and the Variable Rate Government Fund. The Board of Directors may, in the future, authorize the issuance of other series of capital stock representing shares of additional investment portfolios or funds. All shares of the Company have equal voting rights and will be voted in the aggregate, and not by series or class, except where voting by series or class is required by law or where the matter involved affects only one series or class. The Company may dispense with the annual meeting of shareholders in any fiscal year in which it is not required by the 1940 Act to elect Directors; however, shareholders are entitled to call a meeting of shareholders for purposes of voting on removal of a Director or Directors. A more detailed statement of the voting rights of shareholders is contained in the SAI. All shares of the Company, when issued, will be fully paid and nonassessable. A purported class action lawsuit was filed on March 14, 1995 in the United States District Court for the Southern District of California by Conrad D. Schaefer and Diane L. Schaefer, Trustees for the Schaefer Family Trust of 1992 against the Overland Express Family of Funds "Variable Rate Government Fund," Wells Fargo Bank and Wells Fargo & Company. The plaintiffs seek to sue on behalf of persons who bought the fund between January 1, 1991 and March 10, 1995, and allege that defendants violated the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940 and common law by, among other things, failing to disclose adequately the objectives and risks of the Fund, specifically, the risks involved in investing in Support Class Bonds, and that the Fund's prospectuses, annual reports and other documents filed with the Securities and Exchange Commission contained false and misleading statements relating thereto. The named plaintiffs allege that the Class as a whole suffered substantial, but unspecified, damages, including interest, in connection with the purchase of securities covered by the Fund's offering documents over the course of the specified period. Management of the Company believes that the case is without merit and intends to vigorously defend against the action. DIVIDEND DISBURSING AGENT AND CUSTODIAN Wells Fargo Bank, N.A. FOR MORE INFORMATION ABOUT THE FUND, OR WRITE:	497	497	1996-01-12T00:00:00	1996-01-12T16:07:22
0000823927-96-000002	0000823927-96-000002_0000.txt	Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): January 5, 1996 (Exact name of registrant as specified in its charter) (State or other jurisdiction of (Commission File (IRS Employer (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (512) 445-6606 Registrant attaches as Exhibit A hereto, condensed unaudited financial statements as of November 30, 1995, which separately disclose equity transactions completed by the Company in October and November 1995. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. By: /s/ Mary Beth Koenig Cash and cash equivalents $ 651,266 $1,360,000(a) $ 2,011,266 Trade receivables, net 478,131 478,131 Receivable from sale of 993,600 993,600 TOTAL CURRENT ASSETS 3,529,186 4,675,748 PLANT AND EQUIPMENT, net 5,434,694 590,000(d 6,024,694 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Accounts payable $ 794,423 $ CONVERTIBLE NOTES PAYABLE 9,470,000 (2,450,00 7,020,000 TECHNOLOGY LICENSE PAYABLE 2,429,346 (154,888) 2,274,458 (less current portion) 1,243,391 1,243,391 authorized 50,000,000 2,467,323 117,036(a 2,793,260 Stock subscriptions 0 2,994,225 2,994,225 Paid in capital 27,409,142 1,242,964 30,834,65 See notes to condensed unaudited financial statements. Electrosource, Inc. Research and development 3,411,525 3,411,525 Selling, general and 6,381,646 6,381,646 Technology license and 273,918 273,918 Loss before income taxes (16,489,248 (16,565,7 Net loss per common share $ (.82) $ (.82) Average common shares 20,294,222 20,294,22 See notes to condensed unaudited financial statements. Notes to Condensed Unaudited Financial Statements NOTE A - BASIS OF PRESENTATION Column 1 has been prepared from the preliminary, unaudited, internal financial statements of Electrosource, Inc. Column 1 excludes equity transactions completed and recorded in October and November 1995. Column 2 reflects equity transactions recorded in October and November 1995 associated with the completion of the following transactions: (a) the sale and issuance of 1,170,357 shares of Common Stock in October 1995; (b) the conversion of $2,450,000 of Convertible Debentures, net of associated unamortized financing costs, into 1,994,572 shares of Common Stock in October (c) the issuance of 94,444 Common Shares in October and November 1995 in accordance with the terms of the Technology License Agreement with BDM Technologies (d) termination of a research and development arrangement between Electrosource, Inc. ("ELSI") and the Electric Power Research Institute ("EPRI") dated November 1, 1995 which provides for the issuance of 2,158,000 shares of Common Stock in exchange for: the transfer of intellectual property rights, and the transfer of title to certain equipment to ELSI that had been purchased by EPRI in connection with research activity undertaken by ELSI. This transaction was effective as of November 1, 1995. The allocation of the purchase price of the intellectual property rights and equipment is based upon management's current estimates of the relative values of the assets acquired. The final allocation thereof may vary as additional information is obtained, and accordingly, the ultimate allocation may differ from those used in the preliminary, condensed, unaudited financial statements as of and for the eleven months ended November 30, 1995. Column 3 represents the unaudited financial statements of Electrosource, Inc. as of and for the eleven months ended November 30, 1995.	8-K	8-K	1996-01-12T00:00:00	1996-01-12T13:50:42
0000949459-96-000002	0000949459-96-000002_0000.txt	<DESCRIPTION>QUARTERLY REPORT FOR QUARTER ENDED 11/30/95 U.S. Securities and Exchange Commission [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter ended November 30, 1995 Commission file No. 0-16964 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE For the transition period from to (Exact name of small business issuer as specified in its charter) (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4491 South State Road Seven, Suite 200, Fort Lauderdale, Florida, 33314 (Address of principal executive offices) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x . The number of shares outstanding of each of the issuer's classes of common equity, as of December 29, 1995 was: 3,495,765 CANCER TREATMENT HOLDINGS, INC. AND SUBSIDIARIES CANCER TREATMENT HOLDINGS, INC. AND SUBSIDIARIES CANCER TREATMENT HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended November 30, 1995, and 1994 Increase (Decrease) in Cash and Cash Equivalents Non-cash financing and investing activities: In August 1994, the Company completed the sale of substantially all of the assets of two of its radiation therapy centers (CTI of West Broward, Inc. and Boca Raton Radiotherapy Associates, Ltd.) to an unrelated third party. The Company received $900,000 in cash and $2,600,000 in a subordinated promissory note which bears interest at prime and which the Company has recorded net of a discount of $448,803. The sale resulted in a gain of $349,207. The remaining assets sold and liabilities assumed in the transaction were as follows: Property, plant and equipment $(2,406,027) CANCER TREATMENT HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ITEM 1. FINANCIAL STATEMENTS (continued) Notes to Consolidated Financial Statements 1. Preparation of Financial Statements: The accompanying unaudited consolidated financial statements for Cancer Treatment Holdings, Inc. and its subsidiaries (the "Company") have been prepared in accordance with the instructions of SEC Form 10-QSB and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest SEC Form 10-KSB for the year ended May 31, 1995. In the opinion of management, the unaudited consolidated financial statements contain all adjustments which are of a normal, recurring nature for a fair statement of the results of operations for such interim periods presented. The results of operations for the six months ended November 30, 1995, are not necessarily indicative of the results which may be expected for the entire fiscal year. The May 31, 1995, consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. As a general partner, the Company is jointly and severally liable for the liabilities concerning the actions of Palm Beach Radiotherapy Associates, Ltd. ("Palm Beach") and has guaranteed certain liabilities of this Partnership amounting to $528,000 at November 30, 1995. In this connection, the Company could be held responsible for any and all liabilities arising from the actions of Palm Beach. The Company and the other partner of Palm Beach have executed demand promissory notes payable to Palm Beach which have been assigned as collateral to certain creditors of those Partnerships. 3. Sale of Radiation Therapy Centers On August 26, 1994, the Company sold substantially all of the assets of CTI of West Broward, Inc. and Boca Raton Radiotherapy Associates, Ltd. (the "Centers") for $3,500,000 consisting of $900,000 cash and $2,600,000 in a subordinated promissory note which bears interest at prime and is payable in monthly installments over six years. The Company recorded the note net of a discount of 14%, or $448,803, based on, among other factors, the Company's incremental borrowing rate and the credit risk of the buyer. The net gain on the sale amounted to $349,207. Concurrent with the sale, the Company entered into a 12-year management and billing and collection agreement under which the Company will receive 9.5% of annual net collected revenues and a six-year consulting agreement whereby the Company will receive $16,500 per month for consulting services. Certain amounts have been reclassified in the financial statements for the six-month period ended November 30, 1994, to conform to the presentation in the financial statements for the six-month period ended November 30, 1995. CANCER TREATMENT HOLDINGS, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE SIX MONTHS ENDED Comparison of the Six Months Ended November 30, 1995, to the Six Months Ended November 30, 1994 Revenues for the six-month period ended November 30, 1995, increased $125,000 over the six-month period ended November 30, 1994, from $5,449,000 in 1994 to $5,574,000 in 1995. This increase was principally attributable to an increase in revenues from the billing and collection and management contracts with the buyers of the Coral Springs, Boca and Tampa centers. For the six months ended November 30, 1995 and 1994, revenues were derived from the following payor sources: Changes in the current mix of payors, specifically those which would result in a decrease in the percentage of revenues from Medicare or third-party payors, may adversely effect the Company's future results of operations. Patient service revenues are derived from the operations of the home health division and the Company's radiation therapy center in Mississippi and, for the first quarter of fiscal 1995, the Coral Springs and Boca radiation therapy centers, which were sold at the end of the first quarter of fiscal 1995. Patient service revenues in total decreased $92,000 from $4,889,000 in 1994 to $4,797,000 in 1995. Revenues from the home health division which are included in patient service revenues increased $723,000 from $3,966,000 in 1994 to $4,689,000 in 1995. Med Tech participates in the Medicare program under which services are rendered to Medicare program beneficiaries and are reimbursed based on cost-reimbursement principles. The increase in revenues is primarily the result of an increase in the reimbursement rate of Med Tech and Leader. Over 90% of Med Tech's current business is with Medicare beneficiaries. Radiation therapy revenues which are also included in patient service revenues decreased $699,000 from $807,000 in 1994 to $108,000 in 1995. The decrease was attributable to the sale of the Centers. Other revenues, which consist principally of management/consulting and billing and collection revenues and interest income, increased $216,000 from $560,000 in 1994 to $776,000 in 1995. This increase is primarily attributed to revenues from the management/consulting and billing and collection contracts with the buyers of the Coral Springs, Boca and Tampa centers. Interest income increased $84,000 during 1995 as a result of the interest income recognized from the notes receivable from the buyers of the Centers. Operating expenses for the six-month period ended November 30, 1995, increased $343,000, or 7.0% over the six-month period ended November 30, 1994, from $4,915,000 in 1994 to $5,258,000 in 1995. This increase was primarily attributable to the following: Professional care of patients expenses increased $377,000 from $3,943,000 in 1994 to $4,320,000 in 1995 as a result of the increase in revenues in the home health division, offset by a decrease in the expenses of the sold Radiation Centers. General and administrative expenses decreased $168,000 from $642,000 in 1994 to $474,000 in 1995. This decrease is primarily attributed to the increase in revenues of Med Tech which resulted in the Company allocating more general and administrative expenses to Med Tech which operates on a Medicare cost-reimbursement basis. These allocated expenses are included in "professional care of patients" expense in the Company's Statement of Operations. Direct costs of clinical supplies increased $84,000 from $154,000 in 1994 to $238,000 in 1995. This increase was the result of the increase in revenues of Leader. 2. Liquidity and Capital Resources: As of November 30, 1995, the Company had working capital, including cash of $2,518,000, as compared to working capital of $2,569,000 at May 31, 1995. During the six-month period ended November 30, 1995, cash decreased $1,158,000. The principal components of the decrease in cash are as follows: Cash used in operating activities amounted to $1,023,000 in 1995, compared to cash used in operating activities of $221,000 in 1994. The increase is primarily attributed to payments to Medicare of $826,000 and an increase in accounts receivable. The Company's current ratio (current assets over current liabilities) was 2.72 for 1995 and 2.27 for 1994. Cash used in investing activities was $495,000 in 1995, compared to cash provided by investing activities of $573,000 in 1994. The 1994 amount included $838,000 in cash received from the sale of the Centers. Cash provided by financing activities was $360,000 in 1995, compared to cash used in financing activities of $235,000 in 1994. The 1995 amount included $740,000 in short-term borrowings. Under the terms related to the sale of the Centers, the Company will receive approximately $50,000 per month due under the note from the buyer of the Coral Springs and Boca Raton Radiation Centers over the next six years, $16,500 per month in consulting fees over the next six years, and payments of 9.5% of the net monthly revenues collected by the buyer which the Company believes will average approximately $25,000 to $30,000 per month over the next twelve years there can be no assurance that the Company will actually receive this amount. As a result of the sale of the Company's interest in the Tampa radiation therapy center, the Company will receive $150,000 per year over the next 9 years in consulting fees. Except for those items discussed above, and in the Company's latest Form 10-KSB for the year ended May 31, 1995, there are no existing material sources of liquidity available to the Company or material commitments for capital expenditures. There are no material trends, favorable or unfavorable, in the Company's capital resources. Management is unaware, except for those items discussed above, of any trends, demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the Company's liquidity increasing or decreasing in any material way. CANCER TREATMENT HOLDINGS, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: a) The Annual Meeting of Shareholders of the Company was held on November 16, 1995. b) The name of each director elected at the Annual Meeting is Jack W. Buechner and John P. Rosenthal. The name of each other director whose term of office as a director continued after the meeting is Salvatore P. Russo, Ph.D., John C. Mull, M.D., and Ullrich Klamm, Ph.D. c) The following information is provided with respect to each matter voted upon at the Annual Meeting: Votes Cast For Votes Cast Against Abstentions Jack W. Buechner 2,195,083 14,634 0 John P. Rosenthal 2,195,083 14,634 0 & Lybrand as the Company's fiscal year ending May 31, Votes Cast For Votes Cast Against Abstentions Item 7. EXHIBITS AND REPORTS ON FORM 8-K a) There were no reports on Form 8-K filed during the three months ended November 30, 1995. b) Exhibit 27: Financial Data Schedule Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. January 12, 1996 by: /s/ Louis W. Boisvert, III Vice President of Finance and (Principal Accounting Officer and Duly	10QSB	10QSB	1996-01-12T00:00:00	1996-01-12T10:34:23
0000008177-96-000002	0000008177-96-000002_0001.txt	Dated as of October 16, 1995 ARTICLE 2 STOCK PURCHASE AND CLOSING.............................4 2.01 Purchase and Sale of the Shares.......................4 2.03 Payment of Purchase Price.............................4 2.06 Deliveries and Proceedings at the Closing.............6 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER..............6 3.01 Organization and Good Standing of Seller; Power and 3.02 Organization and Good Standing of American Southern; 3.06 No Violation of Applicable Laws or Agreements.........7 3.07 SEC Filings and Financial Statements..................8 3.08 Absence of Certain Changes............................9 3.11 Pending Litigation or Proceedings.....................11 3.12 Compliance With Applicable Laws.......................11 3.18 Title to Assets; Material Contracts...................12 3.20 Compensation Arrangements; Bank Accounts; Officers 3.21 Transactions With Related Parties.....................15 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PURCHASER...........16 4.01 Purchaser's Organization and Good Standing; Power and 4.02 No Violation of Applicable Laws or Agreements.........16 4.03 Pending Litigation or Proceedings.....................17 4.05 Investment Intent; Ability to Bear Risk...............17 4.06 SEC Filings and Financial Statements..................17 4.07 Absence of Certain Changes............................18 ARTICLE 5 CERTAIN ADDITIONAL COVENANTS AND AGREEMENTS...........18 5.01 Operation of Business Pending Closing.................18 5.03 Supplements to Disclosure Memoranda...................19 5.05 Regulatory Approvals and Consents.....................24 ARTICLE 6 CONDITIONS TO CLOSING.................................26 6.01 Conditions to Obligations of Purchaser................26 6.02 Conditions to Obligations of Seller...................27 8.01 When Agreement May be Terminated......................32 10.01 Nature and Survival of Representations................33 THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of October 16, 1995 by and between ATLANTIC AMERICAN CORPORATION, a Georgia corporation ("Purchaser"), and FUQUA ENTERPRISES, INC. (formerly known as Vista Resources, Inc.), a Delaware corporation ("Seller"). WHEREAS, Seller owns 100% of the issued and outstanding capital stock of American Southern Insurance Company, a Georgia corporation ("American WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to purchase, all of the capital stock of American Southern, in accordance with the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the mutual promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: As used herein, the following terms have the following respective meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): 1.01 "Agreement" Agreement means this Stock Purchase Agreement and the Exhibit hereto, as the same may be supplemented, modified or amended from time to time. 1.02 "American Safety" American Safety means American Safety Insurance Company, a Georgia corporation and wholly owned subsidiary of American Southern. 1.03 "Applicable Law" Applicable Law means all applicable provisions of constitutions, statutes, laws, rules, regulations and orders of all Governmental Authorities. 1.04 "Automated Systems" Automated Systems means Automated Systems of Georgia, Inc., a Georgia corporation and wholly owned subsidiary of American Southern. 1.05 "Automobile Safety" Automobile Safety means Automobile Safety Management, Inc., a Delaware corporation and wholly owned subsidiary of American Southern. 1.06"Closing" Closing means the consummation of the transactions described in this Agreement, and "Closing Date" means the date upon which such consummation occurs. 1.07 "Code" Code means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. 1.08 "Companies" Companies means American Southern collectively with the Subsidiaries. 1.09 "ERISA" ERISA means the Employee Retirement Income Security Act of 1974, as in effect from time to time. 1.10 "Fed" Fed means the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York acting as bailee for the Board of Governors. 1.11 "GAAP" GAAP means generally accepted accounting principles. 1.12 "Georgia Insurance Code" Georgia Insurance Code means Title 33 of the Official Code of Georgia Annotated and all regulations promulgated thereunder. 1.13 "Florida Tax Litigation" Florida Tax Litigation means the premium tax litigation with respect to the period from 1985 through 1990 involving American Southern and the State of Florida Department of Revenue currently being litigated in the District Court of Appeals, 1st District of Florida (Civil Action No. 95-2588). 1.14 "Governmental Authority" Governmental Authority means any federal, state, county, local, foreign or other governmental or public agency, instrumentality, commission, authority, board or body. 1.15 "Hart-Scott Act" Hart-Scott Act means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and all regulations promulgated thereunder. 1.16 "InterRedec" InterRedec means InterRedec Southern Company, Inc., a Delaware corporation. 1.17 "InterRedec Escrow" InterRedec Escrow means that certain Escrow Agreement dated as of October 11, 1991 by and among Seller, InterRedec and First Union National Bank of Georgia. 1.18 "InterRedec Note" InterRedec Note means that certain Nonnegotiable Note dated October 11, 1991 made by Seller, payable to InterRedec. 1.19 "InterRedec Pledge" InterRedec Pledge means that certain Pledge and Security Agreement dated October 11, 1991 by and between Seller and InterRedec. 1.20 "Knowledge" Knowledge (i) with respect to Seller, means those facts known, or which should have been known with reasonable diligence, by any of the officers or directors of the Companies; and (ii) with respect to Purchaser, means those facts known, or which should have been known with reasonable diligence, by any of the officers or directors of Purchaser. 1.21 "Material Adverse Effect" Material Adverse Effect means a material adverse effect to the property, results of operations or financial condition of (a) American Southern and the Subsidiaries taken as a whole, or (b) Purchaser, as shall be applicable in the context in which the term is used; provided, however, that a Material Adverse Effect shall not include the effect of any matter which has or may have an industry-wide effect, or any general economic conditions. 1.22 "1933 Act" 1933 Act means the Securities Act of 1933, as amended. 1.23 "1934 Act" 1934 Act means the Securities Exchange Act of 1934, as amended. 1.24 "Person" Person means an individual, corporation, partnership, association, trust or unincorporated organization, or a government or any agency or political subdivision thereof. 1.25 "Pledged Shares" Pledged Shares means the 149,998 shares of American Southern common stock pledged to InterRedec by Seller pursuant to the InterRedec Pledge. 1.26 "Premier" Premier means Premier Adjusting and Claims Service, Inc., a Georgia corporation and wholly owned subsidiary of American Southern. 1.27 "Prime Rate" Prime Rate means the prime rate as published in the "Money Rates" column of The Wall Street Journal, Eastern Edition; in the event that more than one such rate is reported, the Prime Rate shall equal the average of such rates. 1.28 "Purchaser Disclosure Memorandum" Purchaser Disclosure Memorandum means the written information entitled "Purchaser Disclosure Memorandum" delivered to Seller prior to the date of this Agreement describing in reasonable detail the matters contained therein and, with respect to each disclosure made therein, specifically referencing each Section of this Agreement under which such disclosure is being made. Information disclosed with respect to one Section shall be deemed to be disclosed for purposes of all other Sections, provided that the relevance to the Section from which any such matter is omitted is apparent from the disclosure with respect to the Section in which such matter is included. 1.29 "Related Party" Related Party means Seller; any of the officers or directors of any of the Companies; any affiliate of Seller, any Company or any of their respective officers or directors; or any business or entity in which Seller, any Company, or any affiliate of any such person has any direct or material indirect interest. 1.30 "SAP" SAP means the statutory accounting practices as prescribed or permitted by the Georgia Insurance Department. 1.31 "SEC" SEC means the Securities and Exchange Commission. 1.32 "Seller Disclosure Memorandum" Seller Disclosure Memorandum means the written information entitled "Seller Disclosure Memorandum" delivered to Purchaser prior to the date of this Agreement describing in reasonable detail the matters contained therein and, with respect to each disclosure made therein, specifically referencing each Section of this Agreement under which such disclosure is being made. Information disclosed with respect to one Section shall be deemed to be disclosed for purposes of all other Sections, provided that the relevance to the Section from which any such matter is omitted is apparent from the disclosure with respect to the Section in which such matter is included. 1.33 "Shares" Shares means 100% of the issued and outstanding shares of capital stock of American Southern. 1.34 "Stockholders'Equity" Stockholders' Equity means total assets minus total liabilities of American Southern on a consolidated SAP basis. 1.35 "Stock Purchase Agreement" Stock Purchase Agreement means that certain Stock Purchase Agreement dated as of September 17, 1991, among Seller, Concorde Finance & Investment, Inc., InterRedec, Inc., InterRedec and American Southern. 1.36 "Subsidiaries" Subsidiaries means American Safety, Automated Systems, Automobile Safety and Premier. 1.37 "Tax Allocation Agreement" Tax Allocation Agreement means the tax allocation agreement dated as of October 11, 1991 between Seller and American Southern. 1.38 "Tax Returns" Tax Returns means all returns or reports, including accompanying schedules, with respect to Taxes. 1.39 "Taxes" Taxes means all federal, state, local and foreign income, premium, payroll, withholding, excise, sales, use, real and personal property, use and occupation, mercantile, capital stock, franchise and other taxes, including interest and penalties thereon and all estimated taxes. 2.01 Purchase and Sale of the Shares. Upon and subject to the terms and conditions of this Agreement, Seller shall sell, and Purchaser shall purchase, the Shares. 2.02 Consideration. The aggregate consideration (the "Purchase Price") to be paid by Purchaser to Seller for the Shares shall be $34,000,000, subject to adjustment as described in Section 2.04. 2.03 Payment of Purchase Price. Purchaser shall pay the Purchase Price as follows: (a) at Closing, Purchaser shall execute and deliver to Seller a promissory note (the "Purchaser Note") in substantially the form attached hereto as Exhibit 2.03 in a principal amount equal to the total amount of the principal plus accrued interest (as determined pursuant to Section 2(c) of the InterRedec Note) owed by Seller under the InterRedec Note as of the Closing Date; and (b) at Closing, Purchaser shall pay to Seller in cash the difference between $34,000,000 and the principal amount of the Purchaser Note, by means of a wire transfer of immediately available funds (U.S. Dollars) to an account designated by Seller. (a) As soon as practicable, but in any event within thirty (30) days after Closing, Purchaser shall, under the direction and supervision of Roy S. Thompson, Jr., Scott G. Thompson and Calvin L. Wall, or any of them, prepare and deliver to Seller a balance sheet of American Southern as of the Closing Date (the "Closing Balance Sheet"), prepared in accordance with SAP reporting practices consistently applied (but subject to the provisions of Section 5.04(i)). Without limiting the generality of the foregoing sentence, the parties expressly agree that the Closing Balance Sheet shall include amounts for insurance liability reserves calculated in a manner and using methodologies and assumptions consistent in all respects with American Southern's practice of calculating such reserves during the 24-month period immediately prior to the Closing Date. (b) Seller shall have fifteen (15) days after receipt of the Closing Balance Sheet in which to review such Closing Balance Sheet, and during such 15-day period, Purchaser shall make available to Seller and its representatives all information regarding preparation of the Closing Balance Sheet as may be reasonably requested by Seller, including, without limitation, access to all employees, books, records and work papers. If within such 15-day period Seller does not provide Purchaser with written notice of any objection to the Closing Balance Sheet, the Closing Balance Sheet shall be deemed accepted by, and final and binding upon, both parties. If Seller does provide Purchaser with written notice of any objection within such 15-day period, then the parties shall in good faith attempt to resolve such dispute within fifteen (15) days after Purchaser's receipt of Seller's objection notice. If such dispute cannot be resolved by the parties, the dispute shall be submitted to arbitration in accordance with the provisions of Article 9 hereof, except that the third arbitrator selected from a AAA list (as described in Section 9.02) must be an independent certified public accountant knowledgeable about SAP. (c) Once the Closing Balance Sheet has been deemed final and binding on the parties, whether by failure of Seller to object, agreement of the parties or arbitration, within five (5) business days thereafter, Seller shall pay to Purchaser in immediately available funds the amount, if any, by which the Stockholders' Equity reflected on the Closing Balance Sheet is less than $26,800,000, plus interest thereon at the Prime Rate in effect on the Closing Date for the period of the Closing Date through the date of payment. If such Stockholders' Equity as reflected on the Closing Balance Sheet is equal to or greater than $26,800,000, neither party shall owe the other any additional amounts. (d) Notwithstanding anything to the contrary contained herein, the parties agree that all payables of any of the Companies to Seller or any of its affiliates shall be accrued on the Closing Balance Sheet and paid at Closing or paid prior to Closing (in which case the Companies shall furnish Seller with satisfactory evidence of such payment). 2.05 Closing. Closing shall be effective as of the close of business on the last day of the month in which all of the conditions set forth in Article 6 are satisfied or waived, and Closing shall take place at such time and place as the parties may agree. 2.06 Deliveries and Proceedings at the Closing. At the Closing, the parties shall execute and deliver each agreement and instrument required or contemplated by this Agreement to be so executed and delivered and not theretofore executed and delivered. In addition, at the Closing, i) Purchaser shall deliver to Seller the Purchase Price, and (ii) Seller shall deliver to Purchaser the certificate or certificates evidencing the Shares, duly endorsed in blank for transfer or accompanied by duly executed irrevocable stock powers in blank, free and clear of all liens, encumbrances, pledges, options, voting agreements, contractual rights or other claims whatsoever. All actions taken at the Closing shall be deemed to occur simultaneously. REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser as of the date hereof as follows: 3.01 Organization and Good Standing of Seller; Power and Authority. Seller is a corporation duly organized, validly existing and in good standing under the laws of Delaware. Seller has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of, and the performance by Seller of its obligations under, this Agreement have been duly and validly authorized by all necessary corporate action on the part of Seller. No other corporate or shareholder proceedings on the part of Seller is necessary to approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Seller and constitutes Seller's valid and binding obligations, enforceable against Seller in accordance with its terms. 3.02 Organization and Good Standing of American Southern; Power and Authority. American Southern is a corporation duly organized, validly existing and in good standing under the laws of Georgia. American Southern has all requisite corporate power and authority to own or lease its properties and assets as now owned or leased. The copies of American Southern's articles of incorporation and bylaws, as amended to date, which have been delivered to Purchaser, are correct and complete and are in full force and effect. 3.03 Capitalization and Ownership. American Southern's authorized capital stock consists solely of 300,000 shares of common stock, par value $10 per share, 300,000 of which are currently issued and outstanding and none of which are held in its treasury. All of such outstanding shares of American Southern have been duly authorized, validly issued and are fully paid and nonassessable. Such issued and outstanding shares constitute the Shares, all of which are owned beneficially and of record by Seller, free and clear of any liens, encumbrances, pledges, options, voting agreements, contractual rights or other claims whatsoever, other than the security interest created pursuant to the InterRedec Pledge. As of the Closing, the Shares will be solely owned, beneficially and of record, free and clear of all liens, encumbrances, pledges, options, voting agreements, contractual rights or other claims whatsoever. There are no outstanding options, warrants, preemptive rights, agreements, calls, commitments or demands of any character relating to the capital stock of American Southern and no securities convertible into or exchangeable for any of such capital stock. 3.04 Subsidiaries. American Southern owns, free and clear of all liens and encumbrances whatsoever, 100% of the issued and outstanding capital stock of each Subsidiary. All of such outstanding shares of the Subsidiaries have been duly authorized, validly issued and are fully paid and nonassessable. There are no outstanding options, warrants, rights, agreements, calls, commitments or demands of any character relating to the capital stock of any Subsidiary and no securities convertible into or exchangeable for any of such capital stock. Section 3.04 of the Seller Disclosure Memorandum accurately sets forth the number of shares, classes and par values of the authorized and issued shares of the Subsidiaries. American Southern does not, directly or indirectly, own any stock of, or any other interest in, any Person other than the Subsidiaries, except that American Southern may own interests held for investment purposes not exceeding 10% of any such single Person. Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its incorporation, and each Subsidiary has all requisite corporate power and authority to own or lease its properties and assets as now owned or leased. The copies of the articles of incorporation and bylaws of each Subsidiary, as amended to date, which have been delivered to Purchaser, are correct and complete and are in full force and effect. 3.05 Qualification. Each of the Companies is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction in which such qualification or licensing is necessary under Applicable Law, except where the failure to be so duly qualified or licensed or in good standing would not have a Material Adverse Effect. 3.06 No Violation of Applicable Laws or Agreements. The execution and delivery of this Agreement by Seller do not, and the consummation of the transactions contemplated by this Agreement and the compliance with the terms, conditions and provisions of this Agreement by Seller, will not (a) violate or conflict with any provision of Seller's or the Companies' articles of incorporation or bylaws; (b) except as set forth in Section 3.06 of the Seller Disclosure Memorandum, violate, conflict with or result in the breach or termination of, or otherwise give any contracting party (which has not consented to such execution, delivery and consummation) the right to change the terms of, or to terminate or accelerate the maturity of, or constitute a default under the terms of, any indenture, mortgage, loan or credit agreement or any other material agreement or instrument to which any of Seller or the Companies is a party or by which any of them or any of their assets may be bound or affected, or any Applicable Law; (c) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the Companies' assets or give to others any interests or rights therein; other than any such conflicts, breaches, terminations, accelerations, defaults or violations that would not, individually or in the aggregate, have a Material Adverse Effect. 3.07 SEC Filings and Financial Statements. (a) Seller has heretofore delivered to Purchaser copies of Seller's (i) Annual Report on Form 10-K for the fiscal year ended December 31, 1994, (ii) Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995, and (iii) all other reports, registration statements and other documents filed by Seller with the SEC since December 31, 1994 (collectively, the "Seller SEC Filings"). Since December 31, 1994, Seller has timely filed all reports, registration statements and other documents required to be filed with the SEC under the rules and regulations of the SEC, and all such reports, registration statements and other documents have complied in all material respects, as of their respective filing dates and effective dates, as the case may be, with all applicable requirements of the 1933 Act or the 1934 Act. As of their respective filing and effective dates, none of such reports, registration statements or other documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) Seller has delivered, or prior to Closing will deliver, to Purchaser complete and correct copies of the following financial statements: (i)...the Annual Statements of each of American Southern and American Safety filed with the Georgia Insurance Department for the years ending December 31, 1992, 1993 and 1994, together with the exhibits and schedules thereto (collectively the "Annual Statements"); (ii)..the Quarterly Statements of each of American Southern and American Safety filed with the Georgia Insurance Department for the quarters ending March 31, 1995 and June 30, 1995, together with the exhibits and schedules thereto (collectively, the "Quarterly Statements"); (iii).the audited balance sheets (on a SAP basis), statements of income, statements of changes in capital and surplus, and statements of cash flows of American Southern on an unconsolidated basis as of and for the years ended December 31, 1992, 1993 and 1994 (such financial statements, including all notes and schedules thereto and the independent auditors' report of Ernst & Young LLP thereon, being the "Audited Statements") (the balance sheet as of December 31, 1994 included in the Audited Statements is referred to herein as the "1994 Balance Sheet"); and (iv)..the unaudited balance sheet (on a SAP basis) of American Southern on a consolidated basis (consolidating American Southern with the Subsidiaries) as of June 30, 1995 (the "Balance Sheet Date"), and the unaudited statement of income of American Southern on a consolidated basis for the six-month period ending on the Balance Sheet Date (collectively, the "Interim Unaudited Statements"). The statutory financial statements contained in the Annual Statements (and with respect to clause (ii) below, other items contained in the Annual Statements) and the Audited Statements (i) have been prepared in conformity with SAP using comparable estimates and assumptions applied on a consistent basis with the December 31, 1994 financial statements, except that the financial statements contained in the Quarterly Statements are unaudited, (ii) are true, correct and complete and in accordance with the books and records of each Company, respectively, and (iii) present fully and fairly, on a SAP basis, the financial condition, assets and liabilities of each of American Southern and American Safety, as the case may be, as of the respective dates thereof and the results of operations and cash flows for the respective periods indicated. The financial statements contained in the Quarterly Statements include all adjustments necessary for a fair presentation of the financial position of each Company, respectively, and the results of its operations for the interim period presented, subject to normal recurring year-end adjustments and the omission of footnote disclosures. The Interim Unaudited Statements have been prepared in accordance with SAP applied on a consistent basis throughout the period involved and present fairly the financial condition, assets and liabilities of the Companies as of the respective dates thereof and the results of operations for the period indicated, subject to normal recurring year-end adjustments and the omission of footnote disclosures. (c) Seller has delivered to Purchaser complete and correct copies of the Insurance Holding Company System Registration Statement on Form B as filed by American Southern on behalf of itself and American Safety for the years ended December 31, 1992, 1993 and 1994. Such Forms B, as well as the Annual Statements and the Quarterly Statements, when filed complied in all material respects with the Georgia Insurance Code. 3.08 Absence of Certain Changes. Except as disclosed in Section 3.08 of the Seller Disclosure Memorandum, since the Balance Sheet Date (i) there has been no occurrence having, or which would reasonably be expected to result in, a Material Adverse Effect upon the Companies, and (ii)none of the Companies has taken any action that would be prohibited under Section 5.01 after the date of this Agreement. Since the Balance Sheet Date, the business of the Companies has been conducted only in the ordinary and usual course consistent with past practice, except with respect to the transactions contemplated in this Agreement. 3.09 Reserves. All losses and loss adjustment expenses established and reflected in the 1994 Balance Sheet in respect of the Companies' insurance policies was determined in accordance with generally accepted actuarial standards, was based on actuarial estimates and assumptions that were reasonable and appropriate to the relevant insurance policies and were recorded in compliance with the applicable requirements of the Georgia Insurance Code. 3.10 Tax Matters. Except as set forth in Section 3.10 of the Seller Disclosure Memorandum: (a) None of the Companies (i) is, or since Seller's acquisition of the Shares has been, a member of an affiliated group of corporations within the meaning of Section 1504 of the Code filing a consolidated or combined Tax Return other than (A) the affiliated group of which Seller is the common parent (the "Seller Group") with respect to federal Tax Returns, and (B) an affiliated group or groups consisting solely of American Southern and one or more of the Subsidiaries with respect to state Tax Returns (a "Subsidiary Group"); or (ii) has any liability for Taxes of any Person other than the members of the Seller or Subsidiary Group. (b) Each Seller Group and Subsidiary Group has (i) timely filed all Tax Returns required to be filed by it; (ii) paid all Taxes shown to have become due pursuant to such filed Tax Returns; and (iii) paid all other Taxes for which a notice of assessment or demand for payment has been received, except where the failure to file such Tax Returns or pay such Taxes would not have a Material Adverse Effect. All Tax Returns of each Seller Group and Subsidiary Group (i) have been prepared in accordance with all Applicable Laws, and (ii) accurately reflect the taxable income (or other measure of tax) of the corporation or corporations filing the same, except where the failure to do so has not had a Material Adverse Effect on the Companies. All Taxes of the Companies for periods after December 31, 1994 have been paid or are adequately reserved against on the GAAP and SAP books of the Companies. The Companies have timely filed all information returns or reports, including Forms 1099, that are required to be filed and have accurately reported all information required to be included on such returns or reports. True copies of federal income tax returns of the Companies included in the consolidated Tax Returns for the Seller Group for each of the fiscal years ended December 31, 1992 through December 31, 1994 have been made available to Purchaser. True copies of the state Tax Returns of the Companies filed most recently in each state, respectively, in which the Companies have filed Tax Returns have been delivered to Purchaser. (c) There are no proposed assessments of Taxes against the Companies, no proposed adjustments to any Tax Return pending against the Seller Group with respect to the Companies' operations or assets, and no proposed adjustments to the manner in which any Tax of the Seller Group is determined with respect to the Companies' operations or assets. No claim has been made by a taxing authority in a jurisdiction where the Companies do not file Tax Returns that any of the Companies is or may be subject to taxation by that jurisdiction. (d) Since Seller's acquisition of the Shares, none of the Companies has (i) filed any consent agreement under Section 341(f) of the Code, (ii) executed or been the subject of a waiver or consent extending any statute of limitation for any Tax liability that remains outstanding, (iii) joined in or been required to join in filing a consolidated or combined federal, state or local Tax Return with any corporation other than a current or former member of the Seller Group or Subsidiary Group, (iv) been the subject of a ruling of the Internal Revenue Service or any state or local revenue authority that has continuing application to the Companies, (v) been the subject of a closing agreement with any taxing authority that has continuing effect, or (vi) granted a power of attorney with respect to any Tax matters that has continuing effect. During the immediately preceding three years, none of the Companies has agreed to make nor is it required to make any adjustment under Section 481 of the Code by reason of a change in accounting method or otherwise. (e) Seller is not a "foreign person" within the meaning of Section 1445 of the Code. (f) Seller has no Knowledge of any matter involving Taxes with respect to the Seller Group that would make the Companies subject to joint and severable liability of Seller and is reasonably likely to have a Material Adverse Effect on the Companies. 3.11 Pending Litigation or Proceedings. Except for claims under insurance contracts against the Companies in the ordinary course of business, or as set forth in Section 3.11 of the Seller Disclosure Memorandum, there are no claims, suits, actions, proceedings, arbitrations or investigations pending, or to the Knowledge of Seller threatened, against or otherwise relating to or involving any of the Companies or any of their properties, the outcome of which would reasonably be expected to have a Material Adverse Effect or to affect the ability of Seller to consummate the transactions contemplated by this Agreement. Except as set forth in Section 3.11 of the Seller Disclosure Memorandum, with respect to American Southern and American Safety (i) no investigation or examination by any insurance regulatory authority is pending, and (ii) no such investigation or examination has occurred since the date upon which Seller acquired the Shares. Section 3.11 of the Seller Disclosure Memorandum describes each instance in which either American Southern or American Safety has been the subject of a fine or penalty by an insurance regulatory authority since the date upon which Seller acquired the Shares. 3.12 Compliance With Applicable Laws. None of the Companies is in violation of any Applicable Law, except for possible violations that would not, individually or in the aggregate, have or be reasonably likely to have a Material Adverse Effect. Each of the Companies holds all licenses, permits, registrations and other authorizations required to conduct its business, and all such licenses, permits, registrations and other authorizations are valid and in full force and effect, except for those the absence of which are not reasonably likely to have a Material Adverse Effect. Each of the Companies is in compliance with all such licenses, permits, registrations and authorizations, except for possible failures to be so in compliance which are not reasonably likely to have a Material Adverse Effect. 3.13 Consents and Approvals. Except as set forth in Section 3.13 of the Seller Disclosure Memorandum, except as required under the Hart-Scott Act, and except for the approval of the Georgia Insurance Department, the execution, delivery and performance of this Agreement by Seller and the consummation of the transactions contemplated hereby do not require any consent, approval or authorization of, or registration or filing with, any Person or Governmental Authority. 3.14 Legal Investments. The bonds, stocks and other investments owned beneficially or of record by the Companies are permissible investments for them under the Georgia Insurance Code. 3.15 Investment Assets Custody. Section 3.15 of the Seller Disclosure Memorandum contains a complete and correct list of all custodians and depositories for investment assets of any of the Companies, and lists the persons having signatory authority or access thereto on behalf of any of the Companies. 3.16 Insurance Issued. All insurance policies and contracts issued by American Southern or American Safety now in force (other than policies and contracts issued under applicable surplus lines laws) are on forms and at rates approved by the insurance regulatory authority of the state or jurisdiction where issued or have been filed with and not objected to by such authority within the period provided for objection. 3.17 Insurance Agents. Section 3.17 of the Seller Disclosure Memorandum contains a complete and correct list of all insurance agencies and agents authorized to write insurance on behalf of American Southern or American Safety as of the date shown on such list. To the Knowledge of Seller, all such agencies and agents are duly licensed with the insurance regulatory authority of the state or jurisdiction in which such agency or agent writes insurance on behalf of American Southern or American Safety. 3.18 Title to Assets; Material Contracts. (a) Each of the Companies has (i) good and marketable title, or valid and binding leasehold rights in the case of leased property, to all material personal property owned or leased by it, and (ii) valid and binding leasehold rights to all real property leased by it, free and clear of any lien, encumbrance, mortgage, pledge, charge or security interest whatsoever, other than those that would not, individually or in the aggregate, have a Material Adverse Effect. None of the Companies owns any real property. Section 3.18(a) of the Seller Disclosure Memorandum contains a complete and accurate list of all real property leased by any of the Companies, including the date of expiration of each such lease. All material items of personal property owned or leased by the Companies are in good condition and repair, reasonable wear and tear excepted, and are usable in the ordinary course of business consistent with past practices. All of the assets that are being used on a regular basis in the business are being conveyed to Purchaser. (b) Section 3.18(b) of the Seller Disclosure Memorandum contains a complete and correct list of (i) all reinsurance agreements; (ii) all loan or credit agreements, mortgages, indentures, or other agreements for borrowed money; (iii) all employment or compensation agreements with officers, directors, employees, agents (other than insurance agents), consultants and independent contractors; and (iv) all other contracts, leases, agreements or legal commitments of any kind, oral or written, formal or informal, pursuant to which any of the Companies owes more than $50,000 per calendar year (the agreements described in (i)-(iv) and those that cannot be terminated upon 30 days notice without payment or penalty are collectively the "Material Contracts"). Except as described in Section 3.18 of the Seller Disclosure Memorandum, all Material Contracts are in full force and effect, and none of the Companies is in default under, nor has any event occurred which with the passage of time or giving of notice or both would result in any of the Companies being in default under, any of the terms thereof. (a) The only employee pension benefit plans (as defined in Section 3(2) of ERISA), welfare benefit plans (as defined in Section 3(1) of ERISA), bonus, stock purchase, stock ownership, stock option, deferred compensation, incentive or other compensation plan or arrangement, and other employee fringe benefit plans presently maintained by, or contributed to by the Companies or by Seller for the benefit of any current or former employee of the Companies are those listed in Section 3.19 of the Seller Disclosure Memorandum (the "Benefit Plans"). None of the Benefit Plans are provided by Seller; all of such Benefit Plans are provided by American Southern. (b) American Southern and each of the Benefit Plans, are in compliance in all material respects with the applicable provisions of ERISA and those provisions of the Code applicable to the Benefit Plans. (c) All contributions to, and payments from, the Benefit Plans which may have been required to be made in accordance with the Benefit Plans and, when applicable, Section 302 of ERISA or Section 412 of the Code, have, in all material respects, been timely made. (d) There are (i) no pending investigations by any Governmental Authority involving the Benefit Plans, (ii) no termination proceedings involving the Benefit Plans, (iii) to Seller's Knowledge, no threatened or pending claims (except for claims for benefits payable in the normal operation of the Benefit Plans), suits or proceedings against any Benefit Plan or asserting any rights or claims to benefits under any Benefit Plan which could give rise to any material liability and (iv) no facts which could give rise to any material liability in the event of such investigation, claim, suit or proceeding. (e) Neither the Benefit Plans, American Southern nor any employee of the foregoing, nor, to Seller's Knowledge, any trusts created thereunder, or any trustee, administrator or other fiduciary thereof, has engaged in a "prohibited transaction" (as such term is defined in Section 4975 of the Code or Section 406 of ERISA) which could subject the Companies to the tax or penalty on prohibited transactions imposed by such Section 4975 or the sanctions imposed under Title I of ERISA. Neither the Benefit Plans nor any such trust has been terminated nor to Seller's Knowledge have there been any "reportable events" (as defined in Section 4043 of ERISA and the regulations thereunder) with respect to either thereof. (f) No Benefit Plan subject to Title IV of ERISA has incurred any material liability to the Pension Benefit Guaranty Corporation other than for the payment of premiums, all of which have been paid when due. No Benefit Plan has applied for or received a waiver of the minimum funding standards imposed by Section 412 of the Code. (g) At no time for which any relevant statute of limitations remains open have (a) American Southern, (b) any employer that is, together with American Southern, treated as a "single employer" under Section 414(b), 414(c) or 414(m) of the Code (an "Affiliate"), or (c) any employer that was at any time after September 2, 1984, an Affiliate of American Southern (a "Former Affiliate"), incurred any liability which could subject Purchaser or American Southern to liability under Section 4062, 4063 or 4064 of ERISA. (h) At no time for which any relevant statute of limitations remains open have American Southern or any Affiliate or Former Affiliate been required to contribute to, or incurred any withdrawal liability within the meaning of Section 4201 of ERISA, to any multiemployer pension plan, within the meaning of Section 3(37) of ERISA, which liability has not been fully paid as of the date hereof. (i) American Southern has complied in all material respects with the notice and continuation coverage requirements of Section 4980B of the Code and the regulations thereunder with respect to each Benefit Plan that is, or was during any taxable year of American Southern for which the statute of limitations on the assessment of federal income taxes remains open, by consent or otherwise, a group health plan within the meaning of Section 5000(b)(1) of the Code. (j) American Southern has not incurred and is not reasonably likely to incur any liability that is or could reasonably be expected to become a material liability of American Southern with respect to any plan or arrangement that would be included within the definition of "Benefit Plan" hereunder but for the fact that such plan or arrangement was terminated before the date of this Agreement. (k) No payment which is or may be made by American Southern, or from any Benefit Plan, to any employee, former employee, director or agent of American Southern under the terms of any Benefit Plan, either alone or in conjunction with any other payment, will or could be characterized as an excess parachute payment under Section 28OG of the Code. 3.20 Compensation Arrangements; Bank Accounts; Officers and Directors. Section 3.20 of the Seller Disclosure Memorandum sets forth the following information: (a) the name and current annual salary, including any bonus, if applicable, of each of the present officers and employees of the Companies whose current annual salary, including any promised or customary bonus, equals or exceeds $100,000, together with a statement of the full amount of all cash remuneration paid by the Companies to each such person and to any director of the Companies, during the twelve-month period ending on August 31, 1995; (b) the name of each bank in which any of the Companies has an account or safe deposit box, the identifying numbers thereof, and the names of all persons authorized to draw thereon or to have access thereto; and (c) the name and title of each director and officer of each of the Companies and of each trustee, fiduciary or plan administrator of each Benefit Plan. 3.21 Transactions With Related Parties. Except as disclosed in Section 3.21 of the Seller Disclosure Memorandum, no Related Party: (a) has borrowed money or loaned money to any of the Companies which will not be repaid on or before Closing; (b) has any contractual or other claim against any of the Companies; (c) had, since January 1, 1993, any interest in any property or assets used by the Companies in its business. 3.22 Labor Relations. Except as disclosed in Section 3.22 of the Seller Disclosure Memorandum, (a) no employee of any of the Companies is represented by any union or other labor organization; (b) there is no unfair labor practice complaint against any of the Companies pending or overtly threatened before the National Labor Relations Board; and (c) there is no labor strike, dispute, slow down or stoppage actually pending or, to the Knowledge of Seller, threatened against or involving any of the Companies. 3.23 Brokerage. None of Seller or the Companies has made any agreement or taken any other action which might cause anyone to become entitled to a broker's fee or commission as a result of the transactions contemplated hereby. 3.24 Insurance. All of the Companies' properties and assets of an insurable nature and of a character usually insured by companies of similar size and in similar businesses are insured by the Companies in such amounts and against such losses, casualties or risks as is (a) usual in such companies and for such properties, assets and businesses, or (b) required by any Applicable Law. Section 3.24 of the Seller Disclosure Memorandum contains a complete and accurate list of all insurance policies held or owned by the Companies relating to their business now in force. All such policies are in full force and effect. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller as of the date hereof as follows: 4.01 Purchaser's Organization and Good Standing; Power and Authority. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Georgia. Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of, and the performance by Purchaser of its obligations under, this Agreement have been duly and validly authorized by all necessary corporate action on the part of Purchaser. No other corporate or shareholder proceedings on the part of Purchaser are necessary to approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes Purchaser's valid and binding obligation, enforceable against Purchaser in accordance with its terms. 4.02 No Violation of Applicable Laws or Agreements. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and the compliance with the terms, conditions and provisions of this Agreement by Purchaser, will not (a) violate or conflict with any provision of Purchaser's articles of incorporation or bylaws; (b)except as set forth in Section 4.02 of the Purchaser Disclosure Memorandum, violate, conflict with or result in the breach or termination of, or otherwise give any contracting party (which has not consented to such execution, delivery and consummation) the right to change the terms of, or to terminate or accelerate the maturity of, or constitute a default under the terms of, any indenture, mortgage, loan or credit agreement or any other material agreement or instrument to which Purchaser is a party or by which any of its assets may be bound or affected, or any Applicable Law; (c) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of Purchaser's assets or give to others any interests or rights therein; other than any such conflicts, breaches, terminations, accelerations, defaults or violations that would not, individually or in the aggregate, have a Material Adverse Effect. 4.03 Pending Litigation or Proceedings. Except as set forth in Section 4.03 of the Purchaser Disclosure Memorandum, there are no claims, suits, actions, proceedings, arbitrations or investigations pending or, to the Knowledge of Purchaser, threatened, against or otherwise relating to or involving Purchaser or any of its properties, the outcome of which would reasonably be expected to have a Material Adverse Effect or to affect the ability of Purchaser to consummate the transactions contemplated by this Agreement. 4.04 Brokerage. Purchaser has not made any agreement or taken any other action which might cause anyone to become entitled to a broker's fee or commission as a result of the transactions contemplated hereby. 4.05 Investment Intent; Ability to Bear Risk. Purchaser is acquiring the Shares for investment for its own account and not with a view to, or for offer or sale in connection with, ny public distribution thereof. Purchaser has not been and is not involved with any Person concerning an Alternative Transaction (as such term is defined in Section 5.07). Purchaser is familiar with the property and casualty insurance business, and has the requisite knowledge and experience to evaluate the merits and risks of its acquisition of the Shares. 4.06 SEC Filings and Financial Statements. (a) Purchaser has heretofore delivered to Seller copies of Purchaser's (i) Annual Report on Form 10-K for the fiscal year ended December 31, 1994, (ii) 1994 Annual Report to Shareholders, (iii) Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995, and (iv) all other reports, registration statements and other documents filed by Purchaser with the SEC since December 31, 1994 (collectively, the "Purchaser SEC Filings"). Since December 31, 1994, Purchaser has timely filed all reports, registration statements and other documents required to be filed with the SEC under the rules and regulations of the SEC, and all such reports, registration statements and other documents have complied in all material respects, as of their respective filing dates and effective dates, as the case may be, with all applicable requirements of the 1933 Act or the 1934 Act. As of their respective filing and effective dates, none of such reports, registration statements or other documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) The audited consolidated financial statements and unaudited interim consolidated financial statements of Purchaser contained or incorporated by reference in the Purchaser SEC Filings have been prepared in conformity with GAAP, and, together with the notes thereto, present fairly the consolidated financial position of Purchaser and its subsidiaries at the dates shown and the consolidated results of their operations, changes in stockholders' equity and cash flows for the periods then ended. The unaudited interim consolidated financial statements as of, and for, the period ending June 30, 1995 include all adjustments necessary for a fair presentation of the financial position of Purchaser and its subsidiaries and the results of their respective operations for the interim periods presented, subject to normal, recurring year-end adjustments and the omission of footnote disclosures. 4.07 Absence of Certain Changes. Except as disclosed in Section 4.07 of the Purchaser Disclosure Memorandum or as specifically disclosed in the Purchaser SEC Filings, since June 30, 1995 (i)there has been no occurrence having, or which would reasonably be expected to result in, a Material Adverse Effect upon Purchaser. Since June 30, 1995, the business of Purchaser has been conducted only in the ordinary and usual course consistent with past practice, except with respect to transactions contemplated in this Agreement. 4.08 Consents and Approvals. Except as set forth in Section 4.08 of the Purchaser Disclosure Memorandum, except as required under the Hart-Scott Act, and except for the approval of the Georgia Insurance Department, the execution, delivery and performance of this Agreement by Purchaser and the consummation of the transactions contemplated hereby do not require any consent, approval or authorization of, or registration or filing with, any Person or Governmental Authority. CERTAIN ADDITIONAL COVENANTS AND AGREEMENTS 5.01 Operation of Business Pending Closing. Prior to the Closing Date, except with the prior consent of Purchaser and except as necessary to effect the transactions contemplated in this Agreement, (a) Seller shall cause the Companies to conduct their business in the usual and ordinary course as currently being conducted, and (b) without limiting the generality of the foregoing clause (a), Seller shall cause each of the Companies not to do any of the following: (i)...amend its articles of incorporation or bylaws, or merge, (ii)..issue any capital stock, any securities convertible or exchangeable into capital stock, or any options, warrants or rights with respect to capital stock, or split, subdivide or reclassify its capital stock; (iii).declare or pay any dividend or make any other distribution on its capital stock other than cash dividends on the Shares in an amount not (iv)..increase the compensation or benefits of officers or employees of the Companies or pay any bonuses except for normal and customary increases made or bonuses paid or accrued in accordance with past practices; (v)...except in the ordinary course of business, create or incur any lien, encumbrance, mortgage, pledge, charge or security interest whatsoever on any of its properties; or, except for the issuance of insurance contracts or policies and the settlement of insurance claims in the ordinary course of business, incur or assume any guaranty or other liability to discharge an obligation of another, or incur or assume any obligations for money borrowed, or cancel or discount any material debt owed to it; (vi)..enter into or terminate any Material Contract; (vii).make any expenditure for fixed assets in excess of $25,000 for any single item or $100,000 in the aggregate; (viii) do or fail to do anything that will cause a breach of, or default under, any Material Contract; or (ix)..make any change of a material nature in the Companies' accounting procedures, methods, policies or practices or the manner in which the Companies maintain their records. 5.02 Access to Information. Between the date hereof and the Closing Date, Seller shall give, and shall cause the Companies to give, to Purchaser and its authorized representatives, during normal business hours, access to all of the Companies' properties, contracts, books and records, and Seller shall furnish, and shall cause the Companies to furnish, to Purchaser and its authorized representatives such additional financial, legal and other information with respect to the Companies that Purchaser may reasonably request. Purchaser shall use such information solely for the purpose of conducting business, legal and financial reviews of the Companies and for such other purposes as may be related to this Agreement. Purchaser shall maintain the confidentiality of all such information (other than information that is in the public domain or otherwise ascertainable from public or outside sources) except to the extent that disclosure is required by judicial process or governmental regulatory authorities, in which case Purchaser shall give Seller prompt notice in order that Seller may seek to obtain a protective order. 5.03 Supplements to Disclosure Memoranda. At any time and from time to time between the date hereof and the date that is two business days prior to the Closing Date, Seller and Purchaser shall have the right and the continuing obligation to supplement their respective Disclosure Memoranda with respect to any matter arising or coming to the Knowledge of Seller or Purchaser after the date hereof that, if existing, occurring or known at such date, would have been required to be set forth or described in such Disclosure Memorandum. A party receiving a supplemented Disclosure Memorandum within 10 days prior to the anticipated Closing Date may unilaterally extend the time of the Closing up to 10 days from the receipt of the supplement for the sole purpose of reviewing the supplemental Disclosure Memorandum. If, in the recipient party's reasonable determination, any such supplements provided by the other party reveal any Material Adverse Effect or any condition or event that would be reasonably likely to result in a Material Adverse Effect, the recipient party may terminate this Agreement. (a) Except as otherwise provided in this Section 5.04, all tax sharing agreements, arrangements, policies and guidelines, formal or informal, express or implied, that may exist between the Companies and Seller or their affiliates and all obligations thereunder shall terminate as of the Closing Date, and the Companies shall have no liability thereunder for any and all amounts due in respect to periods prior to the Closing Date. Notwithstanding any other provision of this Agreement, Seller and the Companies may make reasonable payments pursuant to such tax sharing agreements and understandings prior to the Closing Date in amounts consistent with past practices and procedures under such tax sharing agreements and the Tax Allocation Agreement shall remain in effect until any overpayments or underpayments are adjusted in accordance with past practices and procedures. (b) The Companies shall continue to be included, up to and including the Closing Date, in the Seller Group's consolidated federal income Tax Return and any required state or local consolidated or combined income Tax Returns that include any of the Companies (all such Tax Returns including taxable periods of the Companies ending on or before the Closing Date are hereinafter referred to as "Pre-Closing Consolidated Returns"). Seller shall timely (which shall not preclude obtaining or filing normal or customary extensions) prepare and file (or cause to be prepared and filed) all Pre-Closing Consolidated Returns and all other Tax Returns required to be filed on or before the Closing Date with respect to the Companies (the "Seller Group Returns"). Seller shall timely pay (or cause to be paid) all Taxes shown as due and payable on the Seller Group Returns ("Seller's Taxes"). Purchaser and Seller agree that if the Companies are permitted under any Applicable Law relating to state or local income tax to treat the Closing Date as the last day of a taxable period, Purchaser and Seller shall treat (and cause their respective affiliates to treat) the Closing Date as the last day of a taxable period, and any Tax Return for such a period shall be considered a Seller Group Return for purposes hereof. (c) Purchaser shall timely (which shall not preclude obtaining or filing normal or customary extensions) prepare and file (or cause to be filed) all Tax Returns required by Applicable Law for the Companies that are not required to be prepared and filed by Seller pursuant to Section 5.04(b) ("Purchaser's Returns"). Any Purchaser's Return including a period prior to the Closing Date shall be prepared in a manner consistent with prior practice and copies of such Purchaser's Returns shall be delivered to Seller. Purchaser shall timely pay (or cause to be paid) all Taxes shown as due and payable on the Purchaser's Returns ("Purchaser's Taxes"). (d) After the Closing Date, Seller shall submit to Purchaser blank Tax Return workpaper packages reasonably necessary for Seller to prepare any Seller Group Returns. Purchaser shall cause the Companies to prepare completely and accurately all information that Seller shall reasonably request in such workpaper packages and shall submit to Seller such packages within the later of 90 days after Purchaser's receipt thereof or 60 days after the close of the taxable period to which a workpaper package relates. Each party shall cooperate with the other in connection with any tax filing, investigation, audit or other proceeding. Purchaser and Seller and their subsidiaries shall preserve all information, returns, books, records and documents relating to any liabilities for Taxes with respect to a taxable period until the later of the expiration of all applicable statutes of limitation and extensions thereof, or the conclusion of all litigation with respect to Taxes for such period. (e) After the Closing Date, Seller shall indemnify and hold harmless Purchaser from and against any Tax liability with respect to (i) any Seller's Taxes; (ii) the Florida Tax Litigation; and (iii) any increase in Tax liability resulting from the Companies being severally liable for any Taxes of the Seller Group or any other consolidated group of which any of the Companies was a member prior to the Closing Date pursuant to Treasury Regulations Section 1.1502-6 or any analogous state or local tax provision; provided that Seller's liability under clause (ii) shall be subject to the limitation of paragraph 7.01(c) and shall be treated, solely for purposes of such subparagraph, as Damages and Costs and, provided, further, that Seller shall have no indemnification obligations with respect to amounts that have been accrued in the Audited Statements and the Interim Unaudited Statements (as such terms are defined in Section 3.07(b) hereof) and any regularly prepared financial statements for a period after June 30, 1995. Subject to the provisions of the third paragraph of Section 5.04(f), Seller shall pay such amounts as they are obligated to pay to Purchaser under the preceding sentence within 15 days after payment of any applicable Tax liability by Purchaser or the Companies and, to the extent not paid by Seller within such 15-day period, shall thereafter include interest thereon at the Prime Rate (reported as of the last day of such 15-day period). After the Closing Date, Purchaser and the Companies shall indemnify and hold harmless Seller and its affiliates from and against any Tax liability with respect to Purchaser's Taxes that are allocable to or apportioned to a period after the Closing Date. Purchaser shall pay such amounts within 15 days after payment of any such Tax liability by Seller or any of their affiliates and to the extent not paid by Purchaser within such 15-day period shall thereafter include interest thereon at the Prime Rate (reported as of the last day of such 15-day period). (f) In the event that Purchaser or any of the Companies receives notice, whether orally or in writing, of any pending or threatened federal, state, local, municipal or foreign tax examinations, claims settlements, proposed adjustments, assessments or reassessments or related matters with respect to Taxes that could affect the Seller Group, or if Seller receives notice of matters that could affect Purchaser or the Companies, the party receiving notice shall notify in writing the potentially affected party within 10 days thereof. The failure of any party to give the notice required by this paragraph shall not impair that party's rights under this Agreement except to the extent that the other parties demonstrate that they have been damaged thereby. Subject to Section 5.04(g), each of Seller and Purchaser (as applicable, the "Controlling Party") shall have the right to control any audit or examination by any taxing authority, initiate any claim for refund, file any amended return, contest, resolve, settle and defend against any assessment, notice of deficiency or other adjustment or proposed adjustment relating to or with respect to those Tax Returns that each is required to prepare and file pursuant to Sections 5.04(b) and (c); provided that, in the event that any such adjustment could have an adverse effect on the Tax liability of the other party (or affect the Purchaser by having an adverse effect on the Tax liability of the Companies, or affect Seller by having an adverse effect on the Tax liability of the Seller Group) (the "Affected Party"), the Controlling Party (i) shall give the Affected Party written notice of any such adjustment, (ii) shall permit the Affected Party to participate in the proceeding to the extent the adjustment may adversely affect the Tax liability of the Affected Party and (iii) shall not settle or otherwise compromise such proceeding without the prior written consent of the Affected Party, which consent shall not be unreasonably withheld or delayed. Except as specified in Section 5.04(g) or the following sentence, Seller and Purchaser shall each be entitled to retain for its own account any refunds of Taxes attributable to those Tax Returns that each is required to prepare and file pursuant to Sections 5.04(b) and (c) and shall pay to the other the amount of any refund to which the other is entitled within 15 days after the receipt of such refund and, to the extent not paid within such 15-day period, shall thereafter include interest at the Prime Rate (reported as of the last day of such 15-day period). In the case of Purchaser, a refund attributable to any Purchaser's Return including a period prior to the Closing Date shall be divided between Purchaser and Seller by recomputing the portion of Tax as readjusted that is allocable to a period prior to the Closing Date. Notwithstanding the foregoing, but subject to Section 5.04(g), Seller shall have the exclusive right to direct and to control the Florida Tax Litigation and to initiate any claim for refund, file any amended return and contest, resolve, settle and defend against such litigation. Purchaser shall use its best efforts to assist Seller in connection with the Florida Tax Litigation, including, without limitation, providing Seller access to information relating to the Florida Tax Litigation that is in Purchaser's or the Companies' possession and making available the officers and employees of Purchaser and the Companies to provide assistance and information in connection therewith and to continue to have the Companies participate as litigants in the Florida Tax Litigation. (g) To the extent permitted under applicable law, neither Purchaser nor the Companies shall carry back any tax attribute ("Purchaser Tax Attribute") to a period ending on or before the Closing Date ("Pre-Closing Period"). Notwithstanding anything to the contrary contained in this Section 5.04(g), if the failure to carry back a Purchaser Tax Attribute is not permitted by law or would be unreasonably burdensome to Purchaser, Purchaser may request Seller to waive the restrictions imposed by this Section 5.04(g), and Seller shall agree to such request unless Seller's obligations hereunder would be unreasonably burdensome to Seller. If Seller agrees to such request, and Purchaser carries back a Purchaser Tax Attribute to a Pre-Closing Period, Seller shall promptly file (or cause to be filed) a claim for refund and shall pay (or cause to be paid) to Purchaser the full amount of any resulting Tax Benefit within 30 days of the date such Tax Benefit is realized, but only to the extent that Seller would not otherwise have been entitled to utilize such Tax Attribute. The Tax Benefit shall be recomputed and any payment made in excess of the redetermined Tax Benefit shall be refunded if and to the extent that Seller subsequently realizes tax attributes that could have been utilized but for the carryback of Purchaser Tax Attributes pursuant to this Section 5.04(g). Such recomputation shall assume that the tax attributes of Seller were utilized first and that the Purchaser Tax Attributes carried back by Purchaser were then utilized in accordance with Applicable Law. For purposes hereof, "Tax Benefit" shall mean (i)...in the case of any Tax Return, the sum of the amount by which the Tax liability is reduced (or the Tax refund is increased) plus any interest (net of Taxes, if any, thereon) relating to such Tax liability (or Tax refund), and in the case of a consolidated federal income Tax Return or unconsolidated, combined, unitary or similar state, local or other Tax return, the sum of the amount by which the Tax liability of the affiliated group of corporations is reduced (or Tax refund is increased) plus any interest (net of Taxes, if any, thereon) from such government or jurisdiction relating to such Tax liability or (ii)..a Tax Benefit shall be deemed to have been realized (A) at the time any refund of Taxes is received, (B) at the time any refund of Taxes is applied against other Taxes due (which, in the case of refunds so applied in the course of an audit or other proceeding, shall be the date on which the audit or other proceeding is finalized) or (C) at the time a liability for Taxes is otherwise reduced (which, in each case, shall be 2 1/2 months after the close of the year in which such liability for Taxes arose); and (iii).where a party has other losses, deductions, credits or similar items available to it, losses, deductions, credits or items for which the other party would be entitled to a payment under this Agreement shall be treated as the last items utilized to produce a Tax Benefit. (h) Purchaser and Seller agree that any indemnification payments made pursuant to this Section 5.04 or Article 7 shall be treated for tax purposes as an adjustment to the Purchase Price unless otherwise required by Applicable Law. (i) Notwithstanding SAP accrual requirements, in preparing the Closing Balance Sheet, an accrual of liability for Taxes(to the extent not paid prior to Closing), will be included in such Closing Balance Sheet and shall only reflect (as a liability for amounts unpaid net of amounts prepaid) the portion of the Companies' Taxes allocable to the period up to and including the Closing Date ("the Companies' Accrued Taxes"). Such allocable portion shall, in the case of Taxes that are based on income or gross receipts, be determined as if the Closing Date were the last day of any applicable taxable period and, in the case of other Taxes, be apportioned ratably on a daily basis. Except as specified in the preceding sentence or the Tax Allocation Agreement, the Closing Balance Sheet specifically shall not reflect a liability for Taxes allocable to Seller Group Returns, which Taxes are solely the responsibility of Seller. (j) Seller agrees that upon Purchaser's request it shall file, or caused to be filed, all documents reasonably necessary for the making of an election under Section 338(h)(10) of the Code (or, at Purchaser's request, any analogous provision of any state or local tax law) and in such case shall file or cause to be filed all tax returns consistent with such election or elections. Seller agrees to provide Purchaser with all relevant information to analyze the impact of a Section 338(h)(10) election. In the event Purchaser determines to make such an election, Purchaser shall provide to Seller in writing a determination of the allocation of the Purchase Price among the assets of the Companies. Seller shall accept any such reasonable allocation by Purchaser, and Seller, Purchaser and the Companies shall file all Tax Returns in a manner consistent with such allocation. 5.05 Regulatory Approvals and Consents. (a) As soon as practicable, but in any event within 30 days, after the date hereof: (i)...Each of Purchaser and Seller will make all necessary filings under the Hart-Scott Act. Each party shall pay the expenses of preparing its own filing, and Purchaser shall pay the $45,000 filing fee. (ii)..Purchaser shall file with the Georgia Insurance Department all Form(s) A required to request such Department's approval of the changes in control of American Southern and American Safety that will be effected by the transfer of the Shares. Seller shall cause the Companies to cooperate reasonably with Purchaser in preparing the Form(s) A. Not less than 10 days prior to making such filing, Purchaser shall deliver a copy of the filing materials to American Southern, and American Southern shall be entitled to provide comments thereon to Purchaser within 5 days after receipt. Seller shall, and shall cause the Companies to, support such filing by Purchaser, so long as it is consistent with this Agreement, and Purchaser shall use its best efforts to obtain the approval of the Georgia Insurance Department for the changes in control. All costs and fees of making such filings shall be paid by Purchaser. (b) Seller and Purchaser shall promptly advise the other of all oral, and promptly provide each other with copies of all written, communications, requests, inquiries or other notifications received from any Governmental Authorities with respect to the transactions contemplated hereby. (c) Seller shall take all reasonable action required to obtain prior to Closing all consents with respect to the material agreements listed in Section 5.05(c) of the Seller Disclosure Memorandum. To the extent any such consent has not been obtained, Seller shall continue its efforts to obtain such consent after the Closing. In order, however, that the full value of every such material agreement may be realized by Purchaser, at Purchaser's request, direction and expense, Seller shall take all such action as shall be reasonably necessary or appropriate (i) in order to preserve for the benefit of Purchaser the rights and obligations of Seller under such agreements, and (ii) to facilitate the collection of any monies due and payable, or to become due and payable, to Seller pursuant to such agreements, and Seller shall remit such monies to Purchaser within five business days of collection. Purchaser shall be entitled to the benefits accruing after the Closing Date of any such agreements, and Purchaser, at its expense, shall perform all of Seller's obligations due to be performed under any such agreements to the extent (i) Purchaser can perform such obligations without violating the terms of such agreements, and (ii) Purchaser is being provided the benefits of such agreements. (d) Purchaser shall take all reasonable action required to obtain all consents and approvals listed in Section 5.05(d) of the Purchaser Disclosure Memorandum. 5.06 Best Efforts. Each of the parties hereto agrees to use its best efforts to take, or to cause to be taken, all reasonable actions and to do, or to cause to be done, all reasonable things necessary, proper or advisable under Applicable Laws to consummate the transactions contemplated by this Agreement. None of the parties hereto will intentionally take or intentionally permit to be taken any action that would be in breach of the terms or provisions of this Agreement or that would cause any of the representations contained herein to be or become untrue. 5.07 Exclusive Dealings. Unless and until this Agreement is terminated prior to Closing pursuant to Article 8, neither of the Seller nor any of Seller's affiliates, officers, directors, agents or advisers shall, directly or indirectly, solicit, encourage or initiate any discussions or negotiations with, provide any information to, or otherwise cooperate in any other way with any Person (other than Purchaser) concerning any direct or indirect purchase of the Shares or of any substantial amount of the assets or properties of the Companies (an "Alternative Transaction"). 5.08 Expenses. Whether or not the Closing occurs, except as otherwise stated herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. 5.09 Resignations. At Closing, Seller will deliver written resignations of the Companies' directors. 5.10 Maintenance of Records. For a period of 7 years after Closing, or for any longer period (i) as may be required by any federal, state, local or foreign Governmental Authority, (ii) as may be reasonably necessary in respect of the prosecution or defense of any suit, action, litigation or administrative, arbitration or other proceeding or investigation that is pending or threatened at the time of any notice to Purchaser while such records are still maintained, or (iii) that is equivalent to the period established by any applicable statute of limitations (or any extension or waiver thereof) with respect to matters pertaining to Taxes, Purchaser shall maintain and shall allow Seller, during normal business hours, through its employees and representatives, the right, at Seller's expense, to examine and make copies of, the books and records of the Companies pertaining to the Companies' business prior to the Closing Date, for any reasonable business purpose. 5.11 Proposals. Purchaser shall promptly notify Seller of any inquiries or proposals by any Person concerning an Alternative Transaction. 5.12 Press Releases. Except as otherwise required by Applicable Law, Purchaser and Seller shall consult with each other in advance concerning any proposed press release or public announcement pertaining to the transactions contemplated by this Agreement, and no such release or announcement shall be made unless both parties have agreed as to the timing, manner and content thereof in their reasonable judgment. 5.13 GAAP Financial Statements. Promptly following the Closing, Purchaser shall cause the Companies to prepare and deliver to Seller GAAP financial statements of the Companies from January 1, 1995 through the Closing Date. 6.01 Conditions to Obligations of Purchaser. The obligations of Purchaser to proceed with the Closing under this Agreement are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of which may be waived in whole or in part by Purchaser at Purchaser's option): (a) The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects on and as of the time of Closing, with the same force and effect as though such representations and warranties had been made on, as of and with reference to such time and Purchaser shall have received a certificate to such effect signed by an authorized officer of Seller. (b) Seller shall have performed in all material respects all of the covenants and complied in all material respects with all of the provisions required by this Agreement to be performed or complied with by it on or before the Closing, and Purchaser shall have received a certificate to such effect signed by an authorized officer of Seller. (c) The applicable waiting period under the Hart-Scott Act (and any extension thereof) shall have expired or been terminated. (d) The Georgia Insurance Department shall have approved the changes in control of American Southern and American Safety effected by the transfer of the Shares. (e) Seller shall have obtained a release from the InterRedec Pledge and the InterRedec Escrow of all of the shares subject to the InterRedec Pledge. (f) No order of any court or administrative agency shall be in effect which enjoins or prohibits the transactions contemplated hereby or which would limit or materially adversely affect Purchaser's ownership or control of the Companies or the business of the Companies, and there shall not have been threatened, nor shall there be pending, any action or proceeding by or before any Governmental Authority (i) challenging any of the transactions contemplated by this Agreement or seeking monetary relief by reason of the consummation of such transactions or (ii) which might have a Material Adverse Effect on the future conduct of the business of the Companies. (g) There shall not have occurred any Material Adverse Effect with respect to the Companies, or any condition or event which is reasonably likely to result in a Material Adverse Effect, subsequent to June 30, 1995. 6.02 Conditions to Obligations of Seller. The obligations of Seller to proceed with the Closing under this Agreement are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of which may be waived in whole or in part by Seller at Seller's option): (a) The representations and warranties of Purchaser contained in this Agreement shall be true and correct in all material respects on and as of the time of Closing, with the same force and effect as though such representations and warranties had been made on, as of and with reference to such time, and Seller shall have received a certificate to such effect signed by an authorized officer of Purchaser. (b) Purchaser shall have performed in all material respects all of the covenants and complied in all material respects with all of the provisions required by this Agreement to be performed or complied with by it on or before the Closing, and Seller shall have received a certificate to such effect signed by an authorized officer of Purchaser. (c) The applicable waiting period under the Hart-Scott Act (and any extension thereof) shall have expired or been terminated. (d) All consents listed on Schedule 5.05(d) shall have been obtained and the Georgia Insurance Department shall have approved the changes in control of American Southern and American Safety effected by the transfer of the Shares. (e) Seller shall have obtained a release from the InterRedec Pledge and the InterRedec Escrow of all of the Shares subject to such InterRedec Pledge. (f) No order of any court or administrative agency shall be in effect which enjoins or prohibits the transactions contemplated hereby, and there shall not have been threatened, nor shall there be pending, any action or proceeding by or before any Governmental Authority (i) challenging any of the transactions contemplated by this Agreement or seeking monetary relief by reason of the consummation of such transactions or (ii) which might have a Material Adverse Effect on the future conduct of the business of the Companies. (g) No Material Adverse Effect. There shall not have occurred any Material Adverse Effect with respect to Purchaser, or any condition or event which is reasonably likely to result in a Material Adverse Effect, subsequent to June 30, 1995. (a) Seller hereby agrees to indemnify and hold harmless Purchaser and the Companies from and against (i) any loss, liability, claim, obligation, damage or deficiency (any "Damage") of or to Purchaser or any of the Companies (other than any relating to Taxes, for which indemnification provisions are set forth in Section 5.04(e)) arising out of or resulting from any misrepresentation, breach of warranty or nonfulfillment of any covenant or agreement on the part of Seller contained in this Agreement or in any statement or certificate furnished or to be furnished to Purchaser pursuant hereto or in connection with the transactions contemplated hereby, and (ii) any actions, judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) (any "Costs") incident to any of the foregoing or the enforcement of this Section 7.01. (b) No action or claim for Damages resulting from breaches of the representations and warranties of Seller or pursuant to Section 5.04(e) shall be brought or made after the third anniversary of the Closing Date, except that such time limitation shall not apply to (i) any breach of the representations contained in Sections 3.03 or 3.04 or (ii) any claims which exist prior to the third anniversary of the Closing Date, and which have been the subject of a written notice from Purchaser to Seller prior to such date, which notice specified in reasonable detail the nature of the claim. (c) Seller shall be liable to Purchaser only to the extent the cumulative total of Damages and Costs under this Section 7.01 and Section 5.04(e) exceeds $200,000 (at which time rights to indemnification may be asserted for such $200,000 amount and amounts in excess thereof) and in no event shall Seller be liable under this Section 7.01 for any amount in excess of $5,000,000; provided, however, no limitation of liability provided in this paragraph (c) shall apply to any Damage or Cost arising out of or resulting from common law fraud in connection with the transactions contemplated by this Agreement. (d) Any indemnification payment by Seller under this Agreement shall be reduced by the amount of any Purchaser's Tax Effect. For purposes hereof, "Purchaser's Tax Effect" shall mean an amount equal to the amount of the federal, state, local or foreign tax savings attributable to Purchaser's payment of any Damage or Cost for which it receives an indemnification payment under this Section 7.01 or under Section 5.04(e) (after taking into account the tax effect, if any, of receipt of any indemnification payment). To the extent the parties cannot agree whether any tax benefit exists or on the appropriate treatment of any tax benefit, such disagreement shall be resolved by either an accounting firm or a law firm with a nationally recognized tax practice selected jointly by Purchaser and Seller. If such parties cannot agree on a firm as specified in the prior sentence, the firm shall be selected jointly by the independent auditors of such parties. (a) Purchaser hereby agrees to indemnify and hold harmless Seller from and against (i) any Damage (other than any relating to Taxes, for which indemnification provisions are set forth in Section 5.04(e)) arising out of or resulting from any misrepresentation, breach of warranty or nonfulfillment of any covenant or agreement on the part of Purchaser contained in this Agreement, or in any statement or certificate furnished or to be furnished to Seller in connection with the transactions contemplated hereby, and (ii) any Costs incident to any of the foregoing or the enforcement of this Section. (b) No action or claim for Damages resulting from breaches of the representations and warranties of Purchaser shall be brought or made after the third anniversary of the Closing Date, except that such time limitation shall not apply to any claims which exist prior to the third anniversary of the Closing Date and which have been the subject of a written notice from Seller to Purchaser prior to such date, which notice specified in reasonable detail the nature of the claim. (c) Purchaser shall be liable to Seller only to the extent the cumulative total of Damages and Costs under this Section 7.02 and Section 5.04(e) exceeds $200,000 (at which time rights to indemnification may be asserted for such $200,000 amount and amounts in excess thereof) and in no event shall Purchaser be liable under this Section 7.02 for any amount in excess of $5,000,000; provided, however, no limitation of liability provided in this paragraph (c) shall apply to any Damage or Cost arising out of or resulting from common law fraud in connection with the transactions contemplated by this Agreement or the failure of Purchaser to make payments under the Purchaser Note in accordance with the terms thereof. (d) Any indemnification payment by Purchaser under this Agreement shall be reduced by the amount of any Seller's Tax Effect. For purposes hereof, "Seller's Tax Effect" shall mean an amount equal to the amount of the federal, state, local or foreign tax savings attributable to Seller's payment of any Damage or Cost for which it receives an indemnification payment under this Section 7.02 or under Section 5.04(e) (after taking into account the tax effect, if any, of receipt of any indemnification payment). To the extent the parties cannot agree whether any tax benefit exists or on the appropriate treatment of any tax benefit, such disagreement shall be resolved by either an accounting firm or a law firm with a nationally recognized tax practice selected jointly by Purchaser and Seller. If such parties cannot agree on a firm as specified in the prior sentence, the firm shall be selected jointly by the independent auditors of such parties. (a) If a claim is made, or any suit or action is commenced for which defense or indemnity is claimed to be due under Section 5.04(e), 7.01 or 7.02, or if knowledge is received of any other state of facts which, if not corrected, may give rise to a right of defense or indemnification under Section 5.04(e), 7.01 or 7.02, the party seeking defense or indemnity ("Indemnified Party") shall give written notice to the party claimed to be liable on the defense or indemnity obligation ("Indemnifying Party") as soon as practicable after, but in no event (i) more than 10 days following notice to the Indemnified Party of any claim, suit or action for which defense or indemnity will be sought, or (ii) more than 30 days following the Indemnified Party's knowledge of any other state of facts which may give rise to a right to defense or indemnity under Section 5.04(e), 7.01 or 7.02. A failure to give prompt notice shall not relieve an Indemnifying Party of its obligation to defend or indemnify, except to the extent the Indemnifying Party is prejudiced by such failure. The Indemnified Party shall make available to the Indemnifying Party and its counsel and accountants at reasonable times and for reasonable periods, during normal business hours, all books and records of the Indemnified Party relating to the matter for which defense or indemnity has been claimed, and each party hereunder will render to the other such assistance as the other may reasonably require in order to assure prompt and adequate defense of any suit, claim or proceeding to which this Section 7.03 applies. (b) If defense or indemnification is sought with respect to a claim, suit or other proceeding against the Indemnified Party, the Indemnifying Party shall have the right to defend, compromise and settle the matter in the name of the Indemnified Party to the extent that the Indemnifying Party may be liable to the Indemnified Party under Section 5.04(e), 7.01 or 7.02 hereof; provided, however, that the Indemnifying Party shall not compromise or settle a suit, claim or proceeding unless it assumes the obligation to indemnify for all losses relating thereto. The Indemnifying Party shall notify the Indemnified Party promptly if the Indemnifying Party elects to assume the defense of any such claim, suit or action. In assuming the defense of a matter hereunder, the Indemnifying Party shall have the right to select counsel, provided that the Indemnified Party does not object to such counsel in a reasonable exercise of its discretion. The Indemnified Party shall have the right to employ its own counsel who may associate with the counsel designated by the Indemnifying Party (upon the Indemnifying Party's assumption of the defense of the matter), but the fees and expenses of such counsel shall be at the Indemnified Party's expense. (c) The Indemnified Party may at any time notify the Indemnifying Party of its intention to settle or compromise any claim, suit or action against the Indemnified Party in respect of which indemnification payments may be sought from the Indemnifying Party hereunder, but shall not settle nor compromise any matter for which indemnification may be sought, notwithstanding this Section 7.03(c), in excess of $1,000 without the consent of the Indemnifying Party, which shall not be unreasonably withheld. Any settlement or compromise of any claim, suit or action in accordance with the preceding sentence, or any final judgment or decree entered on or in, any claim, suit or action in which the Indemnifying Party did not assume the defense in accordance herewith, shall be deemed to have been consented to by, and shall be binding upon, the Indemnifying Party as fully as if the Indemnifying Party had assumed the defense thereof and a final judgment or decree had been entered in such suit or action, or with regard to such claim, by a court of competent jurisdiction for the amount of such settlement, compromise, judgment or decree. (d) The Indemnifying Party shall be subrogated to any claims or rights of the Indemnified Party as against any other persons with respect to any amount paid by the Indemnifying Party under this Article 7 or under Section 5.04(e). The Indemnified Party shall cooperate with the Indemnifying Party, at the Indemnifying Party's expense, in the assertion by the Indemnifying Party of any such claim against other persons. (a) Purchaser's sole and exclusive remedy for any breach of this Agreement by Seller shall be the provisions in Sections 5.04(e) and 7.01, and Purchaser hereby waives any and all other remedies which may be available at law or equity for any breach or alleged breach of this Agreement. (b) Seller's sole and exclusive remedy for any breach of this Agreement by Purchaser shall be the provisions in Sections 5.04(e) and 7.02, and Seller hereby waives any and all other remedies which may be available at law or equity for any breach or alleged breach of this Agreement. (c) Notwithstanding anything to the contrary contained herein, if the Closing occurs no claim for indemnification may be asserted under this Agreement or any document delivered in connection herewith with respect to any matter discovered or known to the party otherwise entitled to seek indemnification on or before the Closing Date. 8.01 When Agreement May be Terminated. This Agreement may be terminated prior to Closing: (a) By mutual written consent of Purchaser and Seller; (b) By Seller in the event that it has not obtained a letter of credit to be used as substitute collateral under the InterRedec Pledge by December 31, 1995 for the reasons described in the second sentence of Section 5.13(b); or (c) In accordance with Section 5.03. 8.02 Final Termination. This Agreement will terminate on January 31, 1996 if the Closing has not yet occurred. 8.03 Effect of Termination. In the event of termination of this Agreement by either Seller or Purchaser, as provided above, this Agreement shall forthwith terminate and there shall be no liability on the part of any party or any party's officers or directors, except for liabilities arising from a breach of this Agreement prior to such termination; provided, however, that the obligations of the parties set forth in Article 7 shall survive such termination. 9.01 Agreement to Arbitrate. Except as set forth in Sections 7.01(d) and 7.02(d), any claim, controversy or dispute arising out of or relating to this Agreement, on which an amicable understanding cannot be reached, to the maximum extent allowed by applicable law and irrespective of the type of relief sought, shall be submitted to and resolved by arbitration, and such arbitration shall be the sole remedy for such matter. Such arbitration shall be heard and conducted in Atlanta, Georgia and shall be conducted expeditiously and confidentially in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), as such rules shall be in effect on the date of delivery of demand for arbitration, with the exception that the arbitrators may not award any punitive or exemplary damages or any damages other than compensatory, and except as such rules may be otherwise inconsistent with the express provisions of this Article 9. 9.02 Initiating Arbitration. To initiate arbitration, a party shall notify the other party in writing of its desire to arbitrate, stating the nature of its dispute and the remedy sought. The receiving party shall acknowledge receipt of the notice in writing within 5 days, and thereafter the parties shall attempt in good faith to resolve the dispute within 15 days. If the dispute cannot be resolved within such 15-day period, any party may file a written demand for arbitration by filing a written notice with the AAA and with the other party, complying with the AAA's prescribed procedures for such notices. Within 15 days of delivery of such demand for arbitration, each party shall appoint one arbitrator, and the arbitrators so selected shall, within 15 days of their appointment, appoint an additional arbitrator. In the event that the arbitrators selected by the parties are unable to agree upon the selection of the additional arbitrator after reasonable efforts within such 15-day period, a list of 7 qualified and available persons shall be requested from the AAA. The parties shall take turns striking one person each from the list with the last remaining person being the additional selected arbitrator. Once selected, the arbitration panel shall meet as expeditiously as possible, select a chairman, schedule the arbitration hearing, and notify the parties in writing of the date, time and place of the hearing. With respect to any arbitration pursuant to Section 2.04, the provisions of Section 2.04 shall apply where inconsistent with this Article 9. 9.03 Effect. All conclusions of law reached by the arbitrators shall be made in accordance with the internal laws of the State of Georgia without regard for its conflict of laws doctrine. Any award rendered by the arbitrators shall be accompanied by a written opinion setting forth the findings of fact and conclusions of law relied upon in reaching their decision. The award rendered by the arbitrators shall be final, binding and non-appealable, and judgment upon such award may be entered by any court having jurisdiction thereof. The parties agree that the existence, conduct and content of any such arbitration shall be kept confidential and no party shall disclose to any person any information about such arbitration, except as may be required by law or for financial reporting purposes in each party's financial statements. 9.04 Costs. Each party shall pay the fees of its own arbitrator, attorneys, expenses of witnesses and all other expenses in connection with the presentation of such party's case. The remaining costs of the arbitration, including, without limitation, fees of the additional arbitrator, costs of records or transcripts and administrative fees, shall be paid as designated by the arbitrators. 10.01 Nature and Survival of Representations. The representations, warranties, covenants and agreements of Purchaser and Seller contained in this Agreement shall survive the Closing and shall not merge in the performance of any obligation by any party hereto. Seller acknowledges and agrees that prior to Closing, Purchaser intends to perform such investigation of the Companies as it deems necessary or appropriate; however, no investigation by Purchaser will diminish or obviate any of the representations, warranties, covenants or agreements made or to be performed by Seller pursuant to this Agreement, or Purchaser's right to rely upon such representations, warranties, covenants and agreements. 10.02 Amendment. This Agreement may not be amended or modified without the prior written consent of all parties. 10.03 Waiver. Failure to insist upon strict compliance with any of the terms or conditions of this Agreement at any one time shall not be deemed a waiver of such term or condition at any other time; nor shall any waiver or relinquishment of any right or power granted herein at any time be deemed a waiver or relinquishment of the same or any other right or power at any other time. 10.04 Governing Law. Notwithstanding the place where this Agreement may be executed by any of the parties, the parties expressly agree that this Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of Georgia, without regard for its conflict of laws doctrine. 10.05 Notices. Any notice or other communication to be given hereunder shall be in writing and shall be deemed sufficient when (i) mailed by United States certified mail, return receipt requested, (ii) mailed by overnight express mail, (iii) sent by facsimile or telecopy machine, followed by confirmation mailed by first-class mail or overnight express mail, or (iv) delivered in person, at the address set forth below, or such other address as a party may provide to the other in accordance with the procedure for notices set forth in this Section: Attention: Hilton H. Howell, Jr. with a copy (which shall not constitute notice) to: One Atlantic Center, Suite 5000 Attention: John J. Huntz, Jr. with a copy (which shall not constitute notice) to: 10.06 Invalid Provision. If any provision of this Agreement shall be determined by arbitrators (acting in accordance with Article 9) to be invalid or unenforceable, this Agreement shall be deemed amended to delete such provision and the remainder of this Agreement shall be enforceable by its terms. 10.07 Subsequent SEC Filings. After the Closing, the parties agree to furnish information to each other (on a GAAP and SAP basis) so that each party may prepare any filings required to be made with the SEC or any other Governmental Authorities. The parties shall each be responsible for their own costs and expenses (including, without limitation professional fees and expenses) incurred in preparing such filings. 10.08 Assignment. This Agreement may not be assigned or delegated by any party without the prior written consent of all other parties. 10.09 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 10.10 Further Assurances. Each party agrees to execute and deliver all such further instruments and do all such further acts as may be reasonably necessary or appropriate to effectuate this Agreement. 10.11 Headings. Headings and captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit, extend or prescribe the scope of this Agreement or the intent of any provision. 10.12 Person and Gender. The masculine gender shall include the feminine and neuter genders and the singular shall include the plural. 10.13 Entire Agreement. This Agreement, together with the Seller Disclosure Memorandum, Purchaser Disclosure Memorandum and the Exhibit referenced herein, constitute the entire agreement of the parties with respect to matters set forth in this Agreement and supersede any prior understanding or agreement, oral or written, with respect to such matters. 10.14 Interpretations. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any party hereto, whether under any rule of construction or otherwise. No party shall be considered the draftsman. On the contrary, this Agreement has been reviewed, negotiated and accepted by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 10.15 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, and all such counterparts shall constitute one and the same Agreement, binding on all the parties notwithstanding that all the parties are not signatories to the same counterpart. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. Attest: Name: Hilton H. Howell, Jr. Attest: Name: Lawrence P. Klamon Title: President and Chief Executive Officer	8-K	EX-2.1	1996-01-12T00:00:00	1996-01-12T15:36:55
0000950124-96-000218	0000950124-96-000218_0000.txt	Pricing Supplement dated January 11, 1996 Rule 424(b)(5) (To Prospectus dated November 6 , 1995 and File No. 33-63311 Prospectus Supplement dated November 17, 1995) Principal Amount: $60,000,000 Interest Rate: 6.03 % Agent's Discount or Commission: 0.500% Stated Maturity: 02-01-01 Net Proceeds to Issuer: $59,700,000 Original Issue Date: 01-17-96 INTEREST PAYMENT DATES: February 1 and August 1 REGULAR RECORD DATES: January 15 next preceding a February 1 Interest Payment Date or July 15 next preceding an August 1 Interest [X] The Notes cannot be redeemed prior to Stated Maturity [ ] The Notes may be redeemed prior to Stated Maturity Initial Redemption Date: Initial Redemption Percentage: Annual Redemption Percentage Reduction: _______% until Redemption Percentage is 100% of the principal amount. [X] The Notes cannot be repaid prior to Stated Maturity [ ] The Notes can be repaid prior to Stated Maturity at the option of the holder of the Notes. Optional Repayment Dates: ORIGINAL ISSUES DISCOUNT: [ ] Yes [X] No Total Amount of OID: Yield to Maturity: Initial Accrual Period: FORM: [X] Book-Entry [ ] Certificated AGENT(S): [X] Merrill Lynch & Co. Amount Placed: $ 18,000,000 [X] Smith Barney Inc. Amount Placed: 15,000,000 [X] Donaldson, Lufkin & Jenrette Securities Corporation Amount Placed: 15,000,000 [X] First Chicago Capital Markets, Inc. Amount Placed: 12,000,000 [ ] Other Amount Placed: __________ AGENT ACTING IN THE CAPACITY AS INDICATED BELOW: [X] Agent [ ] Principal [ ] The Notes are being offered at varying prices related to prevailing market prices at the time of resale. [ ] The Notes are being offered at a fixed initial public offering price of ____% of Principal Amount. The Notes are being offered at a fixed initial public offering price of 100% of Principal Amount.	424B5	424B5	1996-01-12T00:00:00	1996-01-12T15:46:42
0000950135-96-000108	0000950135-96-000108_0000.txt	<DESCRIPTION>DAKA INTERNATIONAL, INC. AMENDMENT NO. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1996 THE SECURITIES ACT OF 1933 (Exact Name of Registrant as Specified in its Charter) (Address, Including Zip Code, and Telephone Number, Including Area Code, of CHAIRMAN AND CHIEF EXECUTIVE OFFICER DAKA INTERNATIONAL, INC. (Name, Address, Including Zip Code and Telephone Number, Including Area Code, of APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon consummation of the merger of CEI Acquisition Corp., a wholly-owned subsidiary of DAKA International, Inc. ("DAKA"), with and into Champps Entertainment, Inc. ("Champps") pursuant to an Agreement and Plan of Merger dated as of October 10, 1995 described in the enclosed Joint Proxy Statement-Prospectus. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / 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. Cross-Reference Sheet Pursuant to Rule 404(a) of Regulation C and Item 501(b) of Regulation S-K Showing the Location in the Joint Proxy Statement-Prospectus of the Information Required by Part I of Form S-4. You are cordially invited to attend a Special Meeting of the Stockholders of Champps Entertainment, Inc. ("Champps") to be held on February 16, 1996 at 10:00 a.m. local time at The Radisson Plaza Hotel Minneapolis, 35 South Seventh Street, Minneapolis, Minnesota (the "Champps Special Meeting"). At the Champps Special Meeting, you will be asked to consider and vote upon a proposal to approve and adopt an Agreement and Plan of Merger (the "Merger Agreement") dated as of October 10, 1995 among Champps, DAKA International, Inc. ("DAKA") and CEI Acquisition Corp., a wholly-owned subsidiary of DAKA ("Merger Subsidiary"), pursuant to which Merger Subsidiary will merge with and into Champps, whereupon Champps will become a wholly-owned subsidiary of DAKA (the "Merger"). Upon the effectiveness of the Merger, each outstanding share of Champps common stock, par value $.01 per share, will be converted into the right to receive four-tenths (.40) of one share of DAKA's common stock, par value $.01 per share, subject to possible adjustment as more fully described in the enclosed Joint Proxy Statement-Prospectus. A copy of the Merger Agreement is attached as Appendix A to the accompanying Joint Proxy Statement-Prospectus. Enclosed are a Notice of Special Meeting of Stockholders and a Joint Proxy Statement-Prospectus that describes, among other things, the Merger, the background to the transaction, the businesses of DAKA and Champps and the factors the Board of Directors of Champps considered in approving the Merger. THE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED A RESOLUTION APPROVING THE MERGER AGREEMENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF APPROVING THE MERGER AGREEMENT. In reaching this decision, the Board of Directors considered many factors, including, but not limited to, the terms of the Merger Agreement, the earnings, management, reputation, financial condition, business and future prospects of DAKA, the earnings, cash flow, financial condition and stock price of Champps, the future value of the common stock of the combined companies, and the October 10, 1995 opinion of Montgomery Securities, Champps' financial advisor, that the consideration to be received by Champps' stockholders in the Merger was fair to such stockholders, from a financial point of view, as of that date. A form of proxy solicited by the Board of Directors is enclosed for your convenience. PLEASE PROMPTLY SIGN AND RETURN YOUR PROXY CARD IN THE ENVELOPE PROVIDED WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. If you attend the Champps Special Meeting, you may vote in person if you wish, even if you have previously returned your proxy card. If approved, promptly after the Merger a letter of transmittal will be mailed to all holders of record of shares of Champps common stock to use in connection with surrendering their stock certificates. PLEASE DO NOT SEND YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD OR TO THE EXCHANGE AGENT UNTIL YOU RECEIVE THE LETTER OF TRANSMITTAL, WHICH WILL INCLUDE INSTRUCTIONS AS TO THE PROCEDURE TO BE USED IN SENDING YOUR STOCK CERTIFICATES. I strongly support the Merger and join with the other members of the Board of Directors in recommending the Merger to you. I urge you to vote in favor of approval and adoption of the Merger Agreement. President and Chief Executive Officer IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE CHAMPPS SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE CHAMPPS SPECIAL MEETING, YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE CHAMPPS SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY 16, 1996 A Special Meeting of Stockholders of Champps Entertainment, Inc., a Minnesota corporation ("Champps"), will be held at 10:00 a.m. local time on February 16, 1996 at The Radisson Plaza Hotel Minneapolis, 35 South Seventh Street, Minneapolis, Minnesota (together with all adjournments and postponements thereof, the "Champps Special Meeting") for the following purposes: 1. To consider and vote upon a proposal to approve and adopt an Agreement and Plan of Merger dated as of October 10, 1995 (the "Merger Agreement"), by and among Champps, DAKA International, Inc., a Delaware corporation ("DAKA"), and CEI Acquisition Corp., a Minnesota corporation and a wholly-owned subsidiary of DAKA ("Merger Subsidiary"), pursuant to which Merger Subsidiary will be merged with and into Champps (the "Merger") whereupon Champps will become a wholly-owned subsidiary of DAKA. At the effective time of the Merger, each then outstanding share of common stock, par value $.01 per share, of Champps ("Champps Common Stock") will be converted into the right to receive four-tenths (.40) of one share of the common stock, par value $.01 per share, of DAKA, subject to possible adjustment as more fully described in the enclosed Joint Proxy Statement-Prospectus. A copy of the Merger Agreement is attached as Appendix A to the accompanying Joint Proxy Statement-Prospectus. 2. To transact such other business as may properly come before the Champps Special Meeting. The Board of Directors has fixed the close of business on January 3, 1996 as the record date (the "Champps Record Date") for determination of stockholders entitled to notice of and to vote at the Champps Special Meeting. A list of such stockholders will be available at the main office of Champps' transfer agent, Norwest Stock Transfer, South St. Paul, Minnesota, for a period of ten days prior to the date of the Champps Special Meeting. Only holders of shares of Champps Common Stock of record at the close of business on the Champps Record Date will be entitled to notice of and to vote at the Champps Special Meeting. In the event there are not sufficient votes to approve the foregoing proposal at the time of the Champps Special Meeting, the Champps Special Meeting may be adjourned in order to permit further solicitations of proxies by Champps. Record and beneficial holders of shares of Champps Common Stock are entitled to dissent from the Merger, and to receive payment in cash of the fair value of their shares in lieu of the consideration they would receive under the Merger Agreement, if they comply with certain procedures specified in the Minnesota Business Corporation Act and described in the accompanying Joint Proxy Statement-Prospectus. A copy of Sections 302A.471 and 302A.473 of said Act, relating to dissenters' rights, is attached to the Joint Proxy Statement-Prospectus as Appendix D. THE BOARD OF DIRECTORS OF CHAMPPS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. By Order of the Board of Directors, WHETHER OR NOT YOU PLAN TO ATTEND THE CHAMPPS SPECIAL MEETING IN PERSON, YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE CHAMPPS SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. You are cordially invited to attend the Annual Meeting of Stockholders of DAKA International, Inc., a Delaware corporation ("DAKA"), to be held at 10:00 a.m. local time on February 16, 1996 at Tara's Ferncroft Conference Resort, 50 Ferncroft Road, Danvers, Massachusetts (the "DAKA Annual Meeting"). At this meeting, stockholders will be asked to (i) approve the issuance of shares of DAKA common stock, par value $.01 per share ("DAKA Common Stock"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of October 10, 1995 among DAKA, CEI Acquisition Corp., a wholly-owned subsidiary of DAKA, and Champps Entertainment, Inc. ("Champps"); (ii) approve and adopt an amendment to DAKA's Certificate of Incorporation, as amended, to increase the number of shares of authorized DAKA Common Stock from 20,000,000 to 30,000,000 shares; and (iii) elect one director to the DAKA Board of Directors. The Merger Agreement, which is described in the accompanying Joint Proxy Statement-Prospectus, provides for the merger of CEI Acquisition Corp. with and into Champps (the "Merger") whereupon Champps will become a wholly-owned subsidiary of DAKA and Champps stockholders will receive shares of DAKA Common Stock in exchange for shares of Champps Common Stock. DAKA'S TRACK RECORD OF GROWTH At the end of fiscal 1993, DAKA announced an aggressive growth plan to double both its foodservice managed volume and the number of Fuddruckers-owned restaurants. We are proud to report that during fiscal 1995, DAKA achieved its aggressive goal of doubling its annualized foodservice managed volume by completing two significant acquisitions and, as of the end of fiscal 1995, there were 61% more Fuddruckers-owned restaurants in operation as compared to fiscal 1993. The successful execution of DAKA's growth plan resulted in a 76% increase in revenues which, coupled with improved operating margins, resulted in the almost doubling of both operating income and net income in fiscal 1995 as compared to fiscal 1993. The significant growth achieved by DAKA has been recognized by Wall Street and our stockholders have been rewarded with a 168% increase in DAKA's stock price during the period from the end of fiscal 1993 to December 29, 1995 compared to a 38% increase in the S&P 500 during the same period. DAKA intends to continue its rapid growth with the proposed Merger of DAKA and Champps. Champps owns, operates and licenses Champps Americana restaurants, a casual theme restaurant concept with over 100 menu items, featuring generous portions of moderately priced, high quality food made from scratch using fresh ingredients, outstanding service and a distinctive, energetic atmosphere. The energetic atmosphere is created by the attitude of the restaurant personnel, various promotions which encourage guest participation and a variety of entertainment, all of which contribute to the strong after dinner hour sales generated by the restaurants. The restaurant decor features multi-level dining, an open kitchen area, wrap around bars and, in certain restaurants, a patio dining area. Since the opening of the first Champps restaurant in 1984, Champps has grown to 6 Champps-owned and 12 franchised or licensed restaurants. Average annual sales per restaurant in Champps-owned restaurants is approximately $6 million, significantly higher than the $2 million average among the leaders in the casual dining segment of the restaurant industry. The success of the Champps Americana concept is in large part due to the efforts of Mr. Dean Vlahos, founder and Chief Executive Officer of Champps. We believe that Mr. Vlahos' creative abilities and understanding of the Champps Americana concept and restaurant operations are critical to the ongoing success of the Champps Americana concept. Accordingly, DAKA has entered into a five year employment agreement with Mr. Vlahos, effective upon consummation of the Merger, to help ensure the continued success of the Champps Americana concept. Mr. Vlahos will serve as the President, Chairman of the Board and Chief Executive Officer of Champps subsequent to the Merger. The Board of Directors believes that the Champps Americana concept is one of the most exciting restaurant concepts in the country and as such has significant growth potential. In addition, Champps complements DAKA's existing businesses and provides DAKA with another long-term strategic growth vehicle. The Board of Directors also believes that the Champps Americana concept, combined with DAKA's proven operating ability and its expertise in the areas of site selection, real estate development, construction and finance, will enable DAKA to rapidly expand the Champps Americana concept into one of the leaders in the casual dining segment of the restaurant industry. Upon consummation of the Merger, each share of Champps Common Stock will be converted into the right to receive DAKA Common Stock at the Exchange Ratio, determined in accordance with the Merger Agreement. Also upon consummation of the Merger, which is expected to occur in February 1996, DAKA will restate its historical financial results to include Champps as if the Merger had occurred on July 2, 1995, the beginning of DAKA's fiscal year. With only four months remaining in DAKA's fiscal year after the Merger, DAKA's earnings per share will be diluted due to the number of shares of DAKA Common Stock to be issued and the transaction costs associated with the Merger. However, with the planned acceleration of new restaurant openings, DAKA anticipates that the Merger will be modestly additive in fiscal 1997 with a much greater additive impact on earnings per share in fiscal 1998. On behalf of the management and Directors of DAKA, I am pleased to be able to send you the enclosed Joint Proxy Statement-Prospectus which includes information about DAKA and Champps as well as details about the proposed Merger. Additionally, the Joint Proxy Statement-Prospectus includes information about the proposed election of a director to the DAKA Board of Directors and the proposal to increase the number of authorized shares of DAKA Common Stock. I urge you to read these materials carefully. Your Board of Directors believes that the Merger is in the best interests of the stockholders of DAKA and has unanimously approved the Merger Agreement and related transactions. In reaching this decision, the Board of Directors considered the growth potential of Champps, as discussed above, and the opinion of Piper Jaffray Inc. as to the fairness to DAKA from a financial point of view of the exchange ratio at which Champps Common Stock will be exchanged pursuant to the Merger Agreement into DAKA Common Stock. The written opinion of Piper Jaffray Inc., dated on or about the date hereof, is reproduced in full as Appendix C to the accompanying Joint Proxy Statement-Prospectus, and I urge you to read the opinion carefully. We appreciate the loyalty and support our stockholders have demonstrated in the past. We hope that you will continue this support by voting FOR these proposals. Regardless of the number of shares you may own, it is important that your shares be represented at the meeting. Accordingly, PLEASE PROMPTLY SIGN AND RETURN YOUR PROXY CARD IN THE ENVELOPE PROVIDED WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. If you attend the meeting, you may vote in person whether or not you have previously returned your proxy. Chairman and Chief Executive Officer NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON FEBRUARY 16, 1996 An Annual Meeting of Stockholders of DAKA International, Inc., a Delaware corporation ("DAKA"), will be held at 10:00 a.m. local time on February 16, 1996 at Tara's Ferncroft Conference Resort, 50 Ferncroft Road, Danvers, Massachusetts (together with all adjournments and postponements thereof, the "DAKA Annual Meeting"), for the following purposes: 1. To consider and vote upon a proposal to issue additional shares of common stock, par value $.01 per share, of DAKA ("DAKA Common Stock") pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of October 10, 1995, by and among Champps Entertainment, Inc., a Minnesota corporation ("Champps"), DAKA and CEI Acquisition Corp., a Minnesota corporation and wholly-owned subsidiary of DAKA ("Merger Subsidiary"). Pursuant to the Merger Agreement, upon the consummation of the merger of Merger Subsidiary with and into Champps, Champps will become a wholly-owned subsidiary of DAKA and each then outstanding share of common stock, par value $.01 per share, of Champps will be converted into the right to receive four-tenths (.40) of one share of DAKA Common Stock, subject to possible adjustment as described more fully in the accompanying Joint Proxy Statement-Prospectus. 2. To consider and vote upon a proposal to approve and adopt an amendment to DAKA's Certificate of Incorporation, as amended, to increase the number of authorized shares of DAKA Common Stock from 20,000,000 to 30,000,000. 3. To elect one Class I director to the Board of Directors. 4. To transact such other business as may properly come before the DAKA Annual Meeting. The Board of Directors has fixed the close of business on January 3 as the record date for determination of stockholders of DAKA Common Stock or DAKA Series A Preferred Stock, par value $.01 per share, entitled to notice of and to vote at the DAKA Annual Meeting. In the event there are not sufficient votes to approve any of the foregoing proposals at the time of the DAKA Annual Meeting, the DAKA Annual Meeting may be adjourned in order to permit further solicitations of proxies by DAKA. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE FOREGOING PROPOSALS. By Order of the Board of Directors, WHETHER OR NOT YOU PLAN TO ATTEND THE DAKA ANNUAL MEETING IN PERSON, YOU ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE DAKA ANNUAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL NOR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION DATED DECEMBER 28, 1995 COMMON STOCK, $0.01 PAR VALUE This Joint Proxy Statement-Prospectus is being furnished to holders of common stock, par value $.01 per share ("Champps Common Stock"), of Champps Entertainment, Inc., a Minnesota corporation ("Champps"), in connection with the solicitation of proxies by the Board of Directors of Champps (the "Champps Board") for use at a Special Meeting of Stockholders of Champps to be held at 10:00 a.m. local time on February 16, 1996 at The Radisson Plaza Hotel Minneapolis, 35 South Seventh Street, Minneapolis, Minnesota (together with any adjournments or postponements thereof, the "Special Meeting"). At the Champps Special Meeting, the holders of Champps Common Stock will consider and vote upon a proposal to adopt an Agreement and Plan of Merger, dated October 10, 1995 (the "Merger Agreement") by and among Champps, DAKA International, Inc., a Delaware corporation ("DAKA"), and CEI Acquisition Corp., a wholly-owned subsidiary of DAKA ("Merger Subsidiary"), pursuant to which Merger Subsidiary will merge with and into Champps whereupon Champps will become a wholly-owned subsidiary of DAKA (the "Merger"). Upon consummation of the Merger, each share of Champps Common Stock issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time") will be converted into the right to receive four-tenths (.40) of one share of DAKA common stock, par value $.01 per share ("DAKA Common Stock"), subject to possible adjustment to forty-three hundredths (.43) of one share of DAKA Common Stock if the average per share closing price of DAKA Common Stock as reported on the Nasdaq National Market over the twenty (20) trading days immediately preceding the second trading day prior to the closing date of the Merger (such time period, the "Determination Period," and such per share closing price, the "DAKA Average Trading Price") is less than $30.00 per share, or thirty-seven hundredths (.37) of one share of DAKA Common Stock if the DAKA Average Trading Price is more than $35.00 per share (as such ratio may be so adjusted, the "Exchange Ratio"). This Joint Proxy Statement-Prospectus is also being furnished to holders of DAKA Common Stock and DAKA Series A Preferred Stock, par value $0.01 per share ("Series A Preferred Stock" and, with the DAKA Common Stock, "DAKA Capital Stock"), in connection with the solicitation of proxies by the Board of Directors of DAKA (the "DAKA Board") for use at the 1995 Annual Meeting of Stockholders of DAKA to be held at 10:00 a.m. local time on February 16, 1996 at Tara's Ferncroft Conference Resort, 50 Ferncroft Road, Danvers, Massachusetts (together with any adjournments or postponements thereof, the "Annual Meeting" and, with the Special Meeting, the "Stockholders Meetings"). At the DAKA Annual Meeting, stockholders of DAKA will vote on proposals regarding (i) the issuance of DAKA Common Stock pursuant to the Merger Agreement (such shares as may be issued, the "DAKA Merger Shares"), (ii) an amendment to DAKA's Certificate of Incorporation, as amended (the "DAKA Certificate"), to increase the number of authorized shares of DAKA Common Stock from 20,000,000 to 30,000,000, and (iii) the election of one Director to the DAKA Board. DAKA and Champps currently anticipate that the Determination Period will end one or two business days prior to the Stockholders Meetings. Stockholders of DAKA and Champps can, beginning one or two business days prior to the date of the Stockholders Meetings, call the following toll-free number established by DAKA to learn the determination of the Exchange Ratio: 1-800-572-8925. The Annual Report to DAKA stockholders for the fiscal year ended July 1, 1995 is being mailed to stockholders of DAKA with this Joint Proxy Statement-Prospectus. A detailed description of the proposals presented at the Stockholders Meetings is included in this Joint Proxy Statement-Prospectus. This Joint Proxy Statement-Prospectus is also the prospectus of DAKA covering the offering and issuance of the DAKA Merger Shares pursuant to the Merger. All information contained in this Joint Proxy Statement-Prospectus with respect to DAKA has been supplied by DAKA and all information with respect to Champps has been supplied by Champps. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 Joint Proxy Statement-Prospectus is , 1996 and it is first being mailed or delivered to DAKA and Champps stockholders on or about that date. Each of DAKA and Champps is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC" or the "Commission"). Proxy statements, reports and other information concerning either DAKA or Champps can be inspected and copied at the SEC's office at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and the SEC's Regional Offices in New York (7 World Trade Center, Suite 1300, New York, New York 10048) and Chicago (CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661), and copies of such material can be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Each of the DAKA Common Stock and Champps Common Stock is listed on the Nasdaq National Market. Consequently, reports, proxy statements and other information concerning DAKA and Champps may also be inspected at the offices of the National Association of Securities Dealers, Inc. (the "NASD") at 1735 K Street, N.W., Washington, D.C. 20006. This Joint Proxy Statement-Prospectus is part of a registration statement on Form S-4 filed with the SEC (the "Registration Statement") and does not contain all the information set forth in the Registration Statement and exhibits thereto which DAKA has filed with the SEC under the Exchange Act, which Registration Statement and exhibits thereto may be obtained from the Public Reference Section of the SEC at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the prescribed fees, and to which reference is hereby made. Statements contained herein or in any document incorporated herein by reference as to the contents of any contract or other document referred to herein or therein are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document incorporated herein by reference. Each such statement is qualified in its entirety by the information contained in such document. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed by DAKA with the SEC pursuant to the Exchange Act are incorporated into this Joint Proxy Statement-Prospectus by reference: (i) DAKA's Annual Report on Form 10-K for the fiscal year ended July 1, 1995 as amended by Form 10-K/A (ii) DAKA's Form 8-K dated October 10, 1995, (iii) DAKA's quarterly report on Form 10-Q for the quarter ended September 30, 1995, and (iv) the description of DAKA's Common Stock contained in DAKA's Registration Statement on Form 8-A dated October 11, 1988, including any amendment or report filed for the purpose of amending such description. All documents filed by DAKA pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Joint Proxy Statement-Prospectus and prior to the filing of a post-effective amendment hereto that indicates that all securities offered hereunder have been sold or that deregisters all such securities then remaining unsold shall be deemed to be incorporated by reference in this Joint Proxy Statement-Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated herein by reference shall be deemed to be modified or superseded for purposes of this Joint Proxy Statement-Prospectus to the extent that a statement contained herein (or in an applicable Prospectus Supplement) or in any subsequently filed document that is incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed to constitute a part of this Joint Proxy Statement-Prospectus or any supplement thereto, except as so modified or superseded. THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED HEREIN BY REFERENCE, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT-PROSPECTUS IS DELIVERED UPON REQUEST FROM, IN THE CASE OF DOCUMENTS RELATING TO DAKA, LOUIE PSALLIDAS, DAKA INTERNATIONAL, INC., ONE CORPORATE PLACE, 55 FERNCROFT ROAD, DANVERS, MASSACHUSETTS 01923-4001, TELEPHONE (508) 774-9115, AND IN THE CASE OF DOCUMENTS RELATING TO CHAMPPS, FROM SHAUN P. NUGENT, CHIEF FINANCIAL OFFICER, CHAMPPS ENTERTAINMENT, INC., 153 EAST LAKE STREET, WAYZATA, MINNESOTA 55391 (TELEPHONE: (612) 449-4841). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY FEBRUARY 9, 1996. The following is a brief summary of certain information contained elsewhere in this Joint Proxy Statement-Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained herein and the exhibits hereto. Each stockholder of Champps and DAKA is urged to read this Joint Proxy Statement-Prospectus with care. The DAKA Board and the Champps Board have each unanimously adopted and approved the Merger Agreement, pursuant to which Merger Subsidiary will be merged with and into Champps if the stockholders of Champps adopt and approve the Merger Agreement, the stockholders of DAKA approve the issuance of the DAKA Merger Shares, and certain regulatory approvals are received and certain other conditions are satisfied. Champps will be the surviving corporation in the Merger and will become a wholly-owned subsidiary of DAKA. As a result of the Merger, each share of Champps Common Stock issued and outstanding immediately prior to the effective time of the Merger (other than shares as to which dissenters' rights are properly exercised) will be converted into the right to receive four-tenths (.40) of one share of DAKA Common Stock, subject to possible adjustment as more fully described herein, with holders receiving cash in lieu of fractional shares of DAKA Common Stock. Champps. Champps owns and operates six casual dining restaurants under the name "Champps Americana" located in Minnesota, Texas, New Jersey, Indiana and California. Champps also has a total of twelve additional restaurants in operation pursuant to franchise or license agreements in the following areas: Minneapolis-St. Paul metropolitan area; Sioux Falls, South Dakota; Milwaukee, Wisconsin; Charlotte, North Carolina; Cleveland, Ohio; and Omaha, Nebraska. Champps plans to continue to expand its concept nationally by establishing additional Champps-owned restaurants. Champps has signed leases to open three additional Champps-owned restaurants in Reston, Virginia, Denver, Colorado and Hempstead, New York. Champps has also entered into various license, franchise and development agreements, some of which are on an exclusive basis, which grant third parties rights to open and operate Champps Americana restaurants in various territories. The principal executive offices of Champps are located at 153 East Lake Street, Wayzata, Minnesota 55931. DAKA. DAKA is a diversified foodservice and restaurant company formed in 1988 pursuant to the merger of Daka, Inc. ("Daka") and Fuddruckers, Inc. ("Fuddruckers") and operates in the contract foodservice management industry and in the restaurant industry. Daka provides restaurant-style contract foodservice management at a variety of schools and colleges, corporate offices, factories, healthcare facilities, museums and government offices. Fuddruckers owns, operates and franchises Fuddruckers restaurants, which specialize in moderately-priced, casual dining for families and adults. In 1994, Casual Dining Ventures, Inc. ("CDVI"), a wholly-owned subsidiary of DAKA, acquired a 57% voting interest in Americana Dining Corp. ("ADC"), a newly formed company which acquired two restaurants located in Richfield and New Brighton, Minnesota operating under the name "Champps Americana" pursuant to a license from Champps. ADC has the exclusive right to develop Champps Americana restaurants in Ohio, Florida and seven Illinois counties. The principal executive offices of DAKA are located at One Corporate Place, 55 Ferncroft Road, Danvers, Massachusetts 01923. Merger Subsidiary. Merger Subsidiary is a Minnesota corporation recently formed by DAKA for the sole purpose of facilitating the Merger. Merger Subsidiary is a wholly-owned subsidiary of DAKA with no assets (other than those received in connection with its initial capitalization) or liabilities. The principal executive offices of Merger Subsidiary are located at One Corporate Place, 55 Ferncroft Road, Danvers, Massachusetts 01923. TERMS OF THE MERGER AND THE MERGER AGREEMENT A copy of the Merger Agreement is attached hereto as Appendix A and is summarized more fully herein under "Terms of the Merger." Pursuant to the Merger Agreement, upon fulfillment (or waiver) of the conditions set forth therein, at the time the Merger becomes effective (the "Effective Time") and in accordance with the relevant provisions of Minnesota law, Merger Subsidiary will be merged with and into Champps. As a result of the Merger, the separate corporate existence of Merger Subsidiary will cease and Champps will continue as the surviving corporation after the Merger (the "Surviving Corporation"). On October 10, 1995, the sole director of Merger Subsidiary approved the Merger Agreement and DAKA, as sole stockholder of Merger Subsidiary, approved and adopted the Merger Agreement. At the Effective Time of the Merger, each outstanding share of Champps Common Stock will be converted into the right to receive four-tenths (.40) of one share of DAKA Common Stock, subject to adjustment to forty-three hundredths (.43) of one share of DAKA Common Stock if the DAKA Average Trading Price is less than $30.00 or to thirty-seven hundredths (.37) of one share of DAKA Common Stock if the DAKA Average Trading Price is more than $35.00, as discussed more fully herein (as such ratio may be so adjusted, the "Exchange Ratio"). See "Terms of the Merger--Conversion of Shares of Champps Stock pursuant to Merger; Treatment of Options and Warrants." Consummation of the Merger is subject to various conditions, including, among other things, the approval and adoption of the Merger Agreement by the stockholders of Champps and the approval of the issuance of the DAKA Merger Shares by the stockholders of DAKA; receipt by Champps and DAKA of opinions of counsel as to the treatment of the Merger as a tax-free reorganization for federal income tax purposes; receipt by DAKA from Deloitte & Touche LLP, its independent auditors, and receipt by Champps from Arthur Andersen LLP, its independent auditors, of a letter to the effect that pooling-of-interests accounting (under Accounting Principles Board Opinion No. 16) is appropriate for the Merger, provided that the Merger is consummated in accordance with the terms and conditions of the Merger Agreement; the lack of any materially adverse changes concerning Champps or DAKA; and other customary closing conditions. See "Terms of the Merger--Conditions to Consummation of the Merger." Upon the occurrence of certain conditions, the Merger Agreement may be terminated. Champps will be obligated to pay DAKA a fee of $2,800,000 to reimburse DAKA for costs and expenses incurred in connection with the Merger (the "Termination Fee") in the event DAKA terminates the Merger Agreement due to (i) a breach of the Merger Agreement by Champps, (ii) a failure by the Champps Board to recommend to Champps stockholders approval of the Merger Agreement, (iii) consummation by a third party of a tender offer for 20% or more of Champps shares, or (iv) (unless the average per share closing price of DAKA Common Stock on the Nasdaq National Market over the twenty (20) trading days immediately preceding the originally scheduled date of the Champps Special Meeting is less than $22.50 (the "Floor Price")) the failure of the Champps stockholders to approve the Merger. The likelihood that the Merger will be consummated in the event that the Floor Price is reached cannot be determined, as consummation of the Merger depends on a number of factors, including (i) whether the affirmative vote of the stockholders of DAKA and Champps with respect to the Merger is obtained, which will be influenced by considerations such as the relative prices of the companies' stock, the prospects of Champps as an independent company as compared to the prospects of the combined DAKA-Champps enterprise, and general changes in the level of broad-based stock indices, and (ii) satisfaction (or waiver) of all conditions precedent to the obligation of each of Champps and DAKA to consummate the Merger. The Termination Fee could discourage a third party from pursuing an acquisition of Champps because the cost of such acquisition, if successful, would be increased by the amount of the Termination Fee. See "Terms of the Merger--Termination of the Merger Agreement" and "--Other Transactions; Termination Fees." The Termination Fee payable to DAKA will be reduced, dollar for dollar, by any payments actually made to DAKA under the Stockholders Agreement. See "Terms of the Merger--The Stockholders Agreement." Champps. The Champps Special Meeting will be held on February 16, 1996 at 10:00 a.m. local time at The Radisson Plaza Hotel Minneapolis, 35 South Seventh Street, Minneapolis, Minnesota. At the Champps Special Meeting, Champps stockholders will consider and vote upon a proposal to approve and adopt the Merger Agreement. The Champps Board has fixed the close of business on January 3 as the record date (the "Champps Record Date") for determination of stockholders entitled to notice of and to vote at the Champps Special Meeting. At the close of business on the Champps Record Date, 4,953,774 shares of Champps Common Stock were outstanding and entitled to vote. The affirmative vote of the holders of at least a majority of the outstanding shares of Champps Common Stock is required to approve and adopt the Merger Agreement. Stockholders of Champps are entitled to one vote at the Champps Special Meeting for each share of Champps Common Stock held of record at the close of business on the Champps Record Date. On the Champps Record Date, directors and executive officers of Champps beneficially owned 2,986,800 shares, or 59.3%, of the outstanding shares of Champps Common Stock. Dean Vlahos, Walter Henrion and Robert Taylor, directors of Champps, have entered into a Stockholders Agreement dated October 10, 1995 (the "Stockholders Agreement") with DAKA, the purpose of which is to assure that an aggregate of 990,000 shares, or 19.98% of the outstanding shares of Champps Common Stock, owned by such individuals is voted in favor of the Merger. See "Terms of the Merger--The Stockholders Agreement." DAKA. The DAKA Annual Meeting will be held on February 16, 1996 at 10:00 a.m. local time at Tara's Ferncroft Conference Resort, 50 Ferncroft Road, Danvers, Massachusetts. At the DAKA Annual Meeting, holders of DAKA Capital Stock will consider and vote upon (i) a proposal to issue the DAKA Merger Shares pursuant to the Merger Agreement, (ii) a proposal to approve and adopt an amendment to the DAKA Certificate to increase the number of authorized shares of DAKA Common Stock from 20,000,000 to 30,000,000, and (iii) a proposal to elect one director to the DAKA Board. Stockholder approval of the proposal to issue the DAKA Merger Shares pursuant to the Merger is required by the rules and regulations of the Nasdaq National Market, on which the DAKA Common Stock is listed for trading, and is not being sought in response to or in fulfillment of any provision of the Delaware General Corporation Law. Such approval is not sought for the purpose of limiting or precluding any liability which DAKA or its officers or directors may have with respect to the Merger under any applicable laws or to prevent any shareholder from contesting the Merger, but DAKA does not know whether such would be the effect. The DAKA Board has fixed the close of business on January 3 as the record date (the "DAKA Record Date") for determination of stockholders entitled to notice of and to vote at the DAKA Annual Meeting. At the close of business on the DAKA Record Date there were 7,225,489 shares of DAKA Common Stock outstanding and entitled to vote and 11,912 shares of Series A Preferred Stock outstanding and entitled to vote. The terms of the Series A Preferred Stock provide that holders of such class of stock are entitled to vote with the holders of DAKA Common Stock upon any matter submitted to a vote of the holders of DAKA Common Stock, but under Delaware law each of the aforementioned classes may also be entitled to separate class votes under certain circumstances. On any matter submitted to a vote of the DAKA stockholders, holders of DAKA Common Stock are entitled to one vote per share of DAKA Common Stock and holders of Series A Preferred Stock are entitled to approximately 22.22 votes per share of Series A Preferred Stock (representing the number of shares of DAKA Common Stock into which each share of Series A Preferred Stock is convertible). Because a subsidiary of DAKA, and not DAKA itself, is a party to the Merger, the approval of stockholders of DAKA is not required to approve and adopt the Merger Agreement. However, the By-laws of the NASD require the affirmative vote of a majority of the votes cast in person or by proxy at the DAKA Annual Meeting to approve the issuance of the DAKA Merger Shares pursuant to the Merger Agreement. The affirmative vote of the holders of at least a majority of the issued and outstanding shares of DAKA Common Stock voting as a separate class, as well as the affirmative vote of at least a majority of the votes eligible to be cast by holders of DAKA Common Stock and Series A Preferred Stock voting together, are required to approve the amendment to the DAKA Certificate to increase the number of authorized shares of DAKA Common Stock. With respect to the election of a director, DAKA's By-laws provide that such election shall be determined by a plurality of the votes cast by holders of DAKA Capital Stock. The approval of the Merger Agreement by the Champps stockholders and the approval of the issuance of the DAKA Merger Shares by the DAKA stockholders are conditions to the consummation of the Merger. See "Voting and Proxies." MANAGEMENT AND OPERATIONS AFTER THE MERGER Immediately following the Merger, Champps will be operated as a wholly-owned subsidiary of DAKA. The Merger Agreement provides that after the Merger the Champps Board will consist of William H. Baumhauer, Chairman and Chief Executive Officer of DAKA, Dean P. Vlahos, currently Chief Executive Officer and President of Champps, and one other person to be mutually designated by Messrs. Baumhauer and Vlahos. Mr. Vlahos has entered into an employment agreement with DAKA and Champps, dated October 10, 1995. The terms of such employment agreement were negotiated after an understanding as to what the Exchange Ratio would be was determined and discussed with the Champps Board. Such employment agreement provides for Mr. Vlahos' employment for a term of five years after the Merger as Chairman of the Board, Chief Executive Officer and President of Champps. Under such employment agreement, Mr. Vlahos will receive an annual base salary of $350,000 plus, subject to the achievement of performance targets relating to DAKA and to Champps, a performance bonus of between 50% and 100% of base salary. See "The DAKA Annual Meeting--Other Information--Employment Agreements" for a summary of the other terms of such employment agreement. A record or beneficial owner of shares of Champps Common Stock whose shares are not voted in favor of approval of the Merger will be entitled to receive the fair market value of his or her shares in cash in lieu of the consideration contemplated by the Merger Agreement if he or she complies with certain procedures specified in the Minnesota Business Corporation Act (the "MBCA") relating to dissenters' rights. See "Rights of Dissenting Stockholders." ANY STOCKHOLDER WHO WISHES TO EXERCISE SUCH DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE HIS OR HER RIGHT TO DO SO SHOULD REVIEW THE DISCUSSION UNDER "RIGHTS OF DISSENTING STOCKHOLDERS" HEREIN AND APPENDIX D CAREFULLY BECAUSE FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE PROCEDURES SPECIFIED WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS UNDER THE MBCA. CERTAIN DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS The rights of stockholders of Champps are currently governed by the Minnesota Business Corporation Act, Champps' Articles of Incorporation, as amended (the "Champps Articles"), and Champps' restated by-laws (the "Champps By-laws"). Upon consummation of the Merger, Champps' stockholders will become holders of DAKA Common Stock and their rights will be governed by the Delaware General Corporation Law ("Delaware law"), the DAKA Certificate and DAKA's By-laws (the "DAKA By-laws"). The differences in the rights of Champps stockholders and DAKA stockholders include (i) Champps stockholders holding sufficient voting power can call a stockholders meeting while DAKA stockholders cannot call a stockholders meeting, (ii) the DAKA Board is classified into three classes while the Champps Board is unclassified, and (iii) Champps is subject to a "control share acquisition" statute (which can have the effect of limiting purchases of a company's stock by a person or group above certain thresholds) while DAKA is not. See "Comparison of the Rights of Holders of Champps Common Stock and DAKA Common Stock" for a more complete summary of the differences in the rights of Champps and DAKA stockholders. REASONS FOR THE RECOMMENDATIONS OF THE BOARDS OF DIRECTORS The DAKA Board and the Champps Board each believes that the Merger is in the best interests of its respective company and stockholders. In reaching its determination that the Merger is in the best interests of the Champps stockholders and unanimously recommending that the Champps stockholders approve the Merger, the Champps Board considered a number of factors, including the beneficial effects the Merger would have on Champps' financial condition and expansion plans; the financial and other terms and tax consequences of the Merger; the business strengths of DAKA; the increased liquidity the Merger should provide Champps' stockholders; and the opinion of Montgomery Securities ("Montgomery") regarding the fairness, from a financial point of view, of the consideration to be received by stockholders of Champps pursuant to the Merger. A special committee of the Champps Board, comprised of six non-management directors (the "Special Committee"), unanimously approved the Merger. The Champps Board ratified such approval by the Special Committee and unanimously approved the Merger. In reaching its determination that the Merger is in the best interests of the DAKA stockholders, and unanimously recommending that the DAKA stockholders approve the issuance of the DAKA Merger Shares, the DAKA Board considered a number of factors, including the growth potential of the Champps Americana concept, particularly when combined with DAKA's ability to rapidly expand the number of Champps Americana restaurants as a result of its expertise in the areas of site selection, real estate development and construction, and finance; Mr. Dean Vlahos' experience in implementing the Champps Americana concept and his five year employment agreement; DAKA's experience in the restaurant industry; and the opinion of Piper Jaffray Inc. ("Piper Jaffray") that the Exchange Ratio is fair to DAKA from a financial point of view. See "The Merger and Related Transactions--Background of the Merger," "--Reasons for the DAKA Board's Recommendation" and "--Reasons for the Champps Board's Recommendation." Montgomery has delivered to the Champps Board written opinions that, as of October 10, 1995 and on or about the date of this Joint Proxy Statement-Prospectus, the consideration to be received by Champps stockholders pursuant to the Merger is fair to such stockholders from a financial point of view. A copy of Montgomery's opinion dated on or about the date of this Joint Proxy Statement-Prospectus is attached hereto as Appendix B and should be read in its entirety. Piper Jaffray has delivered to the DAKA Board its written opinions, dated as of October 9, 1995 and on or about the date of this Joint Proxy Statement-Prospectus, that the Exchange Ratio is fair, from a financial point of view, to DAKA. A copy of Piper Jaffray's opinion dated on or about the date of this Joint Proxy Statement-Prospectus is attached hereto as Appendix C and should be read in its entirety. See "The Merger and Related Transactions--Background of the Merger" "--Opinion of Financial Advisor to Champps" and "--Opinion of Financial Advisor to DAKA." AMENDMENT AND WAIVER OF THE MERGER AGREEMENT; EXTENSIONS The Merger Agreement may be amended by DAKA and Champps, by action taken by or on behalf of their respective Boards, at any time prior to the Effective Time, except that after approval of the Merger by the stockholders of Champps, or after approval of the issuance of the DAKA Merger Shares by the stockholders of DAKA, no amendment that under applicable law may not be made without the approval of the stockholders of DAKA or Champps may be made without such approval. At any time prior to the Effective Time, DAKA and Champps may (i) extend the time for the performance of any of the obligations of the other party under the Merger Agreement, (ii) waive any inaccuracies in the representations and warranties of the other party contained in the Merger Agreement or (iii) waive compliance by the other party with any of the agreements or conditions contained therein. See "Terms of the Merger--Amendment and Waiver of the Merger Agreement; Extensions." In order to allow Champps to continue to develop and construct new restaurants, pursuant to the Merger Agreement DAKA has entered into a loan agreement with a newly formed wholly-owned subsidiary of Champps whereby DAKA has committed to provide loans to such subsidiary up to an aggregate principal amount of $3,000,000. Approximately $710,000 has been loaned by DAKA to such subsidiary to date. The loans bear interest at a fixed rate of 10% per annum with principal due on October 10, 2000 and are subject to other terms as are normal and customary for loans of this type. If the Merger Agreement is DAKA will not be obligated to make additional loans, but existing loans will remain outstanding. See "Champps Management's Discussion and Analysis of Results of Operations and Financial Condition." Dean Vlahos, Walter Henrion and Robert Taylor, members of the Champps Board, all of whom are also stockholders of Champps, negotiated and entered into the Stockholders Agreement contemporaneously with the negotiation and execution of the Merger Agreement. The purpose of the Stockholders Agreement is to assure that an aggregate of 990,000 shares of Champps Common Stock, or 19.98% of the outstanding shares of Champps Common Stock, owned by such individuals is voted in favor of the Merger. See "Terms of the Merger--The Stockholders Agreement." In the event the Merger Agreement is terminated because of a failure by Champps stockholders to approve the Merger, and the average per share closing price of DAKA Common Stock on the Nasdaq National Market over the twenty (20) trading days immediately preceding the originally scheduled date of the Champps Special Meeting was equal to or greater than $22.50, then Messrs. Vlahos, Henrion and Taylor shall be required to pay to DAKA $1,000,000 in the aggregate to reimburse DAKA for costs incurred in connection with the Merger (with such fee to be allocated among Messrs. Vlahos, Henrion and Taylor in proportion to the number of their shares subject to the Stockholders Agreement ($693,939, $94,742, and $211,319, respectively) and with such fee to be subject to reduction on a dollar for dollar basis by the amount of the Termination Fee actually paid by Champps). See "Terms of the Merger--Conditions to Consummation of the Merger," "--Termination of the Merger." Champps and DAKA are not aware of any government or regulatory requirements relating to consummation of the Merger or the proposals to be considered at the DAKA Annual Meeting other than compliance with applicable federal and state securities laws. CERTAIN FEDERAL INCOME TAX CONSEQUENCES Neither DAKA nor Champps has requested nor will they receive an advance ruling from the Internal Revenue Service as to the tax consequences of the Merger. As contemplated by the Merger Agreement, it is a condition to closing of the Merger that counsel for each of DAKA and Champps deliver opinions, dated on or about the date that is two business days prior to the mailing of this Joint Proxy Statement-Prospectus, which opinions are based on customary conditions and qualifications, that for federal income tax purposes the Merger will constitute a tax free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Stockholders of Champps should consult their own tax advisors as to the tax consequences of the Merger to them under federal, state, local or any other applicable law. See "Terms of The Merger--Material Federal Income Tax Consequences." It is the intention of the parties that the Merger shall qualify as a pooling-of-interests for accounting and financial reporting purposes. In addition, it is a condition to consummation of the Merger that DAKA shall have received from Deloitte & Touche LLP, its independent auditors, and Champps shall have received from Arthur Andersen LLP, its independent public accountants, a letter to the effect that pooling-of-interests accounting (under Accounting Principles Board Opinion No. 16) is appropriate for the Merger, provided that the Merger is consummated in accordance with the terms and conditions of the Merger Agreement. The shares of DAKA Common Stock and Champps Common Stock are quoted on the Nasdaq National Market under the symbols DKAI and CHPP, respectively. The table below sets forth the quarterly high and low sale prices for DAKA Common Stock and Champps Common Stock as reported on the Nasdaq National Market for the periods indicated. On October 9, 1995, the last business day immediately preceding the public announcement of the proposed Merger, the closing sale price for DAKA Common Stock as reported on the Nasdaq National Market was $33.25 per share and the closing sale price for Champps Common Stock as reported on the Nasdaq National Market was $11.75 per share. Based on the closing price for DAKA Common Stock on October 9, 1995, and assuming the applicable Exchange Ratio will be .40, the value of the DAKA Common Stock to be received for each share of Champps Common Stock in the Merger is $13.30. PRO FORMA PER SHARE DATA The following unaudited information reflects certain comparative per share data related to book value per share and income per share from continuing operations for each of DAKA and Champps. DAKA has never paid dividends on DAKA Common Stock and Champps has not paid dividends on Champps Common Stock since December 31, 1993. The information set forth below is presented (i) on a historical basis for DAKA and Champps; (ii) on a pro forma combined basis for DAKA and Champps, assuming consummation of the Merger; and (iii) on an equivalent pro forma basis per share of Champps Common Stock assuming consummation of the Merger. The Champps equivalent pro forma data is presented below in the same table as the DAKA historical and pro forma data because, due to the changes to Champps historical data required in order to conform such data to DAKA's fiscal year end, Champps historical data would not be readily comparable to the Champps equivalent pro forma data. The equivalent pro forma per share data for Champps has been computed by multiplying the pro forma DAKA amounts by the maximum Exchange Ratio of .43. Champps. The Champps Special Meeting will be held on February 16, 1996 at 10:00 a.m. local time at The Radisson Plaza Hotel Minneapolis, 35 South Seventh Street, Minneapolis, Minnesota. DAKA. The DAKA Annual Meeting will be held on February 16, 1996 at 10:00 a.m. local time at Tara's Ferncroft Conference Resort, 50 Ferncroft Road, Danvers, Massachusetts. Champps. The Champps Board has fixed the close of business on January 3 as the Champps Record Date. Only holders of record of shares of Champps Common Stock at the close of business on the Champps Record Date will be entitled to notice of and to vote at the Champps Special Meeting (including any adjournments or postponements thereof). At the Champps Record Date, 4,953,774 shares of Champps Common Stock were outstanding and entitled to vote. DAKA. The DAKA Board has fixed the close of business on January 3 as the DAKA Record Date for voting on the proposals presented at the DAKA Annual Meeting. Only holders of record of shares of DAKA Common Stock and Series A Preferred Stock at the close of business on the DAKA Record Date will be entitled to notice of and to vote at the DAKA Annual Meeting (including any adjournments or postponements thereof). At the DAKA Record Date, 7,225,489 shares of DAKA Common Stock and 11,912 shares of Series A Preferred Stock were outstanding and entitled to vote. Holders of Series A Preferred Stock are entitled to approximately 22.22 votes per share (representing the number of shares of DAKA Common Stock into which each share of Series A Preferred Stock is convertible) and holders of DAKA Common Stock are entitled to one vote per share. PURPOSES OF THE STOCKHOLDERS MEETINGS Champps. At the Champps Special Meeting, Champps stockholders will consider and vote upon a proposal to approve and adopt the Merger Agreement. DAKA. At the DAKA Annual Meeting, DAKA stockholders will consider and vote upon proposals to (i) approve the issuance of the DAKA Merger Shares pursuant to the Merger Agreement; (ii) approve and adopt an amendment to the DAKA Certificate to increase the number of authorized shares of DAKA Common Stock from 20,000,000 to 30,000,000; and (iii) elect one Class I director to the DAKA Board. Stockholder approval of the proposal to issue the DAKA Merger Shares pursuant to the Merger is required by the rules and regulations of the Nasdaq National Market, on which the DAKA Common Stock is listed for trading, and is not being sought in response to or in fulfillment of any provision of the Delaware General Corporation Law. Such approval is not sought for the purpose of limiting or precluding any liability which DAKA or its officers or directors may have with respect to the Merger under any applicable laws or to prevent any shareholder from contesting the Merger, but DAKA does not know whether such would be the effect. The DAKA Board is not aware of any other matter to be presented for action at the Annual Meeting, however, if any other matter is properly presented it is the intention of the persons named in the enclosed form of proxy to vote in accordance with their judgment on such matter. DAKA's Annual Report to Stockholders for fiscal year 1995 is being mailed to stockholders with this Joint Proxy Statement-Prospectus. Additional information is contained in DAKA's Annual Report on Form 10-K/A for the fiscal year ended July 1, 1995, including the consolidated financial statements and notes thereto incorporated herein by reference. DAKA will furnish, without charge to any stockholder, a copy of its Annual Report on Form 10-K/A upon written request to: Investor Relations Department, DAKA International, Inc., One Corporate Place, 55 Ferncroft Road, Danvers, Massachusetts 01923-4001. VOTES REQUIRED AT THE STOCKHOLDERS MEETINGS Champps. The affirmative vote of the holders of at least a majority of the outstanding shares of Champps Common Stock is required to approve and adopt the Merger Agreement. Stockholders of Champps are entitled to one vote at the Champps Special Meeting for each share of Champps Common Stock held of record at the close of business on the Champps Record Date. On January 3, 1996, directors officers of Champps and their affiliates beneficially owned 2,986,800 shares, or 59.3% of all outstanding Champps Common Stock. Three stockholders who are directors of Champps have entered into the Stockholders Agreement, the purpose of which is to assure that an aggregate of 990,000 shares of Champps Common Stock, representing 19.98% of the outstanding shares of Champps Common Stock, owned by such individuals is voted in favor of the Merger at the Champps Special Meeting. See "Terms of the Merger Agreement--The Stockholders Agreement." The presence in person or by proxy, of at least a majority of the total number of outstanding shares of Champps Common Stock issued and outstanding and entitled to a vote is necessary to constitute a quorum for the transaction of business at the Champps Special Meeting. Abstentions, votes withheld with respect to director nominees and "broker non-votes" (i.e., shares represented at the Champps Special Meeting held by brokers or nominees as to which instructions have not been received from the beneficial owners or persons entitled to vote such shares and with respect to which the broker or nominee does not have discretionary voting power to vote such shares) shall be treated as shares that are present and entitled to vote for purposes of determining whether a quorum is present. With respect to the Merger Agreement, Minnesota law requires the affirmative vote of a majority of the outstanding shares of Champps Common Stock in order to be approved. Therefore, abstentions and broker non-votes will have the effect of votes cast against the proposal. DAKA. Pursuant to the DAKA By-laws, the presence, in person or by proxy, of at least a majority of the total number of outstanding shares of DAKA Capital Stock issued and outstanding and entitled to vote is necessary to constitute a quorum for the transaction of business at the DAKA Annual Meeting. Abstentions, votes withheld with respect to director nominees and "broker non-votes" (i.e., shares represented at the Annual Meeting held by brokers or nominees with respect to which instructions have not been received from the beneficial owners or persons entitled to vote such shares and with respect to which the broker or nominee does not have discretionary voting power to vote such shares) shall be treated as shares that are present and entitled to vote for purposes of determining whether a quorum is present. With respect to the election of directors the DAKA By-laws provide that such election shall be determined by a plurality of the votes cast by stockholders, and thus shares represented by a proxy that withholds authority to vote for the DAKA Board's nominee and broker non-votes will have no effect on the outcome. With respect to the issuance of the DAKA Merger Shares, the NASD By-laws require the affirmative vote of at least a majority of the total "votes cast" in the proposal in order to approve the issuance of the DAKA Merger Shares; thus, abstentions will have the effect of votes cast against the proposal while broker non-votes will have no effect on the outcome. With respect to the amendment to the DAKA Certificate to increase the number of authorized shares of DAKA Common Stock from 20,000,000 to 30,000,000, under the DAKA Certificate and the Delaware General Corporation Law an affirmative vote of at least a majority of the outstanding shares of DAKA Common Stock voting as a separate class, as well as the affirmative vote of a majority of the votes eligible to be cast by the holders of DAKA Common Stock and Series A Preferred Stock voting together, is required for approval. Therefore, abstentions and broker non-votes will have the effect of votes against such proposal. Champps. Shares represented by a properly executed proxy received prior to the vote at the Champps Special Meeting and not revoked will be voted at the Champps Special Meeting as directed in the proxy. IF A PROPERLY EXECUTED PROXY IS SUBMITTED AND NO DIRECTIONS ARE GIVEN, THE PROXY WILL BE VOTED "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. The persons named as proxies by a Champps stockholder may propose and vote for one or more adjournments or postponements of the Champps Special Meeting to permit further solicitation of proxies in favor of the proposals to be considered at the Champps Special Meeting. A holder of record of Champps Common Stock may revoke a proxy by filing an instrument of revocation with Shaun P. Nugent, Secretary, Champps Entertainment, Inc., 153 East Lake Street, Wayzata, MN 55391. Such stockholder may also revoke a proxy by filing a duly executed proxy bearing a later date, or by appearing at the Champps Special Meeting in person, notifying the Secretary, and voting by ballot at the Champps Special Meeting. Any stockholder of record attending the Champps Special Meeting may vote in person whether or not a proxy has been previously given, but the mere presence (without notifying the Secretary) of a stockholder at the Champps Special Meeting will not constitute revocation of a previously given proxy. DAKA. Shares represented by a properly executed proxy received prior to the vote at the DAKA Annual Meeting and not revoked will be voted at the DAKA Annual Meeting as directed in the proxy. IF A PROPERLY EXECUTED PROXY IS SUBMITTED AND NO DIRECTIONS ARE GIVEN, THE PROXY WILL BE VOTED "FOR" THE APPROVAL AND ADOPTION OF THE PROPOSALS TO BE CONSIDERED AT THE DAKA ANNUAL MEETING. A holder of record of DAKA Capital Stock may revoke a proxy by filing an instrument of revocation with Charles W. Redepenning, Jr., Secretary, DAKA International, Inc., One Corporate Place, 55 Ferncroft Road, Danvers, Massachusetts 01923. Such stockholder may also revoke a proxy by filing a duly executed proxy bearing a later date, or by appearing at the DAKA Annual Meeting in person, notifying the Secretary, and voting by ballot at the DAKA Annual Meeting. Any stockholder of record attending the DAKA Annual Meeting may vote in person whether or not a proxy has been previously given, but the mere presence (without notifying the Secretary) of a stockholder at the DAKA Annual Meeting will not constitute revocation of a previously given proxy. Each of Champps and DAKA will bear the cost of soliciting proxies from their respective stockholders and each will pay one-half of all printing costs in connection with this Joint Proxy Statement-Prospectus. In addition to the use of the mails, proxies may be solicited by the directors, officers and certain employees of Champps and DAKA, and by personal interview, telephone or telegram. Such directors, officers and employees will not receive additional compensation for such solicitation but may be reimbursed for reasonable out-of-pocket expenses incurred in connection therewith. Each of Champps and DAKA may also make arrangements with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation material to the beneficial owners of Champps Common Stock and DAKA Capital Stock, respectively. Each of Champps and DAKA may reimburse such custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred in connection therewith. The following discussion is not a complete statement of the law pertaining to dissenters' rights under the MBCA and is qualified in its entirety by reference to the full text of Section 302A.471 and 302A.473 of the MBCA attached to this Proxy Statement as Appendix D. ANY STOCKHOLDER WHO WISHES TO EXERCISE SUCH DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE HIS OR HER RIGHT TO DO SO SHOULD REVIEW THE FOLLOWING DISCUSSION AND APPENDIX D CAREFULLY BECAUSE FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE PROCEDURES SPECIFIED WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS UNDER THE MBCA. PROCEDURE TO PRESERVE DISSENTERS' RIGHTS Under Minnesota law, any holder of Champps Common Stock who follows the procedures set forth in Section 302A.473 of the MBCA will be entitled to receive payment in cash of the "fair value" of such stockholder's shares. Under Section 302A.473 of the MBCA, if a corporation calls a stockholder meeting at which a plan of merger to which such corporation is a party is to be voted upon, the notice of the meeting must inform each stockholder of the right to dissent and must include a copy of sections 302A.471 and 302A.473 of the MBCA and a brief description of the procedures to be followed under such sections. This Joint Proxy Statement-Prospectus constitutes such notice to the stockholders of Champps and the applicable statutory provisions of the MBCA are attached to this Joint Proxy Statement-Prospectus as Appendix D. The Merger Agreement must be approved by the holders of a majority of the outstanding shares of Champps Common Stock. A stockholder who wishes to exercise dissenters' rights must file with Champps before the vote on the Merger Agreement a written notice of intent to demand the fair value of the shares owned by such stockholder and must not vote his or her shares in favor of the Merger Agreement. The "fair value of the shares" means the value of the shares of Champps immediately before the effective date of the Merger. After the proposed Merger has been approved by the Champps Board and the Champps stockholders, Champps must send a written notice to all stockholders who have not voted their shares in favor of the Merger Agreement and who have filed with Champps before the vote on the Merger Agreement a written notice of intent to demand the fair value of the shares owned by such stockholder. The notice from Champps must contain: (1) The address to which a demand for payment and certificates of certified shares must be sent in order to obtain payment and the date by which they must be received; (2) Any restrictions on transfer of uncertified shares that will apply after the demand for payment is received; (3) A form to be used to certify the date on which the stockholder, or the beneficial owner on whose behalf the stockholder dissents, acquired the shares or an interest in them and to demand payment; and (4) A copy of sections 302A.471 and 302A.473 of the MBCA and a brief description of the procedures to be followed under such sections. In order to receive the fair market value of the shares, a dissenting stockholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice was given, but the dissenter retains all other rights of a stockholder until the Merger takes effect. A stockholder may not assert dissenters' rights as to less than all of the shares registered in the name of the stockholder, unless the stockholder dissents with respect to all the shares that are beneficially owned by another person but registered in the name of the stockholder and discloses the name and address of each beneficial owner on whose behalf the stockholder dissents. In that event, the rights of the dissenter will be determined as if the shares as to which the stockholder has dissented and the other shares were registered in the names of different stockholders. A beneficial owner of shares who is not the stockholder may assert dissenters' rights with respect to shares held on behalf of such beneficial owner, and will be treated as a dissenting stockholder under the terms of sections 302A.471 and 302A.473 of the MBCA, if the beneficial owner submits written consent of the stockholder holding such beneficial owner's shares to Champps at the time of or before the assertion of the rights. PROCEDURES FOLLOWING AN ASSERTION OF DISSENTERS' RIGHTS After the Merger takes effect, or after Champps receives a valid demand for payment, whichever is later, Champps must remit to each dissenting stockholder who has not voted his or her shares in favor of the proposed Merger and has filed with Champps before the vote on the proposed Merger a written notice of intent to demand the fair value of the shares owned by such stockholder, the amount Champps estimates to be the fair value of the shares, plus interest ("interest" commences five days after the effective date of the Merger up to and including the date of payment, calculated at a rate provided under Minnesota law for interest on verdicts and judgments), accompanied by: (1) Champps' balance sheet and statement of operations for a fiscal year ending not more than 16 months before the effective date of the Merger, together with the latest available interim financial statements; (2) An estimate by Champps of the fair value of the shares and a brief description of the method used to reach the estimate; and (3) A copy of sections 302A.471 and 302A.473 of the MBCA, and a brief description of the procedures to be followed in demanding supplemental payment. Champps may withhold the above-described remittance from a person who was not a stockholder on the date the Merger Agreement was first announced to the public or who is dissenting on behalf of a person who was not a beneficial owner on that date. If such dissenter has not voted his or her shares in favor of the proposed Merger Agreement and has filed with Champps before the vote on the proposed Merger Agreement a written notice of intent to demand the fair value of the shares owned by such stockholder, Champps must forward to such dissenter the materials described in the preceding paragraph, a statement of reason for withholding the remittance, and an offer to pay to such dissenter the amount listed in the materials if the dissenter agrees to accept that amount in full satisfaction. Such dissenter may decline the offer and demand payment of such dissenter's own estimate of the fair value of the shares, plus interest, by Champps. Failure to do so entitles such dissenter only to the amount offered. If such dissenter makes demand, the procedures, costs, fees and expenses described below for petitioning the court shall apply. If Champps fails to remit payment within 60 days of the deposit of certificates or the imposition of transfer restrictions on uncertified shares, it must return all deposited certificates and cancel all transfer restrictions. However, Champps may require deposit or restrict transfer at a later time and again give notice that contains: (1) The address to which a demand for payment and certificates of certified shares must be sent in order to obtain payment and the date by which they must be received; (2) Any restrictions on transfer of uncertificated shares that will apply after the demand for payment is received; (3) A form to be used to certify the date on which the stockholder, or the beneficial owner on whose behalf the stockholder dissents, acquired the shares or an interest in them and to demand payment; and (4) A copy of sections 302A.471 and 302A.473 of the MBCA and a brief description of the procedures to be followed under such sections. If a dissenter believes that the amount remitted by Champps is less than the fair value of the shares plus interest, the dissenter may give written notice to Champps of the dissenter's own estimate of the fair value of shares, plus interest, within 30 days after Champps mails the remittance, and demand payment of the difference (a "Demand"). Otherwise, a dissenter is entitled only to the amount remitted by Champps. If Champps receives a Demand, it must, within 60 days after receiving the Demand, either pay to the dissenter the amount demanded, or an amount agreed to by the dissenter after discussion with Champps, or file in court a petition requesting that the court determine the fair value of the shares, plus interest. The petition must be filed in Hennepin County, Minnesota. The petition must name as parties all dissenters who made a Demand and who have not reached agreement with Champps. The jurisdiction of the court is plenary and exclusive. The court may appoint appraisers, with powers and authorities the court deems proper, to receive evidence on and recommend the amount of the fair value of the shares. The court must determine whether the stockholder or stockholders in question have fully complied with the requirements of section 302A.473 of the MBCA, and must determine the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by Champps or by a dissenter. The fair value of the shares as determined by the court is binding on all stockholders, wherever located. A dissenter is entitled to judgment for the amount by which the fair value of the shares as determined by the court, plus interest, exceeds the amount, if any, remitted by Champps, but shall not be liable to Champps for the amount, if any, by which the amount, if any, remitted to the dissenter exceeds the fair value of the shares as determined by the court, plus interest. The court must determine the costs and expenses of any appraisers of a proceeding under the preceding paragraph, including the reasonable expenses and compensation of any appraisers appointed by the court, and must assess those costs and expenses against Champps, except that the court may assess part or all of those costs and expenses against a dissenter whose Demand is found to be arbitrary, vexatious, or not in good faith. If the court finds that Champps has failed to comply substantially with section 302A.473 of the MBCA, the court may assess all fees and expenses of any experts or attorneys as the court deems equitable. These fees and expenses may also be assessed against a person who has acted arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and may be awarded to a party injured by those actions. The court may award, in its discretion, fees and expenses to an attorney for the dissenters out of the amount awarded to the dissenters, if any. THE MERGER AND RELATED TRANSACTIONS The Merger Agreement provides that, subject to the satisfaction or waiver (where permissible) of certain conditions, which are described more fully herein, Merger Subsidiary will be merged with and into Champps whereupon Champps will become a wholly-owned subsidiary of DAKA. In connection with the Merger each outstanding share of Champps Common Stock will be converted into the right to receive four-tenths (.40) of one share of DAKA Common Stock, subject to possible adjustment as described herein. See "Terms of the Merger--Conversion of Shares of Champps Stock Pursuant to the Merger; Treatment of Options and Warrants." In December 1993, Mr. William H. Baumhauer, Chairman and Chief Executive Officer of DAKA, was contacted by persons acting on behalf of the owners of two Champps Americana restaurants located in the Minneapolis/St. Paul area which were operating under license agreements with Champps. The two Champps Americana restaurants were managed, pursuant to a management agreement, by Champps Development Group ("CDG"), which also held exclusive rights to develop Champps Americana restaurants in Ohio, Florida, and seven Illinois counties. As a result of subsequent negotiations, in March 1994, CDVI, a wholly-owned subsidiary of DAKA, invested $2.8 million in ADC. Simultaneously, ADC acquired the two restaurants and CDG's exclusive development rights. CDVI's interest in ADC represents a 57% voting interest; the other stockholders of ADC were, and remain, CDG and the former owner of the restaurants and certain advisors or affiliates thereof. DAKA has received a letter from two minority stockholders of ADC claiming that DAKA breached certain obligations to ADC by pursuing the Merger. DAKA believes this claim is without merit. In April 1994, Champps, which at the time operated one Champps-owned restaurant, completed an initial public offering of its common stock whereby it received approximately $7.2 million in net proceeds to be used to construct new Champps Americana restaurants. By August 1995, Champps had opened its fourth restaurant and had begun to analyze its funding alternatives for its 1996/1997 expansion plans. In August 1995, Champps retained Montgomery to: (i) assist Champps in exploring various methods of obtaining additional financing to continue its planned expansion of Champps-owned restaurants; and (ii) to advise Champps in connection with the possible acquisition of the development rights held by ADC. In late September 1995, DAKA and Champps began general discussions regarding a range of potential transactions, including the sale to Champps of CDVI's interest in ADC and a merger between DAKA and Champps. Over the course of several meetings between Champps and DAKA, the alternatives were discussed and, at a meeting on September 28, 1995, Mr. Vlahos communicated to Mr. Baumhauer that the Champps Board had directed him to negotiate to purchase CDVI's interest in ADC or to pursue a merger with DAKA. At such meeting, DAKA conveyed that it was not interested in the sale of CDVI's interest in ADC, but that a merger could be considered. In the following days, DAKA and Champps discussed the consideration to be given in a stock-for-stock merger and reached an understanding regarding the Exchange Ratio. On October 2, 1995 DAKA engaged Piper Jaffray to prepare a fairness opinion from a financial point of view to DAKA of the proposed exchange ratio at which Champps Common Stock would be exchanged for DAKA Common Stock pursuant to the proposed merger. Similarly, Champps asked Montgomery to prepare a fairness opinion from a financial point of view to the Champps stockholders. On October 5, 1995 DAKA convened a special meeting of the DAKA Board to discuss the potential Merger of a subsidiary of DAKA with and into Champps. During the meeting the proposed terms of the Merger as well as the benefits to DAKA were discussed and materials relating to the proposed transactions were reviewed in detail. After discussion it was determined that a second meeting of the DAKA Board be convened on October 9, 1995 to further discuss the transaction and to review the results of an analysis being finalized by Piper Jaffray. On October 5, 1995, Champps convened a special meeting of its Board of Directors to discuss the potential Merger. Montgomery presented the general terms of the Merger as well as an analysis of the consideration to be received by the stockholders of Champps therefrom. After discussion it was determined that the Special Committee be appointed to review the proposed Merger and Merger Agreement and determine if they should be approved. The Special Committee was formed, consisting of the six non-management directors of Champps. On October 9, 1995, DAKA held a second meeting of its Board of Directors to further discuss the terms of the Merger and to review and discuss Piper Jaffray's analysis as well as a draft of the fairness opinion prepared by Piper Jaffray. Upon review of such analysis and of the fairness opinion and further discussion of the terms of the Merger and benefits to DAKA, the DAKA Board unanimously voted to approve the Merger and the Merger Agreement and to recommend to stockholders that the issuance of shares of DAKA Common Stock pursuant to the Merger be approved at the upcoming annual stockholders' meeting. On October 9, 1995, the Special Committee appointed by the Champps Board reviewed and discussed the proposed Merger. The Special Committee after its discussion determined that a subsequent meeting should be held to further review the proposed Merger Agreement and Merger and determine if they should be approved. On October 10, 1995, the Special Committee reconvened and reviewed the terms of the Merger and after discussion unanimously voted to approve the Merger and Merger Agreement and to recommend to the full Champps Board that the Merger be approved. A meeting of the full Champps Board was convened on such date and by unanimous vote the actions of the Special Committee were ratified and it was agreed to recommend to stockholders that the Merger and Merger Agreement be approved at a special meeting of the stockholders. At the October 10, 1995 meeting, Montgomery delivered to the Champps Board its oral opinion, subsequently confirmed in writing as of such date and as of the date of this Joint Proxy Statement-Prospectus, that the consideration to be received by the stockholders of Champps in the Merger is fair to such stockholders from a financial point of view as of such dates. On October 10, 1995 the Merger Agreement and related agreements were signed and DAKA and Champps issued a joint press release announcing the Merger of DAKA and Champps as well as the key terms of the Merger. REASONS FOR THE CHAMPPS BOARD'S RECOMMENDATION In deciding to approve the Merger Agreement the Champps Board and Special Committee considered many factors, including, but not limited to, the terms of the Merger Agreement; the Champps Board's knowledge of the business and future prospects of DAKA; Champps' historical, current and potential future earnings and cash flow, its financial condition, and the prices at which Champps' Common Stock had been trading; the reputation of DAKA and its management; the historical, current and potential future earnings of DAKA and the effect thereof on the future value of DAKA's Common Stock; DAKA's financial condition, including the amount of indebtedness in relation to stockholder's equity; and the October 10, 1995 opinion of Montgomery that the consideration was fair to the Champps stockholders from a financial point of view as of such date. The Champps Board and Special Committee also considered the following: - Since its initial public offering in 1994, Champps has invested heavily in the development of new restaurants and the growth of its corporate structure. In order to stay on the level of new restaurant growth which is consistent with Champps' strategic business plan, Champps requires additional capital. The Merger would give Champps access to significant amounts of capital at a cost well below what Champps would be able to obtain on a stand-alone basis, allowing it to expand faster than it would have otherwise been able to. - The Merger would create significant operating benefits to Champps through access to DAKA's corporate infrastructure. Such access would enable Champps to reduce the cost of expansion and help it execute its business strategy. The Merger is expected to provide opportunities for increased efficiencies and cost savings as a result of the elimination of duplicative functions and to enhance purchasing power through the combined entities. - Currently only a small portion of outstanding Champps Stock is actively traded on the Nasdaq National Market. The Merger would give Champps stockholders a significant amount of liquidity, which did not previously exist, in a security of a company that is covered by the research analysts of several nationally recognized investment banking firms. - As of the day prior to the date of the Merger Agreement and for the average of the four week period preceding the date of the Merger Agreement the consideration to be paid by DAKA to the Champps stockholders represented an approximate 13.2% and 29.8% premium over the market price of Champps' Common Stock on such day and for such period, respectively, and that the consideration to be paid to Champps stockholders in the Merger would be received by Champps stockholders on a - The Merger will allow stockholders and employees of the combined companies to participate in potential future growth of DAKA, which will have substantially greater business and financial resources than each company individually. REASONS FOR THE DAKA BOARD'S RECOMMENDATION The DAKA Board believes that the Merger is in the best interests of DAKA's stockholders and has unanimously voted in favor of recommending approval of the issuance of DAKA Common Stock in connection with the Merger. The DAKA Board believes that the Champps Americana concept has significant growth potential, complements DAKA's existing business and provides DAKA with a strategic growth vehicle. Since its inception in 1984 in the Minneapolis/St. Paul area, the Champps Americana concept has generated average unit volumes significantly higher than the restaurant industry average. In addition, new restaurants opened in Texas, New Jersey and Indiana have demonstrated that the Champps Americana concept is viable outside of the Minneapolis/St. Paul area. The DAKA Board also believes that the Champps Americana concept, which combines generous portions of high quality food made from fresh ingredients, outstanding service and a vibrant, energetic atmosphere created by various forms of entertainment, has the potential to be one of the leaders in the large and rapidly expanding casual dining segment of the restaurant industry. The DAKA Board believes that DAKA's expertise in the areas of site selection, real estate development and construction, and finance will enable DAKA to rapidly expand the Champps concept in a cost effective manner. The DAKA Board also considered that, in connection with the Merger, Mr. Dean Vlahos, President and Chief Executive Officer of Champps and creator of the Champps Americana concept, has entered into a five-year employment agreement with DAKA whereby Mr. Vlahos will be the Chairman and Chief Executive Officer of Champps. The DAKA Board feels that Mr. Vlahos will make an important contribution to the successful expansion of the Champps Americana concept. In approving the Merger Agreement, the DAKA Board also considered the October 9, 1995 opinion of Piper Jaffray that the Exchange Ratio was fair to DAKA from a financial point of view. RECOMMENDATIONS OF THE BOARDS OF DIRECTORS OF DAKA AND CHAMPPS THE BOARD OF DIRECTORS OF EACH OF DAKA AND CHAMPPS UNANIMOUSLY BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THEIR RESPECTIVE COMPANIES AND STOCKHOLDERS. THE CHAMPPS BOARD UNANIMOUSLY RECOMMENDS THAT THE CHAMPPS STOCKHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT. THE DAKA BOARD UNANIMOUSLY RECOMMENDS THAT THE DAKA STOCKHOLDERS VOTE "FOR" APPROVAL OF THE ISSUANCE OF DAKA COMMON STOCK IN CONNECTION WITH THE MERGER. MANAGEMENT AND OPERATIONS AFTER THE MERGER Immediately following the Merger, Champps will be operated as a wholly-owned subsidiary of DAKA. The Merger Agreement provides that after the Merger the Champps Board will consist of William H. Baumhauer, Chairman and Chief Executive Officer of DAKA, Dean P. Vlahos, currently President and Chief Executive Officer of Champps, and one other person to be mutually designated by Messrs. Baumhauer and Vlahos. Mr. Vlahos has entered into an employment agreement with DAKA and Champps which provides for his employment for a term of five years after the Merger as Chairman of the Board, Chief Executive Officer and President of Champps. The terms of such employment agreement were negotiated after an understanding as to what the Exchange Ratio would be was determined and discussed with the Champps Board. Under such employment agreement, Mr. Vlahos will receive an annual base salary of $350,000 plus, subject to the achievement of performance targets relating to DAKA and to Champps, a performance bonus of between 50% and 100% of base salary. See "The DAKA Annual Meeting--Other Information--Employment Agreements" for a summary of the other terms of such employment agreement. The Merger will entail the combination of certain aspects of two companies that have operated independently and there can be no assurance that the operations, managements and personnel of DAKA and Champps will be compatible or that the combined businesses will not experience loss of key personnel. Champps is largely dependent upon the efforts of Mr. Vlahos and there can be no assurance that his services will continue to be available for the term of his employment agreement. DAKA currently intends to expand the number of Champps restaurants in operation subsequent to the Merger. In this regard, DAKA, as a result of its existing operations in the restaurant and foodservice industry, has in place a corporate infrastructure which includes, among other things, real estate development and site selection, construction supervision, human resources, and training functions which will be used to facilitate the expansion of the Champps concept upon consummation of the Merger. Subsequent to the Merger, DAKA and Champps will seek to capitalize on the existing corporate infrastructure of DAKA wherever possible and to eliminate duplicate functions where practical. However, due to the relatively small size of Champps' existing corporate infrastructure, the cost savings will be relatively small in relation to historical spending levels. However, DAKA expects that as Champps grows, the combined company will benefit through the ability of DAKA's existing corporate infrastructure to service such growth without a proportionate increase in overhead. In addition, Champps is expected to benefit through participation in DAKA's national purchasing and distribution programs, which combine the purchasing power of all of DAKA's businesses. The growth of the Champps concept subsequent to the Merger will be financed by DAKA. With total combined equity in excess of $60 million after the Merger, Champps will have access to significant amounts of capital at a lower cost than it could otherwise obtain on a stand-alone basis, as well as access to alternative financing sources such as sale-leaseback financing and increased landlord contributions as a result of enhanced creditworthiness. OPINION OF FINANCIAL ADVISOR TO CHAMPPS Pursuant to an engagement letter dated October 4, 1995 (the "Engagement Letter"), which superseded an earlier letter dated August 21, 1995, Champps retained Montgomery as its financial advisor in connection with the consideration by the Champps Board of a possible sale of Champps. Montgomery is a nationally recognized firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with merger transactions and other types of acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Champps selected Montgomery as its financial advisor on the basis of its experience and expertise in transactions similar to the Merger and its reputation in the restaurant and investment communities. At the October 10, 1995, meeting of the Champps Board, Montgomery delivered its oral opinion, subsequently confirmed in writing as of such date and as of the date of this Joint Proxy Statement-Prospectus, that the consideration to be received by Champps stockholders pursuant to the Merger was fair to Champps' stockholders, from a financial point of view, as of such dates. The amount of determined pursuant to negotiations between Champps and DAKA and not pursuant to recommendations of Montgomery. Champps gave no specific instructions to Montgomery in connection with its engagement and no limitations were imposed by Champps on Montgomery with respect to the investigations made or procedures followed in rendering its opinion. THE FULL TEXT OF MONTGOMERY'S WRITTEN OPINION TO THE CHAMPPS BOARD (THE "MONTGOMERY OPINION") DATED ON OR ABOUT THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS ATTACHED HERETO AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ CAREFULLY AND IN ITS ENTIRETY IN CONNECTION WITH THIS JOINT PROXY STATEMENT-PROSPECTUS. THE FOLLOWING SUMMARY OF MONTGOMERY'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. MONTGOMERY'S OPINION IS ADDRESSED TO THE CHAMPPS BOARD AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY CHAMPPS STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. IN FURNISHING ITS OPINION, MONTGOMERY DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER, OR THAT ITS OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE SECURITIES ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER, AND STATEMENTS TO SUCH EFFECT ARE INCLUDED IN THE TEXT OF MONTGOMERY'S WRITTEN OPINION. In connection with its opinions, Montgomery, among other things: (i) reviewed certain publicly available financial and other data with respect to Champps and DAKA, including the consolidated financial statements for recent years and interim periods to July 2, 1995 and July 1, 1995, respectively, and certain other relevant financial and operating data relating to Champps and DAKA made available to Montgomery from published sources and from the internal records of Champps and DAKA; (ii) reviewed a preliminary draft of the Merger Agreement provided to Montgomery by Champps; (iii) reviewed certain historical market prices and trading volumes of Champps Common Stock and DAKA Common Stock as reported on the Nasdaq National Market; (iv) compared Champps and DAKA from a financial point of view with certain other companies in the restaurant industry that Montgomery deemed to be relevant; (v) considered the financial terms, to the extent publicly available, of selected business combinations of companies in the restaurant industry that Montgomery deemed to be comparable, in whole or in part, to the Merger; (vi) reviewed and discussed with representatives of the management of Champps and DAKA certain information of a business and financial nature regarding Champps and DAKA, including financial forecasts and related assumptions (a) of Champps for 1996 and 1997, furnished to Montgomery by Champps management, (b) of DAKA for fiscal 1996, furnished to Montgomery by DAKA management, and (c) of DAKA for fiscal 1997, obtained by Montgomery from securities analysts; (vii) made inquiries regarding and discussed the Merger and the Merger Agreement and other matters related thereto with Champps' counsel; and (viii) performed such other analyses and examinations as Montgomery deemed appropriate. In connection with its review, Montgomery assumed and relied upon the accuracy and completeness of the foregoing information and did not assume any responsibility to independently verify such information. With respect to the financial forecasts for Champps and DAKA provided to Montgomery by their respective managements, and, in the case of the DAKA forecasts for fiscal 1997, by securities analysts, Montgomery assumed for purposes of its opinions that the forecasts were reasonably prepared on bases reflecting the best available estimates and judgments of the respective managements of Champps and DAKA and such analysts at the time of preparation as to the future financial performance of Champps and DAKA and that they provided a reasonable basis upon which Montgomery could form its opinion. Neither Champps nor DAKA publicly discloses internal management forecasts of the type provided to Montgomery by their respective managements in connection with Montgomery's review of the Merger. Such forecasts were not prepared with a view toward public disclosure. In addition, such forecasts and the forecasts provided by the securities analysts with respect to DAKA were based upon numerous variables and assumptions that are inherently uncertain, including, without limitation, factors related to general economic and competitive conditions. Accordingly, actual results could vary significantly from those set forth in such forecasts. Montgomery has assumed no liability for such forecasts. Montgomery also assumed that there were no material changes in Champps' or DAKA's assets, financial condition, results of operations, business or prospects since the respective dates of the last financial statements made available to Montgomery. Montgomery assumed that the Merger will be consummated in a manner that complies in all respects with the the Securities Act and the Exchange Act and all other applicable federal and state statutes, rules and regulations. In addition, Montgomery did not assume responsibility for making an independent evaluation, appraisal or physical inspection of the assets or individual properties of Champps or DAKA, nor was Montgomery furnished with any such appraisals. Further, Montgomery's oral opinion was based on economic, monetary and market conditions in effect on, and the information made available to Montgomery as of, October 10, 1995. Montgomery also assumed, with the consent of Champps management, that the Merger will be consummated in accordance with the terms described in the Merger Agreement without any amendments thereto, and without waiver by Champps or DAKA of any of the conditions to their respective obligations thereunder. Set forth below is a brief summary of the report presented by Montgomery to the Champps Board on October 5, 1995 in connection with the Champps Board's consideration of the Merger. Contribution Analysis. Montgomery analyzed the contribution of each of Champps and DAKA to the projected revenues, earnings before interest and taxes ("EBIT") and net income of the pro forma combined companies for fiscal years 1995 and 1996. This analysis showed, among other things, that based on pro forma combined income statements for the combined companies, Champps would have contributed 3.7% and 8.4% of the total revenues, 1.9% and 6.5% of the EBIT and 4.4% and 7.1% of the net income, respectively, of the combined companies in the periods described above. Assuming an exchange ratio of .40 shares of DAKA Common Stock for each share of Champps Common Stock, at the closing, Champps stockholders would own approximately 18.8% of the combined companies. Dilution Analysis. Using estimates prepared by Champps and DAKA management and analysts' estimates, Montgomery compared the estimated fiscal year 1996 and 1997 earnings per share of DAKA Common Stock on a stand alone basis to the estimated fiscal year 1996 and 1997 earnings per share of the common stock of the pro forma combined companies, assuming (a) an exchange ratio of .40 shares of DAKA Common Stock for each share of Champps Common Stock and (b) that pro forma general and administrative expenses related to Champps would be reduced by 50% in all periods. Based on such analysis, the proposed transaction would be dilutive to DAKA's estimated earnings per share by 8.9% ($0.14 per share) and 2.6% ($0.05 per share) in fiscal 1996 and 1997, respectively. Analysis of Selected Comparable Publicly Traded Companies. Montgomery reviewed certain publicly available financial information of certain high growth companies in the restaurant industry, including Applebee's, Apple South, Boston Chicken, Inc., Cheesecake Factory, Dave & Buster's, Landry's Seafood Restaurants, Lone Star Steakhouse, Outback Steakhouse, Papa John's International and Rock Bottom Restaurants (the "Comparable Companies"). Montgomery calculated multiples for the Comparable Companies of aggregate value (defined for this purpose as total equity market capitalization plus total debt minus cash and cash equivalents) to latest twelve months ("LTM") revenues, aggregate value to LTM earnings before interest, taxes, depreciation and amortization ("EBITDA") and aggregate value to LTM earnings before interests and taxes ("EBIT"). This analysis showed average multiples of 3.7x, 17.7x and 24.2x, respectively, as compared to multiples for the per share value of the consideration (calculated based upon assumed values of the consideration of $11.00, $12.00, $13.00 and $14.00 per share of Champps Common Stock) to Champps LTM revenues, LTM EBITDA and LTM EBIT of 4.31x, 46.1x and 157.6x, 4.72x, 50.6x and 172.7x, 5.14x, 55.0x and 187.8x, and 5.55x, 59.4x and 202.9x, respectively. Based upon the $33.25 per share closing price of DAKA Common Stock on October 9, 1995 and an exchange ratio of .40 shares of DAKA Common Stock for each share of Champps Common Stock, the per share value of the consideration as of October 9, 1995 would have been $13.30. Analysis of Selected Comparable Acquisition Transactions. Montgomery also reviewed the financial terms of 55 restaurant industry acquisitions which Montgomery deemed to be similar to the Merger (the "Comparable Acquisitions"). The Comparable Acquisitions included (listed below as "acquired"/"acquiror"): DF&R Restaurants/Apple South; Baltimore Bagel Co./Progressive Bagel Concepts, Inc. (Boston Chicken); Maggiano's/Brinker International, Inc.; Lee's Famous Recipe/RTM Restaurant Group; Marcus Corp. (Applebee's Division)/Apple South; Brackman Bros., Inc./Progressive Bagel Con- cepts, Inc. (Boston Chicken); Souper Salad, Inc./Saunders Karp & Co.; Innovative Restaurant Concepts/Applebee's; Long John Silver's Restaurants/Triarc Companies (canceled); Pub Ventures of New England/Applebee's; Ground Round Restaurants/Investor Group (canceled); On the Border Cafes/Brinker International; D'Angelo's/PepsiCo. Inc.; St. Louis Bread Co./Au Bon Pain Co., Inc.; Chevy's/PepsiCo., Inc.; NRH Corp. (Tony Roma's)/National Pizza Co.; Foodmaker Inc. (Chi Chi's)/Investor Group; Two Pesos-Mexican Restaurant/Taco Cabana, Inc.; Uno Restaurant Corp./Morrison Restaurants, Inc. (canceled); Carl Karcher/Investment Group (canceled); TW Holdings/KKR; TaCasita & Sombrero Rosa/Taco Cabana; California Pizza Kitchen, Inc./PepsiCo. Inc.; Del Taco (Taco Villa)/PepsiCo. Inc.; Zipps Drive Thru Inc./Rally's Inc.; Bayport Restaurant Group/Acquisition Group; Pizza Management/PepsiCo. Inc.; Bob's Big Boy/Allie's/Restaurant Enterprises Group; Kentucky Fried Chicken (Franchises)/PepsiCo. Inc.; Sizzler Restaurants/Collins; Paragon Steak Houses/Kyotaru Co. Ltd.; Restaurant Associates/Kyotaru Co. Ltd.; Roy Rogers/Hardee's Food Systems; Dunkin' Donuts/Allied-Lyons PLC; Skipper's Inc./National Pizza; Jerrico/Investor Group; Ground Round (Hanson's)/International Proteins; TW Services/Coniston; Winchell's Donut House/Shato Holdings Ltd.; TGI Fridays/Carlson; S&A Restaurants/Investor Group; Franchise Enterprises/Investor Group; Church's Fried Chicken/Copeland; Foodmaker, Inc./Gibbons Green, van Amerongen; Restaurant Management Svc./Golder, Thoma & Cressey; Shoney's South/TPI Enterprises; Chi Chi's Foodmaker, International King's Table/Horn & Hardard Co.; Hamburger Hamlets/Weatherly Restaurant Group; Calny's/PepsiCo. Inc.; Restaurant Assoc. Industry/Management; Rusty Pelican/Paragon Restaurant Group; Denny's/TW Services; and Pizza Inn/Pantera Corp. For the Comparable Acquisitions, Montgomery calculated, among other things, the aggregate consideration paid in such transactions as a multiple of the acquired company's LTM revenues and LTM EBITDA. Such calculations yielded the following median and mean multiples: LTM revenue -- median of 0.8x and mean of 1.0x; and LTM EBITDA -- median of 7.5x and mean of 8.8x. The comparable multiples for the Merger (calculated based upon assumed values of the consideration of $11.00, $12.00, $13.00 and $14.00 per share of Champps Common Stock), were as follows: LTM revenue -- 4.31x, 4,72x, 5.14x and 5.55x, respectively; and LTM EBITDA -- 46.1x, 50.6x, 55.0x and 59.4x, respectively. No company or transaction utilized in the above analysis as a comparison is identical to Champps, DAKA or the Merger. Accordingly, an analysis of the results of the foregoing is not purely mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of Champps and DAKA and other factors that could affect the public trading value of such companies or any company to which they or the Merger are being compared. In connection with its written opinion dated on or about the date of this Joint Proxy Statement-Prospectus, Montgomery performed procedures to reconfirm, as necessary, certain of the analyses described above and reviewed the assumptions on which such analyses were based and the factors considered in connection therewith. The summary set forth above does not purport to be a complete description of the presentation by Montgomery to the Champps Board or of the analyses performed by Montgomery. The preparation of a fairness opinion necessarily is not susceptible to partial analysis or summary description. Montgomery believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses and of the factors considered, without considering all analyses and factors, would create an incomplete view of the process underlying the analyses set forth in its presentation to the Champps Board. In addition, Montgomery may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the ranges of valuations resulting from any particular analysis described above should not be taken to be Montgomery's view of the actual value of Champps or the combined companies. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis. In performing its analyses, Montgomery made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Champps or DAKA. The analyses performed by Montgomery are not necessarily indicative of actual values actual future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as part of Montgomery's analysis of the fairness of the Merger to the stockholders of Champps and were provided to the Champps Board in connection with the delivery of Montgomery's opinions. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities may trade at the present time or at any time in the future. Montgomery used in its analyses various projections of future performance prepared by the managements of Champps and DAKA and, in the case of DAKA, by securities analysts. The projections are based on numerous variables and assumptions which are inherently unpredictable and must be considered to be not certain of occurrence as projected. Accordingly, actual results could vary significantly from those set forth in such projections. As described above, Montgomery's opinions and presentation to the Champps Board were among the many factors taken into consideration by the Champps Board in making its determination to approve the Merger. Pursuant to the Engagement Letter, Champps engaged Montgomery to act as its financial advisor in connection with the Merger. Montgomery's fee will be equal to 3% of the first $10 million in consideration involved in the sale, 2% of the next $10 million and 1% of any amount over $20 million, determined as of the closing. Champps will be obligated to pay Montgomery its fee contingent upon the consummation of the transactions contemplated by the Merger Agreement. For example, if the Merger had been consummated on December 20, 1995, Champps estimates that the value of the consideration involved in the transaction would have been approximately $54,000,000 and that Montgomery's fee would have been approximately $840,000. Champps has also agreed to reimburse Montgomery for its reasonable out-of-pocket expenses, regardless of whether the Merger is consummated. Pursuant to a separate letter agreement, Champps has agreed to indemnify Montgomery, its affiliates, and their respective partners, directors, officers, agents, consultants, employees and controlling persons against certain liabilities, including liabilities under the federal securities laws. OPINION OF FINANCIAL ADVISOR TO DAKA DAKA retained Piper Jaffray solely in connection with the delivery of an opinion to the DAKA Board of the fairness, from a financial point of view, to DAKA of the Exchange Ratio. Piper Jaffray has delivered to the DAKA Board its written opinions respectively dated October 9, 1995 and on or about the date of this Joint Proxy Statement-Prospectus that as of those dates the Exchange Ratio was fair, from a financial point of view, to DAKA. Piper Jaffray is an investment banking firm engaged, among other things, in the valuation of businesses and their securities in connection with mergers and acquisitions, underwriting and secondary distributions of securities, private placements and valuations for estate, corporation and other purposes. Piper Jaffray was selected to prepare fairness opinions based upon its experience and expertise in transactions similar to the Merger and its reputation in the restaurant and investment banking industries. Except for rendering its opinions as to the fairness, from a financial point of view, of the Exchange Ratio, Piper Jaffray has not otherwise acted as financial adviser to DAKA or the DAKA Board in connection with the Merger and did not participate in the discussions or negotiations with respect to the Merger. In the ordinary course of its business, Piper Jaffray actively trades DAKA Common Stock for its own account and for the accounts of its customers, and, therefore, may from time to time hold a long or short position in such securities. Piper Jaffray also provides research coverage for DAKA. DAKA gave no specific instructions to Piper Jaffray in connection with its engagement and no limitations were imposed by DAKA on Piper Jaffray with respect to the investigations made or procedures followed in rendering its opinions. THE FULL TEXT OF THE OPINION OF PIPER JAFFRAY DATED ON OR ABOUT THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS (THE "PIPER JAFFRAY OPINION") IS ATTACHED HERETO AT APPENDIX C TO THIS JOINT PROXY STATEMENT-PROSPECTUS. THE FOLLOWING SUMMARY OF THE PIPER JAFFRAY OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE PIPER JAFFRAY OPINION. DAKA STOCKHOLDERS ARE URGED TO ITS ENTIRETY FOR A COMPLETE DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW UNDERTAKEN. In arriving at its opinions, Piper Jaffray reviewed, analyzed and relied upon material bearing upon the financial and operating condition and prospects of DAKA and Champps and material prepared in connection with the Merger, and considered such financial and other factors as it deemed appropriate under the circumstances, including, among other things, the following: (i) a draft dated October 8, 1995 of the Agreement and Plan of Merger by and between DAKA, Champps and CEI Acquisition Corp.; (ii) the audited financial information for Champps for the three years ended December 31, 1994; (iii) the financial information for Champps for the six months ended July 2, 1995; (iv) the audited financial information for DAKA for the three years ended July 1, 1995; (v) the five-year financial forecast for DAKA furnished by DAKA management; (vi) the five-year financial forecast for Champps furnished by Champps management; (vii) the historical pricing and trading activity for DAKA and Champps common stock; and (viii) such other studies, analyses and inquiries as Piper Jaffray deemed appropriate. Piper Jaffray also held discussions with the senior management of DAKA and Champps concerning their past and current business operations, the background and rationale for the proposed Merger, the financial condition, operating performance, balance sheet characteristics and prospects of their respective businesses independently and the financial and operating prospects for the combined company after consummation of the proposed Merger. In addition, in connection with rendering its opinion dated the date of this Joint Proxy Statement-Prospectus, Piper Jaffray reviewed the executed Agreement and Plan of Merger dated October 10, 1995 and the Registration Statement which included this Joint Proxy Statement-Prospectus. The Piper Jaffray Opinions, which were delivered for use and considered by the DAKA Board, are directed only to the fairness, from a financial point of view, of the Exchange Ratio, do not address the value of a share of DAKA Common Stock, do not address DAKA's underlying business decision to participate in the Merger and do not constitute a recommendation to any DAKA stockholder as to how such stockholder should vote with respect to the Merger. Piper Jaffray does not admit that it is an expert within the meaning of the term "expert" as used in the Act and the rules and regulations promulgated thereunder, or that its opinions constitute a report or valuation within the meaning of Section 11 of the Act and the rules and regulations promulgated thereunder. As set forth in its opinions, Piper Jaffray relied upon and assumed the accuracy and completeness of the financial and other information provided to it or publicly available and did not attempt to independently verify the same. With respect to financial forecasts, Piper Jaffray assumed that such forecasts were reasonably prepared on a basis reflecting the best currently available estimates and judgements of the respective managements of DAKA and Champps that such projections and forecasts will be realized in the amounts and in the time periods currently estimated and that the Merger would be accounted for as a pooling of interests under generally accepted accounting principles. Neither DAKA nor Champps publicly discloses internal management forecasts of the type provided to Piper Jaffray in connection with Piper Jaffray's review of the Merger. Such forecasts were not prepared with a view toward public disclosure. In addition, such forecasts were based upon numerous variables and assumptions that are inherently uncertain, including, without limitation, factors related to general economic and competitive conditions. Accordingly, actual results could vary significantly from those set forth in such forecasts. Piper Jaffray has assumed no liability for such forecasts. Piper Jaffray also assumed that there were no material changes in DAKA's or Champps' assets, financial condition, results of operations, business or prospects since the respective dates of the last financial statements made available to Piper Jaffray. Piper Jaffray assumed that the Merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act and the Exchange Act and all other applicable federal and state statutes, rules and regulations. Piper Jaffray did not perform any appraisals or valuations of specific assets of DAKA or Champps and has not expressed any opinion regarding the liquidation value of DAKA or Champps. Piper Jaffray believes that its analyses must be considered as a whole and that selecting portions of its analyses without considering all factors and analyses would create an incomplete view of the analyses and process underlying their opinions. Any estimates contained therein are not necessarily indicative of actual values, which may be significantly more or less favorable than as set forth therein. No company or transaction used as a comparison in the analyses is identical to DAKA or Champps or to the Merger. Additionally, estimates of the value of the businesses do not purport to be appraisals or necessarily reflective of the prices at which the business actually may be sold. Because such estimates are inherently subject to uncertainty, neither the DAKA Board, Piper Jaffray or any other person assumes responsibility for the accuracy of such estimates. Based on this information, Piper Jaffray performed a variety of financial and comparative analyses, including those summarized below, which it discussed with the DAKA Board on October 9, 1995. Piper Jaffray also considered the following qualitative strategic benefits of the Merger as articulated by the management of DAKA: (i) the importance to DAKA of owning a second restaurant concept that is positioned for growth; (ii) that Champps is an attractive, casual dining concept with high unit volume and strong returns on capital and is positioned in an attractive segment of the restaurant market; (iii) the experience and record of Mr. Dean Vlahos, President and founder of Champps. Piper Jaffray confirmed the appropriateness of its reliance on the described analyses in connection with its opinion dated the date of this Joint Proxy Statement-Prospectus by performing procedures to update certain of such analyses and reviewing the assumptions on which such analyses were based and the factors considered in connection therewith. The calculations referred to below were made in connection with rendering the Piper Jaffray Opinions. Discounted Cash Flow Analysis. Piper Jaffray performed a discounted cash flow analysis to calculate a range of theoretical values for Champps based on (i) the net present value of projected free cash flows and (ii) a terminal value which estimates the value of Champps in the year 2000 by applying certain multiples of earnings before interest and taxes. Piper Jaffray assumed, among other things, discount rates of 16% to 20%, which Piper Jaffray deemed appropriate to the risk associated with such projected cash flows, and terminal value multiples of earnings before interest and taxes of 8.0x to 10.0x. Piper Jaffray performed two analyses, with and without the potential cost savings that may result from the Merger (the "Synergies"), on the operating projections prepared by the management of Champps. These Synergies were estimated by management of DAKA with input from Champps management. The analysis without Synergies resulted in an implied equity valuation range for Champps of $45.9 million to $71.4 million. The analysis with Synergies calculated an implied valuation range of $58.3 million to $89.1 million. Piper Jaffray considered this analysis to provide an important justification for fairness, from a financial point of view, of the Exchange Ratio. Contribution Analysis. Piper Jaffray reviewed DAKA's and Champps' historical financial information for the twelve months ended June 30, 1995 and the financial projections for the years 1996 through 2000. For these periods, Piper Jaffray analyzed the contributions to revenue, operating income, pre-tax income, net income and ownership of DAKA and Champps to the combined company. This analysis shows that Champps would have contributed 4.4% and 4.7% to combined revenues and net income, respectively, in fiscal 1995. In fiscal 2000, the Champps contribution increases to 18.2% and 23.8% of revenues and net income, respectively. Assuming an Exchange Ratio of 0.40 shares of DAKA Common Stock for each share of Champps Common Stock, Champps stockholders will account for approximately 18.7% of ownership of the combined company. Piper Jaffray considered this analysis to provide an important justification for fairness, from a financial point of view, of the Exchange Ratio. Premium Analysis. Piper Jaffray reviewed information relating to premiums over trading price paid in mergers ranging in price from $20 million to $100 million which were completed between January 1, 1994 and October 9, 1995. The search of mergers covered the acquisition of 100% of the stock of public companies in all SIC codes except banks, REITs and insurance companies. Based on its analysis of the selected mergers, Piper Jaffray derived a median range from 31.7% premium above the trading price on the day prior to announcement (compared to 13.2% for Champps) to 35.6% premium above the trading price four weeks prior to the announcement (compared to 29.8% for Champps). Piper Jaffray considered this analysis to provide an important justification for fairness, from a financial point of view, of the Exchange Ratio. Combined Company Pro Forma Dilution Analysis. Piper Jaffray reviewed the pro forma impact of the Champps acquisition on DAKA projected earnings per share, comparing DAKA's pre-Merger earnings per share to the earnings per-share following the Merger reflecting the addition of Champps' earnings and the effect of the Synergies, together with the issuance of DAKA Merger Shares in exchange for Champps shares. Based on its analysis, Piper Jaffray concluded that the combination would be dilutive to DAKA in calendar 1996 and fiscal 1996 and 1997 with Synergies by (9.9%), (16.5%) and (3.6%), respectively, and without Synergies it would be dilutive in calendar 1996 and fiscal 1996, 1997 and 1998 by (11.5%), (17.4%), (5.8%) and (1.1%), respectively. Piper Jaffray concluded the combination would be accretive in fiscal 1998, 1999 and 2000 with Synergies by 2.0%, 7.4% and 12.0%, respectively, and without Synergies it would be accretive in fiscal 1999 and 2000 by 3.0% and 6.4%, respectively. Piper Jaffray considered this analysis to provide an important justification for fairness, from a financial point of view, of the Exchange Ratio. Comparable Acquisition Analysis. Piper Jaffray analyzed selected restaurant industry transactions deemed comparable to the Merger, including selected restaurant industry mergers. These transactions included completed and pending transactions since January 1, 1992 whereby the target was 100% acquired. This search yielded 16 comparable transactions (listed below in acquired/acquiror format), including: DF&R Restaurants Inc./Apple South Inc.; Tim Hortons/Wendys; Maggiano's/Brinker International Inc.; Rio Bravo/Applebee's International; Tia's Inc./Morrison Restaurants Inc.; Marco's Mexican Restaurants/Billy Blues Food Corp.; Patrizio Restaurants Inc./Sixx Holdings Inc.; On the Border Cafes Inc./Brinker International Inc.; St. Louis Bread Co./Au Bon Pain Co. Inc.; Klact Inc., Nack Inc./Back Yard Burgers Inc.; Chevys Mexican Restaurant/Taco Bell Corp (PepsiCo Inc.); NRII Corp/National Pizza Co.; Clay-Way Corp/Checkers Drive-In Restaurants; Smith Enterprises of Tampa Bay/Checkers Drive-In Restaurants; California Pizza Kitchen/PepsiCo., Inc.; Carmella's Cafe/Magic Restaurants Inc. Based on its analysis of the comparable transactions, Piper Jaffray derived a mean and median multiple of company value to revenues of 1.5x and 1.5x, respectively (compared to Champps 1995 estimated sales multiple of 3.3x and last twelve (12) months sales multiple of 4.5x), of company value to operating income of 18.2x and 16.6x, respectively (Champps multiple not meaningful), and of equity value to net income of 30.4x and 20.5x, respectively (Champps multiple not meaningful). Piper Jaffray, however, advised the DAKA Board that, in its opinion, it did not believe that such comparable transaction analysis was material in their review of fair value in analyzing the Merger because of the relatively small size of Champps and because of the limitations and analyzing multiples of operating and net income. Comparable Public Company Analysis. Piper Jaffray analyzed information relating to 13 publicly traded high growth companies which operate in the casual dining segment of the restaurant industry, including; Applebee's International Inc.; Apple South Inc.; Boston Chicken Inc.; Brinker Intl Inc.; Cheesecake Factory Inc.; Dave & Busters, Inc.; Landry's Seafood Restaurant; Lone Star Steakhouse Inc.; Outback Steakhouse Inc.; Papa Johns International; Rain Forest Cafe; Rock Bottom Restaurants; and Starbucks Corp. Based on its analysis, Piper Jaffray derived a mean and median price/earnings multiple (i) for the latest twelve (12) months earnings per share (the "LTM EPS") of 34.9x and 34.0x, respectively, (ii) for calendar 1995 estimated earnings per share ("1995 EPS") of 31.3x and 30.7x, respectively, and (iii) for calendar 1996 estimated earnings per share ("1996 EPS") of 22.6x and 23.5x, respectively. Piper Jaffray also derived a mean and median multiple of price to latest twelve (12) months revenues ("Price/Revenues") of 4.1x and 2.7x respectively, and of price to latest twelve (12) months operating income ("Price/Operating Income") of 24.6x and 24.2x, respectively. Champps' LTM EPS, 1995 EPS and Price/Operating Income multiples were not considered meaningful; its 1996 EPS and Price/Revenues multiples were 37.1x and 4.5x, respectively. Piper Jaffray, however, advised the DAKA Board that, in its opinion, it did not consider such comparable company analysis to be material in its analysis of fair value because of the small size of Champps and the limitations of analyzing multiples of operating and net income. As compensation for its services, Piper Jaffray has received from DAKA a fee of $275,000 of which $50,000 was paid at the time of the execution of the engagement letter with Piper Jaffray, $175,000 was paid upon delivery of its opinion dated October 9, 1995 and $50,000 was payable upon delivery of its opinion dated the date of this Joint Proxy Statement-Prospectus. This fee was not contingent upon the ability of Piper Jaffray to render its opinions relating to the Merger. DAKA also agreed to reimburse Piper Jaffray for its reasonable out-of-pocket expenses, including the fees and disbursements of its counsel, and to indemnify Piper Jaffray against certain liabilities, including liabilities under the federal securities laws. THE TERMS OF AND CONDITIONS TO THE MERGER ARE CONTAINED IN THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS JOINT PROXY STATEMENT-PROSPECTUS AS APPENDIX A AND INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING DESCRIPTION OF THE TERMS OF AND CONDITIONS TO THE MERGER IS QUALIFIED IN ITS ENTIRETY BY, AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE MERGER AGREEMENT. EFFECTIVE TIME OF THE MERGER; CLOSING DATE If the Merger Agreement is adopted by the requisite vote of Champps stockholders and the issuance of DAKA Common Stock in connection with the Merger is approved by the requisite vote of DAKA stockholders, and the other conditions to the Merger are satisfied or, where permissible, waived, the Merger will be consummated and become effective when a certificate of merger is filed with the Secretary of State of the State of Minnesota or at such later date and time as is specified in such certificate of merger, (the date and time of such filing, or such later date or time as set forth therein, the "Effective Time"). Under the terms of the Merger Agreement, the Merger will be consummated as soon as practicable (and in any event within two business days) after the satisfaction or waiver of all of the conditions to the Merger set forth in the Merger Agreement. DAKA and Champps currently anticipate that upon approval of the proposals presented at the Stockholders Meetings, all conditions to the Merger will have been satisfied or waived and that the Effective Time will occur on the date of the Stockholders Meetings or the next business day. CONVERSION OF SHARES OF CHAMPPS STOCK PURSUANT TO MERGER; TREATMENT OF OPTIONS At the Effective Time, each outstanding share of Champps Common Stock will be converted into the right to receive four-tenths (.40) of one share of DAKA Common Stock, subject to possible adjustment to forty-three hundredths (.43) of one share of DAKA Common Stock if the average closing price per share of DAKA Common Stock as reported on the Nasdaq National Market over the twenty trading days immediately preceding the second trading day prior to the closing date of the Merger is less than $30.00 per share, or thirty-seven hundredths (.37) of one share of DAKA Common Stock if the average closing price per share of DAKA Common Stock as reported on the Nasdaq National Market over the twenty trading days immediately preceding the second trading day prior to the closing date of the Merger (the "Determination Period") is more than $35.00. DAKA and Champps currently anticipate that the Determination Period will end one or two business days prior to the Stockholders Meetings. Stockholders of DAKA and Champps can, beginning one or two business days prior to the date of the Stockholders Meetings, call the following toll-free number established by DAKA to learn the determination of the Exchange Ratio: 1-800-572-8925. As of the Champps Record Date there were 4,953,774 shares of Champps Common Stock outstanding. No fractional shares of DAKA Common Stock will be issued in the Merger, and in lieu thereof holders will be paid cash in accordance with the terms of the Merger Agreement. After the Effective Time, all of the 205,500 options of Champps granted under employee stock option plans and outstanding as of the Champps Record Date and all of the 120,000 warrants to purchase Champps Common Stock outstanding as of the Champps Record Date (in each case to the extent such options or warrants are not exercised or expire prior to the Effective Time) will continue to have and be subject to the same terms and conditions except that (i) each such option and warrant will be exercisable for that number of shares of DAKA Common Stock which equals the number of shares of Champps Common Stock covered by such option or warrant immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded down to the nearest whole number, and (ii) the exercise price per share under each such option and warrant shall equal the exercise price before the Merger divided by the Exchange Ratio and rounded down to the nearest cent. Upon the consummation of the Merger, Merger Subsidiary will cease to exist as a separate corporation and all of the business, assets, liabilities and obligations of Merger Subsidiary will be merged with and into Champps with Champps remaining as the Surviving Corporation. Pursuant to the Merger Effective Time (i) the Articles of Incorporation of Merger Subsidiary shall be the Articles of Incorporation of the Surviving Corporation except that the name of the Surviving Corporation shall be "Champps Entertainment, Inc." and (ii) the By-laws of Merger Subsidiary shall be the By-laws of the Surviving Corporation. Immediately following the Merger, Champps will be operated as a wholly-owned subsidiary of DAKA. CONDUCT OF BUSINESS PENDING THE MERGER Pursuant to the Merger Agreement, each of Champps and DAKA has agreed that, prior to the Effective Time, it will carry on its respective businesses in the ordinary course, use its reasonable best efforts to preserve intact its present business organization and keep available the services of its present officers and employees, keep in effect insurance policies in coverage amounts not less than those in effect as of the date of the Merger Agreement, preserve and protect its proprietary rights, and preserve its relationships with customers, suppliers, licensors and other persons with which it has significant business dealings. In addition, each of Champps and DAKA have agreed that, except as contemplated by the Merger Agreement, prior to the Effective Time it will not, directly or indirectly, do any of the following without the prior written consent of the other: (i) declare dividends or distributions in respect of any of its capital stock, or split or reclassify any of its capital stock, or repurchase, redeem or otherwise acquire any of its capital stock; (ii) authorize for issuance, issue or commit to issue any shares of stock of any class or any other securities other than the issuance of capital stock in connection with (a) the exercise of options, warrants or other similar rights outstanding as of the date of the Merger Agreement or (b) options granted under DAKA's stock option plans after the date of the Merger Agreement; (iii) in the case of Champps, acquire or encumber (other than in connection with the opening of new Company-owned restaurants) or sell, lease, transfer or dispose of any assets other than in the ordinary course of business; (iv) in the case of Champps, other than in connection with the activities consistent with expansion of its restaurant operations, incur any long-term indebtedness for borrowed money; guarantee any indebtedness; issue or sell debt securities or warrants or rights to acquire any debt securities; guarantee or otherwise become liable for the debt of others; make any loans, advances or capital contributions; encumber any material assets; or create or suffer any material lien thereupon other than, in each case, in the ordinary course of business consistent with prior practice, or incur any short-term indebtedness for borrowed money except for credit facilities in existence on the date of the Merger Agreement; (v) in the case of Champps, pay or satisfy any claims or liabilities, other than in the ordinary course of business consistent with past practice, in connection with the Merger Agreement, and with respect to liabilities reflected or reserved against in, or contemplated by, its consolidated financial statements; (vi) change any of the accounting principles or practices used by it (except as required by generally accepted accounting principles); (vii) in the case of Champps, increase the compensation payable to its executive officers or employees, except for increases in the ordinary course of business, or take certain other actions with respect to severance pay or benefit plans; (viii) amend its charter or by-laws; (ix) in the case of Champps, other than in connection with activities consistent with expansion of its restaurant operations, enter into a new agreement outside of the ordinary course of business involving payment by Champps of $10,000 or more or amend any existing agreement in a manner that could reasonably be expected to have a materially adverse effect on its business, results of operations or financial condition; (x) in the case of Champps, other than in connection with activities consistent with expansion of its restaurant operations, enter into or modify or amend any lease, license agreement, franchise agreement or development agreement; (xi) knowingly engage in any transaction or cause any fact or circumstance which would preclude accounting for the Merger as a pooling of interests; or (xii) enter into an agreement to take any of the foregoing actions or take any action that would result in any of the conditions to the Merger not being satisfied. In order to allow Champps to continue to develop and build restaurants, DAKA agreed in the Merger Agreement to provide loans to Champps up to the aggregate principal amount of $3,000,000 bearing interest at a fixed rate of 10% per annum and maturing on October 10, 2000 and upon such other terms as are normal and customary for loans of this type. On December 19, 1995 DAKA entered into a loan agreement (the "DAKA Loan Agreement") with Champps Entertainment of Wayzata, Inc. ("CEW"), a newly formed wholly-owned subsidiary of Champps to which Champps had previously transferred its recently completed restaurant in Irvine, California, and rights to develop a new restaurant in Reston, Virginia. The loans are guaranteed by Champps and secured by the Irvine and Reston restaurants and the capital stock of CEW. As of the date of this Joint Proxy Statement-Prospectus, approximately $710,000 has been loaned by DAKA to CEW to refund costs incurred by Champps to build the Irvine restaurant. Additional loans will be made to CEW as required to fund construction of the Reston restaurant. If the Merger Agreement is terminated, DAKA will thereafter not be obligated to make additional loans, but loans made prior to such termination will remain outstanding under the terms of the DAKA Loan Agreement. These loans should provide the expansion capital required to fund Champps' construction efforts through June 1996. CONDITIONS TO CONSUMMATION OF THE MERGER The respective obligations of DAKA, Merger Subsidiary and Champps to consummate the Merger are subject to satisfaction at or prior to the Effective Time of a number of conditions, including but not limited to the following, any or all of which may be waived, in whole or in part, to the extent permitted by applicable law: (a) The Registration Statement on Form S-4 pertaining to the Merger shall have been declared effective by the Securities and Exchange Commission. (b) The Merger Agreement shall have been adopted by the requisite vote of the Champps stockholders, and the issuance of the DAKA Merger Shares pursuant to the Merger Agreement shall have been approved by the requisite vote of the DAKA stockholders. In addition, the holders of the requisite number of shares of Champps Common Stock sufficient to preclude accounting for the Merger as a pooling of interests or to prevent tax-deferred treatment for the Merger under Section 368(a) of the Internal Revenue Code shall not have perfected or preserved dissenters' rights under applicable law with respect to the adoption of the Merger Agreement. (c) The consummation of the Merger shall not be prohibited by any injunction or order of court and there shall not have been any action taken that makes consummation of the Merger illegal. (d) The applicable waiting period under the HSR Act shall have expired or been terminated. (e) Other than the filing of merger documents in accordance with Delaware and Minnesota law, all authorizations and waivers required to be obtained, and all filings required to be made, by DAKA and Champps prior to the consummation of the Merger shall have been obtained from, and made with, all required governmental entities and all other persons except where the failure to obtain such authorizations and waivers or make such filings would not have a material adverse effect, at or after the Effective Time, on Champps or DAKA. (f) Receipt by DAKA from Deloitte & Touche LLP, its independent auditors, and receipt by Champps from Arthur Andersen LLP, its independent public accountants, of a letter to the effect that pooling-of-interests accounting (under Accounting Principles Board Opinion No. 16) is appropriate for the Merger, provided that the Merger is consummated in accordance with the terms and conditions of the Merger Agreement. The obligations of DAKA and Merger Subsidiary to effect the Merger are also subject to a number of conditions, including but not limited to the following, any or all of which may be waived in whole or in part by DAKA and Merger Subsidiary in their sole discretion: (a) Each of the representations and warranties of Champps contained in the Merger Agreement shall be true and correct in all material respects as of the date of the Merger Agreement and as of the Effective Time as though made on and as of the Effective Time. (b) Champps shall have performed or complied in all material respects with all agreements and covenants required by the Merger Agreement to be performed or complied with by it on or prior to the Effective Time. (c) DAKA and Merger Subsidiary shall have received the opinion of Goodwin, Procter & Hoar dated on or about the date that is two business days prior to the date upon which the Joint Proxy Statement-Prospectus is first mailed to stockholders of DAKA and Champps, reasonably acceptable to DAKA and Merger Subsidiary, and subject to customary conditions and qualifications, to the effect that the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code, which opinion shall not have been withdrawn or modified in any material respect. (d) Except for any event disclosed in the Champps SEC Reports (as defined in the Merger Agreement) filed prior to the date of the Merger Agreement, there shall not have occurred any change concerning Champps or any of its subsidiaries that, individually or in the aggregate, has had a material adverse effect on Champps and its subsidiaries taken as a whole since December 31, 1994. (e) Champps shall provide a statement dated as of immediately prior to the Effective Time, to DAKA stating that Champps' Common Stock is not a "U.S. real property interest," in compliance with Treasury Regulations Section 1.897-2(h) and 1.1445-2(c)(3). The obligation of Champps to effect the Merger is also subject to the satisfaction of a number of conditions, including but not limited to the following, any or all of which may be waived by Champps in its sole discretion: (a) Each of the representations and warranties of DAKA and Merger Subsidiary contained in the Merger Agreement shall be true and correct in all material respects as of the date of the Merger Agreement and as of the Effective Time, as though made on and as of the Effective Time. (b) DAKA and Merger Subsidiary shall have performed or complied in all material respects with all agreements and covenants required by the Merger Agreement to be performed or complied with by DAKA and Merger Subsidiary on or prior to the Effective Time. (c) Champps shall have received the opinion of Fredrikson & Byron, P.A., dated on or about the date that is two business days prior to the date upon which the Joint Proxy Statement-Prospectus is first mailed to stockholders of Champps and DAKA, reasonably acceptable to Champps, and subject to customary conditions and qualifications, to the effect that the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code, which opinion shall not have been withdrawn or modified in any material respect. (d) Except for any event disclosed in the DAKA SEC Reports (as defined in the Merger Agreement) filed prior to the date of the Merger Agreement, there shall not have occurred any change concerning DAKA or any of its subsidiaries that, individually or in the aggregate, has had a material adverse effect on DAKA and its subsidiaries taken as a whole since July 1, 1995. In addition, the Merger Agreement may be terminated under certain circumstances. See "--Termination of the Merger Agreement." MATERIAL FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes the material U.S. federal income tax consequences of the Merger, including certain consequences to stockholders of Champps who are citizens or residents of the United States and who hold their shares as capital assets. It does not discuss all aspects of federal income taxation that may be relevant to a particular Champps stockholder in light of his or her personal circumstances (for example, a Champps stockholder who acquired his or her shares of Champps Common Stock pursuant to the exercise of employee stock options or otherwise as compensation) or to Champps stockholders subject to special federal income tax treatment (such as insurance companies, dealers in securities, certain retirement plans, financial institutions, tax exempt organizations or foreign persons). In addition, this summary does not address any aspects of state, local, foreign or other tax laws that may be relevant to holders of Champps Common Stock. Neither DAKA nor Champps has requested or will receive an advance ruling from the Internal Revenue Service as to the tax consequences of the Merger. Consummation of the Merger is conditioned (unless waived) on the delivery of opinions of Goodwin, Procter & Hoar and Fredrikson & Byron, P.A., counsel for each of DAKA and Champps, respectively, dated on or about the date that is two business days prior to the mailing of this Joint Proxy Statement-Prospectus. Both the Goodwin, Procter & Hoar and Fredrikson & Byron, P.A. opinions provide that, for federal income tax purposes, the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. The opinion of Fredrikson & Byron, P.A. also provides that the following would be the material federal income tax consequences to holders of Champps Common Stock which would result from the Merger: (a) No gain or loss will be recognized by a Champps stockholder upon the exchange of his or her Champps Common Stock for DAKA Common Stock, except that a Champps stockholder who receives cash proceeds in lieu of a fractional share interest in DAKA Common Stock will recognize gain or loss equal to the difference between such proceeds and the tax basis allocated to the fractional share interest, and such gain or loss will constitute capital gain or loss if such stockholder's Champps Common Stock is held as a capital asset at the Effective Time; (b) The tax basis of the DAKA Common Stock received by a Champps stockholder who exchanges his or her Champps Common Stock for DAKA Common Stock will be the same as such stockholder's tax basis in the Champps Common Stock surrendered in exchange therefor, decreased by the tax basis allocated to any such fractional share interest; and (c) The holding period of the DAKA Common Stock received by a Champps stockholder will include the period during which the Champps Common Stock surrendered in exchange therefor was held (provided that such Champps Common Stock was held by such Champps stockholder as a capital asset at the Effective Time). The Goodwin, Procter & Hoar and Fredrikson & Byron, P.A. opinions are based on, among other things, certain facts, statements, representations, warranties and assumptions (including those noted or set forth in such opinions or contained in the Merger Agreement, this Joint Proxy Statement-Prospectus or otherwise furnished to counsel by Champps, DAKA and Merger Subsidiary). Without limiting the generality of the foregoing, the effectiveness of the opinions is expressly based upon and subject to, among other things, (i) consummation of the Merger in accordance with the applicable laws of Minnesota and Delaware and the terms of the Merger Agreement (including satisfaction of all covenants and conditions to the obligations of the parties without amendment or waiver thereof) and (ii) the truth, correctness and completeness of all facts, statements, representations, warranties and assumptions noted or set forth in such opinion or the Merger Agreement or contained in this Joint Proxy Statement-Prospectus or otherwise furnished to counsel by DAKA, Champps and Merger Subsidiary. As of the date of this Joint Proxy Statement-Prospectus the tax opinions required by the Merger Agreement have been delivered. THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS NOT A COMPLETE DESCRIPTION OF ALL THE TAX CONSEQUENCES OF THE MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND PROPOSED U.S. TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. CHAMPPS STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS. It is the intention of the parties that the Merger shall qualify as a pooling-of-interests for accounting and financial reporting purposes. In addition, it is a condition to consummation of the Merger that DAKA shall have received from Deloitte & Touche LLP, its independent auditors, and Champps shall have received from Arthur Andersen LLP, its independent public accountants, a letter to the effect that pooling-of-interests accounting (under Accounting Principles Board Opinion No. 16) is appropriate for the Merger, provided that the Merger is consummated in accordance with the terms and conditions of the Merger Agreement. Champps and DAKA are not aware of any governmental or regulatory requirements relating to consummation of the Merger or the proposals to be considered at the Champps and DAKA stockholder meetings other than compliance with applicable federal and state securities laws. TERMINATION OF THE MERGER AGREEMENT The Merger Agreement may be terminated at any time prior to the Effective Time: (a) by mutual written consent of DAKA and Champps; (b) by either DAKA or Champps if a court or other government entity shall have issued an injunction or order or taken any other action permanently restraining or otherwise prohibiting the Merger and such injunction or other action shall have become final and non-appealable; (c) by DAKA or Champps, upon a breach of any representation, warranty, covenant or agreement on the part of the other set forth in the Merger Agreement, or if any representation or warranty of the other shall have become untrue, in each case such that certain conditions would be incapable of being satisfied by June 30, 1996; provided that, in any case, a willful breach shall be deemed to cause such conditions to be incapable of being (d) by DAKA, if (i) the Champps Board shall have failed to make or shall withdraw or change its recommendation of the Merger, or (ii) a third party shall have commenced and consummated a tender offer or exchange offer for 20% or more of the outstanding Champps shares; (e) by either DAKA or Champps if (i) the Merger and the Merger Agreement shall have failed to receive the requisite vote for approval by the Champps stockholders, or (ii) the issuance of the DAKA Merger Shares shall have failed to receive the requisite vote for approval by the DAKA (f) by Champps if (i) DAKA's Board shall have failed to make or shall withdraw or change its recommendation of the Merger, or (ii) a third party shall have commenced or shall have filed a Registration Statement under the Securities Act, with respect to a tender offer or exchange offer for 20% or more of the outstanding shares of DAKA Common Stock; and (g) by either DAKA or Champps, if the Merger shall not have been consummated on or before June 30, 1996. Champps has agreed that unless and until the Merger Agreement terminates it will not, directly or indirectly, solicit, knowingly encourage, participate in negotiations with, provide confidential information to, enter into any agreement with, or otherwise cooperate in any way in connection with any person other than DAKA or Merger Subsidiary concerning a Competing Transaction as defined in the Merger Agreement. A Competing Transaction is defined as any merger, consolidation, share exchange, business combination, or other similar transaction; any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more of the assets of Champps; any tender offer or exchange offer for 20% or more of the outstanding shares of Champps Common Stock; or the issuance, sale or other disposal by Champps of securities representing, or convertible into, 20% or more of the voting power of Champps. Champps has agreed to notify DAKA of the identity of any person requesting information or proposing to initiate a Competing Transaction and, if applicable, the terms of such Competing Transaction. Under certain circumstances, Champps may become obligated to pay a Termination Fee of $2,800,000 to DAKA as reimbursement to DAKA for costs associated with the Merger. Such circumstances include termination of the Merger Agreement by DAKA because of a willful breach by Champps of a representation, warranty, covenant or agreement of Champps set forth therein, or because the Champps Board shall have withdrawn or modified its recommendation of the Merger, or because of the consummation by a third party of a tender offer for 20% or more of the outstanding shares of Champps Common Stock, or (unless the average per share closing price of DAKA Common Stock as reported on the Nasdaq National Market over the twenty (20) trading days immediately preceding the date of the Champps Special Meeting is less than the "Floor Price" of $22.50) because the Merger Agreement shall have failed to receive the requisite vote for approval by the Champps stockholders. The likelihood that the Merger will be consummated in the event that the Floor Price is reached cannot be determined, as consummation of the Merger depends on a number of factors, including (i) whether the affirmative vote of the stockholders of DAKA and Champps with respect to the Merger is obtained, which will be influenced by considerations such as the relative prices of the companies' stock, the prospects of Champps as an independent company as compared to the prospects of the combined DAKA-Champps enterprise, and general changes in the level of broad-based stock indices, and (ii) satisfaction (or waiver) of all conditions precedent to the obligation of each of DAKA and Champps to consummate the Merger. In addition, Champps will become obligated to pay the Termination Fee if Champps enters into an agreement relating to a Competing Transaction, or the Champps Board recommends approval or acceptance of a Competing Transaction, in either case within one year after the Merger Agreement is terminated for certain reasons set forth in the Merger Agreement. In connection with the provisions relating to the Termination Fee, Champps agreed in the Merger Agreement that it would not enter into an agreement relating to a Competing Transaction within one year of the termination of the Merger Agreement unless such agreement provides that the third party thereto, upon execution of such agreement, pays any Termination Fee due DAKA under the Merger Agreement. Fees, expenses and out-of-pocket expenses incurred by DAKA, Champps or Merger Subsidiary will be borne by the party that incurs such expenses, except in the event that the Merger is terminated as specified above. Additionally, all costs and expenses related to printing, filing and mailing the Registration Statement and all SEC and other regulatory filing fees incurred in connection with the Registration Statement shall be borne equally by DAKA and Champps. AMENDMENT AND WAIVER OF THE MERGER AGREEMENT; EXTENSIONS The Merger Agreement may be amended, in writing, with the approval of the Boards of Directors of DAKA, Champps and Merger Subsidiary at any time prior to the Effective Time, except that after approval of the Merger by the Champps stockholders or approval of the issuance of the DAKA Merger Shares by the DAKA stockholders, no amendment that under applicable law may not be made without the approval of the stockholders of DAKA or Champps may be made without such approval. At any time prior to the Effective Time, DAKA and Champps may (i) extend the time for the performance of obligations of the other party under the Merger Agreement, (ii) waive any inaccuracies in the representations and warranties of the other party contained in the Merger Agreement, or (iii) waive compliance by the other party with any of the agreements or conditions contained therein. Agreements to extensions or waivers must be in writing. The Merger Agreement provides that the Surviving Corporation and its subsidiaries will provide benefit plans to employees after the Merger that, at the option of DAKA, either (i) will be no less favorable, in the aggregate, than those provided by DAKA to its employees or (ii) will be no less favorable in the aggregate than those provided by Champps and its subsidiaries to employees prior to the Merger. The Merger Agreement also provides that if any employee of Champps or any of its subsidiaries becomes a participant in any employee benefit plan of DAKA, such employee shall be given credit under such plan for all service prior to the Effective Time with Champps and its subsidiaries or any predecessor employer (to the extent such credit was given by Champps under a similar plan) for purposes of eligibility (including, without limitation, waiting periods), vesting and vacation accrual. In the Merger Agreement, Champps has also agreed that, except for normal increases in the ordinary course of business that are consistent with past practices and that do not result in a material increase in benefits or compensation expense to Champps, Champps will not adopt or amend any bonus, profit sharing, retirement or other compensation for the benefit of any director, officer or employee that increases in any manner the compensation, retirement or other benefits provided thereunder or take any action or grant any benefit not expressly required under the terms of any existing agreement, plan or other such arrangement. EXCHANGE OF CERTIFICATES IN THE MERGER As soon as reasonably practicable after the Effective Time, the Exchange Agent (as defined in the Merger Agreement) will mail a letter of transmittal and instructions to each holder of record of certificates (the "Certificates") which evidenced outstanding shares of Champps Common Stock immediately prior to the Effective Time. The letter of transmittal will be used to forward the Certificates for surrender in exchange for (i) certificates representing the number of whole shares of DAKA Common Stock which such holder has the right to receive pursuant to the Merger, and (ii) cash for any fractional shares of DAKA Common Stock to which such holder otherwise would be entitled. CHAMPPS STOCKHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL SUCH LETTER OF TRANSMITTAL AND INSTRUCTIONS ARE RECEIVED BY THEM. After the Effective Time and until surrendered as provided above, Certificates will be deemed to represent only the right to receive certificates representing the number of whole shares of DAKA Common Stock into which the shares of Champps Common Stock formerly represented by such Certificates were converted in the Merger, and a cash payment in lieu of any fractional shares. The holders of Certificates will not be entitled to receive dividends or any other distributions from DAKA until such Certificates are so surrendered. The Merger Agreement contains various representations and warranties of the parties thereto. The Merger Agreement includes representations and warranties by Champps as to (i) its corporate organization, standing and power, (ii) its compliance with the provisions of its organizational documents, (iii) its capitalization, (iv) its authority to execute and deliver the Merger Agreement and its enforceability with respect to Champps, (v) the Merger Agreement's non-contravention of the Minnesota antitakeover or business combination statutes or any law or charter or by-law provision applicable to Champps, (vi) the absence of a violation of or breach of any contract or other instrument or obligation of Champps, (vii) the absence of the need by Champps for governmental or third party consents as to the Merger, (viii) Champps' filing of all required SEC reports since April 6, 1994, (ix) pending or threatened litigation, (x) the accuracy of Champps' financial statements and information contained in certain filings by Champps with the SEC, (xi) the conduct of Champps' business in the ordinary course, and the absence of certain changes since December 31, 1994, (xii) the absence of defaults under material agreements, (xiii) the enforceability of Champps' intellectual property, (xiv) possession of all required licenses and permits, and compliance by Champps with applicable laws, (xv) employee benefit plans and employee related agreements of Champps, (xvi) fees of brokers, finders and investment bankers employed by Champps, (xvii) environmental matters, (xviii) the payment of taxes, (xix) the absence of certain labor disputes, (xx) disclosure of material transactions among Champps and its affiliates, (xxi) the receipt of a fairness opinion by Champps' financial advisor, (xxii) Champps statement that it has no reason to believe pooling of interest accounting treatment for the Merger would not be available, and (xxiii) the required vote of Champps stockholders necessary to approve the Merger. The Merger Agreement also includes representations and warranties by DAKA and Merger Subsidiary as to (i) their corporate organization, standing and power, (ii) their compliance with the provisions of their organizational documents; (iii) DAKA's capitalization, (iv) DAKA and Merger Subsidiary's authority to execute and deliver the Merger Agreement, and its enforceability respect to DAKA and Merger Subsidiary, (v) the Merger Agreement's non-contravention of any law or charter or by-law provision applicable to DAKA, (vi) the absence of a violation of or breach of any contract or other instrument or obligation of DAKA, (vii) the absence of the need by DAKA for governmental or third party consents as to the Merger, (viii) DAKA's filing of all required SEC Reports since June 30, 1994, (ix) pending or threatened litigation, (x) the accuracy of DAKA's financial statements and information contained in certain filings by DAKA with the SEC, (xi) the conduct of DAKA's business in the ordinary course, and the absence of certain changes, since July 1, 1995, (xii) the absence of defaults under material agreements, (xiii) the enforceability of DAKA's intellectual property, (xiv) possession of all required licenses and permits, and compliance by DAKA with applicable laws, (xv) fees of brokers, finders and investment bankers employed by DAKA, (xvi) environmental matters, (xvii) the payment of taxes, (xvii) lack of knowledge of any pending government investigation or review, (xix) the absence of certain labor disputes, (xx) transactions among DAKA and its affiliates, (xxi) the receipt of a fairness opinion by DAKA's financial advisor, (xxii) DAKA's statement that it has no reason to believe pooling of interest accounting treatment for the Merger would not be available, and (xxiii) the required vote of DAKA stockholders necessary to approve issuance of DAKA Common Stock. The respective representations and warranties of DAKA, Champps and Merger Subsidiary will terminate at the Effective Time of the Merger. INTERESTS OF CERTAIN PERSONS IN THE MERGER In connection with the Merger, DAKA has agreed to provide certain benefits to all employees of Champps and its subsidiaries. See "--Effect on Employee Benefits." The following section describes other actions DAKA has agreed to take with respect to certain officers of Champps upon the consummation of the Merger. Employment Arrangement with Dean P. Vlahos. Champps is a party to an employment agreement dated as of January 1, 1994 with Dean P. Vlahos (the "1994 Employment Agreement"). Mr. Vlahos has also executed an employment agreement with Champps and DAKA which provides for the commencement of an employment relationship with the Surviving Corporation at the Effective Time (the "1995 Employment Agreement"). Under the terms of the 1995 Employment Agreement, once the 1995 Employment Agreement becomes effective at the Effective Time, the 1994 Employment Agreement will terminate and Mr. Vlahos will provide full time services to Champps in the capacity of Chairman of the Board of Directors, Chief Executive Officer and President for a five-year term. In addition, under the terms of the 1995 Employment Agreement, DAKA has agreed to appoint Mr. Vlahos to the DAKA Board and, if necessary, to use its best efforts to solicit proxies from DAKA stockholders to secure his election during the term of employment. Mr. Vlahos shall continue to maintain the authority to control the operations of Champps so long as the average annual gross revenues per square foot of the Champps-owned restaurants is at least $400. During the period of Mr. Vlahos' full time employment, Champps shall pay him an initial base salary of $350,000 plus a bonus of 50% of his base salary if he attains certain targets established by the DAKA Board, which amount may be increased up to 100% of his base salary if he exceeds such performance targets by margins determined by the DAKA Board. Twenty percent (20%) of bonus payments for Mr. Vlahos shall be related to performance targets established for DAKA as a whole and eighty percent (80%) shall be related to performance targets established for Champps. Mr. Vlahos shall also be entitled to a monthly automobile allowance, annual vacation and health and life insurance provided by DAKA. If Mr. Vlahos is terminated without cause during the term of his employment, or if Mr. Vlahos leaves for "good reason," DAKA will be obligated to pay him the salary and bonus for the remainder of the term under his contract as severance. In the event that Mr. Vlahos' employment is terminated for any reason other than for cause by DAKA, Mr. Vlahos shall be provided the right to establish as a franchisee five (5) Champps Americana restaurants anywhere in the world, so long as: (i) each is not within a 20 mile radius of any other Champps restaurant; (ii) none is located in any territory that has been franchised or licensed by Champps; and (iii) Mr. Vlahos meets the requirements with respect to Champps franchisees in effect at such time. Continuation of Rights to Indemnification; Limitation of Liability. The Merger Agreement provides that the provisions with respect to indemnification and limitations on personal liability contained in the certificate of incorporation and by-laws of the Surviving Corporation will not be amended, repealed or otherwise modified for a period of six (6) years after the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors or officers of Champps in respect of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by the Merger Agreement), unless such modification is required by law. Election to DAKA Board of Directors. The Merger Agreement provides that immediately following the Effective Time, Mr. Vlahos will be appointed to the DAKA Board. DAKA and three stockholders of Champps (each a "Major Stockholder") entered into a Stockholders Agreement dated October 10, 1995 (the "Stockholders Agreement"). Pursuant to the Stockholders Agreement, each Major Stockholder agreed that he shall vote or cause to be voted a specified number of shares owned by such Stockholder in favor of the Merger, and that the Major Stockholder would vote against any action that would result in a breach in any material respect of any covenant or obligation of Champps under the Merger Agreement. Pursuant to the Stockholders Agreement, each Major Stockholder granted to and appointed DAKA as the Major Stockholder's irrevocable proxy and attorney-in-fact with the right to vote such specified number of the Major Stockholder's shares in favor of the Merger. The following Major Stockholders have executed the Stockholders Agreement committing a total of 990,000 shares of Champps Common Stock: Dean P. Vlahos, Walter H. Henrion and Robert R. Taylor, all directors of Champps. Such shares equal approximately 19.98% of the total number of outstanding shares of Champps Common Stock. Each Stockholder has agreed to neither directly nor indirectly (except as may be required by applicable corporate law with respect to the provision of materials to a stockholder of Champps by a Major Stockholder in his capacity as an officer or director of Champps), solicit or respond to any inquiries or the making of any proposal by any person or entity other than DAKA or an affiliate of DAKA that constitutes or could reasonably be expected to lead to a Competing Transaction. Each Major Stockholder has agreed to promptly inform DAKA of the terms and conditions of any proposal or offer received and the identity of the person making it. Each Major Stockholder has agreed that he shall not directly or indirectly, except pursuant to the terms of the Merger Agreement, offer for sale, sell, transfer, tender, pledge, incumber, assign, or otherwise dispose of or enter into any contract or arrangement for the assignment or other disposition of any of such Major Stockholder's shares. Additionally, each Major Stockholder has agreed not to sell any shares of DAKA Common Stock for a limited period of time following the Merger. The covenants and agreements with respect to the Stockholders Agreement shall terminate on either the Effective Time of the Merger or the date the Merger Agreement is terminated in accordance with its terms. In the event the Merger Agreement is terminated due to the failure of the stockholders of Champps to approve the Merger, the Major Stockholders shall pay to DAKA fees aggregating $1,000,000 as set forth in the Stockholders Agreement. The Stockholders Agreement may not be modified, amended, altered or supplemented except by written agreement by the parties. RESALE OF DAKA COMMON STOCK The DAKA Common Stock issued pursuant to the Merger will be freely transferable under the Securities Act, except for shares issued to any Champps stockholder who may be deemed to be an affiliate (an "Affiliate") of Champps and/or DAKA for purposes of Rule 145 under the Securities Act. Affiliates would include persons (generally executive officers and directors) who control, are controlled by, or are under common control with (i) DAKA or Champps at the time of the Stockholder Meetings or (ii) DAKA at or after the Effective Time. Rules 144 and 145 promulgated by the SEC under the Securities Act restrict the sale of DAKA Common Stock received in the Merger by Affiliates and certain of their family members and related parties. Generally, during the two years following the Effective Time, Affiliates of Champps, provided they are not Affiliates of DAKA, may publicly resell DAKA Common Stock received by them in the Merger, subject to certain limitations as to the amount of DAKA Common Stock sold by them in any three-month period and as to the manner of sale. After the two-year period, such Affiliates of Champps who are not Affiliates of DAKA may resell their shares without such restrictions so long as there is adequate current public information with respect to DAKA as required by Rule 144. Persons who become Affiliates of DAKA prior to, at or after the Effective Time may publicly resell the DAKA Common Stock received by them in the Merger subject to similar limitations and subject to certain filing requirements specified in Rule 144. The ability of Affiliates to resell shares of DAKA Common Stock received in the Merger under Rule 144 or 145 as summarized herein generally will be subject to DAKA having satisfied its Exchange Act reporting requirements for specified periods prior to the time of sale. Affiliates also would be permitted to resell DAKA Common Stock received in the Merger pursuant to an effective registration statement under the Securities Act or another available exemption from the Securities Act registration requirements. This Joint Proxy Statement-Prospectus does not cover any resales of DAKA Common Stock received by persons who may be deemed to be Affiliates of DAKA or Champps. The Merger Agreement further provides that Champps shall use its best efforts to obtain as soon as practicable from Affiliates of Champps a letter agreement in which such Affiliate agrees and acknowledges that he or she will only sell such Affiliate's Shares of DAKA Common Stock if (i) the Affiliate sells the DAKA Common Stock in conformity with certain provisions of Rules 144 and 145, (ii) any subsequent sale of the DAKA Common Stock by the Affiliate has been registered under the Securities Act or (iii) in the opinion of counsel reasonably satisfactory to DAKA the proposed sale is exempt. In connection with the Merger, certain stockholders of Champps transmitted affiliate letters (the "Affiliate Letters") to DAKA, marked as Exhibit A to the Merger Agreement. In the Affiliate Letters, such stockholders represented to DAKA that they would not sell shares of DAKA Common Stock received in connection with the Merger except pursuant to Rule 145 under the Securities Act, an effective registration statement, or an exemption from registration under the Securities Act. Furthermore, and to assure accounting treatment of the Merger as a pooling of interests such stockholders covenanted to DAKA in the Affiliate Letters that they would not sell or transfer any shares of DAKA Common Stock or options with respect thereto, whether or not received in connection with the Merger, until such time as DAKA has published unaudited financial statements covering at least thirty (30) days of the combined operations of Champps and DAKA following the Merger. APPROVAL AND ADOPTION OF THE MERGER AGREEMENT The Champps Special Meeting will be held on February 16, 1996 at 10:00 a.m. local time at The Radisson Plaza Hotel Minneapolis, 35 South Seventh Street, Minneapolis, Minnesota. At the Champps Special Meeting, Champps stockholders will consider and vote upon a proposal to approve and adopt the Merger Agreement. Pursuant to the Merger Agreement, Merger Subsidiary will merge with and into Champps, whereupon Champps will become a wholly-owned subsidiary of DAKA. At the Effective Time of the Merger, each then outstanding share of Champps Common Stock will be converted into the right to receive four-tenths (.40) of one share of DAKA Common Stock, subject to adjustment as more fully defined herein. Cash will be provided in lieu of fractional shares. See "Terms of the Merger--Conversion of Shares of Champps Stock Pursuant to Merger; Treatment of Options and Warrants." Champps Board has fixed the close of business on January 3, 1996 as the record date for the Champps Special Meeting, and any adjournments or postponements thereof. At the close of business on the Champps Record Date, 4,953,774 shares of Champps Common Stock were outstanding and entitled to vote. The affirmative vote of the holders of at least a majority of the outstanding shares of Champps Common Stock is required to approve and adopt the Merger Agreement. Stockholders of Champps are entitled to one vote at the Champps Special Meeting for each share of Champps Common Stock held of record at the close of business on the Champps Record Date. On the Champps Record Date, directors and executive officers of Champps and its affiliates beneficially owned 2,986,800 shares, or 59.3%, of the outstanding shares of Champps Common Stock. Three directors of Champps have entered into the Stockholders Agreement, the purpose of which is to assure that an aggregate of 990,000 shares of Champps Common Stock, or 19.98% of the outstanding shares, is voted in favor of the Merger. See "Stockholders Agreement." THE CHAMPPS BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE MERGER. PROXIES RECEIVED BY THE CHAMPPS BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY CHOICE. PROPOSAL 1--ISSUANCE OF DAKA COMMON STOCK PURSUANT TO THE MERGER AGREEMENT At the DAKA Annual Meeting, DAKA stockholders will be asked to consider and vote upon a proposal to approve and adopt the issuance of the DAKA Merger Shares pursuant to the Merger Agreement. As of the Champps Record Date, 4,953,774 shares of Champps Common Stock were issued and outstanding. Accordingly, based upon such number of shares and the unadjusted Exchange Ratio of .40, it is currently anticipated that approximately 1,981,509 shares of DAKA Common Stock will be issued upon consummation of the Merger, as discussed more fully herein. THE DAKA BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE ISSUANCE OF DAKA MERGER SHARES. PROXIES RECEIVED BY THE DAKA BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY CHOICE. PROPOSAL 2--INCREASE IN THE AUTHORIZED SHARES OF DAKA COMMON STOCK The DAKA Certificate currently provides that DAKA's authorized capital stock consists of 20,000,000 shares of DAKA Common Stock and 1,000,000 shares of Series A Preferred Stock, $.01 par value per share. At the DAKA Annual Meeting, DAKA stockholders will be asked to consider and vote upon a proposal to approve and adopt an amendment to the DAKA Certificate to increase the number of authorized shares of DAKA Common Stock to 30,000,000 shares. The increase in the authorized shares of DAKA Common Stock is being sought, in part, because of the proposed Merger. On the DAKA Record Date, 7,225,489 shares of DAKA Common Stock were issued and outstanding. As outlined above, it is anticipated that approximately 1,981,509 shares of DAKA Common Stock will be issued in connection with the consummation of the Merger and an additional 82,200 shares will be reserved for issuance upon exercise of an outstanding warrant and the outstanding options to purchase Champps Common Stock assumed by DAKA in connection with the Merger. Absent the amendment increasing the number of authorized shares, there would remain only approximately 10,793,002 shares of authorized but unissued shares of DAKA Common Stock following the Effective Time. The continued availability of shares of DAKA Common Stock (without the delay and cost of calling a special stockholders meeting) will provide DAKA with the flexibility to take advantage of certain opportunities which may arise. Following the Effective Time, DAKA may from time to time consider (i) the issuance of DAKA Common Stock as a source of financing; (ii) the acquisition of other businesses utilizing DAKA Common Stock as consideration; and (iii) the issuance of additional shares of DAKA Common Stock through stock splits and stock dividends in appropriate circumstances. The issuance of additional shares may, among other things, have a dilutive effect on earnings per share and on the equity and voting power of existing holders of DAKA Common Stock. The issuance of additional shares may also be deemed to have an antitakeover effect by making it more difficult to obtain shareholder approval of various actions, such as a merger or removal of management. Although the DAKA Board has no present intention of issuing additional shares for such purposes, the proposed increase in the number of authorized shares of DAKA Common Stock could also enable the DAKA Board to render more difficult or discourage an attempt by another person or entity to obtain control of DAKA. For example, additional shares could be issued by the DAKA Board in a public or private sale, merger or similar transaction, increasing the number of outstanding shares and thereby diluting the equity interest and voting power of a party attempting to obtain control of DAKA. There are at present no plans, understandings, agreements or arrangements concerning the issuance of additional shares of DAKA Common Stock, except for the DAKA Merger Shares to be issued pursuant to the Merger and shares of DAKA Common Stock presently reserved for issuance. If any plans, understandings, arrangements or agreements are made concerning the issuance of any such shares, holders of the then outstanding shares of DAKA Capital Stock may or may not be given the opportunity to vote thereon, depending upon the nature of any such transaction, the law applicable thereto, the policy of any stock exchange upon which the DAKA Common Stock may be listed at such time and the judgment of the DAKA Board regarding the submission thereof to DAKA stockholders. This proposal is not in response to any effort of which DAKA is aware to accumulate DAKA Common Stock of or to obtain control of DAKA. THE DAKA BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF AN AMENDMENT TO THE DAKA CERTIFICATE TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF DAKA COMMON STOCK. PROXIES RECEIVED BY THE DAKA BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY CHOICE. PROPOSAL 3--ELECTION OF CLASS I DIRECTOR The DAKA Board is divided into three classes, with the directors of each class elected to three-year terms. One class stands for election at each annual meeting of stockholders. At the DAKA Annual Meeting, one Class I director will be elected to hold office for three years or until his successor is elected and qualified. Unless otherwise specified in the enclosed proxy, the persons named in the enclosed proxy intend to vote the shares represented by each properly executed proxy "FOR" the election of the nominee named below. The DAKA Board has no reason to believe that the nominee will be unable to serve if elected. In the event the nominee shall become unavailable for election, the persons named in the enclosed proxy will vote such shares for the election of such other person as the DAKA Board may recommend. With respect to the election of directors, the DAKA By-laws provide that such election shall be determined by a plurality of the votes cast by stockholders, and thus shares represented by a proxy that withholds authority to vote for a particular nominee or nominees and broker non-votes will have no effect on the outcome. The DAKA Board has nominated the following person for election as a Class I director for a term expiring in 1999: Mr. Cox has served as a Class I director of DAKA since September 1988 and as a director of Fuddruckers, Inc. from June 1988 to November 1988. Mr. Cox served from February, 1990 until his retirement in August, 1995 as Chairman and Chief Executive Officer of Michigan Accident Fund. Mr. Cox is also a member of the Board of Directors of Comerica, Inc., a publicly traded financial institution. For more detailed information regarding Mr. Cox, see "The DAKA Annual Meeting--Other Information--Directors and Committees." THE DAKA BOARD RECOMMENDS A VOTE "FOR" THE RE-ELECTION AS A CLASS I DIRECTOR OF THE NOMINEE. PROXIES RECEIVED BY THE DAKA BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY CHOICE. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS On October 10, 1995, DAKA, Merger Subsidiary and Champps entered into the Merger Agreement pursuant to which Merger Subsidiary will merge with and into Champps and Champps will become a wholly-owned subsidiary of DAKA. As a result of the Merger, each share of Champps Common Stock issued and outstanding immediately prior to the Effective Time of the Merger will be converted into the right to receive four-tenths (.40) of one share of DAKA Common Stock, subject to possible adjustment to forty-three hundredths (.43) of one share of DAKA Common Stock if the DAKA Average Trading Price is less than $30.00, or thirty-seven hundredths (.37) of one share of DAKA Common Stock if the DAKA Average Trading Price is more than $35.00. The Merger will be accounted for using the pooling of interests method of accounting. On February 8, 1995, Daka, a wholly-owned subsidiary of DAKA, acquired an 80.01% general partnership interest in a newly-formed limited partnership, Daka Restaurants, L.P. ("DRLP"), in exchange for cash of $10.1 million. Simultaneously, DRLP acquired substantially all of the assets and foodservice contracts comprising the education and corporate foodservice business (the "Acquired Foodservice Business") of ServiceMaster Management Services L.P. ("SMMSLP") for a purchase price of approximately $21.1 million. The purchase price was comprised of a cash payment of $10.1 million, the assumption of approximately $806 thousand of liabilities, a deferred payment of $10.2 million paid on June 13, 1995 and the issuance of a 19.99% limited partnership interest in DRLP to SMMSLP. The purchase of the Acquired Foodservice Business was accounted for using the purchase method of accounting. The accompanying pro forma condensed combined financial statements reflect the combined statements of income of DAKA and Champps for the fiscal years ended July 1, 1995, July 2, 1994 and June 26, 1993 and for the three months ended September 30, 1995 and October 1, 1994 and the combined balance sheets of DAKA and Champps as of September 30, 1995 and July 1, 1995. In addition, the accompanying pro forma condensed combined statement of income for the fiscal year ended July 1, 1995 reflects the operating results of the Acquired Foodservice Business, acquired as of the close of business on February 8, 1995, as if it had been acquired on July 3, 1994, the beginning of the fiscal year. The accompanying pro forma condensed combined balance sheet as of July 1, 1995 was derived from the audited consolidated balance sheet of DAKA as of July 1, 1995 and from the unaudited consolidated balance sheet of Champps as of July 2, 1995. The accompanying pro forma condensed combined balance sheets and statements of income as of and for the three months ended September 30, 1995 and October 1, 1994 are derived from the unaudited consolidated financial statements of DAKA for the aforementioned periods and from the unaudited consolidated financial statements of Champps for the thirteen weeks ended October 1, 1995 and for the three months ended September 30, 1994. Such consolidated financial statements, in the opinion of each of the respective company's management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such consolidated financial statements. The accompanying pro forma condensed combined statements of income for the years ended July 1, 1995, July 2, 1994 and June 26, 1993 were derived from (i) the audited consolidated statements of income of DAKA for the years ended July 1, 1995, July 2, 1994 and June 26, 1993 and (ii) the unaudited statements of income of Champps for the fifty-two weeks ended July 2, 1995 and for the four quarters ended June 30, 1994 and June 30, 1993. Such consolidated unaudited statements of income of Champps, in the opinion of Champps' management, contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for these periods. The audited consolidated statement of income of DAKA for the year ended July 1, 1995 includes the operating results of the Acquired Foodservice Business from February 9, 1995, through July 1, 1995. In addition to the amounts included in DAKA's historical consolidated statement of income, the accompanying pro forma condensed combined statement of income for the fiscal year ended July 1, 1995 also includes the operating results of the Acquired Foodservice Business for the period from July 3, 1994 to December 21, 1994. For purposes of the accompanying pro forma condensed combined statement of income for the fiscal ended July 1, 1995 the operating results for the period from December 22, 1994 through February 8, 1995, which are not included therein are not considered significant. The accompanying pro forma condensed combined financial statements do not purport to be indicative of the results of operations or financial condition that would have been achieved if DAKA and Champps had operated as a combined company during the periods presented or if the acquisition of the Acquired Foodservice Business had occurred at the beginning of the fiscal year. In addition, the accompanying pro forma condensed combined financial statements do not purport to be indicative of the results of operations or financial condition which may be achieved in the future. The accompanying pro forma condensed combined financial statements have been prepared using the assumptions set forth in the accompanying Notes to Pro Forma Condensed Combined Financial Statements and should be read in conjunction with the audited consolidated financial statements and notes thereto of DAKA incorporated herein by reference and the audited consolidated financial statements of Champps included elsewhere in this Joint Proxy Statement-Prospectus. PRO FORMA CONDENSED COMBINED BALANCE SHEET (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) See Notes to Pro Forma Condensed Combined Financial Statements. PRO FORMA CONDENSED COMBINED BALANCE SHEET (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) See Notes to Pro Forma Condensed Combined Financial Statements. PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FISCAL YEAR ENDED JULY 1, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) See Notes to Pro Forma Condensed Combined Financial Statements PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) See Notes to Pro Forma Condensed Combined Financial Statements. PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME THREE MONTHS ENDED SEPTEMBER 30, 1995 AND OCTOBER 1, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA) See Notes to Pro Forma Condensed Combined Financial Statements. NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS DAKA's fiscal year ends on the Saturday closest to June 30. Prior to January 1, 1995, Champps' year end was December 31. On January 1, 1995, Champps changed its fiscal year to a 52/53 week year ending on the Sunday closest to December 31. The accompanying pro forma condensed combined financial statements have been prepared utilizing DAKA's fiscal calendar and are derived from the historical consolidated financial statements of DAKA and Champps. The amounts included in the pro forma condensed combined statements of income for Champps for the years ended July 1, 1995, July 2, 1994 and June 26, 1993 were derived from the unaudited consolidated statements of income for the fifty-two weeks ended July 2, 1995 and for the four quarters ended June 30, 1994 and June 30, 1993, respectively. The pro forma adjustments to common stock and capital in excess of par value as of July 1, 1995 and September 30, 1995 reflect the issuance of 2,294,913 shares of DAKA Common Stock for all of the outstanding shares of Champps Common Stock representing an Exchange Ratio of .43 DAKA shares for each share of Champps Common Stock. For the purpose of these pro forma condensed combined financial statements, the number of shares of DAKA Common Stock to be issued represents the maximum number of shares which may be issued by DAKA pursuant to the Merger Agreement. Under the pooling-of-interests method of accounting, costs associated with the merger of DAKA and Champps are treated as an expense of the combined company. The accompanying pro forma condensed combined statements of income do not reflect the expenses associated with the Merger, which are estimated to be approximately $3,500 pre-tax and $2,048 after-tax, that will be recorded in the first period that consolidated financial statements of the combined companies are presented, since such expenses are non-recurring. The after-tax effect of these expenses are, however, reflected in the accompanying pro forma condensed combined balance sheets as of July 1, 1995 and September 30, 1995 as a liability and a reduction to retained earnings. Merger expenses consist primarily of professional fees and proxy solicitation costs. The tax effect of the Merger expenses was calculated using DAKA's effective state income tax rate of 6.5% for the fiscal year ended July 1, 1995 and the statutory federal income tax rate of 35%. 4. WEIGHTED AVERAGE SHARES OUTSTANDING The weighted average number of outstanding shares of Champps Common Stock represents the number of equivalent shares of DAKA Common Stock into which such shares of Champps may be exchanged utilizing the maximum Exchange Ratio of .43, applied to the historical weighted average number of shares of Champps Common Stock outstanding. Prior to January 1, 1994, Champps and its Predecessors (the "Companies") were S corporations. As S corporations, the Companies were generally not subject to federal or state income taxes. Instead the stockholders were taxed on the Companies' taxable income at the stockholders' individual federal and state income tax rates. Accordingly, there was no provision for income taxes recorded by the Companies. Effective January 1, 1994, the Companies elected to be taxed as C corporations for federal income tax purposes and were subject to federal and state income taxes subsequent to that date. Net income for 1992 and 1993 includes a pro forma provision for income taxes to reflect income taxes as if the Companies had been taxed as C corporations in 1992 and 1993. NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED) The audited consolidated statement of income of DAKA for the year ended July 1, 1995 includes the operating results of the Acquired Foodservice Business from February 9, 1995, through July 1, 1995. In addition to the amounts included in DAKA's historical consolidated statements of income, the accompanying pro forma condensed combined statement of income for the fiscal year ended July 1, 1995 also includes the operating results of the Acquired Foodservice Business for the period from July 1, 1994 to December 21, 1994, adjusted to reflect the pro forma adjustments for interest expense, depreciation and amortization associated with the new asset basis and SMMSLP's portion of the income of the Acquired Foodservice Business. For purposes of the accompanying pro forma condensed combined statement of income for the fiscal year ended July 1, 1995, the operating results for the period from December 22, 1994 through February 8, 1995, which are not included therein, are not considered significant. (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table presents selected historical statement of operations and balance sheet data of Champps. The balance sheet data presented below as of December 31, 1994 and 1993 and the statement of operations data presented below for each of the years in the three-year period ended December 31, 1994 are derived from Champps' audited consolidated financial statements. The balance sheet data as of December 31, 1992 is derived from Champps unaudited combined financial statements. The balance sheet data as of October 1, 1995 and September 30, 1994 and statement of operations data for the thirty-nine weeks ended October 1, 1995 and for the nine month period ended September 30, 1994, presented below are derived from Champps' unaudited consolidated financial statements, which, in the opinion of Champps' management, contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for these periods. The operating results for the thirty-nine weeks ended October 1, 1995 and for the nine months ended September 30, 1994 are not necessarily indicative of the results that may be expected for the entire year. The selected historical financial data should be read in conjunction with the consolidated financial statements and related notes thereto for Champps and "Champps Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere in this Joint Proxy Statement-Prospectus. (1) Effective January 1, 1995, Champps changed its year from a calendar year end to a 52/53 week year. (2) Prior to 1994, Champps and its predecessors had elected to be treated as S corporations for purposes of federal and state income tax reporting. As an S corporation, Champps generally was not subject to federal and state income taxes with respect to its earnings and profits. Instead the shareholders of Champps were taxed on their allocable share of Champps' taxable income at such shareholders' individual federal and state income tax rates. Accordingly, there was no provision for income taxes recorded by Champps in 1993 and 1992. Effective January 1, 1994, Champps and its subsidiaries elected to be taxed as C corporations for federal and state income tax purposes and have been subject to federal and state income taxes subsequent to that date. Net income and net income per share for 1993 and 1992 include an unaudited pro forma provision for income taxes to reflect income taxes as if Champps had been taxed as a C corporation in 1993 and 1992. CHAMPPS MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Champps owns and operates a full service casual theme restaurant and bar concept under the name Champps Americana. Champps began to expand its concept nationwide with the completion of its initial public offering in April 1994. Since then, Champps has opened five new Champps-owned restaurants and has incurred significant costs related to the construction and opening of these new restaurants. In addition, as a result of the new restaurant development, Champps' statement of operations has and will reflect the negative effect of store openings on cost of sales, restaurant operating income and depreciation and amortization expenses. Champps currently expects that to continue its expansion strategy it will continue to incur slightly higher cost of sales, restaurant operating expenses, depreciation and amortization, and interest expense associated with its development until the point at which the total number of restaurants that have been open at least eighteen months exceeds the number of new restaurants under development. COMPARISON OF THIRTY-NINE WEEKS ENDED OCTOBER 1, 1995 TO NINE MONTHS ENDED Net Sales by Champps-Owned Restaurants. Net sales by Champps-owned restaurants increased 162.4% from $4,681 for the nine months ended September 30, 1994 to $12,284 for the thirty-nine weeks ended October 1, 1995. The increase was primarily attributable to the opening of three new Champps-owned restaurants: Addison, Texas in October 1994, Edison, New Jersey in May 1995 and Marlton, New Jersey in August 1995. Comparable store sales in the Minnetonka restaurant were flat during the thirty-nine weeks ended October 1, 1995 compared to the nine months ended September 30, 1995. Food sales as a percentage of total net sales by Champps-owned restaurants decreased from 67.4% for the nine months ended September 30, 1994 to 59.0% for the thirty-nine weeks ended October 1, 1995 as a result of higher liquor sales in the new restaurants. Royalty and Franchise Fee Revenue. Royalty and franchise fee revenue increased 5.9% from $435 for the nine months ended September 30, 1994 to $461 for the thirty-nine weeks ended October 1, 1995. The increase is attributable to a combination of a $91 increase in royalty income as a result of a 8.2% increase in comparable restaurant sales at licensed and franchised restaurants and one additional franchised restaurant in operation during the thirty-nine weeks ended October 1, 1995 compared to the nine months ended September 30, 1994. This increase in royalty income was offset, in part, by a $65 decrease in franchise fee revenue principally due to $80 of revenue recognized in connection with the sale of a multi-unit development agreement during the nine months ended September 30, 1994. Cost of Sales and Restaurant Operating Expenses. Cost of sales which represent the cost of food, beverage and liquor sales increased from $1,320 for the nine months ended September 30, 1994 to $3,523 for the thirty-nine weeks ended October 1, 1995, due to three new restaurants. Cost of sales as a percentage of net sales by Champps-owned restaurants increased from 28.2% to 28.7%. The increase in cost of sales as a percentage of net sales by Champps-owned restaurants is attributable to higher costs generally associated with the initial period of operations of newly opened restaurants offset, in part, by higher margins resulting from higher liquor sales in Champps' new restaurants. Restaurant operating expenses increased 168.8% from $2,416 for the nine months ended September 30, 1994 to $6,495 for the thirty-nine weeks ended October 1, 1995 as a result of three new restaurants. Restaurant operating expenses as a percentage of net sales by Champps-owned restaurants increased from 51.6% to 52.9%. The percentage increase is primarily attributable to higher operating and occupancy costs for the new restaurants opened in 1995, offset in part by lower labor costs prevailing in the Texas and New Jersey markets where these new restaurants operate. Direct Franchise Expenses. Direct franchise expenses increased 31.4% from $77 for the nine months ended September 30, 1994 to $102 for the thirty-nine weeks ended October 1, 1995. This increase is primarily attributable to $32 of expenses incurred in connection with the opening of one new franchised restaurant in the second quarter of 1995. Depreciation and Amortization. Depreciation and amortization increased from $176 for the nine months ended September 30, 1994 to $1,021 for the thirty-nine weeks ended October 1, 1995, and increased as a percentage of net sales by Champps-owned restaurants from 3.4% to 8.0%. The increase is attributable to depreciation associated with Champps' new restaurants and $415 of amortization of preopening costs. General and Administrative Expenses. General and administrative expenses increased 76.9% from $840 for the nine months ended September 30, 1994 to $1,486 for the thirty-nine weeks ended October 1, 1995, but decreased as a percentage of total revenue from 16.3% in 1994 to 11.6% in 1995. The increase in general and administrative expenses is attributable to increased corporate salaries and benefits associated with the addition of key management personnel, professional fees, corporate travel expenses and general office expenses incurred in anticipation of implementing Champps' expansion strategy. Interest Expense. Interest expense decreased during the thirty-nine weeks ended October 1, 1995 due to a loss of $47 recognized during the nine months ended September 30, 1994 related to certain municipal bond investments. COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993 Net Sales by Champps-Owned Restaurants. Net sales by Champps-owned restaurants increased 27.4% from $6,199 in 1993 to $7,900 in 1994. The increase was primarily due to sales generated by Champps' second restaurant after its opening in October 1994 in Addison, Texas. In addition, sales at Champps' Minnetonka, Minnesota restaurant increased 2.4% in 1994 compared to 1993. Food sales as a percentage of total net sales by Champps-owned restaurants were 63% in 1994 and 66% in 1993. The decrease in food sales as a percentage of total sales in 1994 is due to higher liquor sales in Champps' new restaurant. Royalty and Franchise Fee Revenue. Royalty and franchise fee revenue increased 76.5% from $362 in 1993 to $638 in 1994. The increase is attributable to a $68 increase in franchise fees generated from new franchised restaurants, $80 of revenue recognized in connection with signing a multi-unit development agreement in 1994 and a $128 increase in royalty income in 1994. The increase in royalty income is due to a combination of a 3.7% increase in comparable restaurant sales at franchised restaurants and three additional franchised restaurants in operation during 1994 as compared to 1993. Cost of Sales and Restaurant Operating Expenses. Cost of sales increased 29.8% from $1,753 in 1993 to $2,275 in 1994 due to the opening of Champps' new restaurant in Addison, Texas. Cost of sales as a percentage of net sales by Champps-owned restaurants increased to 28.8% in 1994 as compared to 28.3% in 1993. The increase is attributable to higher costs generally associated with the initial period of operations of newly opened restaurants. Restaurant operating expenses increased 31.4% from $3,120 in 1993 to $4,099 in 1994, and increased as a percentage of net sales by Champps-owned restaurants from 50.3% in 1993 to 51.9% in 1994. The increase is attributable to increased marketing and promotion expenses associated with the opening of the Addison, Texas restaurant and increased workers' compensation, percentage rent, and repairs and maintenance expenses during 1994. Direct Franchise Expenses. Direct franchise expenses increased from $45 in 1993 to $120 in 1994, and increased as a percentage of royalty and franchise fee revenue from 12.4% in 1993 to 18.8% in 1994. This increase is primarily attributable to the recognition of direct expenses incurred with respect to the opening of two new franchised restaurants in 1994 compared to assistance provided for only one in 1993. The increase is also due to an increase in franchised restaurant sales, which resulted in increased licensing fees paid by Champps to the former owner of the "Champps" trade name. Depreciation and Amortization. Depreciation and amortization increased 76.3% from $224 in 1993 to $395 in 1994 and increased as a percentage of total revenue from 3.4% in 1993 to 4.6% in 1994. The increase is attributable to depreciation and amortization of preopening costs associated with Champps' new restaurant in Addison, Texas. General and Administrative Expenses. General and administrative expenses increased 106.8% from $596 in 1993 to $1,233 in 1994 and increased as a percentage of total revenue from 9.0% in 1993 to 14.3% in 1994. The increase is attributable to increased corporate salaries and benefits associated with the addition of certain key management personnel, professional fees, corporate travel expenses and general office expenses incurred in anticipation of implementing Champps' expansion strategy. Interest Income and Expense. Interest income increased from $14 in 1993 to $201 in 1994. The increase in interest income was due to the investment of unused proceeds from Champps' initial public offering in April 1994. Interest expense increased 36.4% from $90 in 1993 to $122 in 1994. The increase in interest expense was due to a $47 loss on its short-term investment portfolio attributable to the declining value of Champps municipal bond investment, offset, in part, by a reduction in interest expense due to the repayment of a portion of outstanding indebtedness with proceeds from Champps' initial public offering. COMPARISON OF YEAR ENDED DECEMBER 31, 1993 TO YEAR ENDED DECEMBER 31, 1992 Net Sales by Champps-Owned Restaurants. Net sales by Champps-owned restaurants decreased 5.4% from $6,554 in 1992 to $6,199 in 1993. The decrease was primarily due to the sale of a Champps-owned restaurant in February 1992, which generated $240 in net sales for the seven weeks it was owned by Champps in 1992. Sales at Champps' Minnetonka, Minnesota restaurant decreased 1.8% in 1993 compared to 1992 due to a decrease in liquor sales. Food sales as a percentage of total net sales by Champps-owned restaurants remained consistent at 67% in 1993 and 1992. Royalty and Franchise Fee Revenue. Royalty and franchise fee revenue increased 37.2% from $263 in 1992 to $362 in 1993. Initial franchise fee revenue recognized in 1993 was $67 compared to $27 in 1992. The increase in franchise fee revenue in 1993 was attributable to two franchised openings in 1993 compared to only one in 1992. Royalty revenues increased 25% from $236 in 1992 to $295 in 1993. This increase was due to new franchised restaurants opened during 1993, as well as increased sales at existing franchised restaurants. Cost of Sales and Restaurant Operating Expenses. Cost of sales decreased 5.5% from $1,856 in 1992 to $1,753 in 1993. Cost of sales as a percentage of net sales by Champps-owned restaurants was 28.3% in both 1993 and 1992. Restaurant operating expenses decreased 4.1% from $3,253 in 1992 to $3,120 in 1993, but increased as a percentage of net sales by Champps-owned restaurants from 49.6% to 50.3%. This percentage increase is primarily attributable to a decrease in sales at Champps' Minnetonka, Minnesota restaurant. Direct Franchise Expenses. Expenses associated with franchise operations increased 51.8% from $29 in 1992 to $45 in 1993. The increase is attributable to the addition of franchise personnel responsible for overseeing Champps franchised operations. General and Administrative Expenses. General and administrative expenses increased 26.3% from $472 in 1992 to $596 in 1993, and increased as a percentage of total revenue from 6.8% in 1992 to 9.0% in 1993 as a result of costs incurred to settle certain litigation. During the thirty-nine weeks ended October 1, 1995, Champps' operating activities provided cash flow of approximately $481. The cash flow from Champps' restaurants was largely offset by pre opening expenses related to the opening of the third and fourth Champps-owned restaurants in Edison and Marlton, New Jersey. Champps believes that it will continue to generate cash from operating activities and anticipates that this cash, along with the cash generated from Champps' initial public offering and its line of credit, will continue to be used to fund the development of additional Champps-owned restaurants through December 1995. Champps has continued its development efforts and opened its third Champps-owned restaurant during the quarter ended July 2, 1995 and its fourth Champps-owned restaurant during the quarter ended October 1, 1995. Approximately $7.4 million was incurred for the construction of existing and future restaurants and other fixed asset purchases. Champps expects that it will use a significant portion of its capital resources to fund new restaurant development and construction. Additionally, Champps paid approximately $160 in construction advances to expand its corporate offices. Champps generated approximately $462 in cash from financing activities during the thirty-nine weeks ended October 1, 1995. The funds were obtained from borrowings under its line of credit and $270 of proceeds received from the exercise of warrants and stock options. Champps also expended approximately $343 to repay a portion of its long-term debt. Champps plans to open two new Champps Americana restaurants during the fourth quarter of 1995 and has entered into noncancellable lease agreements for each of these restaurants. The estimated cash required to complete these restaurants, including pre-opening expenses, is approximately $2,700. In August 1995, Champps entered into a $1,500 revolving line of credit agreement with a bank. The purpose of the credit facility is to provide working capital for new restaurant development. The line of credit expires on August 10, 1996 and bears interest at a variable rate equal to the bank's prime rate plus 1%. As of October 1, 1995, borrowings under this line of credit were $535. In August 1995, Champps entered into a multi-site sale leaseback financing agreement with a third party finance company to provide sale leaseback financing to Champps for up to 6 new restaurant sites in which the Company owns the real estate. Such agreement expires on December 31, 1997. Such new site must be approved by the third party prior to any funding under the agreement. Champps anticipates that the remaining net proceeds of its 1994 initial public offering, cash flow from operations, availability of funds under its line of credit agreement, it's sale leaseback financing agreement and equipment financing agreements will be sufficient to fund planned expansion through December 1995. In order to allow Champps to continue to develop and build restaurants, DAKA agreed in the Merger Agreement to provide loans to Champps up to the aggregate principal amount of $3,000 bearing interest at a fixed rate of 10% per annum and maturing on October 10, 2000 and upon such other terms as are normal and customary for loans of this type. On December 19, 1995 DAKA entered into a loan agreement (the "DAKA Loan Agreement") with Champps Entertainment of Wayzata, Inc. ("CEW"), a newly formed wholly-owned subsidiary of Champps to which Champps had previously transferred its recently completed restaurant in Irvine, California, and rights to develop a new restaurant in Reston, Virginia. The loans are guaranteed by Champps and secured by the Irvine and Reston restaurants and the capital stock of CEW. As of the date of this Joint Proxy Statement-Prospectus, approximately $710 has been loaned by DAKA to CEW to refund costs incurred by Champps to build the Irvine restaurant. Additional loans will be made to CEW as required to fund construction of the Reston restaurant. If the Merger Agreement is terminated, DAKA will thereafter not be obligated to make additional loans, but loans made prior to such termination will remain outstanding under the terms of the DAKA Loan Agreement. These loans should provide the expansion capital required to fund Champps' construction efforts through June 1996. If the Merger between Champps and DAKA is not consummated for any of the reasons described in Note 5 of the Notes to Consolidated Financial Statements as of October 1, 1995, Champps anticipates the need to raise additional debt or equity capital in order to fund the construction of new restaurants in 1996. The primary inflationary factors affecting Champps' operations include food, beverage and labor costs. Labor costs are generally affected by changes in the labor market and, due to the fact that a large portion of Champps' employees are paid at federal and state established minimum wage levels, changes in such wage laws affect Champps' labor costs. In addition, most of Champps' leases require the proportionate payment of taxes, maintenance and repairs and these costs are subject to inflationary pressures. While Champps believes that the low levels of inflation in recent years has contributed to the stabilization of food and beverage costs, there is no assurance that this will continue into the future. As described in Note 2 of the Notes to Consolidated Financial Statements for the year ended December 31, 1994, Champps has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Champps' adoption of Statement of Financial Accounting Standards No. 115 did not have a material financial statement impact on Champps Consolidated Financial Statements. DAKA, formed in 1988 in connection with the merger of Daka and Fuddruckers, is a diversified foodservice and restaurant company operating in the contract foodservice management industry and in the restaurant industry. Daka provides restaurant-style contract foodservice management at a variety of schools and colleges, corporate offices, factories, healthcare facilities, museums and government offices. Fuddruckers owns, operates and franchises Fuddruckers restaurants, which specialize in moderately-priced, casual dining for families and adults. In 1994, CDVI, a wholly-owned subsidiary of DAKA, acquired a 57% voting interest in ADC, a newly formed company which acquired two restaurants operated under the name "Champps Americana" pursuant to a license from Champps. ADC has the exclusive rights to develop Champps Americana restaurants in Ohio, Florida and seven Illinois counties. Founded in 1973, Daka is one of the 10 largest contract foodservice management companies in the United States. Operating under the name "Daka Restaurants," Daka seeks to provide a retail restaurant atmosphere for its guests by operating, among other things, a variety of branded concepts such as Taco Bell, Burger King, Pizza Hut and Dunkin Donuts pursuant to licensing arrangements, as well as its own signature concepts within its foodservice operations. During fiscal 1995 and 1994, Daka focused on executing its three- year growth plan, announced at the end of fiscal 1993, to double the size of its existing foodservice business by the end of fiscal 1996. At the beginning of fiscal 1994, Daka acquired the majority of the assets and foodservice contracts comprising Service America Corporation's educational foodservice business. The acquired business provided contract foodservice to a variety of colleges and universities, and to public and private elementary and secondary schools, many of which are located in geographic areas where Daka had a significant presence. In February 1995, Daka, through a newly formed 80.01% owned limited partnership, Daka Restaurants, L.P., acquired certain educational foodservice and corporate dining contracts from SMMSLP. The acquired contracts expanded Daka's geographic presence into the western United States and strengthened its existing presence in the midwest. As a result of these two acquisitions, Daka achieved its three-year growth objectives in just nineteen months. Daka believes that, as a result of current and anticipated cost containment policies, more public and private educational and healthcare facilities will seek to manage their foodservice costs by replacing self-operated foodservice operations with contract foodservice management. Daka intends to pursue these expanding markets through its internal sales force and by continuing to acquire other contract foodservice management companies. Fuddruckers restaurants, with an average check of $6.15 and a "Kids Eat Free" program after 4:00 p.m. on Monday through Thursday, are designed to appeal to both families and adults seeking value in a casual dining atmosphere. The menu prominently features Fuddruckers' signature hamburgers, which are cooked to order and served on buns baked daily "from scratch" at each restaurant. The Fuddruckers restaurant decor features an open grill area, a glassed-in butcher shop and meat display case, an open bakery and a colorful display island of fresh produce and a variety of condiments, sauces and melted cheeses from which guests may garnish their own meals. Fuddruckers opened its first restaurant in 1980 in San Antonio, Texas and as of September 30, 1995, has expanded its operations to include 102 Fuddruckers-owned and 72 franchised restaurants located throughout the United States and in Canada, the Middle East and Australia. In fiscal 1995, Fuddruckers opened 22 Fuddruckers-owned restaurants and 9 franchised restaurants. In fiscal 1996, Fuddruckers plans to open 30 domestic Fuddruckers-owned and 20 franchised restaurants of which up to 5 will be opened in foreign countries. Acquisitions have been and are expected to continue to be an important part of DAKA's growth strategy both in its contract foodservice management and its restaurant businesses. DAKA believes it has made sufficient recent investments in its corporate infrastructure and operational systems to support significant future growth through acquisitions in existing and new markets. In the ordinary course of its business, DAKA engages in preliminary discussions with other foodservice and restaurant companies concerning possible acquisitions of their business, as well as investments in controlling or minority equity interests. In furtherance of its acquisition strategy, DAKA from time to time enters into confidentiality agreements and/or non-binding letters of intent while it conducts a due diligence review of the business it proposes to acquire or make an investment in and pursues negotiations with respect to terms and conditions of binding agreements. At any given time DAKA is likely to have one or more such letters of intent outstanding and to be actively negotiating with respect to multiple possible transactions. Two potential transactions have progressed to the point where they can be considered probable, although binding obligations of DAKA or any other party with respect to these and any other transactions will arise only upon the execution of final agreements and, accordingly, there can be no assurance that these or any other transactions will be completed in the near future or at all. DAKA has entered into a letter of intent with respect to the possible acquisition at a purchase price of approximately $2.5 million of a 60% equity interest in a company engaged in the business of owning, operating and franchising retail bagel and muffins cafes; this company currently has 55 franchised and 5 owned stores in the Eastern United States and annual sales of approximately $1 million. DAKA is also negotiating the possible acquisition of a minority equity interest in a company engaged in the business of owning, operating and franchising restaurants that serve Mexican food in a "taqueria" format; this company currently has 26 franchised and 26 owned stores in California and the South-Western United States and annual sales of approximately $18 million. The transaction is expected to be structured as an investment by DAKA in convertible preferred stock representing a 16.7% equity interest on a fully-diluted basis at a purchase price of approximately $5 million and warrants to acquire within 18 months convertible preferred stock representing an additional 13.3% equity interest on a fully-diluted basis at a purchase price of approximately $7.1 million. These acquisitions are not expected to constitute significant acquisitions and pro forma financial information reflecting the result of these acquisitions if consummated is not and will not be required to be provided. See Note 13 of Notes to Consolidated Financial Statements for financial information related to Daka, Fuddruckers and ADC incorporated herein by reference. Champps owns and operates six vibrant, energetic, casual theme restaurants under the name "Champps Americana" located in Minnesota, Texas, New Jersey, Indiana and California. It also has a total of twelve additional restaurants in operation pursuant to franchise or license agreements in the following areas: Minneapolis/St. Paul metropolitan area; Sioux Falls, South Dakota; Milwaukee, Wisconsin; Charlotte, North Carolina; Cleveland, Ohio; and Omaha, Nebraska. Champps plans to continue to expand its concept nationally by establishing additional Champps-owned restaurants. Champps has signed leases to open three additional Champps-owned restaurants in Reston, Virginia, Denver, Colorado and Hempstead, New York. Champps has also entered into various license, franchise and development agreements, some of which are on an exclusive basis, which grant third parties rights to open and operate Champps Americana restaurants in various territories. See "--Franchises." The Champps Americana concept is based upon providing the best possible food, value and service to its customers. Menu items are prepared daily from scratch using only ingredients from suppliers who meet Champps' quality control standards. The restaurants' diverse menu has over 120 items including burgers, pastas, salads, sandwiches, ribs, pizzas, seafood, chicken and a variety of other dishes all served in generous portions. Customer service is based on a team approach so that each patron is continually attended to, and employees go through extensive on-going training to ensure consistent service. Although food and service are the most important parts of the Champps Americana concept, an atmosphere that is entertaining, yet comfortable, is also critical. Management believes the Champps Americana concept enjoys a high level of repeat business and customer diversity because it provides great food and service in an exciting and entertaining environment. The goal of Champps is to promote an entertaining and energetic atmosphere. In the typical Champps Americana restaurant, customers are provided a choice of seating in the main dining area, at the diner-type counter, in the bar area, or, in some locations, outside on the patio. Champps Americana restaurants generally have multiple levels and open sight lines so that all areas, including the bar and kitchen, are visible and allow customers to feel a part of all the varied activities in the restaurant. These activities include watching sporting events on multiple television screens, listening to music that is selected by a disc jockey based upon the time of day or season, watching the cooks prepare meals, playing arcade games in the discreetly located game room, or visiting the Champps Americana gift shop. In addition, the bar provides a staging area for on-going promotional events that add to the restaurant's excitement. Although food and service are considered keys to each restaurant's success, the entertaining atmosphere provides an added reason for people to eat and drink at Champps Americana restaurants. In an industry with intense competition, Champps believes it has distinguished itself from other restaurants with its service, entertaining atmosphere and restaurant economics. Champps believes it can take advantage of its perceived distinctiveness by actively developing its Champps Americana restaurant concept through the building of new Champps-owned restaurants. The Champps Americana restaurant concept has been developed and refined since the first Champps Americana restaurant was opened in St. Paul, Minnesota in 1984 by Dean P. Vlahos, Champps' founder, President and Chief Executive Officer. Mr. Vlahos opened a second Champps Americana in Richfield, Minnesota, in 1986 and owned both restaurants until they were sold in 1989. These two original restaurants remain franchises/licensees of Champps. The sale of the two original Champps Americana restaurants allowed Mr. Vlahos to open his larger, prototype Champps Americana restaurant in Minnetonka, Minnesota in November 1990. On May 23, 1990, Champps was formed to franchise the Champps Americana concept. Champps of Minnetonka, Inc. owned the Champps Americana restaurant in Minnetonka, Minnesota and Champps Franchising, Inc. was formed for the specific purpose of establishing a Milwaukee, Wisconsin franchise. Prior to February 14, 1994, Champps was comprised of three separate companies each under common ownership and control. Pursuant to a merger agreement, all three of these companies were combined into one company, Champps of Minnetonka, Inc., and this company changed its name to Champps Entertainment, Inc. (which, with its subsidiaries, is referred to as "Champps" in this Joint Proxy Statement-Prospectus). All operations, including the operation of Champps-owned restaurants and franchising, are performed by Champps. General. The Champps Americana restaurant concept attracts a broad customer base, including families, and offers a wide variety of quality food in an exciting, entertaining and service-oriented environment. Champps believes that it differentiates its restaurants by emphasizing the following strategic elements: (a) Quality food items prepared from scratch daily, emphasizing freshness, variety, generous portions and attractive presentation. (b) Outstanding service which is the result of intensive employee training and supervision that is intended to create motivated, service-oriented employees working toward strong customer satisfaction. (c) An entertaining and energetic environment providing more than just a place to simply eat or drink. Food. The food offerings at Champps Americana restaurants combine a variety of freshly prepared core menu items with unique daily specials. Menu items include a wide selection of appetizers, soups, salads, innovative sandwiches, pizza, burgers, entrees including chicken, beef, fish and pasta and desserts. Selections reflect a variety of ethnic and regional cuisines and traditional favorites. Because Champps' menu is not tied to any particular type of food, Champps can introduce and eliminate items based on current consumer trends without altering its theme. Champps Americana restaurants also offer daily specials which allows for changing food choices. Champps considers its extensive menu selection to be an important factor in the appeal of Champps Americana restaurants and, accordingly, continuous attention is devoted to the development of the menu items. Portion sizes are generous and each dish is attractively presented. Champps believes that these qualities give customers a sense of value. Entree prices currently range from $4.50 to $14.25. Champps emphasizes freshness and quality in its food preparation. Fresh sauces, dressings, and mixes are prepared on the premises, generally from original ingredients with fresh produce. Champps invests substantial time in training and testing kitchen employees to maintain consistent food preparation. Strict food standards at Champps-owned restaurants have also been established to maintain quality. These standards include the establishment of several food purchasing criteria, such as purchasing from acceptable suppliers and purchasing produce only of specified quality. Franchisees must also maintain these same standards and enter into similar supply arrangements. Service. The customer's experience is enhanced by the attitude and attention of restaurant personnel. Accordingly, Champps emphasizes prompt greeting of arrivals, frequent visits to customer tables to monitor customer satisfaction and service, and friendly treatment of its customers. Service is based upon a team concept so that customers are made to feel that any employee can help them, and they are never left unattended. Success of the Champps Americana restaurants depends upon employee adherence to these standards. To maintain these standards, Champps seeks to hire and train personnel who will work in accordance with Champps' philosophy and frequently rewards individual and restaurant achievement through several recognition programs intended to build and maintain employee morale. All of the service personnel at each Champps Americana restaurant meet with the managers at two daily pre-shift motivational meetings. Restaurant promotions, specials and quality control are all discussed and explained during these meetings. Also, employee enthusiasm is raised so that the employees can help increase the energy level and excitement of the restaurant. Restaurant Design and Decor. Champps-owned, franchised and licensed restaurants are designed and decorated in a casual theme, although they differ somewhat from each other. Champps' standard restaurant features a bar, open kitchen and dining on multiple levels including a diner-type counter. Customers can also dine at the bar or outside on the patio, where available. The spacious design facilitates efficient service, encourages customer participation in entertainment and promotional events and allows customers to view the kitchen, dining area, and bar. Strategically placed television screens stimulate customer perception of activity and contribute to the total entertainment experience and excitement of the restaurant. Champps believes that as it expands it can adopt its core concept to fit the demands and opportunities of many locations. Entertainment. An important part of the Champps Americana dining experience is the entertainment. Patrons may watch one of several sporting events that are being broadcast, or listen to a variety of music played by the disc jockey, which music is changed for the time of day and season of the year. The exposed kitchen offers customers the opportunity to observe the cooks, and in certain locations a discreetly located game room is provided for arcade games. The entertainment aspects of the Champps Americana restaurants are designed to encourage repeat visits, increase the length of a customer's stay and attract customers outside of normal peak hours. Along with the basic activities described in the preceding paragraph, a variety of creative promotions and activities are conducted such as "Family Bingo," "Spring Time Big Bike Give Away" and Karaoke. These promotions and activities allow for customer participation and are continually changing. Change of the ambiance is also experienced in each restaurant when they are decorated for the holidays and when the dress of the restaurant staff is changed for the seasons. The different looks and activities of the restaurant provide customers a different feel each time they visit, thus encouraging repeat business. Champps sells merchandise such as t-shirts, hats and sweatshirts bearing the Champps name. Although not currently a significant source of revenue, the sale of its merchandise is believed to be an effective means of promoting the Champps name. Champps' long-term objective is to expand the Champps Americana restaurant concept nationally by opening additional Champps-owned and operated restaurants. Champps does not anticipate significant expansion through new franchise agreements, but expects that new franchise locations will open pursuant to existing franchise development and licensing agreements. Development of Champps-owned restaurants will be concentrated in selected markets with population density levels sufficient to support the restaurants. As of October 20, 1995, Champps has a total of six Champps-owned restaurants located in the following cities: Minnetonka, Minnesota; Addison, Texas; Edison and Marlton, New Jersey; Indianapolis, Indiana and Irvine, California. Champps has leased space to open three new Champps-owned restaurants in Reston, Virginia, Denver, Colorado and Hempstead, New York. Champps is currently negotiating contracts to lease space to open additional Champps-owned restaurants. Champps believes its concept can be adapted to a variety of locations, both in terms of market demographics and configuration of the restaurant. Champps-owned restaurants are expected to be completed at a cost of approximately $2,300,000, less landlord concessions, per restaurant for space that was not previously a restaurant location and possibly less if the space was previously a restaurant. The typical restaurant size will be approximately 8,000 to 12,000 square feet. The locations of Champps Americana restaurants are very important. Potential sites are reviewed for a variety of factors, including trading-area demographics, such as target population density and household income levels; an evaluation of site characteristics, including visibility, accessibility, traffic volume and available parking; proximity to activity centers, such as shopping malls and offices; and an analysis of potential competition. Champps will locate its restaurants in either shopping centers, such as its Champps-owned Minnetonka and Edison restaurants, and those of some of its franchisees, or in free-standing buildings in locations adjacent to a shopping center such as its Addison, Texas; Marlton, New Jersey; and Indianapolis, Indiana restaurants. General. Champps Americana restaurants are generally open from 11:00 a.m. to 1:00 a.m. seven days a week serving lunch, dinner and late night appetizers. Closing times of Champps Americana restaurants will vary based upon state laws concerning operating hours. Sunday brunch is served beginning at 10:00 a.m. Each Champps Americana restaurant maintains standardized food preparation and service manuals which are designed to enhance consistency of operations among the restaurants. Although Champps Americana restaurants differ in some respects, Champps attempts to have each Champps-owned and franchised restaurant operating under uniform standards and specifications. Management and Employees. The management staff of a Champps Americana restaurant are divided into three areas, the General Manager, Front-of-House managers and Back-of-House managers. The General Manager has responsibility for the entire restaurant. Front-of-House management consists of an associate manager, two floor managers and a bar manager. Back-of-House management consists of a kitchen manager, two to three assistant kitchen managers and a daily specials chef. The Front-of-House managers spend time in the dining and bar area supervising the staff and providing service to customers while the kitchen manager supervises all aspects of food preparation. Supervision and Training. Although restaurant managers have responsibility for their Champps Americana restaurant, Champps officers spend considerable time reviewing restaurant operations. Management training of restaurant managers involves an intensive five week program in which managers are educated in all facets of the Champps Americana concept. Front-of-House managers spend four weeks on Front-of-House training and one week on Back-of-House training. Kitchen managers spend four weeks in Back-of-House training and one week in Front-of-House training. Further, each restaurant conducts a significant amount of training in accordance with the detailed policy and procedure manuals that provide a blueprint for restaurant operations for all levels of employees. Managers are evaluated every six months using a two-pronged program of self-evaluation and a structured review. Employees are reviewed by managers on an as-needed basis. Where appropriate, part of their review focuses on the secret shopper reports which are performed on a regularly scheduled basis to evaluate performance of employees and overall operations of the restaurant. Managers are compensated based on salary plus monthly bonus. The bonus is calculated based on achieving restaurant sales and profit goals. Other employees are paid on an hourly basis. Purchasing. Champps has established several purchasing criteria, including acceptable suppliers, product quality, and distribution channels. National suppliers are used when advantageous, as in the areas of meat, cheese, seafood, and operating supplies. Produce and certain perishable items are obtained locally to ensure freshness. Other than Champps' exclusive supply contract with Coca-Cola, Champps does not have any long-term contracts with, and is not dependent on, any single supplier. Champps believes that adequate supplies and alternative sources are available for all of its food and beverage items. Champps does not have a food distribution center or commissary and does not intend to establish either in the future. As Champps expands it intends to continue to use its current suppliers when economical and find new local suppliers that will meet Champps' standards. Advertising and Marketing. Champps has achieved its historical success while expending minimal amounts on advertising and marketing. Champps Americana restaurants have relied on location and customer word-of-mouth. However, Champps-owned restaurants expend a different amount of resources on in- restaurant marketing and promotions. The restaurant business is highly competitive and is affected by changes in taste and eating habits of the public, local and national economic conditions affecting spending habits, demographic trends, location of competing restaurants and traffic patterns. The principal competitive factors in the restaurant industry are the quality and price of the food and service provided. Restaurant location, name recognition, advertising and restaurant decor are also important. Champps Americana restaurants compete on a general basis with a large variety of national and regional restaurant operations and restaurant chains as well as locally owned restaurants and other establishments. The greatest competition to Champps Americana restaurants comes from the American casual theme segment of the industry. Many companies operating competitive restaurants and engaged in competitive franchising programs have greater financial resources, operational experience, marketing capability and name recognition than Champps. Future Franchises. Prior to Champps' initial public offering in 1994, Champps lacked consistency in its franchise agreement terms. Since then Champps has focused its franchise operations, and new franchisees enter into agreements with Champps on generally identical terms. Under the new arrangements, a typical franchisee pays an initial fee of $75,000 per restaurant, of which a part may be associated with a development fee, a continuing royalty fee of 3 1/4% of gross sales, and a regional and/or national advertising fee of 1/2% of gross sales at such time as Champps establishes a regional/national advertising program. Among the services and materials that Champps provides to franchisees are site selection assistance, assistance in design development, an operating manual that includes quality control and service procedures, training, on-site pre-opening supervision and consultation relating to the operation of the franchised restaurants. Champps grants both single and multi-restaurant development rights depending upon market factors and franchisee capabilities. With respect to multi-restaurant agreements, the franchisee's continuing right to obtain franchises is contingent upon the franchisee's continuing compliance with the restaurant development schedule. All franchisees are required to operate their restaurants in accordance with Champps' standards and specifications, including controls over menu selection and food quality and preparation. Champps approves all restaurant site selections and applies the same criteria used for its own restaurant sites. Champps requires all new franchisees to provide at least annual financial statements reviewed by an independent certified public accountant and conducts its own audit of the franchisee's books and records. Periodic on-site inspections are conducted to assure compliance with Champps standards and to assist franchisees with operational issues. Franchisees bear all direct costs involved in the development, construction and operation of their restaurants. Development Agreements. Champps and ADC, in which CDVI has a 57% interest, are parties to a Service Mark License Agreement (the "ADC Agreement") whereby ADC has the exclusive right to use Champps' licensed marks including the "Champps" name to develop restaurants in the states of Florida and Ohio and in the city of Chicago and its suburbs (the "ADC Territory"). Champps is not required to perform any services for ADC. ADC must maintain the overall Champps standards in its restaurants. ADC is not required to pay a front-end fee per restaurant but is required to pay a monthly restaurant royalty payment equal to the greater of $5,000 per year for each restaurant, or 1 1/4% of a restaurant's monthly gross sales for each restaurant with annual gross sales of less than $4,000,000, which monthly fee increases to 1 3/4% of all annual gross sales once the $4,000,000 threshold is attained. If ADC sells any restaurant to a third party and does not retain an ownership interest of at least 15%, or does not continue to manage the restaurant pursuant to the Agreement, then such assignee must pay a flat royalty fee of 2 1/4% of gross sales. ADC must have at least 12 restaurants open and operating on or before January 1, 2004. If ADC fails to open at least 12 restaurants by 2004, Champps will have the right and option to terminate the Agreement. However, ADC will have the right to keep its existing restaurants and will continue to be required to pay the monthly royalty fees. Even if the Agreement is terminated, ADC will continue to have the right to develop restaurants within the city limits of a city located in the ADC Territory in which ADC has developed two or more restaurants that are open and operating. If ADC fails to have two or more restaurants opened and operating within such city limits by 2004, Champps will have the right to develop a restaurant in that city. Champps has no obligation to assist ADC with training managers or opening its restaurant. In June 1993, Champps entered into a development agreement with a franchisee who agreed to open and operate three restaurants in the greater Milwaukee Metropolitan area by March 1997. The franchisee paid an initial fee of $75,000 on the first restaurant in Greenfield, Wisconsin and has prepaid $25,000 for each of the next two restaurants. The franchisee pays a royalty fee of 3 1/4% of weekly gross sales and an advertising fee of 1/2%, which will be paid on each restaurant when Champps begins an advertising program. The franchisee has one restaurant in operation in Greenfield, Wisconsin. On June 30, 1994, Champps entered into a Development Agreement which gives the franchisee the exclusive right to develop four franchises in South Carolina and North Carolina. The franchisee paid Champps a development fee of $80,000 for the rights to the territory. The franchisee is obligated to develop the four restaurants by June 30, 2001. The franchisee will pay an initial fee of $55,000 for each of the first three restaurants and $30,000 for the fourth restaurant. The franchisee pays a royalty fee of 3 1/4% of weekly gross sales from the first three restaurants and 3% of such sales from the fourth. In addition, the Franchisee is required to pay an advertising fee of 1/2% of gross sales for each restaurant at such time as Champps establishes an advertising program. Other Franchisees. There are other existing individual franchise agreements for Champps restaurants in St. Paul, Maplewood, Burnsville, Minneapolis and Maple Grove, Minnesota; Sioux Falls, South Dakota; and Omaha, Nebraska and existing license agreements in New Brighton and Richfield, Minnesota and Cleveland, Ohio. Currently, the Richfield and St. Paul franchisees do not pay Champps a royalty fee. However, from May 1999 through May 2009 the St. Paul franchisee will pay a fee equal to 1% of the franchisee's weekly gross sales. The Maplewood franchisee pays a royalty fee of 1% of weekly gross sales. Burnsville and Sioux Falls franchisees pay a 1 1/4% royalty fee of weekly gross sales. The Omaha franchisee pays a fee of 2 1/4% on weekly gross sales and is required to pay an advertising fee of 1/2% of weekly gross sales at such time as Champps establishes an advertising program. The New Brighton franchisee pays Champps a monthly fee equal to 1 1/4% of monthly gross sales; and if annual sales are greater than $4 million, the franchisee pays a fee equal to 1 3/4% of monthly gross sales. The Minneapolis franchisee pays a royalty fee of 1 3/4% of monthly gross sales. The Maple Grove franchisee pays a royalty fee equal to 1 3/4% of monthly gross sales. The Cleveland, Ohio franchisee pays a monthly fee equal to 1 1/4% of monthly gross sales; and if annual sales are greater than $4 million, the franchisee pays a fee equal to 1 3/4% of monthly gross sales. Generally, Champps is required to provide the franchisees with assistance in the overall operation of the franchised restaurants, including training managers, assisting in the opening of new restaurants and developing promotions. The franchisees are required to maintain the standards of operation as set forth by Champps, including recipes, menu items, uniforms and suppliers. In February 1994, Champps entered into a preliminary agreement with the affiliates of the franchisee of the Minneapolis restaurant to develop a restaurant in Rochester, Minnesota. The terms of the franchise agreement, when entered into, will be on terms identical to the Minneapolis franchise. However, if the franchisee decides not to develop a restaurant in Rochester, it can request a change of location to develop a restaurant in a city with a total population of less than one million people, but Champps has the right to refuse the request. Regulation of Franchising Activities. Champps is subject to Federal Trade Commission ("FTC") rules and certain state laws which regulate the offer and sale of franchises. Champps is also subject to a number of state laws which regulate substantive aspects of the franchisor-franchisee relationship. The FTC Trade Regulation Rule relating to Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures (the "FTC Rule") requires Champps to furnish to prospective franchisees a franchise offering circular containing information prescribed by the FTC Rule. Fourteen states presently regulate the offer and sale of franchises by laws requiring both disclosure to prospective franchisees and registration of the franchise offerings with state authorities. Champps has registered its franchise in all of these states. The laws in many states regulate the substantive aspects of the franchisor-franchisee relationship by restricting the ability of a franchisor to terminate, cancel, refuse to renew or substantially change the competitive circumstances of its franchisees. Other laws relate to fair dealing, discrimination and market protection in the franchisor-franchisee relationship. To the extent that the terms of Champps' agreements with any of its franchisees violate any such law applicable to their relationship, the provisions of such law will govern. Champps believes that its operations comply in all material respects with the FTC Rule and applicable state franchise laws. Champps cannot predict, however, the effect on its operations of future legislation or regulations which might have an adverse impact on the franchise industry generally. Champps is subject to various federal, state and local laws and regulations affecting the operation of its restaurants. Champps Americana restaurants are subject to licensing and/or regulation by various fire, health, sanitation and safety agencies in the applicable state and/or municipality. The suspension of or inability to renew a license could interrupt operations at an existing restaurant. In addition, difficulties or failures in obtaining the required licenses or other regulatory approvals could delay or prevent the opening of a new restaurant. Champps Americana restaurants are subject to state and local licensing and regulation with respect to selling and serving alcoholic beverages, which accounted for approximately 37% of Champps Americana restaurants' total sales during the year ended December 31. 1994. The failure to receive or retain, or a delay in obtaining, a liquor license in a particular location could adversely affect Champps' or a franchisee's operations in that location and could impair Champps' or such franchisee's ability to obtain licenses elsewhere. Typically licenses must be renewed annually and may be revoked or suspended for cause. Champps' liquor licenses are issued by various municipalities which may or may not have similar provisions for transfer of these licenses upon consummation of the Merger difficulty or failure to retain or obtain required licenses or other regulatory approvals to operate Champps restaurants after the Merger could have a material adverse effect on Champps' current operations or delay or prevent the opening of new restaurants. There is no assurance that all of the municipalities will approve transfer of Champps' liquor licenses upon consummation of the Merger. Champps is subject to "dram shop" statutes at its current restaurants which generally give a person injured by an intoxicated person the right to recover damages from the establishment that has wrongfully served alcoholic beverages to the intoxicated person, and Champps will be subject to such statutes in certain other states where it locates restaurants. Champps carries liquor liability coverage in the amount of $1 million, with a $10 million umbrella policy. However, a judgment against Champps under a dram shop statute in excess of Champps' liability coverage, or any inability to continue to obtain such insurance coverage at reasonable costs, could have a material adverse effect on DAKA and Champps. The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. Champps is subject to federal and state fair labor standards statutes and regulations, which govern such matters as minimum wages, overtime and other working conditions. A significant number of food service personnel are paid at rates based on applicable federal and state minimum wages. Significant additional government-imposed increases in minimum wages, paid leaves of absence, mandated health care benefits and increased tax payments with respect to employees who receive gratuities could have an adverse effect on particular Champps Americana restaurants and Champps as a whole. Effective February 1, 1994, Champps entered into a Master Agreement with Champs Restaurants, Inc. ("CRI"), an unrelated corporation located in San Antonio, Texas, whereby CRI assigned to Champps all of its right, title, and interest in and to certain "Champ's" and "Champps" service marks, trademarks and trade names, along with the goodwill of CRI's business that was associated with such marks and names. As a result of the Master Agreement and the previous activities of Champps, Champps now owns outright all of the names and marks "Champ's," "Champps," "Champps Americana," "Champps American Sports Cafe" and "Champps Entertainment" (collectively, the "Marks") in connection with providing bar and restaurant services, and in connection with the sale of related food products. Champps has also obtained the right from CRI to sue any third party for any past infringements of the Marks. Pursuant to the Master Agreement, Champps issued to CRI 18,824 shares of Champps' Common Stock along with certain piggyback registration rights. In addition, Champps pays CRI a fee equal to one-quarter of one percent ( 1/4%) of the gross sales of Champps' restaurants, excluding four pre-existing Champps restaurants in Minnesota. The maximum fee that Champps is obligated to pay CRI is equal to the prior year's maximum fee, which was $250,000, increased by a percentage that is the lesser of the percentage increase in the Consumer Price Index for that prior year, or four percent (4%). Champps is obligated to pay CRI a minimum of $40,000 a year in fees. In connection with the Master Agreement, Champps has granted an exclusive paid-up license to CRI to use the name "Champ's" (but not any variation thereof, including "Champps") in conjunction with the advertising, promotion and operation of any existing CRI restaurants in Houston, Texas and any future CRI restaurants having the same concept and trade dress as the existing CRI restaurants. CRI's rights to develop future CRI restaurants under the name "Champ's" is limited to the State of Texas. Under the license granted by Champps, CRI has the right to use the Champ's name indefinitely, as long as CRI has existing or future restaurants in operation and complies with standards of quality of service satisfactory to Champps. Both CRI and Champps have agreed not to open, operate, franchise or license any restaurants within a one mile radius of any restaurant being operated by the other party in Houston, Texas. Champps vigorously enforces the Marks against any third parties who infringe upon the Marks by promoting and operating establishments under the Marks or similar names where such activities are likely to cause confusion as to source, sponsorship, affiliation or endorsement between Champps and any such third party. Champps believes that its service marks and name have significant value and are important to the marketing of its restaurants. There can be no assurance, however, that Champps will be successful in enforcing its rights under its service marks and preventing others from using its name. There also can be no assurance that the use of such marks does not, or will not, violate the trademarks of others, that the registrations of Champps' marks would be upheld if challenged, or that Champps would not be prevented from using its marks in certain areas of the country where others might have established bona fide prior rights, any of which events could have an adverse effect on the combined operations of Champps. As of October 27, 1995, Champps had approximately 1,000 employees, including 17 corporate and administrative personnel, 79 restaurant management personnel, and 902 restaurant hourly employees. Champps has experienced little or no difficulty in attracting employees and management believes that relations between Champps and its employees are good. None of Champps' employees are covered by a collective bargaining agreement. Champps has entered into noncancelable lease agreements for restaurants in Minnetonka, Minnesota; Addison, Texas; Edison and Marlton, New Jersey; Reston, Virginia; Indianapolis, Indiana; and Irvine, California. Generally the leases provide between 8,000 to 12,000 square feet of space with terms of 15 to 20 years and require Champps to pay an annual base rental fee and a percentage rent fee, based upon Champps' defined gross sales. In addition, Champps typically pays its proportionate share of operating expenses, taxes, and common area charges. Champps leases its corporate office, located in Wayzata, Minnesota, a suburb of Minneapolis, pursuant to a five year lease at a monthly rate of $5,897. Champps also leases approximately 1,200 square feet adjacent to the Minnetonka restaurant, pursuant to a lease expiring in 2000. This space is used by Champps' management and support staff. Champps Entertainment, Inc. v. Tom Munson (Hennepin County, Minnesota District Court) Munson, who was formerly affiliated with a franchisee of Champps, asserted, among other matters, that Champps had offered to him a franchise and that he had incurred expenses in reliance on such alleged offer. Champps filed for declaratory judgment against Munson and the court granted summary judgment in Champps' favor on all counts except a counterclaim by Munson that he was entitled to reimbursement of expenses incurred based on a promise that he would be awarded a franchise. Champps believes that Munson's claim is without merit and that Champps has meritorious defenses, and Champps intends to vigorously defend such suit. The case is set for trial at the end of January 1996 and Champps believes that its maximum exposure is approximately $50,000. Champps is not a party to any other material litigation. PRINCIPAL AND MANAGEMENT STOCKHOLDERS OF CHAMPPS The following table sets forth the number of shares of Champps Common Stock beneficially owned as of January 3, 1996 by each person known to be the beneficial owner of 5% or more of Champps Common Stock by the Chief Executive Officer of Champps (who was the only executive officer whose salary and bonus during fiscal 1995 exceeded $100,000), and by each director of Champps, and by all directors and executive officers as a group: COMPARISON OF THE RIGHTS OF HOLDERS OF CHAMPPS COMMON STOCK AND DAKA COMMON STOCK As a result of the Merger, holders of Champps Common Stock will become holders of DAKA Common Stock. Such persons will have different rights as stockholders of DAKA than they had as stockholders of Champps. These differences are due to (i) differences in the respective charters and by-laws of Champps and DAKA and (ii) differences between the corporate laws of Delaware, where DAKA is incorporated and by whose laws it is governed, and the corporate laws of Minnesota, where Champps is incorporated and by whose laws it is governed. The following is a summary of certain significant differences between the charter documents of Champps and DAKA and between the laws of Minnesota and Delaware. This summary is not intended to be exhaustive, nor is it a detailed description of such differences. It is qualified in its entirety by the respective charter and by-laws of DAKA and Champps and the corporate laws of Delaware and Minnesota, to which holders of Champps Common Stock are referred. Minnesota law provides that special meetings of stockholders may be called by: (i) the chief executive officer; (ii) the chief financial officer; (iii) two or more directors; (iv) stockholders holding 10% or more of the voting power of all shares entitled to vote (except that the voting power needed to demand a special meeting to directly or indirectly effect a business combination is 25%); or (v) any other person authorized in the articles or by-laws. The Champps By-laws provide that special meetings of stockholders may be called by the parties listed in items (i) through (iv) above. Delaware law provides that special meetings of stockholders may be called only by the directors or by any other person as may be authorized by the corporation's certificate of incorporation or by-laws. The DAKA By-laws provide that special meetings of stockholders may be called by either of DAKA's Chairman or President, and shall be called by any such officer at the request in writing of a majority of the DAKA Board. DIVIDENDS AND REPURCHASES OF STOCK The Champps Board, under Minnesota law, may declare dividends without stockholder approval so long as the corporation will be able to pay its debts in the ordinary course of business after making the distribution. Delaware law permits a corporation, in general, to declare and pay dividends out of surplus or out of net profits for the current and/or preceding fiscal year, and, in general, to redeem or repurchase shares of its stock if the capital of the corporation is not impaired and such redemption or repurchase will not impair the capital of the corporation. The directors of a Delaware corporation may be jointly and severally liable to the corporation for a willful or negligent violation of such provisions of Delaware law. Under Minnesota law, a stockholder has an "absolute right", upon written demand, to examine the following corporate documents: (i) the share register; (ii) records of all proceedings of shareholders for the last three years; (iii) records of all proceedings of the board for the last three years; (iv) the corporation's articles and all amendments currently in effect; (v) the corporation's bylaws and all amendments currently in effect; (vi) certain financial statements and the financial statement for the most recent interim period prepared in the course of the operation of the corporation for distribution to the shareholders or to a governmental agency as a matter of public record; (vii) reports made to shareholders generally within the last three years; (viii) a statement of the names and usual business addresses of its directors and principal officers; (ix) voting trust agreements; (x) shareholder control agreements; and (xi) a copy of agreements, contracts, or other arrangements or portions of them fixing the rights of a class or series of securities issued by the company. Under Delaware law, stockholders, upon the demonstration of a proper purpose, have the right to inspect a corporation's stock ledger, stockholder list, and other books and records. Minnesota law provides that the Champps Articles may be amended by the holders of a majority of the voting power of the shares present at a meeting of stockholders, unless a greater proportion is required by such Articles. The Champps Articles do not require a greater proportion. Under Delaware law, charter amendments require the approval of the directors and the vote of the holders of a majority of the outstanding stock and a majority of each class of stock outstanding and entitled to vote thereon as a class, unless the certificate of incorporation requires a greater proportion. The DAKA Certificate provides that approval of 80% of the voting power present at a meeting of stockholders is required to amend certain provisions of the DAKA Certificate. Minnesota law provides that the Champps By-laws may be amended by the holders of a majority of the voting power of the shares present at a meeting of stockholders, unless a greater proportion is specified. The Champps By-laws provide that such By-laws may be amended by the Champps Board, subject to the power of Champps' stockholders to change or repeal such By-laws. The Champps By-laws provide that the Champps Board shall not make or alter any By-Laws fixing a quorum for meetings of shareholders, prescribing procedures for removing directors or filling vacancies on the Champps Board, or fixing the number of directors or their classifications, qualifications or terms of office, but the Champps Board may adopt or amend a By-law to increase the number of directors. Under Delaware law, the power to adopt, amend or repeal by-laws lies in stockholders entitled to vote; provided, however, that any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal by-laws upon the directors. The DAKA By-laws provide that the DAKA Board has the power to amend the DAKA By-laws, and that DAKA stockholders may not amend the DAKA By-laws except upon the affirmative vote of the holders of record of shares of voting stock representing at least 80% of the votes entitled to be cast by the holders of all of the then outstanding shares of voting stock, voting together as a single class. The Champps Articles and the DAKA Certificate deny preemptive rights to stockholders of Champps and DAKA, respectively. Under Minnesota law and the governing documents of Champps, directors hold office until the next annual meeting of stockholders of the election and qualification of their successors. The DAKA By-laws provide that the DAKA Board shall consist of at least three, but no more than seven members and that such number shall be determined by the DAKA Board. DAKA's directors are divided into three classes: one director will serve until the 1995 Annual Meeting of Stockholders (Class I); two directors will serve until the 1996 Annual Meeting of Stockholders (Class II); and one director will serve until the 1997 Annual Meeting of Stockholders (Class III), and in all cases, until their respective successors are duly elected and qualified. Holders of Series A Preferred Stock have the right to elect two directors to serve annually, if more than 50% of such stock is outstanding and one director if more than 25% of such stock is outstanding. Currently, there is less than 25% of such stock outstanding. The classification of directors will have the effect of making it more difficult to change the composition of the DAKA Board. At least two annual meetings of stockholders, instead of one, will be required for stockholders to effect a change in the control of the DAKA Board. The DAKA By-laws provide that any increase or decrease in the number of directors, whether instituted by the directors or by the stockholders at an annual meeting, be apportioned among the classes so as to maintain, as nearly as possible, an equal number of directors in each class and that no decrease in the number of directors can result in the elimination of an entire class of directors, cause any class of directors to contain a number of directors that is two or more greater than any other class or shorten the term of any incumbent director. A vacancy on the DAKA Board requires the two-thirds vote of the remaining directors to fill such vacancy. The DAKA By-laws further provide that directors may be removed only for cause by vote of the stockholders or for cause by a vote of a majority of the entire DAKA Board. Such By-law provisions relating to directors may be amended only by the affirmative vote of the holders of not less than two-thirds of the voting power of all shares of stock of DAKA entitled to vote. The DAKA By-law provisions with respect to the DAKA Board were designed to ensure continuity of the DAKA Board to promote the long-term goals of and orderly changes in control of the DAKA Board. These provisions could, however, operate to discourage or prevent takeovers, including mergers, tender offers or proxy contests, or changes in management of DAKA which are proposed to be effected without approval of the DAKA Board, whether or not such takeover or change in control are detrimental to DAKA or its stockholders. The DAKA By-law provisions could delay stockholders who are not in agreement with the policies of the DAKA Board from removing a majority of the DAKA Board for two years, unless such stockholders could show cause to justify such removal. Article 11 of the DAKA Certificate, in conjunction with Delaware law, will limit or eliminate a director's personal liability to the corporation or its stockholders for breach of fiduciary duty. Such provision will not, however, limit or eliminate a director's monetary liability for: (i) a breach of the director's duty of loyalty; (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) corporate distributions such as dividends; (iv) any transaction from which the director derived an improper personal benefit; (v) any act or omission occurring prior to the date such Certificate of Incorporation became effective; or (vi) violation of federal or Delaware securities laws. Minnesota law generally permits a Minnesota corporation's articles to eliminate or limit a director's personal liability to the corporation or its shareholders for monetary damages for breaches of a director's duty as a director. However, the articles cannot deprive the corporation or its shareholders of the right to enjoin transactions which violate a director's duty of care. Moreover, the articles cannot limit liability for any breach of the director's duty of loyalty, for transactions resulting in an improper personal benefit to the director or for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law. In addition, liability for illegal dividends, stock repurchases or other distributions to shareholders or for violations of Minnesota's securities statutes cannot be limited. The Champps by-laws provide that Champps shall indemnify directors to the extent permitted under Minnesota law. Article 5 of the Champps By-laws provides for mandatory indemnification of directors, officers, employees and agents of Champps to the full extent permitted by Minnesota law. Minnesota law provides for mandatory indemnification of a person acting in an official capacity on behalf of the corporation (including a director, officer, employee or agent) if such person acted in good faith, received no improper personal benefit, acted in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Delaware law permits, but does not require, a corporation to indemnify officers, directors, employees or agents and expressly provides that the indemnification provided for under Delaware law shall not be deemed exclusive of any indemnification right under any by-law, vote of stockholders or disinterested directors, or otherwise. Delaware law permits indemnification against expenses and certain other liabilities arising out of legal actions brought or threatened against such persons for their conduct on behalf of DAKA, provided that each such person acted in good faith and in a manner that he reasonably believed was in or not opposed to DAKA's best interests and in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Delaware law does not allow indemnification of directors in the case of an action by or in the right of DAKA (including stockholder derivative suits) unless the directors successfully defend the action or indemnification is ordered by the court. However, insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Champps and DAKA, Champps and DAKA have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. Champps is subject to the Minnesota Control Share Acquisition Act (the "MCSAA"). The MCSAA provides that any person (an "acquiring person") proposing to make a "control share acquisition" must disclose certain information to the target corporation and the target corporation's stockholders must thereafter approve the control share acquisition or certain of the shares acquired in the control share acquisition shall not have voting rights and shall be subject to redemption by the target corporation for a specified period of time at the market value of such shares. A "control share acquisition" is an acquisition of shares of issuing public corporation which results in the acquiring person having voting power that exceeds one of the following thresholds: (i) at least 20 percent but less than 33 1/3 percent; (ii) at least 33 1/3 percent but less than or equal to 50 percent; and (iii) over 50 percent. The definition of a "control shares acquisition" specifically excludes acquisition of shares from the corporation issuing such shares, and acquisitions pursuant to plans of merger or exchange which are approved by the stockholders of the corporation. The MCSAA applies to a control share acquisition with respect to an issuing public corporation unless otherwise expressly provided in the issuing public corporation's articles of incorporation or in by-laws approved by the stockholders. The Champps Articles do not provide that the MCSAA will not apply to Champps. There are no provisions of Delaware law which are analogous to the MCSAA. The MBCA provides that Champps may not engage in any "business combination" with any "interested stockholder" or affiliate or associate of an interested stockholder for a period of four years after the interested stockholder's "share acquisition date" unless either the business combination or the acquisition of shares by the interested stockholder on his share acquisition date is approved by a disinterested committee of the Champps Board before such interested stockholder's share acquisition date. The Delaware Business Combination Act ("DBCA") restricts publicly-held corporations from engaging in any "business combination" with any "interested stockholder" or affiliate or associate of an "interested stockholder" for a period of three years, after the date on which such person becomes an "interested stockholder" unless (i) prior to such date the board of directors approved the "business combination" or transaction making the stockholder "interested," or (ii) upon consummation of such transaction the "interested stockholder" owned at least 85% of the outstanding voting stock, or (iii) the "business combination" is approved by the board and by the two-thirds vote of the shares (exclusive of the shares held by the "interested stockholder") at a meeting. For purposes of the MBCA, an "interested stockholder" is a 10% or more beneficial owner of voting shares of such corporation, or a person who is an associate and an affiliate of the corporation and who at any time within the four year period preceding the date in question was a 10% or more beneficial owner of voting shares of such corporation. An "interested stockholder" under the DBCA is the beneficial owner of 15% or more of the outstanding voting stock or was at any time within the preceding three years such a holder. The MBCA and DBCA apply to any business combination of a corporation with any interested stockholder unless otherwise expressly provided in such corporation's articles of incorporation or by-laws, or other restrictions on applicability exist as set forth in the DBCA. Neither the Articles nor the By-laws of Champps or DAKA provide that such corporation will not be subject to the MBCA or the DBCA, respectively. Furthermore, the DAKA Certificate provides that a business combination requires the approval of 80% of the votes entitled to be cast by the holders of DAKA Capital Stock. Under Section 302A.473 of the MBCA, if a corporation calls a stockholder meeting to approve a merger to which such corporation is a party, the sale of substantially all of the assets of the corporation, or in certain other circumstances, the notice of the meeting must inform each stockholder of the right to dissent from such action and must include a copy of section 302A.471 and section 302A.473 of the MBCA and a brief description of the procedure to be followed under such sections. A stockholder who wishes to exercise dissenters' rights in such circumstances is entitled to demand the fair value of the shares owned by such stockholder. Under Delaware law, stockholders have the right, in some circumstances, to dissent from mergers and consolidations by demanding payment in cash for their shares equal to the fair value (excluding any appreciation or depreciation as a consequence or in expectation of the transaction), as determined by agreement with the corporations or by an independent appraiser appointed by a court in an action timely brought by the dissenters. No appraisal rights exist, however, for shares listed on a national securities exchange or held of record by more than 2,000 stockholders unless the certificate of incorporation provides otherwise or the stockholders receive anything other than: (i) shares of stock of the corporation surviving or resulting from such merger or consolidation; (ii) shares of stock of any other corporation which at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 stockholders; (iii) cash in lieu of fractional shares of the corporation described in the foregoing clauses (i) and (ii); or (iv) any combination of (i), (ii) or (iii). THE DAKA ANNUAL MEETING--OTHER INFORMATION This Joint Proxy Statement-Prospectus is being used by DAKA in connection with its Annual Meeting of Stockholders to be held on February 16, 1996. As such, and in accordance with SEC rules and regulations, set forth below is information regarding DAKA's directors, management, executive compensation, stock price performance and other matters. The DAKA Board currently consists of seven members, two of whom were elected by the holders of Series A Preferred Stock for one-year terms, pursuant to the terms of the Series A Preferred Stock. The terms of these two directors will expire at the close of the DAKA Annual Meeting and thereafter holders of Series A Preferred Stock will not be entitled to elect directors. The remaining five directors are divided into three classes, with the directors of each class elected to three-year terms. One class stands for election at each annual meeting. One Class I director will be elected at the DAKA Annual Meeting to hold office for three years or until his successor is elected and qualified. Two Class II and Class III directors who are currently in office have one year and two years remaining in their respective terms. Pursuant to the Merger Agreement, DAKA has agreed to appoint Dean P. Vlahos to the DAKA Board immediately following the Effective Time, and it is expected that immediately after consummation of the Merger, Mr. Vlahos will become a Class I director of DAKA. Mr. Vlahos was the founder, and has been a director and the President and Chief Executive Officer of Champps since its inception in October 1988. Mr. Vlahos also served as Chief Financial Officer of Champps from its inception to March 1994. Prior to establishing Champps, he started, owned and operated the original Champps Americana restaurants in St. Paul (opened January 1983) and Richfield, Minnesota (opened February 1986). Mr. Vlahos, 44 years old, has over 20 years of experience in the restaurant industry. The following table sets forth certain information regarding current members of the Board of Directors: The name, age principal occupation during the past five years and other information concerning each director are set forth below: William H. Baumhauer, 47, has served as Chairman of the Board and Chief Executive Officer of DAKA since November 1990 and as a Class III Director since September 1988. He served as President and Chief Operating Officer of DAKA from September 1988 to November 1990. He has also served Fuddruckers, Inc. as Chairman of the Board since March 1985, President since January 1985 and as a director since July 1983. Allen R. Maxwell, 56, has served as President and Chief Operating Officer of DAKA since November 1990 and as a Class III Director since September 1988. Mr. Maxwell, one of the original founders of Daka, Inc., has also served as its President since November 1988. Erline Belton, 51, has served as a Class II director of DAKA since December 1993. She has served as President and Chief Executive Officer of The Lyceum Group, a human resource consulting firm, since September 1992. She served as Senior Vice President of Human Resource and Organizational Development for Progressive Insurance Companies from April 1991 through September 1992. She also served as International Human Relations Director, as well as several other human resources positions, with Digital Equipment Corporation from 1978 through April 1991. Ms. Belton serves on the Board of Directors of: The National Leadership Coalition on AIDS; National Minority AIDS Coalition; Museum of African American History; Civil Rights Project, Inc.; Cleveland Museum of Contemporary Art; Cleveland International Film Society; The Greater Cleveland Chapter of the American Red Cross; Cleveland Council on World Affairs and the Ohio State University Visiting Committee. Alan D. Schwartz, 45, has served as a Class II director of DAKA since September 1988 and as a director of Fuddruckers, Inc. from September 1984 until November 1988. Mr. Schwartz is Senior Managing Director-Corporate Finance of Bear, Stearns & Co., Inc., and a director of its parent, The Bear Stearns Companies, Inc. He has been associated with such investment banking firm for more than five years. Mr. Schwartz is also a director of Protein Databases, Inc. and a member of the Board of Visitors of the Fuqua School of Business at Duke University. E. L. Cox, 68, served as a Class I director of DAKA since September 1988 and as a director of Fuddruckers, Inc. from June 1988 until November 1988. Mr. Cox served as Chairman and Chief Executive Officer of the Michigan Accident Fund from February 1990 until his retirement in August 1995. Prior thereto Mr. Cox served as Chairman and Chief Executive Officer of Michigan Mutual/Amerisure Companies and its affiliated insurance companies from May 1981 through January 1990. Mr. Cox is also a member of the Board of Directors of Comerica, Inc., a publicly-traded financial institution, and a director of various trade associations in the insurance industry. Eric C. Larson, 40, has served as a director of DAKA since January 1992 and has been employed by the First National Bank of Chicago and its affiliates in various capacities since May 1984. Mr. Larson is Managing Director of First Chicago Equity Capital. Prior thereto, he served as a Vice President of the First Chicago Merchant Bank and a Senior Investment Manager of First Chicago Venture Capital. Mr. Larson is also a general partner of Cross Creek Partners I, an investment partnership composed of individual officers of First Chicago. Mr. Larson is also a director of M-Wave, Inc. Timothy A. Dugan, 29, has served as a director of DAKA since January 1992 and has been employed by the First National Bank of Chicago and its affiliates in various capacities since July 1987. Mr. Dugan is a Vice President of First Chicago Equity Capital. Prior thereto, he was an Investment Officer of the First Chicago Merchant Bank. Mr. Dugan is also a general partner of Cross Creek Partners I, an investment partnership composed of individual officers of First Chicago. Mr. Dugan is also a director of M-Wave, Inc. The DAKA Board has an Audit Committee, a Compensation Committee, an Executive Committee and a Nominating Committee. During the fiscal year ended July 1, 1995, the DAKA Board held six meetings, the Audit Committee held two meetings, and the Compensation Committee held two meetings. The Nominating Committee does not meet separately and its business is conducted at meetings of the DAKA Board. Each director, except Mr. Schwartz, attended 75% or more of the aggregate of (a) the total number of meetings of the DAKA Board during fiscal year 1995, and (b) the total number of meetings held by all committees of the DAKA Board on which such director served during fiscal year 1995. The Audit Committee has the responsibility of selecting DAKA's independent auditors and communicating with DAKA's independent auditors on matters of auditing and accounting. The Audit Committee is currently composed of Ms. Belton and Messrs. Cox, Dugan, Larson and Schwartz. The Compensation Committee has the responsibility of reviewing on an annual basis all officer and employee compensation. The Compensation Committee is currently composed of Ms. Belton and Messrs. Cox, Dugan, Larson and Schwartz. The Compensation Committee also acts as the Stock Option Committee, and has the responsibility of administering the Incentive Stock Option Plan, the Non-Qualified Stock Option Plan, the Executive Stock Option Plan and the 1994 Equity Incentive Plan (collectively, the "Stock Option Plans"). The Executive Committee has the authority to exercise substantially all powers of the DAKA Board which may be legally delegated to it by the DAKA Board in the management and direction of business and affairs of DAKA. The Executive Committee is currently composed of Mr. Baumhauer. The Nominating Committee has the responsibility of nominating persons to serve as directors of DAKA and is comprised of the DAKA Board acting as a whole. Directors receive $1,000 per meeting plus travel expenses. Under the 1994 Equity Incentive Plan, each year each non-employee director receives options to purchase 1,500 shares of DAKA Common Stock at an exercise price equal to the fair market value of DAKA Common Stock as of the date of grant. The following tables provide information as to compensation paid by DAKA during each of the three previous fiscal years ending with the fiscal year ended July 1, 1995 to DAKA's Chief Executive Officer and the four other most highly compensated executive officers whose total salary and bonus for fiscal year 1995 exceeded $100,000: OPTION GRANTS IN FISCAL 1995 AGGREGATE OPTION EXERCISES IN FISCAL 1995 LONG-TERM INCENTIVE PLAN--AWARD IN FISCAL 1995 Mr. Baumhauer and Mr. Maxwell are each employed by DAKA pursuant to separate five (5) year employment agreements which commenced in each case on January 1, 1992 and provide for initial annual base salaries of $280,000 and $237,000, respectively. Any adjustments to these amounts are at the discretion of the DAKA Board. Each of the agreements provides that in the event DAKA terminates the executive's employment without "cause" (as defined therein) or the executive terminates his employment for "good reason" (as defined therein), DAKA shall pay the executive an amount equal to the executive's base salary for the remainder of the term of the contract or for three years, whichever is greater. "good reason" is defined in each agreement as (i) an assignment to the executive of duties other than those contemplated by the agreement, or a limitation on the powers of the executive not contemplated by the agreement, (ii) the removal of the executive from or failure to elect the executive to his named position, or (iii) a reduction in the executive's rate of compensation or level of fringe benefits. "Cause" is defined in each agreement as the executive's (i) theft from or fraud on DAKA, (ii) conviction of a felony, (iii) violation of the terms of the agreement, (iv) conscious disregard or neglect of his duties, or (v) demonstrated unwillingness to perform his duties under the agreement. If the employment contracts of each of Messrs. Baumhauer and Maxwell were terminated without cause by DAKA or for good reason by Messrs. Baumhauer and Maxwell as of December 31, 1995, Messrs. Baumhauer and Maxwell would have been entitled to certain payments in consideration of the termination of the remaining term of their employment agreements. Mr. Baumhauer would have received a lump sum payment in the amount of $1,110,000 (equal to his base salary for a period of three years because as of such date only one year would remain in the term of Mr. Baumhauer's employment contract), plus a lump sum payment of approximately $945,000 representing a pro rata portion of amounts earned under his long term incentive plan (which would not otherwise be paid until June 1, would not be paid at all if Mr. Baumhauer voluntarily terminated his employment without good reason or was terminated for cause). Mr. Maxwell would have received a lump sum payment in the amount of $765,000 (equal to his base salary for a period of three years because as of such date only one year would remain in the term of Mr. Maxwell's employment contract). Under the terms of the 1995 Employment Agreement among DAKA, Champps and Mr. Vlahos, after the Effective Time Mr. Vlahos will provide full-time services to Champps in the capacity of Chairman of the Board, Chief Executive Officer and President of Champps, for a five (5) year term, and will be appointed to the DAKA Board. Mr. Vlahos shall continue to maintain the authority to control the operations of Champps so long as the average annual gross revenues per square foot of the Champps-owned restaurants is at least $400. During the period of Mr. Vlahos's full time employment, Champps shall pay Mr. Vlahos an initial base salary of $350,000 plus a bonus of 50% of his base salary if he attains certain targets established by the DAKA Board, which amount may be increased up to 100% of his base salary if he exceeds such performance targets by margins determined by the DAKA Board. Twenty percent (20%) of the potential bonus payments for Mr. Vlahos shall be related to performance targets established for DAKA as a whole and eighty percent (80%) shall be related to performance targets established for Champps. If Mr. Vlahos leaves for "good reason", or is terminated by DAKA without "cause", during the term of his employment contract, DAKA will be obligated to pay him his remaining salary and bonus as severance. "Good reason" is defined in the agreement as (i) an assignment to Mr. Vlahos of duties other than those contemplated by the agreement, or a limitation on the powers of Mr. Vlahos not contemplated by the agreement, (ii) the removal of Mr. Vlahos from or failure to elect Mr. Vlahos to his named position, or (iii) a reduction in Mr. Vlahos' rate of compensation or level of fringe benefits. "Cause" is defined in the agreement as Mr. Vlahos' (i) theft from or fraud on DAKA, (ii) conviction of a felony, (iii) violation of the terms of the agreement, (iv) conscious disregard or neglect of his duties, or (v) demonstrated unwillingness to perform his duties under the agreement. In the event that Mr. Vlahos' employment is terminated for any reason other than by DAKA for cause, Mr. Vlahos shall be provided the right to establish a franchise for up to five (5) Champps Americana restaurants anywhere in the world, but no such restaurant may be within a 20 mile radius of any other Champps restaurant, or in any territory that has been franchised or licensed by Champps, and provided that Mr. Vlahos meets the requirements applicable to Champps franchisees at such time and provided that Mr. Vlahos pays the required franchise fees and royalties. If Mr. Vlahos' employment contract were terminated without cause by DAKA or for good reason by Mr. Vlahos as of December 31, 1995 (assuming that the contract had become effective as of such date), Mr. Vlahos would receive $3,500,000 over five years (because five years would remain in the term of Mr. Vlahos' employment contract). The Compensation Committee reviews and approves compensation levels for DAKA's executive officers and oversees and administers DAKA's executive compensation programs. All members of the Compensation Committee, listed at the end of this report, are outside directors who are not eligible to participate in the compensation programs that the Compensation Committee oversees except for non-discretionary option grants. See "--Directors' Compensation." Philosophy. The Compensation Committee believes that the interests of its shareholders are best served when compensation is directly aligned with DAKA's financial performance. Therefore, the Compensation Committee has approved overall compensation programs which award a competitive base salary, and then encourage exceptional performance through meaningful incentive awards, both short and long term, which are tied to DAKA's performance. Responsibilities. The responsibilities of the Compensation Committee include: - developing compensation programs that are consistent with and are - assessing the performance of and determining an appropriate compensation package for the Chief Executive Officer; and - ensuring that compensation for the other executive officers reflects individual, team, and DAKA performance appropriately. Purpose. DAKA's executive compensation programs are designed to: - attract, retain, and motivate key executive officers; - link the interests of executive officers with stockholders by - support DAKA's goal of providing superior value to its stockholders - provide appropriate incentives for executive officers, based on achieving key operating and organizational goals. The Compensation Committee believes that DAKA's executive compensation policies should be reviewed during the first quarter of the fiscal year when the financial results of the prior fiscal year become available. The policies should be reviewed in light of their consistency with DAKA's financial performance, its business plan and its position within the foodservice and restaurant industries, as well as the compensation policies of similar companies in the foodservice and restaurant businesses. The compensation of individual executives is reviewed annually by the Compensation Committee in light of its executive compensation policies for that year. In setting and reviewing compensation for the executive officers, the Compensation Committee considers a number of different factors designed to assure that compensation levels are properly aligned with DAKA's business strategy, corporate culture and operating performance. Among the factors considered are the following: Comparability -- The Compensation Committee considers the compensation packages of similarly situated executives at companies deemed comparable to DAKA. The objective is to maintain competitiveness in the marketplace in order to attract and retain the highest quality executives. This is a principal factor in setting base levels of compensation. Pay for Performance -- The Compensation Committee believes that compensation should in part be directly linked to operating performance. To achieve this link with regard to short-term performance, the Compensation Committee has relied on cash bonuses which have been determined on the basis of certain objective criteria and recommendations of the Chief Executive Officer. Equity Ownership -- The Compensation Committee believes that equity-based, long-term compensation aligns executives' long-range interests with those of the stockholders. These long-term incentive programs are principally reflected in DAKA's stock option plans. The Compensation Committee believes that significant stock ownership is a major incentive in building stockholder value and reviews grants of options with that goal in mind. Qualitative Factors -- The Compensation Committee believes that in addition to corporate performance and specific business unit performance, in setting and reviewing executive compensation it is appropriate to consider the personal contributions that a particular individual may make to the overall success of DAKA. Such qualitative factors as leadership skills, planning initiatives and employee development have been deemed to be important qualitative factors to take into account in considering levels of compensation. Annual Cash Compensation. Annual cash compensation for the executive officers consists of a base salary and a variable, at-risk incentive bonus under DAKA's Management Annual Incentive Plan. It is DAKA's general policy to pay competitive base compensation to its executive officers. The Compensation Committee annually reviews and, if appropriate, adjusts executive officers' salaries, based on an evaluation of each executive officer's performance as well as the performance of DAKA as a whole and, where applicable, the performance of specific business units. The Compensation Committee annually reviews base salary. In making individual base salary recommendations, the Compensation Committee considers the executive's experience, management and leadership ability and technical skills, his or her compensation history, DAKA's or its subsidiaries' performance and individual performance. In fiscal year 1995, base salaries for executives were favorably affected by DAKA's record financial performance. Under the Management Annual Incentive Plan, each executive is assigned a target incentive award. This incentive award, or some portion thereof, is 'earned' through a combination of four factors: DAKA's performance, business unit performance, attainment of predetermined individual goals, and the level of personal/leadership impact. This evaluation process is not strictly quantitative, but is largely based on qualitative judgments made by the Chief Executive Officer related to individual, team, and DAKA's performance. In fiscal year 1995, annual incentive awards for executives were favorably affected by DAKA's record financial performance. Long Term Incentives. The Compensation Committee believes that the granting of stock options to its executive officers and key employees provides a powerful incentive for them to make decisions which are in the long-term best interests of DAKA and strengthens the link between executive compensation and the long-term performance of DAKA. Under the CEO Long Term Incentive Plan Mr. Baumhauer is eligible to earn a percentage of an increase in DAKA's value, as measured by stock appreciation above a predetermined rate of return, over a specified three-year period. The Compensation Committee may, at its option, pay any amount due under the CEO Long Term Incentive Plan in cash or in DAKA stock. Any amount due under the CEO Long Term Incentive Plan will vest 100% at the end of the three-year period. Fiscal 1995 was the first year of the three-year vesting period. The Management Long Term Incentive Plan, developed by the Compensation Committee effective for fiscal year 1996 and beyond, will grant stock options to senior management and certain other managers. The options will vest 100% on the third anniversary of the date of grant and will have an exercise price equal to the fair market value of the DAKA Common Stock as of the date of grant with respect to one third of the options granted and equal to such fair market value plus a predetermined rate of appreciation with respect to the remaining two thirds of the options granted. The Compensation Committee has discretion in awarding grants under this plan based upon the executive's level and direct line responsibility. Chief Executive Officer Compensation. Mr. Baumhauer is employed by DAKA pursuant to a five-year employment contract which commenced January 1, 1992. He participates in the compensation programs as outlined above. Mr. Baumhauer's total compensation for 1995 reflects the Compensation Committee's view of his outstanding performance and leadership in creating enhanced returns to stockholders, in executing expansion plans for future growth, and in articulating a clear and sound approach to an innovative growth strategy. Mr. Baumhauer was awarded an annual incentive award of $230,000, compared to $161,000 the prior year. Mr. Baumhauer's salary was increased to $370,000 from $325,000, representing a 13.8% increase. His long term incentive award, although not vested until June 30, 1997, has, as of July 1995, a value of approximately $380,000. This long term incentive award represents the largest single component of the total compensation package, reflecting the Compensation Committee's philosophy that variable, at-risk pay should comprise a significant portion of overall executive compensation. Compensation of Other Officers. DAKA's executive compensation program for other executive officers is described above, although the Corporate, business unit and individual performance goals and the relative weighting of the quantitative performance factors described above varies, depending upon the responsibilities of particular officers. The following graph presents a five-year comparison of total cumulative returns on DAKA Common Stock, the S&P 500 Index and a DAKA-selected peer group consisting of businesses in the foodservice and restaurant industries, assuming an initial investment of $100 and reinvestment of all dividends: COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN The companies included in the peer group are: Bertucci's, Inc., Ground Round Restaurants, Inc., Hamburger Hamlet Restaurants, Inc., Morrison, Inc., Sizzler International, Inc. and Uno Restaurant Corporation. The returns of each issuer in the foregoing group have been weighted according to the respective company's stock market capitalization as of the end of each period. The DAKA Common Stock prices shown are neither indicative nor determinative of future stock price performance. PRINCIPAL AND MANAGEMENT STOCKHOLDERS OF DAKA The following table sets forth certain information, as of January 3, 1996, with respect to each person known by DAKA to be the beneficial owner of more than 5% of any class of the voting stock of DAKA, each director of DAKA, executive officers included in the Summary Compensation Table above, and all directors and executive officers of DAKA as a group: (9) Includes 2,500 shares of DAKA Common Stock issuable upon exercise of options granted under the Stock Option Plans. (10) The address of the beneficial owner is 245 Park Avenue, New York, NY 10167. (11) Includes 7,000 shares of DAKA Common Stock issuable upon exercise of options granted under the Stock Option Plans. (12) Mr. Larson is a general partner of Cross Creek Partners I, in investment partnership composed of individual officers of The First National Bank of Chicago, an affiliate of First Capital Corporation of Chicago ("FCCC"). Mr. Larson is the beneficial owner of a portion of the 1,323.4 shares of Series A Preferred Stock held by Cross Creek Partners I by virtue of his general partnership interest therein. (13) The address of the beneficial owner is The First National Bank of Chicago, Three First National Plaza, Chicago, IL 60670. (14) Assumes conversion of all outstanding shares of Series A Preferred Stock owned by the beneficial owner, and includes 1,500 shares of DAKA Common Stock granted under the Stock Option Plans. (15) Mr. Dugan is general partner of Cross Creek Partners I, an investment partnership composed of individual officers of The First National Bank of Chicago, an affiliate of FCCC. Mr. Dugan is the beneficial owner of a portion of the 1,323.4 shares of Series A Preferred Stock held by Cross Creek Partners I by virtue of his general partnership interest therein. (16) Includes 34,900 shares of DAKA Common Stock issuable upon exercise of options granted under the Stock Option Plans. (17) Includes 14,500 shares of DAKA Common Stock issuable upon exercise of options granted under the Stock Option Plans. (18) Includes 3,000 shares of DAKA Common Stock issuable under options granted under the Stock Option Plans. (19) The address of the beneficial owner is 100 E. Pratt Street, Baltimore, MD 21202. (20) This information is based on a Schedule 13G, dated May 10, 1995, filed by T. Rowe Associates, Inc. with the SEC. (21) Includes 264,800 shares of DAKA Common Stock issuable upon exercise of stock options previously granted and 29,409 shares of DAKA Common Stock issuable upon conversion of 1,323.4 shares of Series A Preferred Stock held by Cross Creek Partners I, of which each of Messrs. Larson and Dugan is a general partner. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Exchange Act requires DAKA's executive officers, directors and persons who own more than 10% of a registered class of DAKA's equity securities to file reports of ownership and changes in ownership with the SEC and to furnish copies thereof to DAKA. Based upon a review of the reports furnished to DAKA and representations made to DAKA by its officers and directors, DAKA believes that, during fiscal 1995, its officers, directors and 10% beneficial owners complied with all applicable reporting requirements. The Board of Directors has selected the firm of Deloitte & Touche LLP as auditors for DAKA for the 1996 fiscal year. Representatives of Deloitte & Touche LLP are expected to be present at the DAKA Annual Meeting and will have an opportunity to make a statement if they desire to do so, and they will be available to respond to appropriate questions. Any stockholder desiring to present a proposal for inclusion in DAKA's proxy statement in connection with its 1997 annual meeting of stockholders must submit the proposal so as to be received by the Secretary of DAKA at the principal executive offices of DAKA located at One Corporate Place, 55 Ferncroft Road, Danvers, Massachusetts 01923-4001, not later than August 9, 1996. In addition, in order to be included in the proxy statement, such a proposal must comply with the requirements as to form and substance established by applicable laws and regulations. The consolidated financial statements incorporated in this Joint Proxy Statement-Prospectus by reference to the DAKA Annual Report on Form 10-K/A for the year ended July 1, 1995 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference in reliance upon the report of such firm, given upon their authority as experts in accounting and auditing. The consolidated financial statements of Champps and its subsidiaries as of December 31, 1994, and for the three-year period ended December 31, 1994, included herein have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto and are included herein in reliance upon the authority of said firm as experts in giving said report. The legality of the shares of DAKA Common Stock to be issued to the Champps stockholders pursuant to the Merger will be passed upon by Goodwin, Procter & Hoar, Boston, Massachusetts. The Merger Agreement also provides that it is a condition to the obligation of DAKA and Merger Subsidiary to consummate the Merger that they receive the opinion of Goodwin, Procter & Hoar to the effect that the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code, which opinion shall not have been withdrawn or modified in any effect. In addition, the Merger Agreement provides that it is a condition to the obligation of Champps to consummate the Merger that it receive the opinion of Fredrikson & Byron, Minneapolis, Minnesota to the effect that the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code, which opinion shall not have been withdrawn or modified in any effect. In connection with the filing of the Registration Statement of which this Joint Proxy Statement-Prospectus is a part and the mailing of this Joint Proxy Statement-Prospectus, each of Goodwin, Procter & Hoar and Fredrikson & Byron have passed upon certain federal income tax consequences of the Merger for DAKA and Champps, respectively. INDEX TO CHAMPPS CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited the accompanying consolidated balance sheets of Champps Entertainment, Inc. (a Minnesota corporation) and Subsidiaries as of December 31, 1994 and 1993, the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended December 31, 1994. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Champps Entertainment, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. The accompanying notes are an integral part of these consolidated balance sheets. The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT YEARS ENDED DECEMBER 31, 1992, 1993, 1994 The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION Champps Entertainment, Inc. ("Champps") owns and operates a full-service, casual theme restaurant and bar concept under the name Champps Americana. As of December 31, 1994, Champps had two Champps-owned restaurants in operation in Minnesota and Texas and 11 franchised restaurants. On April 6, 1994, Champps completed an initial public offering of its common stock. In order to facilitate this offering, the owners of the various predecessor companies under common control and ownership agreed to exchange their ownership interests for shares of Champps pursuant to the terms of an Agreement and Plan of Merger (the "Champps Merger Agreement") dated February 14, 1994 (see Note 5). The predecessor companies consisted of the following: - Champps Entertainment, Inc. ("former Champps"), a Minnesota corporation, organized to obtain trade names and licensing rights as well as to develop and franchise Champps restaurants. - Champps of Minnetonka, Inc. ("CMI"), a Minnesota corporation, organized to develop and operate a Champps Americana restaurant in Minnetonka, Minnesota. - Champps Franchising, Inc. ("CFI"), a Minnesota corporation, organized for the specific purpose of establishing a franchise. The operations of CFI include expenses incurred in connection with the development of new franchises and the related franchise fee revenue. As discussed in Note 5, former Champps and CFI merged into CMI. The surviving corporation changed its name to Champps Entertainment, Inc. The accompanying 1994 financial statements have been consolidated as discussed in Note 2. The 1993 and 1992 financial statements have been presented on a combined basis and contain the financial position and results of operations because the predecessor companies were under common control. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of Champps and its two wholly owned subsidiaries, Champps Entertainment of Texas, Inc. and Champps Entertainment of Edison, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS -- Cash and cash equivalents consist of cash and highly liquid investments with original maturities of three months or less. Champps has pledged cash equivalents valued at $750,000 as collateral for a letter of credit issued by a bank in the amount of $300,000 (see Note 9). MARKETABLE SECURITIES -- Champps adopted Financial Accounting Standard No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) as of January 1, 1994. At December 31, 1993, Champps had no investments in marketable securities. Thus, there was no effect on the financial statements upon adoption of SFAS 115 as of January 1, 1994. SFAS 115 requires the classification of debt and marketable equity securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of related tax effect, on available-for-sale securities are reported as a separate component of shareholders' investment until realized. All marketable securities held by Champps at December 31, 1994, were classified as current and available-for-sale. As of December 31, 1994, Champps has recorded an unrealized loss as a result of a decrease in fair market value below original cost, net of tax effect, of $18,300. This unrealized loss has NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reflected as a separate component of shareholders' investment in the accompanying consolidated balance sheets. Marketable securities consist entirely of auction rate preferred stock with an original cost of $200,000. INVENTORIES--Inventories are stated at the lower of cost (first-in first-out) or market and consist principally of food and beverages. PREOPENING COSTS--Preopening costs include the direct and incremental costs typically associated with the opening of a new restaurant which primarily consists of costs incurred to recruit and develop new restaurant management teams, travel and lodging for both the training and opening unit management teams, and the food, beverage and supplies costs incurred to perform role-play, testing of all equipment, concept systems and recipes. These costs are capitalized and amortized over the first 12 months of the restaurant's operations. RESTAURANT OPERATIONS--Food and beverage revenues from Champps-owned restaurants are recognized at the time of sale. Restaurant revenues are reported net of applicable sales and excise taxes. Restaurant cost of sales consists of food and beverage costs. Restaurant operating expenses include all on-site labor, occupancy and direct overhead costs. FRANCHISE OPERATIONS--Royalty fees received from franchisees are recognized when earned and are based primarily on a contractual percentage of restaurant revenue. Initial franchise fees are included in franchise revenue when the franchised restaurant commences operations. Fees received pursuant to multiple unit development agreements are nonrefundable and recognized as revenue when received based on the fact that no additional services are required to be performed by Champps in connection with the development agreement. Direct franchise expenses include franchise development and support costs and on-site restaurant management expenses as well as a fee paid to the former owner of the "Champps" trade name (see Note 9). PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS--Property, equipment and leasehold improvements are recorded at cost less accumulated depreciation and amortization as follows at December 31: Champps uses the straight-line method of depreciation for financial reporting purposes and accelerated methods for income tax reporting purposes. Equipment and furniture are depreciated over their estimated useful lives, which range from 5 to 10 years. Leasehold improvements are amortized over the life of the lease term, generally 10 to 15 years. INCOME TAXES--Effective January 1, 1994, Champps adopted FASB Statement No. 109, "Accounting for Income Taxes" (SFAS 109), which requires the asset and liability approach for financial accounting and reporting for deferred income taxes. The cumulative effect of adopting SFAS 109 was not material. Prior to January 1, 1994, each of the affiliated legal entities described in Note 1 had elected those provisions of the Internal Revenue Code and state laws which provide for the income of the entities to be taxed at the shareholder level. Accordingly, the consolidated statements of operations for the years ended December 31, 1993 and 1992 do not include a provision for income taxes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NET INCOME PER COMMON SHARE--Net income per common share is computed by dividing net income by the weighted average number of shares of common and dilutive common equivalent shares assumed to be outstanding during the period. Common equivalent shares consist of dilutive options and warrants to purchase common stock. RECLASSIFICATIONS--Certain reclassifications have been made to the 1993 and 1992 financial statements to conform with the 1994 presentation. These reclassifications had no effect on stockholders' investment or net income as previously presented. Debt consisted of the following as of December 31: Maturities of long-term debt as of December 31, 1994 are as follows: The components of the provision for income taxes for the year ended December 31, 1994 are as follows: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the statutory federal income tax rate to Champps' effective income tax rate for the year ended December 31, 1994 is as follows: The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 1994 are as follows: The deferred tax asset is included as a component of other assets in the accompanying consolidated balance sheets. Management has determined, based on Champps' current taxable income and the anticipation of sufficient future taxable income, that Champps will more likely than not be able to realize the full value of the deferred tax asset. Thus, no valuation allowance has been recorded as of December 31, 1994. Unaudited pro forma income taxes represent the estimated income taxes that would have been reported had Champps been a C corporation for the years ended December 31, 1993 and 1992. The following summarizes the unaudited pro forma provision for income taxes: The unaudited pro forma provision for income taxes on adjusted historical income differs from the amounts computed by applying the applicable federal statutory rates due to state income taxes. The components of the pro forma deferred income taxes are principally depreciation and deferred franchise fees. REORGANIZATION--On February 14, 1994, former Champps, CMI and CFI were consolidated into Champps of Minnetonka, Inc., and this corporation changed its name to Champps Entertainment, Inc. Pursuant to the Champps Merger Agreement, all outstanding shares of former Champps common stock were NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) converted to CMI stock; all outstanding shares of CMI stock were converted on a ratio of 87.08 to 1; and all outstanding shares of CFI common stock were converted to CMI stock on a ratio of 100 to 1. Total outstanding shares subsequent to this merger were 3,381,300. In addition, the Champps Merger Agreement authorized 15,000,000 shares of common stock with a par value of $.01 and 1,000,000 shares of $.01 preferred stock. No shares of preferred stock have been issued. SALE OF COMMON STOCK--On December 31, 1993, Champps sold 302,253 shares of common stock (600,000 shares after giving effect to the merger described above) to a then unrelated investor for $1,500,000 pursuant to a stock purchase agreement. On March 29, 1994, the Securities and Exchange Commission declared effective a Registration Statement relating to the initial public offering of 1,200,000 shares of Champps' common stock. Champps received net proceeds of $6,650,000 on April 6, 1994 and $990,000 upon exercise of the underwriter's overallotment option of 180,000 shares on April 25, 1994. The accompanying consolidated financial statements reflect the effect of this offering net of transaction-related expenses. STOCK PURCHASE WARRANTS--On April 1, 1992, Champps sold a stock purchase warrant to a consultant for $1,000. The warrant gave the holder the right to purchase 5% of the capital stock of Champps for $75,000, fair market value at the issuance date. On August 19, 1993, the warrant was exercised. Pursuant to the merger described above, the certificates initially issued upon the exercise of the warrant were canceled and new certificates which reflected the dilution associated with the sale of the warrant and common stock described above were issued. Total shares issued represented 135,510 shares as of December 31, 1993 and 269,000 as of December 31, 1994. STOCK OPTION PLANS--Up to 260,000 shares of common stock may be issued for stock options to employees and directors under Champps' 1994 Incentive Stock Option and Outside Director Stock Option Plans. Such options may be granted from time to time at the discretion of the Champps Board of directors at option prices equal to the fair market value of the shares for incentive stock options. The option price may be less than fair market value for nonstatutory stock options granted. Options generally have a 10-year term and vest over various periods. During 1994, 198,000 options were granted at prices ranging from $5.25 to $6.25 per share. No options were canceled or exercised during 1994. 6. SALE OF NEW BRIGHTON RESTAURANT On February 12, 1992, former Champps entered into an agreement to sell its interest in the New Brighton, Minnesota, restaurant. Former Champps repurchased the minority shares held by the buyer group of the restaurant, gave its ownership rights in principally all assets and was released of its obligations to pay account payables, accrued expenses and long-term debt. Former Champps recognized a loss of approximately $262,000 as a result of this transaction. Approximately $240,000 in sales from this restaurant are included in "Net sales by Champps-owned restaurants" in the accompanying consolidated statements of operations for the year ended December 31, 1992. In January, 1995, Champps reached a settlement agreement with its former chief executive officer related to his November 1994 departure from Champps. The settlement included the cancellation of a $102,000 note receivable and resulted in a net charge to 1994 operations of $280,377. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of transactions between Champps and related parties in addition to those described elsewhere in the Notes to Consolidated Financial Statements: All related-party transactions which occurred during the year ended December 31, 1994 have been disclosed elsewhere in the Notes to Consolidated Financial Statements. LEASE COMMITMENTS--Champps conducts its operations principally from leased restaurant facilities, all of which have noncancelable operating leases with various expiration dates through 2011. The restaurant leases generally include land and building, require contingent rent above the minimum lease payment based on a percentage of sales ranging from 3% to 5%, as well as various expenses incidental to the use of the property. Most leases have renewal options. In connection with certain lease agreements, Champps has entered into separate agreements for the use of liquor licenses from the landlord. In consideration for the licenses, Champps has issued promissory notes aggregating $390,000. These promissory notes require monthly interest payments based on interest rates of 7% and 12% annually. Champps may discharge the indebtedness at any time by returning the license to the landlord and is obligated to return the license at lease termination at which time the indebtedness would be NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) canceled. Accordingly, this obligation has not been reflected in the accompanying consolidated balance sheets. Interest payments have been included in future minimum lease payments throughout the lease terms. The aggregate minimum annual lease payments under noncancelable leases, including those for restaurants which are not yet open, at December 31, 1994 were as follows: Rent expense charged to operations on operating leases was as follows for each of the three years ended December 31: PURCHASE OF TRADE NAME--On February 1, 1994, Champps purchased the exclusive rights to use the "Champps" trade name from a third party by agreeing to pay a fee of 1/4% of gross sales, excluding four pre-existing Champps restaurants in Minnesota, up to a maximum of $250,000 per year, adjusted annually for inflation, or a minimum of $40,000 per year. In addition, Champps issued 18,824 shares of its common stock as additional consideration for the trade name. LETTER OF CREDIT AGREEMENTS--A standby letter of credit in the amount of $300,000 has been issued by Champps' bank to secure Champps' obligations under a capital lease for certain restaurant equipment. This letter of credit and the related security agreement terminate in April 1996 upon the satisfaction of certain financial covenants. As security for this standby letter of credit, Champps has pledged certain cash equivalents held at the bank (see Note 2). EMPLOYMENT AND CONSULTING AGREEMENTS--On January 1, 1994, Champps entered into an employment agreement with its president that continues through December 31, 1998. The agreement requires a base salary of $236,000 per year and a maximum annual bonus of up to $100,000. The agreement also requires Champps to pay 50% of his salary and bonus to his estate if employment is terminated due to death or one year's salary as severance in the event of a change in control of Champps. On January 1, 1994, Champps entered into two consulting agreements with a shareholder. Champps agreed to pay the shareholder/consultant $50,000 at the completion of an initial public offering in NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) consideration for his management consulting services directly associated with the offering. Champps also agreed to pay the shareholder/consultant an amount no less than $50,000 and no more than $150,000 in any year, equal to the sum of .5% of new Company-owned restaurants' sales and .25% of new franchised restaurants' sales. He is also to receive a one-time payment of $50,000 upon the opening of a Champps-owned restaurant in early 1995. Champps paid the shareholder/consultant $83,000 during the year ended December 31, 1994 pursuant to these agreements. 10. PRO FORMA FINANCIAL INFORMATION The unaudited pro forma financial information is provided to show the significant effects on the historical financial information had Champps operated as a single consolidated C corporation throughout all periods presented. Net income per common share is calculated using adjusted net income. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and common equivalent shares which were issued or became issuable during the 12 months immediately preceding the initial public offering have been included in the calculation as if they were outstanding for all periods prior to the initial public offering using the treasury stock method and the initial public offering price. The accompanying notes are an integral part of these consolidated balance sheets. The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- The accompanying consolidated financial statements have been prepared by Champps Entertainment, Inc. ("Champps"), without audit, in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although Champps believes that the disclosures made are adequate to make the information not misleading. The unaudited consolidated balance sheet as of October 1, 1995 and September 30, 1994 and the unaudited consolidated statements of operations and cash flows for the thirty-nine weeks ended October 1, 1995 and nine months ended September 30, 1994 include, in the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial condition and results of operations for the respective interim periods and are not necessarily indicative of results of operations to be expected for the entire fiscal year ending December 31, 1995. The accompanying interim consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read, or have access to the audited consolidated financial statements and notes thereto included in Champps' annual report for the year ended December 31, 1994. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 1994 audited financial statements have been omitted from these interim consolidated financial statements except for the disclosures below. It is suggested that these unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for Champps included elsewhere in their Joint Proxy Statement/Prospectus. FISCAL PERIODS -- Effective January 1, 1995, Champps changed its fiscal year from a calendar year end to a 52/53 week year. Accordingly, the three quarters ended October 1, 1995 consisted of thirty-nine weeks and 2 days and the three quarters ended September 30, 1994 consisted of thirty-nine weeks. All future quarterly periods will consist of thirteen weeks. Champps believes that the change in reporting periods does not have a material effect on the comparability of the accompanying consolidated financial statements. On March 29, 1994, the Securities and Exchange Commission declared effective a Registration Statement on Form SB-2 relating to the initial public offering of 1,200,000 shares of Champps' common stock. Following the effective date of the Registration Statement, Champps issued 1,200,000 shares at $6.25 per share. Champps received net proceeds of $6,650,000 on April 6, 1994 and $990,000 upon exercise of the underwriter's over-allotment option on April 25, 1994. The accompanying consolidated financial statements reflect the effect of this offering net of transaction related expenses. As of December 31, 1994, there were warrants outstanding to purchase 171,250 shares of Champps' common stock at $1.50 per share which were granted to Champps' former chief executive officer in connection with his employment agreement. On January 9, 1995, 68,500 shares were exercised and the remaining 102,750 shares were exercised on February 3, 1995. None of these shares are currently held by the former officer. The exercise of these warrants resulted in receipt by Champps of approximately $257,000. In connection with the transaction, Champps recognized a noncash tax benefit of approximately $205,000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In August 1995, Champps entered into a $1.5 million revolving line of credit agreement with its bank. The purpose of the credit facility is to provide working capital for new restaurant development. The line of credit expires on August 10, 1996 and bears a variable interest rate equal to the bank's reference rate plus 1% (9.75% on October 1, 1995). The line of credit is collateralized by substantially all of Champp's assets which are not encumbered by capital lease obligations. As of October 1, 1995, borrowings under this line of credit were $535,000. In August 1995, Champps entered into a noncancellable capital lease agreement for the restaurant audio/visual and point of sale equipment installed in the Champp's Marlton, New Jersey restaurant. The lease has a five-year term and an implicit interest rate of 10.2%. Total borrowings at the inception of the lease were approximately $917,000. In August 1995, Champps entered into an Interim Financing Agreement (the "Agreement") with a third party lender. Under the terms of the Agreement, Champps has the ability to borrow up to $925,000 to fund the cost of new restaurant, audio/visual and point of sale equipment during the new restaurant construction period. As of October 1, 1995, borrowings under this facility were approximately $421,000. Capital lease financing is in place such that all outstanding balances will be converted to permanent lease financing within thirty days of each new restaurant opening. Champps is involved from time to time in legal proceedings incidental to the normal course of business. Although the ultimate outcome of any of these proceedings cannot be determined at any particular time, management believes there are no current legal proceedings, the final disposition of which, would have a material adverse effect on the financial position or results of operations of Champps. In August 1995, Champps entered into a multi-site sale leaseback financing agreement with a third party finance company to provide sale leaseback financing to Champps for up to 6 new restaurant sites in which the Company owns the real estate. Such agreement expires on December 31, 1997. Such new site must be approved by the third party prior to any funding under the agreement. In October 1995, Champps and DAKA International, Inc. (DAKA) announced that they had entered into a definitive merger agreement (the "Merger Agreement") whereby Champps would become a wholly owned subsidiary of DAKA. Under the terms of the Merger Agreement, each outstanding share of Champps common stock will be converted into the right to receive approximately four-tenths (0.4) of one share of DAKA common stock, subject to adjustment to forty-three hundredths (0.43) of one share of DAKA common stock if the average per share closing price of DAKA common stock as reported on the Nasdaq National Market over the twenty trading days immediately preceding the second trading day prior to the closing date of the Merger (the "DAKA Average Trading Price") is less than $30.00 per share, or thirty-seven hundredths (0.37) of one share of DAKA common stock if the DAKA average trading price is more than $35.00 per share. Consummation of the merger is subject to various conditions, including among other things, the approval by Champp's shareholders of the merger and by DAKA's shareholders to the issuance of stock pursuant to the Merger Agreement; receipt by Champps and DAKA of opinions of counsel as to the treatment of the merger as a tax-free reorganization for federal income tax purposes; qualification of the Merger as a pooling of interests for accounting purposes; and other customary closing conditions. The transaction is anticipated to close in February 1996. DATED AS OF OCTOBER 10, 1995 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of October 10, 1995 (the "Agreement"), by and among Champps Entertainment, Inc., a Minnesota corporation (the "Company"), DAKA International, Inc., a Delaware corporation ("Parent"), and CEI Acquisition Corp., a Minnesota corporation and a wholly-owned subsidiary of Parent ("Sub"). WHEREAS, upon the terms and subject to the conditions of this Agreement and in accordance with the Minnesota Business Corporation Act ("Minnesota Law"), Parent, Sub and the Company will enter into a business combination transaction pursuant to which Sub will merge with and into the Company (the "Merger") and in connection therewith each stockholder of the Company will be entitled to receive a share or shares of Common Stock, par value $.01 per share, of Parent ("Parent Common Stock") in exchange for each share of Common Stock, par value $.01 per share, of the Company ("Company Common Stock") that such stockholder owns (and cash in lieu of any fractional share of Parent Common Stock that such stockholder would otherwise be entitled to); WHEREAS, the Board of Directors of the Company has determined that the Merger is consistent with and in furtherance of the long-term business strategy of the Company and is fair to, and in the best interests of, the Company and the holders of Company Common Stock and has approved and adopted this Agreement, has approved the Merger and the other transactions contemplated hereby and has recommended approval and adoption of this Agreement and of the Merger by the WHEREAS, the Board of Directors of Parent has determined that the Merger is consistent with and in furtherance of the long-term business strategy of Parent and is fair to, and in the best interests of, Parent and its stockholders and has approved and adopted this Agreement, has approved the Merger and the other transactions contemplated hereby and recommended approval and adoption of the Parent Vote Matter (as defined in Section 4.04 of this Agreement) by holders of WHEREAS, it is intended that the Merger qualify as (i) a "pooling of interests" under generally accepted accounting principles; and (ii) a tax-free reorganization under the provisions of Sections 368(a) of the United States Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Company, Parent and Sub hereby agree as follows. Section 1.01 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the relevant provisions of Minnesota Law, at the Effective Time (as defined in Section 1.03), Sub shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). Section 1.02 Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 7.01 and subject to the satisfaction or waiver of the conditions set forth in Article VI, the consummation of the Merger will take place as promptly as practicable (and in any event within two business days) after satisfaction or waiver of the conditions set forth in Article VI at the offices of Goodwin, Procter & Hoar, Exchange Place, Boston, Massachusetts, unless another date, time or place is agreed to in writing by the parties hereto. The date of such consummation is hereinafter referred to as the "Closing Date". Section 1.03 Effective Time. As promptly as practicable after the satisfaction or, if permissible, waiver of the conditions set forth in Article VI, the parties hereto shall cause the Merger to be consummated by filing articles of merger (the "Articles of Merger") with the Secretary of State of the State of Minnesota in such form as required by, and executed in accordance with the relevant provisions of, Minnesota Law (the date and time of such filing, or such later date or time as set forth therein, being the "Effective Time"). Section 1.04 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Minnesota Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, except as otherwise provided herein, all of the property, rights, privileges, powers and franchises of the Company and Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Sub shall become the debts, liabilities and duties of the Surviving Corporation. Section 1.05 Articles of Incorporation and By-laws. (a) At the Effective Time, the Articles of Incorporation of Sub as in effect immediately prior to the Effective Time, shall become the Articles of Incorporation of the Surviving Corporation, except that the name of the Surviving Corporation shall be amended to be "Champps Entertainment, Inc." (b) The By-laws of Sub as in effect immediately prior to the Effective Time shall become the By-laws of the Surviving Corporation. Section 1.06 Directors. The directors of Sub immediately after the Effective Time shall be William Baumhauer, Dean Vlahos and one other person to be mutually designated by Messrs. Baumhauer and Vlahos. The directors of Parent immediately after the Effective Time shall include Mr. Vlahos. Section 1.07 Officers. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation subsequent to the Effective Time. CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES Section 2.01 Conversion of Securities. At the Effective Time and without any action on the part of Parent, Sub, the Company or the holders of any of the securities of any of these corporations, each of the following shall occur: (a) Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (other than shares of Company Common Stock to be canceled pursuant to Section 2.01(b) and shares, if any, held by persons who in accordance with Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act have taken all actions prior to the Effective Time to perfect or preserve their rights to demand an appraisal of their shares ("Dissenting Shares")) shall be converted, subject to the provision of Section 2.02(d), into the right to receive .40 of one share of Parent Common Stock; provided, however, that in the event that at the Effective Time the Closing Price (as such term is hereinafter defined) of a share of Parent Common Stock is less than $30.00 per share, then each share of Company Common Stock will be converted into the right to receive .43 of one share of Parent Common Stock; and provided, further, that in the event that at the Effective Time the Closing Price of a share of Parent Common Stock is more than $35.00 per share, then each share of Company Common Stock will be converted into the right to receive .37 of one share of Parent Common Stock (such fraction of a share of Parent Common Stock as each share of Company Common Stock shall convert into the right to receive pursuant hereto, the "Exchange Ratio"). For purposes of this Agreement, the term "Closing Price" shall mean the average per share closing price of Parent Common Stock as reported on the Nasdaq National Market System over the twenty (20) trading days immediately preceding the second trading day prior to the Closing Date. Notwithstanding the foregoing, if between the date of this Agreement and the Effective Time the outstanding shares of Parent Common Stock or Company Common Stock shall have been changed into a different number of shares or a different class or series, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Exchange Ratio and the Closing Prices of Parent Common Stock that determine the Exchange Ratio shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares. All such shares of Company Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each certificate previously evidencing any such shares shall thereafter represent the right to receive, upon the surrender of such certificate in accordance with the provisions of Section 2.02, certificates evidencing such number of whole shares of Parent Common Stock into which such Company Common Stock was converted in accordance with the Exchange Ratio. The holders of such certificates previously evidencing such shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such shares of Company Common Stock except as otherwise provided herein or by law. No fractional shares of Parent Common Stock shall be issued in connection with the Merger, and in lieu thereof, a cash payment shall be made in accordance with the provisions of Section 2.02(d). (b) Each share of Company Common Stock held in the treasury of the Company and each share of Company Common Stock owned by Parent or any direct or indirect wholly-owned subsidiary of Parent or of the Company immediately prior to the Effective Time shall automatically be canceled and extinguished without any conversion thereof and no payment shall be made with respect thereto. (c) Each share of capital stock of Sub issued and outstanding immediately prior to the Effective Time shall be converted into one share of common stock of the Surviving Corporation and thereafter each stock certificate of Sub shall evidence ownership of shares of common stock of the Surviving Corporation. Section 2.02 Exchange of Certificates and Cash. (a) At or prior to the Effective Time, Parent shall deposit, or shall cause to be deposited, with or for the account of a bank or trust company designated by Parent and reasonably acceptable to the Company (the "Exchange Agent"), for the benefit of the holders of shares of Company Common Stock, for exchange in accordance with this Article II, (i) certificates evidencing the shares of Parent Common Stock issuable pursuant to Section 2.01 in exchange for outstanding shares of Company Common Stock and (ii) upon the request of the Exchange Agent, cash in an amount sufficient to make any cash payment due under Section 2.02(d) hereof (such certificates for shares of Parent Common Stock and cash being hereafter collectively referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions, deliver Parent Common Stock contemplated to be issued pursuant to Section 2.01 out of the Exchange Fund to holders of shares of Company Common Stock. Except as contemplated by Section 2.02(d) hereof, the Exchange Fund shall not be used for any other purpose. Any interest, dividends or other income earned on the investment of cash or other property held in the Exchange Fund shall be for the account of Parent. (b) As soon as reasonably practicable after the Effective Time, Parent will instruct the Exchange Agent to mail to each holder of record of a certificate or certificates that, immediately prior to the Effective Time, evidenced outstanding shares of Company Common Stock (the "Certificates") (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions to effect the surrender of the Certificates in exchange for the certificates evidencing shares of Parent Common Stock and cash, if applicable. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor (A) a stock certificate evidencing that number of whole shares of Parent Common Stock that such holder has the right to receive in accordance with the Exchange Ratio in respect of the shares of Company Common Stock formerly evidenced by such Certificate, and (B) cash in lieu of fractional shares of Parent Common Stock to which such holder is entitled pursuant to Section 2.02(d) (the shares of Parent Common Stock and cash described in clauses (A) and (B) being, collectively, the "Merger Consideration"), and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of shares of Company Common Stock that is not registered in the transfer records of Company, shares of Parent Common Stock may be issued and paid in accordance with this Article II to a transferee if the Certificate evidencing such shares of Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.02, each Certificate shall be deemed any time after the Effective Time to evidence only the right to receive the Merger Consideration upon such surrender. On or after the Effective Time, any Certificates presented to the Exchange Agent or Parent for any reason shall be converted into the Merger Consideration. (c) No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock they are entitled to receive until the holder of such Certificate shall surrender such Certificate. (d) No fraction of a share of Parent Common Stock shall be issued in connection with the Merger. In lieu of any such fractional shares, each holder of Company Common Stock upon surrender of a Certificate for exchange pursuant to this Section 2.02 shall be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying (i) the Closing Price of a share of Parent Common Stock by (ii) the fraction of a share of Parent Common Stock to which such holder would otherwise be entitled to receive under Section 2.01 of this Agreement. (e) Any portion of the Exchange Fund that remains undistributed to the holders of Company Common Stock as of that date which is six months after the Effective Time shall be delivered to Parent, upon demand, and any holders of Company Common Stock who have not theretofore complied with this Article II shall thereafter look only to Parent for the Merger Consideration to which they are entitled pursuant to this Article II. (f) None of the Surviving Corporation, Parent or the Company shall be liable to any holder of, or person otherwise entitled to receive, shares of Parent Common Stock for any such shares of Parent Common Stock (or dividends or distributions with respect thereto) from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) Parent and the Exchange Agent shall be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as Parent or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Parent or the Exchange Agent, (i) such withheld amounts shall be paid over to the proper authority or authorities in a reasonably commercial manner and time and (ii) such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Parent or the Exchange Agent. Section 2.03 Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed, and there shall be no further registration of transfers of shares of Company Common Stock thereafter on the records of the Company. On or after the Effective Time, any Certificates presented to the Exchange Agent or Parent for any reason shall be converted into the Merger Consideration. Section 2.04 Stock Options. Prior to the Effective Time, the Company and Parent shall take such actions with respect to each stock option (each, an "Existing Company Options") set forth in Schedule 3.03 of the volume of disclosure schedules delivered by the Company to Parent on October 10, 1995 (the "Company Disclosure Volume") as may be necessary to cause such Existing Company Option to be assumed by Parent (such options after such assumption, the "Assumed Options"), subject to the amendments described in this Section 2.04. Each Assumed Option shall continue to have, and be subject to, the same terms and conditions (including, without limitation, the applicable vesting schedule, as modified to reflect the change in the number of shares covered by such option as described herein) as set forth in the stock option plan and agreement (as in effect immediately prior to the Effective Time) pursuant to which such Existing Company Option was issued, except that (i) all references to the Company shall be deemed to be references to Parent (or, with respect to employment, Parent or its subsidiaries), (ii) each option shall be exercisable for that number of whole shares of Parent Common Stock equal to the product of the number of shares of Company Common Stock covered by such option immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded down to the nearest whole number of shares of Parent Common Stock and (iii) the exercise price per share of Parent Common Stock under such option shall be equal to the exercise price per share of Company Common Stock under the Existing Company Option divided by the Exchange Ratio and rounded down to the nearest cent. The adjustment provided herein with respect to any Existing Company Options that are "incentive stock options" (as defined in Section 422 of the Code) shall be and is intended to be effected in a manner that is consistent with Section 424(a) of the Code. Parent shall (i) reserve for issuance the number of shares of Parent Common Stock that will become issuable upon the exercise of such Assumed Options pursuant to this Section 2.04 and (ii) promptly after the Effective Time issue to each holder of an outstanding Existing Company Option a document evidencing the assumption by Parent of the Company's obligations with respect thereto under this Section 2.04. Nothing in this Section 2.04 shall affect the schedule of vesting with respect to Company Stock Options to be assumed by Parent as provided in this Section 2.04. Promptly after the Effective Time, Parent shall file a registration statement on Form S-8 with the Securities and Exchange Commission (the "SEC") covering the shares of Parent Common Stock to be issued upon exercise of the Assumed Options, shall use reasonable best efforts to cause such registration statement to become and remain effective so long as any Assumed Options are outstanding, and shall reserve a sufficient number of shares of Parent Common Stock for issuance upon exercise thereof. Section 2.05 Warrants. At the Effective Time, the Company's obligations with respect to each outstanding warrant to purchase shares of Company Common Stock set forth in Schedule 3.03 of the Company Disclosure Volume, that will not automatically terminate by its terms at the Effective Time, shall be assumed by Parent, subject to the amendments described in this Section 2.05. The Company's warrants so assumed by Parent shall continue to have, and be subject to, the same terms and conditions as set forth in such warrants as in effect immediately prior to the Effective Time, except that (A) each such warrant shall be exercisable for that number of whole shares of Parent Common Stock equal to the product of the number of shares of Company Common Stock into which such warrant was exercisable immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded to the nearest whole number of shares of Parent Common Stock and (B) the exercise price per share of Parent Common Stock under such warrant shall be equal to the exercise price per share of Company Common Stock under such warrant immediately prior to the Effective Time divided by the Exchange Ratio and rounded to the nearest cent. The duration and other terms of the new warrant shall be the same as the original warrant, except that all references to the Company shall be deemed to be references to Parent. Parent shall (i) reserve for issuance the number of shares of Parent Common Stock that will become issuable upon the exercise of such warrant pursuant to this Section 2.05 and (ii) promptly after the Effective Time, issue to each holder of such an outstanding warrant a document evidencing the assumption by Parent of Company's obligations with respect thereto under this Section 2.05. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Sub as follows: Section 3.01 Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. Each of the Company's subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization. The Company and each of its subsidiaries have the requisite power and authority and all necessary governmental approvals to own, lease and operate their properties and to conduct their businesses as currently conducted, except where the failure to have such power, authority or governmental approval would not, individually or in the aggregate, have a Company Material Adverse Effect (as defined below). Each of the Company and its subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Company Material Adverse Effect. The term "Company Material Adverse Effect" means any change or effect that is or would be materially adverse to the business, results of operations or financial condition of the Company and its subsidiaries taken as a whole. Section 3.02 Articles of Incorporation and By-laws. The Company has previously delivered to Parent a true, complete and correct copy of the Articles of Incorporation and the By-laws or equivalent organizational documents, each as amended to date, of the Company and each of its subsidiaries. Such Articles of Incorporation, By-laws and equivalent organizational documents are in full force and effect. Neither the Company nor any of its subsidiaries is in violation of any provision of its Articles of Incorporation, By-laws or equivalent organizational documents. Section 3.03 Capitalization. The authorized capital stock of the Company consists of (i) 15,000,000 shares of Company Common Stock and (ii) 1,000,000 shares of preferred stock, $.01 par value per share (the "Company Preferred Stock"). As of the date of this Agreement, (i) 4,953,774 shares of Company Common Stock are issued and outstanding, (ii) 263,000 shares of Company Common Stock are issuable upon the exercise of outstanding stock options granted pursuant to the Company's employee stock option plans, ("Company Stock Options"), (iii) 120,000 shares of Company Common Stock are issuable upon exercise of the Company's outstanding warrants, (iv) no shares of Company Common Stock are held in the treasury of the Company and (v) no shares of Company Preferred Stock are issued or outstanding. The actions necessary under Section 2.04 to cause such options to become Assumed Options are permitted under the terms of the agreements and plans under which such options were issued. Schedule 3.03 of the Company Disclosure Volume sets forth a complete and accurate list of all outstanding Company Stock Options or any other options to purchase shares of Company Common Stock, including with respect to each such option: (i) its grant date, (ii) the per share exercise price, (iii) the termination date, and (iv) the vesting schedule for such option, including whether or not the vesting of such option will be accelerated as a result of the transactions contemplated by this Agreement. Schedule 3.03 of the Company Disclosure Volume sets forth a complete and accurate list of all outstanding warrants (the "Warrants") to purchase shares of Company Common Stock, including with respect to each such Warrant: (i) its grant date, (ii) the per share exercise price, (iii) the termination date, and (iv) a summary of any rights of the holder of such Warrant to have the Company register the shares issuable upon exercise of the Warrant under the Securities Act of 1933, as amended (the "Securities Act"). Except as set forth in Schedule 3.03 of the Company Disclosure Volume, at the Effective Time, all of the Warrants will automatically terminate by their terms, the holders thereof will have no further rights thereunder, including no right to receive the Merger Consideration, and no person will have any right from and after the Effective Time to obligate the Company, the Surviving Corporation, the Parent or any other person to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of the Company, the Surviving Corporation or any other person pursuant to the Warrants. The Company has no restricted Company Common Stock that is subject to vesting or a restricted stock grant. All of the outstanding shares of Company Common Stock has been duly authorized and validly issued and are fully paid and non-assessable and free of preemptive rights. Except as set forth in this Section 3.03 or Schedule 3.03 of the Company Disclosure Volume, the Company does not have any outstanding options, warrants, subscriptions or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or any of its subsidiaries or obligating the Company or any of its subsidiaries to issue or sell any shares of capital stock of, or other equity interests in, the Company or any of its subsidiaries. The Company owns all of the outstanding shares of capital stock of each of its subsidiaries, and such shares are duly authorized, validly issued, fully paid and non-assessable, and free and clear of all preemptive rights and all liens, charges, encumbrances, equities, claims and options of any kind whatsoever. There are no agreements or understandings to which the Company is a party with respect to the voting of any shares of Company Common Stock or which restrict the transfer of any such shares, nor does the Company have knowledge of any such agreements or understandings with respect to the voting of any such shares or which restrict the transfer of such shares. There are no outstanding contractual obligations of the Company or any subsidiary of the Company to repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any subsidiary of the Company. Except as set forth in Schedule 3.03 of the Company Disclosure Volume, neither the Company nor any subsidiary of the Company is under any obligation, contingent or otherwise, by reason of any agreement to register any of its securities under the Securities Act. Section 3.04 Authority Relative to this Agreement. The Company has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company, and no other corporate proceedings or action on the part of the Company are necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement (other than the approval and adoption of the Merger and this Agreement by the holders of a majority of the outstanding shares of Company Common Stock and the filing and recordation of appropriate merger documents as required by Minnesota Law). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent and Sub, constitutes the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. Section 3.05 Consents and Approvals; No Violations. (a) The Board of Directors of the Company has approved the Merger and this Agreement, and the execution and enforceability of this Agreement and the acquisition of shares of Company Common Stock pursuant hereto are not affected by or prohibited under any antitakeover or business combination statute under Minnesota law (provided that no representation is made with respect to Section 302A.671 of the Minnesota Business Corporation Act). (b) Except as set forth on Schedule 3.05 of the Company Disclosure Volume, the execution and delivery of this Agreement by the Company do not, and the performance of the transactions contemplated by this Agreement by the Company will not, require any filing with or notification to, or any consent, approval, authorization or permit from, any governmental or regulatory authority, domestic or foreign (a "Governmental Entity") or any other person except (i) for (A) applicable requirements of the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and state securities or "blue sky" laws, (B) the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), and (C) the filing and recordation of Articles of Merger as required by Minnesota Law, or (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, (X) would not prevent or delay consummation of the Merger in any material respect, (Y) would not otherwise prevent or delay the Company from performing its obligations under this Agreement in any material respect or (Z) would not, individually or in the aggregate, have a Company Material Adverse Effect. (c) Except as set forth on Schedule 3.05 of the Company Disclosure Volume, the execution and delivery of this Agreement by the Company do not, and the performance of the transactions contemplated by this Agreement by the Company will not, (i) conflict with or violate the Articles of Incorporation, By-laws or equivalent documents of the Company or any of its subsidiaries, (ii) conflict with or violate any order, writ, injunction, decree, statute, treaty, law, rule or regulation applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected, or (iii) result in a violation or a breach of, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or result in the loss of a benefit under, or give to others any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or any of any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any property or asset of the Company or any of its subsidiaries is bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences that (A) would not prevent or delay consummation of the Merger in any material respect or otherwise prevent or delay the Company from performing its obligations under this Agreement in any material respect or (B) would not, individually or in the aggregate, have a Company Material Adverse Effect. Section 3.06 Compliance. (a) The Company and its subsidiaries have all licenses, permits, franchises, orders or approvals of any federal, state, local or foreign governmental or regulatory body or other Governmental Entity material to the conduct of the business of the Company (collectively, "Company Permits"), and such Company Permits are in full force and effect and no proceeding is pending or, to the best knowledge of the Company, threatened to revoke or limit any Company Permit. Except as set forth on Schedule 3.06 of the Company Disclosure Volume, the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement will not adversely affect any Company Permit or result in any Company Permit being either revoked or limited in any material respect. The Company has made available for review by Parent all material Company Permits. (b) Neither the Company nor any of its subsidiaries is in conflict with, or in default or violation of, (i) any law, rule, ordinance, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (including, without limitation, any of the same that apply to franchisors and the offering and sale of franchises) or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any its subsidiaries or any property or asset of the Company or any of its subsidiaries is bound or affected, except for any such conflicts, defaults or violations that would not, individually or in the aggregate, have a Company Material Adverse Effect. No investigation or review by any Governmental Entity or any other person concerning any such possible violations by the Company or any of its subsidiaries is pending or, to the knowledge of the Company, threatened, nor has any Governmental Entity or any other person indicated an intention to conduct the same in each case other than those the outcome of which would not have, or that, insofar as reasonably can be foreseen, in the future are not reasonably likely to have, a Company Material Adverse Effect. Section 3.07 SEC Reports. (a) The Company has filed all forms, reports and documents required to be filed by it with the SEC since April 6, 1994, and has heretofore provided to Parent, in the form filed with the SEC (including any exhibits thereto), (i) its Annual Reports on Form 10-KSB for the fiscal year ended December 31, 1994, (ii) its Quarterly Reports on Form 10-QSB filed with the SEC since April 6, 1994, (iii) all proxy statements relating to the Company's meetings of stockholders (whether annual or special) held since April 6, 1994 and (iv) all other forms, reports, registration statements and other documents filed by the Company with the SEC since April 6, 1994 (the forms, reports, registration statements and other documents referred to in clauses (i), (ii), (iii) and (iv) above being referred to herein, collectively, as the "Company SEC Reports"). The Company SEC Reports and any other forms, reports and other documents filed by the Company with the SEC after the date of this Agreement (i) were or will be prepared in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (ii) did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were or are made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Company SEC Reports was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto) and each fairly presented the consolidated financial position, results of operations and cash flows of the Company and its consolidated subsidiaries, as the case may be, as at the respective dates thereof and for the respective periods indicated therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments that were not and are not expected, individually or in the aggregate, to be material in amount). (c) Except as set forth in the Company SEC Reports filed with the SEC prior to the date of this Agreement, the Company and its subsidiaries do not have any liability or obligation of any nature (whether accrued, absolute, contingent or otherwise) other than liabilities and obligations that would not, individually or in the aggregate, have a Company Material Adverse Effect. Section 3.08 Absence of Certain Changes. Since December 31, 1994, except as disclosed in any Company SEC Report, there has not been (i) a Company Material Adverse Effect, (ii) any declaration, setting aside or payment of any dividend or other distribution in respect of any shares of any capital stock of the Company or any of its subsidiaries, or any redemption, purchase or other acquisition of any of their respective securities other than dividends by a subsidiary to the Company, (iii) any entry into any agreement, commitment or transaction by the Company or any of its subsidiaries that is material to the Company and its subsidiaries taken as a whole, except agreements, commitments or transactions in the ordinary course of business and lease and other agreements relating to the opening of new Company-owned restaurants, (iv) any change by the Company in accounting methods, principles or practices, or (v) any damage, destruction or loss (whether or not covered by insurance) with respect to any property or asset of the Company or any of its subsidiaries and having, individually or in the aggregate, a Company Material Adverse Effect. To the best knowledge of the Company, the Company has disclosed to Parent all facts and circumstances regarding the Company and the transactions it has engaged in which could reasonably be expected to adversely affect or preclude accounting for the Merger (as structured by this Agreement, the Stockholders Agreement and the Employment Agreement of even date herewith with Mr. Vlahos (the "Employment Agreement")) as a pooling of interest if consummated at any time from the date hereof through June 30, 1996. As of the date hereof, to the best knowledge of the Company based on the facts and circumstances known to it, the Company has no reason to believe that accounting for the Merger as a pooling of interests if consummated at any time from the date hereof through June 30, 1996 would not be available. Section 3.09 Environmental Matters. The Company and its subsidiaries are in compliance with all Environmental Laws, except for any noncompliance that, either singly or in the aggregate, could not have a Company Material Adverse Effect. "Environmental Laws" shall mean all federal, state and local laws, rules, regulations, ordinances and orders that purport to regulate the release of hazardous substances or other materials into the environment, or impose requirements relating to environmental protection. The Company has previously furnished to Parent a true and correct list of all Hazardous Materials (as hereinafter defined) generated, used, handled or stored by the Company or any of its subsidiaries, the proper disposal of which will require any material expenditure by the Company or any of its subsidiaries. "Hazardous Materials" means any "hazardous waste" as defined in either the United States Resource Conservation and Recovery Act or regulations adopted pursuant to said act, any "hazardous substances" or "hazardous materials" as defined in the United States Comprehensive Environmental Response, Compensation and Liability Act and, to the extent not included in the foregoing, any medical waste. The Company has previously made available to Parent copies of all documents concerning any environmental or health and safety matter adversely affecting the Company and copies of any environmental audits or risk assessments, site assessments, documentation regarding off-site disposal of Hazardous Materials, spill control plans and material correspondence with any Governmental Entity regarding the foregoing. Section 3.10 Litigation. Except as set forth in Schedule 3.10 of the Company Disclosure Volume, there is no litigation, claim, suit, action, proceeding, investigation or complaint pending or, to the best knowledge of the Company, threatened against the Company or any of its subsidiaries before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign (including, without limitation, any litigation, claim, suit, action, proceeding, investigation, or complaint in which any person alleges (i) the release, threat of release or placement of any hazardous substance in connection with the business of the Company or any subsidiary of the Company, (ii) the generation, transportation, storage, treatment or disposal of any hazardous substance, hazardous waste, pollutant, contaminant or other substance listed or regulated under the Environmental Laws in connection with the business of the Company or any subsidiary of the Company or (iii) any failure of the Company or a subsidiary of the Company to comply with any of the Environmental Laws). Section 3.11 ERISA Compliance, etc. (a) The Company has delivered to Parent true and complete copies of all "employee welfare benefit plans" ("Welfare Plans") (as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), and all other bonus, deferred compensation, pension, profit-sharing, retirement, medical, group life, disability income, stock purchase, stock option or other "employee pension benefits plans" (as defined in Section 3(2) of ERISA), or any bonus or incentive plan, stock option plan, restricted stock plan, stock bonus plan, deferred bonus plan, salary reduction agreement, change-of-control agreement, employment agreement, consulting agreement, severance agreement or plan, material fringe benefit plan or payroll practice, whether or not written or terminated (sometimes referred to herein collectively as "Benefit Plans") currently maintained or contributed to, or required to be maintained or contributed to, by the Company or any other person or entity that, together with the Company, is treated as a single employer under Section 414(b), (c), (m) or (o) of the Code (each a "Commonly Controlled Entity") or for which the Company could have any material liability of any nature and which is for the benefit of any current or former employees, officers or directors or independent contractors (or the dependents or beneficiaries thereof) of the Company or any of its Commonly Controlled Entities. The Company has delivered to Parent true, complete and correct copies of (x) the three (3) most recent annual reports on Form 5500 filed with the Internal Revenue Service (the "IRS") with respect to each Benefit Plan (if any such report was required), (y) the most recent summary plan description for each Benefit Plan for which such summary plan description is required or if no such summary plan description is required, a written summary of the material terms of each such Benefit Plan and (z) each funding vehicle or arrangement relating to any Benefit Plan. (b) Except as would not give rise either singly or in the aggregate to a Company Material Adverse Effect: (i) Each Benefit Plan has been administered in accordance with its terms. The Company, any Commonly Controlled Entity and each Benefit Plan are in compliance with all applicable provisions of ERISA and the Code. (ii) All Benefit Plans intended to be qualified under Section 401(a) of the Code have been the subject of determination letters from the Internal Revenue Service to the effect that such Benefit Plans are qualified and exempt from federal income taxes under Section 401(a) and 501(a), respectively, of the Code and no such determination letter has been revoked nor, to the knowledge of the Company or any Commonly Controlled Entity, has revocation been threatened, nor has any such Benefit Plan been amended (or failed to be amended) since the date of its most recent determination letter or application therefor in any respect that would result in a loss of qualification or exempt status of any such Benefit Plan. (iii) No person has engaged in a non-exempt "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject the Company, any of its subsidiaries, any officer of the Company or any of its subsidiaries or any Benefit Plan service provider to tax or penalty under ERISA, the Code or other applicable law. There has been no "reportable event" (as that term is defined in Section 4043 of ERISA) with respect to any Benefit Plan during the last five years. (iv) With respect to any Benefit Plan that is a Welfare Plan, (Y) no such Benefit Plan is funded through a "welfare benefit fund," as such term is defined in Section 419(a) of the Code, and (Z) each such Benefit Plan complies in all material respects with the applicable requirements of Section 4980B(f) of the Code, Part 6 of Subtitle B of Title I of ERISA and any applicable state continuation coverage requirements ("COBRA"). (v) With respect to each Benefit Plan, there are no actions, suits or investigations or claims pending or, to the knowledge of the Company or any of its Commonly Controlled Entities, threatened with respect to the assets thereof (other than routine claims for benefits), and there are no facts that could give rise to any liability, action, suit, investigation, or claim against any Benefit Plan, any fiduciary or plan administrator or other person dealing with any Benefit Plan or the assets of any such Benefit Plan. (vi) Each Benefit Plan may be amended, terminated, modified or otherwise revised by the Company or any of its Commonly Controlled Entities as of the Effective Time, including the elimination of any and all benefits under any Benefit Plan (except claims incurred but not reported under any Welfare Plan or any benefit described in Section 411(d)(6) of the Code or benefits under cash bonus plans, stock option and stock incentive plans, employment agreements, consulting agreements and change-of-control agreements; provided that copies of such plans and agreements have been provided to Parent's counsel). (vii) There is no accrued liability with respect to a Benefit Plan except for which there exists a separate funding vehicle, with assets equal to such liability, or an equal accrual on the balance sheets (except for liabilities under cash bonus plans, stock option and stock incentive plans, employment agreements, consulting agreements and change-of-control agreements (provided that copies of such plans and agreements have been provided to Parent's counsel), and, except as set forth on Schedule 3.11 of the Company Disclosure Volume, for accruals in respect of earned vacation pay). (c) The Company and any Commonly Controlled Entity do not maintain or contribute to or have any other liability of any nature with respect to any Benefit Plan that is subject to Title IV of ERISA, subject to Code Section 412, a "multiemployer plan" as defined in Section 4001 of ERISA, a "multiemployer plan" within the meaning of Section 3(37) of ERISA, a "multiple employer plan" within the meaning of Code Section 413(c) or a "multiple employer welfare arrangement" within the meaning of Section 3(40) of ERISA. No Benefit Plan provides post-retirement medical or life insurance benefits, except as may be required by COBRA. (d) No payment will be made to any "disqualified individual" as defined in Section 280G(c) of the Code as a result of the Merger that will result in a loss of deduction by Parent or the Surviving Corporation as a result of the provisions of Section 280G of the Code. (e) For purposes of this Section 3.11, "Company Material Adverse Effect" shall mean a material adverse effect on the business, results of operations or financial condition of the Company and its subsidiaries taken as a whole, after taking into account the liabilities of the Company and its subsidiaries and any other liabilities arising with respect to any Benefit Plan, either to such Benefit Plan or any fiduciary, participant, beneficiary or agent thereof (whether or not the Company and its subsidiaries are obligated directly or indirectly for such liabilities). Section 3.12 Trademarks, Patents and Copyrights. The Company and its subsidiaries own, or possess adequate licenses or other valid rights to use, all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, copyrights, service marks, service mark rights, trade secrets, applications to register and registrations for, the foregoing patents, trademarks, service marks, know-how and other proprietary rights and information used in connection with the business of the Company and its subsidiaries as currently conducted (the "Company Proprietary Rights"), and no assertion or claim has been made in writing challenging the validity of any of the Company Proprietary Rights. To the best knowledge of the Company, the conduct of the business of the Company and its subsidiaries as currently conducted does not conflict in any way with any patent, patent rights, license, trademark, trademark right, trade name, trade name right, service mark, copyright or other proprietary right of any other person, the Company has received no claim or threat that any such conflict exists, and no litigation, claim, suit, action, proceeding, or complaint concerning the foregoing has been filed or is ongoing. Except as set forth in Schedule 3.12 of the Company Disclosure Volume, the Company and its subsidiaries have the unencumbered right to sell their products and services (whether now offered for sale or under development) free from any royalty or other obligations to any third parties. Section 3.13 Taxes. The Company and its subsidiaries have timely filed all material federal, state, local and foreign tax returns and reports required to be filed by them through the date hereof and shall timely file all returns and reports required on or before the Effective Time. Such reports and returns are and will be true, correct and complete in all material respects. The Company and its subsidiaries have paid and discharged all federal, state, local and foreign taxes due from them, other than such taxes that are being contested in good faith by appropriate proceedings and are adequately reserved for as shown in the audited consolidated balance sheet of the Company dated December 31, 1994 (the "Company 1994 Balance Sheet") and its most recent quarterly financial statements, except for such failures to so pay and discharge that would not, individually or in the aggregate, have a Company Material Adverse Effect. Neither the IRS nor any other taxing authority or agency, domestic or foreign, is now asserting or, to the best knowledge of the Company, threatening to assert against the Company or any of its subsidiaries any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith that, if such deficiencies or claims were finally resolved against the Company and its subsidiaries, would, individually or in the aggregate, have a Company Material Adverse Effect. The accruals and reserves for taxes (including interest and penalties, if any, thereon) reflected in the Company 1994 Balance Sheet and the most recent quarterly financial statements are adequate in accordance with generally accepted accounting principles. The Company and its subsidiaries have withheld or collected and paid over to the appropriate governmental authorities or are properly holding for such payment all taxes required by law to be withheld or collected, except for such failures to have so withheld or collected and paid over to be so holding for payment that would not, individually or in the aggregate, have a Company Material Adverse Effect. There are no material liens for taxes upon the assets of the Company and its subsidiaries. Neither the Company nor any of its subsidiaries has agreed to or is required to make any adjustment under Section 481(a) of the Code. Neither the Company nor any of its subsidiaries has made an election under Section 341(f) of the Code. For purposes of this Section 3.13, where a determination of whether a failure by the Company or any of its subsidiaries to comply with the representations herein has a Company Material Adverse Effect is necessary, such determination shall be made on an aggregate basis with all other failures within this Section 3.13. As of today no payments are due under, and the Company knows of no facts or circumstances that exist and which could give rise to the obligation of the Company to make payments under, any agreement to which the Company is subject and under which the Company has agreed to indemnify persons for tax liabilities. Section 3.14 Labor Matters. There is not currently, and within the last three years neither the Company nor any subsidiary of the Company has experienced, any strike, picketing, boycott, work stoppage or slow down or union organization activity. No employee of the Company or any subsidiary of the Company is represented by a union or any similar entity and there is no request for representation pending. The Company has no knowledge (i) of any allegation, charge or complaint of unfair labor practice, employment discrimination or other matter relating to the employment of labor pending or threatened against the Company or any subsidiary of the Company, (ii) of any basis for any such allegation, charge or complaint or (iii) that it, or any subsidiary of the Company, has not complied with all applicable laws relating to the employment of labor that could reasonably be expected to have, either individually or in the aggregate, a Company Material Adverse Effect. Section 3.15 Affiliate Transactions. The Company has set forth in Schedule 3.15 of the Company Disclosure Volume each material transaction involving the transfer of any cash, property or rights to or from the Company or any subsidiary of the Company from, to or for the benefit of any affiliate or former affiliate of the Company or any subsidiary of the Company or any officer, director, employee or greater than five percent stockholder of the Company ("Company Affiliate Transactions") during the period commencing March 29, 1994 through the date hereof and any existing commitments of the Company or any subsidiary of the Company to engage in the future in any material Company Affiliate Transactions. Section 3.16 Opinion of Financial Advisor. The Company has received the opinion of Montgomery Securities, Inc. ("Montgomery"), dated as of the date hereof, to the effect that, as of such date, the Merger Consideration is fair to the stockholders of the Company from a financial point of view, a copy of which opinion has been delivered to Parent. Section 3.17 Vote Required. The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock entitled to vote is the only vote of the holders of any class or series of the Company's capital stock necessary to approve the Merger, this Agreement and the transactions contemplated by this Agreement. Section 3.18 Brokers. No broker, finder or investment banker (other than Montgomery) is entitled to any brokerage, finder's or other fee or commission from the Company in connection with the transactions contemplated by this Agreement. The Company has heretofore furnished to Parent a complete and correct copy of all agreements between the Company and Montgomery pursuant to which such firm would be entitled to any payment relating to the transactions contemplated by this Agreement. Section 3.19 Contracts and Other Agreements. Neither the Company nor any of its subsidiaries is a party to or bound by, and neither they nor any of their properties or assets are bound or subject to, any contract or other agreement required to be disclosed in, or filed as exhibit to, the Company SEC Reports which is not filed in the Company SEC Reports. All such contracts and other agreements and each of the contracts set forth in Schedule 3.19 of the Company Disclosure Volume are valid, existing, in full force and effect, binding upon the Company or its subsidiaries, as the case may be, and to the best knowledge of the Company, binding upon the other parties thereto in accordance with their terms, and the Company and its subsidiaries have paid in full or accrued all amounts now due from them thereunder and have satisfied in full or provided for all of their liabilities and obligations thereunder which are presently required to be satisfied or provided for, and are not in default under any of them, nor, to the best knowledge of the Company, is any other party to any such contract or other agreement in default thereunder, nor does any condition exist that with notice or lapse of time or both would constitute a default thereunder. Schedule 3.19 of the Company Disclosure Volume sets forth a list of the following contracts and other agreements to which the Company or any of its subsidiaries is a party or by or to which they or their assets or properties are bound or subject: (a) any agreement that individually requires aggregate expenditures by the Company or any of its subsidiaries in any one year of more than (b) any indenture, trust agreement, loan agreement or note that involves or evidences outstanding indebtedness, obligations or liabilities for borrowed money in excess of $10,000; (c) any lease, sublease, installment purchase or similar arrangement for the purchase, use or occupancy of real or personal property (i) that individually requires aggregate expenditures by the Company or any of its subsidiaries in any one year of more than $10,000, or (ii) pursuant to which the Company or any of its subsidiaries is the lessor of any real property which has rentals over $5,000 per year, together with the date of termination of such leases, the name of the other party and the annual rental payments required to be made under such leases; (d) any agreement of surety, guarantee or indemnification, other than (i) an agreement in the ordinary course of business with respect to obligations in an amount not in excess of $10,000, or (ii) indemnification provisions contained in leases not otherwise required to be disclosed; (e) any agreement, including without limitation employment agreements and bonus plans, relating to the compensation of, or obligating the Company to make payments (whether such payments are fixed in amount or contingent upon revenues of, or opening of, a restaurant or other factors) to, (i) officers, (ii) employees, (iii) former employees, (iv) consultants, (v) advisors or (vi) any person who was promised such payments in consideration of helping the Company establish or promote restaurants; (f) any agreement containing covenants of the Company not to compete in any line of business, in any geographic area or with any person or covenants of any other person not to compete with the Company or in any line of business of the Company; (g) any agreement granting or restricting the right of the Company or any of its subsidiaries to use a trade name, trade mark, logo or the (h) any agreement with any customer or supplier that cannot be terminated without penalty in excess of $10,000 by the Company or any of its subsidiaries within one year; and (i) any franchise, licensing or development agreement. True and complete copies of all of the contracts and other agreements set forth in Schedule 3.19 of the Company Disclosure Volume (or required to be set forth therein) have been previously provided to Parent. Section 3.20 Subsidiaries. Set forth on Schedule 3.20 to the Company Disclosure Volume is a list of all subsidiaries of the Company, their jurisdiction of incorporation or organization, and the location of their principal offices. Such subsidiaries are wholly owned by the Company and no person has a right to acquire an interest therein. Other than such subsidiaries, the Company does not have any interest, direct or indirect, in any partnership, joint venture or other business entity. Section 3.21 Insurance. During the last five years (or, with respect to any particular type of claim, the applicable statute of limitations with respect to such claim) the Company has maintained liability insurance policies of a commercially reasonable amount and nature consistent for a company of its size and with its operations at such time. Section 3.22 Disclosure. To the best knowledge of the Company, all material facts relating to the business, operations, properties, assets, liabilities (contingent or otherwise), and financial condition of the Company and its subsidiaries have been disclosed to Parent in or in connection with this Agreement. The representations, warranties and statements made by the Company in this Agreement and in the certificates delivered pursuant hereto do not contain any untrue statement of a material fact, and, when taken together, do not omit to state any material fact necessary to make such representations, warranties and statements, in light of the circumstances under which they are made, not misleading. Section 3.23 Definition of Company's Knowledge. As used in this Agreement, the phrase "to the knowledge of the Company" or "to the best knowledge of the Company" (or words of similar import) means the knowledge or the best knowledge of those individuals identified in Schedule 3.23 of the Company Disclosure Volume, and includes any fact, matter or circumstance which any of such individuals, as an ordinary and prudent business person employed in the same capacity in the same type and size of business as the Company, should have known. REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Parent and Sub jointly and severally represent and warrant to the Company as follows: Section 4.01 Organization. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of Parent's subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization. Each of Parent and its subsidiaries has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to conduct its business as it is currently conducted, except where the failure to have such power, authority or governmental approval would not, individually or in the aggregate, have a Parent Material Adverse Effect (as defined below). Each of Parent and its subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Parent Material Adverse Effect. The term "Parent Material Adverse Effect" means any change or effect that is or would be materially adverse to the business, results of operations or financial condition of the Parent and its subsidiaries taken as a whole. Sub is a newly-formed, wholly-owned subsidiary of Parent, formed solely for the purpose of consummating the transactions described herein, and has no assets (other than those received in connection with its initial capitalization) or liabilities. Section 4.02 Certificate of Incorporation and By-laws. Parent has made available to the Company a true, complete and correct copy of the Certificate of Incorporation, the By-laws or equivalent organizational documents, each as amended to date, of Parent and each of its subsidiaries. Such Certificate of Incorporation, By-laws and equivalent organizational documents are in full force and effect. Neither Parent nor any of its subsidiaries is in violation of any provision of its Certificate of Incorporation, By-laws or equivalent organizational documents. Section 4.03 Capitalization. The authorized capital stock of Parent consists of 20,000,000 shares of Parent Common Stock and 1,000,000 shares of preferred stock, $.01 par value per share ("Parent Preferred Stock"). As of the date of this Agreement, (i) 6,924,419 shares of Parent Common Stock are issued and outstanding, (ii) 755,883 shares of Parent Common Stock are issuable upon the exercise of outstanding stock options granted pursuant to Parent's employee stock option plans, (iii) no shares of Parent Common Stock are held in the treasury of Parent, and (iv) 11,911.545 shares of Parent Preferred Stock are issued and outstanding and 264,701 shares of Parent Common Stock are issuable upon conversion of such shares, and (v) 1,291,667 shares of Parent Common Stock are issuable upon conversion of outstanding convertible subordinated notes. All of the outstanding shares of Parent Common Stock have been duly authorized and validly issued and are fully paid and non-assessable and free of preemptive rights. Except as set forth in Schedule 4.03 of the volume of disclosure schedules delivered by the Parent to the Company on October 10, 1995 (the "Parent Disclosure Volume"), Parent does not have any outstanding options, warrants, subscriptions or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of Parent or any of its subsidiaries or obligating Parent or any of its subsidiaries to issue or sell any shares of capital stock of, or other equity interests in, Parent or any of its subsidiaries. Parent owns all of the outstanding shares of capital stock of each of its subsidiaries, and such shares are duly authorized, validly issued, fully paid and non-assessable, and free and clear of all preemptive rights and all liens, charges, encumbrances, equities, claims and options of any kind whatsoever. Section 4.04 Authority Relative to this Agreement. Except as set forth on Schedule 4.05, each of Parent and Sub has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Parent and Sub and the consummation by Parent and Sub of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Parent and Sub and the sole stockholder of Sub, and no other corporate proceedings or action on the part of Parent and Sub are necessary to authorize this Agreement or to consummate the transactions contemplated by this Agreement (other than, with respect to consummation of the Merger, (i) the approval by Parent's stockholders, in accordance with applicable rules of the Nasdaq National Market System, of the issuance of shares of Parent Common Stock (the "Parent Vote Matter") and (ii) filing and recordation of the appropriate merger documents by Sub as required by Minnesota Law). This Agreement has been duly and validly executed and delivered by parent and Sub, as the case may be, and, assuming the due authorization, execution and delivery by the Company, constitute the valid and binding agreements of parent and Sub, as the case may be, enforceable against parent and Sub in accordance with their terms. Section 4.05 Consents and Approvals; No Violations. (a) The Board of Directors of each of Parent and Sub and the sole stockholder of Sub have approved the Merger and this Agreement. (b) Except as set forth in Schedule 4.05 of the Parent Disclosure Volume, the execution and delivery of this Agreement by Parent and Sub do not, and the performance of the transactions contemplated by this Agreement by Parent and Sub will not, require any filing with or notification to, or any consent, approval, authorization or permit from, any Governmental Entity or any other person except (i) for (A) applicable requirements of the Securities Act, the Exchange Act and state securities or "blue sky" laws, (B) the pre-merger notification requirements of the HSR Act, and (C) the filing and recordation of the Articles of Merger, as required by Minnesota Law, or (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, (X) would not prevent or delay consummation of the Merger in any material respect or otherwise prevent or delay either Parent or Sub from performing its obligations under this Agreement in any material respect, (Y) would not otherwise prevent or delay Parent from performing its obligations under this Agreement in any material respect or (Z) would not, individually or in the aggregate, have a Parent Material Adverse Effect. (c) Except as set forth in Schedule 4.05 of the Parent Disclosure Volume, the execution and delivery of this Agreement by Parent and Sub do not, and the performance of the transactions contemplated by this Agreement by Parent and Sub will not, (i) conflict with or violate the Certificate of Incorporation, By-laws or equivalent documents of Parent or of any of its subsidiaries, (ii) conflict with or violate any order, writ, injunction, decree, statute, treaty, law, rule or regulation applicable to Parent or any of its subsidiaries or by which any property or asset of Parent or any of its subsidiaries is bound or affected or (iii) result in a violation or a breach of, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or result in the loss of a benefit under, or give to others any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of Parent or any of any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any of its subsidiaries is a party or by which or any of its subsidiaries or any property or asset of Parent or any of its subsidiaries is bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences that (A) would not prevent or delay consummation of the Merger in any material respect or otherwise prevent or delay either Parent or Sub from performing its obligations under this Agreement in any material respect or (B) would not, individually or in the aggregate, have a Parent Material Adverse Effect. Section 4.06 Compliance. (a) Parent and its subsidiaries have all licenses, permits, franchises, orders or approvals of any federal, state, local or foreign governmental or regulatory body or other Governmental Entity material to the conduct of the business of Parent (collectively, "Parent Permits"), and such Parent Permits are in full force and effect and no proceeding is pending or, to the best knowledge of Parent, threatened to revoke or limit any Parent Permit. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement will not adversely affect any Parent Permit or result in any Parent Permit being either revoked or limited in any material respect. (b) Neither Parent nor any of its subsidiaries is in conflict with, or in default or violation of, (i) any law, rule, regulation, order, judgment or decree applicable to Parent or any of its subsidiaries or by which any property or asset of Parent or any of its subsidiaries is bound or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any of its subsidiaries is a party or by which Parent or any its subsidiaries or any property or asset of Parent or any of its subsidiaries is bound or affected, except for any such conflicts, defaults or violations that would not, individually or in the aggregate, have a Parent Material Adverse Effect. No investigation or review by any Governmental Entity or any other person concerning any such possible violations by Parent or any of its subsidiaries is pending or, to the knowledge of Parent, threatened, nor has any Governmental Entity or any other person indicated an intention to conduct the same in each case other than those the outcome of which would not have, or that insofar as reasonably can be foreseen, in the future are not reasonably likely to have, a Parent Material Adverse Effect. Section 4.07 SEC Reports. (a) Parent has filed all forms, reports and documents required to be filed by it with the SEC since June 30, 1994 and has heretofore made available to the Company, in the form filed with the SEC (excluding any exhibits thereto), (i) its Annual Report on Form 10-K for the fiscal year ended July 1, 1995, and (ii) all other forms, reports, registration statements and other documents filed by Parent with the SEC since July 1, 1995 (the forms, reports, registration statements and other documents referred to in clauses (i) and (ii) above being referred to herein, collectively, as the "Parent SEC Reports"). The Parent SEC Reports and any other forms, reports and other documents filed by Parent with the SEC after the date of this Agreement (i) were or will be prepared in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (ii) did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were or are made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Parent SEC Reports was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto) and each fairly presented the consolidated financial position, results of operations and cash flows of Parent and its consolidated subsidiaries as the case may be, as at the respective dates thereof and for the respective periods indicated therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments that were not and are not expected, individually or in the aggregate, to be material in amount). (c) Except as set forth in the Parent SEC Reports filed with the SEC prior to the date of this Agreement, Parent and its subsidiaries do not have any liability or obligation of any nature (whether accrued, absolute, contingent or otherwise) other than liabilities and obligations that would not, individually or in the aggregate, have a Parent Material Adverse Effect. Section 4.08 Absence of Certain Changes. Since July 1, 1995, except as disclosed in any Parent SEC Report, there has not been (i) a Parent Material Adverse Effect, (ii) any declaration, setting aside or payment of any dividend or other distribution in respect of any shares of any capital stock of Parent or any of its subsidiaries, or any redemption, purchase or other acquisition of any of their respective securities other than dividends by a subsidiary to Parent, (iii) any entry into any agreement, commitment or transaction by Parent or any of its subsidiaries that is material to Parent and its subsidiaries taken as a whole, except agreements, commitments or transactions in the ordinary course of business, (iv) any change by Parent in accounting methods, principles or practices, or (v) any damage, destruction or loss (whether or not covered by insurance) with respect to any property or asset of Parent or any of its subsidiaries and having, individually or in the aggregate, a Parent Material Adverse Effect. To the best knowledge of Parent, Parent has disclosed to the Company all facts and circumstances regarding Parent and the transactions it has engaged in which could reasonably be expected to adversely affect or preclude accounting for the Merger (as structured by this Agreement, the Stockholders Agreement and the Employment Agreement) as a pooling of interests if consummated at any time from the date hereof through June 30, 1996. As of the date hereof, to the best knowledge of Parent based on the facts and circumstances known to it, Parent has no reason to believe that accounting for the Merger as a pooling of interests if consummated at any time from the date hereof through June 30, 1996 would not be available. Section 4.09 Environmental Matters. Parent and its subsidiaries are in compliance with all Environmental Laws, except for any noncompliance that, either singly or in the aggregate, would not have a Parent Material Adverse Effect. "Environmental Laws" shall mean all federal, state and local laws, rules, regulations, ordinances and orders that purport to regulate the release of hazardous substances or other materials into the environment, or impose requirements relating to environmental protection. Section 4.10 Litigation. There is no litigation, claim, suit, action, proceeding, investigation or complaint pending or, to the best knowledge of Parent, threatened against Parent or any of its subsidiaries before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign (including, without limitation, any litigation, claim, suit, action, proceeding, investigation, or complaint in which any person alleges (i) the release, threat of release or placement of any hazardous substance in connection with the business of Parent or any subsidiary of Parent, (ii) the generation, transportation, storage, treatment or disposal of any hazardous substance, hazardous waste, pollutant, contaminant or other substance listed or regulated under the Environmental Laws in connection with the business of Parent or any subsidiary of Parent or (iii) any failure of Parent or a subsidiary of Parent to comply with any of the Environmental Laws) which are expected, individually or in the aggregate, to have a Parent Material Adverse Effect. Section 4.11 ERISA Compliance. (a) Parent has made available to the Company true and complete copies of all Welfare Plans and all other bonus, deferred compensation, pension, profit-sharing, retirement, medical, group life, disability income, stock purchase, stock option or other "employee pension benefits plans" (as defined in Section 3(2) of ERISA), or any bonus or incentive plan, stock option plan, restricted stock plan, stock bonus plan, deferred bonus plan, salary reduction agreement, change-of-control agreement, employment agreement, consulting agreement, severance agreement or plan, material fringe benefit plan or payroll practice, whether or not written or terminated (sometimes referred to herein collectively as "Parent Benefit Plans") currently maintained or contributed to, or required to be maintained or contributed to, by Parent or any other person or entity that, together with Parent, is treated as a single employer under Section 414(b), (c), (m) or (o) of the Code (each a "Parent Commonly Controlled Entity") or for which Parent could have any material liability of any nature and that is for the benefit of any current or former employees, officers or directors or independent contractors (or the dependents or beneficiaries thereof) of Parent or any of the Parent Commonly Controlled Entities. Parent has made available to the Company true, complete and correct copies of (x) the most recent annual report on Form 5500 filed with the IRS with respect to each Parent Benefit Plan (if any such report was required), (y) the most recent summary plan description for each Parent Benefit Plan for which such summary plan description is required or if no such summary plan description is required, a written summary of the material terms of each such Parent Benefit Plan and (z) each funding vehicle or arrangement relating to any Parent Benefit Plan. (b) Except as would not give rise either singly or in the aggregate to a Parent Material Adverse Effect: (i) Each Parent Benefit Plan has been administered in accordance with its terms. Parent, any Parent Commonly Controlled Entity and each Parent Benefit Plan are in compliance with all applicable provisions of ERISA and the Code. (ii) All Parent Benefit Plans intended to be qualified under Section 401(a) of the Code have been the subject of determination letters from the Internal Revenue Service to the effect that such Parent Benefit Plans are qualified and exempt from federal income taxes under Section 401(a) and 501(a), respectively, of the Code and no such determination letter has been revoked nor, to the knowledge of Parent any Parent Commonly Controlled Entity, has revocation been threatened, nor has any such Parent Benefit Plan been amended (or failed to be amended) since the date of its most letter or application therefor in any respect that would result in a loss of qualification or exempt status of any such Parent Benefit Plan. (iii) No person has engaged in a non-exempt "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) or any other breach of fiduciary responsibility that could subject Parent, any of its subsidiaries, any officer of Parent or any of its subsidiaries or any Parent Benefit Plan service provider to tax or penalty under ERISA, the Code or other applicable law. There has been no "reportable event" (as that term is defined in Section 4043 of ERISA) with respect to any Parent Benefit Plan during the last five years. (iv) With respect to any Parent Benefit Plan that is a Welfare Plan, (Y) no such Parent Benefit Plan is funded through a "welfare benefit fund," as such term is defined in Section 419(a) of the Code, and (Z) each such Parent Benefit Plan complies in all material respects with the applicable requirements of COBRA. (v) With respect to each Parent Benefit Plan, there are no actions, suits or investigations or claims pending or, to the knowledge of Parent or any of its Parent Commonly Controlled Entities, threatened with respect to the assets thereof (other than routine claims for benefits), and there are no facts that would give rise to any liability, action, suit, investigation, or claim against any Parent Benefit Plan, any fiduciary or plan administrator or other person dealing with any Parent Benefit Plan or the assets of any such Parent Benefit Plan. (vi) Each Parent Benefit Plan may be amended, terminated, modified or otherwise revised by Parent or any Parent Commonly Controlled Entities as of the Effective Time, including the elimination of any and all benefits under any Parent Benefit Plan (except claims incurred but not reported under any Welfare Plan or any benefit described in Section 411(d)(6) of the Code or benefits under cash bonus plans, stock option and stock incentive plans, employment agreements, consulting agreements and change-of-control agreements; provided that copies of such plans and agreements have been provided to the Company's counsel). (vii) There is no accrued liability with respect to a Parent Benefit Plan except for which there exists a separate funding vehicle, with assets equal to such liability, or an equal accrual on the balance sheets (except for liabilities under cash bonus plans, stock option and stock incentive plans, employment agreements, consulting agreements and change-of-control agreements; provided that copies of such plans and agreements have been provided to the Company's counsel). (c) Parent and any Parent Commonly Controlled Entity do not maintain or contribute to or have any other liability of any nature with respect to any Parent Benefit Plan that is subject to Title IV of ERISA, subject to Code Section 412, a "multiemployer plan" as defined in Section 4001 of ERISA, a "multiemployer plan" within the meaning of Section 3(37) of ERISA, a "multiple employer plan" within the meaning of Code Section 413(c) or a "multiple employer welfare arrangement" within the meaning of Section 3(40) of ERISA. No Parent Benefit Plan provides post-retirement medical or life insurance benefits, except as may be required by COBRA. (d) For purposes of this Section 4.11, "Parent Material Adverse Effect" shall mean a material adverse effect on the business, results of operations or financial condition of Parent and its subsidiaries taken as a whole, after taking into account the liabilities of Parent and its subsidiaries and any other liabilities arising with respect to any Parent Benefit Plan, either to such Parent Benefit Plan or any fiduciary, participant, beneficiary or agent thereof (whether or not Parent and its subsidiaries are obligated directly or indirectly for such liabilities). Section 4.12 Trademarks, Patents and Copyrights. Parent and its subsidiaries own, or possess adequate licenses or other valid rights to use, all patents, patent rights, patents, trademarks, trademark rights, trade names, trade name rights, copyrights, service marks, service mark rights, trade secrets, applications to register and registrations for, the foregoing trademarks, service marks, know-how and other proprietary rights and information used in connection with the business of Parent and its subsidiaries as currently conducted (the "Parent Proprietary Rights"), and no assertion or claim has been made in writing challenging the validity of any of the Parent Proprietary Rights. To the best knowledge of Parent, the conduct of the business of Parent and its subsidiaries as currently conducted does not conflict in any way with any patent, patent rights, license, trademark, trademark right, trade name, trade name right, service mark, copyright or other proprietary right of any other person. Except as set forth in Schedule 4.12 of the Parent Disclosure Volume, Parent and its subsidiaries have the unencumbered right to sell their products and services (whether now offered for sale or under development) free from any royalty or other obligations to any third parties. Section 4.13 Taxes. Parent and its subsidiaries have timely filed all federal, state, local and foreign tax returns and reports required to be filed by them through the date hereof and shall timely file all returns and reports required on or before the Effective Time. Such reports and returns are and will be true, correct and complete in all material respects. Parent and its subsidiaries have paid and discharged all federal, state, local and foreign taxes due from them, other than such taxes that are being contested in good faith by appropriate proceedings and are adequately reserved as shown in the audited consolidated balance sheet of Parent dated July 1, 1995 (the "Parent 1995 Balance Sheet"), except for such failures to so pay and discharge which would not, individually or in the aggregate, have a Parent Material Adverse Effect. Neither the IRS nor any other taxing authority or agency, domestic or foreign, is now asserting or, to the best knowledge of Parent, threatening to assert against Parent or any of its subsidiaries any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith that, if such deficiencies or claims were finally resolved against Parent and its subsidiaries, would, individually or in the aggregate, have a Parent Material Adverse Effect. The accruals and reserves for taxes (including interest and penalties, if any, thereon) reflected in the Parent 1995 Balance Sheet are adequate in accordance with generally accepted accounting principles. Parent and its subsidiaries have withheld or collected and paid over to the appropriate governmental authorities or are properly holding for such payment all taxes required by law to be withheld or collected, except for such failures to have so withheld or collected and paid over to be so holding for payment that would not, individually or in the aggregate, have a Parent Material Adverse Effect. There are no material liens for taxes upon the assets of Parent and its subsidiaries. Neither Parent nor any of its subsidiaries has agreed to or is required to make any adjustment under Section 481(a) of the Code. Neither Parent nor any of its subsidiaries has made an election under Section 341(f) of the Code. For purposes of this Section 4.13, where a determination of whether a failure by Parent or any of its subsidiaries to comply with the representations herein has a Parent Material Adverse Effect is necessary, such determination shall be made on an aggregate basis with all other failures within this Section 4.13. Section 4.14 Labor Matters. There is not currently, and within the last three years neither Parent nor any subsidiary of Parent has experienced, any strike, picketing, boycott, work stoppage or slow down or union organization activity. No employee of Parent or any subsidiary of Parent is represented by a union or any similar entity and there is no request for representation pending. Parent has no knowledge (i) of any allegation, charge or complaint of unfair labor practice, employment discrimination or other matter relating to the employment of labor pending or threatened against Parent or any subsidiary of Parent, (ii) of any basis for any such allegation, charge or complaint or (iii) that it, or any subsidiary of Parent, has not complied with all applicable laws relating to the employment of labor that could reasonably be expected to have, either individually or in the aggregate, a Parent Material Adverse Effect. Section 4.15 Affiliate Transactions. Parent has set forth in Schedule 4.15 of the Parent Disclosure Volume each material transaction involving the transfer of any cash, property or rights to or from Parent or any subsidiary of Parent from, to or for the benefit of any affiliate or former affiliate of Parent or any subsidiary of Parent or any officer, director, employee or greater than five percent stockholder of the Company ("Parent Affiliate Transactions") during the period from July 2, 1994 through the date hereof and any existing commitments of Parent or any subsidiary of Parent to engage in the future in any material Parent Affiliate Transactions. Section 4.16 Opinion of Financial Advisor. Parent has received the opinion of Piper Jaffray, Inc. ("Piper Jaffray"), dated as of the date hereof, to the effect that, as of such date, the Merger Consideration is fair to the stockholders of Parent from a financial point of view, a copy of which opinion has been delivered to the Company. Section 4.17 Vote Required. The affirmative vote of the holders of a majority of the shares of Parent Common Stock cast at the Parent Stockholders Meeting, provided that the total vote cast on the Parent Vote Matter represents over 50% of the outstanding shares of Parent Common Stock, is the only vote of the holders of any class or series of Parent's capital stock necessary to approve the Parent Vote Matter. The sole stockholder of Sub has approved this Agreement and the Merger and no further vote of such stockholder is required with respect to such matters. Section 4.18 Brokers. No broker, finder or investment banker (other than Piper Jaffray) is entitled to any brokerage, finder's or other fee or commission from Parent in connection with the transactions contemplated herein by this Agreement. The Parent has heretofore furnished to the Company a complete and correct copy of all agreements between Parent and Piper Jaffray pursuant to which such firm would be entitled to any payment relating to the transactions contemplated by this Agreement. Section 4.19 Disclosure. To the best knowledge of Parent and Sub, all material facts relating to the business, operations, properties, assets, liabilities (contingent or otherwise) and financial condition of Parent and its subsidiaries have been disclosed to the Company in or in connection with this Agreement. The representations, warranties and statements made by Parent and Sub in this Agreement and in the certificates delivered pursuant hereto do not contain any untrue statement of a material fact, and, when taken together, do not omit to state any material fact necessary to make such representations, warranties and statements, in light of the circumstances under which they are made, not misleading. Section 4.20 Insurance. During the last five years (or, with respect to any particular type of claim, the applicable statute of limitations with respect to such claim) Parent has maintained liability insurance policies of a commercially reasonable amount and nature consistent for a company of its size and with its operations at such time. Section 4.21 Definition of Parent's Knowledge. As used in this Agreement, the phrase "to the knowledge of Parent" or "to the best knowledge of Parent" (or words of similar import) means the knowledge or the best knowledge of those individuals identified in Schedule 4.21 of the Parent Disclosure Volume, and includes any fact, matter or circumstance which any of such individuals, as an ordinary and prudent business person employed in the same capacity in the same type and size of business as Parent, should have known. Section 5.01 Conduct of Respective Businesses of the Company and Parent Pending the Merger. Each of the Company and Parent covenants and agrees as to itself and each of its subsidiaries that between the date of this Agreement and the Effective Time, it shall carry on its respective businesses in the usual, regular and ordinary course, consistent with past practice, and each of them shall use its reasonable best efforts to preserve intact its present business organizations, keep available the services of its present officers and employees, keep in effect casualty, public liability, worker's compensation and other insurance policies in coverage amounts not less than those in effect as of the date of this Agreement, to preserve and protect the Company Proprietary Rights (in the case of the Company) and the Parent Proprietary Rights (in the case of Parent) and preserve its relationships with customers, franchisees, suppliers, licensors and other persons with which it has significant business dealings. Without limiting the generality of the foregoing, neither the Company nor Parent nor any of their respective subsidiaries shall, between the date of this Agreement and the Effective Time, directly or indirectly, do, or propose or agree to do, any of the following without the prior written consent of the other: (a) (i) Declare, set aside or pay any dividend or other distribution (whether in cash, stock, or property or any combination thereof) in respect of any of its capital stock, except for any dividend from a subsidiary to Parent or the Company, as the case may be, (ii) split, combine, reclassify or subdivide any of its capital stock or (iii) repurchase, redeem or otherwise acquire any of (b) Authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) (collectively, "Issue") any shares of stock of any class or any other securities (including indebtedness having the right to vote) or equity equivalents (including, without limitation, phantom stock or stock appreciation rights), other than (i) the issuance of capital stock in connection with (X) the exercise of options, warrants, convertible debentures, convertible preferred stock or other similar rights outstanding as of the date of this Agreement and in accordance with the terms of such options, warrants, convertible debentures, convertible preferred stock or other rights in effect on the date of this Agreement or (Y) options granted under Parent's stock option plans after the date of this Agreement, or (ii) is otherwise permitted to be issued pursuant to (c) In the case of the Company, acquire or encumber (other than in connection with the opening of new Company-owned restaurants) or sell, lease, transfer or dispose of any assets other than in the ordinary course of business; (d) In the case of the Company, other than in connection with activities consistent with expansion of Company's restaurant operations, incur any long-term indebtedness for borrowed money, guarantee any indebtedness, issue or sell debt securities or warrants or rights to acquire any debt securities, guarantee (or otherwise become liable or potentially liable for) any debt of others, make any loans, advances or capital contributions; mortgage, pledge or otherwise encumber any material assets; or create or suffer any material lien thereupon other than in the ordinary course of business consistent with prior practice or incur any short-term indebtedness for borrowed money except for credit facilities in existence on the date hereof; (e) In the case of the Company, pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than any payment, discharge or satisfaction (i) in the ordinary course of business consistent with past practice, (ii) in connection with the transactions contemplated by this Agreement, or (iii) in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the consolidated financial statements (or the notes thereto) of the Company and its consolidated subsidiaries or Parent and its consolidated subsidiaries, as the case may be; (f) Change any of the accounting principles or practices used by it (except as required by generally accepted accounting principles); (g) In the case of the Company, increase the compensation payable or to become payable to its officers or employees, except for increases in the ordinary course of business in accordance with past practice, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director or officer of it or any of its subsidiaries, or establish, adopt, enter into or amend in any material respect or take action to accelerate any rights or benefits under any collective bargaining, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any (h) Amend or otherwise change the Company's Articles of Incorporation or By-laws (in the case of the Company) Parent's Certificate of Incorporation or By-laws (in the case of Parent) or Sub's Articles of Incorporation or By-laws (in the case of Parent); (i) In the case of the Company, other than in connection with activities consistent with expansion of Company's restaurant operations, (i) enter into a new agreement, contract or commitment involving payment to or by the Company of $10,000 or more or (ii) amend any existing agreement that could reasonably be expected to have a Company Material Adverse Effect; (j) In the case of the Company, other than in connection with activities consistent with expansion of the Company's restaurant operations, enter into or modify or amend any lease, license agreement, franchise agreement or development (k) Knowingly engage in any transaction or cause any fact or circumstance to occur which would preclude accounting for the Merger (as structured by this Agreement, the Stockholders Agreement and the Employment Agreement) as a pooling of interests if consummated at any time from the date hereof through June 30, (l) Enter into an agreement to take any of the foregoing actions or take, or enter into an agreement to take, any action that would result in any of the conditions to the Merger set forth in Article VI not being satisfied. Section 5.02 No Solicitations. (a) Unless and until this Agreement shall have terminated in accordance with its terms, neither the Company nor any of its subsidiaries shall (and the Company and each of its subsidiaries shall use its best efforts to cause all of its officers, directors, employees, agents, representatives and advisors, including, without limitation, investment bankers, attorneys and accountants, not to), directly or indirectly, solicit, initiate, knowingly encourage or enter into any agreement with respect to or participate in negotiations with, provide any confidential information to, enter into any agreement with or (except, as advised in a written opinion of Fredrikson & Byron, P.A. or other counsel reasonably acceptable to Parent, as may be required by applicable state corporate law with respect to the provisions of materials to a stockholder of the Company) otherwise cooperate in any way in connection with, any Third Party (as hereinafter defined) concerning any Competing Transaction (as defined in Section 7.01). For purposes of this Agreement, "Third Party" shall mean any corporation, partnership, person or "group" (as defined in Section 13(d)(3) of the Exchange Act and the Rules and Regulations thereunder) other than Parent, Sub, any affiliate of Parent or Sub or any of their respective directors, officers, employees, representatives, advisors and agents. The Company agrees to terminate, immediately following the execution of this Agreement, all pending discussions or negotiations with any Third Party with respect to any possible Competing Transaction (as defined in Section 7.01). (b) The Company will notify Parent and Sub orally, within twenty-four hours, and in writing, as promptly as practicable (i) of the identity of any Third Party from which it or any of its subsidiaries or any of their respective officers, directors, employees, agents, representative or advisors receives any request for information, any inquiry or any proposal to initiate discussions or negotiations with respect to, or relating to, a Competing Transaction or any of the other matters set forth in Section 5.02(a) and (ii) if applicable, the terms of such Competing Transaction. If such request, inquiry or proposal is in writing, the Company will deliver to Parent and Sub a copy of such request, inquiry or proposal within twenty-four hours of its receipt. Section 5.03 Access to Information; Confidentiality. (a) From the date hereof to the Effective Time, each of the Company and Parent shall (and shall cause its subsidiaries and officers, directors, employees, auditors and agents to) afford the officers, employees and agents of the other party (the "Respective Representatives") reasonable access at all reasonable times to its officers, employees, agents, properties, offices, plants and other facilities, books and records, and shall furnish such Respective Representatives with all financial, operating and other data and information as may be reasonably requested. (b) All information obtained by the Company or Parent pursuant to this Section 5.03 shall be kept confidential in accordance with the terms of the agreement or agreements covering confidentiality of materials entered into between each party or between a party and a financial advisor to a party in connection with a contemplated transaction between the parties. (c) No investigation pursuant to this Section 5.03 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. Section 5.04 Indemnification and Insurance. (a) The provisions in the charter and by-laws of each of the Surviving Corporation and Parent with respect to indemnification of officers and directors and limitations on their personal liability shall not be amended, repealed or otherwise modified for a period of six years after the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors or officers of the Company ("Company Parties") in respect of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement), unless such modification is required by law. Parent shall guarantee the obligations of the Surviving Corporation arising out of such provisions or, at its option, in the alternative shall purchase a one-year directors' and officers' "tail" insurance policy covering the obligations of the Surviving Corporation in such regard. (b) This Section 5.04 is intended for the irrevocable benefit of, and to grant third party rights to, the Company Parties and shall be binding on all successors and assigns of Parent, the Company and the Surviving Corporation. Each of the Company Parties shall be entitled to enforce the covenants contained in this Section 5.04. (c) In the event the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other person or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person or entity, then, and in each such case, proper provision shall be made so that the successors and assigns of the Surviving Corporation assume the obligations set forth in this Section 5.04. Section 5.05 Certain Benefits. (a) Parent and Sub agree that the Company and its subsidiaries, and the Surviving Corporation and its subsidiaries after the Effective Time, will provide benefit plans to employees of the Company and its subsidiaries that, at the option of the Parent, either (i) will be no less favorable, in the aggregate, than those provided by Parent and its subsidiaries to their employees or (ii) will, in the aggregate, be no less favorable than those provided by the Company and its subsidiaries to their employees prior to the date of this Agreement. Nothing contained in this Section 5.05(a) shall be construed to grant any right of continued employment to any present employee of the Company or any of its subsidiaries. (b) If any employee of the Company or any of its subsidiaries becomes a participant in any employee benefit plan, practice or policy of Parent, any of its affiliates or the Surviving Corporation, such employee shall be given credit under such plan for all service prior to the Effective Time with the Company and its subsidiaries or any predecessor employer (to the extent such credit was given by the Company under a similar plan) for purposes of eligibility (including, without limitation, waiting periods), vesting and vacation accrual. (c) Except for normal increases in the ordinary course of business that are consistent with past practices and that, in the aggregate, do not result in a material increase in benefits or compensation expense to the Company, the Company will not, and will not permit any of its Commonly Controlled Entities to, adopt or amend any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other employee benefit agreements, trusts, plans, funds or other arrangements for the benefit or welfare of any director, officer or employee that increase in any manner the compensation, retirement, welfare or fringe benefits of any director, officer or employee or pay any benefit not required by any existing plan or arrangement (including without limitation the granting of stock options) or take any action or grant any benefit not expressly required under the terms of any existing agreements, trusts, plans, funds or other such arrangements or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. Section 5.06 Registration Statement; Joint Proxy Statement. (a) As promptly as practicable after the execution of this Agreement, (i) Parent and the Company shall prepare and file with the SEC a joint proxy statement relating to the meetings of the stockholders of Parent and the Company to be held in connection with the Merger and the Parent Vote Matter (together with any amendments thereof or supplements thereto, the "Proxy Statement") and (ii) Parent shall prepare and file with the SEC a registration statement on Form S-4 (the "Form S-4") in which the Proxy Statement shall be included as part (together with the Proxy Statement and all amendments to the Proxy Statement and the Form S-4, the "Registration Statement") in connection with the registration under the Securities Act of the shares of Parent Common Stock to be issued to the stockholders of the Company pursuant to the Merger. Each of the Company and Parent shall use their reasonable best efforts to have or cause the Registration Statement to become effective as promptly as practicable, and shall take all or any action required under any applicable federal or state securities laws in connection with the issuance of shares of Parent Common Stock pursuant to the Merger. Each of the Company and Parent shall furnish all information concerning itself to the other as the other may reasonably request in connection with such actions and the preparation of the Registration Statement. As promptly as practicable after the Registration Statement shall have become effective, each of Parent and the Company shall mail the Registration Statement to its respective stockholders. The Registration Statement shall include the recommendation of the Board of Directors of each of Parent and the Company in favor of the Merger, the Merger Agreement and the Parent Vote Matter, as the case may be; provided, however, that nothing contained in this Section 5.06 shall prohibit the Board of Directors of the Company or Parent from failing to make the recommendation if the Board of Directors of Parent or the Company, as the case may be, has determined in good faith, after consultation with and based upon the written advice of independent legal counsel, that such action is necessary for such Board of Directors to comply with its fiduciary duties to its stockholders under applicable law. (b) The information supplied by Parent for inclusion in the Registration Statement shall not, at (i) the time the Registration Statement is declared effective, (ii) the time the Registration Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of Parent and the Company, (iii) the time of each of the Stockholders Meetings (as defined in Section 5.07), and (iv) the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. If at any time prior to the Effective Time any event or circumstance relating to Parent or any of its subsidiaries, or any of their respective officers or directors, should be discovered by Parent which should be set forth in an amendment or a supplement to the Registration Statement, Parent shall promptly inform the Company. (c) The information supplied by the Company for inclusion in the Registration Statement shall not, at (i) the time the Registration Statement is declared effective, (ii) the time the Registration Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of the Company and Parent, (iii) the time of each of the Stockholders Meetings (as defined in Section 5.07), and (iv) the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. If at any time prior to the Effective Time any event or circumstance relating to the Company or any its subsidiaries, or any of their respective officers or directors, should be discovered by the Company that should be set forth in an amendment or a supplement to the Registration Statement, the Company shall promptly inform Parent. Section 5.07 Stockholders' Meetings. Parent shall call and hold a meeting of its stockholders, and the Company shall call and hold a meeting of its stockholders (collectively, the "Stockholders' Meetings") as promptly as practicable for the purpose of voting upon the approval, in the case of the Company, of the Merger and the Merger Agreement and, in the case of Parent, of the Parent Vote Matter, and Parent and the Company shall use their reasonable best efforts to hold the Stockholders' Meetings on the same day and as soon as practicable after the date on which the Registration Statement becomes effective. The Company and Parent shall use their reasonable best efforts to solicit from their stockholders proxies in favor of the approval of the Merger and Merger Agreement or the Parent Vote Matter, as the case may be, and shall take all other action necessary or advisable to secure the vote or consent of stockholders required by Delaware Law or Minnesota law, as the case may be, to obtain such approvals. Parent shall vote the shares of Company Common Stock for which it will act as proxy at the Company's Stockholder Meeting pursuant to the Stockholders Agreement in favor of approval of the Merger and the Merger Agreement. Section 5.08 Letters of Accountants. Provided Parent gives to Arthur Andersen LLP a customary representation letter, the Company shall deliver to Parent "comfort" letters of Arthur Andersen LLP, the Company's independent public accountants, dated and delivered the date on which the Registration Statement shall become effective and as of the Effective Time, and addressed to Parent, in form and substance reasonably satisfactory to Parent, to the effect that: (i) they are independent accountants within the meaning of the Securities Act and the Exchange Act; (ii) in their opinion, the financial statements of the Company included in the Registration Statement that were reported on by such firm comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the Exchange Act; (iii) on the basis of a reading of the latest unaudited financial statements made available by the Company and its subsidiaries; their limited review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited interim financial information for the period since December 31, 1994, carrying out certain specified procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter; a reading of the minutes of the meetings of the stockholders, the board of directors and the executive, compensation, and audit committees of the board of directors; and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company and its subsidiaries as to transactions and events subsequent to December 31, 1994, nothing came to their attention which caused them to believe that: (1) any unaudited financial statements included in the Registration Statement do not comply in form in all material respects with applicable accounting requirements of the Act and with the published rules and regulations of the Commission with respect to registration statements on Form S-4; or that any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement, (2) with respect to the period subsequent to the unaudited interim balance sheet of the Company set forth in the Registration Statement, there were any changes, at a specified date not more than five business days prior to the date of the letter, in the long-term debt or notes payable of the Company and its subsidiaries or capital stock of the Company or increases in the accumulated deficit of the Company as compared with the amounts shown on such balance sheet included in the Registration Statement, or for the period from the date of such balance sheet to such specified date there were any decreases, as compared with the corresponding period in the preceding quarter, in operating revenues, or any decreases, as compared with the corresponding period in the preceding year, in operating income or net income before income taxes or in total or per share amounts of net income of the Company, except in all instances for changes or decreases set forth in such letter, in which case the letter shall be accompanied by an explanation by the Company as to the significance thereof unless such explanation is not deemed necessary by Parent; and (iv) they have performed certain other specified procedures as a result of which they determined that certain information (including specified dollar amounts, numbers of shares, and percentages of revenues and earnings) of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company and its subsidiaries) set forth in the Registration Statement, agrees with the accounting records of the Company and its subsidiaries, excluding any questions of legal interpretation. Section 5.09 Further Action; Reasonable Best Efforts. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall (i) make promptly its respective filings, and thereafter make any other required submissions under the HSR Act with respect to the transactions contemplated herein, (ii) use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated herein including, without limitation, using its reasonable best efforts to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities and all parties to contracts with Parent and the Company and their respective subsidiaries as are necessary for the consummation of the transactions contemplated herein. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such action. Each party shall promptly consult with the other with respect to, provide any necessary information with respect to and provide the other (or its counsel) with copies of, (i) all filings made by such party with any Governmental Entity or any other person in connection with the execution of this Agreement and the consummation of the transactions contemplated hereby and (ii) all other written materials submitted or prepared by any such party concerning obtaining all licenses, permits, consents, approvals, authorizations and orders that are required to be obtained in connection with the execution of this Agreement and the consummation of the transactions contemplated by this Agreement. (b) Each party shall use its best efforts not to take any action, or enter into any transaction, that would cause any of its representations or warranties contained in this Agreement to be untrue or result in a breach of any covenant made by it in this Agreement. (c) The Company will take no action to assert or cooperate (other than as required by law) with a Third Party who asserts that the voting rights of the shares of common stock of the Company that are subject to that certain stockholders Agreement of even date herewith among certain Stockholders of the Company and Parent (the "Stockholders Agreement") are adversely affected by the execution and delivery of the Stockholders' Agreement as a result of the provisions of Section 302A.671 of the Minnesota Business Corporation Act or any other antitakeover or business combination statute under Minnesota law. Section 5.10 Public Announcements. Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement or any transaction contemplated herein and shall not issue any such press release or make any such public statement without the prior consent of the other party, which consent shall not be unreasonably withheld; provided, however, that a party may, without the prior consent of the other party, issue such press release or make such public statement as may be required by law if it has used all reasonable efforts to consult with the other party and to obtain such party's consent but has been unable to do so in a timely manner. Section 5.11 Affiliates of the Company. Within 30 days after the date of this Agreement, (a) the Company shall deliver to Parent a letter identifying all persons who may be deemed affiliates of the Company under Rule 145 of the Securities Act ("Rule 145"), including, without limitation, all directors and executive officers of the Company and (b) the Company shall advise the persons identified in such letter of the resale restrictions imposed by applicable securities laws. The Company shall use its best efforts to obtain as soon as practicable from any person who may be deemed to have become an affiliate of the Company after the Company's delivery of the letter referred to above and prior to the Effective Time, a written agreement substantially in the form of Exhibit A. Section 5.12 Conveyance Taxes. Parent and the Company shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees and any similar taxes which become payable in connection with the transactions contemplated hereby that are required or permitted to be filed on or before the Effective Time. Section 5.13 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to Company, of (i) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would be likely to cause (x) any representation or warranty contained in this Agreement to be untrue or inaccurate or (y) any covenant, condition or agreement contained in this Agreement not to be complied with or satisfied and (ii) any failure of the Company or Parent, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.14 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. Section 5.14 Tax Opinion Matters. Each of Parent, Sub and the Company will deliver to counsel to the parties hereto a document containing, to the extent reasonably required, the representations, warranties and agreements necessary for counsel to the parties to render the opinions described in Sections 6.02(c) and 6.03(c). Section 5.15 Interim Financing Arrangement. Parent and Company shall promptly negotiate and enter into a financing arrangement on the terms set forth on Exhibit B. Section 6.01 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to effect the Merger and the other transactions contemplated herein shall be subject to the satisfaction at or prior to the Effective Time of the following conditions, any or all of which may be waived, in whole or in part, to the extent permitted by applicable law: (a) Effectiveness of the Registration Statement. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose shall have been initiated or, to the knowledge of Parent or the Company, threatened by the SEC. (b) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the requisite vote of the stockholders of the Company, and the Parent Vote Matter shall have been approved and adopted by the requisite vote of the stockholders of Parent. In addition, the holders of the requisite number of shares of Company Common Stock sufficient, either alone or in combination with other factors (including payment of cash in lieu of fractional shares), to preclude accounting for the Merger as a pooling of interests or to obtain tax free treatment for the Merger under Section 368(a) of the Code shall not have perfected or preserved dissenters' rights under applicable law with respect to the adoption of this Agreement. (c) No Injunction or Restraints; Illegality. The consummation of the Merger shall not be prohibited by any injunction, order, decree or ruling (an "Injunction") of a United States federal or state court of competent jurisdiction (each party agreeing to use its best efforts to have any such Injunction stayed or reversed), and there shall not have been any action taken or any statute, rule or regulation enacted, promulgated or deemed applicable to the Merger, or any executive order or decree issued, by any Government Entity that is in effect and that makes consummation of the Merger illegal. (d) HSR Act. The applicable waiting period under the HSR Act shall have expired or been terminated. (e) Approvals; Consents. Other than the filing of merger documents in accordance with Minnesota Law, all authorizations, consents (including the consent of Parent's lender as set forth in Schedules 4.04 and 4.05), waivers, orders and approvals required to be obtained, and all filings, notices and declarations required to be made, by Parent and the Company prior to the consummation of the Merger and the transactions contemplated hereunder shall have been obtained from, and made with, all required Governmental Entities and all other persons except for such authorizations, consents, waivers, orders, approvals, filings, notices or declarations the failure to obtain or make would not have a Material Adverse Effect (as defined in Section 8.11), at or after the Effective Time, on (i) the Company and its subsidiaries taken as a whole or (ii) Parent and its subsidiaries taken as a whole. (f) Accountants' Letters. Each of Parent and the Company shall have received letters, dated as of the Effective Time, from Deloitte & Touche LLP and Arthur Andersen LLP to the effect that the Merger will qualify for pooling of interests accounting treatment under Accounting Principles Board Opinion No. 16 if closed and consummated in accordance with this Agreement. Section 6.02 Additional Conditions to Obligations of Parent and Sub. The obligations of Parent and Sub to effect the Merger and the transactions contemplated herein are also subject to the satisfaction of the following conditions, any or all of which may be waived in whole or in part by Parent and Sub in their sole discretion: (a) Representations and Warranties. Each of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time as though made on and as of their Effective Time (except for such representations and warranties which are qualified by their terms by a reference to materiality or a Company Material Adverse Effect, which representations and warranties as so qualified shall be correct in all respects as of the date of this Agreement and as of the Effective Time as though made on and as of the Effective Time). Parent and Sub shall have received a certificate signed on behalf of the Company by the Chief Executive Officer and Chief Financial Officer of the Company to the foregoing effect. (b) Agreement and Covenants. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time. Parent and Sub shall have received a certificate signed on behalf of the Company by the Chief Executive Officer and Chief Financial Officer of the Company to the foregoing effect. (c) Tax Opinion. Parent and Sub shall have received the opinion of Goodwin, Procter & Hoar dated on or about the date that is two business days prior to the date the Registration Statement is first mailed to stockholders of Parent and the Company, reasonably acceptable to Parent and Sub, and subject to customary conditions and qualifications, to the effect that the Merger will be treated for federal income tax purposes as a tax-free reorganization qualifying under the provisions of Sections 368(a) of the Code, which opinion shall not have been withdrawn or modified in any material respect. (d) Material Adverse Change. Except for any event disclosed in the Company's SEC Reports filed prior to the date of this Agreement, there shall not have occurred any change concerning the Company or any of its subsidiaries that, individually or in the aggregate, has had a Material Adverse Effect on the Company and its subsidiaries taken as a whole since December 31, 1994, and Parent and Sub shall have received a certificate signed on behalf of the Company by the Chief Executive Officer and Chief Financial Officer of the Company to the foregoing effect. (e) Additional Tax Statement. Parent shall have received a statement dated as of immediately prior to the Effective Time, from the Company to the effect that the Company Common Stock is not a "U.S. real property interest." Such statement shall be in compliance with Treasury Regulations Sections 1.897-2(h) and 1.1445-2(c)(3). Section 6.03 Additional Conditions to Obligations of the Company. The obligation of the Company to effect the Merger and the other transactions contemplated in this Agreement are also subject to the satisfaction of following conditions, any or all of which may be waived by the Company in its sole discretion: (a) Representations and Warranties. Each of the representations and warranties of Parent and Sub contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time, as though made on and as of the Effective Time (except for such representations and warranties which are qualified by their terms by a reference to materiality or a Parent Material Adverse Effect, which representations and warranties as so qualified shall be correct in all respects as of the date of this Agreement and as of the Effective Time as though made on and as Effective Time). The Company shall have received a certificate signed on behalf of the Parent and Sub by the Chief Executive Officers and Chief Financial Officers of Parent and Sub to the foregoing effect. (b) Agreements and Covenants. Parent and Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time. The Company shall have received a certificate signed on behalf of the Parent and Sub by the Chief Executive Officers and Chief Financial Officers of Parent and Sub to the foregoing effect. (c) Tax Opinion. The Company shall have received the opinion of Fredrikson & Byron, P.A. dated on or about the date that is two business days prior to the date the Registration Statement to first mailed to stockholders of the Company and Parent, reasonably acceptable to the Company, and subject to customary conditions and qualifications, to the effect that the Merger will be treated for federal income tax purposes as a tax-free reorganization qualifying under the provisions of Sections 368(a) of the Code, which opinion shall not have been withdrawn or modified in any material respect. (d) Material Adverse Change. Except for any event disclosed in Parent's SEC Reports filed prior to the date of this Agreement, there shall not have occurred any change concerning Parent or any of its subsidiaries that, individually or in the aggregate, has had a Material Adverse Effect on Parent and its subsidiaries taken as a whole since July 1, 1995, and the Company shall have received a certificate signed on behalf of Parent and Sub by the Chief Executive Officers and Chief Financial Officers of Parent and Sub to the foregoing effect. Section 7.01 Termination. (a) This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval and adoption of this Agreement by the stockholders of the Company or the approval by the stockholders of Parent of the Parent Vote Matter: (a) by mutual written consent of Parent and the Company; (b) by either Parent or the Company if any United States federal or state court of competent jurisdiction or other Government Entity shall have issued an Injunction or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such Injunction or other action shall have (c) by Parent, upon a breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement, or if any representation or warranty of the Company shall have become untrue, in each case such that the conditions set forth in Section 6.02(a) or Section 6.02(b), as the case may be, would be incapable of being satisfied by June 30, 1996; provided that, in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section 7.01(c); (d) by the Company, upon a breach of any representation, warranty, covenant or agreement on the part of Parent or Sub set forth in this Agreement, or if any representation or warranty of Parent or Sub shall have become untrue, in either case such that the conditions set forth in Section 6.03(a) or Section 6.03(b), as the case may be, would be incapable of being satisfied by June 30, 1996; provided that, in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of this Section (e) by Parent, if (i) the Board of Directors of the Company shall have failed to make or shall withdraw, modify or change its recommendation of this Agreement or the Merger or shall have resolved to do any of the foregoing, or (ii) a Third Party shall have commenced (as such term is defined in Rule 14d-2 of the Exchange Act) and consummated a tender offer or exchange offer for 20% or more of the outstanding shares of Company Common Stock; (f) by either Parent or the Company if (i) the Merger and the Merger Agreement shall have failed to receive the requisite vote for approval and adoption by the stockholders of the Company (except that Parent may not terminate under this clause 7.01(f)(i) if Parent failed to vote for such matters the shares of Company Common Stock with respect to which it had authority to act as proxy at the Company Stockholder Meeting and such matters would have been approved had such shares been voted for such matters) or (ii) the Parent Vote Matter shall have failed to receive the requisite vote for approval and adoption by the stockholders of Parent; or (g) by either Parent or the Company, if the Merger shall not have been consummated on or before June 30, 1996; or (h) by Company if (i) the Board of Directors of Parent shall have failed to make or shall withdraw, modify or change its recommendation of this Agreement or the Merger or shall have resolved to do any of the foregoing, or (ii) a Third Party shall have commenced (as such term is defined in Rule 14d-2 of the Exchange Act), or shall have filed a Registration Statement under the Securities Act, with respect to a tender offer or exchange offer for 20% or more of the outstanding shares of Parent Common Stock. The right of any party hereto to terminate this Agreement pursuant to this Section 7.01 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any person controlling any such party or any of their respective employees, officers, directors, agents, representatives or advisors, whether prior to or after the execution of this Agreement. For purposes of this Agreement, a "Competing Transaction" shall mean any of the following involving the Company or any of its subsidiaries: (i) any merger, consolidation, share exchange, business combination, or other similar transaction, (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more of the assets of the Company and its subsidiaries taken as a whole, in a single transaction or series of transactions, (iii) any tender offer or exchange offer for 20% or more of the outstanding shares of Company Common Stock or the filing of a registration statement under the Securities Act in connection therewith, (iv) the issuance, sale or other disposal by the Company (including by way of merger, consolidation, share exchange or any similar transaction) of securities representing, or convertible into or exercisable for the acquisition of, 20% or more of the voting power of the Company or any of its subsidiaries or (v) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. Section 7.02 Effect of Termination. (a) Except as set forth in Section 8.01, in the event of the termination and abandonment of this Agreement pursuant to Section 7.01 hereof, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party hereto or its affiliates, directors, officers or stockholders and all rights and obligations of any party hereto shall cease; provided that nothing contained in this Section 7.02 shall relieve any party from liability for any breach of this Agreement except as provided in Section 7.02(f) or shall relieve the Company from liability under this Section 7.02 except as provided in Section 7.02(f). (b) If Parent terminates this Agreement pursuant to Section 7.01(c) or pursuant to Section 7.01(e) or 7.01(f)(i), then, within ten (10) days of the date of such termination (or within 45 days of such termination if Company acknowledges to Parent in writing within ten days of such termination that it is obligated to pay the Termination Fee with no right of offset for counterclaims, but such 45 day period shall end if a Proceeding (as defined below) should occur), the Company shall pay to Parent the Termination Fee (as defined below); provided, that, no such Termination Fee will be due in the event of a termination of this Agreement pursuant to Section 7.01(f)(i) if the average per share closing price of Parent Common Stock on the Nasdaq National Market System over the twenty (20) trading days immediately preceding the originally scheduled date of the Company's Stockholder Meeting was less than $22.50. (c) If at any time prior to or within one year after termination of this Agreement (unless such termination was pursuant to Section 7.01(a), (b), (d), (g), (h), (f)(ii) or, if the average per share closing price of Parent Common Stock on the Nasdaq National Market System over the twenty (20) trading days immediately preceding the date of the Company's Stockholder Meeting was less than $22.50, f(i)) the Company enters into an agreement relating to a Competing Transaction with a Third Party or the Company's Board of Directors recommends or resolves to recommend to the Company's stockholders approval or acceptance of a Competing Transaction with a Third Party then, upon the entry into such agreement or the making of such recommendation or resolution the Company shall pay to Parent the Termination Fee. (d) At any time prior to or within one year after termination of this Agreement, the Company shall not enter into any agreement relating to a Competing Transaction with a Third Party unless such agreement provides that such Third Party shall, upon the execution of such agreement, pay any Termination Fee due Parent under this Section 7.02. (e) As used herein, the term "Termination Fee" means the sum of $2,800,000 paid in cash in immediately available funds to an account designated by Parent, provided that the Termination Fee shall be reduced, on a dollar for dollar basis, to the extent that payments are made to Parent under the certain Stockholder's Agreement on account of Stockholder Fees (as defined therein). The parties acknowledge and agree that the provisions for payment of a Termination Fee are included herein in order to reimburse Parent for incurring the costs and expenses related to entering into this Agreement and consummating the transactions contemplated by this Agreement. No more than one Termination Fee shall be paid under this Section 7.02. The parties hereto agree that any Termination Fee that is paid to or due Parent shall not be deemed to be liquidated damages, and that, subject to Section 7.02(f), Parent's right to payment of the Termination Fee shall be in addition to any other rights or remedies under contract, at law or in equity to which Parent may be entitled. (f) In the event of a termination giving rise to the right of Parent to receive a Termination Fee, Company shall have no liability to Parent other than the payment of such Termination Fee so long as (x) such Termination Fee is paid in full when due, (y) there is no pending or threatened suit or complaint brought by or on behalf of any stockholder of the Company against Parent or Sub arising out of any matter relating to this Agreement or the transactions contemplated in connection herewith (a "Proceeding"), and (z) the Company and the persons who are parties to the Stockholders Agreement have given a full release of any rights or claims they then or may thereafter have arising out of this Agreement and have waived all rights to instigate or pursue any Proceeding; provided that if at any time a Proceeding is initiated by any stockholder of the Company or by or on behalf of the Company (other than on behalf of the Company by Parent or a stockholder of the Company controlled by Parent), then, during the existence of such Proceeding, Parent's rights shall not be limited by this clause (f). Section 7.03 Amendment. This Agreement may be amended by the parties hereto, by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger or the Parent Vote Matter by the stockholders of Parent or the Company, no amendment that under applicable law may not be made without the approval of the stockholders of Parent or the Company may be made without such approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 7.04 Extension; Waiver. At any time prior to the Effective Time, the parties hereto may (i) extend the time for the performance of any of the obligations or other acts of the other party hereto, (ii) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto or (iii) waive compliance by the other party with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. Section 8.01 Effectiveness of Representations, Warranties and Agreements. Except as set forth in Section 8.01(b), the representations, warranties and agreements of each party hereto shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any other party hereto, any person controlling any such party or any of their officers or directors, whether prior to or after the execution of this Agreement. (b) The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Article VII; except that the agreements set forth in Articles I, II and VIII and Sections 5.04, 5.05(a) and (b) shall survive the Effective Time and those set forth in Sections 5.03(b) and 7.02 and Article VIII hereof shall survive termination. Section 8.02 Notices. All notices and other communications hereunder shall be in writing (and shall be deemed given upon receipt) if delivered personally, telecopied (which is confirmed) or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Parent or Sub, to Attn: Charles W. Redepenning, Jr. (b) if to the Company, to Section 8.03 Descriptive Headings. The descriptive headings herein are inserted for convenience only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 8.04 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. Section 8.05 Entire Agreement; Assignment. This Agreement (together with the Confidentiality Agreement, the Company Disclosure Volume, the Parent Disclosure Volume, the exhibits hereto and the other documents delivered pursuant hereto) (a) constitute the entire agreement of the parties and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (b) shall not be assigned by operation of law or otherwise, provided that Parent may cause Sub to assign its rights and obligations to Parent or any other direct or indirect wholly-owned subsidiary of Parent that becomes a party to this Agreement and agrees to perform and assume the obligations of Sub hereunder, but no such assignment shall relieve either Parent or Sub of its obligations hereunder if such assignee does not perform such obligations. Section 8.06 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Minnesota without regard to any applicable principles of conflicts of law. Section 8.07 Specific Performance. Except when Section 7.02(f) limits the remedies of Parent and Sub, the parties hereto agree that if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached, irreparable damage would occur, no adequate remedy at law would exist and damages would be difficult to determine, and that the parties shall be entitled to specific performance of the terms hereof, without the posting of any bond whatsoever in addition to any other remedy at law or equity. Section 8.08 Expenses. Fees, expenses and all out-of-pocket costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred by the parties hereto shall be borne solely and entirely by the party that has incurred such costs and expenses; provided, however, that all costs and expenses related to printing, filing and mailing the Registration Statement and all SEC and other regulatory filing fees (including, without limitation, under the HSR Act) incurred in connection with the Registration Statement shall be borne equally by the Company and Parent. Section 8.09 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person or persons any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement, except pursuant to Sections 5.04 and 5.05 hereof. Parent shall cause Sub to perform its obligations hereunder and shall be fully liable, severally and jointly, for any failure of Sub to perform such obligations. Section 8.10 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible to the fullest extent permitted by applicable law in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. Section 8.11 Certain Definitions. For purposes of this Agreement, the term: (a) "affiliate" means a person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with, (b) With respect to any shares of Company Common Stock, a person shall be deemed to be the "beneficial owner" of such shares (i) that such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly or indirectly, (ii) that such person or any of its affiliates or associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time or the satisfaction of certain conditions), pursuant to any agreement, arrangement or understanding or upon the exercise of consideration rights, exchange rights, warrants or options or otherwise or (B) the right to vote pursuant to any agreement, arrangement or understanding or (iii) that are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or associates, or any person with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares, and with respect to any shares of capital stock of any person other than the Company, beneficial ownership shall be determined in accordance with the provisions of Rule 13(d)(3) of the Exchange (c) "control" (including the terms "controlled," "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock or as trustee or executor, by contract or credit arrangement or otherwise; (d) "subsidiary" or "subsidiaries" of Parent, the Company, the Surviving Corporation or any other person means any corporation, partnership, joint venture or other legal entity of which Parent, the Company, the Surviving Corporation or such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity; (e) "person" shall mean any individual, corporation, partnership, joint venture, association, trust, unincorporated organization or government or any agency or political subdivision thereof or any other entity; and (f) "Material Adverse Effect" shall mean, when used with respect to any person, a material adverse effect on the business, operations, results of operations or financial condition of such person. IN WITNESS WHEREOF, the Company, Parent and Sub have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. EXHIBIT A -- FORM OF AFFILIATE LETTER The undersigned, a holder of shares and/or options to purchase shares of common stock, par value $.01 per share (collectively, the "Champps Shares"), of Champps Entertainment, Inc. ("Champps"), is entitled to receive shares and/or options to purchase shares of common stock, $.01 par value per share (collectively, the "Daka Stock"), of DAKA International, Inc. ("Daka"), in connection with the merger ("the Merger") of CEI Acquisition Corp. ("Sub"), a wholly-owned subsidiary of Daka, into Champps as contemplated by the Agreement and Plan of Merger dated October , 1995 (the "Merger Agreement") among Daka, Sub and Champps. The Daka Stock into which the undersigned's Champps Shares will convert pursuant to the Merger shall be referred to herein as "Daka Shares." Rule 145. The undersigned has been advised that the issuance of the Daka Shares in the Merger has been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), on a Registration Statement on Form S-4. However, the undersigned has also been advised that, since at the time the Merger is submitted for a vote of Champps stockholders the undersigned may be an "affiliate" of Champps (although nothing contained herein should be construed as an admission of such fact), as that term is used in Rule 145(c) promulgated under the Act ("Rule 145"), the Daka Shares may be offered for sale, sold, assigned, transferred, distributed or otherwise disposed of (any of such transactions being referred to hereinafter as a "sale") by the undersigned only if (i) the undersigned sells the Daka Shares in conformity with certain provisions of Rule 144 promulgated under the Act as made applicable pursuant to paragraph (d) of Rule 145, (ii) any subsequent sale of the Daka Shares by the undersigned has been registered under the Act, or (iii) in the opinion of counsel, reasonably satisfactory to Daka, some other exemption from registration under the Act is available with respect to any sale of the Daka Shares. The undersigned understands that the requirements of Rule 145(d) will differ depending upon how long the undersigned holds the Daka Shares and whether the undersigned is or recently was an affiliate of Daka at the time of sale. The undersigned understands that, in general, the provisions of Rule 145(d) will permit resale of the Daka Shares within two years following the Merger only in brokers' transactions where the aggregate number of shares sold at any time, together with all sales of the undersigned's Daka Stock during the preceding three-month period, does not exceed the greater of (i) one percent (1%) of the total number of shares of Daka Stock outstanding or (ii) the average weekly volume of trading in shares of Daka Stock on all national securities exchanges during the four-week period preceding any such sale. The undersigned hereby represents to and covenants to Daka that the undersigned will not sell the Daka Shares except pursuant to the provisions of Rule 145, an effective registration statement or an exemption from registration under the Act. In the event that the undersigned intends to sell Daka Shares other than (i) pursuant to Rule 145 or (ii) pursuant to an effective registration statement, at least two business days prior to effecting any such sale the undersigned will furnish Daka with an opinion of counsel, reasonably satisfactory to Daka (the "Legal Opinion"), to the effect that some other exemption from registration is available with respect to such sale. Pooling of Interest. The undersigned acknowledges that Daka and Champps contemplate that the Merger will be treated as pooling of interests" under generally accepted accounting principles. In connection therewith, the undersigned hereby represents and warrants to and covenants with Daka that the will not, directly or indirectly, sell, transfer or otherwise dispose of any shares of Daka Stock including the Daka Shares, or cause any shares of Daka Stock including the Daka Shares, to be sold, transferred or otherwise disposed of, until such time as unaudited financial statements covering at least 30 days of the combined operations of Champps and Daka following the Merger have been published by Daka. Representation. The undersigned represents and warrants to Daka as follows: (a) Set forth below the undersigned's signature hereto are the exact numbers of Champps Shares which the undersigned owns of record only, beneficially only and of record and beneficially; and (b) Such ownership is free and clear of any security interest, lien, encumbrance, charge, equity, claim or restriction whatsoever, except as set forth below the undersigned's signature hereto and as may be imposed by reason of the Act or the General Rules and Regulations thereunder. The undersigned understands that Daka may, within the two-year period immediately following the Merger, instruct its transfer agent to withhold the transfer of any Daka Shares by the undersigned, but if the transfer is pursuant to an effective registration statement or Rule 145 or if Daka receives a Legal Opinion (in the case of a sale made pursuant to an exemption from registration other than Rule 145) the transfer agent shall effect such transfer. The undersigned acknowledges that the undersigned has carefully read this letter, has had the opportunity to discuss this letter with counsel and understands the requirements hereof and the limitations imposed upon the sale of the Daka Shares. EXHIBIT B -- INTERIM FINANCING AGREEMENT SUMMARY OF INTERIM FINANCING ARRANGEMENT Parent will, or will cause one of its subsidiaries to, provide to the Company additional financing for the development of Champps restaurants subject to the terms and conditions outlined below: 1. Amount and Terms of Additional Financing: up to $3,000,000 aggregate principal amount, with each loan bearing interest at the rate of 10% per year, interest on all loans payable quarterly in arrears and principal of all loans payable in a single installment on October 10, 2000 (or such earlier date to which maturity is accelerated pursuant to paragraph 4 below). In the alternative, Parent may satisfy its commitment by providing credit enhancements to induce third parties to provide financing to the Company upon terms and conditions no less favorable than those described herein. 2. Conditions of Each Loan: (i) consent of the Company's lender, if required, including an agreement to subordinate with respect to liens described in paragraph 3 below, and (ii) delivery of customary documentation in form and substance reasonably satisfactory to Parent and the Company. 3. Form of and Collateral for Each Loan: Loans shall be provided by Parent from time to time as required with respect to the development by the Company of specific proposed Champps restaurants ("Approved Projects"), so long as the site and plans for such proposed new restaurant (including without limitation the terms of any lease) are approved by Parent, which approval shall not be unreasonably withheld. Parent shall provide such loans with respect to any Approved Project in such amount and in form as is reasonably acceptable to Parent giving due regard to the circumstances affecting the development of such restaurant, it being understood that such form is presently contemplated to be a mortgage loan secured by a first priority lien on and collateral assignment of all real estate leases (or owned real estate, if any) with respect to each Approved Project, a security interest in all furniture, fixtures and equipment at such Approved Project (which may be junior to any purchase money lien to the extent such property is financed through loans from third parties), collateral assignments of all licenses, permits and approvals and a license upon reasonably acceptable terms and conditions with respect to the "Champps" trademark and trade dress effective in the event of foreclosure. The subsidiaries of the Company will guarantee all obligations of the Company to Parent. 4. Termination; Prepayment; Acceleration: No further financing will be made available by Parent in the event that the Merger Agreement terminates. All principal of outstanding loans may be (a) repaid at any time at the option of the Company and (b) declared immediately due and payable by Parent (i) in the event that a majority change of control occurs with respect to the Company or (ii) upon the happening of usual and customary events of default with respect to payment collateral, cross-defaults and insolvency and grace periods. FAIRNESS OPINION OF MONTGOMERY SECURITIES Members of the Board of Directors Champps Entertainment, Inc. We understand that Champps Entertainment, Inc., a Minnesota corporation (the "Company"), DAKA International, Inc., a Delaware corporation ("Parent"), and CEI Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent ("Sub"), propose to enter into an Agreement and Plan of Merger, dated as of October 10, 1995 (the "Merger Agreement"), pursuant to which Sub will be merged with and into the Company, which will be the surviving entity (the "Merger"). Pursuant to the Merger, as more fully described in the Merger Agreement, we understand that each outstanding share of the common stock of the Company, par value $.01 per share ("Company Common Stock"), not owned directly or indirectly by the Company or Parent, will be converted into .40 shares (the "Exchange Ratio") of the common stock of Parent, par value $.01 per share ("Parent Common Stock"), subject to adjustment as described below (the "Consideration"). If the average per share closing price of Parent Common Stock as reported on the Nasdaq National Market over the twenty (20) trading days immediately preceding the second trading day prior to the closing date of the Merger is (a) less than $30.00 per share, the Exchange Ratio will be adjusted to .43 shares of Parent Common Stock for each share of Company Common Stock, or (b) more than $35.00 per share, the Exchange Ratio will be adjusted to .37 shares of Parent Common Stock for each share of Company Common Stock. You have asked for our opinion as to whether the Consideration to be received by the stockholders of the Company pursuant to the Merger is fair to such stockholders from a financial point of view, as of the date hereof. In connection with our opinion, we have, among other things: (i) reviewed certain publicly available financial and other data with respect to the Company and Parent, including the consolidated financial statements for recent years and interim periods to October 1, 1995 and September 30, 1995, respectively, and certain other relevant financial and operating data relating to the Company and Parent made available to us from published sources and from the internal records of the Company and Parent; (ii) reviewed a draft of the Merger Agreement provided to us by the Company; (iii) reviewed certain historical market prices and trading volumes of the Company Common Stock and the Parent Common Stock as reported on the Nasdaq National Market; (iv) compared the Company and Parent from a financial point of view with certain other companies in the restaurant industry that we deemed to be relevant; (v) considered the financial terms, to the extent publicly available, of selected recent business combinations of companies in the restaurant industry that we deemed to be comparable, in whole or in part, to the Merger; (vi) reviewed and discussed with representatives of the management of the Company and Parent certain information of a business and financial nature regarding the Company and Parent, furnished to us by them, including financial forecasts and related assumptions of the Company and Parent; (vii) made inquiries regarding and discussed the Merger and the Merger Agreement and other matters related thereto with the Company's counsel; and (viii) performed such other analyses and examinations as we have deemed appropriate. In connection with our review, we have assumed and relied upon the accuracy and completeness of the foregoing information and we have not assumed any responsibility for independent verification of such information. With respect to the financial forecasts for the Company and Parent provided to us by their respective managements, we have assumed for purposes of our opinion that the forecasts have been reasonably prepared on bases reflecting the best available estimates and judgments of their respective managements at the time of preparation as to the future financial performance of the Company and Parent and that they provide a reasonable basis upon which we can form our opinion. We have also assumed that there have been no material changes in the Company's or Parent's assets, financial condition, results of operations, business or prospects since the respective dates of their last financial statements made available to us. We have relied on advice of counsel and independent accountants to the Company as to all legal and financial reporting matters with respect to the Company, the Merger and the Merger Agreement. We have assumed that the Merger will be consummated in a manner that complies in all respects with the applicable provisions of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended, and all other applicable federal and state statutes, rules and regulations. In addition, we have not assumed responsibility for making an independent evaluation, appraisal or physical inspection of the assets or individual properties of the Company or Parent, nor have we been furnished with any such appraisals. Finally, our opinion is based on economic, monetary and market and other conditions as in effect on, and the information made available to us as of, the date hereof. We have further assumed, with your consent, that the Merger will be consummated in accordance with the terms described in the Merger Agreement without any amendments thereto, and without waiver by the Company or Parent of any of the conditions to their respective obligations thereunder. Based upon the foregoing and in reliance thereon, it is our opinion that the Consideration to be received by the stockholders of the Company pursuant to the Merger is fair to such stockholders from a financial point of view, as of the date hereof. This opinion is furnished pursuant to our engagement letter, dated October 4, 1995. This opinion is addressed to the Board of Directors of the Company and is not intended to be and shall not be deemed to be a recommendation to any stockholder as to how such stockholder should vote with respect to the Merger. Except as provided in such engagement letter, this opinion may not be used or referred to by the Company, or quoted or disclosed to any person in any manner, without our prior written consent. In furnishing this opinion, we do not admit that we are experts within the meaning of the term "experts" as used in the Securities Act and the rules and regulations promulgated thereunder, nor do we admit that this opinion constitutes a report or valuation within the meaning of Section 11 of the Securities Act. FAIRNESS OPINION OF PIPER JAFFRAY INC. This letter relates to the issuance of shares of common stock of DAKA International, Inc. ("DAKA") in exchange for all of the outstanding shares of common stock of Champps Entertainment, Inc. ("Champps") pursuant to the Agreement and Plan of Merger referred to below (the "Transaction"). The aggregate consideration to be paid by DAKA will be based on a fixed exchange ratio of 0.40 of a DAKA share of common stock for each Champps' share of common stock if the Closing Price (as defined below) of DAKA common stock is equal to or more than $30.00 but not more than $35.00; 0.43 of a share of DAKA common stock for each share of Champps common stock if the Closing Price of DAKA common stock is less than $30.00; and 0.37 of a share of DAKA common stock if the Closing Price of DAKA common stock is more than $35.00 (the "Exchange Ratio"). As used herein, "Closing Price" means the average per share closing price of DAKA common stock as reported on the Nasdaq National Market System over the twenty (20) trading days immediately preceding the second trading day prior to the closing date of the Transaction. You have requested our opinion as to the fairness to DAKA, from a financial point of view, of the Exchange Ratio in the Transaction. Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, underwritings and secondary distributions of securities, private placements, and valuations for estate, corporate and other purposes. Piper Jaffray makes a market in the Common Stock of DAKA and also provides research coverage for DAKA. For our services in rendering this opinion, DAKA will pay us a fee and indemnify us against certain liabilities. The fee is not contingent upon the consummation of the Merger. In arriving at our opinion, we have undertaken such reviews, analyses and inquiries as we deemed necessary and appropriate under the circumstances. Among other things, we have: 1. Reviewed the Agreement and Plan of Merger by and between DAKA, Champps and CEI Acquisition Corp. dated October 10, 1995. 2. Reviewed the audited Financial Information for Champps for the three years ended December 31, 1994. 3. Reviewed the Financial Information for Champps for the nine months ended September 30, 1995. 4. Reviewed the audited Financial Information for DAKA for the three years ended July 1, 1995. 5. Reviewed the Financial Information for DAKA for the three months ended September 30, 1995. 6. Reviewed five-year financial forecasts for DAKA furnished by DAKA management. 7. Reviewed five-year financial forecasts for Champps furnished by Champps management. 8. Conducted discussions with members of senior management of Champps, including the President/Chief Executive Officer and the Vice President of Finance/Chief Financial Officer. Topics discussed included, but were not limited to, the background and rationale of the proposed Transaction, the financial condition, operating performance, and the balance sheet characteristics of Champps and the prospects for the combined company after consummation of the proposed Transaction. 9. Conducted discussions with members of senior management of DAKA, including the Chairman and Chief Executive Officer, Chief Financial Officer and Controller. Topics discussed included, but were not limited to, the background and rationale for the proposed Transaction, the financial condition, operating performance, balance sheet characteristics and prospects of DAKA's business independently and the financial and operating prospects for the combined company after consummation of the proposed Transaction. 10. Reviewed the historical prices and trading activity for DAKA and Champps common stock. 11. Reviewed the financial terms, to the extent publicly available, of certain comparable merger and acquisition transactions which we deemed relevant. 12. Performed discounted cash flow analysis on five-year financial forecasts for Champps furnished by Champps' management. 13. Considered the proforma effect of the proposed Transaction on DAKA's earnings per share for calendar 1996 and the five fiscal years ending June 30, 2000. 14. Compared certain financial and securities data of Champps and DAKA with certain financial and securities data of companies deemed similar to Champps and DAKA or representative of the business sector in which both companies operate. 15. Analyzed the premiums paid in recent acquisitions of public company stock. 16. Calculated the projected contribution of DAKA and Champps to the combined company by revenue, income and ownership for six fiscal years beginning July 1, 1995. 17. Reviewed such other financial data, performed such other analyses and considered such other information as we deemed necessary and appropriate under the circumstances. We have relied upon and assumed the accuracy and completeness of the financial statements and other information provided by DAKA and Champps or otherwise made available to us and have not attempted independently to verify such information. We have further relied upon the assurances of DAKA's and Champps's managements that the information provided has been prepared on a reasonable basis and, with respect to financial planning data, reflects the best currently available estimates and that they are not aware of any information or facts that would make the information provided to us incomplete or misleading. In that regard, we have assumed with your consent that any projections or forecasts, including without limitation, any projected cost savings and operating synergies resulting from the Transaction, reflect best currently available estimates and judgments of the respective managements of DAKA and Champps and that such projections and forecasts will be realized in the amounts and in the time periods currently estimated by the managements of DAKA and Champps. Furthermore, we have assumed that neither DAKA nor Champps is a party to any pending transaction, including external financings, recapitalizations, acquisitions or merger discussions, other than the Transaction or in the ordinary course of business. In arriving at our opinion, we have not performed any appraisals or valuations of specific assets of DAKA or Champps and express no opinion regarding the liquidation value of DAKA or Champps. Our opinion is necessarily based upon information available to us, facts and circumstances and economic, market and other conditions as they exist and are subject to evaluation on the date hereof; events occurring after the date hereof could materially affect the assumptions used in preparing this opinion. We have not undertaken to reaffirm or revise this opinion or otherwise comment upon any events occurring after the date hereof. We express no opinion herein as to the prices at which shares of DAKA common stock may trade at any future time. This opinion is for benefit of the Board of Directors of DAKA and shall not be relied upon, published or otherwise used, nor shall any public references to Piper Jaffray be made without our written consent, except for inclusion in the full proxy/prospectus to be sent to all stockholders of DAKA and Champps and in any filings or disclosures required by law. Based upon and subject to the foregoing and based upon such other factors as we consider relevant, it is our opinion that the Exchange Ratio in the Transaction is fair, from a financial point of view, to DAKA. SECTIONS 302A.471 AND 302A.473 OF THE 302A.471 RIGHTS OF DISSENTING SHAREHOLDER. Subdivision 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may dissent from, and obtain payment for the fair value of the shareholder's shares in the event of, any of the following corporate actions: (a) An amendment of the articles that materially and adversely affects the rights or preferences of the shares of the dissenting shareholder in that it: (1) alters or abolishes a preferential right of the shares; (2) creates, alters or abolishes a right in respect of the redemption of the shares, including a provision respecting a sinking fund for the redemption or repurchase of the shares; (3) alters or abolishes a preemptive right of the holder of the shares to acquire shares, securities other than shares, or rights to purchase shares or securities other than shares; (4) excludes or limits the right of a shareholder to vote on a matter, or to cumulate votes, except as the right may be excluded or limited through the authorization or issuance of securities of an existing or new class or series with similar or different voting rights; except that an amendment to the articles of an issuing public corporation that provides that section 302A.671 does not apply to a control share acquisition does not give rise to the right to obtain payment under this section; (b) A sale, lease, transfer, or other disposition of all or substantially all of the property and assets of the corporation, but not including a transaction permitted without shareholder approval in section 302A.661, subdivision 1, or a disposition in dissolution described in section 302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a disposition for cash on terms requiring that all or substantially all of the net proceeds of disposition be distributed to the shareholders in accordance with their respective interests within one year after the date of disposition; (c) A plan of merger, whether under this chapter or under chapter 322B, to which the corporation is a party, except as provided in subdivision 3; (d) A plan of exchange, whether under this chapter or under chapter 322B, to which the corporation is a party as the corporation whose shares will be acquired by the acquiring corporation, if the shares of the shareholder are entitled to be voted on the plan; or (e) Any other corporate action taken pursuant to a shareholder vote with respect to which the articles, the by-laws, or a resolution approved by the board directs that dissenting shareholders may obtain payment for their shares. (a) A shareholder shall not assert dissenters' rights as to less than all of the shares registered in the name of the shareholder, unless the shareholder dissents with respect to all the shares that are beneficially owned by another person but registered in the name of the shareholder and discloses the name and address of each beneficial owner on whose behalf the shareholder dissents. In that event, the rights of the dissenter shall be determined as if the shares as to which the shareholder has dissented and the other shares were registered in the names of different shareholders. (b) A beneficial owner of shares who is not the shareholder may assert dissenters' rights with respect to shares held on behalf of the beneficial owner, and shall be treated as a dissenting shareholder under the terms of this section and section 302A.473, if the beneficial owner submits to the corporation at the time of or before the assertion of the rights a written consent of the shareholder. Subdivision 3. RIGHTS NOT TO APPLY. Unless the articles, the by-laws, or a resolution approved by the board otherwise provide, the right to obtain payment under this section does not apply to a shareholder of the surviving corporation in a merger, if the shares of the shareholder are not entitled to be voted on the merger. Subdivision 4. OTHER RIGHTS. The shareholders of a corporation who have a right under this section to obtain payment for their shares do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation. HISTORY: 1981 c 270 s 80; 1987 c 203 s 2,3; 1988 c 629 s 10; 1991 c 49 s 16; 1992 c 517 art 1 s 15; 1993 c 17 s 40; 1994 c 417 s 5 302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS. (a) For purposes of this section, the terms defined in this subdivision have the meanings given them. (b) "Corporation" means the issuer of the shares held by a dissenter before the corporate action referred to in section 302A.471, subdivision 1 or the successor by merger of that issuer. (c) "Fair value of the shares" means the value of the shares of a corporation immediately before the effective date of the corporate action referred to in section 302A.471, subdivision 1. (d) "Interest" means interest commencing five days after the effective date of the corporate action referred to in section 302A.471, subdivision 1, up to and including the date of payment, calculated at the rate provided in section 549.09 for interest on verdicts and judgments. Subdivision 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at which any action described in section 302A.471, subdivision 1 is to be voted upon, the notice of the meeting shall inform each shareholder of the right to dissent and shall include a copy of section 302A.471 and this section and a brief description of the procedure to be followed under these sections. Subdivision 3. NOTICE OF DISSENT. If the proposed action must be approved by the shareholders, a shareholder who wishes to exercise dissenters' rights must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the share owned by the shareholder and must not vote the shares in favor of the proposed action. Subdivision 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed action has been approved by the board and, if necessary, the shareholders, the corporation shall send to all shareholders who have complied with subdivision 3 and to all shareholders entitled to dissent if no shareholder vote was required, a notice that contains: (1) The address to which a demand for payment and certificates of certificated shares must be sent in order to obtain payment and the date by which they must be received; (2) Any restrictions on transfer of uncertificated shares that will apply after the demand for payment is received; (3) A form to be used to certify the date on which the shareholder, or the beneficial owner on whose behalf the shareholder dissents, acquired the shares or an interest in them and to demand payment; and (4) A copy of section 302A.471 and this section and a brief description of the procedures to be followed under these sections. (b) In order to receive the fair value of the shares, a dissenting shareholder must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given, but the dissenter retains all other rights of a shareholder until the proposed action takes effect. Subdivision 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes effect, or after the corporation receives a valid demand for payment, whichever is later, the corporation shall remit to each dissenting shareholder who has complied with subdivisions 3 and 4 the amount the corporation estimates to be the fair value of the shares, plus interest, accompanied by: (1) the corporation's closing balance sheet and statement of income for a fiscal year ending not more than 16 months before the effective date of the corporate action, together with the latest available interim (2) an estimate by the corporation of the fair value of the shares and a brief description of the method used to reach the estimate; and (3) a copy of section 302A.471 and this section, and a brief description of the procedure to be followed in demanding supplemental payment. (b) The corporation may withhold the remittance described in paragraph (a) from a person who was not a shareholder on the date the action dissented from was first announced to the public or who is dissenting on behalf of a person who was not a beneficial owner on that date. If the dissenter has complied with subdivisions 3 and 4, the corporation shall forward to the dissenter the materials described in paragraph (a), a statement of the reason for withholding the remittance, and an offer to pay to the dissenter the amount listed in the materials if the dissenter agrees to accept that amount in full satisfaction. The dissenter may decline the offer and demand payment under subdivision 6. Failure to do so entitles the dissenter only to the amount offered. If the dissenter makes demand, subdivisions 7 and 8 apply. (c) If the corporation fails to remit payment within 60 days of the deposit of certificates or the imposition of transfer restrictions on uncertificated shares, it shall return all deposited certificates and cancel all transfer restrictions. However, the corporation may again give notice under subdivision 4 and require deposit or restrict transfer at a later time. Subdivision 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the amount remitted under subdivision 5 is less than the fair value of the shares plus interest, the dissenter may give written notice to the corporation of the dissenter's own estimate of the fair value of the shares, plus interest, within 30 days after the corporation mails the remittance under subdivision 5, and demand payment of the difference. Otherwise, a dissenter is entitled only to the amount remitted by the corporation. Subdivision 7. PETITION; DETERMINATION. If the corporation receives a demand under subdivision 6, it shall, within 60 days after receiving the demand, either pay to the dissenter the amount demanded or agreed to by the dissenter after discussion with the corporation or file in court a petition requesting that the court determine the fair value of the shares, plus interest. The petition shall be filed in the county in which the registered office of the corporation is located, except that a surviving foreign corporation that receives a demand relating to the shares of a constituent domestic corporation shall file the petition in the county in this state in which the last registered office of the constituent corporation was located. The petition shall name as parties all dissenters who have demanded payment under subdivision 6 and who have not reached agreement with the corporation. The corporation shall, after filing the petition, serve all parties with a summons and copy of the petition under the rules of civil procedure. Nonresidents of this state may be served by registered or certified mail or by publication as provided by law. Except as otherwise provided, the rules of civil procedure apply to this proceeding. The jurisdiction of the court is plenary and exclusive. The court may appoint appraisers, with powers and authorities the court deems proper, to receive evidence on and recommend the amount of the fair value of the shares. The court shall determine whether the shareholder or shareholders in question have fully complied with the requirements of this section; and shall determine the fair value of the shares, taking into account any and all factors the court finds relevant, computed by any method or combination of methods that the court, in its discretion, sees fit to use; whether or not used by the corporation or by a dissenter. The fair value of the shares as determined by the court is binding on all shareholders, wherever located. A dissenter is entitled to judgment in cash for the amount by which the fair value of the shares as determined by the court, plus interest, exceeds the amount, if any, remitted under subdivision 5, but shall not be liable to the corporation for the amount, if any, but which the amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair value of the shares as determined by the court, plus interest. Subdivision 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs and expense of a proceeding under subdivision 7, including the reasonable expenses and compensation of any appraisers appointed by the court, and shall assess those costs and expenses against the corporation, except that the court may assess part or all of those costs and expenses against a dissenter whose action in demanding payment under subdivision 6 is found to be arbitrary, vexatious, or not in good faith. (b) If the court finds that the corporation has failed to comply substantially with this section, the court may assess all fees and expenses of any experts or attorneys as the court deems equitable. These fees and expense may also be assessed against a person who has acted arbitrarily, vexatiously, or not in good faith in bringing the proceeding, and may be awarded to a party injured by those actions. (c) The court may award, in its discretion, fees and expense to an attorney for the dissenters out of the amount awarded to the dissenters, if any. HISTORY: 1981 c 270 s 81; 1987 c 104 s 30-33; 1993 c 17 s 41, 42 INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. LIMITATION OF LIABILITY AND INDEMNIFICATION The Registrant is a Delaware corporation. Reference is made to Section 145(a) and Section 145(b) of the Delaware General Corporation Law, which enables a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. A corporation may also indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he or she was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorney's fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145 further provides: that a Delaware corporation is required to indemnify a director, officer, employee or agent against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with any action, suit or proceeding or in defense of any claim, issue or matter therein as to which such person has been successful on the merits or otherwise; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that indemnification provided for by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators. A Delaware corporation may provide indemnification only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct. Such determination is to be made (i) by the board of directors by vote of directors who were not party to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (iii) by the stockholders of the Registrant. The Restated Certificate of Incorporation and By-laws of the Registrant provide for indemnification of directors and officers of the Registrant to the fullest extent permitted by law, as now in effect or later amended. The By-laws also provide that expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding may be paid by the Registrant in advance of final disposition upon receipt of an undertaking by or on behalf of such person to repay such amount if it ultimately is determined that he is not entitled to be indemnified by the Registrant. The By-laws further provide that such indemnification provisions are not exclusive. Additionally, the Registrant's Restated Articles of Incorporation eliminate the personal liability of the Registrant's directors to the Registrant or the stockholders of the Registrant to the fullest extent permitted by the provisions of Section 102 of the Delaware General Corporation Law, as the same may be amended and supplemented. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made pursuant to this Registration Statement, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the (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 (iii) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequently to the effective date of the registration statement through the date of responding to the request; and (iv) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (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. (b) The Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this Registration Statement 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. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by 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 by such director, officer or controlling person in connection with the securities being registered, 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 Act and will be governed by the final adjudication of such issue. Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-4 and has duly caused this amendment to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Danvers, the Commonwealth of Massachusetts, on January 12, 1996. Pursuant to the requirements of the Securities Act of 1933, this amendment to registration statement has been signed below by the following persons in the capacities and on the date indicated.	S-4/A	S-4/A	1996-01-12T00:00:00	1996-01-12T16:40:23
0001005678-96-000001	0001005678-96-000001_0000.txt	Under the Securities Exchange Act of 1934 (Amendment No. 3)* (Title of Class of Securities) Joshua S. Kanter, Windy City, Inc., 333 West Wacker Drive, Suite 2700 CHICAGO, ILLINOIS 60606 (312) 984-3120 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with this statement [ ]. (A fee is not required only if the reporting person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities described in Item 1; and (2) has filed no amendment subsequent to thereto reporting beneficial ownership of less than five percent of such Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). CUSIP NO. 541402 10 3 13D PAGE 2 OF 9 PAGES 1 NAME OF REPORTING PERSON S.S. or I.R.S. IDENTIFICATION NO. OF ABOVE PERSON 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO 6 CITIZENSHIP OR PLACE OF ORGANIZATION NUMBER OF 7 SOLE VOTING POWER OWNED BY 8 SHARED VOTING POWER PERSON 9 SOLE DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9 14 TYPE OF REPORTING PERSON* SEE INSTRUCTION BEFORE FILLING OUT! CUSIP NO. 206009 10 2 13D PAGE 3 OF 9 PAGES 1 NAME OF REPORTING PERSON S.S. or I.R.S. IDENTIFICATION NO. OF ABOVE PERSON 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO 6 CITIZENSHIP OR PLACE OF ORGANIZATION NUMBER OF 7 SOLE VOTING POWER OWNED BY 8 SHARED VOTING POWER PERSON 9 SOLE DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 9 14 TYPE OF REPORTING PERSON* *SEE INSTRUCTION BEFORE FILLING OUT! ITEM 1. SECURITY AND ISSUER. This Schedule relates to the shares of common stock (the "Common Stock") of Logic Devices Incorporated, a California corporation (the "Issuer"). The principal executive offices of the Issuer are located at 628 East Evelyn Avenue, Sunnyvale, California 94086. ITEM 2. IDENTITY AND BACKGROUND. This Schedule is being filed by: (i) Windy City, Inc., a Delaware corporation ("Windy City"). The principal place of business and principal office of Windy City, Inc. is 8000 Towers Crescent Drive, Suite 1070, Vienna, Virginia 22182. Windy City's principal business is investing in private investments and public securities. (ii) BRT Partnership (the "Partnership") as successor-in-interest to Solomon A. Weisgal, not personally but solely as Trustee (the "Trustee") of those certain 25 separate and individual trusts commonly and collectively known as the Bea Ritch Trusts (the "Trusts"). The Partnership's business address is 120 South Riverside Drive, Suite 1420, Chicago, Illinois 60606. Mr. Weisgal is a certified public accountant. Windy City and the Partnership are collectively referred to herein as the "Reporting Persons". The sole partners of the Partnership are the Trusts. The names and business addresses of the officers and directors of Windy City are listed on EXHIBIT A attached hereto. All of said individuals are United States citizens. Neither of the Reporting Persons, the Trustee nor any of the parties listed on EXHIBIT A has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors), or been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, Federal or state securities laws or fining any violation with respect to such laws. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. This Schedule relates solely to (i) the disposition of Common Stock, and (ii) a change of record ownership of common stock. As such, this Item 3 is not applicable. ITEM 4. PURPOSE OF TRANSACTION. No additional Common Stock has been acquired by the Reporting Persons and all Common Stock held by the Reporting Persons continues to be held for investment purposes. The Reporting Persons have no present plan or proposal which relates to or would result in: (a) The acquisition by any person of additional securities of the Issuer, or the disposition of securities of the Issuer; (b) An extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Issuer or any of its (c) A sale or transfer of a material amount of assets of the Issuer or (d) Any change in the present Board of Directors or management of the Issuer, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the Board; (e) Any material change in the present capitalization or dividend policy (f) Any other material change in the Issuer's business or corporate (g) Changes in the Issuer's charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Issuer by any person; (h) Causing a class of securities of the Issuer to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national (i) A class of equity securities of the Issuer becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934; or (j) Any action similar to any of those enumerated above. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. (i) Windy City 500,000 shares {1}Includes 75,000 shares of Common Stock (the "Subject Shares") owned by the Partnership, which Subject Shares have been loaned by the Partnership to an unaffiliated person (the "Borrower"). During the term of said loan, the Borrower will exercise exclusive investment control of the Subject Shares. {2}Includes (i) 500,000 shares of Common Stock owned directly by Windy City, and (ii) 369,482 shares of Common Stock owned directly by the Partnership. See Footnote 1. The Partnership owns 319.5 shares of Windy City's Class A, Series A Preferred Stock and all of Windy City's issued and outstanding common stock. As a result, the Partnership may be deemed to control Windy City. Mr. Joel S. Kanter is the President and sole Director of Windy City. Mr. Joshua S. Kanter is the Vice President of Windy City. Messrs. Kanter's father, Mr. Burton W. Kanter, is a Director of the Issuer. The sole partners of the Partnership are the Trusts. The beneficiaries of the Trusts are various members of Mr. Burton W. Kanter's family, including, Messrs. Joel and Joshua Kanter but excluding Mr. Burton W. Kanter. Mr. Solomon A. Weisgal, Trustee of the Trusts, is an independent trustee and is unrelated to the Kanter family. Due to relationship between the Partnership and Windy City, the Reporting Persons have agreed to file this Schedule 13D as a group. Nevertheless, each of the Reporting Persons disclaims any beneficial ownership of the securities issued to the other Reporting Person. (i) Windy City, Inc. 8.46% (B) NUMBER OF SHARES AS TO WHICH SUCH PERSON HAS: (i) sole power to vote or to direct the vote (i) Windy City 500,000 shares (II) SHARED POWER TO VOTE OR TO DIRECT THE VOTE (III)SOLE POWER TO DISPOSE OR TO DIRECT THE DISPOSITION OF (i) Windy City 500,000 shares (IV) SHARED POWER TO DISPOSE OR TO DIRECT THE DISPOSITION OF This amendment is being filed to disclose (i) the sale of 25,000 shares of Common Stock at $15.50 per share by the Trusts on July 27, 1995; and (ii) the transfer of record ownership (without consideration) of 369,482 shares of Common Stock from the Trusts to the Partnership. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH TO SECURITIES OF THE ISSUER. There are no contracts, arrangements, understandings or relationships among the Reporting Persons and their respective officers and directors or fiduciaries, as applicable, or between such persons and any other person, with respect to any securities of the Issuer, except as set forth in Footnote 2 to Item 5 and in the documents and instruments listed in Item 7 below. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. EXHIBIT A - Officers and Directors of Windy City, Inc. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. By: /S/ JOSHUA S. KANTER After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. By: /S/ SOLOMON A. WEISGAL Solomon A. Weisgal, not personally but solely as Trustee of that certain Trust commonly known as the BK Descendant's OFFICERS AND DIRECTORS OF WINDY CITY, INC. Joel S. Kanter 8000 Towers Crescent Drive Joshua S. KanterVice President, Secretary333 West Wacker Drive Joel S. Kanter President, Treasurer 8000 Towers Crescent Drive	SC 13D	SC 13D	1996-01-12T00:00:00	1996-01-12T14:45:37
0000950131-96-000066	0000950131-96-000066_0017.txt	BALANCED ASSETS FUND - CLASS A FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + (.1375))/1/= ERV = 1,137.50 five-year = P(1 + T)/5/ = ERV = N/A since inception = P(1 + (.0707))/365/ = ERV = 1,147.69 BALANCED ASSETS FUND - CLASS B FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + (.1516))/1/= ERV = 1,151.60 five-year = P(1 + .1367)/5/ = ERV = 1,897.71 since inception = P(1 + .1178)/12/ = ERV = 3,280.08 BLUE CHIP GROWTH FUND - CLASS A FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + .1432)/1/ = ERV = 1,143.20 five-year = P(1 + T)/5/ = ERV = N/A since inception = P(1 + (.0643))/365/ = ERV = 1,131.19 BLUE CHIP GROWTH FUND - CLASS B FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + (.1569))/1/= ERV = 1,156.90 five-year = P(1 + .1456)/5/ = ERV = 1,973.17 since inception = P(1 + .1033) /12/ = ERV = 2,807.26 MID-CAP GROWTH FUND - CLASS A FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + (.2206))/1/ = ERV = 1,220.60 five-year = P(1 + .1687)/5/ = ERV = 2,180.29 since inception = P(1 + (.1199))/12/ = ERV = 2,668.21 MID-CAP GROWTH FUND - CLASS B FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + .2341)/1/ = ERV = 1,234.10 five-year = P(1 + T)/5/ = ERV = N/A since inception = P(1 + (.0506))/365/ = ERV = 1,103.31 SMALL COMPANY GROWTH FUND - CLASS A FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + (.4137))/1/= ERV = 1,413.70 five-year = P(1 + .2587)/5/ = ERV = 3,159.45 since inception = P(1 + (.1436))/12/ = ERV = 3,199.21 SMALL COMPANY GROWTH FUND - CLASS B FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + (.4312))/1/= ERV = 1,431.20 five-year = P(1 + T)/5/ = ERV = N/A since inception = P(1 + .1531)/365/ = ERV = 1,332.76 GLOBAL BALANCED FUND - CLASS A FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + .0059)/1/ = ERV = 1,005.90 five-year = P(1 + T)/5/ = ERV = N/A since inception = P(1 + (.0012))/365/ = ERV = 1,001.56 GLOBAL BALANCED FUND - CLASS B FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + .0168)/1/ = ERV = 1,016.80 five-year = P(1 + T)/5/ = ERV = N/A since inception = P(1 + (.0087))/365/ = ERV = 1,011.26 GROWTH AND INCOME FUND - CLASS A FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + .1266)/1/ = ERV = 1,126.60 five-year = P(1 + T)/5/ = ERV = N/A since inception = P(1 + (.1206))/365/ = ERV = 1,153.23 GROWTH AND INCOME FUND - CLASS B FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 1995 P(1 + T)/n/ = ERV Where: P = A hypothetical initial payment of $1,000 T = Average annual total return n = Number of years ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). one-year = P(1 + .1442)/1/ = ERV = 1,144.20 five-year = P(1 + T)/5/ = ERV = N/A since inception = P(1 + (.1332))/365/ = ERV = 1,167.48	485BPOS	EX-99.16	1996-01-12T00:00:00	1996-01-12T16:13:13
0000869393-96-000001	0000869393-96-000001_0001.txt	You have requested my opinion for use in conjunction with a Rule 24f-2 Notice for Newpoint Funds ("Trust") to be filed in respect of shares of the Trust ("Shares") sold for the fiscal year ended November 30, 1995, pursuant to the Trust's registration statement filed with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933 (File No. 33-37993 ("Registration Statement"). In its Registration Statement, the Trust elected to register an indefinite number of shares pursuant to the provisions of Investment Company Act Rule 24f- 2. As counsel, I have participated in the preparation and filing of the Trust's amended Registration Statement under the Securities Act of 1933. Further, I have examined and am familiar with the provisions of the Declaration of Trust dated November 12, 1990, ("Declaration of Trust"), the Bylaws of the Trust and such other documents and records deemed relevant. I have also reviewed questions of law and consulted with counsel thereon as deemed necessary or appropriate by me for the purposes of this opinion. On the basis of the foregoing, it is my opinion the Shares sold for the fiscal year ended November 30, 1995, registration of which the Rule 24f-2 Notice makes definite in number, were legally issued, fully paid and non-assessable by the Trust. I hereby consent to the filing of this opinion as an exhibit to the Rule 24f-2 Notice referred to above, the Registration Statement of the Trust and to any application or registration statement filed under the securities laws of any of the States of the United States. The foregoing opinion is limited to the Federal laws of the United States and the laws of the Commonwealth of Massachusetts, and I am expressing no opinion as to the effect of the laws of any other jurisdiction.	24F-2NT	EX-99.OPINIONLETTER	1996-01-12T00:00:00	1996-01-12T12:03:12
0000950109-96-000200	0000950109-96-000200_0013.txt	AGREEMENT made this ____ day of ___________, 1995 between WEISS TREASURY FUND, a Massachusetts business trust (the "Trust"), on behalf of theWeiss Intermediate Treasury Fund, and Weiss Money Management Inc., a corporation organized under the laws of Florida (the "Adviser"). W I T N E S S E T H: WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Trust is authorized to issue shares of beneficial interest (hereafter referred to as "Shares") in separate series with each such series representing the interests in a separate portfolio of securities and other WHEREAS, the Trust has established and presently offers (or intends to offer) Shares of beneficial interest in a portfolio currently known as the Weiss Intermediate Treasury Fund (the "Fund"); and WHEREAS, the Trust desires to retain the Adviser to render investment advisory services to the Trust with respect to the Fund as indicated herein and the Adviser is willing to so render such services; NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth, the parties hereto agree as follows: 1. Appointment of Adviser. The Trust hereby appoints the Adviser to act as investment adviser to the Trust and the Fund for the periods and on the terms herein set forth. The Adviser accepts such appointment and agrees to render the services herein set forth, for the compensation herein provided. 2. Delivery of Documents. The Trust has delivered (or will deliver as soon as is possible) to the Adviser copies properly certified or authenticated of each of the following documents: (a) Agreement and Declaration of Trust of the Trust dated as of ______ __, 1995 (such Agreement and Declaration of Trust, as presently in effect and as amended from time to time, is herein called the "Trust Agreement"), copies of which are also on file with the Secretary of the (b) By-Laws of the Trust (such By-Laws, as presently in effect and as amended from time to time, are herein called the "By-Laws"); (c) Certified resolutions of the Shareholder(s) and the Trustees of the Trust approving the terms of this Agreement; (d) Custodian Agreement (including related fee schedule) dated ________________, 1995 between the Trust and PNC Bank (such Agreement, as presently in effect and as amended and/or superseded from time to time, is herein called the "Custodian Agreement"); (e) Prospectus and Statement of Additional Information of the Trust with respect to the Fund as currently in effect (such Prospectus and Statement of Additional Information, as currently in effect and as amended, supplemented and/or superseded from time to time, is herein called the (f) Registration Statement of the Trust under the Securities Act of 1933 (the "1933 Act"), and the 1940 Act on Form N-1A as filed with the Securities and Exchange Commission (the "Commission") on ________ __, 1995, and as amended on Form N-1A (such Registration Statement, as presently in effect and as amended from time to time, is herein called the "Registration Statement"). The Trust agrees to promptly furnish the Adviser from time to time with copies of all amendments of or supplements to or otherwise current versions of any of the foregoing documents not heretofore furnished. 3. Name of Trust or Fund. The Trust and the Fund may use any name derived from the name "Weiss Money Management Inc.", if the Trust elects to do so, only for so long as this Agreement, any other investment advisory or management agreement between the Adviser and the Trust or any extension, renewal or amendment hereof or thereof remains in effect, including any similar agreement with any organization which shall have succeeded to the Adviser's business as investment adviser. At such time as such an agreement shall no longer be in effect, the Fund (to the extent the Corporation has the legal power to cause it to be done) cease to use such a name or any other name indicating that it is advised or managed by or otherwise connected with the Adviser or any organization which shall have so succeeded to the Adviser's business. (a) Subject to the general supervision of the Trustees of the Trust, the Adviser shall manage the investment operations of the Fund and the composition of the Fund's assets, including the purchase, retention and disposition thereof. In this regard, the Adviser: (i) shall provide supervision of the Fund's assets, furnish a continuous investment program for the Fund, determine from time to time what investments or securities will be purchased, retained or sold by the Fund, and what portion of the assets will be invested or held uninvested as (ii) shall place orders with broker-dealers, foreign currency dealers, futures commissions merchants or others pursuant to the Adviser's determinations in accordance with the Fund's policies as expressed in (iii) may, on occasions when it deems the purchase or sale of a security to be in the best interests of the Fund as well as its other customers (including any other Fund or any other investment company or trust or advisory account for which the Adviser acts as adviser), aggregate, to the extent permitted by applicable laws and regulations, the securities to be sold or purchased in order to obtain the best net price and the most favorable execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other customers. (b) The Adviser, in the performance of its duties hereunder, shall act in conformity with the Trust Agreement, By-Laws, Registration Statement and Prospectus and with the instructions and directions of the Trustees of the Trust, and will use its best efforts to conform to the requirements of the 1940 Act, the Investment Advisers Act of 1940 (to the extent applicable), the Internal Revenue Code of 1986, as amended, ( the "Code") relating to regulated investment companies and all rules and regulations thereunder, the Insider Trading and Securities Fraud Enforcement Act of 1988 (to the extent applicable) and all other applicable federal and state laws, regulations and rulings, subject always to policies and instructions adopted by the Trust's Board of Trustees. In connection therewith, the Adviser shall use reasonable efforts or manage the Fund so that it will qualify as a regulated investment company under Subchapter M of the Code and regulations issued thereunder. (c) The Adviser shall render to the Trustees of the Trust such periodic and special reports as the Trustees may reasonably request. (d) The Adviser shall notify the Trust of any material change in the management of the Adviser within a reasonable time after such change. (e) The Adviser shall immediately notify the Trust in the event that the Adviser or any of its affiliates: (1) becomes aware that it is subject to a statutory disqualification that prevents the Adviser from serving as investment adviser pursuant to this Agreement; or (2) becomes aware that it is the subject of an administrative proceeding or enforcement action by the Securities and Exchange Commission or other regulatory authority. The Adviser further agrees to notify the Trust immediately of any material fact known to the Adviser respecting or relating to the Adviser that is not contained in the Trust's Registration Statement regarding the Trust, or any amendment or supplement thereto, but that is required to be disclosed therein, and of any statement contained therein that becomes untrue in any material respect. (f) The services of the Adviser hereunder are not deemed exclusive and the Adviser shall be free to render similar services to others so long as its services under this Agreement are not impaired thereby. 5. Allocation of Charges and Expenses. Except as otherwise specifically provided in this section 5, the Adviser shall pay the compensation and expenses of all trustees, officers and executive employees of the Trust (including the Fund's share of payroll taxes) who are affiliated persons of the Adviser, and the Adviser shall make available, without expense to the Fund, the services of such of its directors, officers and employees as may duly be elected officers of the Trust, subject to their individual consent to serve and to any limitations imposed by law. The Adviser shall provide at its expense the portfolio management services described in section 4 hereof, other than the cost (including taxes and brokerage commissions, if any) of securities purchased for the Fund.. The Adviser shall not be required to pay any expenses of the Fund other than those specifically allocated to it in this section 5. 6. Management Fee. For all services to be rendered, payments to be made and costs to be assumed by the Adviser as provided in sections 4 and 5 hereof, the Trust on behalf of the Fund shall pay the Adviser on the last day of each month the unpaid balance of a fee equal to the excess of (a) .50% of the average daily net assets as defined below of the Fund for such month. The "average daily net assets" of the Fund shall mean the average of the values placed on the Fund's net assets as of 4:00 p.m. (New York time) on each day on which the net asset value of the Fund is determined consistent with the provisions of Rule 22c-1 under the 1940 Act or, if the Fund lawfully determines the value of its net assets as of some other time on each business day, as of such time. The value of the net assets of the Fund shall always be determined pursuant to the applicable provisions of the Declaration and the Registration Statement. If the determination of net asset value does not take place for any particular day, then for the purposes of this section 6, the value of the net assets of the Fund as last determined shall be deemed to be the value of its net assets as of 4:00 p.m. (New York time), or as of such other time as the value of the net assets of the Fund's portfolio may be lawfully determined on that day. If the Fund determines the value of the net assets of its portfolio more than once on any day, then the last such determination thereof on that day shall be deemed to be the sole determination thereof on that day for the purposes of this section 6. The Adviser agrees that its gross compensation for any fiscal year shall not be greater than an amount which, when added to the other expenses of the Fund, shall cause the aggregate expenses of the Fund to equal the maximum expenses under the lowest applicable expense limitation established pursuant to the statutes or regulations of any jurisdiction in which the Shares of the Fund may be qualified for offer and sale. Such calculation shall not take into account expenses which may be excluded as provided under applicable law. Except to the extent that such amount has been reflected in reduced payments to the Adviser, the Adviser shall refund to the Fund the amount of any payment received in excess of the limitation pursuant to this section 6 as promptly as practicable after the end of such fiscal year, provided that the Adviser shall not be required to pay the Fund an amount greater than the fee paid to it in respect of such year pursuant to this Agreement. As used in this section 6, "expenses" shall mean those expenses included in the applicable expense limitation having the broadest specifications thereof, and "expense limitation" means a limit on the maximum annual expenses which may be incurred by an investment company determined (i) by multiplying a fixed percentage by the average, or by multiplying more than one such percentage by different specified amounts of the average, of the values of an investment company's net assets for a fiscal year or (ii) by multiplying a fixed percentage by an investment company's net investment income for a fiscal year. The words "lowest applicable expense limitation" shall be construed to result in the largest reduction of the Adviser's compensation for any fiscal year of the Fund; provided, however, that nothing in this Agreement shall limit the Adviser's fees if not required by an applicable statute or regulation referred to above in this section 6. The Adviser may waive all or a portion of and such waiver shall be treated as a reduction services. The Adviser shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of the Fund's expenses, as if such waiver or limitation were fully set forth herein. 7. Avoidance of Inconsistent Position; Services Not Exclusive. In connection with purchases or sales of portfolio securities and other investments for the account of the Fund, neither the Adviser nor any of its directors, officers or employees shall act as a principal or agent or receive any commission. The Adviser or its agent shall arrange for the placing of all orders for the purchase and sale of portfolio securities and other investments for the Fund's account with brokers or dealers selected by the Adviser in accordance with Fund policies as expressed in the Registration Statement. If any occasion should arise in which the Adviser gives any advice to its clients concerning the Shares of the Fund, the Adviser shall act solely as investment counsel for such clients and not in any way on behalf of the Fund. The Adviser's services to the Fund pursuant to this Agreement are not be deemed to be exclusive and it is understood that the Adviser may render investment advice, management and services to others. In acting under this Agreement, the Adviser shall be an independent contractor and not an agent of the Trust. 8. Limitation of Liability of Manager. As an inducement to the Adviser's undertaking to render services pursuant to this Agreement, the Trust agrees that the Adviser shall not be liable under this Agreement for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to which this Agreement relates, provided that nothing in this Agreement shall be deemed to protect or purport to protect the Adviser against any liability to the Trust, the Fund or its shareholders to which the Adviser would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of its reckless disregard of its obligations and duties hereunder. Any person, even though also employed by the Adviser, who may be or become an employee of and paid by the Fund shall be deemed when acting within the scope of his or her employment by the Fund, to be acting in such employment solely for the Fund and not as the Adviser's employee or agent. 9. Duration and Termination of This Agreement. This Agreement shall remain in force until __________________,1997, and continue in force from year to year thereafter, but only so long as such continuance is specifically approved at least annually (a) by the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of any party to this agreement, cast in person at a meeting called for the purpose of voting on such approval and (b) by the Trustees of the Trust, or by the vote of a majority of the outstanding voting securities of the Fund. The aforesaid requirement that continuance of this Agreement be "specifically approved at least annually" shall be construed in a manner consistent with the 1940 Act and the rules and regulations thereunder. This Agreement may be terminated with respect to the Fund at any time, without the payment of any penalty, by the vote of a majority of the outstanding voting securities of the Fund or by the Trust's Board of Trustees on 60 days' written notice to the Adviser, or by the Adviser on 60 days' written notice to the Fund. This Agreement shall terminate automatically in the event of its assignment. 10. Amendment of this Agreement. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought, and no amendment of this Agreement shall be effective until approved by the vote of a majority of the Trustees who are not parties to this Agreement or interested persons of any party to this Agreement, cast in person at a meeting called for the purpose of voting on such approval. 11. Miscellaneous. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. In interpreting the provisions of this Agreement, the definitions contained in Section 2(a) of the 1940 Act (particularly the definitions of "affiliated person," "assignment" and "majority of the outstanding voting securities"), as from time to time amended, shall be applied, subject, however, to such exemptions as may be granted by the SEC by any rule, regulation or order. This Agreement shall be construed in accordance with the laws of the Commonwealth of Massachusetts, provided that nothing herein shall be construed in a manner inconsistent with the 1940 Act, or in a manner which would cause the Fund to fail to comply with the requirements of Subchapter M of the Code. This Agreement shall supersede all prior investment advisory or management agreements entered into between the Adviser and the Fund. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed as of the day and year first above written. on behalf of Weiss Intermediate Treasury	N-1/A	EX-99.10	1996-01-12T00:00:00	1996-01-11T17:32:37
0000823535-96-000006	0000823535-96-000006_0000.txt	REGISTRATION STATEMENT (No. 33-17704 ) UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. 19 [X] UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] (Exact Name of Registrant as Specified in Charter) 82 Devonshire St., Boston, Massachusetts 02109 (Address Of Principal Executive Offices) (Zip Code) (Name and Address of Agent for Service) It is proposed that this filing will become effective ( ) immediately upon filing pursuant to paragraph (b) (X) on January 15, 1996 pursuant to paragraph (b) ( ) 60 days after filing pursuant to paragraph (a)(i) ( ) on ( ) pursuant to paragraph (a)(i) ( ) 75 days after filing pursuant to paragraph (a)(ii) ( ) on ( ) pursuant to paragraph (a)(ii) of rule 485. If appropriate, check the following box: ( ) this post-effective amendment designates a new effective date for a post-effective amendment. Registrant has filed a declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940 and intends to file the Notice required by such Rule before September 29, 1996. ITEM NUMBER STATEMENT OF ADDITIONAL INFORMATION Please read this prospectus before investing, and keep it on file for future reference. It contains important information, including how each fund invests and the services available to shareholders. To learn more about each fund and its investments, you can obtain a copy of the funds' Statement of Additional Information (SAI) dated January 15,1996. The SAI has been filed with the Securities and Exchange Commission (SEC) and is incorporated herein by reference (legally forms a part of the prospectus). For a free copy call Fidelity at 1-800-544-8888. Mutual fund shares are not deposits or obligations of, or guaranteed by, any depository institution. Shares are not insured by the FDIC, Federal Reserve Board or any other agency, and are subject to investment risk s , including possible loss of principal amount invested . Each fund seeks a definable return over its lifetime by investing in investment grade quality debt securities. Each fund will be liquidated shortly after its target maturity date. JANUARY 15, 1996(FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET, BOSTON, MA KEY FACTS THE FUNDS AT A GLANCE WHO MAY WANT TO INVEST THE FUNDS IN DETAIL CHARTER How each fund is organized. Each fund's overall approach to investing. operating costs are calculated and what they include. YOUR ACCOUNT DOING BUSINESS WITH FIDELITY ways to set up your account, plans. HOW TO BUY SHARES Opening an investments. HOW TO SELL SHARES Taking money out and closing your account. help you manage your account. SHAREHOLDER AND MATURITY AND LIQUIDATION OF calculations and the timing of purchases and redemptions. THE FUNDS AT A GLANCE GOAL: Definable return over the life of the funds. Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fidelity Target Timeline 2003 will be liquidated shortly after their target maturity dates of September 30, 1999, September 30, 2001, and September 30, 2003, respectively. STRATEGY: Each fund invests in investment grade quality debt securities whose average duration is approximately equal to each fund's maturity. MANAGEMENT: Fidelity Management & Research Company (FMR) is the management arm of Fidelity Investments, which was established in 1946 and is now America's largest mutual fund manager. As with any mutual fund, there is no assurance that a fund will achieve its goal. WHO MAY WANT TO INVEST These non-diversified funds are designed for investors who seek to receive a relatively predictable return. The funds may be appropriate for those who have an investment goal with a specific time frame such as college savings, retirement, or a major purchase. For a shareholder, a fund's predictable return is the quoted yield to maturity at the time shares are purchased. To seek a predictable return, shareholders must expect to hold their shares until the target date and reinvest all distributions. Each fund will purchase U.S. dollar-denominated securities that are investment-grade quality or better that FMR expects will provide predictable returns. The funds may not be able to achieve their goal if the underlying investments do not provide the returns FMR expected due to factors such as realized losses related to declines in credit quality of individual issuers or if interest rates for securities of different maturities sharply diverge. The value of the funds' investments and the income they generate will vary from day to day, and generally reflect interest rates, market conditions, and other economic and political news. When you sell your shares or upon liquidation, they may be worth more or less than what you paid for them. By themselves, the funds do not constitute a balanced investment plan. SHAREHOLDER TRANSACTION EXPENSES are charges you pay when you buy, sell or hold shares of a fund. See page for more information about these fees. Maximum sales charge on purchases and Deferred sales charge on redemptions None Redemption fee (as a % of amount redeemed on shares held less than 90 days) .50% (for accounts under $2500) $12.00 ANNUAL FUND OPERATING EXPENSES are paid out of each fund's assets. Each fund pays a management fee to FMR. It also incurs other expenses for services such as maintaining shareholder records and furnishing shareholder statements and financial reports. A fund's expenses are factored into its share price or dividends and are not charged directly to shareholder accounts (see page ). The following are projections based on estimated expenses, and are calculated as a percentage of average net assets. Total fund operating expenses .69 % Total fund operating expenses .68 % Total fund operating expenses .68 % EXAMPLES: Let's say, hypothetically, that each fund's annual return is 5% and that its operating expenses are exactly as just described. For every $1,000 you invested, here's how much you would pay in total expenses if you close your account after the number of years indicated: 1999 $ 7 $ 22 2001 $ 7 $ 22 2003 $ 7 $ 22 These examples illustrate the effect of expenses, but are not meant to suggest actual or expected costs or returns, all of which may vary. This section would normally show how the fund s ha ve performed over time. Because the funds were new when this prospectus was printed, their performance is not included. Twice a year, you will receive a report detailing each fund's recent strategies, performance, and holdings. For current performance or a free annual report, call 1-800-544-8888. TOTAL RETURN is the change in value of an investment in a fund over a given period, assuming reinvestment of any dividends and capital gains. A CUMULATIVE TOTAL RETURN reflects actual performance over a stated period of time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that, if achieved annually, would have produced the same cumulative total return if performance had been constant over the entire period. Average annual total returns smooth out variations in performance; they are not the same as actual year-by-year results. Average annual total returns covering periods of less than one year assume that performance will remain constant for the rest of the year. YIELD refers to the income generated by an investment in a fund over a given period of time, expressed as an annual percentage rate. Yields are calculated according to a standard that is required for all stock and bond funds. Because this differs from other accounting methods, the quoted yield may not equal the income actually paid to shareholders. to changes in interest rates. bond funds. For that reason, offer higher yields and carry bond funds. THE CONSUMER PRICE INDEX is a widely recognized measure of inflation calculated by the U.S. government. TOTAL RETURNS AND YIELDS ARE BASED ON PAST RESULTS AND ARE NOT AN INDICATION OF FUTURE PERFORMANCE. EACH FUND IS A MUTUAL FUND, an investment that pools shareholders' money and invests it toward a specified goal. In technical terms, each fund is currently a non-diversified fund of Fidelity Boston Street Trust, an open-end management investment company organized as a Massachusetts business trust on December 31, 1989. EACH FUND IS GOVERNED BY A BOARD OF TRUSTEES, which is responsible for protecting the interests of shareholders. The trustees are experienced executives who meet throughout the year to oversee the funds' activities, review contractual arrangements with companies that provide services to the funds, and review performance. The majority of trustees are not otherwise affiliated with Fidelity. THE FUNDS MAY HOLD SPECIAL MEETINGS AND MAIL PROXY MATERIALS. These meetings may be called to elect or remove trustees, change fundamental policies, approve a management contract, or for other purposes. Shareholders not attending these meetings are encouraged to vote by proxy. Fidelity will mail proxy materials in advance, including a voting card and information about the proposals to be voted on . The number of votes you are entitled to is based upon the dollar value of your investment. The funds are managed by FMR, which chooses their investments and handles their business affairs. Fidelity Management & Research (U.K.) Inc. (FMR U.K.), in London, England, and Fidelity Management & Research (Far East) Inc. (FMR Far East), in Tokyo, Japan, assist FMR with foreign investments. Christine Thompson is manager of the Target Timeline Funds, which she has managed since inception. Ms. Thompson also manages Intermediate Bond and U.S. Bond Index. Previously, she was a senior bond analyst. Ms. Thompson joined Fidelity in 1985. Fidelity investment personnel may invest in securities for their own account pursuant to a code of ethics that establishes procedures for personal investing and restricts certain transactions. Fidelity Distributors Corporation (FDC) distributes and markets Fidelity's funds and services. Fidelity Service Co. (FSC) performs transfer agent servicing functions for the funds. FMR Corp. is the ultimate parent company of FMR, FMR U.K., and FMR Far East. Members of the Edward C. Johnson 3d family are the predominant owners of a class of shares of common stock representing approximately 49% of the voting power of FMR Corp. Under the Investment Company Act of 1940 (the 1940 Act), control of a company is presumed where one individual or group of individuals owns more than 25% of the voting stock of that company; therefore, the Johnson family may be deemed under the 1940 Act to form a controlling group with respect to FMR Corp. To carry out the funds' transactions, FMR may use its broker-dealer affiliates and other firms that sell fund shares, provided that a fund receives services and commission rates comparable to those of other broker-dealers. The Fidelity Target Timeline Funds consist of three funds with target dates for maturity of September 30, 1999, September 30, 2001, and September 30, 2003. Each fund will be liquidated shortly after its target date. Each fund seeks a definable return over its lifetime by investing in investment-grade, U.S. dollar-denominated debt securities. The goal of each fund is to provide investors with a total return that approximates the fund's quoted yield as of the date of purchase if investors hold their investment to the fund's target date and reinvest all distributions. The yield quoted by a fund represents the average yield to maturity of the fund's investments according to the Securities and Exchange Commission (SEC) standards. Yield to maturity approximates the annualized expected return of a bond over its lifetime, assuming its interest payments are reinvested at the same rate. The funds may allocate their investments among a variety of debt securities including U.S. government securities, corporate debt securities, and asset-backed and mortgage-backed securities. FMR anticipates actively managing each fund's investments to take advantage of opportunities among and within market sectors. FMR seeks to achieve a definable return by managing each fund's sensitivity to changing interest rates. In addition to affecting the value of the funds' bonds, changes in interest rates affect the amount the funds earn from reinvesting the income from the bonds. Falling interest rates, for example, will increase the value of the funds' bonds but decrease earnings from reinvestment, while rising interest rates will increase earnings from reinvestment but decrease the value of the funds' bonds. In seeking a definable return, FMR structures each fund's portfolio so that these interest rate impacts generally offset each other over the funds' lifetimes. This strategy involves selecting securities whose average duration is approximately equal to the amount of time remaining to the fund's target date. The duration of a security measures the weighted average time until the interest and principal from a security are received. For a typical bond, duration is shorter than maturity because much of the bond's return consists of interest paid prior to the maturity date. In matching a fund's duration to the time remaining to its target date, a fund is likely to hold individual securities with longer maturities than the time remaining before its target date. As the target date approaches, a fund will generally sell securities with longer maturities and purchase securities that mature closer to the target date. By following this investment strategy, FMR expects to generate a predictable return (within " 0.50% annually of the fund's quoted yield at the time of purchase) for a shareholder who holds the fund until its maturity and reinvests all distributions. FMR will seek to generate this return on average over each fund's lifetime, not on a year-by-year basis. Several factors could cause a fund to achieve less than its quoted yield. If an issuer of an investment owned by a fund defaults or if an investment's credit quality declines and the investment is sold before maturity, the fund's return will be reduced. Some securities may not lock in a definite yield to maturity in all circumstances and may pay in a different manner than FMR expects if, for example, they are called before maturity or prepay interest or principal. In addition, the fund's strategy of structuring its interest rate sensitivity may not be effective if interest rates change significantly, or if interest rates for securities with different maturities do not move in the same direction or by similar magnitudes. Although FMR will try to avoid these risks in managing the funds, the funds' quoted yields are not guaranteed and there is no assurance that they will be achieved. Each fund's yield and share price change daily and are based on changes in interest rates, market conditions, other economic and political news, and on the quality and maturity of their investments. In general, bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities. Lower-quality securities offer higher yields, but also carry more risk. FMR may use various investment techniques to hedge a portion of the funds' risks, but there is no guarantee that these strategies will work as intended. While each fund seeks a definable return (including reinvested dividends and capital gains) over its life, the funds do not seek to provide stability of principal, to give investors their principal back at maturity, or to achieve any target share price. Returns over the funds' lifetimes may come from any combination of changes in share price, dividends, and capital gain distributions. If you sell your shares before the fund's target date, you may earn more or less than your original yield, and may have an overall loss on your investment. Upon liquidation of each fund, your shares may be worth more or less than you paid for them. FMR normally invests each fund's assets according to its investment strategy. Each fund also reserves the right to invest without limitation in investment-grade money market or short-term debt instruments for temporary, defensive purposes. The following pages contain more detailed information about types of instruments in which a fund may invest, strategies FMR may employ in pursuit of a fund's investment objective, and a summary of related risks. Any restrictions listed supplement those discussed earlier in this section. A complete listing of each fund's limitations and more detailed information about the funds' investments are contained in the funds' SAI. Policies and limitations are considered at the time of purchase; the sale of instruments is not required in the event of a subsequent change in circumstances. FMR may not buy all of these instruments or use all of these techniques unless it believes that they are consistent with a fund's investment objective and policies and that doing so will help a fund achieve its goal. Current holdings and recent investment strategies are described in each fund's financial reports which are sent to shareholders twice a year. For a free SAI or financial report, call 1-800-544-8888. DEBT SECURITIES. Bonds and other debt instruments are used by issuers to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest, and must repay the amount borrowed at maturity. Some debt securities, such as zero coupon bonds, do not pay current interest, but are purchased at a discount from their face values. In general, bond prices rise when interest rates fall, and vice versa. Debt securities, loans, and other direct debt have varying degrees of quality and varying levels of sensitivity to changes in interest rates. Longer-term bonds are generally more sensitive to interest rate changes than short-term bonds. Investment-grade debt securities are medium- and high-quality securities. Some, however, may possess speculative characteristics and may be more sensitive to economic changes and to changes in the financial condition of issuers. RESTRICTIONS: Purchase of a debt security is consistent with a fund's debt quality policy if it is rated at or above the stated level by Moody's or rated in the equivalent categories by any other nationally recognized rating service, or is unrated but judged to be of equivalent quality by FMR. The funds currently intend to limit their investments in debt securities to those of Baa-quality or above. MONEY MARKET SECURITIES are high-quality, short-term obligations issued by the U.S. Government, corporations, financial institutions, and other entities. These obligations may carry fixed, variable, or floating interest rates. U.S. GOVERNMENT SECURITIES are high-quality debt securities issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the full faith and credit of the United States. For example, securities issued by the Federal Farm Credit Bank or by the Federal National Mortgage Association are supported by the instrumentality's right to borrow money from the U.S. Treasury under certain circumstances. However, securities issued by the Financing Corporation are supported only by the credit of the entity that issued them. EXPOSURE TO FOREIGN MARKETS. Foreign securities and securities issued by U.S. entities with substantial foreign operations may involve additional risks and considerations. These include risks relating to political or economic conditions in foreign countries, withholding or other taxes, operational risks, increased regulatory burdens, and the potentially less stringent investor protection and disclosure standards of foreign markets. Additionally, governmental issuers of foreign securities may be unwilling to repay principal and interest when due, and may require that the conditions for payment be renegotiated. All of these factors can make foreign investments, especially those in developing countries, more volatile. ASSET-BACKED SECURITIES represent interests in pools of debt securities or consumer loans. The value of these securities may be significantly affected by changes in the market's perception of the issuers and the creditworthiness of the parties involved. MORTGAGE SECURITIES are interests in pools of commercial or residential mortgages, and may include complex instruments such as collateralized mortgage obligations and stripped mortgage-backed securities. Mortgage securities may be issued by the U.S. government or by private entities. For example, Ginnie Maes are interests in pools of mortgage loans insured or guaranteed by a U.S. government agency. Because mortgage securities pay both interest and principal as their underlying mortgages are paid off, they are subject to prepayment risk. This is especially true for stripped securities. Also, the value of a mortgage security may be significantly affected by changes in interest rates. Some mortgage securities may have a structure that makes their reaction to interest rates and other factors difficult to predict, making their value highly volatile. STRIPPED SECURITIES are the separate income or principal components of a debt security. Their risks are similar to those of other debt securities, although they may be more volatile and the value of certain types of stripped securities may move in the same direction as interest rates. REPURCHASE AGREEMENTS. In a repurchase agreement, a fund buys a security at one price and simultaneously agrees to sell it back at a higher price. Delays or losses could result if the other party to the agreement defaults or becomes insolvent. ADJUSTING INVESTMENT EXPOSURE. A fund can use various techniques to increase or decrease its exposure to changing security prices and interest rates, or other factors that affect security values. These techniques may involve derivative transactions such as buying and selling options and futures contracts, entering into swap agreements, and purchasing indexed securities. FMR can use these practices to adjust the risk and return characteristics of a fund's portfolio of investments. If FMR judges market conditions incorrectly or employs a strategy that does not correlate well with the fund's investments, these techniques could result in a loss, regardless of whether the intent was to reduce risk or increase return. These techniques may increase the volatility of the fund and may involve a small investment of cash relative to the magnitude of the risk assumed. In addition, these techniques could result in a loss if the counterparty to the transaction does not perform as promised. ILLIQUID AND RESTRICTED SECURITIES. Some investments may be determined by FMR, under the supervision of the Board of Trustees, to be illiquid, which means that they may be difficult to sell promptly at an acceptable price. The sale of some illiquid securities and some other securities may be subject to legal restrictions. Difficulty in selling securities may result in a loss or may be costly to a fund. RESTRICTIONS: A fund may not purchase a security if, as a result, more than 10% of its assets would be invested in illiquid securities. WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS are trading practices in which payment and delivery for the securities take place at a future date. The market value of a security could change during this period, which could affect a fund's yield. DIVERSIFICATION. Diversifying a fund's investment portfolio can reduce the risks of investing. This may include limiting the amount of money invested in any one issuer or, on a broader scale, in any one industry. A fund that is not diversified may be more sensitive to changes in the market value of a single issuer or industry. RESTRICTIONS: The funds are considered non-diversified. Generally, to meet federal tax requirements at the close of each quarter, a fund does not invest more than 25% of its total assets in any one issuer and, with respect to 50% of total assets, does not invest more than 5% of its total assets in any one issuer. A fund may not invest more than 25% of its total assets in any one industry. These limitations do not apply to U.S. government securities. BORROWING. A fund may borrow from banks or from other funds advised by FMR, or through reverse repurchase agreements. If a fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If the fund makes additional investments while borrowings are outstanding, this may be considered a form of leverage. RESTRICTIONS: A fund may borrow only for temporary or emergency purposes, but not in an amount exceeding 33% of its total assets. LENDING. Lending securities to broker-dealers and institutions, including Fidelity Brokerage Services, Inc. (FBSI), an affiliate of FMR, is a means of earning income. This practice could result in a loss or a delay in recovering a fund's securities. A fund may also lend money to other funds advised by FMR. RESTRICTIONS: Loans, in the aggregate, may not exceed 33% of a fund's total assets. FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS Some of the policies and restrictions discussed on the preceding pages are fundamental, that is, subject to change only by shareholder approval. The following paragraphs restate all those that are fundamental. All policies stated throughout this prospectus, other than those identified in the following paragraph, can be changed without shareholder approval. Each fund seeks a definable return over its lifetime. Each fund may not invest more than 25% of its total assets in any one industry. Each fund may borrow only for temporary or emergency purposes, but not in an amount exceeding 33% of its total assets. Loans, in the aggregate, may not exceed 33% of each funds' total assets. Like all mutual funds, the funds pay fees related to their daily operations. Expenses paid out of a fund's assets are reflected in its share price or dividends; they are neither billed directly to shareholders nor deducted from shareholder accounts. Each fund pays a MANAGEMENT FEE to FMR for managing its investments and business affairs. Each fund also pays OTHER EXPENSES, which are explained at right. FMR may, from time to time, agree to reimburse the funds for management fees and other expenses above a specified limit. FMR retains the ability to be repaid by a fund if expenses fall below the specified limit prior to the end of the fiscal year. Reimbursement arrangements, which may be terminated at any time without notice, can decrease a fund's expenses and boost its performance. The management fee is calculated and paid to FMR every month. The fee is calculated by adding a group fee rate to an individual fund fee rate, and multiplying the result by the fund's average net assets. The group fee rate is based on the average net assets of all the mutual funds advised by FMR. This rate cannot rise above .37%, and it drops as total assets under management increase. For November 1995, the group fee rate was . 1487 %. The individual fund fee rate is .30% for each fund. The total management fee rate for fiscal 199 6 is estimated to be .45% for each fund. FMR HAS SUB-ADVISORY AGREEMENTS with FMR U.K. and FMR Far East. These sub-advisers provide FMR with investment research and advice on issuers based outside the United States. Under the sub-advisory agreements, FMR pays FMR U.K. and FMR Far East fees equal to 110% and 105%, respectively, of the costs of providing these services. The sub-advisers may also provide investment management services. In return, FMR pays FMR U.K. and FMR Far East a fee equal to 50% of its management fee rate with respect to a fund's investments that the sub-adviser manages on a discretionary basis. While the management fee is a significant component of the funds' annual operating costs, the funds have other expenses as well. The funds contract with Fidelity Service Co. ( FSC ) to perform many transaction and accounting functions. These services include processing shareholder transactions, valuing each fund's investments, and handling securities loans. The funds also pay other expenses, such as legal, audit, and custodian fees; proxy solicitation costs; and the compensation of trustees who are not affiliated with Fidelity. Each fund has adopted a Distribution and Service Plan. These plans recognize that FMR may use its resources, including management fees, to pay expenses associated with the sale of fund shares. This may include payments to third parties, such as banks or broker-dealers, that provide shareholder support services or engage in the sale of the fund's shares. It is important to note, however, that the funds do not pay FMR any separate fees for this service. The annualized portfolio turnover rates for each fund, are not expected to exceed 100%, respectively, in the first fiscal period. These rates vary from year to year. Fidelity Investments was established in 1946 to manage one of America's first mutual funds. Today, Fidelity is the largest mutual fund company in the country, and is known as an innovative provider of high-quality financial services to individuals and institutions. In addition to its mutual fund business, the company operates one of America's leading discount brokerage firms, FBSI. Fidelity is also a leader in providing tax-sheltered retirement plans for individuals investing on their own or through their employer. Fidelity is committed to providing investors with practical information to make investment decisions. Based in Boston, Fidelity provides customers with complete service 24 hours a day, 365 days a year, through a network of telephone service centers around the country. To reach Fidelity for general information, call these numbers: (small solid bullet) For mutual funds, 1-800-544-8888 (small solid bullet) For brokerage, 1-800-544-7272 If you would prefer to speak with a representative in person, Fidelity has over 80 walk-in Investor Centers across the country. You may set up an account directly in a fund or, if you own or intend to purchase individual securities as part of your total investment portfolio, you may consider investing in a fund through a brokerage account. If you are investing through FBSI or another financial institution or investment professional, refer to its program materials for any special provisions regarding your investment in the fund. The different ways to set up (register) your account with Fidelity are listed at right. The account guidelines that follow may not apply to certain retirement accounts. If your employer offers a fund through a retirement program, contact your employer for more information. Otherwise, call Fidelity directly. (solid bullet) Number of Fidelity mutual (solid bullet) Assets in Fidelity mutual funds: over $ 348 billion (solid bullet) Number of shareholder (solid bullet) Number of investment WAYS TO SET UP YOUR ACCOUNT FOR YOUR GENERAL INVESTMENT NEEDS Individual accounts are owned by one person. Joint accounts can have two or more owners (tenants). TO SHELTER YOUR RETIREMENT SAVINGS FROM TAXES Retirement plans allow individuals to shelter investment income and capital gains from current taxes. In addition, contributions to these accounts may be tax deductible. Retirement accounts require special applications and typically have lower minimums. (solid bullet) INDIVIDUAL RETIREMENT ACCOUNTS (IRAS) allow anyone of legal age and under 70 with earned income to invest up to $2,000 per tax year. Individuals can also invest in a spouse's IRA if the spouse has earned income of less than $250. (solid bullet) ROLLOVER IRAS retain special tax advantages for certain distributions from employer-sponsored retirement plans. (solid bullet) KEOGH OR CORPORATE PROFIT SHARING AND MONEY PURCHASE PENSION PLANS allow self-employed individuals or small business owners (and their employees) to make tax-deductible contributions for themselves and any eligible employees up to $30,000 per year. (solid bullet) SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS) provide small business owners or those with self-employed income (and their eligible employees) with many of the same advantages as a Keogh, but with fewer administrative requirements. (solid bullet) 403(B) CUSTODIAL ACCOUNTS are available to employees of most tax-exempt institutions, including schools, hospitals, and other charitable organizations. (solid bullet) 401(K) PROGRAMS allow employees of corporations of all sizes to contribute a percentage of their wages on a tax-deferred basis. These accounts need to be established by the trustee of the plan. GIFTS OR TRANSFERS TO A MINOR (UGMA, UTMA) TO INVEST FOR A CHILD'S EDUCATION OR OTHER FUTURE NEEDS These custodial accounts provide a way to give money to a child and obtain tax benefits. An individual can give up to $10,000 a year per child without paying federal gift tax. Depending on state laws, you can set up a custodial account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). FOR MONEY BEING INVESTED BY A TRUST The trust must be established before an account can be opened. FOR INVESTMENT NEEDS OF CORPORATIONS, ASSOCIATIONS, PARTNERSHIPS, OR OTHER Requires a special application. EACH FUND'S SHARE PRICE, called net asset value (NAV), is calculated every business day. Each fund's shares are sold without a sales charge. Shares are purchased at the next share price calculated after your investment is received and accepted. Share price is normally calculated at 4 p.m. Eastern time. IF YOU ARE NEW TO FIDELITY, complete and sign an account application and mail it along with your check. You may also open your account in person or by wire as described on page . If there is no application accompanying this prospectus, call 1-800-544-8888. IF YOU ALREADY HAVE MONEY INVESTED IN A FIDELITY FUND, you can: (small solid bullet) Mail in an application with a check, or (small solid bullet) Open your account by exchanging from another Fidelity fund. IF YOU ARE INVESTING THROUGH A TAX-SHELTERED RETIREMENT PLAN, such as an IRA, for the first time, you will need a special application. Retirement investing also involves its own investment procedures. Call 1-800-544-8888 for more information and a retirement application. If you buy shares by check or Fidelity Money Line(registered trademark), and then sell those shares by any method other than by exchange to another Fidelity fund, the payment may be delayed for up to seven business days to ensure that your previous investment has cleared. TO OPEN AN ACCOUNT $2,500 For Fidelity retirement accounts $500 TO ADD TO AN ACCOUNT $250 For Fidelity retirement accounts $250 Through automatic investment plans $100 For Fidelity retirement accounts $500 These minimums may vary for investments through Fidelity Portfolio Advisory Services. Refer to the program materials for details. You can arrange to take money out of your fund account at any time by selling (redeeming) some or all of your shares. Your shares will be sold at the next share price calculated after your order is received and accepted. Share price is normally calculated at 4 p.m. Eastern time. TO SELL SHARES IN A NON-RETIREMENT ACCOUNT, you may use any of the methods described on these two pages. TO SELL SHARES IN A FIDELITY RETIREMENT ACCOUNT, your request must be made in writing, except for exchanges to other Fidelity funds, which can be requested by phone or in writing. Call 1-800-544-6666 for a retirement distribution form. IF YOU ARE SELLING SOME BUT NOT ALL OF YOUR SHARES, leave at least $1,000 worth of shares in the account to keep it open ($500 for retirement accounts). TO SELL SHARES BY BANK WIRE OR FIDELITY MONEY LINE, you will need to sign up for these services in advance. CERTAIN REQUESTS MUST INCLUDE A SIGNATURE GUARANTEE. It is designed to protect you and Fidelity from fraud. Your request must be made in writing and include a signature guarantee if any of the following situations apply: (small solid bullet) You wish to redeem more than $100,000 worth of shares, (small solid bullet) Your account registration has changed within the last (small solid bullet) The check is being mailed to a different address than the one on your account (record address), (small solid bullet) The check is being made payable to someone other than (small solid bullet) The redemption proceeds are being transferred to a Fidelity account with a different registration. You should be able to obtain a signature guarantee from a bank, broker (including Fidelity Investor Centers), dealer, credit union (if authorized under state law), securities exchange or association, clearing agency, or savings association. A notary public cannot provide a signature guarantee. Write a "letter of instruction" with: (small solid bullet) Your name, (small solid bullet) The fund's name, (small solid bullet) Your fund account number, (small solid bullet) The dollar amount or number of shares to be redeemed, (small solid bullet) Any other applicable requirements listed in the table at right. Unless otherwise instructed, Fidelity will send a check to the record address. Deliver your letter to a Fidelity Investor Center, or mail it to: Fidelity provides a variety of services to help you manage your account. FIDELITY'S TELEPHONE REPRESENTATIVES are available 24 hours a day, 365 days a year. Whenever you call, you can speak with someone equipped to provide the information or service you need. STATEMENTS AND REPORTS that Fidelity sends to you include the following: (small solid bullet) Confirmation statements (after every transaction, except reinvestments, that affects your account balance or your account (small solid bullet) Account statements (quarterly) (small solid bullet) Financial reports (every six months) To reduce expenses, only one copy of most financial reports will be mailed to your household, even if you have more than one account in the fund. Call 1-800-544-6666 if you need copies of financial reports or historical account information. EXCHANGE PRIVILEGE. You may sell your fund shares and buy shares of other Fidelity funds by telephone or in writing. Note that exchanges out of a fund are limited to four per calendar year, and that they may have tax consequences for you. For details on policies and restrictions governing exchanges, including circumstances under which a shareholder's exchange privilege may be suspended or revoked, see page . SYSTEMATIC WITHDRAWAL PLANS let you set up periodic redemptions from your account. FIDELITY MONEY LINE(registered trademark) enables you to transfer money by phone between your bank account and your fund account. Most transfers are complete within three business days of your call. One easy way to pursue your financial goals is to invest money regularly. Fidelity offers convenient services that let you transfer money into your fund account, or between fund accounts, automatically. While regular investment plans do not guarantee a profit and will not protect you against loss in a declining market, they can be an excellent way to invest for retirement, a home, educational expenses, and other long-term financial goals. Certain restrictions apply for retirement accounts. Call 1-800-544-6666 for more information. TO MOVE MONEY FROM YOUR BANK ACCOUNT TO A FIDELITY FUND A BECAUSE THEIR SHARE PRICES FLUCTUATE, THESE FUNDS MAY NOT BE APPROPRIATE CHOICES FOR DIRECT DEPOSIT OF YOUR ENTIRE CHECK. MATURITY AND LIQUIDATION OF THE FUNDS The target date for Target Timeline 1999, Target Timeline 2001, and Target Timeline 2003 is September 30, 1999, 2001, and 2003, respectively. On those dates, the respective funds will mature. The trustees expect to liquidate each fund within one month after the funds' target date. Prior to the target date, shareholders of each fund will be notified of the liquidation and can receive payment for the value of their shares or exchange their shares into another Fidelity fund. If instructions are not received prior to the target date, shares will be exchanged for Fidelity Cash Reserves, or if Fidelity Cash Reserves is not available, shares of another money market fund advised by FMR, or in the case of employee benefit plans, the cash option specified by the plan. The trustees anticipate closing each fund to new investors approximately one year prior to the target date of the fund. Purchases of a fund's shares will continue to be available to shareholders investing through regular investment programs. DIVIDENDS, CAPITAL GAINS, AND TAXES Each fund distributes substantially all of its net investment income and capital gains to shareholders each year. Income dividends are declared daily and paid monthly. Capital gains are normally distributed in September and December. When you open an account, specify on your application how you want to receive your distributions. If the option you prefer is not listed on the application, call 1-800-544-6666 for instructions. Each fund offers four options: 1. REINVESTMENT OPTION. Your dividend and capital gain distributions will be automatically reinvested in additional shares of the fund. If you do not indicate a choice on your application, you will be assigned this option. 2. INCOME-EARNED OPTION. Your capital gain distributions will be automatically reinvested, but you will be sent a check for each dividend distribution. As a fund shareholder, you are entitled to your share of the fund's net income and gains on its investments. The along to its investors as DISTRIBUTIONS. Each fund earns interest from realize capital gains if it sells securities for a higher price than it paid for them. These are passed along as CAPITAL GAIN DISTRIBUTIONS. 3. CASH OPTION. You will be sent a check for your dividend and capital gain distributions. 4. DIRECTED DIVIDENDS(registered trademark) OPTION. Your dividend and capital gain distributions will be automatically invested in another identically registered Fidelity fund. FOR RETIREMENT ACCOUNTS, all distributions are automatically reinvested. When you are over 59 years old, you can receive distributions in cash. Dividends will be reinvested at the fund's NAV on the last day of the month. Capital gain distributions will be reinvested at the NAV as of the date the fund deducts the distribution from its NAV. The mailing of distribution checks will begin within seven days . As with any investment, you should consider how your investment in a fund will be taxed. If your account is not a tax-deferred retirement account, you should be aware of these tax implications. TAXES ON DISTRIBUTIONS. Distributions are subject to federal income tax, and may also be subject to state or local taxes. If you live outside the United States, your distributions could also be taxed by the country in which you reside. Your distributions are taxable when they are paid, whether you take them in cash or reinvest them. However, distributions declared in December and paid in January are taxable as if they were paid on December 31. For federal tax purposes, each fund's income and short-term capital gain distributions are taxed as dividends; long-term capital gain distributions are taxed as long-term capital gains. Every January, Fidelity will send you and the IRS a statement showing the taxable distributions paid to you in the previous year. TAXES ON TRANSACTIONS. Your redemptions - including exchanges to other Fidelity funds and payments resulting from liquidation of the funds after their respective target dates - are subject to capital gains tax. A capital gain or loss is the difference between the cost of your shares and the price you receive when you sell them. Whenever you sell shares of a fund, Fidelity will send you a confirmation statement showing how many shares you sold and at what price. You will also receive a consolidated transaction statement every January. However, it is up to you or your tax preparer to determine whether this sale resulted in a capital gain and, if so, the amount of tax to be paid. Be sure to keep your regular account statements; the information they contain will be essential in calculating the amount of your capital gains. "BUYING A DIVIDEND." If you buy shares just before a fund deducts a capital gain distribution from its NAV, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable distribution. EFFECT OF FOREIGN TAXES. Foreign governments may impose taxes on a fund and its investments and these taxes generally will reduce the fund's distributions. There are tax requirements that all funds must follow in order to avoid federal taxation. In its effort to adhere to these requirements, a fund may have to limit its investment activity in some types of instruments. THE FUNDS ARE OPEN FOR BUSINESS each day the New York Stock Exchange (NYSE) is open. Fidelity normally calculates each fund's NAV as of the close of business of the NYSE, normally 4 p.m. Eastern time. EACH FUND'S NAV is the value of a single share. The NAV is computed by adding the value of the fund's investments, cash, and other assets, subtracting its liabilities, and then dividing the result by the number of shares outstanding. Each fund's assets are valued primarily on the basis of market quotations. Foreign securities are valued on the basis of quotations from the primary market in which they are traded, and are translated from the local currency into U.S. dollars using current exchange rates. If quotations are not readily available, or if the values have been materially affected by events occurring after the closing of a foreign market, assets are valued by a method that the Board of Trustees believes accurately reflects fair value. EACH FUND'S OFFERING PRICE (price to buy one share) and REDEMPTION PRICE (price to sell one share) are its NAV. WHEN YOU SIGN YOUR ACCOUNT APPLICATION, you will be asked to certify that your Social Security or taxpayer identification number is correct and that you are not subject to 31% backup withholding for failing to report income to the IRS. If you violate IRS regulations, the IRS can require a fund to withhold 31% of your taxable distributions and redemptions. YOU MAY INITIATE MANY TRANSACTIONS BY TELEPHONE. Fidelity may only be liable for losses resulting from unauthorized transactions if it does not follow reasonable procedures designed to verify the identity of the caller. Fidelity will request personalized security codes or other information, and may also record calls. You should verify the accuracy of your confirmation statements immediately after you receive them. If you do not want the ability to redeem and exchange by telephone, call Fidelity for instructions. IF YOU ARE UNABLE TO REACH FIDELITY BY PHONE (for example, during periods of unusual market activity), consider placing your order by mail or by visiting a Fidelity Investor Center. EACH FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period of time. Each fund also reserves the right to reject any specific purchase order, including certain purchases by exchange. See "Exchange Restrictions" on page . Purchase orders may be refused if, in FMR's opinion, they would disrupt management of a fund. WHEN YOU PLACE AN ORDER TO BUY SHARES, your order will be processed at the next offering price calculated after your order is received and accepted. Note the following: (small solid bullet) All of your purchases must be made in U.S. dollars and checks must be drawn on U.S. banks. (small solid bullet) Fidelity does not accept cash. (small solid bullet) When making a purchase with more than one check, each check must have a value of at least $50. (small solid bullet) Each fund reserves the right to limit the number of checks processed at one time. (small solid bullet) If your check does not clear, your purchase will be cancelled and you could be liable for any losses or fees a fund or its transfer agent has incurred. (small solid bullet) You begin to earn dividends as of the first business day following the day of your purchase. TO AVOID THE COLLECTION PERIOD associated with check and Money Line purchases, consider buying shares by bank wire, U.S. Postal money order, U.S. Treasury check, Federal Reserve check, or direct deposit instead. YOU MAY BUY OR SELL SHARES OF THE FUNDS THROUGH A BROKER, who may charge you a fee for this service. If you invest through a broker or other institution, read its program materials for any additional service features or fees that may apply. CERTAIN FINANCIAL INSTITUTIONS that have entered into sales agreements with FDC may enter confirmed purchase orders on behalf of customers by phone, with payment to follow no later than the time when a fund is priced on the following business day. If payment is not received by that time, the financial institution could be held liable for resulting fees or losses. WHEN YOU PLACE AN ORDER TO SELL SHARES, your shares will be sold at the next NAV calculated after your request is received and accepted. Note the following: (small solid bullet) Normally, redemption proceeds will be mailed to you on the next business day, but if making immediate payment could adversely affect a fund, it may take up to seven days to pay you. (small solid bullet) Shares will earn dividends through the date of redemption; however, shares redeemed on a Friday or prior to a holiday will continue to earn dividends until the next business day. (small solid bullet) Fidelity Money Line redemptions generally will be credited to your bank account on the second or third business day after your phone call. (small solid bullet) Each fund may hold payment on redemptions until it is reasonably satisfied that investments made by check or Fidelity Money Line have been collected, which can take up to seven business days. (small solid bullet) Redemptions may be suspended or payment dates postponed when the NYSE is closed (other than weekends or holidays), when trading on the NYSE is restricted, or as permitted by the SEC. THE REDEMPTION FEE, if applicable, will be deducted from the amount of your redemption. This fee is paid to the fund rather than FMR, and it does not apply to shares that were acquired through reinvestment of distributions. If shares you are redeeming were not all held for the same length of time, those shares you held longest will be redeemed first for purposes of determining whether the fee applies. FIDELITY RESERVES THE RIGHT TO DEDUCT AN ANNUAL MAINTENANCE FEE of $12.00 from accounts with a value of less than $2,500, subject to an annual maximum charge of $60.00 per shareholder. It is expected that accounts will be valued on the second Friday in November of each year. Accounts opened after September 30 will not be subject to the fee for that year. The fee, which is payable to the transfer agent, is designed to offset in part the relatively higher costs of servicing smaller accounts. The fee will not be deducted from retirement accounts (except non-prototype retirement accounts), accounts using regular investment plans, or if total assets in Fidelity funds exceed $50,000. Eligibility for the $50,000 waiver is determined by aggregating Fidelity mutual fund accounts maintained by FSC or FBSI which are registered under the same social security number or which list the same social security number for the custodian of a Uniform Gifts/Transfers to Minors Act account. IF YOUR ACCOUNT BALANCE FALLS BELOW $1,000, you will be given 30 days' notice to reestablish the minimum balance. If you do not increase your balance, Fidelity reserves the right to close your account and send the proceeds to you. Your shares will be redeemed at the NAV on the day your account is closed. FIDELITY MAY CHARGE A FEE FOR SPECIAL SERVICES, such as providing historical account documents, that are beyond the normal scope of its services. FDC may, at its own expense, provide promotional incentives to qualified recipients who support the sale of shares of the funds without reimbursement from the funds. Qualified recipients are securities dealers who have sold fund shares or others, including banks and other financial institutions, under special arrangements in connection with FDC's sales activities. In some instances, these incentives may be offered only to certain institutions whose representatives provide services in connection with the sale or expected sale of significant amounts of shares. As a shareholder, you have the privilege of exchanging shares of a fund for shares of other Fidelity funds. However, you should note the following: (small solid bullet) The fund you are exchanging into must be registered for sale in your state. (small solid bullet) You may only exchange between accounts that are registered in the same name, address, and taxpayer identification number. (small solid bullet) Before exchanging into a fund, read its prospectus. (small solid bullet) If you exchange into a fund with a sales charge, you pay the percentage-point difference between that fund's sales charge and any sales charge you have previously paid in connection with the shares you are exchanging. For example, if you had already paid a sales charge of 2% on your shares and you exchange them into a fund with a 3% sales charge, you would pay an additional 1% sales charge. (small solid bullet) Exchanges may have tax consequences for you. (small solid bullet) Because excessive trading can hurt fund performance and shareholders, each fund reserves the right to temporarily or permanently terminate the exchange privilege of any investor who makes more than four exchanges out of the fund per calendar year. Accounts under common ownership or control, including accounts with the same taxpayer identification number, will be counted together for purposes of the four exchange limit. (small solid bullet) The exchange limit may be modified for accounts in certain institutional retirement plans to conform to plan exchange limits and Department of Labor regulations. See your plan materials for further information. (small solid bullet) Each fund reserves the right to refuse exchange purchases by any person or group if, in FMR's judgment, the fund would be unable to invest the money effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. (small solid bullet) Your exchanges may be restricted or refused if a fund receives or anticipates simultaneous orders affecting significant portions of the fund's assets. In particular, a pattern of exchanges that coincides with a "market timing" strategy may be disruptive to a fund. Although the funds will attempt to give you prior notice whenever they are reasonably able to do so, they may impose these restrictions at any time. The funds reserve the right to terminate or modify the exchange privilege in the future. OTHER FUNDS MAY HAVE DIFFERENT EXCHANGE RESTRICTIONS, and may impose administrative fees of up to $7.50 and redemption fees of up to 1.50% on exchanges. Check each fund's prospectus for details. This prospectus is printed on recycled paper using soy-based inks. FIDELITY TARGET TIMELINE 1999, FIDELITY TARGET TIMELINE 2001, AND FIDELITY FUNDS OF FIDELITY BOSTON STREET TRUST This Statement is not a prospectus but should be read in conjunction with the funds' current Prospectus (dated January 15, 1996). Please retain this document for future reference. To obtain an additional copy of the Prospectus, please call Fidelity Distributors Corporation at 1-800-544-8888. Additional Purchase and Redemption Information Fidelity Management & Research Company (FMR) Fidelity Management & Research (U.K.) Inc. (FMR U.K.) Fidelity Management & Research (Far East) Inc. (FMR Far East) The following policies and limitations supplement those set forth in the Prospectus. Unless otherwise noted, whenever an investment policy or limitation states a maximum percentage of a fund's assets that may be invested in any security or other asset, or sets forth a policy regarding quality standards, such standard or percentage limitation will be determined immediately after and as a result of the fund's acquisition of such security or other asset. Accordingly, any subsequent change in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the fund's investment policies and limitations. The funds' fundamental investment policies and limitations cannot be changed without approval by a "majority of the outstanding voting securities" (as defined in the Investment Company Act of 1940) of the fund. However, except for the fundamental investment limitations listed below, the investment policies and limitations described in this Statement of Additional Information are not fundamental and may be changed without shareholder approval. INVESTMENT LIMITATIONS OF FIDELITY TARGET TIMELINE 1999 THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT: (1) issue senior securities, except as permitted under the Investment (2) borrow money, except that the fund may borrow money for temporary or emergency purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings). Any borrowings that come to exceed this amount will be reduced within three days (not including Sundays and holidays) to the extent necessary to comply with the 33 1/3% limitation; (3) underwrite securities issued by others, except to the extent that the fund may be considered an underwriter within the meaning of the Securities Act of 1933 in the disposition of restricted securities; (4) purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, more than 25% of the fund's total assets would be invested in the securities of companies whose principal business activities are in the same industry; (5) purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business); (6) purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the fund from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical (7) lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties, but this limitation does not apply to purchases of debt securities or to repurchase agreements. (8) The fund may, notwithstanding any other fundamental investment policy or limitation, invest all of its assets in the securities of a single open-end management investment company managed by Fidelity Management & Research Company or an affiliate or successor with substantially the same fundamental investment objective, policies, and limitations as the fund. THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL. (i) To meet federal tax requirements for qualification as a "regulated investment company," the fund limits its investments so that at the close of each quarter of its taxable year: (a) with regard to at least 50% of total assets, no more than 5% of total assets are invested in the securities of a single issuer, and (b) no more than 25% of total assets are invested in the securities of a single issuer. Limitations (a) and (b) do not apply to "Government securities" as defined for federal tax purposes. (ii) With respect to 75% of its total assets, the fund does not currently intend to purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, the fund would hold more than 10% of the outstanding voting securities of that issuer. (i i i) The fund does not currently intend to sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. (i v ) The fund does not currently intend to purchase securities on margin, except that the fund may obtain such short-term credits as are necessary for the clearance of transactions, and provided that margin payments in connection with futures contracts and options on futures contracts shall not constitute purchasing securities on margin. (v) The fund may borrow money only (a) from a bank or from a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser or (b) by engaging in reverse repurchase agreements with any party (reverse repurchase agreements are treated as borrowings for purposes of fundamental investment limitation (2)). The fund will not purchase any security while borrowings representing more than 5% of its total assets are outstanding. The fund will not borrow from other funds advised by FMR or its affiliates if total outstanding borrowings immediately after such borrowing would exceed 15% of the fund's total assets. (v i ) The fund does not currently intend to purchase any security if, as a result, more than 10% of its net assets would be invested in securities that are deemed to be illiquid because they are subject to legal or contractual restrictions on resale or because they cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. (vi i ) The fund does not currently intend to lend assets other than securities to other parties, except by (a) lending money (up to 5% of the fund's net assets) to a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser or (b) acquiring loans, loan participations, or other forms of direct debt instruments and, in connection therewith, assuming any associated unfunded commitments of the sellers. (This limitation does not apply to purchases of debt securities or to repurchase agreements.) (vii i ) The fund does not currently intend to (a) purchase securities of other investment companies, except in the open market where no commission except the ordinary broker's commission is paid, or (b) purchase or retain securities issued by other open-end investment companies. Limitations (a) and (b) do not apply to securities received as dividends, through offers of exchange, or as a result of a reorganization, consolidation, or merger. (ix) The fund does not currently intend to purchase the securities of any issuer (other than securities issued or guaranteed by domestic or foreign governments or political subdivisions thereof) if, as a result, more than 5% of its total assets would be invested in the securities of business enterprises that, including predecessors, have a record of less than three years of continuous operation. (x) The fund does not currently intend to purchase warrants, valued at the lower of cost or market, in excess of 5% of the fund's net assets. Included in that amount, but not to exceed 2% of the fund's net assets, may be warrants that are not listed on the New York Stock Exchange or the American Stock Exchange. Warrants acquired by the fund in units or attached to securities are not subject to these restrictions. (xi) The fund does not currently intend to invest in oil, gas, or other mineral exploration or development programs or leases. (xii) The fund does not currently intend to invest all of its assets in the securities of a single open-end management investment company managed by Fidelity Management & Research Company or an affiliate or successor with substantially the same fundamental investment objective, policies, and limitations as the fund. For purposes of limitation (ix), pass-through entities and other special purpose vehicles or pools of financial assets, such as issuers of asset-backed securities or investment companies, are not considered "business enterprises." INVESTMENT LIMITATIONS OF FIDELITY TARGET TIMELINE 2001 THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT: (1) issue senior securities, except as permitted under the Investment (2) borrow money, except that the fund may borrow money for temporary or emergency purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings). Any borrowings that come to exceed this amount will be reduced within three days (not including Sundays and holidays) to the extent necessary to comply with the 33 1/3% limitation; (3) underwrite securities issued by others, except to the extent that the fund may be considered an underwriter within the meaning of the Securities Act of 1933 in the disposition of restricted securities; (4) purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, more than 25% of the fund's total assets would be invested in the securities of companies whose principal business activities are in the same industry; (5) purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business); (6) purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the fund from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical (7) lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties, but this limitation does not apply to purchases of debt securities or to repurchase agreements. (8) The fund may, notwithstanding any other fundamental investment policy or limitation, invest all of its assets in the securities of a single open-end management investment company managed by Fidelity Management & Research Company or an affiliate or successor with substantially the same fundamental investment objective, policies, and limitations as the fund. THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL. (i) To meet federal tax requirements for qualification as a "regulated investment company," the fund limits its investments so that at the close of each quarter of its taxable year: (a) with regard to at least 50% of total assets, no more than 5% of total assets are invested in the securities of a single issuer, and (b) no more than 25% of total assets are invested in the securities of a single issuer. Limitations (a) and (b) do not apply to "Government securities" as defined for federal tax purposes. (ii) With respect to 75% of its total assets, the fund does not currently intend to purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, the fund would hold more than 10% of the outstanding voting securities of that issuer. (i i i) The fund does not currently intend to sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. (i v ) The fund does not currently intend to purchase securities on margin, except that the fund may obtain such short-term credits as are necessary for the clearance of transactions, and provided that margin payments in connection with futures contracts and options on futures contracts shall not constitute purchasing securities on margin. (v) The fund may borrow money only (a) from a bank or from a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser or (b) by engaging in reverse repurchase agreements with any party (reverse repurchase agreements are treated as borrowings for purposes of fundamental investment limitation (2)). The fund will not purchase any security while borrowings representing more than 5% of its total assets are outstanding. The fund will not borrow from other funds advised by FMR or its affiliates if total outstanding borrowings immediately after such borrowing would exceed 15% of the fund's total assets. (v i ) The fund does not currently intend to purchase any security if, as a result, more than 10% of its net assets would be invested in securities that are deemed to be illiquid because they are subject to legal or contractual restrictions on resale or because they cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. (vi i ) The fund does not currently intend to lend assets other than securities to other parties, except by (a) lending money (up to 5% of the fund's net assets) to a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser or (b) acquiring loans, loan participations, or other forms of direct debt instruments and, in connection therewith, assuming any associated unfunded commitments of the sellers. (This limitation does not apply to purchases of debt securities or to repurchase agreements.) (vii i ) The fund does not currently intend to (a) purchase securities of other investment companies, except in the open market where no commission except the ordinary broker's commission is paid, or (b) purchase or retain securities issued by other open-end investment companies. Limitations (a) and (b) do not apply to securities received as dividends, through offers of exchange, or as a result of a reorganization, consolidation, or merger. (ix) The fund does not currently intend to purchase the securities of any issuer (other than securities issued or guaranteed by domestic or foreign governments or political subdivisions thereof) if, as a result, more than 5% of its total assets would be invested in the securities of business enterprises that, including predecessors, have a record of less than three years of continuous operation. (x) The fund does not currently intend to purchase warrants, valued at the lower of cost or market, in excess of 5% of the fund's net assets. Included in that amount, but not to exceed 2% of the fund's net assets, may be warrants that are not listed on the New York Stock Exchange or the American Stock Exchange. Warrants acquired by the fund in units or attached to securities are not subject to these restrictions. (xi) The fund does not currently intend to invest in oil, gas, or other mineral exploration or development programs or leases. (xii) The fund does not currently intend to invest all of its assets in the securities of a single open-end management investment company managed by Fidelity Management & Research Company or an affiliate or successor with substantially the same fundamental investment objective, policies, and limitations as the fund. For purposes of limitation (ix), pass-through entities and other special purpose vehicles or pools of financial assets, such as issuers of asset-backed securities or investment companies, are not considered "business enterprises." INVESTMENT LIMITATIONS OF FIDELITY TARGET TIMELINE 2003 THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT: (1) issue senior securities, except as permitted under the Investment (2) borrow money, except that the fund may borrow money for temporary or emergency purposes (not for leveraging or investment) in an amount not exceeding 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings). Any borrowings that come to exceed this amount will be reduced within three days (not including Sundays and holidays) to the extent necessary to comply with the 33 1/3% limitation; (3) underwrite securities issued by others, except to the extent that the fund may be considered an underwriter within the meaning of the Securities Act of 1933 in the disposition of restricted securities; (4) purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, more than 25% of the fund's total assets would be invested in the securities of companies whose principal business activities are in the same industry; (5) purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business); (6) purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the fund from purchasing or selling options and futures contracts or from investing in securities or other instruments backed by physical (7) lend any security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties, but this limitation does not apply to purchases of debt securities or to repurchase agreements. (8) The fund may, notwithstanding any other fundamental investment policy or limitation, invest all of its assets in the securities of a single open-end management investment company managed by Fidelity Management & Research Company or an affiliate or successor with substantially the same fundamental investment objective, policies, and limitations as the fund. THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL. (i) To meet federal tax requirements for qualification as a "regulated investment company," the fund limits its investments so that at the close of each quarter of its taxable year: (a) with regard to at least 50% of total assets, no more than 5% of total assets are invested in the securities of a single issuer, and (b) no more than 25% of total assets are invested in the securities of a single issuer. Limitations (a) and (b) do not apply to "Government securities" as defined for federal tax purposes. (ii) With respect to 75% of its total assets, the fund does not currently intend to purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities) if, as a result, the fund would hold more than 10% of the outstanding voting securities of that issuer. (i i i) The fund does not currently intend to sell securities short, unless it owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, and provided that transactions in futures contracts and options are not deemed to constitute selling securities short. (i v ) The fund does not currently intend to purchase securities on margin, except that the fund may obtain such short-term credits as are necessary for the clearance of transactions, and provided that margin payments in connection with futures contracts and options on futures contracts shall not constitute purchasing securities on margin. (v) The fund may borrow money only (a) from a bank or from a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser or (b) by engaging in reverse repurchase agreements with any party (reverse repurchase agreements are treated as borrowings for purposes of fundamental investment limitation (2)). The fund will not purchase any security while borrowings representing more than 5% of its total assets are outstanding. The fund will not borrow from other funds advised by FMR or its affiliates if total outstanding borrowings immediately after such borrowing would exceed 15% of the fund's total assets. (v i ) The fund does not currently intend to purchase any security if, as a result, more than 10% of its net assets would be invested in securities that are deemed to be illiquid because they are subject to legal or contractual restrictions on resale or because they cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. (vi i ) The fund does not currently intend to lend assets other than securities to other parties, except by (a) lending money (up to 5% of the fund's net assets) to a registered investment company or portfolio for which FMR or an affiliate serves as investment adviser or (b) acquiring loans, loan participations, or other forms of direct debt instruments and, in connection therewith, assuming any associated unfunded commitments of the sellers. (This limitation does not apply to purchases of debt securities or to repurchase agreements.) (vi i i) The fund does not currently intend to (a) purchase securities of other investment companies, except in the open market where no commission except the ordinary broker's commission is paid, or (b) purchase or retain securities issued by other open-end investment companies. Limitations (a) and (b) do not apply to securities received as dividends, through offers of exchange, or as a result of a reorganization, consolidation, or merger. (ix) The fund does not currently intend to purchase the securities of any issuer (other than securities issued or guaranteed by domestic or foreign governments or political subdivisions thereof) if, as a result, more than 5% of its total assets would be invested in the securities of business enterprises that, including predecessors, have a record of less than three years of continuous operation. (x) The fund does not currently intend to purchase warrants, valued at the lower of cost or market, in excess of 5% of the fund's net assets. Included in that amount, but not to exceed 2% of the fund's net assets, may be warrants that are not listed on the New York Stock Exchange or the American Stock Exchange. Warrants acquired by the fund in units or attached to securities are not subject to these restrictions. (xi) The fund does not currently intend to invest in oil, gas, or other mineral exploration or development programs or leases. (xii) The fund does not currently intend to invest all of its assets in the securities of a single open-end management investment company managed by Fidelity Management & Research Company or an affiliate or successor with substantially the same fundamental investment objective, policies, and limitations as the fund. For purposes of limitation (ix), pass-through entities and other special purpose vehicles or pools of financial assets, such as issuers of asset-backed securities or investment companies, are not considered "business enterprises." For each fund's limitations on futures and options transactions, see the section entitled "Limitations on Futures and Options Transactions" on page . Each fund's investments must be consistent with its investment objective and policies. Accordingly, not all of the security types and investment techniques discussed below are eligible investments for each of the funds. AFFILIATED BANK TRANSACTIONS. A fund may engage in transactions with financial institutions that are, or may be considered to be, "affiliated persons" of the fund under the Investment Company Act of 1940. These transactions may include repurchase agreements with custodian banks; short-term obligations of, and repurchase agreements with, the 50 largest U.S. banks (measured by deposits); municipal securities; U.S. government securities with affiliated financial institutions that are primary dealers in these securities; short-term currency transactions; and short-term borrowings. In accordance with exemptive orders issued by the Securities and Exchange Commission (SEC), the Board of Trustees has established and periodically reviews procedures applicable to transactions involving affiliated financial institutions. ASSET-BACKED SECURITIES include pools of mortgages, loans, receivables or other assets. Payment of principal and interest may be largely dependent upon the cash flows generated by the assets backing the securities and, in certain cases, supported by letters of credit, surety bonds, or other credit enhancements. The value of asset-backed securities may also be affected by the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables, or the entities providing the credit support. DELAYED-DELIVERY TRANSACTIONS. Each fund may buy and sell securities on a delayed-delivery or when-issued basis. These transactions involve a commitment by a fund to purchase or sell specific securities at a predetermined price or yield, with payment and delivery taking place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. The funds may receive fees for entering into delayed-delivery transactions. When purchasing securities on a delayed-delivery basis, each fund assumes the rights and risks of ownership, including the risk of price and yield fluctuations. Because a fund is not required to pay for securities until the delivery date, these risks are in addition to the risks associated with the fund's other investments. If a fund remains substantially fully invested at a time when delayed-delivery purchases are outstanding, the delayed-delivery purchases may result in a form of leverage. When delayed-delivery purchases are outstanding, the fund will set aside appropriate liquid assets in a segregated custodial account to cover its purchase obligations. When a fund has sold a security on a delayed-delivery basis, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could miss a favorable price or yield opportunity, or could suffer a loss. Each fund may renegotiate delayed-delivery transactions after they are entered into, and may sell underlying securities before they are delivered, which may result in capital gains or losses. EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments. The value of dividends and interest paid with respect to such securities will fluctuate based on the relative strength of the U.S. dollar. Foreign investments involve a risk of local political, economic, or social instability, military action or unrest, or adverse diplomatic developments, and may be affected by actions of foreign governments adverse to the interests of U.S. investors. Such actions may include the possibility of expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars, or other government intervention. There is no assurance that FMR will be able to anticipate these potential events or counter their effects. These risks are magnified for investments in developing countries, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. Economies of particular countries or areas of the world may differ favorably or unfavorably from the economy of the United States. Foreign markets may offer less protection to investors than U.S. markets. It is anticipated that in most cases the best available market for foreign securities will be on an exchange or in over-the-counter markets located outside of the United States. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers (particularly those located in developing countries) may be less liquid and more volatile than securities of comparable U.S. issuers. Foreign security trading practices, including those involving securities settlement where fund assets may be released prior to receipt of payment, may result in increased risk in the event of a failed trade or the insolvency of a foreign broker-dealer, and may involve substantial delays. In addition, the costs of foreign investing, including withholding taxes, brokerage commissions and custodial costs, are generally higher than for U.S. investors. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. It may also be difficult to enforce legal rights in foreign countries. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers. Some foreign securities impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions. American Depository Receipts (ADR's) as well as other "hybrid" forms of ADRs including European Depository Receipts (EDRs) and Global Depository Receipts (GDRs), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer's home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are an alternative to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks associated with investing directly in foreign securities. These risks include foreign exchange risk as well as the political and economic risks of the underlying issuer's country. FUNDS' RIGHTS AS A SHAREHOLDER. The funds do not intend to direct or administer the day-to-day operations of any company. Each fund, however, may exercise its rights as a shareholder and may communicate its views on important matters of policy to management, the Board of Directors, and shareholders of a company when FMR determines that such matters could have a significant effect on the value of the fund's investment in the company. The activities that a fund may engage in, either individually or in conjunction with others, may include, among others, supporting or opposing proposed changes in a company's corporate structure or business activities; seeking changes in a company's directors or management; seeking changes in a company's direction or policies; seeking the sale or reorganization of the company or a portion of its assets; or supporting or opposing third party takeover efforts. This area of corporate activity is increasingly prone to litigation and it is possible that a fund could be involved in lawsuits related to such activities. FMR will monitor such activities with a view to mitigating, to the extent possible, the risk of litigation against a fund and the risk of actual liability if a fund is involved in litigation. No guarantee can be made, however, that litigation against a fund will not be undertaken or liabilities incurred. FUTURES AND OPTIONS. The following sections pertain to futures and options: Asset Coverage for Futures and Options Positions, Combined Positions, Correlation of Price Changes, Futures Contracts, Futures Margin Payments, Limitations on Futures and Options Transactions, Liquidity of Options and Futures Contracts, OTC Options, Purchasing Put and Call Options, and Writing Put and Call Options. ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The funds will comply with guidelines established by the Securities and Exchange Commission with respect to coverage of options and futures strategies by mutual funds, and if the guidelines so require will set aside appropriate liquid assets in a segregated custodial account in the amount prescribed. Securities held in a segregated account cannot be sold while the futures or option strategy is outstanding, unless they are replaced with other suitable assets. As a result, there is a possibility that segregation of a large percentage of a fund's assets could impede portfolio management or the fund's ability to meet redemption requests or other current obligations. COMBINED POSITIONS. A fund may purchase and write options in combination with each other, or in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, a fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out. CORRELATION OF PRICE CHANGES. Because there are a limited number of types of exchange-traded options and futures contracts, it is likely that the standardized contracts available will not match a fund's current or anticipated investments exactly. The funds may invest in options and futures contracts based on securities with different issuers, maturities, or other characteristics from the securities in which they typically invest, which involves a risk that the options or futures position will not track the performance of a fund's other investments. Options and futures prices can also diverge from the prices of their underlying instruments, even if the underlying instruments match a fund's investments well. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect correlation may also result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures and securities are traded, or from imposition of daily price fluctuation limits or trading halts. A fund may purchase or sell options and futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between the contract and the securities, although this may not be successful in all cases. If price changes in a fund's options or futures positions are poorly correlated with its other investments, the positions may fail to produce anticipated gains or result in losses that are not offset by gains in other investments. FUTURES CONTRACTS. When a fund purchases a futures contract, it agrees to purchase a specified underlying instrument at a specified future date. When a fund sells a futures contract, it agrees to sell the underlying instrument at a specified future date. The price at which the purchase and sale will take place is fixed when the fund enters into the contract. Some currently available futures contracts are based on specific securities, such as U.S. Treasury bonds or notes, and some are based on indices of securities prices, such as the Bond Buyer Municipal Bond Index. Futures can be held until their delivery dates, or can be closed out before then if a liquid secondary market is available. The value of a futures contract tends to increase and decrease in tandem with the value of its underlying instrument. Therefore, purchasing futures contracts will tend to increase a fund's exposure to positive and negative price fluctuations in the underlying instrument, much as if it had purchased the underlying instrument directly. When a fund sells a futures contract, by contrast, the value of its futures position will tend to move in a direction contrary to the market. Selling futures contracts, therefore, will tend to offset both positive and negative market price changes, much as if the underlying instrument had been sold. FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures contract is not required to deliver or pay for the underlying instrument unless the contract is held until the delivery date. However, both the purchaser and seller are required to deposit "initial margin" with a futures broker, known as a futures commission merchant (FCM), when the contract is entered into. Initial margin deposits are typically equal to a percentage of the contract's value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. The party that has a gain may be entitled to receive all or a portion of this amount. Initial and variation margin payments do not constitute purchasing securities on margin for purposes of a fund's investment limitations. In the event of the bankruptcy of an FCM that holds margin on behalf of a fund, the fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the fund. LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. Each fund intends to file a notice of eligibility for exclusion from the definition of the term "commodity pool operator" with the Commodity Futures Trading Commission (CFTC) and the National Futures Association, which regulate trading in the futures markets, before engaging in any purchases or sales of futures contracts or options on futures contracts. The funds intend to comply with Rule 4.5 under the Commodity Exchange Act, which limits the extent to which the funds can commit assets to initial margin deposits and option premiums. In addition, each fund will not: (a) sell futures contracts, purchase put options, or write call options if, as a result, more than 25% of the fund's total assets would be hedged with futures and options under normal conditions; (b) purchase futures contracts or write put options if, as a result, the fund's total obligations upon settlement or exercise of purchased futures contracts and written put options would exceed 25% of its total assets; or (c) purchase call options if, as a result, the current value of option premiums for call options purchased by the fund would exceed 5% of the fund's total assets. These limitations do not apply to options attached to or acquired or traded together with their underlying securities, and do not apply to securities that incorporate features similar to options. The above limitations on the funds' investments in futures contracts and options, and the funds' policies regarding futures contracts and options discussed elsewhere in this Statement of Additional Information, may be changed as regulatory agencies permit. LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a liquid secondary market will exist for any particular options or futures contract at any particular time. Options may have relatively low trading volume and liquidity if their strike prices are not close to the underlying instrument's current price. In addition, exchanges may establish daily price fluctuation limits for options and futures contracts, and may halt trading if a contract's price moves upward or downward more than the limit in a given day. On volatile trading days when the price fluctuation limit is reached or a trading halt is imposed, it may be impossible for a fund to enter into new positions or close out existing positions. If the secondary market for a contract is not liquid because of price fluctuation limits or otherwise, it could prevent prompt liquidation of unfavorable positions, and potentially could require a fund to continue to hold a position until delivery or expiration regardless of changes in its value. As a result, a fund's access to other assets held to cover its options or futures positions could also be impaired. OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of over-the-counter (OTC) options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the funds greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a fund obtains the right (but not the obligation) to sell the option's underlying instrument at a fixed strike price. In return for this right, the fund pays the current market price for the option (known as the option premium). Options have various types of underlying instruments, including specific securities, indices of securities prices, and futures contracts. The fund may terminate its position in a put option it has purchased by allowing it to expire or by exercising the option. If the option is allowed to expire, the fund will lose the entire premium it paid. If the fund exercises the option, it completes the sale of the underlying instrument at the strike price. A fund may also terminate a put option position by closing it out in the secondary market at its current price, if a liquid secondary market exists. The buyer of a typical put option can expect to realize a gain if security prices fall substantially. However, if the underlying instrument's price does not fall enough to offset the cost of purchasing the option, a put buyer can expect to suffer a loss (limited to the amount of the premium paid, plus related transaction costs). The features of call options are essentially the same as those of put options, except that the purchaser of a call option obtains the right to purchase, rather than sell, the underlying instrument at the option's strike price. A call buyer typically attempts to participate in potential price increases of the underlying instrument with risk limited to the cost of the option if security prices fall. At the same time, the buyer can expect to suffer a loss if security prices do not rise sufficiently to offset the cost of the option. WRITING PUT AND CALL OPTIONS. When a fund writes a put option, it takes the opposite side of the transaction from the option's purchaser. In return for receipt of the premium, the fund assumes the obligation to pay the strike price for the option's underlying instrument if the other party to the option chooses to exercise it. When writing an option on a futures contract, the fund will be required to make margin payments to an FCM as described above for futures contracts. A fund may seek to terminate its position in a put option it writes before exercise by closing out the option in the secondary market at its current price. If the secondary market is not liquid for a put option the fund has written, however, the fund must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes, and must continue to set aside assets to cover its position. If security prices rise, a put writer would generally expect to profit, although its gain would be limited to the amount of the premium it received. If security prices remain the same over time, it is likely that the writer will also profit, because it should be able to close out the option at a lower price. If security prices fall, the put writer would expect to suffer a loss. This loss should be less than the loss from purchasing the underlying instrument directly, however, because the premium received for writing the option should mitigate the effects of the decline. Writing a call option obligates a fund to sell or deliver the option's underlying instrument, in return for the strike price, upon exercise of the option. The characteristics of writing call options are similar to those of writing put options, except that writing calls generally is a profitable strategy if prices remain the same or fall. Through receipt of the option premium, a call writer mitigates the effects of a price decline. At the same time, because a call writer must be prepared to deliver the underlying instrument in return for the strike price, even if its current value is greater, a call writer gives up some ability to participate in security price increases. ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the ordinary course of business at approximately the prices at which they are valued. Under the supervision of the Board of Trustees, FMR determines the liquidity of a fund's investments and, through reports from FMR, the Board monitors investments in illiquid instruments. In determining the liquidity of a fund's investments, FMR may consider various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the nature of the security (including any demand or tender features), and (5) the nature of the marketplace for trades (including the ability to assign or offset the fund's rights and obligations relating to the investment). Investments currently considered by a fund to be illiquid include repurchase agreements not entitling the holder to payment of principal and interest within seven days, non-government stripped fixed-rate mortgage-backed securities, and over-the-counter options. Also, FMR may determine some restricted securities, government-stripped fixed-rate mortgage-backed securities, loans and other direct debt instruments, emerging market securities, and swap agreements to be illiquid. However, with respect to over-the-counter options a fund writes, all or a portion of the value of the underlying instrument may be illiquid depending on the assets held to cover the option and the nature and terms of any agreement the fund may have to close out the option before expiration. In the absence of market quotations, illiquid investments are priced at fair value as determined in good faith by a committee appointed by the Board of Trustees. If through a change in values, net assets, or other circumstances, a fund were in a position where more than 10% of its net assets was invested in illiquid securities, it would seek to take appropriate steps to protect liquidity. INDEXED SECURITIES. Each fund may purchase securities whose prices are indexed to the prices of other securities, securities indices, or other financial indicators. Indexed securities typically, but not always, are debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. A mortgage indexed security, for example, could be synthesized to replicate the performance of mortgage securities and the characteristics of direct ownership. The performance of indexed securities depends to a great extent on the performance of the security or other instrument to which they are indexed, and may also be influenced by interest rate changes. At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the issuer's creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. INTERFUND BORROWING AND LENDING PROGRAM. Pursuant to an exemptive order issued by the SEC, each fund has received permission to lend money to, and borrow money from, other funds advised by FMR or its affiliates. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one day's notice. A fund will lend through the program only when the returns are higher than those available from other short-term instruments (such as repurchase agreements), and will borrow through the program only when the costs are equal to or lower than the cost of bank loans. A fund may have to borrow from a bank at a higher interest rate if an interfund loan is called or not renewed. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs. LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates (loans and loan participations), to suppliers of goods or services (trade claims or other receivables), or to other parties. Direct debt instruments are subject to each fund's policies regarding the quality of debt securities. Purchasers of loans and other forms of direct indebtedness depend primarily upon the creditworthiness of the borrower for payment of principal and interest. Direct debt instruments may not be rated by any nationally recognized rating service. If a fund does not receive scheduled interest or principal payments on such indebtedness, the fund's share price and yield could be adversely affected. Loans that are fully secured offer a fund more protections than an unsecured loan in the event of non-payment of scheduled interest or principal. However, there is no assurance that the liquidation of collateral from a secured loan would satisfy the borrower's obligation, or that the collateral could be liquidated. Indebtedness of borrowers whose creditworthiness is poor involves substantially greater risks and may be highly speculative. Borrowers that are in bankruptcy or restructuring may never pay off their indebtedness, or may pay only a small fraction of the amount owed. Direct indebtedness of developing countries also involves a risk that the governmental entities responsible for the repayment of the debt may be unable, or unwilling, to pay interest and repay principal when due. Investments in loans through direct assignment of a financial institution's interests with respect to a loan may involve additional risks to a fund. For example, if a loan is foreclosed, the fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that under emerging legal theories of lender liability, the fund could be held liable as a co-lender. Direct debt instruments may also involve a risk of insolvency of the lending bank or other intermediary. Direct debt instruments that are not in the form of securities may offer less legal protection to a fund in the event of fraud or misrepresentation. In the absence of definitive regulatory guidance, each fund relies on FMR's research in an attempt to avoid situations where fraud or misrepresentation could adversely affect the fund. A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. Unless, under the terms of the loan or other indebtedness, each fund has direct recourse against the borrower, it may have to rely on the agent to apply appropriate credit remedies against a borrower. If assets held by the agent for the benefit of a fund were determined to be subject to the claims of the agent's general creditors, the fund might incur certain costs and delays in realizing payment on the loan or loan participation and could suffer a loss of principal or interest. Direct indebtedness purchased by each fund may include letters of credit, revolving credit facilities, or other standby financing commitments obligating the fund to pay additional cash on demand. These commitments may have the effect of requiring the fund to increase its investment in a borrower at a time when it would not otherwise have done so, even if the borrower's condition makes it unlikely that the amount will ever be repaid. Each fund will set aside appropriate liquid assets in a segregated custodial account to cover its potential obligations under standby financing commitments. Each fund limits the amount of total assets that it will invest in any one issuer or in issuers within the same industry (see limitations ( 4 ) and ( i ) ). For purposes of these limitations, each fund generally will treat the borrower as the "issuer" of indebtedness held by the fund. In the case of loan participations where a bank or other lending institution serves as financial intermediary between each fund and the borrower, if the participation does not shift to the fund the direct debtor-creditor relationship with the borrower, SEC interpretations require the fund, in appropriate circumstances, to treat both the lending bank or other lending institution and the borrower as "issuers" for these purposes. Treating a financial intermediary as an issuer of indebtedness may restrict a fund's ability to invest in indebtedness related to a single financial intermediary, or a group of intermediaries engaged in the same industry, even if the underlying borrowers represent many different companies and industries. MORTGAGE-BACKED SECURITIES. The funds may purchase mortgage-backed securities issued by government and non-government entities such as banks, mortgage lenders, or other financial institutions. A mortgage-backed security is an obligation of the issuer backed by a mortgage or pool of mortgages or a direct interest in an underlying pool of mortgages. Some mortgage-backed securities, such as collateralized mortgage obligations or CMOs, make payments of both principal and interest at a variety of intervals; others make semiannual interest payments at a predetermined rate and repay principal at maturity (like a typical bond). Mortgage-backed securities are based on different types of mortgages including those on commercial real estate or residential properties. Other types of mortgage-backed securities will likely be developed in the future, and the funds may invest in them if FMR determines they are consistent with the funds' investment objective and policies. The value of mortgage-backed securities may change due to shifts in the market's perception of issuers. In addition, regulatory or tax changes may adversely affect the mortgage securities market as a whole. Non-government mortgage-backed securities may offer higher yields than those issued by government entities, but also may be subject to greater price changes than government issues. Mortgage-backed securities are subject to prepayment risk. Prepayment, which occurs when unscheduled or early payments are made on the underlying mortgages, may shorten the effective maturities of these securities and may lower their total returns. REPURCHASE AGREEMENTS. In a repurchase agreement, a fund purchases a security and simultaneously commits to sell that security back to the original seller at an agreed-upon price. The resale price reflects the purchase price plus an agreed-upon incremental amount which is unrelated to the coupon rate or maturity of the purchased security. To protect the fund from the risk that the original seller will not fulfill its obligation, the securities are held in an account of the fund at a bank, marked-to-market daily, and maintained at a value at least equal to the sale price plus the accrued incremental amount. While it does not presently appear possible to eliminate all risks from these transactions (particularly the possibility that the value of the underlying security will be less than the resale price, as well as delays and costs to a fund in connection with bankruptcy proceedings), it is each fund's current policy to engage in repurchase agreement transactions with parties whose creditworthiness has been reviewed and found satisfactory by FMR. RESTRICTED SECURITIES generally can be sold in privately negotiated transactions, pursuant to an exemption from registration under the Securities Act of 1933, or in a registered public offering. Where registration is required, a fund may be obligated to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration and the time it may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a fund might obtain a less favorable price than prevailed when it decided to seek registration of the security. REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells a portfolio instrument to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase the instrument at a particular price and time. While a reverse repurchase agreement is outstanding, the fund will maintain appropriate liquid assets in a segregated custodial account to cover its obligation under the agreement. A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been found satisfactory by FMR. Such transactions may increase fluctuations in the market value of the fund's assets and may be viewed as a form of leverage. SECURITIES LENDING. A fund may lend securities to parties such as broker-dealers or institutional investors, including Fidelity Brokerage Services, Inc. (FBSI). FBSI is a member of the New York Stock Exchange and a subsidiary of FMR Corp. Securities lending allows a fund to retain ownership of the securities loaned and, at the same time, to earn additional income. Since there may be delays in the recovery of loaned securities, or even a loss of rights in collateral supplied should the borrower fail financially, loans will be made only to parties deemed by FMR to be of good standing. Furthermore, they will only be made if, in FMR's judgment, the consideration to be earned from such loans would justify the risk. FMR understands that it is the current view of the SEC Staff that a fund may engage in loan transactions only under the following conditions: (1) the fund must receive 100% collateral in the form of cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the borrower must increase the collateral whenever the market value of the securities loaned (determined on a daily basis) rises above the value of the collateral; (3) after giving notice, the fund must be able to terminate the loan at any time; (4) the fund must receive reasonable interest on the loan or a flat fee from the borrower, as well as amounts equivalent to any dividends, interest, or other distributions on the securities loaned and to any increase in market value; (5) the fund may pay only reasonable custodian fees in connection with the loan; and (6) the Board of Trustees must be able to vote proxies on the securities loaned, either by terminating the loan or by entering into an alternative arrangement with the borrower. Cash received through loan transactions may be invested in any security in which a fund is authorized to invest. Investing this cash subjects that investment, as well as the security loaned, to market forces (i.e., capital appreciation or depreciation). STRIPPED MORTGAGE-BACKED SECURITIES are created when a U.S. government agency or a financial institution separates the interest and principal components of a mortgage-backed security and sells them as individual securities. The holder of the "principal-only" security (PO) receives the principal payments made by the underlying mortgage-backed security, while the holder of the "interest-only" security (IO) receives interest payments from the same underlying security. The prices of stripped mortgage-backed securities may be particularly affected by changes in interest rates. As interest rates fall, prepayment rates tend to increase, which tends to reduce prices of IOs and increase prices of POs. Rising interest rates can have the opposite effect. SWAP AGREEMENTS. Swap agreements can be individually negotiated and structured to include exposure to a variety of different types of investments or market factors. Depending on their structure, swap agreements may increase or decrease a fund's exposure to long- or short-term interest rates (in the United States or abroad), mortgage securities, corporate borrowing rates, or other factors such as security prices or inflation rates. Swap agreements can take many different forms and are known by a variety of names. A fund is not limited to any particular form of swap agreement if FMR determines it is consistent with the fund's investment objective and policies. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed-upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor. Swap agreements will tend to shift a fund's investment exposure from one type of investment to another. For example, if the fund agreed to pay fixed rates in exchange for floating rates while holding fixed-rate bonds, the swap would tend to decrease the fund's exposure to long-term interest rates. Caps and floors have an effect similar to buying or writing options. Depending on how they are used, swap agreements may increase or decrease the overall volatility of a fund's investments and its share price and yield. The most significant factor in the performance of swap agreements is the change in the specific interest rate, or other factors that determine the amounts of payments due to and from a fund. If a swap agreement calls for payments by the fund, the fund must be prepared to make such payments when due. In addition, if the counterparty's creditworthiness declined, the value of a swap agreement would be likely to decline, potentially resulting in losses. Each fund expects to be able to eliminate its exposure under swap agreements either by assignment or other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. Each fund will maintain appropriate liquid assets in a segregated custodial account to cover its current obligations under swap agreements. If a fund enters into a swap agreement on a net basis, it will segregate assets with a daily value at least equal to the excess, if any, of the fund's accrued obligations under the swap agreement over the accrued amount the fund is entitled to receive under the agreement. If a fund enters into a swap agreement on other than a net basis, it will segregate assets with a value equal to the full amount of the fund's accrued obligations under the agreement. VARIABLE OR FLOATING RATE OBLIGATIONS bear variable or floating interest rates and carry rights that permit holders to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries. Floating rate instruments have interest rates that change whenever there is a change in a designated base rate while variable rate instruments provide for a specified periodic adjustment in the interest rate. These formulas are designed to result in a market value for the instrument that approximates its par value. ZERO COUPON BONDS. Zero coupon bonds do not make interest payments; instead, they are sold at a deep discount from their face value and are redeemed at face value when they mature. Because zero coupon bonds do not pay current income, their prices can be very volatile when interest rates change. In calculating its dividends, a fund takes into account as income a portion of the difference between a zero coupon bond's purchase price and its face value. A broker-dealer creates a DERIVATIVE ZERO by separating the interest and principal components of a U.S. Treasury security and selling them as two individual securities. CATS (Certificates of Accrual on Treasury Securities), TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are examples of derivative zeros. The Federal Reserve Bank creates STRIPS (Separate Trading of Registered Interest and Principal of Securities) by separating the interest and principal components of an outstanding U.S. Treasury bond and selling them as individual securities. Bonds issued by the Resolution Funding Corporation (REFCORP) and the Financing Corporation (FICO) can also be separated in this fashion. ORIGINAL ISSUE ZEROS are zero coupon securities originally issued by the U.S. government, a government agency, or a corporation in zero coupon form. All orders for the purchase or sale of portfolio securities are placed on behalf of each fund by FMR pursuant to authority contained in the management contract. FMR is also responsible for the placement of transaction orders for other investment companies and accounts for which it or its affiliates act as investment adviser. In selecting broker-dealers, subject to applicable limitations of the federal securities laws, FMR considers various relevant factors, including, but not limited to: the size and type of the transaction; the nature and character of the markets for the security to be purchased or sold; the execution efficiency, settlement capability, and financial condition of the broker-dealer firm; the broker-dealer's execution services rendered on a continuing basis; and the reasonableness of any commissions. The funds may execute portfolio transactions with broker-dealers who provide research and execution services to the funds or other accounts over which FMR or its affiliates exercise investment discretion. Such services may include advice concerning the value of securities; the advisability of investing in, purchasing, or selling securities; and the availability of securities or the purchasers or sellers of securities. In addition, such broker-dealers may furnish analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and performance of accounts; effect securities transactions, and perform functions incidental thereto (such as clearance and settlement). The selection of such broker-dealers generally is made by FMR (to the extent possible consistent with execution considerations) based upon the quality of research and execution services provided. The receipt of research from broker-dealers that execute transactions on behalf of the funds may be useful to FMR in rendering investment management services to the funds or its other clients, and conversely, such research provided by broker-dealers who have executed transaction orders on behalf of other FMR clients may be useful to FMR in carrying out its obligations to the funds. The receipt of such research has not reduced FMR's normal independent research activities; however, it enables FMR to avoid the additional expenses that could be incurred if FMR tried to develop comparable information through its own efforts. Subject to applicable limitations of the federal securities laws, broker-dealers may receive commissions for agency transactions that are in excess of the amount of commissions charged by other broker-dealers in recognition of their research and execution services. In order to cause each fund to pay such higher commissions, FMR must determine in good faith that such commissions are reasonable in relation to the value of the brokerage and research services provided by such executing broker-dealers, viewed in terms of a particular transaction or FMR's overall responsibilities to the funds and its other clients. In reaching this determination, FMR will not attempt to place a specific dollar value on the brokerage and research services provided, or to determine what portion of the compensation should be related to those services. FMR is authorized to use research services provided by and to place portfolio transactions with brokerage firms that have provided assistance in the distribution of shares of the funds or shares of other Fidelity funds to the extent permitted by law. FMR may use research services provided by and place agency transactions with Fidelity Brokerage Services, Inc. (FBSI) and Fidelity Brokerage Services (FBS), subsidiaries of FMR Corp., if the commissions are fair, reasonable, and comparable to commissions charged by non-affiliated, qualified brokerage firms for similar services. From September 1992 through December 1994, FBS operated under the name Fidelity Brokerage Services Limited, Inc. (FBSL). As of January 1995, FBSL was converted to an unlimited liability company and assumed the name FBS. Prior to September 4, 1992, FBSL operated under the name Fidelity Portfolio Services, Ltd. (FPSL) as a wholly owned subsidiary of Fidelity International Limited (FIL). Edward C. Johnson 3d is Chairman of FIL. Mr. Johnson 3d, Johnson family members, and various trusts for the benefit of the Johnson family own, directly or indirectly, more than 25% of the voting common stock of FIL. Section 11(a) of the Securities Exchange Act of 1934 prohibits members of national securities exchanges from executing exchange transactions for accounts which they or their affiliates manage, unless certain requirements are satisfied. Pursuant to such requirements, the Board of Trustees has authorized FBSI to execute portfolio transactions on national securities exchanges in accordance with approved procedures and applicable SEC rules. Each fund's Trustees periodically review FMR's performance of its responsibilities in connection with the placement of portfolio transactions on behalf of the funds and review the commissions paid by each fund over representative periods of time to determine if they are reasonable in relation to the benefits to the fund. Each fund's annualized turnover rate for its first fiscal period is not expected to exceed 100%. From time to time the Trustees will review whether the recapture for the benefit of the funds of some portion of the brokerage commissions or similar fees paid by the funds on portfolio transactions is legally permissible and advisable. Each fund seeks to recapture soliciting broker-dealer fees on the tender of portfolio securities, but at present no other recapture arrangements are in effect. The Trustees intend to continue to review whether recapture opportunities are available and are legally permissible and, if so, to determine in the exercise of their business judgment whether it would be advisable for each fund to seek such recapture. Although the Trustees and officers of each fund are substantially the same as those of other funds managed by FMR, investment decisions for each fund are made independently from those of other funds managed by FMR or accounts managed by FMR affiliates. It sometimes happens that the same security is held in the portfolio of more than one of these funds or accounts. Simultaneous transactions are inevitable when several funds and accounts are managed by the same investment adviser, particularly when the same security is suitable for the investment objective of more than one fund or account. When two or more funds are simultaneously engaged in the purchase or sale of the same security, the prices and amounts are allocated in accordance with procedures believed to be appropriate and equitable for each fund. In some cases this system could have a detrimental effect on the price or value of the security as far as each fund is concerned. In other cases, however, the ability of the funds to participate in volume transactions will produce better executions and prices for the funds. It is the current opinion of the Trustees that the desirability of retaining FMR as investment adviser to each fund outweighs any disadvantages that may be said to exist from exposure to simultaneous transactions. The fund's net asset value per share is determined by FSC under procedures established by the Board of Trustees. Portfolio securities are valued primarily on the basis of valuations furnished by a pricing service which uses both dealer-supplied valuations and electronic data processing techniques that take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data, without exclusive reliance upon quoted prices or exchange or over-the-counter prices, since such valuations are believed to reflect more accurately the fair value of such securities. Use of the pricing service has been approved by the Board of Trustees. There are a number of pricing services available, and the Trustees, or officers acting on behalf of the Trustees, on the basis of ongoing evaluation of these services, may use other pricing services or discontinue the use of any pricing service in whole or in part. Securities not valued by the pricing service and for which quotations are readily available are valued at market values determined on the basis of their latest available bid prices as furnished by recognized dealers in such securities. Futures contracts and options are valued on the basis of market quotations, if available. Securities and other assets for which quotations or pricing service valuations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. The funds may quote performance in various ways. All performance information supplied by the funds in advertising is historical and is not intended to indicate future returns. Each fund's share price, yield, and total return fluctuate in response to market conditions and other factors, and the value of fund shares when redeemed may be more or less than their original cost. YIELD CALCULATIONS. Yields for a fund are computed by dividing the fund's interest income for a given 30-day or one-month period, net of expenses, by the average number of shares entitled to receive distributions during the period, dividing this figure by the fund's net asset value (NAV) at the end of the period, and annualizing the result (assuming compounding of income) in order to arrive at an annual percentage rate. Yields do not reflect each fund's .50% redemption fee, which applies to shares held less than 90 days. Income is calculated for purposes of yield quotations in accordance with standardized methods applicable to all stock and bond funds. In general, interest income is reduced with respect to bonds trading at a premium over their par value by subtracting a portion of the premium from income on a daily basis, and is increased with respect to bonds trading at a discount by adding a portion of the discount to daily income. Capital gains and losses generally are excluded from the calculation as are gains and losses from currency exchange rate fluctuations. Income calculated for the purposes of calculating a fund's yield differs from income as determined for other accounting purposes. Because of the different accounting methods used, and because of the compounding of income assumed in yield calculations, a fund's yield may not equal its distribution rate, the income paid to your account, or the income reported in the fund's financial statements. Yield information may be useful in reviewing a fund's performance and in providing a basis for comparison with other investment alternatives. However, each fund's yield fluctuates, unlike investments that pay a fixed interest rate over a stated period of time. When comparing investment alternatives, investors should also note the quality and maturity of the portfolio securities of respective investment companies they have chosen to consider. Investors should recognize that in periods of declining interest rates a fund's yield will tend to be somewhat higher than prevailing market rates, and in periods of rising interest rates the fund's yield will tend to be somewhat lower. Also, when interest rates are falling, the inflow of net new money to a fund from the continuous sale of its shares will likely be invested in instruments producing lower yields than the balance of the fund's holdings, thereby reducing the fund's current yield. In periods of rising interest rates, the opposite can be expected to occur. TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all aspects of a fund's return, including the effect of reinvesting dividends and capital gain distributions, and any change in the fund's NAV over a stated period. Average annual total returns are calculated by determining the growth or decline in value of a hypothetical historical investment in a fund over a stated period, and then calculating the annually compounded percentage rate that would have produced the same result if the rate of growth or decline in value had been constant over the period. For example, a cumulative total return of 100% over ten years would produce an average annual total return of 7.18%, which is the steady annual rate of return that would equal 100% growth on a compounded basis in ten years. Average annual total returns covering periods of less than one year are calculated by determining a fund's total return for the period, extending that return for a full year (assuming that return remains constant over the year), and quoting the result as an annual return. While average annual total returns are a convenient means of comparing investment alternatives, investors should realize that a fund's performance is not constant over time, but changes from year to year, and that average annual total returns represent averaged figures as opposed to the actual year-to-year performance of the fund. In addition to average annual total returns, a fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Average annual and cumulative total returns may be quoted as a percentage or as a dollar amount, and may be calculated for a single investment, a series of investments, or a series of redemptions, over any time period. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship of these factors and their contributions to total return. Total returns may be quoted on a before-tax or after-tax basis and may or may not include the effect of the fund's .50% redemption fee on shares held less than 90 days. Excluding a fund's redemption fee from a total return calculation produces a higher total return figure. Total returns, yields, and other performance information may be quoted numerically or in a table, graph, or similar illustration. NET ASSET VALUE. Charts and graphs using a fund's net asset values, adjusted net asset values, and benchmark indices may be used to exhibit performance. An adjusted NAV includes any distributions paid by a fund and reflects all elements of its return. Unless otherwise indicated, a fund's adjusted NAVs are not adjusted for sales charges, if any. Each fund may compare its return to the record of the Standard & Poor's Composite Index of 500 Stocks (S&P 500), the Dow Jones Industrial Average (DJIA), and the cost of living (measured by the Consumer Price Index, or CPI) over the same period. The S&P 500 and DJIA comparisons would show how each fund's total return compared to the record of a broad average of common stocks and a narrower set of stocks of major industrial companies, respectively, over the same period. Of course, since each fund invests in fixed-income securities, common stocks represent a different type of investment from the fund. Common stocks generally offer greater growth potential than the fund, but generally experience greater price volatility, which means greater potential for loss. In addition, common stocks generally provide lower income than a fixed-income investment such as the funds. Figures for the S&P 500 and DJIA are based on the prices of unmanaged groups of stocks and, unlike the fund's returns, their returns do not include the effect of paying brokerage commissions or other costs of investing. PERFORMANCE COMPARISONS. A fund's performance may be compared to the performance of other mutual funds in general, or to the performance of particular types of mutual funds. These comparisons may be expressed as mutual fund rankings prepared by Lipper Analytical Services, Inc. (Lipper), an independent service located in Summit, New Jersey that monitors the performance of mutual funds. Lipper generally ranks funds on the basis of total return, assuming reinvestment of distributions, but does not take sales charges or redemption fees into consideration, and is prepared without regard to tax consequences. Lipper may also rank funds based on yield. In addition to the mutual fund rankings, a fund's performance may be compared to stock, bond, and money market mutual fund performance indices prepared by Lipper or other organizations. When comparing these indices, it is important to remember the risk and return characteristics of each type of investment. For example, while stock mutual funds may offer higher potential returns, they also carry the highest degree of share price volatility. Likewise, money market funds may offer greater stability of principal, but generally do not offer the higher potential returns available from stock mutual funds. From time to time, a fund's performance may also be compared to other mutual funds tracked by financial or business publications and periodicals. For example, the fund may quote Morningstar, Inc. in its advertising materials. Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the basis of risk-adjusted performance. Rankings that compare the performance of Fidelity funds to one another in appropriate categories over specific periods of time may also be quoted in advertising. A fund may be compared in advertising to Certificates of Deposit (CDs) or other investments issued by banks or other depository institutions. Mutual funds differ from bank investments in several respects. For example, a fund may offer greater liquidity or higher potential returns than CDs, a fund does not guarantee your principal or your return, and fund shares are not FDIC insured. Fidelity may provide information designed to help individuals understand their investment goals and explore various financial strategies. Such information may include information about current economic, market, and political conditions; materials that describe general principles of investing, such as asset allocation, diversification, risk tolerance, and goal setting; questionnaires designed to help create a personal financial profile; worksheets used to project savings needs based on assumed rates of inflation and hypothetical rates of return; and action plans offering investment alternatives. Materials may also include discussions of Fidelity's asset allocation funds and other Fidelity funds, products, and services. Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation (based on the Consumer Price Index), and combinations of various capital markets. The performance of these capital markets is based on the returns of different indices. Fidelity funds may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. Performance comparisons may also include the value of a hypothetical investment in any of these capital markets. The risks associated with the security types in any capital market may or may not correspond directly to those of the funds. Ibbotson calculates total returns in the same method as the funds. The funds may also compare performance to that of other compilations or indices that may be developed and made available in the future. A fund may compare its performance or the performance of securities in which it may invest to averages published by IBC USA (Publications), Inc. of Ashland, Massachusetts. These averages assume reinvestment of distributions. The IBC/Donoghue's MONEY FUND AVERAGES(trademark)/all-taxable, which is reported in the MONEY FUND REPORT(registered trademark), covers over 763 taxable money market funds. The Bond Fund Report AverageS(trademark)/all-taxable, which is reported in the BOND FUND REPORT(registered trademark), covers over 467 taxable bond funds. When evaluating comparisons to money market funds, investors should consider the relevant differences in investment objectives and policies. Specifically, money market funds invest in short-term, high-quality instruments and seek to maintain a stable $1.00 share price. Bond funds, however, invests in longer-term instruments and its share price changes daily in response to a variety of factors. In advertising materials, Fidelity may reference or discuss its products and services, which may include other Fidelity funds; retirement investing; brokerage products and services; model portfolios or allocations; saving for college or other goals; charitable giving; and the Fidelity credit card. In addition, Fidelity may quote or reprint financial or business publications and periodicals as they relate to current economic and political conditions, fund management, portfolio composition, investment philosophy, investment techniques, the desirability of owning a particular mutual fund, and Fidelity services and products. Fidelity may also reprint, and use as advertising and sales literature, articles from Fidelity Focus, a quarterly magazine provided free of charge to Fidelity fund shareholders. A fund may present its fund number, Quotron(trademark) number, and CUSIP number, and discuss or quote its current portfolio manager. VOLATILITY. A fund may quote various measures of volatility and benchmark correlation in advertising. In addition, the fund may compare these measures to those of other funds. Measures of volatility seek to compare the fund's historical share price fluctuations or total returns to those of a benchmark. Measures of benchmark correlation indicate how valid a comparative benchmark may be. All measures of volatility and correlation are calculated using averages of historical data. In advertising, a fund may also discuss or illustrate examples of interest rate sensitivity. MOMENTUM INDICATORS indicate a fund's price movements over specific periods of time. Each point on the momentum indicator represents the fund's percentage change in price movements over that period. A fund may advertise examples of the effects of periodic investment plans, including the principle of dollar cost averaging. In such a program, an investor invests a fixed dollar amount in a fund at periodic intervals, thereby purchasing fewer shares when prices are high and more shares when prices are low. While such a strategy does not assure a profit or guard against loss in a declining market, the investor's average cost per share can be lower than if fixed numbers of shares are purchased at the same intervals. In evaluating such a plan, investors should consider their ability to continue purchasing shares during periods of low price levels. A fund may be available for purchase through retirement plans or other programs offering deferral of, or exemption from, income taxes, which may produce superior after-tax returns over time. For example, a $1,000 investment earning a taxable return of 10% annually would have an after-tax value of $1,949 after ten years, assuming tax was deducted from the return each year at a 31% rate. An equivalent tax-deferred investment would have an after-tax value of $2,100 after ten years, assuming tax was deducted at a 31% rate from the tax-deferred earnings at the end of the ten-year period. As of November 30 , 1995, FMR advised over $ 26.5 billion in tax-free fund assets, $ 81 billion in money market fund assets, $ 234 billion in equity fund assets, $ 48 billion in international fund assets, and $ 23 billion in Spartan fund assets. The funds may reference the growth and variety of money market mutual funds and the adviser's innovation and participation in the industry. The equity funds under management figure represents the largest amount of equity fund assets under management by a mutual fund investment adviser in the United States, making FMR America's leading equity (stock) fund manager. FMR, its subsidiaries, and affiliates maintain a worldwide information and communications network for the purpose of researching and managing investments abroad. In addition to performance rankings, each fund may compare its total expense ratio to the average total expense ratio of similar funds tracked by Lipper. A fund's total expense ratio is a significant factor in comparing bond and money market investments because of its effect on yield. ADDITIONAL PURCHASE AND REDEMPTION INFORMATION Each fund is open for business and its net asset value per share (NAV) is calculated each day the New York Stock Exchange (NYSE) is open for trading. The NYSE has designated the following holiday closings for 1996: New Year's Day, Presidents' Day (observed), Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although FMR expects the same holiday schedule to be observed in the future, the NYSE may modify its holiday schedule at any time. In addition, the funds will not process wire purchases and redemptions on days when the Federal Reserve Wire System is closed. FSC normally determines each fund's NAV as of the close of the NYSE (normally 4:00 p.m. Eastern time). However, NAV may be calculated earlier if trading on the NYSE is restricted or as permitted by the Securities and Exchange Commission (SEC). To the extent that portfolio securities are traded in other markets on days when the NYSE is closed, a fund's NAV may be affected on days when investors do not have access to the fund to purchase or redeem shares. In addition, trading in some of a fund's portfolio securities may not occur on days when the fund is open for business. If the Trustees determine that existing conditions make cash payments undesirable, redemption payments may be made in whole or in part in securities or other property, valued for this purpose as they are valued in computing a fund's NAV. Shareholders receiving securities or other property on redemption may realize a gain or loss for tax purposes, and will incur any costs of sale, as well as the associated inconveniences. Pursuant to Rule 11a-3 under the Investment Company Act of 1940 (the 1940 Act), each fund is required to give shareholders at least 60 days' notice prior to terminating or modifying its exchange privilege. Under the Rule, the 60-day notification requirement may be waived if (i) the only effect of a modification would be to reduce or eliminate an administrative fee, redemption fee, or deferred sales charge ordinarily payable at the time of an exchange, or (ii) the fund suspends the redemption of the shares to be exchanged as permitted under the 1940 Act or the rules and regulations thereunder, or the fund to be acquired suspends the sale of its shares because it is unable to invest amounts effectively in accordance with its investment objective and policies. In the Prospectus, each fund has notified shareholders that it reserves the right at any time, without prior notice, to refuse exchange purchases by any person or group if, in FMR's judgment, the fund would be unable to invest effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. DISTRIBUTIONS. If you request to have distributions mailed to you and the U.S. Postal Service cannot deliver your checks, or if your checks remain uncashed for six months, Fidelity may reinvest your distributions at the then-current NAV. All subsequent distributions will then be reinvested until you provide Fidelity with alternate instructions. DIVIDENDS. Because each fund's income is primarily derived from interest, dividends from the fund generally will not qualify for the dividends-received deduction available to corporate shareholders. Short-term capital gains are distributed as dividend income, but do not qualify for the dividends-received deduction. A portion of each fund's dividends derived from certain U.S. government obligations may be exempt from state and local taxation. If a fund's distribution exceeds its net investment income during a taxable year, all or a portion of the distributions made in the same taxable year would be recharacterized as a return of capital to shareholders, thereby reducing each shareholders' cost basis in his or her fund. Each fund will send each shareholder a notice in January describing the tax status of dividend and capital gain distributions for the prior year. CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains earned by each fund on the sale of securities and distributed to shareholders are federally taxable as long-term capital gains, regardless of the length of time shareholders have held their shares. If a shareholder receives a long-term capital gain distribution on shares of a fund, and such shares are held six months or less and are sold at a loss, the portion of the loss equal to the amount of the long-term capital gain distribution will be considered a long-term loss for tax purposes. Short-term capital gains distributed by each fund are taxable to shareholders as dividends, not as capital gains. FOREIGN TAXES. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. Because a fund does not currently anticipate that securities of foreign issuers will constitute more than 50% of its total assets at the end of its fiscal year, shareholders should not expect to claim a foreign tax credit or deduction on their federal income tax returns with respect to foreign taxes withheld. TAX STATUS OF THE FUNDS. Each fund intends to qualify each year as a "regulated investment company" for tax purposes so that it will not be liable for federal tax on income and capital gains distributed to shareholders. In order to qualify as a regulated investment company and avoid being subject to federal income or excise taxes at the fund level, each fund intends to distribute substantially all of its net investment income and net realized capital gains within each calendar year as well as on a fiscal year basis. Each fund intends to comply with other tax rules applicable to regulated investment companies, including a requirement that capital gains from the sale of securities held less than three months constitute less than 30% of the fund's gross income for each fiscal year. Gains from some, futures contracts, and options are included in this 30% calculation, which may limit a fund's investments in such instruments. If a fund purchases shares in certain foreign investment entities, defined as passive foreign investment companies (PFICs) in the Internal Revenue Code, it may be subject to U.S. federal income tax on a portion of any excess distribution or gain from the disposition of such shares. Interest charges may also be imposed on a fund with respect to deferred taxes arising from such distributions or gains. Generally, each fund will elect to mark-to-market any PFIC shares. Unrealized gains will be recognized as income for tax purposes and must be distributed to shareholders as dividends. Each fund is treated as a separate entity from the other funds of Fidelity Boston Street Trust for tax purposes. OTHER TAX INFORMATION. The information above is only a summary of some of the tax consequences generally affecting each fund and its shareholders, and no attempt has been made to discuss individual tax consequences. In addition to federal income taxes, shareholders may be subject to state and local taxes on fund distributions, and shares may be subject to state and local personal property taxes. Investors should consult their tax advisers to determine whether a fund is suitable to their particular tax situation. All of the stock of FMR is owned by FMR Corp., its parent organized in 1972. The voting common stock of FMR Corp. is divided into two classes. Class B is held predominantly by members of the Edward C. Johnson 3d family and is entitled to 49% of the vote on any matter acted upon by the voting common stock. Class A is held predominantly by non-Johnson family member employees of FMR Corp. and its affiliates and is entitled to 51% of the vote on any such matter. The Johnson family group and all other Class B shareholders have entered into a shareholders' voting agreement under which all Class B shares will be voted in accordance with the majority vote of Class B shares. Under the 1940 Act, control of a company is presumed where one individual or group of individuals owns more than 25% of the voting stock of that company. Therefore, through their ownership of voting common stock and the execution of the shareholders' voting agreement, members of the Johnson family may be deemed, under the 1940 Act, to form a controlling group with respect to FMR Corp. At present, the principal operating activities of FMR Corp. are those conducted by three of its divisions as follows: FSC, which is the transfer and shareholder servicing agent for certain of the funds advised by FMR; Fidelity Investments Institutional Operations Company, which performs shareholder servicing functions for institutional customers and funds sold through intermediaries; and Fidelity Investments Retail Marketing Company, which provides marketing services to various companies within the Fidelity organization. Fidelity investment personnel may invest in securities for their own account pursuant to a code of ethics that sets forth all employees' fiduciary responsibilities regarding the funds, establishes procedures for personal investing and restricts certain transactions. For example, all personal trades in most securities require pre-clearance, and participation in initial public offerings is prohibited. In addition, restrictions on the timing of personal investing in relation to trades by Fidelity funds and on short-term trading have been adopted. The Trustees and executive officers of the trust are listed below. Except as indicated, each individual has held the office shown or other offices in the same company for the last five years. All persons named as Trustees also serve in similar capacities for other funds advised by FMR. The business address of each Trustee and officer who is an "interested person" (as defined in the Investment Company Act of 1940) is 82 Devonshire Street, Boston, Massachusetts 02109, which is also the address of FMR. The business address of all the other Trustees is Fidelity Investments, P.O. Box 9235, Boston, Massachusetts 02205-9235. Those Trustees who are "interested persons" by virtue of their affiliation with either the trust or FMR are indicated by an asterisk (). EDWARD C. JOHNSON 3d (65), Trustee and President, is Chairman, Chief Executive Officer and a Director of FMR Corp.; a Director and Chairman of the Board and of the Executive Committee of FMR; Chairman and a Director of FMR Texas Inc., Fidelity Management & Research (U.K.) Inc., and Fidelity Management & Research (Far East) Inc. J. GARY BURKHEAD (54), Trustee and Senior Vice President, is President of FMR; and President and a Director of FMR Texas Inc., Fidelity Management & Research (U.K.) Inc., and Fidelity Management & Research (Far East) Inc. RALPH F. COX (63), Trustee (1991), is a consultant to Western Mining Corporation (1994). Prior to February 1994, he was President of Greenhill Petroleum Corporation (petroleum exploration and production, 1990). Until March 1990, Mr. Cox was President and Chief Operating Officer of Union Pacific Resources Company (exploration and production). He is a Director of Sanifill Corporation (non-hazardous waste, 1993) and CH2M Hill Companies (engineering). In addition, he served on the Board of Directors of the Norton Company (manufacturer of industrial devices, 1983-1990) and continues to serve on the Board of Directors of the Texas State Chamber of Commerce, and is a member of advisory boards of Texas A&M University and the University of Texas at Austin. PHYLLIS BURKE DAVIS (64), Trustee (1992). Prior to her retirement in September 1991, Mrs. Davis was the Senior Vice President of Corporate Affairs of Avon Products, Inc. She is currently a Director of BellSouth Corporation (telecommunications), Eaton Corporation (manufacturing, 1991), and the TJX Companies, Inc. (retail stores, 1990), and she previously served as a Director of Hallmark Cards, Inc. (1985-1991) and Nabisco Brands, Inc. In addition, she is a member of the President's Advisory Council of The University of Vermont School of Business Administration. RICHARD J. FLYNN (71), Trustee, is a financial consultant. Prior to September 1986, Mr. Flynn was Vice Chairman and a Director of the Norton Company (manufacturer of industrial devices). He is currently a Trustee of College of the Holy Cross and Old Sturbridge Village, Inc., and he previously served as a Director of Mechanics Bank (1971-1995). E. BRADLEY JONES (68), Trustee (1990). Prior to his retirement in 1984, Mr. Jones was Chairman and Chief Executive Officer of LTV Steel Company. He is a Director of TRW Inc. (original equipment and replacement products), Cleveland-Cliffs Inc (mining), Consolidated Rail Corporation, Birmingham Steel Corporation, and RPM, Inc. (manufacturer of chemical products, 1990), and he previously served as a Director of NACCO Industries, Inc. (mining and marketing, 1985-1995) and Hyster-Yale Materials Handling, Inc. (1985-1995). In addition, he serves as a Trustee of First Union Real Estate Investments, a Trustee and member of the Executive Committee of the Cleveland Clinic Foundation, a Trustee and member of the Executive Committee of University School (Cleveland), and a Trustee of Cleveland Clinic Florida. DONALD J. KIRK (63), Trustee, is Executive-in-Residence (1995) at Columbia University Graduate School of Business and a financial consultant. From 1987 to January 1995, Mr. Kirk was a Professor at Columbia University Graduate School of Business. Prior to 1987, he was Chairman of the Financial Accounting Standards Board. Mr. Kirk is a Director of General Re Corporation (reinsurance), and he previously served as a Director of Valuation Research Corp. (appraisals and valuations, 1993-1995). In addition, he serves as Chairman of the Board of Directors of the National Arts Stabilization Fund, Vice Chairman of the Board of Trustees of the Greenwich Hospital Association, and as a Member of the Public Oversight Board of the American Institute of Certified Public Accountants' SEC Practice Section (1995). PETER S. LYNCH (52), Trustee (1990) is Vice Chairman and Director of FMR (1992). Prior to May 31, 1990, he was a Director of FMR and Executive Vice President of FMR (a position he held until March 31, 1991); Vice President of Fidelity Magellan Fund and FMR Growth Group Leader; and Managing Director of FMR Corp. Mr. Lynch was also Vice President of Fidelity Investments Corporate Services (1991-1992). He is a Director of W.R. Grace & Co. (chemicals) and Morrison Knudsen Corporation (engineering and construction). In addition, he serves as a Trustee of Boston College, Massachusetts Eye & Ear Infirmary, Historic Deerfield and Society for the Preservation of New England Antiquities, and as an Overseer of the Museum of Fine Arts of Boston (1990). GERALD C. McDONOUGH (66), Trustee, is Chairman of G.M. Management Group (strategic advisory services). Prior to his retirement in July 1988, he was Chairman and Chief Executive Officer of Leaseway Transportation Corp. (physical distribution services). Mr. McDonough is a Director of ACME-Cleveland Corp. (metal working, telecommunications and electronic products), Brush-Wellman Inc. (metal refining), York International Corp. (air conditioning and refrigeration), Commercial Intertech Corp. (water treatment equipment, 1992), and Associated Estates Realty Corporation (a real estate investment trust, 1993). EDWARD H. MALONE (71), Trustee. Prior to his retirement in 1985, Mr. Malone was Chairman, General Electric Investment Corporation and a Vice President of General Electric Company. He is a Director of Allegheny Power Systems, Inc. (electric utility), General Re Corporation (reinsurance) and Mattel Inc. (toy manufacturer). In addition, he serves as a Trustee of the Naples Philharmonic Center for the Arts and Rensselaer Polytechnic Institute, and he is a member of the Advisory Boards of Butler Capital Corporation Funds and Warburg, Pincus Partnership Funds. MARVIN L. MANN (62), Trustee (1993) is Chairman of the Board, President, and Chief Executive Officer of Lexmark International, Inc. (office machines, 1991). Prior to 1991, he held the positions of Vice President of International Business Machines Corporation ("IBM") and President and General Manager of various IBM divisions and subsidiaries. Mr. Mann is a Director of M.A. Hanna Company (chemicals, 1993) and Infomart (marketing services, 1991), a Trammell Crow Co. In addition, he serves as the Campaign Vice Chairman of the Tri-State United Way (1993) and is a member of the University of Alabama President's Cabinet (1990). THOMAS R. WILLIAMS (67), Trustee, is President of The Wales Group, Inc. (management and financial advisory services). Prior to retiring in 1987, Mr. Williams served as Chairman of the Board of First Wachovia Corporation (bank holding company), and Chairman and Chief Executive Officer of The First National Bank of Atlanta and First Atlanta Corporation (bank holding company). He is currently a Director of BellSouth Corporation (telecommunications), ConAgra, Inc. (agricultural products), Fisher Business Systems, Inc. (computer software), Georgia Power Company (electric utility), Gerber Alley & Associates, Inc. (computer software), National Life Insurance Company of Vermont, American Software, Inc., and AppleSouth, Inc. (restaurants, 1992). FRED L. HENNING, JR. (56), Vice President, is Vice President of Fidelity's money market (1994) and fixed-income (1995) funds and Senior Vice President of FMR Texas Inc. ARTHUR S. LORING (48), Secretary, is Senior Vice President (1993) and General Counsel of FMR, Vice President-Legal of FMR Corp., and Vice President and Clerk of FDC. KENNETH A. RATHGEBER (48), Treasurer (1995), is Treasurer of the Fidelity funds and is an employee of FMR (1995). Before joining FMR, Mr. Rathgeber was a Vice President of Goldman Sachs & Co. (1978-1995), where he served in various positions, including Vice President of Proprietary Accounting (1988-1992), Global Co-Controller (1992-1994), and Chief Operations Officer of Goldman Sachs (Asia) LLC (1994-1995) JOHN H. COSTELLO (49), Assistant Treasurer, is an employee of FMR. LEONARD M. RUSH (49), Assistant Treasurer (1994), is an employee of FMR (1994). Prior to becoming Assistant Treasurer of the Fidelity funds, Mr. Rush was Chief Compliance of Officer of FMR Corp. (1993-1994); Chief Financial Officer of Fidelity Brokerage Services, Inc. (1990-1993); and Vice President, Assistant Controller, and Director of the Accounting Department - First Boston Corp. (1986-1990). The following table sets forth information describing the compensation of each current trustee of each fund for his or her services a s trustee for the fiscal year ended November 30, 1995. * Information is as December 31, 199 5 for 2 19 funds in the complex. ** Interested trustees of the fund are compensated by FMR. The non-interested Trustees may elect to defer receipt of all or a percentage of their annual fees in accordance with the terms of a Deferred Compensation Plan (the Plan). Under the Plan, compensation deferred by a Trustee is periodically adjusted as though an equivalent amount had been invested and reinvested in shares of one or more funds in the complex designated by such Trustee (designated securities). The amount paid to the Trustee under the Plan will be determined based upon the performance of such investments. Deferral of Trustees' fees in accordance with the Plan will have a negligible effect on a fund's assets, liabilities, and net income per share, and will not obligate the fund to retain the services of any Trustee or to pay any particular level of compensation to the Trustee. Each fund may invest in such designated securities under the Plan without shareholder approval. Under a retirement program adopted in July 1988, the non-interested Trustees, upon reaching age 72, become eligible to participate in a retirement program under which they receive payments during their lifetime from a fund based on their basic trustee fees and length of service. The obligation of a fund to make such payments is not secured or funded. Trustees become eligible if, at the time of retirement, they have served on the Board for at least five years. Currently, Messrs. Ralph S. Saul, William R. Spaulding, Bertram H. Witham, and David L. Yunich, all former non-interested Trustees, receive retirement benefits under the program. As of January 15, 1996, FMR owned the majority of the outstanding shares of each fund. Each fund employs FMR to furnish investment advisory and other services. Under its management contract with each fund, FMR acts as investment adviser and, subject to the supervision of the Board of Trustees, directs the investments of each fund in accordance with its investment objective, policies, and limitations. FMR also provides each fund with all necessary office facilities and personnel for servicing each fund's investments, compensates all officers of each fund and all Trustees who are "interested persons" of the trust or of FMR, and all personnel of each fund or FMR performing services relating to research, statistical, and investment activities. In addition, FMR or its affiliates, subject to the supervision of the Board of Trustees, provide the management and administrative services necessary for the operation of each fund. These services include providing facilities for maintaining each fund's organization; supervising relations with custodians, transfer and pricing agents, accountants, underwriters, and other persons dealing with each fund; preparing all general shareholder communications and conducting shareholder relations; maintaining each fund's records and the registration of each fund's shares under federal and state laws; developing management and shareholder services for each fund; and furnishing reports, evaluations, and analyses on a variety of subjects to the Trustees. In addition to the management fee payable to FMR and the fees payable to FSC, each fund pays all of its expenses, without limitation, that are not assumed by those parties. Each fund pays for the typesetting, printing, and mailing of its proxy materials to shareholders, legal expenses, and the fees of the custodian, auditor and non-interested Trustees. Although each fund's current management contract provides that each fund will pay for typesetting, printing, and mailing prospectuses, statements of additional information, notices, and reports to shareholders, the trust, on behalf of each fund has entered into a revised transfer agent agreement with FSC, pursuant to which FSC bears the costs of providing these services to existing shareholders. Other expenses paid by each fund include interest, taxes, brokerage commissions, and each fund's proportionate share of insurance premiums and Investment Company Institute dues. Each fund is also liable for such non-recurring expenses as may arise, including costs of any litigation to which each fund may be a party, and any obligation it may have to indemnify its officers and Trustees with respect to litigation. FMR is each fund's manager pursuant to management contracts dated February 1, 1996 which were approved by FMR the then sole shareholder of each fund on January 18, 1996 . For the services of FMR under the contract, each fund pays FMR a monthly management fee composed of the sum of two elements: a group fee rate and an individual fund fee rate. The group fee rate is based on the monthly average net assets of all of the registered investment companies with which FMR has management contracts and is calculated on a cumulative basis pursuant to the graduated fee rate schedule shown below on the left. The schedule below on the right shows the effective annual group fee rate at various asset levels, which is the result of cumulatively applying the annualized rates on the left. For example, the effective annual fee rate at $ 359 billion of group net assets - the approximate level for November 1995 - was .1487 %, which is the weighted average of the respective fee rates for each level of group net assets up to $ 359 billion. GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES Average Group Annualized Group Net Effective Annual Fee 0 - $ 3 billion .3700% $ 0.5 billion .5200% 3 - 6 .3400 25 .4238 6 - 9 .3100 50 .3823 9 - 12 .2800 75 .3626 12 - 15 .2500 100 .3512 15 - 18 .2200 125 .3430 18 - 21 .2000 150 .3371 21 - 24 .1900 175 .3325 24 - 30 .1800 200 .3284 30 - 36 .1750 225 .3249 36 - 42 .1700 250 .3219 42 - 48 .1650 275 .3190 48 - 66 .1600 300 .3163 66 - 84 .1550 325 .3137 84 - 120 .1500 350 .3113 120 - 156 .1450 375 .3090 156 - 192 .1400 400 .3067 192 - 228 .1350 425 .1443 228 - 264 .1300 450 .1427 264 - 300 .1275 475 .1413 300 - 336 .1250 500 .1399 336 - 372 .1225 525 .1385 372 - 408 .1200 550 .1372 The individual fund fee rate is .30%. Based on the average group net assets of the funds advised by FMR for November 1995, the annual basic fee rate for each fund would be calculated as follows: Group Fee Rate Individual Fund Fee Rate Basic Fee Rate .1487 % + .30% = .4487 % One-twelfth of this annual rate is applied to each fund's net assets averaged for the most recent month, giving a dollar amount, which is the fee for that month. FMR may, from time to time, voluntarily reimburse all or a portion of each fund's operating expenses (exclusive of interest, taxes, brokerage commissions, and extraordinary expenses). FMR retains the ability to be repaid for these expense reimbursements in the amount that expenses fall below the limit prior to the end of the fiscal year. Expense reimbursements by FMR will increase each fund's total returns and yield and repayment of the reimbursement by each fund will lower its total returns and yield. During the fiscal periods reported, FMR voluntarily agreed to reimburse certain funds to the extent that the fund's aggregate operating expenses were in excess of an annual rate of its average net assets. The table below identifies the funds in reimbursement; the levels of and periods for such reimbursement; the amount of management fees incurred under each contract before reimbursement; and the dollar amount reimbursed by FMR, if any, for each period. To comply with the California Code of Regulations, FMR will reimburse each fund if and to the extent that each fund's aggregate annual operating expenses exceed specified percentages of its average net assets. The applicable percentages are 2 1/2% of the first $30 million, 2% of the next $70 million, and 1 1/2% of average net assets in excess of $100 million. When calculating each fund's expenses for purposes of this regulation, each fund may exclude interest, taxes, brokerage commissions, and extraordinary expenses, as well as a portion of its distribution plan expenses and custodian fees attributable to investments in foreign securities. SUB-ADVISERS. On behalf of the funds FMR has entered into sub-advisory agreements with FMR U.K. and FMR Far East. Pursuant to the sub-advisory agreements, FMR may receive investment advice and research services outside the United States from the sub-advisers. FMR may also grant the sub-advisers investment management authority as well as the authority to buy and sell securities if FMR believes it would be beneficial to the funds. Currently, FMR U.K. and FMR Far East each focus on issuers in countries other than the United States such as those in Europe, Asia, and the Pacific Basin. FMR U.K. and FMR Far East, which were organized in 1986, are wholly owned subsidiaries of FMR. Under the sub-advisory agreements FMR pays the fees of FMR U.K. and FMR Far East. For providing non-discretionary investment advice and research services, FMR pays FMR U.K. and FMR Far East fees equal to 110% and 105%, respectively, of FMR U.K.'s and FMR Far East's costs incurred in connection with providing investment advice and research services. For providing discretionary investment management and executing portfolio transactions, FMR pays FMR U.K. and FMR Far East a fee equal to 50% of its monthly management fee rate respect to each fund's average net assets managed by the sub-adviser on a discretionary basis. The Trustees have approved Distribution and Service Plans on behalf of the funds (the Plans) pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the Rule). The Rule provides in substance that a mutual fund may not engage directly or indirectly in financing any activity that is primarily intended to result in the sale of shares of a fund except pursuant to a plan approved on behalf of the fund under the Rule. The Plans, as approved by the Trustees, allow the funds and FMR to incur certain expenses that might be considered to constitute indirect payment by the funds of distribution expenses. Under each Plan, if the payment of management fees by the funds to FMR is deemed to be indirect financing by the funds of the distribution of their shares, such payment is authorized by the Plans. Each Plan also specifically recognizes that FMR, either directly or through FDC, may use its management fee revenue, past profits, or other resources, without limitation, to pay promotional and administrative expenses in connection with the offer and sale of shares of each fund. In addition, each Plan provides that FMR may use its resources, including its management fee revenues, to make payments to third parties that assist in selling shares of each fund, or to third parties, including banks, that render shareholder support services. Prior to approving each Plan, the Trustees carefully considered all pertinent factors relating to the implementation of the Plan, and have determined that there is a reasonable likelihood that the Plan will benefit the fund and its shareholders. In particular, the Trustees noted that the Plans do not authorize payments by a fund other than those made to FMR under its management contract with the fund. To the extent that each Plan gives FMR and FDC greater flexibility in connection with the distribution of shares of each fund, additional sales of fund shares may result. Furthermore, certain shareholder support services may be provided more effectively under the Plans by local entities with whom shareholders have other relationships. The Plans were approved by FMR as the then sole shareholders of each fund on January 18, 1996 . The Glass-Steagall Act generally prohibits federally and state chartered or supervised banks from engaging in the business of underwriting, selling, or distributing securities. Although the scope of this prohibition under the Glass-Steagall Act has not been clearly defined by the courts or appropriate regulatory agencies, FDC believes that the Glass-Steagall Act should not preclude a bank from performing shareholder support services, or servicing and recordkeeping functions. FDC intends to engage banks only to perform such functions. However, changes in federal or state statutes and regulations pertaining to the permissible activities of banks and their affiliates or subsidiaries, as well as further judicial or administrative decisions or interpretations, could prevent a bank from continuing to perform all or a part of the contemplated services. If a bank were prohibited from so acting, the Trustees would consider what actions, if any, would be necessary to continue to provide efficient and effective shareholder services. In such event, changes in the operation of the funds might occur, including possible termination of any automatic investment or redemption or other services then provided by the bank. It is not expected that shareholders would suffer any adverse financial consequences as a result of any of these occurrences. In addition, state securities laws on this issue may differ from the interpretations of federal law expressed herein, and banks and financial institutions may be required to register as dealers pursuant to state law. Each fund may execute portfolio transactions with, and purchase securities issued by, depository institutions that receive payments under the Plans. No preference for the instruments of such depository institutions will be shown in the selection of investments. FSC is transfer, dividend disbursing, and shareholder servicing agent for each fund. FSC receives annual account fees and asset-based fees for each retail account and certain institutional accounts based on account size. With respect to certain institutional retirement accounts, FSC receives asset-based fees only. In addition, these fees are subject to increase based on postal rate changes. With respect to certain other institutional retirement accounts, FSC receives annual account fees and asset based fees based on fund type. FSC also collects small account fees from certain accounts with balances of less than $2,500. FSC pays out-of-pocket expenses associated with providing transfer agent services. In addition, FSC bears the expense of typesetting, printing, and mailing prospectuses, statements of additional information, and all other reports, notices, and statements to shareholders, with the exception of proxy statements. FSC also performs the calculations necessary to determine each fund's net asset value per share and dividends, and maintains each fund's accounting records. The annual fee rates for these pricing and bookkeeping services are based on each fund's average net assets, specifically, .04% for the first $500 million of average net assets and .02% for average net assets in excess of $500 million. The fee is limited to a minimum of $60,000 and a maximum of $800,000 per year. Each fund has a distribution agreement with FDC, a Massachusetts corporation organized on July 18, 1960. FDC is a broker-dealer registered under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. The distribution agreements call for FDC to use all reasonable efforts, consistent with its other business, to secure purchasers for shares of each fund, which are continuously offered at net asset value. Promotional and administrative expenses in connection with the offer and sale of shares are paid by FMR. TRUST ORGANIZATION. Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fidelity Target Timeline 2003 are funds of Fidelity Boston Street Trust, an open-end management investment company originally organized as a limited partnership in the state of Delaware on October 13, 1987. The fund was converted to a Massachusetts business trust on December 31, 1989, at which time its name was changed from Fidelity U.S. Treasury Money Market Fund L.P. to Fidelity U.S. Treasury Money Market Fund. On May 18, 1990, the fund's name was changed to Spartan U.S. Treasury Money Market Fund. In September 1995 the trust was renamed Fidelity Boston Street Trust. Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fidelity Target Timeline 2003 are the only funds of the trust. The Declaration of Trust permits the Trustees to create additional funds. In the event that FMR ceases to be the investment adviser to the trust or a fund, the right of the trust or fund to use the identifying name "Fidelity" may be withdrawn. There is a remote possibility that one fund might become liable for any misstatement in its prospectus or statement of additional information about another fund. The assets of the trust received for the issue or sale of shares of each fund and all income, earnings, profits, and proceeds thereof, subject only to the rights of creditors, are especially allocated to such fund, and constitute the underlying assets of such fund. The underlying assets of each fund are segregated on the books of account, and are to be charged with the liabilities with respect to such fund and with a share of the general expenses of the trust. Expenses with respect to the trust are to be allocated in proportion to the asset value of the respective funds, except where allocations of direct expense can otherwise be fairly made. The officers of the trust, subject to the general supervision of the Board of Trustees, have the power to determine which expenses are allocable to a given fund, or which are general or allocable to all of the funds. In the event of the dissolution or liquidation of the trust, shareholders of each fund are entitled to receive as a class the underlying assets of such fund available for distribution. SHAREHOLDER AND TRUSTEE LIABILITY. The trust is an entity of the type commonly known as "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable for the obligations of the trust. The Declaration of Trust provides that the trust shall not have any claim against shareholders except for the payment of the purchase price of shares and requires that each agreement, obligation, or instrument entered into or executed by the trust or the Trustees shall include a provision limiting the obligations created thereby to the trust and its assets. The Declaration of Trust provides for indemnification out of each fund's property of any shareholders held personally liable for the obligations of the fund. The Declaration of Trust also provides that each fund shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the fund and satisfy any judgment thereon. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the fund itself would be unable to meet its obligations. FMR believes that, in view of the above, the risk of personal liability to shareholders is remote. The Declaration of Trust further provides that the Trustees, if they have exercised reasonable care, will not be liable for any neglect or wrongdoing, but nothing in the Declaration of Trust protects Trustees against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of their office. VOTING RIGHTS. Each fund's capital consists of shares of beneficial interest. As a shareholder you receive one vote for each dollar of net asset value you own. The shares have no preemptive or conversion rights; the voting and dividend rights, the right of redemption, and the privilege of exchange are described in the Prospectus. Shares are fully paid and nonassessable, except as set forth under the heading "Shareholder and Trustee Liability" above. Shareholders representing 10% or more of the trust or a fund may, as set forth in the Declaration of Trust, call meetings of the trust or a fund for any purpose related to the trust or fund, as the case may be, including, in the case of a meeting of the entire trust, the purpose of voting on removal of one or more Trustees. The trust or any fund may be terminated upon the sale of its assets to another open-end management investment company, or upon liquidation and distribution of its assets, if approved by vote of the holders of a majority of the trust or the fund , as determined by the current value of each shareholder's investment in the fund or trust . If not so terminated, the trust and the funds will continue indefinitely. Each fund may invest all of its assets in another investment company. CUSTODIAN. The Bank of New York , 110 Washington Street, New York, New York, is custodian of the assets of the funds. The custodian is responsible for the safekeeping of a fund's assets and the appointment of the subcustodian banks and clearing agencies. The custodian takes no part in determining the investment policies of a fund or in deciding which securities are purchased or sold by a fund. However, a fund may invest in obligations of the custodian and may purchase securities from or sell securities to the custodian. Chemical Bank, headquartered in New York, also may serve as a special purpose custodian of certain assets in connection with pooled repurchase agreement transactions. FMR, its officers and directors, its affiliated companies, and the Board of Trustees may, from time to time, conduct transactions with various banks, including banks serving as custodians for certain funds advised by FMR. Transactions that have occurred to date include mortgages and personal and general business loans. In the judgment of FMR, the terms and conditions of those transactions were not influenced by existing or potential custodial or other fund relationships. AUDITOR. Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts serves as the trust's independent accountant. The auditor examines financial statements for the funds and provides other audit, tax, and related services. Item 24. Financial Statements and Exhibits (a) Fidelity Target Timeline Funds: 1999, 2001, and 2003 (1) Statements of Assets and Liabilities, January 10, 1996. (2) Report of Independent Accountants, January 11, 1996. (3) Consent of Independent Accountants, January 11, 1996. (b) Exhibits: (1)(a) Declaration of Trust, dated September 9, 1989, is filed herein as Exhibit 24(b)(1)(a). (b) Supplement to the Declaration of Trust, dated October 23, 1989, is filed herein as Exhibit 24(b)(1)(b). (c) Supplement to the Declaration of Trust, dated May 18, 1990, is filed herein as Exhibit 24(b)(1)(c). (2) Bylaws of the Trust, as amended, are incorporated herein by reference to Exhibit 2(a) to Fidelity Union Street Trust's Post-Effective Amendment No. 87. (3) Not applicable. (4) Not applicable. (5)(a) Form of Management Contract between Fidelity Boston Street Trust, on behalf of Fidelity Target Timeline 1999, and Fidelity Management & Research Company, is filed herein as Exhibit 5(a). (b) Form of Management Contract between Fidelity Boston Street Trust, on behalf of Fidelity Target Timeline 2001, and Fidelity Management & Research Company, is filed herein as Exhibit 5(b). (c) Form of Management Contract between Fidelity Boston Street Trust, on behalf of Fidelity Target Timeline 2003, and Fidelity Management & Research Company, is filed herein as Exhibit 5(c). (d) Form of Sub-Advisory Agreement between Fidelity Management & Research Company and Fidelity Management & Research (U.K.) Inc. on behalf of Fidelity Target Timeline 1999, is incorporated herein by reference to Exhibit 5(d) of Post-Effective Amendment No. 18. (e) Form of Sub-Advisory Agreement between Fidelity Management & Research Company and Fidelity Management & Research (Far East) Inc. on behalf of Fidelity Target Timeline 1999, is incorporated herein by reference to Exhibit 5(e) of Post-Effective Amendment No. 18. (f) Form of Sub-Advisory Agreement between Fidelity Management & Research Company and Fidelity Management & Research (U.K.) Inc. on behalf of Fidelity Target Timeline 2001, is incorporated herein by reference to Exhibit 5(f) of Post-Effective Amendment No. 18. (g) Form of Sub-Advisory Agreement between Fidelity Management & Research Company and Fidelity Management & Research (Far East) Inc. on behalf of Fidelity Target Timeline 2001, is incorporated herein by reference to Exhibit 5(g) of Post-Effective Amendment No. 18. (h) Form of Sub-Advisory Agreement between Fidelity Management & Research Company and Fidelity Management & Research (U.K.) Inc. on behalf of Fidelity Target Timeline 2003, is incorporated herein by reference to Exhibit 5(h) of Post-Effective Amendment No. 18. (i) Form of Sub-Advisory Agreement between Fidelity Management & Research Company and Fidelity Management & Research (Far East) Inc. on behalf of Fidelity Target Timeline 2003, is incorporated herein by reference to Exhibit 5(i) of Post-Effective Amendment No. 18. (6)(a) Form of General Distribution Agreement between Fidelity Target Timeline 1999 and Fidelity Distributors Corporation, is incorporated herein by reference to Exhibit 6(a) of Post-Effective Amendment No. 18. (b) Form of General Distribution Agreement between Fidelity Target Timeline 2001 and Fidelity Distributors Corporation, is incorporated herein by reference to Exhibit 6(b) of Post-Effective Amendment No. 18. (c) Form of General Distribution Agreement between Fidelity Target Timeline 2003 and Fidelity Distributors Corporation, is incorporated herein by reference to Exhibit 6(c) of Post-Effective Amendment No. 18. (7)(a) Retirement Plan for Non-Interested Person Trustees, Directors or General Partners, dated November 1, 1989, is incorporated herein by reference to Exhibit No. 7 of Union Street Trust's Post-Effective Amendment No. 87 (File No. 2-50318). (b) The Fee Deferral Plan for Non-Interested Person Directors and Trustees of the Fidelity Funds, effective as of December 1,1995 is incorporated herein by reference to Exhibit 7(b) of Fidelity School Street Trust's (File No. 2-57167) Post-Effective Amendment No. 47. (8)(a) Form of Custodian Agreement between Bank of New York and Fidelity Boston Street Trust on behalf of Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fidelity Target Timeline 2003 is incorporated herein by reference to Exhibit 8(a) of Post-Effective Amendment No. 18. (b) Form of Appendix B to the Custodian Agreement between Bank of New York and Fidelity Boston Street Trust on behalf of Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fidelity Target Timeline 2003 is incorporated herein by reference to Exhibit 8(b) of Post-Effective Amendment No. 18. (b) Form of Appendix C to the Custodian Agreement between Bank of New York and Fidelity Boston Street Trust on behalf of Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fidelity Target Timeline 2003 is incorporated herein by reference to Exhibit 8(c) of Post-Effective Amendment No. 18. (9) Not applicable. (10) Not applicable. (11) Not applicable. (12) Not applicable. (13) Not applicable. (14)(a) Fidelity Individual Retirement Account Custodial Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(a) of Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (b) Fidelity Institutional Individual Retirement Account Custodial Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(d) of Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (c) National Financial Services Corporation Individual Retirement Account Custodial Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(h) of Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (d) Fidelity Portfolio Advisory Services Individual Retirement Account Custodial Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(i) of Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (e) Fidelity 403(b)(7) Custodial Account Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(e) of Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (f) National Financial Services Corporation Defined Contribution Retirement Plan and Trust Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(k) of Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (g) The CORPORATEplan for Retirement Profit Sharing/401K Plan, as currently in effect, is incorporated herein by reference to Exhibit 14(l) of Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (h) The CORPORATEplan for Retirement Money Purchase Pension Plan, as currently in effect, is incorporated herein by reference to Exhibit 14(m) of Fidelity Union Street Trust's (File No. 2-50318) Post-Effective Amendment No. 87. (i) Fidelity Investments Section 403(b)(7) Individual Custodial Account Agreement and Disclosure Statement, as currently in effect, is incorporated herein by reference to Exhibit 14(f) of Fidelity Commonwealth Trust's (File No. 2-52322) Post Effective Amendment No. 57. (j) Plymouth Investments Defined Contribution Retirement Plan and Trust Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(o) of Fidelity Commonwealth Trust's (File No. 2-52322) Post Effective Amendment No. 57. (k) The Fidelity Prototype Defined Benefit Pension Plan and Trust Basic Plan Document and Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(d) of Fidelity Securities Fund's (File No. 2-93601) Post Effective Amendment No. 33. (l) The Institutional Prototype Plan Basic Plan Document, Standardized Adoption Agreement, and Non-Standardized Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(o) of Fidelity Securities Fund's (File No. 2-93601) Post Effective Amendment No. 33. (m) The CORPORATEplan for Retirement 100SM Profit Sharing/401(k) Basic Plan Document, Standardized Adoption Agreement, and Non-Standardized Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(f) of Fidelity Securities Fund's (File No. 2-93601) Post Effective Amendment No. 33. (n) The Fidelity Investments 401(a) Prototype Plan for Tax-Exempt Employers Basic Plan Document, Standardized Profit Sharing Plan Adoption Agreement, Non-Standardized Discretionary Contribution Plan No. 002 Adoption Agreement, and Non-Standardized Discretionary Contribution Plan No. 003 Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(g) of Fidelity Securities Fund's (File No. 2-93601) Post Effective Amendment No. 33. (o) Fidelity Investments 403(b) Sample Plan Basic Plan Document and Adoption Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(p) of Fidelity Securities Fund's (File No. 2-93601) Post Effective Amendment No. 33. (p) Fidelity Defined Contribution Retirement Plan and Trust Agreement, as currently in effect, is incorporated herein by reference to Exhibit 14(c) of Fidelity Securities Fund's (File No. 2-93601) Post Effective Amendment No. 33. (15)(a) Form of Distribution and Service Plan pursuant to Rule 12b-1 for Fidelity Target Timeline 1999 is incorporated herein by reference to Exhibit 15(a) of Post-Effective Amendment No. 18. (b) Form of Distribution and Service Plan pursuant to Rule 12b-1 for Fidelity Target Timeline 2001 is incorporated herein by reference to Exhibit 15(b) of Post-Effective Amendment No. 18. (c) Form of Distribution and Service Plan pursuant to Rule 12b-1 for Fidelity Target Timeline 2003 is incorporated herein by reference to Exhibit 15(c) of Post-Effective Amendment No. 18. (16)(a) A schedule for computation of performance calculations is filed herein as Exhibit 16(a). (b) A schedule for computation of adjusted NAVs is filed herein as Exhibit 16(b). (17) Not applicable. (18) Not applicable. Item 25. Persons Controlled by or Under Common Control with Registrant The Board of Trustees of Registrant is the same as the Board of Trustees of other funds advised by FMR, each of which has Fidelity Management & Research Company as its investment adviser. In addition, the officers of these funds are substantially identical. Nonetheless, Registrant takes the position that it is not under common control with these other funds since the power residing in the respective boards and officers arises as the result of an official position with the respective funds. Item 26. Number of Holders of Securities Fidelity Target Timeline 1999 0 Fidelity Target Timeline 2001 0 Fidelity Target Timeline 2003 0 Article XI, Section 2 of the Declaration of Trust sets forth the reasonable and fair means for determining whether indemnification shall be provided to any past or present Trustee or officer. It states that the Registrant shall indemnify any present or past Trustee or officer to the fullest extent permitted by law against liability and all expenses reasonably incurred by him in connection with any claim, action, suit, or proceeding in which he is involved by virtue of his service as a Trustee, an officer, or both. Additionally, amounts paid or incurred in settlement of such matters are covered by this indemnification. Indemnification will not be provided in certain circumstances, however. These include instances of willful misfeasance, bad faith, gross negligence, and reckless disregard of the duties involved in the conduct of the particular office involved. Pursuant to Section 11 of the Distribution Agreement, the Registrant agrees to indemnify and hold harmless the Distributor and each of its directors and officers and each person, if any, who controls the Distributor within the meaning of Section 15 of the 1933 Act against any loss, liability, claim, damages or expense arising by reason of any person acquiring any shares, based upon the ground that the registration statement, Prospectus, Statement of Additional Information, shareholder reports or other information filed or made public by the Registrant included a materially misleading statement or omission. However, the Registrant does not agree to indemnify the Distributor or hold it harmless to the extent that the statement or omission was made in reliance upon, and in conformity with, information furnished to the Registrant by or on behalf of the Distributor. The Registrant does not agree to indemnify the parties against any liability to which they would be subject by reason of willful misfeasance, bad faith, gross negligence, and reckless disregard of the obligations and duties under the Distribution Agreement. Pursuant to the agreement by which Fidelity Service Company ("Service") is appointed sub-transfer agent, the Transfer Agent agrees to indemnify Service for its losses, claims, damages, liabilities and expenses to the extent the Transfer Agent is entitled to and receives indemnification from the Registrant for the same events. Under the Transfer Agency Agreement, the Registrant agrees to indemnify and hold the Transfer Agent harmless against any losses, claims, damages, liabilities, or expenses resulting from: (1) any claim, demand, action or suit brought by any person other than the Registrant, which names the Transfer Agent and/or the Registrant as a party and is not based on and does not result from the Transfer Agent's willful misfeasance, bad faith, negligence or reckless disregard of its duties, and arises out of or in connection with the Transfer Agent's performance under the Transfer Agency Agreement; or (2) any claim, demand, action or suit (except to the extent contributed to by the Transfer Agent's willful misfeasance, bad faith, negligence or reckless disregard of its duties) which results from the negligence of the Registrant, or from the Transfer Agent's acting upon any instruction(s) reasonably believed by it to have been executed or communicated by any person duly authorized by the Registrant, or as a result of the Transfer Agent's acting in reliance upon advice reasonably believed by the Transfer Agent to have been given by counsel for the Registrant, or as a result of the Transfer Agent's acting in reliance upon any instrument or stock certificate reasonably believed by it to have been genuine and signed, countersigned or executed by the proper person. Item 28. Business and Other Connections of Investment Adviser (1) FIDELITY MANAGEMENT & RESEARCH COMPANY FMR serves as investment adviser to a number of other investment companies. The directors and officers of the Adviser have held, during the past two fiscal years, the following positions of a substantial nature. John Hickling Vice President of FMR (1993) and of funds advised by FMR. (2) FIDELITY MANAGEMENT & RESEARCH (U.K.) INC. (FMR U.K.) FMR U.K. provides investment advisory services to Fidelity Management & Research Company and Fidelity Management Trust Company. The directors and officers of the Sub-Adviser have held the following positions of a substantial nature during the past two fiscal years. (3) FIDELITY MANAGEMENT & RESEARCH (FAR EAST) INC. (FMR Far East) FMR Far East provides investment advisory services to Fidelity Management & Research Company and Fidelity Management Trust Company. The directors and officers of the Sub-Adviser have held the following positions of a substantial nature during the past two fiscal years. (a) Fidelity Distributors Corporation (FDC) acts as distributor for most funds advised by FMR and the following other funds: Name and Principal Positions and Offices Positions and Offices Business Address* With Underwriter With Registrant Edward C. Johnson 3d Director Trustee and President W. Humphrey Bogart Director None Kurt A. Lange President and Treasurer None Thomas W. Littauer Senior Vice President None Arthur S. Loring Vice President and Clerk Secretary * 82 Devonshire Street, Boston, MA (c) Not applicable. Item 30. Location of Accounts and Records All accounts, books, and other documents required to be maintained by Section 31a of the 1940 Act and the Rules promulgated thereunder are maintained by Fidelity Management & Research Company or Fidelity Service Co., 82 Devonshire Street, Boston, MA 02109, or the funds' custodian The Bank of New York, 110 Washington Street, New York, N.Y. Not applicable. (1) The Registrant undertakes to file a Post-Effective Amendment, using financial statements for Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fidelity Target Timeline 2003, which need not be certified, within six months of the fund's effectiveness, unless permitted by the SEC to extend this period. (2) The Registrant, on behalf of Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fidelity Target Timeline 2003: (1) to call a meeting of shareholders for the purpose of voting upon the question of removal of a trustee or trustees, when requested to do so by record holders of not less than 10% of its outstanding shares; and (2) to assist in communications with other shareholders pursuant to Section 16(c)(1) and (2), whenever shareholders meeting the qualifications set forth in Section 16(c) seek the opportunity to communicate with other shareholders with a view toward requesting a meeting. (3) The Registrant, on behalf of Fidelity Target Timeline 1999, Fidelity Target Timeline 2001, and Fideilty Target Timeline 2003, provided the information required by Item 5A is contained in the annual report, undertakes to furnish to each person to whom a prospectus has been delivered, upon their request and without charge, a copy of the Registrant's latest annual report to shareholders. Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Post-Effective Amendment No. 19 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, and the Commonwealth of Massachusetts, on the 12th day of January 1996. By /s/Edward C. Johnson 3d (dagger) Edward C. Johnson 3d, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. /s/Kenneth A. Rathgeber Treasurer January 12, 1996 /s/J. Gary Burkhead Trustee January 12, 1996 /s/Ralph F. Cox * Trustee January 12, 1996 /s/Phyllis Burke Davis * Trustee January 12, 1996 /s/Richard J. Flynn * Trustee January 12, 1996 /s/E. Bradley Jones * Trustee January 12, 1996 /s/Donald J. Kirk * Trustee January 12, 1996 /s/Peter S. Lynch * Trustee January 12, 1996 /s/Edward H. Malone * Trustee January 12, 1996 /s/Marvin L. Mann * Trustee January 12, 1996 /s/Gerald C. McDonough* Trustee January 12, 1996 /s/Thomas R. Williams * Trustee January 12, 1996 (dagger) Signatures affixed by J. Gary Burkhead pursuant to a power of attorney dated December 15, 1994 and filed herewith. * Signature affixed by Robert C. Hacker pursuant to a power of attorney dated December 15, 1994 and filed herewith. We, the undersigned Directors, Trustees or General Partners, as the case may be, of the following investment companies: plus any other investment company for which Fidelity Management & Research Company acts as investment adviser and for which the undersigned individuals serve as Board Members (collectively, the "Funds"), hereby severally constitute and appoint Arthur J. Brown, Arthur C. Delibert, Robert C. Hacker, Richard M. Phillips, Dana L. Platt and Stephanie A. Djinis, each of them singly, our true and lawful attorneys-in-fact, with full power of substitution, and with full power to each of them, to sign for us and in our names in the appropriate capacities, all Pre-Effective Amendments to any Registration Statements of the Funds, any and all subsequent Post-Effective Amendments to said Registration Statements, any Registration Statements on Form N-14, and any supplements or other instruments in connection therewith, and generally to do all such things in our names and behalf in connection therewith as said attorneys-in-fact deem necessary or appropriate, to comply with the provisions of the Securities Act of 1933 and Investment Company Act of 1940, and all related requirements of the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes may do or cause to be done by virtue hereof. WITNESS our hands on this fifteenth day of December, 1994. /s/Edward C. Johnson 3d /s/Donald J. Kirk Edward C. Johnson 3d Donald J. Kirk /s/J. Gary Burkhead /s/Peter S. Lynch J. Gary Burkhead Peter S. Lynch /s/Ralph F. Cox /s/Marvin L. Mann Ralph F. Cox Marvin L. Mann /s/Phyllis Burke Davis /s/Edward H. Malone Phyllis Burke Davis Edward H. Malone /s/Richard J. Flynn /s/Gerald C. McDonough Richard J. Flynn Gerald C. McDonough /s/E. Bradley Jones /s/Thomas R. Williams E. Bradley Jones Thomas R. Williams I, the undersigned President and Director, Trustee or General Partner, as the case may be, of the following investment companies: plus any other investment company for which Fidelity Management & Research Company acts as investment adviser and for which the undersigned individual serves as President and Board Member (collectively, the "Funds"), hereby severally constitute and appoint J. Gary Burkhead, my true and lawful attorney-in-fact, with full power of substitution, and with full power to sign for me and in my name in the appropriate capacity, all Pre-Effective Amendments to any Registration Statements of the Funds, any and all subsequent Post-Effective Amendments to said Registration Statements, any Registration Statements on Form N-14, and any supplements or other instruments in connection therewith, and generally to do all such things in my name and behalf in connection therewith as said attorney-in-fact deem necessary or appropriate, to comply with the provisions of the Securities Act of 1933 and Investment Company Act of 1940, and all related requirements of the Securities and Exchange Commission. I hereby ratify and confirm all that said attorneys-in-fact or their substitutes may do or cause to be done by virtue hereof. WITNESS my hand on the date set forth below. /s/Edward C. Johnson 3d December 15, 1994	485BPOS	485BPOS	1996-01-12T00:00:00	1996-01-12T16:08:42
0000708950-96-000001	0000708950-96-000001_0000.txt	--CALVERT RESPONSIBLY INVESTED BOND PORTFOLIO NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON February 16, 1996 Notice is hereby given that a Special Meeting (the "Meeting") of Shareholders of the Calvert Responsibly Invested ("CRI") Bond Portfolio (the "Bond Portfolio") of Acacia Capital Corporation (the "Company") will be held at the offices of the Company, 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814 on February 16, 1996 at 10:00 a.m., Eastern Time, for the following purposes: 1. To consider and act upon an amendment to the Company's Articles of Incorporation to, in effect, combine the Bond Portfolio into the Company's existing CRI Balanced Portfolio (the "Balanced Portfolio") by a reclassification of Bond Portfolio shares. A vote in favor of the proposed amendment is a vote in favor of the elimination of the Bond 2. To transact any other business which may properly come before the Meeting or any adjournments thereof. The Directors of the Company have fixed the close of business on December 18, 1995 as the record date for the determination of shareholders of the Bond Portfolio entitled to notice of and to vote at the Meeting and any adjournment thereof. IT IS IMPORTANT THAT VOTING INSTRUCTIONS BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE ENCLOSED VOTING INSTRUCTION FORM IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT THEIR SHARES MAY BE REPRESENTED AND VOTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED VOTING INSTRUCTION FORM WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION. By Order of the Board of Directors INSTRUCTIONS FOR EXECUTING VOTING INSTRUCTION FORM The following general rules for signing voting instruction forms may be of assistance to you and may help to avoid the time and expense involved in validating your vote if you fail to sign your voting instruction form properly. 1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears in the registration on the voting instruction form. 2. JOINT ACCOUNTS: Either party may sign, but the name of the party signing should conform exactly to a name shown in the registration on the voting instruction form. 3. ALL OTHER ACCOUNTS: The capacity of the individual signing the voting instruction form should be indicated unless it is reflected in the form of registration. For example: (1) ABC Corp. ABC Corp. (2) ABC Corp. John Doe, Treasurer (3) ABC Corp. c/o John Doe, Treasurer John Doe, Treasurer (4) ABC Corp. Profit Sharing Plan John Doe, Trustee (1) ABC Trust Jane B. Doe, Trustee (2) Jane B. Doe, Trustee Jane B. Doe (1) John B. Smith, Cust. John B. Smith f/b/o John B. Smith, Jr. UGMA (2) John B. Smith, Jr. John B. Smith, Jr., Executor PROSPECTUS/PROXY STATEMENT DATED December 30, 1995 CALVERT RESPONSIBLY INVESTED BOND PORTFOLIO This Prospectus/Proxy Statement is being furnished to shareholders of the Calvert Responsibly Invested ("CRI") Bond Portfolio (the "Bond Portfolio") of Acacia Capital Corporation (the "Company"), in connection with a proposed amendment to the Company's Articles of Incorporation that would, in effect, combine the Bond Portfolio into the Company's existing CRI Balanced Portfolio (the "Balanced Portfolio") (the "Proposed Merger"). The Proposed Merger would be accomplished by a reclassification of shares and tax-free transfer of all assets and liabilities of the Bond Portfolio in exchange for shares of the Balanced Portfolio. As a result of the Proposed Merger, shareholders of the Bond Portfolio would exchange their shares and become shareholders of the Balanced Portfolio and the Bond Portfolio would be eliminated. Each Portfolio will pay its respective expenses attributable to the Proposed Merger. The Company is an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company currently consists of 7 portfolios, each with a different investment objective. The Bond Portfolio and the Balanced Portfolio have different investment objectives, policies and restrictions. The Balanced Portfolio seeks to achieve a total return above the rate of inflation through an actively managed portfolio of stocks, bonds and money market instruments, including repurchase agreements secured by such instruments, selected with a concern for the investment and social impact of each investment. The Balanced Portfolio, unlike the Bond Portfolio, is non-diversified. This Prospectus/Proxy Statement, which should be retained for future reference, sets forth concisely the information about the Balanced Portfolio that shareholders of the Bond Portfolio should know before voting on the Proposed Merger. Certain relevant documents listed below, which have been filed with the Securities and Exchange Commission (the "SEC"), are incorporated in whole or in part by reference. A Statement of Additional Information dated May 1, 1995, relating to this Prospectus/Proxy Statement and the Proposed Merger, incorporating by reference the financial statements of the Balanced Portfolio and the Bond Portfolio (each a "Portfolio" and together, the "Portfolios"), dated December 31, 1994 has been filed with the SEC and is incorporated by reference in its entirety into this Prospectus/Proxy Statement. A copy of such Statement of Additional Information is available upon request and without charge by writing to the Company at 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814 or by calling toll-free 1-800-368-2748. The Prospectus of the CRI Balanced Portfolio of the Company, dated May 1, 1995, and the Company's Annual Report for such CRI Portfolio for the fiscal year ended December 31, 1994 are incorporated herein by reference in their entirety, insofar as they relate to the Balanced Portfolio only, and not to any other portfolios described therein. Included as Exhibit A to this Prospectus/Proxy Statement is a copy of the Plan of Reclassification (the "Plan") and included as Exhibit B to this Prospectus/Proxy Statement is the form of amendment to the Company's Articles of Incorporation to be filed with the State of Maryland if shareholders of the Bond Portfolio approve the Plan. 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/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS OR OBLIGATIONS OF OR ENDORSED OR GUARANTEED BY ANY BANK, AND ARE NOT INSURED OR OTHERWISE PROTECTED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS. WHEN INVESTORS SELL SHARES OF THE FUND, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY PAID. INVESTMENT OBJECTIVES AND POLICIES OF THE BALANCED PORTFOLIO AND THE BOND PORTFOLIO...................................... MANAGEMENT OF THE PORTFOLIOS............................... INVESTMENT ADVISORS AND SUBADVISORS............. PORTFOLIO MANAGEMENT........................................ DISTRIBUTION OF SHARES...................................... PURCHASE AND REDEMPTION PROCEDURES.......................... DIVIDENDS AND DISTRIBUTIONS................................. INFORMATION ABOUT THE PROPOSED MERGER............................ DESCRIPTION OF THE MERGER................................... REASONS FOR THE PROPOSED MERGER............................. COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES................. COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS.................. FORM OF ORGANIZATION........................................ CAPITALIZATION.............................................. SHAREHOLDER MEETINGS AND VOTING RIGHTS.......................... LIQUIDATION OR DISSOLUTION.................................. RIGHTS OF INSPECTION................................... This Prospectus/Proxy Statement solicits the accompanying voting instructions ("Proxy") on behalf of the Board of Directors of the Company for use at the Special Meeting of Shareholders of the Bond Portfolio to be held February 16, 1996 at 10:00 a.m., Eastern Time, and any adjournments thereof (the "Meeting"). The Bond Portfolio will bear all expenses in connection with the solicitation of Proxies. Employees of Calvert Asset Management Company, Inc. ("CAMCO"), the Portfolios' investment advisor, and Providian Life and Health Insurance Company ("Providian") will solicit Proxies. The solicitation will be by mail and may also be by telephone, telegram or personal interview. Outstanding Shares and Voting Requirements The Board of Directors of the Company has fixed the close of business on December 18, 1995 as the record date (the "Record Date") for determination of shareholders entitled to notice of and to vote at the Meeting and any adjournments thereof. All outstanding shares of the Bond Portfolio are owned of record by Providian Separate Account V, which is registered with the Securities and Exchange Commission (the "SEC"), (the "Separate Account"), to fund variable annuity contracts (the "contracts") issued by Providian. Approval of the Proposed Merger requires the affirmative vote of the holders of at least a majority (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")), of the interest of the Bond Portfolio shares entitled to vote. Providian holds through its Separate Account all of the Bond Portfolio shares entitled to vote. Providian will attend the Meeting and vote the Bond Portfolio shares held by its Separate Account in accordance with instructions received from contract owners having values allocated to the Bond Portfolio, as provided in the contracts. Providian will vote Bond Portfolio shares for which no instructions are received in the same proportion as to which instructions are received with respect to Separate Account. Each contract participant (other than participants under contracts issued in connection with non-qualified and unfunded deferred compensation plans or contracts issued in connection with a deferred compensation plan) has the right to give instructions as to how shares of the Bond Portfolio attributable to the participant's account should be voted, notwithstanding that the contract owner may be the participant's employer. Contract owners will instruct the Separate Account in accordance with such instructions. Fractional shares also will be voted in accordance with instructions received. A contract owner or participant who has given voting instructions may revoke such voting instructions only through the Separate Account prior to the Meeting date. There are no appraisal rights. The number of Bond Portfolio shares deemed attributable to a participant's account prior to the annuity date and during the lifetime of the annuitant will be determined on the basis of the value of accumulation units credited to the participant's account as of the Record Date. On or after the annuity date or after the death of the participant, the number of Bond Portfolio shares deemed attributable to the participant's account will be based on the liability for future variable annuity payments to the payee under the contract as of the Record Date. Such liability for future payments will be calculated on the basis of the mortality assumptions and the assumed investment rate used in determining the number of annuity units credited to the participant's account and the applicable annuity unit value on the Record Date. As of the close of business on the Record Date, there were outstanding 209,179.316 shares of common stock of the Bond Portfolio. Each share is entitled to one vote. To the Company's knowledge no person owns annuity contracts or interests therein entitling that person to give voting instructions regarding five percent or more of the total outstanding shares of the Bond Portfolio. Directors and officers of the Company as a group own annuity contracts or interests therein entitling them to give voting instructions regarding less than one percent of the total outstanding shares of the Bond Portfolio. The cost of this proxy solicitation, including the printing and mailing of the proxy materials, will be borne by the Bond Portfolio. A proxy may be revoked at any time before or during the meeting by oral or written notice to William M. Tartikoff, Esq., Secretary of the company, located at 4550 Montgomery Ave., Suite 1000N, Bethesda, MD 20814. This Prospectus/Proxy Statement was first mailed to contract owners on or about December 30, 1995. If you have any questions about the proposed merger, please call 1-800-866-6007. The Bond Portfolio and the Balanced Portfolio are each a series of the Company, an open-end management investment company organized as a Maryland corporation on December 22, 1982. The Company currently consists of seven separate investment portfolios, each of which is, in effect, a separate mutual fund issuing its own separate class of common stock. By investing in a portfolio, an investor becomes entitled to a pro-rata share of all dividends and distributions arising from the net income and capital gains on the investments of that portfolio. Each portfolio is governed by the Company's Articles of Incorporation, its Bylaws and applicable Maryland law. The Board of Directors of the Company has approved a Plan of Reclassification (the "Plan") providing for the Company to amend its Articles of Incorporation, subject to the approval of the shareholders of the Bond Portfolio, to reclassify the issued and unissued shares of the class of the Company's common stock currently designated as CRI Bond Portfolio into the class of the Company's common stock currently designated as CRI Balanced Portfolio. In effect, shareholders of the Bond Portfolio would exchange their shares for shares of the Balanced Portfolio and the Bond Portfolio would be eliminated. The Plan contemplates a Proposed Merger in which shares of the Bond Portfolio will be reclassified and the Bond Portfolio will transfer all of its assets and liabilities to the Balanced Portfolio in exchange for shares of the Balanced Portfolio. The number of shares of the Balanced Portfolio to be issued to the Bond Portfolio will be determined on the basis of the relative net asset values of the Bond Portfolio and the Balanced Portfolio calculated as of the close of business on the business day immediately preceding the effective date of the Proposed Merger, currently scheduled for February 26, 1996. The Bond Portfolio will then distribute the Balanced Portfolio shares it receives to Bond Portfolio shareholders in exchange for their Bond Portfolio shares, on a pro-rata basis. The Directors of the Company, including the Directors who are not "interested persons," as such term is defined in the 1940 Act (the "Independent Directors"), have concluded that the Proposed Merger would be in the best interests of shareholders of the Bond Portfolio and that the interests of the shareholders of the Bond Portfolio and the Balanced Portfolio will not be economically diluted as a result of the transactions contemplated by the Reorganization. Accordingly, the Directors have submitted the Plan for the approval of the BOND Portfolio's shareholders. THE DIRECTORS OF THE COMPANY RECOMMEND APPROVAL BY SHAREHOLDERS OF THE BOND PORTFOLIO OF THE PLAN EFFECTING THE PROPOSED MERGER. If the shareholders of the Bond Portfolio do not vote to approve the Proposed Merger, the Directors of the Company will consider other possible courses of action in the best interests of shareholders. The completion of the Proposed Merger is contingent upon the receipt by the Company of an opinion of outside tax counsel to the effect that the Proposed Merger will qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). As such, the Proposed Merger will not result in the recognition, for federal income tax purposes, of any gain or loss to the Bond Portfolio or its shareholders, the aggregate tax basis of the shares of the Balanced Portfolio received by shareholders of the Bond Portfolio will be the same as the tax basis of those shareholders' Bond Portfolio shares and the aggregate tax basis of the assets of the Bond Portfolio in the hands of the Balanced Portfolio will be the same as the tax basis of such assets in the hands of the Bond Portfolio prior to the Proposed Merger. In addition, the Proposed Merger will not result in the recognition of any gain or loss to contract owners. INVESTMENT OBJECTIVES AND POLICIES OF THE BALANCED PORTFOLIO AND THE The Balanced Portfolio. The Balanced Portfolio seeks to achieve a total return above the rate of inflation through an actively managed portfolio of stocks, bonds and money market instruments (including repurchase agreements secured by such instruments) selected with a concern for the investment and social impact of each investment. It is not the policy of the Balanced Portfolio to take risks to obtain speculatively or aggressively high returns. There is no predetermined percentage of assets allocated to stocks, bonds or money market instruments, although, as an operating policy, the Balanced Portfolio will have at least 25% of its assets in fixed income senior securities. Fixed-income investments are selected by the Advisor Calvert Asset Management Company, Inc. ("CAM" or "Advisor"). The Balanced Portfolio's Subadvisor, NCM Capital Management Group, Inc. ("NCM"), selects equity investments for the portfolio, subject to direction and control by the Portfolio's Advisor and the Board of Directors of the Company. CAM and NCM determine the mix for the Balanced Portfolio depending on their view of market conditions and the economic outlook. The Balanced Portfolio may purchase both common and preferred stock. For its fixed-income investments, the Portfolio normally invests in bonds which are considered investment grade, including bonds which are direct or indirect obligations of the U.S. Government, or which at the date of investment are rated AAA, AA, A, or BBB by Standard & Poor's Corporation ("S&P") or Aaa, Aa, A, or Baa by Moody's Investors Service Inc. ("Moody's"). Bonds rated Baa or BBB are considered medium grade obligations and possess speculative characteristics. The Portfolio may purchase lower-rated obligations but no more than 20% of its assets may be invested in obligations rated lower than B. The Portfolio may purchase without limitation bonds which are unrated but of comparable quality to bonds rated B or better as determined by the Advisors under the supervision of the Board of Directors. See the Company's CRI Statement of Additional Information for additional information concerning bond ratings. The Balanced Portfolio may invest in foreign securities, including emerging markets, to a limited extent. The Bond Portfolio. The Bond Portfolio seeks to provide as high a level of current income as is consistent with prudent investment risk and preservation of capital though investment in bonds and other straight debt securities, selected pursuant to the Portfolio's investment and social criteria. The Bond Portfolio is neither speculative nor conservative in its investment policies and will take reasonable risks in seeking to achieve its investment objective of current income and preservation of capital. Debt securities may be long-term, intermediate-term, short-term, or any combination thereof, depending on the Advisors' evaluation of current and anticipated market patterns and trends; the Advisors expect that the Bond Portfolio's average weighted maturity will range between 5 and 20 years. The value of the Portfolio generally will vary inversely with changes in interest rates. In seeking to achieve these objectives, it is anticipated that under normal conditions the Bond Portfolio will invest at least 80% of the value of its assets in publicly-traded straight debt securities which have a rating within the four highest grades as determined by a nationally recognized rating service such as S&P or Moody's; obligations issued or guaranteed by the United States Government or its agencies or instrumentalities; or cash and cash equivalents. Up to 20% of the Portfolio's total assets may be invested in straight debt securities which are not rated within the four highest grades as described above (including unrated securities), in convertible debt securities, convertible preferred and preferred stocks, or other securities. The Bond Portfolio does not currently hold or intend to invest more than 5% of its assets in non-investment grade securities. The overall management of the Company and the Portfolios is the responsibility of, and is supervised by, the Board of Directors of the Company. Calvert Asset Management Company, Inc. ("CAM"), 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814, is the investment advisor to both Portfolios. CAM is a wholly-owned subsidiary of The Calvert Group, Ltd., of the same address, which is in turn an indirect wholly-owned subsidiary of Acacia Mutual Life Insurance Company, 51 Louisiana Avenue, N.W., Washington, D.C. 20001. As of October 31, 1995, CAM had assets under management and administration in excess of $4.9 billion. Pursuant to its investment advisory agreement with the Company, CAM manages the investment and reinvestment of the assets of each Portfolio and is responsible for the overall management of the business affairs of each Portfolio, subject to the direction and authority of the Company's Board of Directors. CAM also serves as investment advisor to seven other registered investment companies in the Calvert Group of Funds: First Variable Rate Fund for Government Income, Calvert Cash Reserves (doing business as Money Management Plus), Calvert Social Investment Fund, Calvert Tax-Free Reserves, The Calvert Fund, Calvert Municipal Fund, Inc., and Calvert World Values Fund, Inc. CAM has retained certain investment Subadvisors ("Subadvisors") for the Portfolios. The Subadvisor to the Balanced Portfolio is NCM Capital Management Group, Inc. ("NCM") located at 103 W. Main Street., Durham, NC 27701. Pursuant to its Investment Sub-Advisory Agreement with the Investment Advisor, NCM manages the equity portion of the portfolio selections for the Balanced Portfolio. NCM was founded by Maceo K. Sloan in 1986 as a subsidiary of North Carolina Mutual Life Insurance Company, which was established by Mr. Sloan's ancestors in 1898 and is one of the oldest and largest minority-owned financial institutions in the country. NCM has been an employee-owned subsidiary of Sloan Financial Group since 1991. Sloan Financial Group is controlled by Mr. Sloan and Justin F. Beckett, Executive Vice President and a Director of NCM. NCM is one of the largest minority-owned investment management firms in the country, and provides products in equity, fixed-incomed and balanced portfolio management. It is also one of the industry leaders in the employment and training of minority and women investment professionals. NCM has served as Subadvisor to the Balanced Portfolio since February 1995. Wendell E. Mackey, Vice President of NCM, is the portfolio manager with respect to the Portfolio's equity investments. Mr. Mackey earned his B.B.A. degree from Howard University, and his M.M. degree from Kellogg Graduate School of Management at Northwestern University. He subsequently worked with several securities firms before joining NCM as an equity portfolio manager in 1993. He has managed the Balanced Portfolio since February 1995. Fixed-income Investment selections for the Portfolio are made by Stephen N. Van Order. Mr. Van Order joined Calvert Group in October 1992 as the head of the trading desk. He oversees the day-to-day investments and operations of the department and participates in setting market and portfolio strategy. Previously, Mr. Van Order was Director of Long Term Funding at Federal National Mortgage Association (Fannie Mae). In his former capacity, Mr. Van Order was responsible for Fannie Mae's long term borrowing programs, hedging programs and debt marketing program. He has managed the Portfolio's fixed income investments since December 1995. The Subadvisor to the Bond Portfolio is United States Trust Company of Boston ("US Trust") Address. US Trust is a wholly-owned subsidiary of UST Corporation, a Massachusetts bank holding company. The address of UST Corporation is 30 court Street Boston, MA 02108. The individual portfolio manager responsible for the Bond Portfolio is Cheryl Smith, Vice President of US Trust. Ms. Smith joined US Trust in 1992. In addition to the management of the Bond Portfolio, her duties at US Trust include management of institutional and individual client investment portfolios and integration of client social criteria into the portfolio management process. She served as Vice President of Franklin Research & Development from 1987 to 1992. Ms. Smith has managed the Bond Portfolio since August 1994. She is a Chartered Financial Analyst and holds a Ph.D. in Economics from Yale University. For its services, CAM, as the Portfolios' investment advisor, is entitled to receive a fee based on a percentage of the average daily net assets of each of the Portfolios. CAM is currently entitled to receive an annual base fee, paid monthly, of 0.65% of average daily net assets of the Bond Portfolio and 0.70% of the average daily net assets of the Balanced Portfolio. CAM will pay the Subadvisor of the Balanced Portfolio an annual base fee of 0.25% of one-half of the Balanced Portfolio's average daily net assets. In addition, under the circumstances described below, CAM and NCM, as the Advisor and Subadvisor, respectively, to the Balanced Portfolio may earn (or have their respective fees reduced by) performance fee adjustments based on the extent to which performance of the Balanced Portfolio exceeds or trails the Lipper Balanced Funds Index. The specific adjustments are as follows: The Balanced Portfolio: CAM's Performance Fee Adjustment Performance versus the Performance Fee Lipper Balanced Funds Index Adjustment 6% to less than 12% 0.05% 12% to less than 18% 0.10% CAM's performance fee adjustment will be paid directly from the Portfolio to CAM. The Balanced Portfolio: NCM's Performance Fee Adjustment: Lipper Balanced Funds' Index Adjustment 6% to less than 12% 0.05% 12% to less than 18% 0.10% Payment of an upward performance fee adjustment to the Subadvisor is paid out of the fee CAM receives from the Balanced Portfolio. The initial performance period is the twelve month period between July 1, 1995 and July 1, 1996. Each month an additional month's performance will be factored into the calculation until a total of 36 months comprises the performance computation period. Payment by the Portfolio of the performance adjustment will be conditioned on: (1) the performance of the Portfolio as a whole having exceeded the Lipper Balanced Funds Index; and (2) payment of the performance adjustment not causing the Portfolio's performance to fall below the Lipper Balanced Funds Index. CAM pays an annual fee of 0.25% of the average daily net assets of the Bond Portfolio to US Trust as a subadvisory fee. See "Investment Advisor and Subadvisors" above. Annual Fund operating expenses of the Bond Portfolio and the Balanced Portfolio are shown below. Expenses are unaudited and are based on year-to-date actual expenses through November 30, 1995, expressed as a percentage of average net assets. Bond Balanced Pro Forma Combined Management fees include sub-advisor fees. Although the fees in the Balanced Portfolio are higher than those in the Bond Portfolio, the Fund's Board of Directors believes that the proposed merger is in the best interests of the shareholders of both the Bond Portfolio and the Balanced Portfolio, particularly in terms of the comparative performance records of each of the Portfolios; relative compatibility of their investment objectives and policies; the relative size of the portfolios in terms of assets; and the investment experience, expertise and resources of the Advisor and Subadvisors. With regard to the Portfolios, the Company's shares are sold to Providian for allocation to the Separate Account to fund the benefits under certain variable annuity and variable life insurance policies (the "Variable Accounts"). Shares of the Portfolios may also be sold to other insurance companies for the same purpose. In this Prospectus/Proxy Statement, Providian and any other applicable companies may be referred to as the "Insurance Companies," and the variable annuity and variable life insurance policies may be referred to as the "Policies." Shares of the Portfolios may only be sold to the Insurance Companies for their Separate Accounts, and not to individual investors. As such, the "shareholders" referred to in this prospectus are the Insurance Companies. Nevertheless, as a policyholder you have an opportunity to choose among the various Portfolios in order to fund the benefits under any Policies you purchase, subject to any limitations described in the Insurance Companies' prospectuses. Shares are purchased by the Variable Accounts at the net asset value of a Portfolio next determined after the Insurance Company receives the premium payment. The Company continuously offers its shares in the Portfolios at a price equal to the net asset value per share. Initial and subsequent payments allocated to a Portfolio are subject to the limits applicable in the Policies issued by the Insurance Companies. It is conceivable that in the future it may be disadvantageous for both annuity Variable Accounts and life insurance Variable Accounts, or for Variable Accounts of different Insurance Companies, to invest simultaneously in a Portfolio, although currently neither the Insurance Companies nor the Company foresees any such disadvantages to either variable annuity or variable life insurance policyholders of any Insurance Company. The Company's Directors intend to monitor events in order to identify any material conflict between such policyholders and to determine what action, if any, should be taken in response to the problem. Information concerning the purchase of shares is described above. The Insurance Companies redeem shares of the Portfolios to make benefit and surrender payments under the terms of their Policies. Redemptions are processed on any day on which the Company is open for business (each day the New York Stock Exchange is open), and are made at a Portfolio's net asset value next determined after the appropriate Insurance Company receives a surrender request in acceptable form. Payment for redeemed shares will be made promptly, and in no event later than seven days. However, the right of redemption may be suspended or the date of payment postponed in accordance with the Rules under the 1940 Act. The amount received on redemption of the shares of a Portfolio may be more or less than the amount paid for the shares, depending on the fluctuations in the market value of the assets owned by the Portfolio. The Company redeems all full and fractional shares of the Portfolios for cash. The net asset value of the shares of each Portfolio is determined once daily as of the close of business of the New York Stock Exchange, on days when the Exchange is open for business, or for any other day when there is a sufficient degree of trading in the investments of a Portfolio to affect materially net asset value per share (except on days when no orders to purchase or redeem shares of the Portfolio have been received). The net asset value is determined by adding the values of all securities and other assets of a Portfolio, subtracting liabilities and expenses, and dividing by the number of outstanding shares of the Portfolio. Except for money market instruments maturing in 60 days or less, securities held by the Portfolios are valued at their market value if market quotations are readily available. Otherwise, securities are valued at fair value as determined in good faith by the Board of Directors, although the actual calculations may be made by persons acting pursuant to the direction of the Board of Directors of the Company. All money market instruments with a remaining maturity of 60 days or less held by a Portfolio, are valued on an amortized cost basis. It is the Company's intention to distribute substantially all of the net investment income, if any, of the Portfolios. Net investment income consists of all payments of dividends or interest received by a Portfolio less estimated expenses, including the investment advisory fee. All net realized capital gains, if any, are declared and distributed periodically, at least annually. All dividends and distributions are reinvested in additional shares of the Portfolio at net asset value. The following tables provide information about the Balanced Portfolio's financial history. They express the information in terms of a single share outstanding throughout each period. The table has been audited by those independent accountants whose reports are included in the Fund's Annual Report to Shareholders, for each of the respective periods presented, except for the six month period ended June 30, 1995 which is unaudited. The tables should be read in conjunction with the financial statements and their related notes. The current Annual Report to Shareholders is incorporated by reference into the Statement of Additional Information. The Bond Portfolio and the Balanced Portfolio have different and distinct investment objectives that they pursue through their separate investment policies, as stated above. There can be no assurance that the objectives of either the Bond Portfolio or the Balanced Portfolio will be achieved. The differences in objectives and policies between the Bond Portfolio and the Balanced Portfolio can be expected to affect the return of each. As described below under "Comparison of Investment Objectives and Policies", the Balanced Portfolio maintains an actively managed nondiversified portfolio of stocks, bonds and money market instruments and as such may be viewed as more aggressive and concomitantly more volatile than the Bond Portfolio for the following principal reasons. First, the Balanced Portfolio is "non-diversified" which means that, as opposed to the "diversified" Bond Portfolio, a higher percentage of its assets may be invested in a more limited number of issuers, with the result that its shares are more susceptible to any single economic, political or regulatory event than the shares of the Bond Portfolio. Second, while there is no predetermined percentage of assets allocated to stocks, bonds or money market instruments held by the Balanced Portfolio, as an operating policy, the Balanced Portfolio will have at least 25% of its assets in fixed income securities. This means that the Balanced Portfolio could have up to 75% of its assets invested in common stocks which, historically, have been more volatile than the types of fixed income securities in which the Bond Portfolio invests. Third, the Balanced Portfolio may purchase non-investment grade fixed income securities (i.e., those rated lower than BBB, also known as "junk bonds") without limitation, although no more than 20% of its assets may be invested in fixed income securities rated lower than B. The Bond Portfolio may invest 20% of its assets in non-investment grade fixed income securities. However, neither the Balanced nor the Bond Portfolio currently holds nor intends to invest more than 5% of its respective assets in non-investment grade securities. See "Non-Investment Grade Debt Securities and the Portfolios' Statement of Additional Information concerning bond ratings. INFORMATION ABOUT THE PROPOSED MERGER DESCRIPTION OF THE PROPOSED MERGER The Plan provides that after the Effective Time on the Closing Date the Bond Portfolio will transfer all of its assets and liabilities to the Balanced Portfolio if all of the conditions of the Plan are fulfilled and are not waived and the Closing Date is not extended. In exchange for the Bond Portfolio assets and liabilities, the Balanced Portfolio will issue to the Bond Portfolio shareholders a number of Balanced Portfolio shares having a value equal to the aggregate net assets of the Bond Portfolio acquired. The Closing Date is currently scheduled for February 26, 1996 and may be changed as determined by officers of the Company. As part of the Plan, the Company's shareholders are being asked to approve a proposed amendment to the Company's Articles of Incorporation to reclassify the issued and unissued shares of the class of the Company's common stock currently designated as the CRI Bond Portfolio into the class of common stock currently designated as the CRI Balanced Portfolio. Copies of the Plan and the proposed amendment to the Company's Articles of Incorporation are attached as Exhibits A and B, respectively, to this Prospectus/Proxy Statement. The number of shares of the Balanced Portfolio to be issued in the Proposed Merger will be determined on the basis of the relative net asset values of the Bond Portfolio and the Balanced Portfolio calculated as of the Valuation Date. The net asset value of each Portfolio will be determined by dividing the value of that Portfolio's portfolio securities, cash and other assets (including accrued but uncollected interest and dividends), less all liabilities (including accrued expenses but excluding capital and surplus) by the number of shares of that Portfolio outstanding. Balanced Portfolio shares will be distributed to Bond Portfolio shareholders in exchange for their Bond Portfolio shares, on a pro rata basis. The number of such full and fractional Balanced shares issued to each Bond Portfolio shareholder will be determined by multiplying the number of Bond Portfolio shares to be exchanged by a fraction, the numerator of which is the net asset value per share of the Bond Portfolio and the denominator of which is the net asset value per share of the Balanced Portfolio. Thus, the Bond Portfolio shares of each Bond Portfolio shareholder will be exchanged for the number of full and fractional shares of the Balanced Portfolio which, when multiplied by the net asset value per share of the Balanced Portfolio, will have a value equal to the aggregate net asset value of that shareholder's shares in the Bond Portfolio at the Effective Time on the Closing Date. The aggregate value of the Balanced Portfolio shares attributable to shareholders previously holding Bond Portfolio shares will be the same immediately after the Proposed Merger as the aggregate value of the Bond Portfolio shares attributable to such shareholders immediately before the Proposed Merger. The Proposed Merger as provided in the Plan is subject to approval of the shareholders of the Bond Portfolio. Approval requires the affirmative vote of the holders of at least a majority (as defined in the 1940 Act) of the Bond Portfolio shares entitled to vote. The Plan is also conditioned on: (i) acceptance of the amendment to the Company's Articles of Incorporation by the Maryland Department of Assessments and Taxation and the amendment's having become effective; (ii) receipt of any necessary regulatory approvals from the SEC; (iii) receipt of an opinion of outside counsel that the Proposed Merger qualifies as a tax-free reorganization under the Code; and (iv) receipt of any necessary regulatory approvals by relevant state insurance authorities. REASONS FOR THE PROPOSED MERGER The Directors of the Company have considered and approved the Proposed Merger, as recommended by CAM, including entry by the Company on behalf of each Portfolio into the Plan, as in the best interests of the shareholders. In making their recommendation to the Directors, the representatives of CAM reviewed with the Directors various factors about the Company and its Portfolios and the Proposed Merger. In terms of total net assets the Bond Portfolio at October 31, 1995 had net assets of approximately $3.4 million. The Balanced Portfolio's net assets at such date were approximately $102 million. The Bond Portfolio has not, since its inception in 1992 achieved asset levels on a continuing basis that would permit it to operate economically and generate a competitive return. The Directors of the Company met on August 2, 1995 and considered the recommendation of CAM, and, in addition, considered among other things in general, (i) the terms and conditions of the Proposed Merger; (ii) whether the Proposed Merger would result in the economic dilution of shareholder interests; (iii) the comparative performance records of each of the Portfolios; relative compatibility of their investment objectives and policies; the investment experience, expertise and resources of CAM and the Subadvisor; and the personnel and financial resources of CAM and the Subadvisor; (iv) the fact that the Balanced Portfolio will assume certain identified liabilities of the Bond Portfolio; (v) the expected federal income tax consequences of the Proposed Merger; and (vi) the fact that the Balanced Portfolio was the most similar to the bond Portfolio in terms of investment objective of the Company's seven portfolios. The Directors also considered the benefits to be derived by shareholders of the Bond Portfolio from the transfer of its assets to the Balanced Portfolio. In this regard, the Directors considered the economies of scale that could be realized by the participation by shareholders of the Bond Portfolio in the combined portfolio. They also considered that for small funds such as the Bond Portfolio, it is difficult for the portfolio manager to fine profitable investments of small denomination that will comply with regulatory requirements for diversification. During their consideration of the Proposed Merger, the Directors met with members of the legal staff at CAM, as well as counsel to the Independent Directors, regarding the legal issues involved. The Directors also concluded at a meeting on August 2, 1995 that the Proposed Merger would be in the best interests of shareholders of the Balanced Portfolio and that the interests of the shareholders of the Balanced Portfolio will not be diluted as a result of the transactions contemplated by the Proposed Merger. THE DIRECTORS OF THE COMPANY RECOMMEND THAT THE SHAREHOLDERS OF THE BOND PORTFOLIO APPROVE THE PROPOSED MERGER. The following tables show the capitalization of the Balanced Portfolio and the Bond Portfolio as of October 31, 1995 individually and on a pro forma basis as of that date, giving effect to the proposed acquisition of assets and liabilities of the Bond Portfolio at the then net asset value: On the Record Date, there were 209,179.316 and 58,386,542.411 shares of the Bond Portfolio and the Balanced Portfolio, respectively, outstanding. COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES The following discussion is based upon by the descriptions of the respective investment objectives, policies and restrictions set forth in the Company's CRI Prospectus and Statement of Additional Information for the CRI portfolios. The Company also offers additional portfolios which are not involved in the Proposed Merger, and their investment objectives, policies and restrictions are not discussed in this Prospectus/Proxy Statement and their shares are not offered hereby. The Bond Portfolio invests primarily in corporate bonds and other straight debt securities while the Balanced Portfolio maintains an actively managed portfolio of stocks, bonds and money market instruments. Each Portfolio may invest in non-investment grade debt securities. The Bond Portfolio may, in pursuit of its investment objectives, purchase put and call options and engage in the writing of covered call options and secured put options on securities of issuers that meet its social criteria, and employ a variety of other investment techniques, including the purchase and sale of market index futures contracts, financial futures contracts and options on such futures. The Bond Portfolio may engage in futures contracts and related options only to protect against market declines. The Bond Portfolio does not engage in such transactions for speculation or leverage. It is an operating policy of the Company that the Bond Portfolio may not invest in options and futures contracts if as a result more than 5% of its assets would be so invested. Each Portfolio may engage in repurchase agreements and reverse repurchase agreements. No more than 10% of either Portfolio's assets may be invested in repurchase agreements not terminable within seven days. The Portfolios may borrow no more than 10% of the value of their assets from banks (and pledge their assets to secure such borrowings) for temporary or emergency purposes, but not for leverage. Each Portfolio may also make loans of the securities it holds. Each Portfolio may lend its securities to New York Stock Exchange member firms and to commercial banks with assets of $1 billion or more. The Portfolios may only make loans if the value of the securities loaned does not exceed 10% of the Portfolio's assets. The Bond Portfolio may invest up to 25% of its assets in the securities of foreign issuers and the Balanced Portfolio may invest up to 10% of its assets in such securities. The Bond Portfolio may write exchange-traded call options on its securities. Call options may be written on portfolio securities, securities indices, or foreign currencies. With respect to securities and foreign currencies, the Bond Portfolio may write call and put options on an exchange or over-the-counter. The Bond Portfolio may not write options on more than 50% of its total assets. Management presently intends to cease writing options if and as long as 25% of such total assets are subject to outstanding options contracts or if required under regulations of state securities administrators. Each Portfolio may write call and put options in order to obtain a return on its investments from the premiums received and will retain the premiums whether or not the options are exercised. The Bond Portfolio may invest up to an aggregate of 5% of its total assets in exchange-traded or over-the-counter call and put options on securities and securities indices and foreign currencies. Purchases of such options may be made for the purpose of hedging against changes in the market value of the underlying securities or foreign currencies. The Bond Portfolios may sell a call option or a put option which it has previously purchased prior to the purchase (in the case of a call) or the sale (in the case of a put) of the underlying security or foreign currency. Each Portfolio may invest up to 5% of its net assets in warrants and stock rights, but no more than 2% of its net assets in warrants and stock rights not listed on the New York Stock Exchange or the American Stock Exchange. The Bond Portfolio may enter into financial futures contracts and related options as a hedge against anticipated changes in the market value of its portfolio securities or securities which it intends to purchase or in the exchange rate of foreign currencies. The Bond Portfolio may purchase and sell financial futures contracts which are traded on a recognized exchange or board of trade and may purchase exchange or board-traded put and call options in financial futures contracts. The Bond Portfolio may engage in transactions in financial futures contracts and related options only for hedging purposes and not for speculation. In addition, the Bond Portfolio will not purchase or sell any financial futures contract or related option if, immediately thereafter, the sum of the cash or U.S. Treasury bills committed with respect to the Bond Portfolio's existing futures and related options positions and the premiums paid for related options would exceed 5% of the market value of its total assets. The value of each Portfolio's assets as measured in United States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the Portfolios may incur costs in connection with conversions between various currencies. The Portfolios conduct their foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through forward contracts to purchase or sell foreign currencies. The Bond Portfolio may also hedge its foreign currency exchange rate risk by engaging in currency financial futures and options transactions. When CAM or a Subadvisor believes that the currency of a particular foreign country may suffer a substantial decline against the United States dollar, it may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of a Portfolio's portfolio securities denominated in such foreign currency. Each Portfolio may invest up to less than 1% of its assets in investments in securities that offer a rate of return below the then prevailing market rate and that present attractive opportunities for furthering the Portfolios' social criteria. Neither Portfolio may purchase illiquid securities if more than 10%, of the value of its net assets would be invested in such securities. The Bond Portfolio is diversified while the Balanced Portfolio is not diversified. There are risks associated with the Balanced Portfolio being non-diversified. Specifically, since a relatively high percentage of the assets of the Balanced Portfolio may be invested in the obligations of a limited number of issuers, the value of the shares of the Balanced Portfolio may be more susceptible to any single economic, political or regulatory event than the shares of a diversified Portfolio. All fixed income instruments are subject to interest-rate risk: that is, if market interest rates rise, the current principal value of a bond will decline. In general, the longer the maturity of the bond, the greater the decline in value will be. Noninvestment-grade securities tend to be less sensitive to interest rate changes than higher-rated investments, but are more sensitive to adverse economic changes and individual corporate developments. This may affect the issuer's ability to make principal and interest payments on the debt obligation. There is also a greater risk of price declines due to changes in the issue's creditworthiness. Because the market for lower-rated securities may be less active ("thinner") than for higher-rated securities, it may be difficult for a Portfolio to sell the securities. Because of a lack of objective data, a thinly-traded market may make it difficult to value the securities, so that the Board of Directors may have to exercise its judgment in assigning a value. See the Appendix in the Statement of Additional Information for more information on bond ratings. The Balanced Portfolio and the Bond Portfolio are subject to the same investment screens. Each investment is selected with a concern for its social impact. Both Portfolios invest in accordance with their philosophy that long-term rewards to investors will come from those organizations whose products, services, and methods enhance the human condition and the traditional American values of individual initiative, equality of opportunity and cooperative effort. The Portfolios have developed the criteria for the selection of organizations in which they invest. The Portfolios recognize, however, that these criteria represent standards of behavior which few, if any, organizations totally satisfy and that, as a matter of practice, evaluation of a particular organization in the context of these criteria will involve subjective judgment by the Portfolios' Investment Advisor and Subadvisor. The characteristics of each investment policy and the associated risks are described in the Company's CRI Prospectus and Statement of Additional Information. Both Portfolios have other investment policies and restrictions which are also set forth in the Company's CRI Prospectus and Statement of Additional Information, which are hereby incorporated herein by reference and available upon request. NCM Capital Management and CAM assumed portfolio management responsibility of the equity and fixed-income portions of the Balanced Portfolio, respectively, on February 9, 1995. For the 12 months ended December 31, 1994, when the Portfolio was managed by its former sub-advisor, U.S. Trust Company, the Portfolio returned -3.30%. This was a bit behind that of Lipper Balanced Funds Average, which returned -2.50% for the year. This was attributed to a wrong call by U.S. Trust Company on long term interest rates. For the six months ended June 30, 1995, the Balanced Portfolio return 17.35%. This return compares favorably to the 13.72% return of the Lipper Balanced Funds Average. This performance was due to substantial equity investments in the better performing market sectors, including technology, financials, consumer staples and capital goods. In addition, the Portfolio's holdings of major foreign growth stocks, such as Ericsson and Philips, also contributed positive returns. The fixed-income portion also made a strong contribution as the Portfolio's duration was taking out to a position longer than that of the benchmarks. Positions were also added in corporate bonds, which enhanced diversification and boosted yields. The line graph below is comparing a hypothetical $10,000 investment of the Balanced Portfolio: Comparison of change in value of a hypothetical $10,000 investment. ==================================== (not able to show graph) 9/86 87 88 89 90 91 92 93 94 95 ......Calvert Responsibly Invested Balanced Portfolio Life of Portfolio (9/86) 8.00% 9.51% Performance information is for the Balanced Portfolio only and does not reflect chganges and expenses of the variable annuity. Past performance does not indicate future results. The current Sub-advisers have managed the Portfolio since February 1995. COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS The Company was incorporated in Maryland on September 27, 1982, and is an open-end management investment company registered under the 1940 Act. The Company has seven CRI portfolios, including the Portfolios, each designed to provide opportunities for investing in enterprises that make a significant contribution to society through their products and services and through the way they do business. The total number of shares of stock of all classes which the Company is currently authorized to issue is 100 million shares. The par value of each share is $1.00. The Balanced Portfolio currently has 75,000,000 authorized shares and the Bond Portfolio currently has 1,000,000 authorized shares. Fractional shares may be issued. Each Portfolio's shares have equal voting rights and represent equal proportionate interests in the assets belonging to the Portfolio. Shareholders of each Portfolio are entitled to receive dividends and other amounts as determined by the Directors of the Company. Shareholders of each Portfolio vote separately, as to matters, that affect only their particular Portfolio such as approval or amendments of investment advisory agreements or proposed reclassifications, that affect only their particular portfolio. SHAREHOLDER MEETINGS AND VOTING RIGHTS The Company is not required to hold annual meetings of shareholders. The Company does not permit cumulative voting. A majority of shares entitled to vote on a matter constitutes a quorum for consideration of such matter. In either case, a majority of the shares voting is sufficient to act on a matter (unless otherwise specifically required by the applicable governing documents or other law, including the 1940 Act). In the event of the liquidation of a portfolio the shareholders are entitled to receive, when, and as declared by the Directors, the excess of the assets belonging to such portfolio over the liabilities belonging to the portfolio. The assets so distributable to shareholders of a Portfolio will be distributed among the shareholders in proportion to the number of shares of the Portfolio held by them and recorded on the books of the Company. Shareholders of the respective Portfolios have the same right to inspect in Maryland the governing documents, records of meetings of shareholders, shareholder lists, share transfer records, accounts and books of the Company as are permitted shareholders of a corporation under the Maryland corporation law. The purpose of inspection must be for interests of shareholders relative to the affairs of the Portfolios. The foregoing is only a summary of certain characteristics of the operations of the Company's Articles of Incorporation, its By-Laws and Maryland law and is not a complete description of those documents or the law. Shareholders should refer to the provisions of such respective Articles of Incorporation, By-Laws, and Maryland law directly for more complete information. Information concerning the operation and management of the Company and the Portfolios is incorporated herein by reference from the Prospectus dated May 1, 1995, a copy of which is enclosed, and the Statement of Additional Information dated as of the same date. A copy of such Statement of Additional Information is available upon request and without charge by writing to the Company, at the address listed on the cover page of this Prospectus/Proxy Statement or by calling toll-free 1-800-368-2748. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended and the 1940 Act, and in accordance therewith files reports and other information including proxy material, and charter documents with the SEC. These items can be inspected and copies obtained at the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The Statement of Additional Information relating to this Prospectus/Proxy Statement includes the following financial statements: (i) financial statements for the fiscal year ended December 31, 1994, included in the Company's Annual Report for that period; and (ii) unaudited financial statements for the six-months ended June 30, 1995. The financial statements included in the Company's Annual Report are incorporated by reference into the Statement of Additional Information. The financial statements for the year ended December 31, 1994 included in the Company's Annual Report have been audited by Coopers & Lybrand LLP, independent accountants, and have been included in the Statement of Additional Information in reliance upon the report of Coopers & Lybrand LLP given upon the authority of such firm as experts in accounting and auditing. Certain legal matters concerning the issuance of shares of the Company will be passed upon by William M. Tartikoff, Esq., General Counsel of The Calvert Group, Ltd. Sullivan & Worcester, Washington, D.C., has advised the Company on certain federal income tax matters. The Directors of the Company do not intend to present any other business at the Meeting. If, however, any other matters are properly brought before the Meeting, the persons named in the accompanying form of proxy will vote thereon in accordance with their judgment. THE BOARD OF DIRECTORS OF THE COMPANY, INCLUDING THE INDEPENDENT DIRECTORS, RECOMMENDS APPROVAL OF THE PROPOSED MERGER, ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PROPOSED MERGER. The Company is a Maryland corporation whose shares of common stock are currently classified into seven classes or series ("Portfolios"), including the Calvert Responsibly Invested ("CRI") Bond Portfolio (the "Bond Portfolio") and the CRI Balanced Portfolio (the "Balanced Portfolio"). The Company is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company, and its shares of common stock are registered under the Securities Act of 1933, as amended (the "1933 Act"). The Company offers shares of certain Portfolios to Providian Life and Health Insurance Company ("Providian") and its Separate Accounts and other insurance companies and their separate accounts. Providian issues, or intends to issue, variable annuity contracts ("contracts") through its Separate Account or Accounts. The Company understands that Providian votes the shares of the Bond Portfolio held by its Separate Account that are attributable to contracts in accordance with instructions received from holders of interests in the contracts (hereinafter, "shareholders"). The Company further understands that Providian votes shares of the Bond Portfolio as to which no instructions have been received in the same proportion as the shares of the relevant Separate Account as to which instructions have been received. The Directors of the Company have determined that it is advisable to amend the Articles of Incorporation of the Company to reclassify the issued and unissued shares of common stock currently designated as the Bond Portfolio into the class of common stock currently designated as the Balanced Portfolio (the "Reclassification") and have directed that the proposed amendment be submitted for consideration at a special meeting of shareholders. The Directors of the Company have determined - independently for the Bond Portfolio and for the Balanced Portfolio - that the Reclassification, including the consideration, is reasonable and fair, does not involve overreaching on the part of any person concerned, and will not dilute the interests of shareholders. Furthermore, the Directors have determined that the Reclassification would be in the best interests of shareholders and is consistent with the general purposes of the 1940 Act, the protection of investors, and the purposes fairly intended by the policies and provisions of the 1940 Act. It is intended that the Reclassification shall qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). 1. Meeting Date. In accordance with Section 2-604 of the Maryland General Corporation Law (the "Maryland Law") and the Company's Articles of Incorporation, the Reclassification shall be submitted to the shareholders of the Bond Portfolio for their approval at a special meeting (the "Meeting") to be held on or about February 16, 1996, 1996 at 10:00 a.m., Eastern Time, at the offices of the Company, 4550 Montgomery Avenue, Suite 1000N, Bethesda, Maryland 20814. 2. Record Date. The close of business on December 18, 1995, shall be the record date (the "Record Date") for the Meeting and only shareholders of record of the Bond Portfolio on such date shall be entitled to notice of and be permitted to give voting instructions at the Meeting. 3. Required Vote. The Reclassification shall not become effective without the affirmative vote of the holders of a majority (as defined in the 1940 Act) of the Bond Portfolio shares outstanding and entitled to vote thereon. 4. Form N-14 Registration Statement/Proxy Materials. The appropriate officers of the Company shall take all actions necessary or appropriate to solicit the approval of the shareholders of the Bond Portfolio, including the preparation and execution of a registration statement on Form N-14 of the Securities and Exchange Commission (the "SEC"), and any amendments thereto, containing a notice of meeting, proxy statement, and voting instruction forms (collectively, the "proxy materials"), and the filing of such proxy materials with the SEC. 5. Mailing of Proxy Materials. The appropriate officers of the Company shall cause the proxy materials to be mailed on or about December 30, 1995, as appropriate, to each shareholder of the Bond Portfolio of record on the Record Date. B. Amendment of Articles of Incorporation. In accordance with Maryland Law, the Company shall effect the Reclassification by amending its Articles of Incorporation. 1. Form of Amendment. The amendment to the Company's Articles of Incorporation (the "Amendment") shall be substantially in the form attached hereto and made a part hereof, with such modifications as the officers executing the same deem necessary or appropriate, consistent with the purposes of this Plan. 2. Date of Filing. The appropriate officers of the Company shall execute, acknowledge, verify and file the Amendment with the Maryland State Department of Assessments and Taxation (the "Maryland State Department") on or about February 19, 1996, following shareholder approval, for effectiveness at 12:01 a.m. on February 26, 1996. In connection with the Reclassification of shares, the Bond Portfolio shall transfer all of its assets and liabilities to the Balanced Portfolio, in exchange for which the Balanced Portfolio shall issue to the Bond Portfolio a number of the Balanced Portfolio shares having a value equal to the aggregate net assets of the Bond Portfolio acquired. 1. Time of Transfer. The above-described transfer shall occur on February 26, 1996 (the "Closing Date"), or such other time and date as determined by the appropriate officers of the Company. 2. Issuance of Balanced Portfolio Shares to the Bond Portfolio. The number of shares of the Balanced Portfolio to be issued to the Bond Portfolio shall be determined on the basis of the relative net asset values of the Balanced Portfolio and the Bond Portfolio calculated as of the close of business on the business day immediately preceding the Closing Date. The net asset value of each Portfolio shall be determined by dividing the value of that Portfolio's securities, cash, and other assets (including accrued but uncollected interest and dividends), less all liabilities (including accrued expenses but excluding capital and surplus) by the number of shares of that Portfolio outstanding. 3. Distribution of Balanced Portfolio Shares to Bond Portfolio Shareholders. Upon effectiveness of the Amendment, the Bond Portfolio shall distribute the Balanced Portfolio shares it receives to the Bond Portfolio shareholders in exchange for their Bond Portfolio shares, on a pro rata basis. The number of such full and fractional Balanced Portfolio shares issued to each Bond Portfolio shareholder shall be determined by multiplying the number of Bond Portfolio shares to be exchanged by a fraction, the numerator of which is the net asset value per share of the Balanced Portfolio and the denominator of which is the net asset value per share of the Bond Portfolio. Thus, the Bond Portfolio shares of each Bond Portfolio shareholder shall be exchanged for the number of full and fractional shares of the Balanced Portfolio which, when multiplied by the net asset value per share of the Balanced Portfolio, will have a value equal to the aggregate net asset value of that shareholder's shares in the Bond Portfolio on the Closing Date. D. Costs of Effecting the Reclassification. The Bond Portfolio and the Balanced Portfolio shall each pay its portion of the expenses attributable to the Reclassification. 1. Termination of Agreements. The appropriate officers of the Company shall cause all agreements with the Bond Portfolio or the Company to be terminated as they relate to the Bond Portfolio. 2. General Authority. The appropriate officers of the Company shall, in the name and on behalf of the Company or either of the Portfolios, do and perform such further acts and things, modify any dates or deadlines, and execute and deliver or file such other instruments, certificates, and documents as they shall determine to be necessary, appropriate, or desirable to carry out the foregoing, any such determination to be conclusively evidenced by the doing or performing of any such act or thing or the execution and delivery or filing of any such instrument, certificate, or document. The Reclassification shall not become effective unless each of the following has occurred: A. The Amendment shall have been approved by the affirmative vote of the holders of a majority (as defined in the 1940 Act) of Bond Portfolio shares outstanding and entitled to vote thereon; B. The Amendment shall have been accepted for filing by the Maryland Department of Assessments and Taxation and become effective; C. The Company shall have received any necessary regulatory approvals of the proposed Reclassification by the SEC; D. The Company shall have received an opinion of counsel reasonably satisfactory to it that the Reclassification shall qualify as a tax-free reorganization under Section 368 of the Code; and E. The Insurance Companies shall have received any necessary regulatory approvals of the proposed Reclassification by relevant state insurance authorities. At the Closing Date, the Balanced Portfolio shall succeed, without any transfer other than that contemplated in Section II.C above, to all the assets belonging to the Bond Portfolio (or allocated to the Bond Portfolio by the Board of Directors of the Company pursuant to Article Ninth of the Company's Articles of Incorporation) and shall be subject to all the liabilities of the Bond Portfolio in the same manner as if the liabilities had been incurred by, or allocated to, the Balanced Portfolio in the first instance. Upon effectiveness of the Amendment, all of the Shares of the Bond Portfolio shall be reclassified as Balanced Portfolio shares, and the Bond Portfolio shall cease to be a separate class of stock of the Company. THE RESTATED ARTICLES OF INCORPORATION Acacia Capital Corporation, a Maryland corporation, having its principal office in the State of Maryland in Baltimore City, Maryland (hereafter called the "Corporation"), hereby amends, effective February 26, 1996 its Articles of Incorporation, (the "Articles of Incorporation"), to redesignate and reclassify the issued and unissued shares of the Corporation which were divided and classified as the class of common stock bearing the designation CRI Bond Portfolio into the class of common stock bearing the designation CRI Balanced Portfolio. All of such shares have the powers, preferences, other special rights, qualifications, restrictions and limitations set forth in Article Tenth of the Articles of Incorporation ARTICLE NINTH, of the Articles of Incorporation of the Company is amended to read as follows: (1) The total number of shares of stock of all classes which the Corporation is authorized to issue is one hundred million (100,000,000) shares of capital stock. The par value of each share shall be One Dollar ($1.00). The shares shall be allocated as follows for each series: No. of Shares per Series CRI Money Market Portfolio 9,000,000 CRI Global Equity Portfolio 4,000,000 CRI Capital Accumulation Portfolio 4,000,000 CRI Strategic Growth Portfolio 5,000,000 The Board of Directors shall have the authority to classify or reclassify and issue authorized stock in such other classes as it may determine, each comprising such number of shares and having such designations, powers, preferences and rights and such qualifications, limitations and restrictions thereof, as may be fixed or determined from time to time by resolution or resolutions providing for the issue of such stock. The Board of Directors may increase or decrease the number of shares of any class provided that it may not decrease the number of shares of any class below the number of shares thereof then outstanding. The foregoing amendment was advised by the Board of Directors of the Company and approved by the affirmative vote of the holders of a majority of the total number of shares outstanding and entitled to vote on the proposed amendment. IN WITNESS WHEREOF, the Company has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on the ___ day of ______, 199_ to be effective on the ___ day of _____, 1996. /s/ William M. Tartikoff /s/ Clifton S. Sorrell, Jr. William M. Tartikoff Clifton S. Sorrell	497J	497J	1996-01-12T00:00:00	1996-01-12T13:07:19
0000912057-96-000444	0000912057-96-000444_0001.txt	WHEREAS, on March 15, 1990, Lee Pharmaceuticals ("Maker") and Henry L. Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Ninety Three Thousand Dollars; WHEREAS, the parties thereto desire to modify said note, NOW, THEREFORE, the parties modify said note as follows: 1. The maturity date of the note is extended from November 15, 1999, until January 1, 2005. 2. This note may be extended for an additional five years beyond the maturity date at the option of Lee Pharmaceuticals. 3. All other terms and conditions of the note remain the same. By: Ronald G. Lee, President WHEREAS, on March 15, 1993, Lee Pharmaceuticals ("Maker") and Henry L. Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was to pay to Henry Lee the sum of Three Hundred Seventy One Thousand Three Hundred Thirty Four Dollars; and WHEREAS, the parties thereto desire to modify said note, NOW, THEREFORE, the parties modify said note as follows: 1. The maturity date of the note is extended from March 15, 1993, until January 1, 2005. 2. This note may be extended for an additional five years beyond the maturity date at the option of Lee Pharmaceuticals. 3. All other terms and conditions of the note remain the same. By: Ronald G. Lee, President WHEREAS, on December 2, 1993, Lee Pharmaceuticals ("Maker") and Henry L. Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Thousand Dollars; WHEREAS, the parties thereto desire to modify said note, NOW, THEREFORE, the parties modify said note as follows: 1. The maturity date of the note is extended from February 14, 1997, until January 1, 2005. 2. This note may be extended for an additional five years beyond the maturity date at the option of Lee Pharmaceuticals. 3. All other terms and conditions of the note remain the same. By: Ronald G. Lee, President WHEREAS, on January 26, 1994, Lee Pharmaceuticals ("Maker") and Henry L. Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was to pay to Henry Lee the sum of Fifty Thousand Dollars; and WHEREAS, the parties thereto desire to modify said note, NOW, THEREFORE, the parties modify said note as follows: 1. The maturity date of the note is extended from January 26, 1997, until January 1, 2005. 2. This note may be extended for an additional five years beyond the maturity date at the option of Lee Pharmaceuticals. 3. All other terms and conditions of the note remain the same. By: Ronald G. Lee, President WHEREAS, on January 26, 1994, Lee Pharmaceuticals ("Maker") and Henry L. Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Thousand Dollars; WHEREAS, the parties thereto desire to modify said note, NOW, THEREFORE, the parties modify said note as follows: 1. The maturity date of the note is extended from January 28, 1997, until January 1, 2005. 2. This note may be extended for an additional five years beyond the maturity date at the option of Lee Pharmaceuticals. 3. All other terms and conditions of the note remain the same. By: Ronald G. Lee, President WHEREAS, on January 26, 1994, Lee Pharmaceuticals ("Maker") and Henry L. Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Thousand Dollars; WHEREAS, the parties thereto desire to modify said note, NOW, THEREFORE, the parties modify said note as follows: 1. The maturity date of the note is extended from January 28, 1997, until January 1, 2005. 2. This note may be extended for an additional five years beyond the maturity date at the option of Lee Pharmaceuticals. 3. All other terms and conditions of the note remain the same. By: Ronald G. Lee, President WHEREAS, on September 29, 1994, Lee Pharmaceuticals ("Maker") and Henry L. Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was to pay to Henry Lee the sum of One Hundred Fifty Thousand WHEREAS, the parties thereto desire to modify said note, NOW, THEREFORE, the parties modify said note as follows: 1. The maturity date of the note is extended from January 28, 1998, until January 1, 2005. 2. This note may be extended for an additional five years beyond the maturity date at the option of Lee Pharmaceuticals. 3. All other terms and conditions of the note remain the same. By: Ronald G. Lee, President WHEREAS, on December 23, 1994, Lee Pharmaceuticals ("Maker") and Henry L. Lee, Jr. ("Holder") entered into an agreement ("Note") whereby Lee Pharmaceuticals was to pay to Henry Lee the sum of Two Hundred Fifty Thousand WHEREAS, the parties thereto desire to modify said note, NOW, THEREFORE, the parties modify said note as follows: 1. The maturity date of the note is extended from June 30, 1998, until January 1, 2005. 2. This note may be extended for an additional five years beyond the maturity date at the option of Lee Pharmaceuticals. 3. All other terms and conditions of the note remain the same. By: Ronald G. Lee, President $250,000.00 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Lee Foundation or order, at South El Monte, California the sum of TWO HUNDRED AND FIFTY THOUSAND DOLLARS, with interest from February 12, 1992 on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated February 12, 1992, which is the reason interest runs from February 12, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $150,000.00 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Lee Foundation or order, at South El Monte, California the sum of ONE HUNDRED AND FIFTY THOUSAND DOLLARS, with interest from February 12, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principle payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated February 12, 1992, which is the reason interest runs from February 12, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Cassandra Karazissis or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated December 26, 1991, which is the reason interest runs from January 1, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Diana Lee Karazissis or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated December 26, 1991, which is the reason interest runs from January 1, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Kristopher Karazissis or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated December 26, 1991, which is the reason interest runs from January 1, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Nick Karazissis or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated December 26, 1991, which is the reason interest runs from January 1, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Nickie Karazissis or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated December 26, 1991, which is the reason interest runs from January 1, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Megan Amy Lee or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated December 26, 1991, which is the reason interest runs from January 1, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Henry L. Lee IV or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated December 26, 1991, which is the reason interest runs from January 1, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Debbie Lee or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from January 1, 1992, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated December 26, 1991, which is the reason interest runs from January 1, 1992. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti $10,000 South El Monte, California January 1, 1995 For value received, Lee Pharmaceuticals promises to pay Ronald G. Lee or order, at South El Monte, California the sum of TEN THOUSAND DOLLARS, with interest from November 22, 1993, on unpaid principal at the rate of Imperial Bank Prime Rate per cent per annum; principal payable on January 1, 2005. Interest shall be calculated on the basis of the unpaid principal balance daily, based on a 365 day year, actual day month, payable monthly. Principal and interest shall be payable in lawful money of the United States. If action be instituted on this note, I promise to pay such sum as the Court may fix as attorney's fees. At Lee Pharmaceuticals option this note could be extended for an additional five years beyond the above maturity date. This note is secured by the product brand. This note replaces another note dated November 22, 1993, which is the reason interest runs from November 22, 1993. January 3, 1995 RONALD G. LEE Date Lee Pharmaceuticals - Ronald G. Lee January 3, 1995 MICHAEL L. AGRESTI Date Lee Pharmaceuticals - Michael L. Agresti	10KSB40	EX-10.17	1996-01-12T00:00:00	1996-01-12T14:39:28
0000950130-96-000101	0000950130-96-000101_0000.txt	PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 7, 1996 (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation) (Commission File Number) (IRS Employer Identification No.) 6801 Rockledge Drive Bethesda, Maryland 20817 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 301-897-6000 (Former name or former address, if changed since last report) On January 7, 1996, the Registrant and Loral Corporation entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") among the Registrant, Loral Corporation and LAC Acquisition Corporation, a wholly-owned subsidiary of the Registrant ("LAC"), providing for the transactions that will result in Loral Corporation becoming a subsidiary of the Registrant and the spin-off by Loral Corporation to Loral Corporation shareholders (the "Spin-Off") of shares of stock in Loral Space & Communications Ltd., a newly-formed Bermuda company ("Loral Space") that will then own substantially all of the space and satellite telecommunications interests of Loral Corporation. Under the terms of the Merger Agreement, LAC will commence a cash tender offer on or before January 12, 1996 for all outstanding shares of common stock, par value $.25 per share, of Loral (the "Loral Common Stock") at a price of $38.00 per share. Consummation of the tender offer is subject to, among other things, at least two-thirds of the shares of Loral Common Stock, determined on a fully-diluted basis, being validly tendered and not withdrawn prior to the expiration of the tender offer, applicable regulatory approvals and the occurrence of the Spin-Off Record Date (as defined below). A copy of each of the Merger Agreement and the joint press release of the Registrant and Loral Corporation announcing the transaction is filed herewith as an exhibit and incorporated by reference herein. Also filed herewith as an exhibit and incorporated by reference herein is a copy of the Restructuring, Financing and Distribution Agreement among the Registrant, Loral Corporation, Loral Telecommunications Acquisition, Inc., a wholly-owned subsidiary of Loral Corporation (to be reorganized as Loral Space), and certain other wholly-owned subsidiaries of Loral Corporation, concurrently with the execution of the Merger Agreement, which provides, among other things, for (i) the transfer of substantially all of the space and satellite telecommunications interests of Loral Corporation and certain other assets of Loral Corporation to Loral Space, (ii) the distribution of all of the shares of Loral Space common stock to holders of Loral Common Stock and persons entitled to acquire shares of Loral Common Stock, each as of a record date (the "Spin-Off Record Date") to be declared by the Board of Directors of Loral Corporation and to be a date on or immediately prior to the consummation of the tender offer, and (iii) Loral Corporation to retain a 20% equity interest in Loral Space through the ownership of Loral Space preferred stock convertible into common stock. The Registrant cautions that certain forward looking statements contained in the press release including, without limitation, the effect of the merger of the Registrant and Loral Corporation on the Registrant's earnings and cash flows, are qualified by important factors that could cause actual operating results to differ materially from those described in the press release, including among others, the following: (i) unanticipated events and circumstances may occur rendering the transaction less beneficial to the Registrant than projected; (ii) the Registrant and Loral Corporation face intense competition in their markets, a substantial portion of their business is obtained through the submission of competitive proposals, and there is, accordingly, no guarantee that after consummation of the merger the Registrant will achieve the expected financial and operating results and synergies; (iii) the Registrant and Loral Corporation rely heavily upon government contracts, particularly national security and defense related contracts, and there can be no assurance that government programs from which these contracts are derived will not be reduced in scope or terminated at the convenience of the government, rendering the merger less advantageous than projected; and (iv) in order to secure the requisite antitrust and other approvals for the merger, the Registrant may be required to divest or hold separate certain assets which would render the merger less beneficial than predicted. Results actually achieved thus may differ materially from the expected results described in the press release. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS Exhibit 2.1 Agreement and Plan of Merger dated as of January 7, 1996 among the Registrant, LAC Acquisition Company and Loral Corporation. Exhibit 99.1 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996 among the Registrant, Loral Corporation, Loral Telecommunications Acquisition, Inc. and certain other wholly-owned subsidiaries of Loral Corporation. Exhibit 99.2 Press release of the Registrant and Loral Corporation dated January 8, 1996. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Vice President and General Counsel Exhibit 2.1 Agreement and Plan of Merger dated as of January 7, 1996 among the Registrant, LAC Acquisition Corporation and Loral Corporation. Exhibit 99.1 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996 among the Registrant, Loral Corporation, Loral Telecommunications Acquisition, Inc. and certain other wholly-owned subsidiaries of Wings Corporation. Exhibit 99.2 Press release of the Registrant and Loral Corporation dated January 8, 1996.	8-K	8-K	1996-01-12T00:00:00	1996-01-12T15:27:00
0000950109-96-000200	0000950109-96-000200_0000.txt	As filed with the Securities and Exchange Commission on January 11, 1996 THE SECURITIES ACT OF 1933 THE INVESTMENT COMPANY ACT OF 1940 (Exact Name of Registrant as Specified in Charter) 4176 Burns Road, Palm Beach Gardens, Florida 33410 (Address of Principal Executive Offices) John N. Breazeale With a copy to: Weiss Money Management, Inc Joseph R. Fleming, Esq. 4176 Burns Road Dechert Price & Rhoads Palm Beach Gardens, Florida 33410 Ten Post Office Square, South - Suite 1230 (Name and Address of Agent for Service) Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this registration statement. The Registrant has filed a declaration registering an indefinite amount of securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended. The Registrant intends to file the notice required by Rule 24f-2 following its initial fiscal year. 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. The total number of pages is _______. The exhibit index is on page _________. Items Required by Form N-1A Weiss Treasury Only Money Market Fund SUPPLEMENT TO PROSPECTUS DATED JANUARY 16, 1996 Shares of the Weiss Treasury Bond Fund are not currently offered. Weiss Treasury Only Money Market Fund Palm Beach Gardens, FL 33410 This Prospectus sets forth concisely the information about Weiss Treasury Only Money Market Fund, Weiss Intermediate Treasury Fund and Weiss Treasury Bond Fund, each a series of Weiss Treasury Fund (the "Trust"), that an investor should know before investing. Each of these series (individually, a "Fund" and collectively, the "Funds") represents shares of beneficial interest in a sepa- rate portfolio of securities and other assets with its own objective and poli- cies. --Weiss Treasury Only Money Market Fund seeks maximum current income consis- tent with capital preservation. --Weiss Intermediate Treasury Fund and Weiss Treasury Bond Fund each seek a high level of income consistent with capital preservation. The Funds are no-load funds, selling and redeeming their shares at net asset value without any sales charges, commissions or redemption fees. For complete details on how to purchase, redeem and exchange shares, please refer to "Shareholder Services" on page 11. Please read this Prospectus carefully and retain it for future reference. Ad- ditional information about the Funds is contained in the Funds' combined Statement of Additional Information dated January 16, 1996, which is filed with the Securities and Exchange Commission and is incorporated by reference into this Prospectus. The Statement of Additional Information is available upon request and without charge by writing or calling the Funds at the address or telephone number listed above. THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SECURITIES AND EXCHANGE COMMIS- SION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADE- QUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF- FENSE. INVESTMENTS IN THE FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV- ERNMENT. THERE IS NO ASSURANCE THAT THE WEISS TREASURY ONLY MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. The purpose of the following tables is to assist investors in understanding the various costs and expenses that they would bear directly or indirectly by investing in any of the Funds. Further information regarding costs and ex- penses may be found under "Fund Organization and Management--Investment Manag- er" in this Prospectus and "Investment Advisory and Other Services--Investment Manager" in the Statement of Additional Information. (For the current fiscal year ending December 31, 1996 as a percentage of Based on the level of total Fund operating expenses listed above, you would pay indirectly the following expenses on a $1,000 investment, assuming a 5% annual return and redemption at the end of each period: THIS EXAMPLE SHOULD NOT BE CONSIDERED REPRESENTATIVE OF PAST OR FUTURE EXPENSES OR RETURNS. ACTUAL FUND EXPENSES AND RETURNS VARY FROM YEAR TO YEAR AND MAY BE HIGHER OR LOWER THAN THE AMOUNTS SHOWN. 1 A $10 service fee may be charged for redemptions by wire. 2 The fees and expenses in the tables and examples above are based on the es- timated fees and expenses that each Fund expects to incur in its initial fiscal year ending December 31, 1996, net of fee waivers and/or reimburse- ments from the Manager and other service providers. Without such waivers and/or reimbursements, the "Management Fee" and "Total Fund Operating Ex- penses" for each of the Funds would be as follows: Weiss Treasury Only Money Market Fund, .50% and 1.18%, respectively; Weiss Intermediate Treasury Fund, .50% and 1.66%, respectively; Weiss Treasury Bond Fund, .70% and 4.73%, re- spectively. For the period through April 30, 1996, the Manager has agreed to waive that portion of its fee and reimburse other operating expenses neces- sary to maintain the total Fund expenses at .50% for each of the Weiss Trea- sury Only Money Market Fund and the Weiss Intermediate Treasury Fund. Through December 31, 1996, the Manager has agreed to waive that portion of its fee and reimburse other operating expenses necessary to maintain total Fund expenses at .70% for the Weiss Treasury Bond Fund. See "Fund Manage- ment--Organization and Management" for a more detailed discussion of the Funds' fees and expenses. INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS The Funds' investment manager, Weiss Money Management, Inc. (the "Manager"), uses a variety of different investments and investment techniques in seeking to achieve each Fund's investment objective. Each Fund does not use all of the investment techniques described below. Investors should consider which Fund best meets their investment goals. Although each Fund will attempt to achieve its investment objective, there is no assurance it will be successful. Except as otherwise indicated, the Funds' investment objectives and policies are not fundamental and may be changed without shareholder approval. Share- holders will receive written notice of any material change in a Fund's invest- ment objective. If such a change occurs, each shareholder should consider whether the Fund remains an appropriate investment in light of his or her then current financial position and needs. The Funds are subject to additional in- vestment policies and restrictions described in the Statement of Additional Information, some of which are fundamental and may not be changed without shareholder approval. WEISS TREASURY ONLY MONEY MARKET FUND The investment objective of the Weiss Treasury Only Money Market Fund is to seek maximum current income consistent with preservation of capital. The Fund pursues its objective by investing exclusively in U.S. Treasury securities, and repurchase agreements secured by such obligations. The Fund seeks to main- tain a constant net asset value of $1.00 per share and declares dividends dai- ly. Under certain circumstances the Fund may not be able to maintain a stable net asset value. Under normal circumstances, at least 80% of the Fund's total assets will be invested in U.S. Treasury securities, and no more than 20% of the Fund's net assets will be invested in repurchase agreements backed by such obligations. For temporary defensive or emergency purposes, the Fund may invest up to 100% of its assets in cash or other investment companies that invest primarily in U.S. Treasury securities or repurchase agreements. Accordingly, the Fund is appropriate for investors who are seeking a high degree of credit safety but who are unwilling to accept stock or bond market risk. The income earned by the Fund fluctuates with changes in interest rates. The Fund will invest only in those securities that conform to the credit qual- ity standards established under Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"). The Manager shall determine whether a secu- rity presents minimal credit risk under procedures adopted by the Board of Trustees. The securities in which the Fund may invest must have a remaining maturity of 397 days or less (as calculated pursuant to Rule 2a-7 under the 1940 Act) and must maintain a dollar-weighted average portfolio maturity of 90 days or less. WEISS INTERMEDIATE TREASURY FUND AND WEISS TREASURY BOND FUND The Weiss Intermediate Treasury Fund and the Weiss Treasury Bond Fund offer to investors two alternatives for participating in the fixed income securities market. The investment objective of each Fund is to seek a high level of in- come consistent with preservation of capital. Each Fund pursues its objective by investing exclusively in U.S. Treasury securities, including repurchase agreements collateralized by such obligations, and other investment companies that invest primarily in U.S. Treasury securities or repurchase agreements. Under normal circumstances, the Weiss Intermediate Treasury Fund's dollar- weighted average portfolio maturity will be between three and ten years. There is no maturity limitation on the individual portfolio securities purchased for the Weiss Treasury Bond Fund, and the dollar-weighted average maturity of the Fund will vary with market conditions. Each Fund normally invests at least 80% of its assets in U.S. Treasury securi- ties, including repurchase agreements collateralized by such obligations. Cur- rently each Fund intends to invest 100% of its assets in such instruments in- cluding investment companies that invest primarily in U.S. Treasury securities and repurchase agreements. For temporary defensive or emergency purposes, each Fund may invest up to 100% of its assets in cash or other investment companies that invest primarily in U.S. Treasury securities and repurchase agreements. Each Fund may invest in a variety of U.S. Treasury securities, including bonds, notes and bills. The value of each Fund's portfolio (and consequently its shares) is expected to fluctuate inversely in relation to changes in the direction of interest rates. --U.S. TREASURY SECURITIES. Each Fund invests primarily in U.S. Treasury secu- rities, which are direct obligations of the U.S. Treasury. U.S. Treasury secu- rities differ only in their interest rates, maturities and times of issuance. For example, Treasury bills have initial maturities of one year or less; Trea- sury notes have initial maturities of one to ten years; and Treasury bonds generally have initial maturities of greater than ten years. The payment of principal and interest on U.S. Treasury securities is unconditionally guaran- teed by the U.S. Government, and therefore they are of the highest possible credit quality. --REPURCHASE AGREEMENTS. As a means of earning income for periods as short as overnight, each Fund may enter into repurchase agreements that mature within seven days or less with selected banks and broker-dealers. When a Fund enters into a repurchase agreement, it buys securities for a specified price and agrees to resell the securities to the seller at a higher price at some future date, normally one to seven days from the time of initial purchase. --ZERO COUPON SECURITIES. Zero coupon securities are debt obligations which do not entitle the holder to any periodic payments of interest prior to maturity or a specified date. Such securities are issued and traded at a discount to their face amounts or par value. --WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a when-issued or forward delivery basis. When-issued securities involve a commitment by a Fund to purchase or sell particular securities with payment and delivery tak- ing place at a future date and permit a Fund to lock in a price or yield on a security it intends to purchase or sell regardless of future interest rate changes. At the time of settlement, the market value of the security may be more or less than at the time of commitment. --OTHER INVESTMENT COMPANIES. The Weiss Intermediate Treasury Fund and Weiss Treasury Bond Fund may each invest in the securities of other mutual funds in- vesting primarily in U.S. Treasury securities and repurchase agreements sub- ject to applicable securities regulations. When a Fund invests in another mu- tual fund, it pays a pro rata portion of the advisory fees and other expenses of that fund as a shareholder of that fund. These expenses are in addition to the advisory and other expenses a Fund pays in connection with its own opera- tions. --U.S. TREASURY SECURITIES. Because short-term interest rates can fluctuate substantially over short periods, income risk to shareholders (i.e., the po- tential for a decline in a Fund's income due to falling interest rates) with respect to the Funds' investments in short-term U.S. Treasury securities is expected to be high. As interest rates change, the values of such securities will also fluctuate. --REPURCHASE AGREEMENTS. If the seller of the securities under a repurchase agreement fails to pay the agreed resale price on the agreed delivery date, the Fund may incur costs in disposing of the collateral and be subject to higher losses to the extent such disposal is delayed. --ZERO COUPON SECURITIES. Generally, the market prices of zero coupon securi- ties are more volatile than the prices of securities that pay interest period- ically in cash and are likely to respond to changes in interest rates to a greater degree than other types of debt securities having similar maturities and credit quality. --WHEN ISSUED SECURITIES. Securities purchased on a when-issued or delayed de- livery basis are subject to market price fluctuation, and losses may result if the value or yield of the security to be purchased declines prior to the set- tlement date. Each Fund has adopted the following fundamental policies which cannot be changed without shareholder approval: --Each Fund may not make loans, except that a Fund may lend its portfolio se- curities. The entry into repurchase agreements and the purchase of debt in- struments are not deemed to be loans for purposes of this restriction. --Each Fund may not borrow money except for temporary or emergency purposes or in connection with reverse repurchase agreements, provided that the Fund main- tains asset coverage of 300% for all borrowings. The Funds have no current in- tention to engage in reverse repurchase agreements during the coming year. A complete description of these and other policies and restrictions is con- tained under "Investment Restrictions" in the Funds' combined Statement of Ad- ditional Information. Each of the Funds is a diversified series of Weiss Treasury Fund, an open-end management investment company registered under the 1940 Act. The Trust was or- ganized on August 10, 1995 as a Massachusetts business trust. The Board of Trustees of the Trust oversees the business affairs of the Trust and is re- sponsible for significant decisions relating to each Fund's investment objec- tive and policies. The Trustees delegate the day-to-day management of the Funds to the officers of the Trust. Shareholders have one vote for each share held on matters on which they are entitled to vote. Separate votes are taken by each Fund only if a matter af- fects or requires the vote of only that Fund. The Funds are not required to and do not currently intend to hold annual shareholder meetings, although spe- cial meetings may be called for purposes such as electing or removing Trust- ees, changing fundamental investment policies, or approving certain contracts. Shareholders will be assisted in communicating with other shareholders in con- nection with removing a Trustee as if Section 16(c) of the 1940 Act were ap- plicable. Weiss Money Management, Inc., 4176 Burns Road, Palm Beach Gardens, Florida 33410 (the "Manager"), is the investment adviser to each of the Funds, and is responsible for the day-to-day management of their respective portfolios. The Manager has been advising individuals, trusts, corporations and other business entities since 1988 but has no previous experience advising registered invest- ment companies ("mutual funds"). Under investment advisory agreements with each of the Funds, the Manager provides continuous advice and recommendations concerning each Fund's investments. The Funds have each agreed to compensate the Manager for its services by the monthly payment of a fee at the annual rate of .50% of average net assets, with respect to Weiss Treasury Only Money Market Fund and the Weiss Intermediate Treasury Fund, and .70% of average net assets, with respect to Weiss Treasury Bond Fund. For the period through April 30, 1996, the Manager has agreed to waive that portion of its fee which is necessary in order to maintain total annual Fund expenses at .50%, for Weiss Treasury Only Money Market Fund and Weiss Intermediate Treasury Fund. For the period through December 31, 1996, the Manager has agreed to waive that portion of its fee which is necessary in order to maintain total annual Fund expenses at .70% for the Weiss Treasury Bond Fund. John N. Breazeale is the portfolio manager for each of the Funds. Mr. Breazeale is the President of Weiss Money Management, Inc., and President and a Trustee of the Trust. Mr. Breazeale has been a portfolio manager with the Manager since 1994. Mr. Breazeale has over 25 years' experience in the securi- ties industry and has provided portfolio management services at Provident In- stitutional Management Inc., Mitchell Hutchins Asset Management Inc., and most recently with Mackenzie Investment Management Inc. The Manager pays the compensation and expenses of all trustees, officers and executive employees of the Trust who are affiliated persons of the Manager. Each Fund is responsible for all its other expenses, including fees and ex- penses incurred in connection with membership in investment company organiza- tions, brokers' commissions, legal, auditing and accounting expenses, taxes and governmental fees, the fees and expenses of the transfer agent, the ex- penses or fees for registering or qualifying Fund securities for sale, the cost of printing and distributing reports and notices to shareholders, the fees and disbursements of custodians, and the fees and expenses of trustees, officers and employees of the Trust who are not affiliated with the Manager. Each Fund's shares are sold on a continuous basis by Weiss Funds, Inc., 4176 Burns Road, Palm Beach Gardens, Florida 33410, a registered broker-dealer (the "Distributor") and wholly-owned subsidiary of the Manager. PFPC, Inc., Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809 ("PFPC"), performs various administrative and accounting serv- ices for each Fund. These services include maintenance of books and records, preparation of governmental filings and shareholder reports and computation of net asset values and dividend distributions. For its administrative services, PFPC receives a fee, payable monthly, at the rate of .10% per annum of the average daily net assets of each Fund, plus any reasonable out- of-pocket expenses. TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND CUSTODIAN PFPC serves as the Funds' transfer agent, dividend disbursing agent and regis- trar. In its capacity as transfer agent, dividend disbursing agent and regis- trar, PFPC performs bookkeeping, data processing and administrative services incidental to the maintenance of shareholder accounts. PNC Bank, 200 Stevens Drive, Lester, Pennsylvania 19113, serves as custodian for the Funds' portfo- lio securities and cash. Purchases and sales of fixed income securities on behalf of a Fund are gener- ally placed by the Manager with primary market makers for these securities on a net basis, without any brokerage commission being paid by the Fund. Such trading does, however, involve transaction costs. Transactions with dealers serving as primary market makers reflect the spread between the bid and asked prices. Purchases of underwritten issues may be made which will include an un- derwriting fee paid to the underwriter. Portfolio transactions in debt securi- ties may also be placed on an agency basis, with a commission being charged. With respect to Weiss Intermediate Treasury Fund and Weiss Treasury Bond Fund it is anticipated that each Fund's annual portfolio turnover rate will not ex- ceed 100% for its initial fiscal year, although market conditions may warrant a higher rate. A higher rate will result in higher brokerage costs to such Funds and may result in the realization of net short-term capital gains which would be taxable to shareholders as ordinary income when distributed. The Funds intend to distribute substantially all of their respective invest- ment income and any net realized capital gains. Net investment income for each Fund consists of all interest income accrued on the Fund's assets, less all actual and accrued expenses. Interest income included in the daily computation of net investment income is comprised of original issue discount earned on discount paper accrued to the date of maturity as well as accrued interest. Each Fund's expenses, including the management fee payable to the Manager, are accrued each day. Distributions by a Fund are reinvested in the Fund or paid in cash at the election of the shareholder. If no election is made, all distributions will be reinvested in additional Fund shares. Dividends are declared daily. Weiss Treasury Only Money Market Fund intends to distribute dividends on the last business day of each month. Weiss Intermediate Treasury Fund and Weiss Trea- sury Bond Fund intend to distribute taxable income quarterly, and distribute net capital gains realized during each fiscal year annually before each Fund's fiscal year end on December 31. Each Fund may make an additional distribution of income and gains if necessary to satisfy a calendar year excise tax distri- bution requirement. Each Fund intends to qualify annually and elect to be treated as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). To qualify, a Fund must meet certain income, distribution and diver- sification requirements. In any year in which a Fund qualifies as a regulated investment company and timely distributes all of its taxable income, the Fund generally will not pay any U.S. federal income or excise tax. Dividends paid out of a Fund's investment company taxable income (including dividends, interest and net short-term capital gains) will be taxable to a U.S. shareholder as ordinary income. Because no portion of a Fund's income is expected to consist of dividends paid by U.S. corporations, no portion of the dividends paid by a Fund is expected to be eligible for the corporate divi- dends-received deduction. Distributions of net capital gains (the excess of net long-term capital gains over net short-term capital losses), if any, des- ignated as capital gain dividends are taxable as long-term capital gains, re- gardless of how long the shareholder has held the Fund's shares. Dividends are taxable to shareholders in the same manner whether received in cash or rein- vested in additional Fund shares. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by a Fund in October, November or December with a rec- a month and paid by the Fund during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. Each year each Fund will notify shareholders of the tax status of dividends and distributions. Investments in zero coupon securities will result in income to a Fund each year equal to a portion of the excess of the face value of the securities over their issue price, even though the Fund receives no cash interest payments from the securities. Upon the sale or other disposition of shares of a Fund, a shareholder may re- alize a capital gain or loss which will be long-term or short-term, generally depending upon the shareholder's holding period for the shares. Each Fund may be required to withhold U.S. federal income tax at the rate of 31% of all taxable distributions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal income tax li- ability. Further information relating to federal tax consequences is contained in the Statement of Additional Information. The foregoing discussion of federal tax consequences is intended for general information only. Distributions of a Fund which are derived from interest on U.S. Treasury securities may be exempt from state and local taxes in certain states. Shareholders should consult their own tax advisors regarding the par- ticular tax consequences of an investment in a Fund. HOW TO INVEST IN THE FUNDS Share purchases are executed at the net asset value next calculated after a purchase order is received by the Fund's transfer agent in good order as de- scribed below under "Opening an Account" and "Adding to Your Investment." Pur- chase and redemption requests received following the close of regular trading on the Exchange will be executed the following business day. Purchases are made in full and fractional shares. Fund shares may be purchased without a sales charge if you purchase them through the Fund's Distributor. Broker-dealers other than the Distributor may assess transaction charges in connection with purchases of Fund shares. Shares begin to earn dividends as of the first business day following the day of your purchase. Purchases by check are executed on the day the check is re- ceived in good order by the Transfer Agent and begin earning income on the following business day. The Trust reserves the right to reject any purchase order or to waive the min- imum investment requirement. Payment for orders which are not received or ac- cepted will be returned after prompt notice. The issuance of shares is re- corded in the shareholder records of the Funds, and share certificates will not be issued. Please see "Transaction Information" later in this prospectus for additional information on buying, redeeming and exchanging Fund shares. The minimum initial investment in a Fund is $1,000. Complete an account application and mail it along with a check payable to the Fund in which you are investing to: Complete an account application and deliver it along with a check payable to the Fund in which you are investing, to the Funds' address indicated on the cover page of this Prospectus. Ask your bank to send immediately available funds by wire to: PNC Bank N.A. Further Credit to: (Shareholder Name and The wire should include your name, address and taxpayer identification number and the name of the Fund in which you are investing. An account application indicating the name in which the purchase is to be made must be completed and mailed by you to the address under "Opening an Account--By Mail" above via overnight delivery or sent by facsimile transmission. Purchase money will be returned promptly in the event an account application is not received timely. Please call the Fund's transfer agent at (800) 430-9617 for additional infor- mation prior to making a purchase by wire and consult your bank regarding bank wire or other charges. The minimum amount required to make subsequent investments is $100. Make a check payable to the Fund in which you are investing and mail to the address shown above in "Buying Shares--By Mail". Please be sure to include your account number on the check or, if you prefer, use the tear off form at- tached to your regular Fund account statement. Make a check payable to the Fund in which you are investing and deliver it to the Funds' address indicated on the cover page of this Prospectus. Please be sure to include your account number on the check or, if you prefer, use the tear off form attached to your regular Fund account statement. Ask your bank to send immediately available funds by wire to: PNC Bank N.A. Further Credit to: (Shareholder Name and Account Number) The wire should include your name and account number. Please call the Fund's transfer agent at (800) 430-9617 regarding purchases by wire and consult your bank regarding bank wire or other charges. Please call (800) 430-9617 for more information and to request an election form. See "Transaction Information--Automatic Investment Plan." REDEEMING OR EXCHANGING FUND SHARES The Funds mail redemption proceeds within three business days following the receipt of a redemption request in proper form as described below, except in the case of shares recently purchased by check. The Funds may delay payment of redemption proceeds for shares purchased by check until the check clears, which may take up to 15 days from the purchase date. Once the purchase check has cleared, redemption proceeds will be sent within three business days. Redemptions in the amount of $50,000 or more require a signature guarantee. Please refer to "Signature Guarantees" later in this prospectus for more in- formation. The redemption requirements for corporations, other organizations, trusts, fi- duciaries, agents, institutional investors and retirement plans may be differ- ent from those for regular accounts. Please call (800) 430-9617 for more in- formation. Call (800) 430-9617 and speak with a Weiss Treasury Fund service representa- tive anytime between 8:30 a.m. and 5:00 p.m. Transactions by telephone cannot be in an amount in excess of $50,000 and must be sent to the shareholder's ad- dress of record. See "Transaction Information--Telephone Transactions" below. Send a letter of instruction signed by each owner on the account (sign exactly as each name appears on the account) to the address shown above in "Buying Shares--By Mail". Please be sure to include your account number in your re- quest. Prepare and send a letter of instruction in the same manner and to the same address as described under "Redeeming Shares--By Mail". If you have selected wire redemption privileges on your account application, you may redeem your shares by wire. Send a letter of instruction to the Funds in the same manner as described under "Redeeming Shares--By Mail" or you may call (800) 430-9617. Redemptions by wire must be in the amount of at least $1,000. Call (800) 430-9617 for more information and to request an election form. See "Shareholder Services--Automatic Withdrawal Plan." The exchange requirements for corporations, other organizations, trusts, fidu- ciaries, agents, institutional investors and retirement plans may be different from those for regular accounts. Please call 1-800-430-9617 for more informa- tion. This exchange privilege is available only in states where a Fund's shares may be legally sold. A minimum initial investment must be made to establish an account into which exchange proceeds may be invested. If you are opening an account in a differ- ent Fund by exchange, the shares being exchanged must be at least equal in value to the minimum investment requirement for the Fund into which exchange proceeds are being invested. Call (800) 430-9617 and speak with a Weiss Treasury Fund service representa- tive anytime between 8:30 a.m. and 5:00 p.m. Transactions by telephone cannot be in an amount in excess of $50,000. See "Transaction Information--Telephone Transactions" below. Send a letter of instruction signed by each owner on the account (sign exactly as each name appears on the account) to the address shown above in "Buying Shares--By Mail" or, if by fax, call (800)430-9617 for additional information. Please be sure to include in your instructions: --the dollar amount or number of shares you wish to exchange; --the name of the Fund you are exchanging from; --the name of the Fund you are exchanging into; and --a daytime telephone number at which you can be reached. Each of the Funds values its shares on each day the New York Stock Exchange (the "Exchange") is open for trading as of the regular close of trading of the Exchange (normally 4:00 p.m. New York time). On those days when the Funds' Custodian or the New York Stock Exchange close early as a result of such day being a partial holiday or otherwise, the Funds reserve the right to advance on that day the time by which purchase and redemption requests must be re- ceived. The Funds' Administrator determines net asset value per share by adding the value of the Fund's investments, cash and other assets, subtracting liabili- ties attributable to the Fund and then dividing the result by the number of shares outstanding. The assets of the Weiss Treasury Only Money Market Fund are valued at amortized cost. The assets of the Weiss Intermediate Treasury Fund and Weiss Treasury Bond Fund are valued at market value or if market value cannot be readily obtained, at fair value as determined by the Board of Trustees. Debt securities held by the Funds that have maturities of less than sixty days are valued at amortized cost. The minimum dollar amount of shares of the Weiss Treasury Only Money Market Fund that may be purchased by check is $1,000. With respect to all of the Funds, if you purchase shares with a check that does not clear, your purchase order will be cancelled and you will be liable for any losses or fees a Fund or the Transfer Agent has incurred. Checks must be drawn on a U.S. bank. Shareholders who elect to use the Telephone Exchange Privilege must first com- plete the Telephone Exchange authorization portion of the Account Application or complete a separate authorization form available by calling (800) 430-9617. The Telephone Exchange Privilege allows a shareholder to effect exchanges from one Fund into an identically registered account in one of the other Funds by calling (800) 430-9617. Neither the Fund nor the Transfer Agent will be liable for following instructions communicated by telephone reasonably believed to be genuine and a loss to the shareholder may result due to an unauthorized trans- action. The Fund and the Transfer Agent will employ reasonable procedures (which may include one or more of the following: recording all telephone calls requesting telephone exchanges, verifying authorization and requiring some form of personal identification prior to acting upon instructions, and sending a statement each time a telephone exchange is made) to confirm that instruc- tions communicated by telephone are genuine. The Fund and the Transfer Agent may be liable for any losses due to unauthorized or fraudulent instructions only if such reasonable procedures are not followed. Of course, shareholders are not obligated in any way to execute a Telephone Exchange Privilege form and may choose to make an exchange in writing. During periods of drastic eco- nomic or market changes, it is possible that the Telephone Exchange Privilege may be difficult to implement. In this event, shareholders should follow the other exchange procedures discussed under "Exchanging Shares," including the procedures for processing exchanges through securities dealers. Certain types of redemption requests must include a signature guarantee for each name in which the account is registered. Signature guarantees must accom- pany redemption requests for: (i) an amount in excess of $50,000 per day; (ii) any amount, if the redemption proceeds are to be sent elsewhere than the ad- dress of record on the Fund's books; or (iii) an amount of $50,000 or less if the address of record has been changed on the Fund's books for less than 60 days, although the Transfer Agent reserves the right to require signature guarantees on all redemptions. Signature guarantees can be obtained from a bank, trust company, credit union, savings association, broker-dealer or other member of a national securities exchange, or other eligible guarantor institu- tion. Signature guarantees by notaries public are not acceptable. Guarantees must be signed by an authorized person at one of these institutions and be ac- companied by the words "Signature Guarantee." When you complete your account application, please be sure to certify that your Social Security or tax identification number is correct and that you are not subject to 31% backup withholding for failing to report income to the IRS. Federal tax law requires the Funds to withhold 31% of taxable dividends, capi- tal gains distributions and redemption proceeds from most accounts without a certified Social Security or tax identification number and certain other cer- tified information or upon notification from the IRS or a broker that with- holding is required. The Funds reserve the right to reject account applica- tions without a certified Social Security or tax identification number. The Funds also reserve the right to redeem shares from accounts without such in- formation upon 30 days' notice. Shareholders may avoid redemption by providing the Funds with a tax identification number during the notice period. The Funds reserve the right to involuntarily redeem an account if, after 30 days' written notice, the account's net asset value falls and remains below a $500 minimum due to share redemptions and not market fluctuations. Purchase and redemption orders may be suspended on days when the Exchange is closed, closes early as a result of such day being a partial holiday or other- wise, when trading is restricted or otherwise as permitted by the SEC. In unusual circumstances, the Funds may make payment in readily marketable portfolio securities at their market value equal to the redemption price. The Funds and the Transfer Agent may restrict purchase transactions (including exchanges) when a pattern of frequent purchases and redemptions in response to short-term fluctuations in a Fund's share price appears evident. You may elect to redeem shares by writing checks against your account balance in the Weiss Treasury Only Money Market Fund for at least $250 on your account application. Your fund investments will continue to earn dividends until your purchase check is presented to the Fund for payment. Checks will be returned by the Fund's transfer agent if there are insufficient shares to meet the withdrawal amount. You should not attempt to close an account by check because the exact balance at the time the check clears will not be known when the check is written. For additional information call (800) 430-9617. You may elect to have money automatically transferred from your bank account into your Fund account(s) at regular intervals of your choice. Your bank ac- count must be a checking, NOW or bank money market account maintained at a do- mestic financial institution that is an Automated Clearinghouse Member. Subse- quent to making the required minimum initial investment of $1,000, a minimum investment of $50 per transaction is required for participation in the Auto- matic Investment Plan. Please call (800) 430-9617 for additional information. You may elect to have money automatically withdrawn from your Fund account on a monthly, quarterly, semi-annual or annual basis in the amount of $100 or more. The automatic withdrawal will be made on or about the 25th day of each month. Please call (800) 430-9617 for additional information. Dividends will be automatically reinvested in additional fund shares unless otherwise indicated on the account application. Please call (800) 430-9617 for additional information. You may want to have your dividends received from a Fund automatically in- vested in shares of any other Fund in the Weiss family of funds. Investments will be made at a price equal to the net asset value of the acquired shares next determined after receipt of the distribution proceeds by the Transfer Agent. In order to qualify for the Cross Reinvestment Privilege, the value of your account in the acquired fund must equal or exceed the acquired fund's minimum initial investment requirement. There are no subsequent investment re- quirements for amounts to which dividends are directed nor are service fees currently charged for effecting these transactions. The election to cross-re- invest dividends will not affect the tax treatment of such dividends, which will be treated as received by you and then used to purchase shares of the ac- quired fund. Please call (800)430-9617 for additional information. The Funds offer Individual Retirement Account ("IRA") plans, which allow a maximum annual contribution of $2,000 per person for anyone with earned in- come. PNC Bank, which serves as custodian or trustee under each Fund's IRA plan, charges certain nominal fees for the annual maintenance of such ac- counts. Please call (800) 430-9617 for additional information. All performance figures are historical, show the performance of a hypothetical investment and are not intended to indicate future performance. Each Fund may quote its performance in advertisements or shareholder communi- cations, including reports, newsletters and sales literature. Total return for each Fund may be calculated on an average total return basis or an aggregate total return basis. Average annual total return reflects the average annual percentage change in value of an investment over the measuring period. Average total return reflects the total percentage change in value of an investment over the measuring period. Both measures assume the reinvestment of dividends and distributions. Yield refers to income generated by an investment in a Fund over a specified 30-day period, for the Weiss Treasury Bond Fund and Weiss In- termediate Treasury Fund, and specified 7-day period for the Weiss Treasury Only Money Market Fund. Yield is expressed as an annualized percentage. Effec- tive yield is expressed similarly but, when annualized, the income earned by an investment in a Fund is assumed to be reinvested and will reflect the ef- fects of compounding. Palm Beach Gardens, FL 33410 Weiss Treasury Only Money Market Fund This Statement of Additional Information pertains to the funds listed above, each of which is a separate series of Weiss Treasury Fund, a Massachusetts business trust (the "Trust"). Each of these series (individually, a "Fund" and collectively, the "Funds") represents shares of beneficial interest in a separate portfolio of securities and other assets with its own objective and policies. Each Fund is managed separately by Weiss Money Management, Inc. (the "Manager). This Statement of Additional Information is not a Prospectus and should be read in conjunction with the combined Prospectus for the Funds dated January 16, 1996, copies of which may be obtained from the Trust without charge by writing to the above address or by calling (___) ____-_______. INVESTMENT OBJECTIVES, RESTRICTIONS AND TECHNIQUES 1 ORGANIZATION OF THE FUNDS 5 INVESTMENT ADVISORY AND OTHER SERVICES 8 Transfer Agent, Dividend Disbursing Agent and Custodian 9 INVESTMENT OBJECTIVES, RESTRICTIONS AND TECHNIQUES Each Fund's investment objective is discussed in the Prospectus and summarized below. There is no assurance that the Funds will achieve their respective objectives. The investment objectives of the Funds are not fundamental and may be changed by the Trustees without shareholder approval. Unless otherwise stated, the Funds' policies are not fundamental. Weiss Treasury Only Money Market Fund The investment objective of the Weiss Treasury Only Money Market Fund is to seek maximum current income consistent with preservation of capital. The Fund pursues its objective by investing exclusively in U.S. Treasury securities, as well as repurchase agreements secured by such obligations. The Fund seeks to maintain a constant net asset value of $1.00 per share and declares dividends daily. Under certain circumstances the Fund may not be able to maintain a stable net asset value. The Weiss Intermediate Treasury Fund and the Weiss Treasury Bond Fund offer to investors two alternatives for participating in the fixed income securities market with concentration on U.S. Government securities. The investment objective of each Fund is to seek a high level of income consistent with preservation of capital. Each Fund pursues its objective by investing exclusively in obligations issued and/or guaranteed by the U.S. Government, repurchase agreements collateralized by such obligations and other investment companies investing in U.S. Treasury securities and repurchase agreements. While the maturity of individual securities will not be restricted, except during temporary defensive periods or unusual market conditions, it is expected that the Weiss Intermediate Treasury Fund's dollar-weighted average portfolio maturity will be between three and ten years. There is no maturity limitation on the individual portfolio securities purchased for the Weiss Treasury Bond Fund and the dollar-weighted average maturity of the Fund will vary with market conditions. The Funds invest primarily in direct obligations of the U.S. Treasury (e.g., Treasury bills, notes, and bonds). When such securities are held to maturity, the payment of principal and interest is unconditionally guaranteed by the U.S. Government, and therefore they are of the highest possible credit quality. U.S. Treasury securities that are not held to maturity are subject to variations in market value caused by fluctuations in interest rates. In general, investing in debt securities involves both interest rate and credit risk. As a rule, the value of debt instruments rises and falls inversely with interest rates. As interest rates decline, the value of debt securities generally increases. Conversely, rising interest rates tend to cause the value of debt securities to decrease. Debt securities with longer maturities generally are more volatile than those with shorter maturities. The Funds may enter into repurchase agreements with selected brokers-dealers, banks or other financial institutions. A repurchase agreement is an arrangement under which the purchaser (i.e., a Fund) purchases a U.S. Government or other high quality short-term debt obligation (an "Obligation") and the seller agrees at the time of sale to repurchase the Obligation at a specified time and price. Custody of the Obligation will be maintained by the Funds' custodian or subcustodian. The repurchase price may be higher than the purchase price, the difference being income to the Funds, or the purchase and repurchase prices may be the same, with interest at a stated rate due to the Funds together with the repurchase price on repurchase. In either case, the income to a Fund is unrelated to the interest rate on the Obligation subject to the repurchase agreement. Repurchase agreements pose certain risks for all entities, including the Funds, that utilize them. Such risks are not unique to the Funds but are inherent in repurchase agreements. Each Fund seeks to minimize such risks by, among others, the means indicated below, but because of the inherent legal uncertainties involved in repurchase agreements, such risks cannot be eliminated. For purposes of Investment Company Act of 1940, as amended (the "1940 Act"), a repurchase agreement is deemed to be a loan from Fund to the seller of the Obligation. It is not clear whether for other purposes a court would consider the Obligation purchased by a Fund subject to a repurchase agreement as being owned by the Fund or as being collateral for a loan by the Fund to the seller. If in the event of bankruptcy or insolvency proceedings against the seller of the Obligation, a court holds that a Fund does not have a perfected security interest in the Obligation, the Fund may be required to return the Obligation to the seller's estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, the Fund would be at risk of losing some or all of the principal and income involved in the transaction. To minimize this risk, the Fund utilizes custodians and subcustodians that the Manager believes follow customary securities industry practice with respect to repurchase agreements, and the Manager analyzes the creditworthiness of the obligor, in this case the seller of the Obligation. But because of the legal uncertainties, this risk, like others associated with repurchase agreements, cannot be eliminated. Also, in the event of commencement of bankruptcy or insolvency proceedings with respect to the seller of the Obligation before repurchase of the Obligation under a repurchase agreement, a Fund may encounter delay and incur costs before being able to sell the security. Such a delay may involve loss of interest or a decline in price of the Obligation. Apart from risks associated with bankruptcy or insolvency proceedings, there is also the risk that the seller may fail to repurchase the security. However, if the market value of the Obligation subject to the repurchase agreement becomes less than the repurchase price (including accrued interest), the Funds will direct the seller of the Obligation to deliver additional securities so that the market value of all securities subject to the repurchase agreement equals or exceeds the repurchase price. Certain repurchase agreements which provide for settlement in more than seven days can be liquidated before the nominal fixed term on seven days' or less notice. Such repurchase agreements will be regarded as illiquid instruments. Each Fund currently intends to limit its investments in repurchase agreements to those with maturities of less than seven days. The Fund may also enter into repurchase agreements with any party deemed creditworthy by the Manager, including broker-dealers, if the transaction is entered into for investment purposes and the counterparty's creditworthiness is at least equal to that of issuers of securities which the Fund may purchase. Each Fund may invest up to 10% of its assets in zero coupon securities. Zero coupon bonds are issued and traded at a discount from their face value. They do not entitle the holder to any periodic payment of interest prior to maturity. Current federal income tax law requires holders of zero coupon securities to report the portion of any original issue discount on such securities that accrues during a given year as interest income, even though the holders receive no cash payments of interest during the year. In order to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, a Fund must distribute its investment company taxable income, including any original issue discount accrued on zero coupon bonds. Because a Fund will not receive cash payments on a current basis in respect of any accrued original issue discount on these bonds, in some years that Fund may have to distribute cash obtained from other sources in order to satisfy the distribution requirements under the Code. A Fund might obtain such cash from selling other portfolio holdings which might cause that Fund to incur capital gains or losses on the sale. Additionally, these actions are likely to reduce the assets to which Fund expenses could be allocated and to reduce the rate of return for that Fund. In some circumstances, such sales might be necessary in order to satisfy cash distribution requirements even though investment considerations might otherwise make it undesirable for a Fund to sell the securities at the time. Generally, the market prices of zero coupon securities are more volatile than the prices of securities that pay interest periodically and in cash and are likely to respond to changes in interest rates to a greater degree than other types of debt securities having similar maturities and credit quality. When-Issued Securities. When a Fund purchases new issues of securities on a when-issued basis, the Fund's custodian will establish a segregated account for the Fund consisting of cash, U.S. Treasury securities or other high-grade debt securities equal to the amount of the commitment. If the value of securities in the account should decline, additional cash or securities will be placed in the account so that the market value of the account will equal the amount of such commitments by the Fund on a daily basis. Securities purchased on a when-issued basis and the securities held in a Fund's portfolio are subject to changes in market value based upon various factors including changes in the level of market interest rates. Generally, the value of such securities will fluctuate inversely to changes in interest rates (i.e., they will appreciate in value when market interest rates decline and decrease in value when market interest rates rise). For this reason, placing securities rather than cash in the segregated account may have a leveraging effect on the Fund's net assets. In other words, to the extent that the Fund remains substantially fully invested in securities at the same time that it has committed to purchase securities on a when-issued basis, there will be greater fluctuations in its net assets than if it had set aside cash to satisfy its purchase commitment. Upon the settlement date of the when-issued securities, the Fund ordinarily will meet its obligation to purchase the securities from available cash flow, use of the cash (or liquidation of securities) held in the segregated account or sale of other securities. Although it would not normally expect to do so, the Fund also may meet its obligation from the sale of the when-issued securities themselves (which may have a current market value greater or less than the Fund's payment obligation). The sale of securities to meet such obligations carries with it a greater potential for the realization of capital gains. As indicated in the Prospectus, the Funds are subject to certain policies and restrictions that may not be changed without shareholder approval. Shareholder approval means approval by the lesser of (i) more than 50% of the outstanding voting securities of the Trust (or a particular Fund if a matter affects just that Fund), or (ii) 67% or more of the voting securities present at a meeting if the holders of more than 50% of the outstanding voting securities of the Trust (or a particular Fund) are present or represented by proxy. As a matter of fundamental policy, a Fund may not: (1) with respect to 75% of its total assets taken at market value purchase more than 10% of the voting securities of any one issuer; or invest more than 5% of the value of its total assets in the securities of any one issuer, except obligations issued or guaranteed by the U.S. Government and securities of other investment companies; (2) borrow money, except as a temporary measure for extraordinary or emergency purposes, provided that the Fund maintains asset coverage of 300% for (3) purchase any securities which would cause 25% or more of the market value of its total assets at the time of such purchase to be invested in the securities of one or more issuers having their principal business activities in the same industry, provided that there is no limitation with respect to investments in obligations issued or guaranteed by the U.S. Government. (For purposes of this restriction, telephone companies are considered to be in a separate industry from gas and electric public utilities, and wholly-owned finance companies are considered to be in the industry of their parents if their activities are primarily related to financing the activities of their parents.) (4) purchase or sell real estate (except that the Fund may invest in (i) securities of companies which deal in real estate or mortgages, and (ii) securities secured by real estate or interest therein, and that the Fund reserves freedom of action to hold and to sell real estate acquired as a result of the Fund's ownership of securities); or purchase or sell physical commodities or contracts relating to physical commodities; (5) act as an underwriter of securities issued by others, except to the extent that it may be deemed an underwriter in connection with the disposition of portfolio securities of the Fund; (6) make loans to other persons, except (a) loans of portfolio securities, and (b) to the extent the entry into repurchase agreements and the purchase of debt securities in accordance with its investment objective and investment policies may be deemed to be loans; and (7) issue senior securities, except as appropriate to evidence indebtedness which the Fund is permitted to incur and except for shares of the separate classes or series of the Trust. As a matter of nonfundamental policy, a Fund may not: (a) purchase or retain securities of any open-end investment company or securities of closed-end investment companies except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchases, or except when such purchase, though not made in the open market, is part of a plan of merger, consolidation, reorganization or acquisition of assets; in any event, the Fund may not purchase more than 3% of the outstanding voting securities of another investment company, may not invest more than 5% of its assets in another investment company, and may not invest more than 10% of its assets in other investment companies; (b) pledge, mortgage or hypothecate its assets in excess, together with permitted borrowings, of 1/3 of its total assets; (c) purchase or retain securities of an issuer any of whose officers, directors, trustees or security holders is an officer, director or trustee of the Fund or a member, officer, director or trustee of the investment adviser of the Fund if one or more of such individuals owns beneficially more than one-half of one percent (.5%) of the outstanding shares or securities or both (taken at market value) of such issuer and such individuals owning more than one-half of one percent (.5%) of such shares or securities together own beneficially more than 5% of such shares or securities or both; (d) purchase securities on margin, make short sales or maintain a short position, unless, by virtue of its ownership of other securities, it has the right to obtain securities equivalent in kind and amount to the securities sold and, if the right is conditional, the sale is made upon the same conditions, except in connection with arbitrage transactions and except that the Fund may obtain such short-term credits as may be necessary for the clearance of purchase and sales of securities; (e) invest more than 10% of its net assets in securities which are not readily marketable, the disposition of which is restricted under federal securities laws, or in repurchase agreements not terminable within 7 days; or invest more than 5% of its total assets in restricted securities; (f) with the exception of U.S. Government securities, purchase securities of any issuer with a record of less than three years of continuous operations, including predecessors, if such purchase would cause the investments of the Fund in all such issuers to exceed 5% of the total assets of the Fund (g) purchase more than 10% of the voting securities of any one issuer, except securities issued by the U.S. Government; (h) purchase or sell any put or call options or any combination (i) enter into futures contracts or purchase options thereon; (j) invest in oil, gas or other mineral leases, or exploration or development programs (although it may invest in issuers which own or invest in (k) borrow money (including reverse repurchase agreements), except as a temporary measure for emergency purposes, and not in excess of 5% of its total assets taken at market value, or borrow other than from banks; however, in the case of reverse repurchase agreements, the Fund may invest in such agreements with entities other than banks subject to total asset coverage of 300% for such agreements and all borrowings; (m) purchase or sell real estate limited partnership interests; and (n) lend securities, if the value of securities loaned exceeds 30% of the value of the Fund's total assets at the time any loan is made, provided that the loans are fully collateralized and marked to market daily, and provided further that the entry of a Fund into repurchase agreements and the purchase of debt instruments are not deemed to be loans for purposes of this restriction. None of the Funds currently intends to make loans of portfolio securities that would amount to greater than 5% of the Fund's net assets in the coming year. With respect to fundamental policy (2), a Fund may not purchase securities when borrowing exceeds 5% of the Fund's total assets. In addition, so long as it remains a restriction of the Ohio Division of Securities, the Funds will treat securities eligible for resale under Rule 144A of the Securities Act of 1933 as subject to the Funds' restriction on investing in restricted securities (nonfundamental policy (e), above). With respect to nonfundamental policy (a), above, to the extent that any of the Funds invest in securities of other investment companies, the Trust and the Manager will ensure that there will be no duplication of advisory fees. Further, no sales load will be paid by a Fund in connection with such investments. Whenever an investment objective, policy or restriction set forth in the Prospectus or this Statement of Additional Information states a maximum percentage of assets that may be invested in any security or other asset or describes a policy regarding quality standards, such percentage limitation or standard shall, unless otherwise indicated, apply to the Fund only at the time a transaction is entered into. Accordingly, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in the percentage which results from circumstances not involving any affirmative action by the Fund, such as a change in market conditions or a change in the Fund's asset level or other circumstances beyond the Fund's control, will not be considered a violation. Each of the Funds is a diversified series of Weiss Treasury Fund, an open-end management investment company registered under the 1940 Act. The Trust was organized on August 10, 1995 as a Massachusetts business trust. The Board of Trustees of the Trust oversees the business affairs of the Trust and is responsible for significant decisions relating to each Fund's investment objective and policies. The Trustees delegate the day-to-day management of the Funds to the officers of the Trust. The Trust's authorized capital consists of an unlimited number of shares of beneficial interest, $.01 par value, all of which are of one class and have equal rights as to voting, dividends and liquidation. The Trustees have the authority to issue two or more series of shares and to designate the relative rights and preferences as between the different series. If more than one series of shares were issued and a series were unable to meet its obligations, the remaining series might have to assume the unsatisfied obligations of that series. All shares issued and outstanding will be fully paid and non-assessable by the Trust, and redeemable as described in this combined statement of additional information and in the prospectus. The assets of the Trust received for the issue or sale of the shares of each series and all income, earnings, profits and proceeds thereof, subject only to the rights of creditors, are specifically allocated to such series and constitute the underlying assets of such series. The underlying assets of each series are segregated on the books of account, and are to be charged with the liabilities in respect to such series and with a proportionate share of the general liabilities of the Trust. If a series were unable to meet its obligations, the assets of all other series could be used to circumstances be available to creditors for that purpose, in which case the assets of such other series could be used to meet liabilities which are not otherwise properly chargeable to them. Expenses with respect to any two or more series are to be allocated in proportion to the asset value of the respective series except where allocations of direct expenses can otherwise be fairly made. The officers of the Trust, subject to the general supervision of the Trustees, have the power to determine which liabilities are allocable to a given series, or which are general or allocable to two or more series. In the event of the dissolution or liquidation of the Trust or any series, the holders of the shares of any series are entitled to receive as a class the underlying assets of such shares available for distribution to shareholders. Shares of the Trust entitle their holders to one vote per share; however, separate votes are taken by each series on matters affecting an individual series. For example, a change in investment policy for a series would be voted upon only by shareholders of the series involved. Additionally, approval of the investment advisory agreement is a matter to be determined separately by each series. Approval by the shareholders of one series is effective as to that series whether or not enough votes are received from the shareholders of the other series to approve such agreement as to the other series. The Trustees, in their discretion, may authorize the division of shares of a series into different classes, permitting shares of different classes to be distributed by different methods. Although shareholders of different classes of a series would have an interest in the same portfolio of assets, shareholders of different classes may bear different expenses in connection with different methods of distribution. The Trustees have no present intention of taking the action necessary to effect the division of shares into separate classes nor of changing the method of distribution of shares of a Fund. The Declaration of Trust provides that obligations of the Trust are not binding upon the Trustees individually but only upon the property of the Trust, that the Trustees and officers will not be liable for errors of judgment or mistakes of fact or law, and that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, except if it is determined, in the manner provided in the Declaration of trust, that they have not acted in good faith in the reasonable belief that their actions were in the best interests of the Trust. However, nothing in the Declaration of Trust protects or indemnifies a Trustee or officer against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. Shareholders have one vote for each share held on matters on which they are entitled to vote. Separate votes are taken by each Fund only if a matter affects or requires the vote of only that Fund. The Funds are not required to and do not currently intend to hold annual shareholder meetings, although special meetings may be called for purposes such as electing or removing Trustees, changing fundamental investment policies, or approving certain contracts. Shareholders will be assisted in communicating with other shareholders in connection with removing a Trustee as if Section 16(c) of the 1940 Act were applicable. Shares of the Funds are presently offered through the use of a prospectus that combines disclosure about each of the Funds. The use of a combined prospectus by two or more Funds may cause one Fund to be liable to purchasers of shares of another Fund for misstatements in the prospectus concerning the other Fund. The Trustees and Executive Officers of the Trust, their business addresses and their principal occupations during the past five years are as follows: As of January 15, 1996, all Trustees and officers of the Trust as a group owned beneficially less than 1% of the shares of the each of the Funds outstanding on such date. To the best knowledge of the Funds, no person owned beneficially more than 5% of any of the Funds. INVESTMENT ADVISORY AND OTHER SERVICES As stated in the Prospectus, the Trust, on behalf of each Fund, has entered into an Investment Advisory Agreement with the Manager, Weiss Money Management, Inc. Under these Advisory Agreements, the Manager provides continuing investment management for each Fund consistent with the Fund's investment objectives, policies and restrictions and determines what securities shall be purchased for or sold by the Fund. The Funds have each agreed to compensate the Manager for its services by the monthly payment of a fee at the annual rate of .50% of average net assets, with respect to Weiss Treasury Only Money Market Fund and the Weiss Intermediate Treasury Fund, and .70% of average net assets, with respect to Weiss Treasury Bond Fund. For the period through April 30, 1996, the Manager has agreed to waive that portion of its fee and reimburse other operating expenses necessary to maintain the total Fund expenses at .50% for each the Weiss Treasury Only Money Market Fund and the Weiss Intermediate Treasury Fund. Through December 31, 1996, the Manager has agreed to waive that portion of its fee and reimburse other operating expenses necessary to maintain total Fund expenses at .70% for the Weiss Treasury Bond Fund. In addition, the Manager has agreed that if a Fund's total expenses in any fiscal year (other than interest, taxes, distribution expenses, brokerage commissions and any extraordinary expenses) exceed the permissible limits on such expenses that apply to the Fund in any state in which its shares are currently qualified for sale, the Manager will refund to the Fund the amount of any such excess, except to the extent that such amount has already been reflected in reduced payments to the Manager. The Funds believe that, currently, the most restrictive state limitation is 2.50% of the first $30,000,000 of a Fund's average daily net assets, plus 2.00% of the next $70,000,000 of average daily net assets, plus 1.50% of the balance of the average daily net assets of that Fund for a fiscal year. The Manager is responsible for fees and expenses of Trustees, officers and employees of the Trust who are affiliated with the Manager. Each Fund is responsible for all of its other expenses, including fees and expenses incurred in connection with membership in investment company organizations; brokers' commissions; payments for portfolio pricing services to a pricing agent, if any; legal, auditing and accounting expenses; taxes and governmental fees; transfer agent fees; the cost of preparing share certificates or other share-related expenses, such as expenses of issuance, sale, redemption or repurchase of shares of beneficial interest; the expenses of and fees for registering or qualifying securities for sale; the fees and expenses of Trustees, officers and employees of the Trust who are not affiliated with the Manager; the cost of printing and distributing reports and notices to shareholders; and the fees and disbursements of custodians. Each Fund is also responsible for expenses of shareholder meetings and expenses incurred in connection with litigation, proceedings and claims and the legal obligation it may have to indemnify its officers and Trustees with respect thereto. Each Fund's shares are sold on a continuous basis by Weiss Funds, Inc. (the "Distributor"), 4176 Burns Road, Palm Beach Gardens, Florida 33410, a registered broker-dealer and wholly-owned subsidiary of the Manager. PFPC, Inc. , Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809 ("PFPC"), performs various administrative services for each Fund. These services include maintenance of books and records, preparation of certain governmental filings and shareholder reports and computation of net asset values and dividend distributions. For its administrative services, PFPC receives a fee, payable monthly, of .1 of 1% (.10%) per annum of the average daily net assets of each Fund, plus any reasonable out-of-pocket expenses. Transfer Agent, Dividend Disbursing Agent and Custodian PFPC serves as the Funds' transfer agent, dividend disbursing agent and registrar. In its capacity as transfer agent, dividend disbursing agent and registrar, PFPC performs bookkeeping, data processing and administrative services incidental to the maintenance of shareholder accounts. For transfer agency and shareholder services, the Funds pay the Transfer Agent a base fee plus annual fees of $18 per open account for daily distribution funds and $12 per open account for quarterly distribution funds, payable in equal monthly installments. The Funds also pay an annual fee of $4 to the Transfer Agent for each account that is closed, and reimburses the Transfer Agent monthly for out-of-pocket expenses. PNC Bank, 200 Stevens Drive, Lester, Pennsylvania 19113, serves as custodian for the Funds' portfolio securities and cash. From time to time, quotations of the Fund's performance may be included in advertisements, sales literature or reports to shareholders or prospective investors. These performance figures are calculated in the following manners: Average annual total return is the average annual compound rate of return for periods of one year, five years, and ten years, all ended on the last day of a recent calendar quarter. Average annual total return quotations reflect changes in the price of the Fund's shares and assume that all dividends and capital gains distributions during the respective periods were reinvested in Fund shares. Average annual total return is calculated by finding the average annual compound rates of return of a hypothetical investment over such periods according to the following formula (average annual total return is then expressed as a percentage): T = (ERV/P)1/n - 1 Where: P = a hypothetical initial investment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period. Cumulative total return is the cumulative rate of return on a hypothetical initial investment of $1,000 for a specified period. Cumulative total return quotations reflect changes in the price of a Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in fund shares. Cumulative total return is calculated by finding the cumulative rates of return of a hypothetical investment over such periods according to the following formula (cumulative total return is then expressed as a percentage): C = (ERV/P) - 1 Where: C = Cumulative Total Return. P = a hypothetical initial investment of $1,000. ERV = ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period. Total Return is the rate of return on an investment for a specified period of time calculated in the same manner as cumulative total return. Capital change measures the return from invested capital including reinvested capital gains distributions. Capital change does not include the reinvestment of income dividends. Yield for these two Funds is the net annualized yield based on a specified 30-day (or one month) period assuming semiannual compounding of income. Yield is calculated by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period according to the following formula: Yield = 2[(a-b/cd + 1)6 -1] Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during that period that were entitled to receive dividends. d = the maximum offering price per share on the last day of the period. Quotations of a Fund's performance are based on historical earnings, show the performance of a hypothetical investment, and are not intended to indicate future performance of a Fund. An investor's shares when redeemed may be worth more or less than their original cost. Performance of a Fund will vary based on changes in market conditions and the level of a Fund's expenses. In periods of declining interest rates, a Fund's quoted yield will tend to be somewhat higher than prevailing market rates, and in periods of rising interest rates, a Fund's quoted yield will tend to be somewhat lower. Weiss Treasury Only Money Market Fund Current Yield: Current yield is the net annualized yield based on a specified 7 calendar-days calculated at simple interest rates. Current yield is calculated by determining the net change, exclusive of capital changes, in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period and dividing such change by the value of the account at the beginning of the base period to obtain the base-period return. The base-period return is then annualized by multiplying it by 365/7; the resultant product equals net annualized current yield. Effective Yield: Effective yield for Weiss Treasury Only Money Market Fund is the net annualized yield for a specified 7 calendar-days assuming a reinvestment in Fund shares of all dividends during the period (i.e., compounding). Effective yield is calculated by using the same base-period return used in the calculation of current yield, except that the base-period return is compounded by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula: Effective Yield = [(Base Period Return + 1)365/7] - 1 As described above, current yield and effective yield are based on historical earnings, show the performance of a hypothetical investment and are not intended to indicate future performance. Current yield and effective yield will vary based on changes in market conditions and the level of Fund expenses. A comparison of the quoted non-standard performance offered for various investments is valid only if performance is calculated in the same manner. Since there are different methods of calculating performance, investors should consider the effects of the methods used to calculate performance when comparing performance of a Fund with performance quoted with respect to other investment companies or types of investments. In connection with communicating its performance to current or prospective shareholders, a Fund also may compare these figures to the performance of unmanaged indices which may assume reinvestment of dividends or interest but generally do not reflect deductions for administrative and management costs. Examples include, but are not limited to the Dow Jones Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite Stock Price Index (S&P 500), the NASDAQ OTC Composite Index, the NASDAQ Industrials Index, the Russell 2000 Index, and the statistics published by the Small Business Administration. From time to time, in advertising and marketing literature, a Fund's performance may be compared to the performance of broad groups of mutual funds with similar investment goals, as tracked by independent organizations such as, Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value Line Mutual Fund Survey and other independent organizations. When these organizations' tracking results are used, a Fund will be compared to the appropriate fund category, that is, by fund objective and portfolio holdings, or to the appropriate volatility grouping, where volatility is a measure of a fund's risk. A Fund (except for a money market fund) may also be compared to funds with similar volatility, as measured statistically by independent organizations. From time to time, in marketing and other Fund literature, Trustees and officers of a Fund, a Fund's portfolio manager, or members of the portfolio management team may be depicted and quoted to give prospective and current shareholders a better sense of the outlook and approach of those who manage a Fund. In addition, the assets that Manager has under management in various geographical areas may be quoted in advertising and marketing materials. Statistical and other information, as provided by the Social Security Administration, may be used in marketing materials pertaining to retirement planning in order to estimate future payouts of social security benefits. Estimates may be used on demographic and economic data. Marketing and other Fund literature may include a description of the potential risks and rewards associated with an investment in a Fund. The description may include a "risk/return spectrum" which compares the Fund to other Weiss funds or broad categories of funds, such as money market, bond or equity funds, in terms of potential risks and returns. Money market funds are designed to maintain a constant $1.00 share price and have a fluctuating yield. Share price, yield and total return of a bond fund will fluctuate. The share price and return of an equity fund also will fluctuate. The description may also compare a Fund to bank products, such as certificates of deposit. Unlike mutual funds, certificates of deposit are insured up to $100,000 by the U.S. Government and offer a fixed rate of return. Because bank products guarantee the principal value of an investment and money market funds seek stability of principal, these investments are considered to be less risky than investments in either bond or equity funds, which may involve the loss of principal. However, all long-term investments, including investments in bank products, may be subject to inflation risk, which is the risk of erosion of the value of an investment as prices increase over a long time period. The risk/returns associated with an investment in bond or equity funds also will depend upon currency exchange fluctuation. A risk/return spectrum generally will position the various investment categories in the following order: bank products, money market funds, bond funds and equity funds. Shorter-term bond funds generally are considered less risky and offer the potential for less return than longer-term bond funds. The same is true of domestic bond funds relative to international bond funds, and bond funds that purchase higher quality securities relative to bond funds that purchase lower quality securities. Growth and income equity funds are generally considered to be less risky and offer the potential for less return than growth funds. In addition, international equity funds usually are considered more risky than domestic equity funds but generally offer the potential for greater return. Risk/return spectrums also may depict funds that invest in both domestic and foreign securities or a combination of bond and equity securities. Evaluation of Fund performance made by independent sources may also be used in advertisements concerning a Fund, including reprints of, or selections from, editorials or articles about a Fund. Share purchases are executed at the net asset value next calculated after a purchase order is received by the Fund's transfer agent in good order as described in the Funds' prospectus under "Opening an Account" and "Adding to Your Investment". Purchases are made in full and fractional shares. Fund shares may be purchased without a sales charge if you purchase them through the Fund's Distributor. Broker-dealers other than the Distributor may assess transaction charges in connection with purchases of Fund shares. Shares begin to earn dividends as of the first business day following the day or your purchase. Purchases by check are executed on the day the check is received in good order by the Transfer Agent and begin earning income on the following business day. Individual Retirement Accounts ("IRAs"). Shares of the Trust may be used as a funding medium for an IRA. Eligible individuals may establish an IRA by adopting a custodial account available from PNC Bank, which may impose a charge for establishing and/or maintaining the account. The Trust may suspend the right of redemption of shares of a Fund and may postpone payment: (i) for any period during which the New York Stock Exchange is closed, other than customary weekend and holiday closings, or during which trading on the New York Stock Exchange is restricted, (ii) when the SEC determines that a state of emergency exists which may make payment or transfer not reasonably practicable, (iii) as the SEC may by order permit for the protection of the Shareholders of the Trust, or (iv) at any other time when the Trust may, under applicable laws and regulations, suspend payment on the redemption of its shares. The Trust agrees to redeem shares of a Fund solely in cash up to the lesser of $250,000 or 1% of the net asset value of a Fund during any 90-day period for any one shareholder. The Trust reserves the right to pay other redemptions, either total or partial, by a distribution in kind of securities (instead of cash) from the applicable Fund's portfolio, although the Trust has no current intention to do so. The securities distributed in such a distribution would be valued at the same value as that assigned to them in calculating the net asset value of the shares being redeemed. If a shareholder receives a distribution in kind, he or she should expect to incur transaction costs when he or she converts the securities to cash. All of the Funds intend to distribute substantially all of their respective investment income and any net realized capital gains. Net investment income for each Fund consists of all interest income accrued on the Fund's assets, less accrued expenses. Interest income included in the daily computation of net investment income is comprised of original issue discount earned on discount paper accrued to the date of maturity as well as accrued interest. Each Fund's expenses, including the management fee payable to the Manager, are accrued each day. Distributions by a Fund are reinvested in the Fund or paid in cash at the election of the shareholder. If no election is made, all distributions will be reinvested in additional Fund shares. Dividends are declared daily. Weiss Treasury Only Money Market Fund intends to distribute dividends on the last business day of each month. Weiss Intermediate Treasury Fund and Weiss Treasury Bond Fund intend to distribute taxable income quarterly, and distribute net capital gains realized during each fiscal year annually before each Fund's fiscal year end on December 31. The net income of a Fund is determined as of the close of regular trading on the New York Stock Exchange (the "Exchange"), usually 4:00 p.m. eastern time on each day the Exchange is open for trading. The following is a general discussion of certain tax rules thought to be applicable with respect to a Fund. It is merely a summary and is not an exhaustive discussion of all possible situations or of all potentially applicable taxes. Accordingly, shareholders and prospective shareholders should consult a competent tax advisor about the tax consequences to them of investing in a Fund. General. Each Fund intends to qualify annually and elect to be treated as a regulated investment company under Subchapter M of the Code. To qualify, a Fund must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities, or foreign currencies, or other income (including but not limited to gains from options, futures, and forward contracts) derived with respect to its business of investing in such stock, securities or currencies; (b) derive in each taxable year less than 30% of its gross income from the sale or other disposition of certain assets (namely, (i) stock or securities, (ii) options, futures, and forward contracts (other than those on foreign currencies), and (iii) foreign currencies (including options, futures, and forward contracts on such currencies) not directly related to the Fund's principal business of investing in stocks or securities (or options and futures with respect to stocks and securities)) held less than three months (the "30% Limitation"); and (c) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of the Fund's assets is represented by cash, U.S. Government securities, the securities of other regulated investment companies, and other securities, with such other securities of any one issuer limited for purposes of this calculation to an amount not greater than 5% of the Fund's assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in securities of any other issuer (other than U.S. Government securities and the securities of other regulated investment companies). As a regulated investment company, each Fund generally will not be subject to U.S. Federal income tax on its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) and net capital gains (net long-term capital gains in excess of net short-term capital losses) that it distributes to shareholders, if at least 90% of its investment company taxable income for the taxable year is distributed. Each Fund intends to distribute such income. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To avoid that tax, each Fund must distribute during each calendar year an amount equal to (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the twelve-month period ending on October 31 of the calendar year, and (3) all ordinary income and capital gains for previous years that were not distributed during such years. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by a Fund in October, November or December of that year to shareholders of record at some date in such a month and paid by the Fund during January of the following distributions will be taken into account by shareholders in the calendar year the distributions are declared, rather than the calendar year in which the distributions are received. Distributions. Distributions of investment company taxable income are taxable to a U.S. shareholder as ordinary income, whether paid in cash or shares. Because it is not anticipated that any portion of a Fund's gross income will consist of dividends from domestic corporations, no portion of the dividends paid by a Fund to its corporate shareholders is expected to qualify for the dividends received deduction. Distributions of net capital gains, if any, which are designated as capital gain dividends are taxable as long-term capital gains, whether paid in cash or in shares, regardless of how long the shareholder has held the Fund's shares, and are not eligible for the dividends received deduction. The tax treatment of distributions from a Fund is the same whether the dividends are received in cash or in additional shares. Shareholders receiving distributions in the form of newly issued shares will have a cost basis in each share received equal to the net asset value of a share of the Fund on the reinvestment date. A distribution of an amount in excess of a Fund's current and accumulated earnings and profits will be treated by a shareholder as a return of capital which is applied against and reduces the shareholder's basis in his or her shares. To the extent that the amount of any such distribution exceeds the shareholder's basis in his or her shares, the excess will be treated by the shareholder as gain from a sale or exchange of the shares. Shareholders will be notified annually as to the U.S. Federal tax status of distributions and shareholders receiving distributions in the form of newly issued shares will receive a report as to the net asset value of the shares received. If the net asset value of shares is reduced below a shareholder's cost as a result of a distribution by a Fund, such distribution will be taxable even though it represents a return of invested capital. Investors should be careful to consider the tax implications of buying shares just prior to a distribution. The price of shares purchased at this time may reflect the amount of the forthcoming distribution. Those purchasing just prior to a distribution will receive a distribution which will nevertheless be taxable to them. Disposition of Shares. Upon a redemption, sale or exchange of his or her shares, a shareholder will realize a taxable gain or loss depending upon his or her basis in the shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder's hands and will be long-term or short-term, generally, depending upon the shareholder's holding period for the shares. Any loss realized on a redemption, sale or exchange will be disallowed to the extent the shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days beginning 30 days before and ending 30 days after the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on the sale of Fund shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gains received or treated as having been received by the shareholder with respect to such shares. Discount. Certain of the bonds purchased by the Funds may be treated as bonds that were originally issued at a discount. Original issue discount represents interest for Federal income tax purposes and can generally be defined as the difference between the price at which a security was issued and its stated redemption price at maturity. Original issue discount is treated for Federal income tax purposes as income earned by a Fund even though the Fund doesn't actually receive any cash, and therefore is subject to the distribution requirements of the Code. The amount of income earned by the Fund generally is determined on the basis of a constant yield to maturity which takes into account the semi-annual compounding of accrued interest. In addition, some of the bonds may be purchased by a Fund at a discount which exceeds the original issue discount on such bonds, if any. This additional discount represents market discount for Federal income tax purposes. The gain realized on the disposition of any bond having market discount will be treated as ordinary income to the extent it does not exceed the accrued market discount on such bond (unless the Fund elects for all its debt securities acquired after the first day of the first taxable year to which the election applies having a fixed maturity date of more than one year from the date of issue to include market discount in income in tax years to which it is attributable). Generally, market discount accrues on a daily basis for each day the bond is held by the Fund at a constant rate over the time remaining to the bond's maturity. Backup Withholding. Each Fund generally will be required to report to the IRS all distributions as well as gross proceeds from the redemption of the Fund's shares, except in the case of certain exempt shareholders. All such distributions and proceeds will be subject to withholding of Federal income tax at a rate of 31% ("backup withholding") in the case of non-exempt shareholders if (1) the shareholder fails to furnish the Fund with and to certify the shareholder's correct taxpayer identification number or social security number; (2) the IRS notifies the shareholder or the Fund that the shareholder has failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect; or (3) when required to do so, the shareholder fails to certify that he or she is not subject to backup withholding. If the withholding provisions are applicable, any such distributions or proceeds, whether reinvested in additional shares or taken in cash, will be reduced by the amounts required to be withheld. Other Taxation. The foregoing discussion relates only to U.S. Federal income tax law as applicable to U.S. persons (i.e., U.S. citizens and residents and domestic corporations, partnerships, trusts and estates). Distributions by a Fund also may be subject to state and local taxes, and their treatment under state and local income tax laws may differ from the U.S. Federal income tax treatment. In many states, Fund distributions which are derived from interest on certain U.S. Government obligations are exempt from state and local taxation. Shareholders should consult their tax advisers with respect to particular questions of U.S. Federal, state and local taxation. Shareholders who are not U.S. persons should consult their tax advisers regarding U.S. and foreign tax consequences of ownership of shares of the Fund, including the likelihood that distributions to them would be subject to withholding of U.S. Federal income tax at a rate of 30% (or at a lower rate under a tax treaty). To the maximum extent feasible, the Manager places orders for portfolio transactions through the Distributor, which in turn places orders on behalf of each Fund with other broker/dealers. The Distributor receives no commissions, fees or other remuneration from a Fund for this service. Allocation of brokerage is supervised by the Manager. The primary objective of the Manager in placing orders for the purchase and sale of securities for each Fund's portfolio is to obtain the most favorable net results taking into account such factors as price, commission (negotiable in the case of U.S. national securities exchange transactions) where applicable, size of order, difficulty of execution and skill required of the executing broker/dealer. The Manager seeks to evaluate the overall reasonableness of brokerage commissions paid (to the extent applicable) through the familiarity of the Distributor with commissions charged on comparable transactions, as well as by comparing commissions paid by a Fund to reported commissions paid by others. The Manager reviews on a routine basis commission rates, execution and settlement services performed, making internal and external comparisons. Each Fund's purchases and sales of fixed-income securities are generally placed by the Manager with primary market makers for these securities on a net basis, without any brokerage commission being paid by the Fund. Trading does, however, involve transaction costs. Transactions with dealers serving as primary market makers reflect the spread between the bid and asked prices. Purchases of underwritten issues may be made that will include an underwriting fee paid to the underwriter. Portfolio transactions in debt securities may also be placed on an agency basis, with a commission being charged. When it can be done consistently with the policy of obtaining the most favorable net results, it is the Manager's practice to place such orders with broker/dealers who supply research, market and statistical information to the Funds. The term "research market and statistical information" includes advice as to the value of securities; the advisability of investing in, purchasing or selling securities; the availability of securities or purchasers or sellers of securities; and analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. The Manager is not authorized when placing portfolio transactions for a Fund to pay a brokerage commission (to the extent applicable) in excess of that which another broker might charge for executing the same transaction solely on account of the receipt of research, market or statistical information. The Manager does not place orders with brokers or dealers because the broker or dealer has or has not sold shares of a Fund. In effecting transactions in over-the-counter securities, orders are placed with the principal market makers for the security being traded unless, after exercising care, it appears that more favorable results are available elsewhere. Although certain research, market and statistical information from broker/dealers may be useful to a Fund and to the Manager, it is the opinion of the Manager that such information only supplements its own research effort since the information must still be analyzed, weighed and reviewed by the Manager's staff. Such information may be useful to the Manager in providing services to clients other than a Fund and not all such information is used by the Manager in connection with the Fund. Conversely, such information provided to the Manager by broker/dealers through whom other clients of the Manager effect securities transactions may be useful to the Manager in providing services to a Fund. The Trustees of the Trust review from time to time whether the recapture for the benefit of a Fund of some portion of the brokerage commissions or similar fees paid by the Fund on portfolio transactions is legally permissible and advisable. Fund securities may be sold in an effort to improve a Fund's overall investment return. Each Fund's portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the fiscal year. A 100% turnover rate occurs, for example, if all of the Fund's portfolio securities are sold and either repurchased or replaced within one year. For purposes of determining portfolio turnover, all securities whose maturities at the time of acquisition were one year or less are excluded. A higher portfolio turnover rate involves correspondingly higher brokerage commissions and other transaction costs, which will be borne directly by the affected Fund. In addition, short-term gains realized from portfolio transactions are taxable to shareholders as ordinary income. It is currently anticipated that the portfolio turnover rate for each Fund during its initial fiscal year will not exceed 100%. The net asset value per share of each Fund is determined by dividing the value of the total assets of the Fund, less all liabilities, by the total number shares of the Fund outstanding. Net asset value for the Funds is computed once daily as of the close of regular trading on the Exchange (normally 4:00 p.m. eastern time) on each day the Exchange is open for trading. The Exchange is normally closed on New Year's Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Veterans Day, Thanksgiving Day and Christmas Day. On those days when the Funds' Custodian or the New York Stock Exchange close early as a result of such day being a partial holiday or otherwise, the Funds reserve the right to advance on that day the time by which purchase and redemption requests must be received. Weiss Treasury Only Money Market Fund Weiss Treasury Only Money Market Fund uses the amortized cost method of security valuation, as permitted under Rule 2a-7 under the 1940 Act. Under this method, securities acquired by the Fund are valued at cost on the date of acquisition and thereafter assume a constant accretion of discount or amortization of premium to maturity, regardless of the impact of fluctuating interest rates on the market value of the instruments. Debt securities, other than short-term securities, are valued at bid prices supplied by a Fund's pricing agent and reflect broker/dealer supplied valuations and electronic data processing techniques. Short-term securities with remaining maturities of sixty days or less are valued by the amortized cost method, which the Board of Trustees believes approximates market value. If it is not possible to value a particular debt security pursuant to these valuation methods, the value of such security is the most recent bid quotation supplied by a bona fide marketmaker. If no such bid quotation is available, the Manager may calculate the price of that debt security, subject to limitations established by the Board of Trustees. If a security is traded on more than one exchange, or on one or more exchanges and in the over-the-counter market, quotations are taken from the market in which the security is traded most extensively. If, in the opinion of the Fund's Valuation Committee, the value of an asset as determined in accordance with these procedures does not represent the fair market value of the asset, the value of the asset is taken to be an amount which, in the opinion of the Valuation Committee, represents fair market value on the basis of all available information. The value of other portfolio holdings owned by a Fund is determined in a manner which, in the discretion of the Valuation Committee most fairly reflects fair market value of the property on the valuation date. The initial balance sheet for each Fund and related reports of Coopers & Lybrand LLP are attached hereto and incorporated by reference herein. The Financial Statements included herewith have been so included in reliance on the report of Coopers & Lybrand LLP, independent accountants, 200 South Biscayne Blvd., Suite 1900, Miami, FL 33131, and given on the authority of that firm as experts in accounting and auditing. Dechert Price & Rhoads, Ten Post Office Square--South, Boston, MA 02109 serves as counsel to the Trust and the Funds. STATEMENT OF ASSETS AND LIABILITIES The accompanying notes are an integral part of this financial statement. NOTES TO STATEMENT OF ASSETS AND LIABILITIES Weiss Intermediate Treasury Fund ("Fund") is a diversified series of Weiss Treasury Fund ("Trust"), an open-end management investment company registered under the Investment Company Act of 1940, as amended. The Trust was organized on August 10, 1995 as a Massachusetts business trust. The Fund commenced operations on January 16, 1996. As of the date of this report, operations have been limited to organizational matters and the issuance of initial shares to Weiss Money Management Inc. ("the Manager"). 2. ORGANIZATION COSTS AND TRANSACTIONS WITH AFFILIATES: Organization expenses are being amortized over a five year period from January 16, 1996, the commencement date of operations. Such organizational expenses have been paid by the Manager and will be reimbursed by the Fund. If the Manager withdraws any portion of its $33,333 seed money prior to the end of the five year period beginning January 16, 1996, the redemption price of the seed money shares will be reduced by a pro rata share (based on the proportionate share of the original shares redeemed to the total number of original shares outstanding at the time of redemption) of the unamortized organizational expenses. The Manager is the investment adviser to Weiss Intermediate Treasury Fund, and is responsible for the day-to-day management of the Fund's portfolio. Weiss Intermediate Treasury Fund shares are sold on a continuous basis by Weiss Funds, Inc., a registered broker-dealer and wholly-owned subsidiary of the Manager. PFPC Inc. ("the Administrator"), a wholly-owned subsidiary of PNC Bank, NA, serves as administrator to the Fund. Certain officers of the Trust are officers and / or employees of the Manager, Administrator and Counsel to the Fund. Such individuals are not compensated by the Trust for services in their capacity as Trust officers. WEISS TREASURY ONLY MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES The accompanying notes are an integral part of this financial statement. WEISS TREASURY ONLY MONEY MARKET FUND NOTES TO STATEMENT OF ASSETS AND LIABILITIES Weiss Treasury Only Money Market Fund ("Fund") is a diversified series of Weiss Treasury Fund ("Trust"), an open-end management investment company registered under the Investment Company Act of 1940, as amended. The Trust was organized on August 10, 1995 as a Massachusetts business trust. The Fund commenced operations on January 16, 1996. As of the date of this report, operations have been limited to organizational matters and the issuance of initial shares to Weiss Money Management Inc. ("the Manager"). 2. ORGANIZATION COSTS AND TRANSACTIONS WITH AFFILIATES: Organization expenses are being amortized over a five year period from January 16, 1996, the commencement date of operations. Such organizational expenses have been paid by the Manager and will be reimbursed by the Fund. If the Manager withdraws any portion of its $33,334 seed money prior to the end of the five year period beginning January 16, 1996, the redemption price of the seed money shares will be reduced by a pro rata share (based on the proportionate share of the original shares redeemed to the total number of original shares outstanding at the time of redemption) of the unamortized organizational expenses. The Manager is the investment adviser to Weiss Treasury Only Money Market Fund, and is responsible for the day-to-day management of the Fund's portfolio. Weiss Treasury Only Money Market Fund shares are sold on a continuous basis by Weiss Funds, Inc., a registered broker-dealer and wholly-owned subsidiary of the Manager. PFPC Inc. ("the Administrator"), a wholly-owned subsidiary of PNC Bank, NA, serves as administrator to the Fund. Certain officers of the Trust are officers and / or employees of the Manager, Administrator and Counsel to the Funds. Such individuals are not compensated by the Trust for services in their capacity as Trust officers. STATEMENT OF ASSETS AND LIABILITIES The accompanying notes are an integral part of this financial statement. NOTES TO STATEMENT OF ASSETS AND LIABILITIES Weiss Treasury Bond Fund ("Fund") is a diversified series of Weiss Treasury Fund ("Trust"), an open-end management investment company registered under the Investment Company Act of 1940, as amended. The Trust was organized on August 10, 1995 as a Massachusetts business trust. As of the date of this report, except for organizational matters and the issuance of initial shares to Weiss Money Management, Inc. ("the Manager"), the Fund has not yet commenced operations. 2. ORGANIZATION COSTS AND TRANSACTIONS WITH AFFILIATES: Organization expenses will be amortized over a five year period from commencement of operations. Such organizational expenses have been paid by the Manager and will be reimbursed by the Fund. If the Manager withdraws any portion of its $33,333 seed money prior to the end of the five year period beginning with commencement of operations, the redemption price of the seed money shares will be reduced by a pro rata share (based on the proportionate share of the original shares redeemed to the total number of original shares outstanding at the time of redemption) of the unamortized organizational expenses. The Manager is the investment adviser to Weiss Treasury Bond Fund, and is responsible for the day-to-day management of the Fund's portfolio. PFPC Inc. ("the Administrator"), a wholly-owned subsidiary of PNC Bank, NA, serves as administrator to the Fund. Certain officers of the Trust are officers and / or employees of the Manager, Administrator and Counsel to the Funds. Such individuals are not compensated by the Trust for services in their capacity as Trust officers. Item 24 Financial Statements and Exhibits Financial Statements Included in Part B: 1. (a) Declaration of Trust of the Registrant dated August 10, 1995 is incorporated by reference to Registrant's initial Registration Statement on Form N-1A. (b) Establishment and Designation of Shares of Beneficial Interest, $.01 Par Value Per Share is incorporated by reference to Registrant's initial Registration Statement on Form N-1A. 2. By-Laws of the Registrant dated August 10, 1995 are incorporated by reference to Registrant's initial Registration Statement on Form N-1A. 5. (a) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Treasury Only Money Market Fund, and Weiss Money Management, Inc. to be filed herewith. (b) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Intermediate Treasury Fund, and Weiss Money Management, Inc. to be filed herewith. (c) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Treasury Bond Fund, and Weiss Money Management, Inc. to be filed herewith. 6. Form of Distribution Agreement between the Registrant and Weiss Funds, Inc. to be filed herewith. 8. (a) Form of Custodian Agreement between the Registrant and PNC Bank to be filed herewith. (b) Form of Transfer Agency and Service Agreement between the Registrant and PFPC, Inc. to be filed herewith. (c) Form of Administration and Accounting Services Agreement between the Registrant and PFPC, Inc. to be filed herewith. 10. Opinion and Consent of Dechert Price & Rhoads, counsel to the Registrant to be filed with Registrant's Notice Pursuant to Rule 24f-2 11. Opinion and Consent of Coopers & Lybrand, LLP, independent accountants for the Registrant. 14. Form of Weiss Individual Retirement Plan. 1. (a) Declaration of Trust of the Registrant dated August 10, 1995 is incorporated by reference to Registrant's initial Registration Statement on Form N-1A. (b) Establishment and Designation of Shares of Beneficial Interest, $.01 Par Value Per Share is incorporated by reference to Registrant's initial Registration Statement on Form N-1A. 2. By-Laws of the Registrant dated August 10, 1995 are incorporated by reference to Registrant's initial Registration Statement on Form N-1A. 5. (a) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Treasury Only Money Market Fund, and Weiss Investment Management Inc. (b) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Intermediate Treasury Fund, and Weiss Investment Management Inc. (c) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Treasury Bond Fund, and Weiss Investment Management Inc. 6. Form of Distribution Agreement between the Registrant and Weiss Funds, Inc. 8. (a) Form of Custodian Agreement between the Registrant and PNC Bank. (b) Form of Transfer Agency and Service Agreement between the Registrant and PFPC, Inc. (c) Form of Administration and Accounting Services Agreement between the Registrant and PFPC, Inc. 10. Opinion and Consent of Dechert Price & Rhoads, counsel to the Registrant to be filed with Registrant's Notice Pursuant to Rule 24f-2 11. Opinion and Consent of Coopers & Lybrand, LLP 14. Form of Weiss Individual Retirement Plan 13. Copy of Investment Representation Letter from Initial Shareholder. Item 25 Persons Controlled By or Under Common Control With Registrant Item 26 Number of Holders of Securities Weiss Treasury Only Money Market Fund (1/5/96) Shares of beneficial interest: 1 (1/5/96) Shares of beneficial interest: 1 (1/5/96) Shares of beneficial interest: 1 5. (a) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Treasury Only Money Market Fund, and Weiss Money Management, Inc. to be filed herewith. (b) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Intermediate Treasury Fund, and Weiss Money Management, Inc. to be filed herewith. (c) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Treasury Bond Fund, and Weiss Money Management, Inc. to be filed herewith. 6. Form of Distribution Agreement between the Registrant and Weiss Funds, Inc. to be filed herewith. 8. (a) Form of Custodian Agreement between the Registrant and PNC Bank to be filed herewith. (b) Form of Transfer Agency and Service Agreement between the Registrant and PFPC, Inc. to be filed herewith. (c) Form of Administration and Accounting Services Agreement between the Registrant and PFPC, Inc. to be filed herewith. A policy of insurance covering Weiss Money Management, Inc. and the Registrant will insure the Registrant's trustees and officers and others against liability arising by reason of an alleged breach of duty caused by any negligent act, error or accidental omission in the scope of their duties. In addition, Article IV, Sections 4.1 through 4.3 of Registrant's Declaration of Trust provide as follows: Section 4.1. No Personal Liability of Shareholders, Trustees, Etc. No Shareholder shall be subject to any personal liability whatsoever to any Person in connection with Trust Property or the acts, obligations or affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall be subject to any personal liability whatsoever to any Person, other than to the Trust or its Shareholders, in connection with Trust Property or the affairs of the Trust, save only that arising from bad faith, willful misfeasance, gross negligence or reckless disregard of his duties with respect to such Person; and all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature arising in connection with the affairs of the Trust. If any Shareholder, Trustee, officer, employee, or agent, as such, of the Trust, is made a party to any suit or proceeding to enforce any such liability of the Trust, he shall not, on account thereof, be held to any personal liability. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. The indemnification and reimbursement required by the preceding sentence shall be made only out of the assets of the one or more Series of which the Shareholder who is entitled to indemnification or reimbursement was a Shareholder at the time the act or event that gave rise to the claim against or liability of said Shareholder occurred. The rights accruing to a Shareholder under this Section 4.1 shall not impair any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein. Section 4.2. Non-Liability of Trustees, Etc. No Trustee, officer, employee or agent of the Trust shall be liable to the Trust, its Shareholders, or to any Shareholder, Trustee, officer, employee, or agent thereof for any action or failure to act (including without limitation the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of the duties involved in the conduct of his office. (a) Subject to the exceptions and limitations contained in paragraph (b) below: (i) every person who is, or has been, a Trustee or officer of the Trust shall be indemnified by the Trust to the fullest extent permitted by law against all liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement thereof; (ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal, administrative or other, including appeals), actual or threatened; and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Trustee or officer: (i) against any liability to the Trust, a Series thereof, or the Shareholders by reason of a final adjudication by a court or other body before which a proceeding was brought that he engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; (ii) with respect to any matter as to which he shall have been finally adjudicated not to have acted in good faith in the reasonable belief that his action was in the best interests of the Trust; or (iii) in the event of a settlement or other disposition not involving a final adjudication as provided in paragraph (b)(i) or (b)(ii) resulting in a payment by a Trustee or officer, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office: (A) by the court or other body approving the settlement or other disposition; or (B) based upon a review of readily available facts (as opposed to a full trial-type inquiry) by (x) vote of a majority of the Disinterested Trustees (as defined below) acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter), or (y) written opinion of independent legal counsel. (c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any Trustee or officer may now or hereafter be entitled, shall continue as to a person who has ceased to be such Trustee or officer and shall inure to the benefit of the heirs, executors, administrators and assigns of such a person. Nothing contained herein shall affect any rights to indemnification to which personnel of the Trust other than Trustees and officers may be entitled by contract or otherwise under law. (d) Expenses of preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in paragraph (a) of this Section 4.3 may be advanced by the Trust prior to a final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he is not entitled to indemnification under this Section 4.3, provided that either: (i) such undertaking is secured by a surety bond or some other appropriate security provided by the recipient, or the Trust shall be insured against losses arising out of any such advances; or (ii) a majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees act on the matter) or an independent legal counsel in a written opinion shall determine, based upon a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the recipient ultimately will be found entitled to indemnification. As used in this Section 4.3, a "Disinterested Trustee" is one who is not (i) an Interested Person of the Trust, as defined under 2(a)(19) of the 1940 Act (including anyone who has been exempted from being an Interested Person by any rule, regulation or order of the Commission), or (ii) involved in the claim, action, suit or proceeding. Item 28 Business and Other Connections of Investment Adviser Reference is made to the Form ADV dated April 10, 1995 of Weiss Money Management Inc., investment adviser to Weiss Treasury Only Money Market Fund, Weiss Intermediate Treasury Fund and Weiss Treasury Bond Fund. The information required by this Item 28 is incorporated by reference to such Form ADV. BusinessPositions and Offices Positions and Offices Address with Underwriter with Registrant John N. Breazeale President Trustee Martin D. Weiss Director Trustee James B. Black Treasurer, Secretary Treasurer, Secretary Weiss Funds, Inc. is a newly formed corporation that will file its Form BD before the effective date of the Registrant's registration statement. (c) Name of principal underwriter: Weiss Funds, Inc. Net underwriting discounts and commissions: $ None Compensation on redemption and repurchase: $ None Item 30 Location of Accounts and Records Weiss Money Management Inc., 4176 Burns Road, Palm Beach Gardens, Florida 33410; PFPC, Inc., Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809; PNC Bank, 200 Stevens Drive, Lester, Pennsylvania 19113. (b) Registrant undertakes to file a post-effective amendment, using financial statements which need not be certified, within four to six months from the effective date of its 1933 Act registration statement. (c) Registrant undertakes to furnish to each person to whom a prospectus is delivered, upon request and without charge, a copy of the Registrant's latest annual report to shareholders. Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, in the Commonwealth of Massachusetts, on the 10th day of January, 1996. By: /s/ JOSEPH R. FLEMING Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Trustee January 10, 1996 * Trustee January 10, 1996 * Trustee January 10, 1996 * Trustee January 10, 1996 * Trustee January 10, 1996 By: /s/ JOSEPH R. FLEMING Executed pursuant to powers of attorney filed herewith. 1. (a) Declaration of Trust of the Registrant dated August 10, 1995 is incorporated by reference to Registrant's initial Registration Statement on Form N-1A. (b) Establishment and Designation of Shares of Beneficial Interest, $.01 Par Value Per Share is incorporated by reference to Registrant's initial Registration Statement on Form N-1A. 2. By-Laws of the Registrant dated August 10, 1995 are incorporated by reference to Registrant's initial Registration Statement on Form N-1A. 5. (a) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Treasury Only Money Market Fund, and Weiss Money Management, Inc. to be filed herewith. (b) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Intermediate Treasury Fund, and Weiss Money Management, Inc. to be filed herewith. (c) Form of Investment Advisory Agreement between the Registrant, on behalf of Weiss Treasury Bond Fund, and Weiss Money Management, Inc. to be filed herewith. 6. Form of Distribution Agreement between the Registrant and Weiss Funds, Inc. to be filed herewith. 8. (a) Form of Custodian Agreement between the Registrant and PNC Bank to be filed herewith. (b) Form of Transfer Agency and Service Agreement between the Registrant and PFPC, Inc. to be filed herewith. (c) Form of Administration and Accounting Services Agreement between the Registrant and PFPC, Inc. to be filed herewith. 10. Opinion and Consent of Dechert Price & Rhoads, counsel to the Registrant to be filed with Registrant's Notice Pursuant to Rule 24f-2 11. Opinion and Consent of Coopers & Lybrand, LLP, independent accountants for the Registrant. 14. Form of Weiss Individual Retirement Plan. KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints Joseph R. Fleming and Sheldon A. Jones, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for him in his name, place, and stead, to sign any and all registration statements applicable to Weiss Treasury Fund and any amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints John N. Breazeale, Joseph R. Fleming and Sheldon A. Jones, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for him in his name, place, and stead, to sign any and all registration statements applicable to Weiss Treasury Fund and any amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints John N. Breazeale, Joseph R. Fleming and Sheldon A. Jones, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for him in his name, place, and stead, to sign any and all registration statements applicable to Weiss Treasury Fund and any amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints John N. Breazeale, Joseph R. Fleming and Sheldon A. Jones, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for him in his name, place, and stead, to sign any and all registration statements applicable to Weiss Treasury Fund and any amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints John N. Breazeale, Joseph R. Fleming and Sheldon A. Jones, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for him in his name, place, and stead, to sign any and all registration statements applicable to Weiss Treasury Fund and any amendments or supplements thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. To the Shareholders and Board of Trustees We have audited the accompanying Statement of Assets and Liabilities of Weiss Treasury Fund (the "Trust") (consisting of Weiss Treasury Only Money Market Fund, Weiss Intermediate Treasury Fund and Weiss Treasury Bond Fund) as of January 5, 1996. This financial statement is the responsibility of the Trust's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Weiss Treasury Fund as of January 5, 1996 in conformity with generally accepted accounting principles.	N-1/A	N-1/A	1996-01-12T00:00:00	1996-01-11T17:32:37
0000950110-96-000046	0000950110-96-000046_0000.txt	[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act Of 1934 For the period ended November 30, 1995 [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act Of 1934 For the transition period from ____ to ____ (Exact name of small business issuer as specified in its charter) (State or other jurisdiction of (I.R.S. Employer Identification No.) 400 Oser Avenue, Hauppauge, NY 11788 (Address of principal executive offices) (Former name, former address and former fiscal year, if changed since last report) Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No 1,506,569 shares of common stock, par value $.01 per share, as of December 31, 1995. The accompanying notes are an integral part of these consolidated condensed financial statements. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1994 The accompanying notes are an integral part of these consolidated condensed financial statements. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1994 Cash flows from operating activities: Net income.......................................... $ 437,524 $ 368,948 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................... 85,479 57,756 Provision for losses on accounts receivable....... -- -- Gain on sale of securities........................ (8,111) (443) Deferred income taxes............................. (4,000) (34,000) Loss on sale of assets............................ 1,924 -- Changes in assets and liabilities: Trade accounts receivable ...................... (832,447) (442,998) Other accounts receivable ...................... 43,134 47,536 Prepaid expenses ............................... (43,323) 21,204 Prepaid and recoverable income taxes ........... 10,001 (1,302) Other assets ................................... (10,640) 5,597 Accounts payable and accrued expenses .......... (35,797) 82,790 Income taxes payable ........................... (3,568) 1,998 Advances from customers ........................ 28,544 -- Net cash provided by (used in) operating activities. (331,280) 107,086 Cash flows from investing activities: Proceeds from sales of marketable securities...... 3,426,751 1,474,638 Purchase of marketable securities................. (972,803) (2,926,080) Purchase of fixed assets.......................... (134,740) (70,516) Proceeds from sales of fixed assets............... 14,256 -- Net cash provided by (used in) investing activities. 2,333,464 (1,521,958) Cash flows from financing activities: Cash dividends ................................... (605,828) -- Net cash used in financing activities............... (605,828) -- Net increase (decrease) in cash and cash equivalents.. 1,396,356 (1,414,872) Cash and cash equivalents at beginning of period...... 633,656 3,261,298 Cash and cash equivalents at end of period............ $2,030,012 $1,846,426 Supplemental Disclosures: Income tax payments (refunds), net.................. $ 347,000 $ 381,000 Interest paid....................................... $ -- $ -- The accompanying notes are an integral part of these consolidated condensed financial statements. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10-QSB of Regulation S-B. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. For further information refer to the Registrant's consolidated financial statements and notes thereto included in the Registrant's Annual Report on Form 10-KSB for the year ended May 31, 1995. 2. In the opinion of the Registrant, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position, the consolidated results of operations, and consolidated cash flows for the periods presented. 3. The Registrant is engaged primarily in the business of providing contract programming services. In addition, the Registrant provides construction specifications data bases on magnetic media, primarily to architectural and engineering firms, provides maintenance and support for its conversion software, provides program updating and consulting services to American Express Bank, Ltd. (AEBL). The results of operations for the six month period ended November 30, 1995 are not necessarily indicative of the results to be expected for the full year. 4. The consolidated condensed financial statements include the accounts of TSR, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 5. Cash and cash equivalents consist primarily of United States Treasury Bills with a maturity at acquisition of 90 days or less. 6. Marketable securities consist primarily of United States Treasury Bills with a maturity at acquisition in excess of 90 days. Such investments are expected to be held to maturity and are carried at amortized cost. 7. On July 6, 1995 the Board of Directors of the Company declared a cash dividend of $0.40 per share on Common Stock payable on August 28, 1995 to shareholders of record on July 31, 1995. The Company funded such dividend from its available cash and matured marketable securities. This dividend, which amounted to $605,828 did not have a material impact on the liquidity of the Company. This dividend was declared due to the Registrant's favorable operating results achieved during fiscal 1995. The Registrant has not adopted a policy of paying dividends on a regular periodic basis. 8. In the second quarter of fiscal 1996, the Registrant determined to withdraw from the health care services business. The growth and profitability experienced had not matched what was expected when the business commenced. Small recent improvements in operating results notwithstanding, the Registrant had concluded that its resources were better utilized in the further development of the contract programming business. OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with the consolidated condensed financial statements and the notes to the consolidated condensed financial statements. SIX MONTHS ENDED NOVEMBER 30, 1995 AS COMPARED WITH NOVEMBER 30, 1994 Income from operations as a percentage of revenues decreased to 4.3% in the current six month period from 4.9% in the prior year comparable period. This decline occurred despite $120,000 of expenses accrued in the prior year period to cover ongoing customer support costs associated with terminating the Registrant's construction specifications business by March, 1996. The decline in income from operations as a percentage of revenues is attributable to additional compensation paid to additional contract programming sales and recruiting employees who do not make an immediate contribution to operating results but are expected to fuel future growth. The decline was also attributable to lower margins in contract programming. For the six months ended November 30, 1995, revenues increased $2,638,000 or 20.9% over the prior year period. Although construction specifications and health care services revenues were down slightly from the prior year, contract programming services revenues increased $2,835,000, which resulted primarily from further penetration within existing accounts by the sales personnel. Cost of sales increased $2,040,000 or 22.7% over the prior year period. This increase included additional costs of $2,238,000 from contract programming, which resulted primarily from the above-mentioned revenue increase. However, the increase in cost of sales was heightened, to an extent, by reduced margins in the contract programming business. This continues the trend started in the second half of fiscal 1995 and is attributable to increased amounts paid to qualified programming professionals who have been in demand. Cost of sales decreased by $153,000 in the construction specifications business, primarily because of $120,000 of expenses accrued in the prior year to cover ongoing customer support costs associated with terminating this business by March, 1996. Health care services had a decrease in cost of sales of $45,000 whch resulted from reduced revenues. Selling, general, and administrative expenses increased $542,000, or 18.3% over the prior year comparable period. The contract programming and construction specifications businesses incurred increases amounting to $635,000, due to additional commission based compensation and the hiring of additional sales and recruiting employees. This is in line with the Registrant's plan for growth which seeks to focus on bringing in new accounts. The health care services and construction specifications businesses reduced expenses for the period. Interest and dividend income increased by $41,000 for the period, primarily because of an increase in short-term interest rates paid on the Registrant's treasury bills compared to the year ago. The effective income tax rate decreased to 44.4% in the current period from 47.4% in the prior year period, mainly because of reduced non-deductible entertainment expenses in the current period. OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED THREE MONTHS ENDED NOVEMBER 30, 1995 AS COMPARED WITH NOVEMBER 30, 1994 Income from operations as a percentage of revenues decreased to 3.7% in the current year quarter from 5.1% in the prior year comparable period. This decline occurred, despite $60,000 of expenses accrued in the prior year quarter to cover ongoing customer support costs associated with terminating the Registrant's construction specifications business by March, 1996. The decline in income from operations is attributable to additional compensation paid to newly hired sales and recruiting employees in the Registrant's recently opened contract programming office in Connecticut and to a decline in profit margins in the contract programming business. For the quarter ended November 30, 1995, revenues increased $1,378,000 or 22.1% over the prior year period. Although construction specifications and health care services revenues were down slightly from the prior year, contract programming services revenues increased $1,558,000, which resulted primarily from further penetration within existing accounts by the sales personnel. Cost of sales increased $1,083,000 or 24.4% over the prior year quarter. This increase included additional costs of $1,217,000 from contract programming, which resulted primarily from the above-mentioned revenue increase. However, the increase in cost of sales was heightened, to an extent, by reduced margins in the contract programming business. This continues the trend started in the second half of fiscal 1995 and is attributable to increased amounts paid to qualified programming professionals who have been in demand. Cost of sales decreased by $75,000 in the construction specifications business, primarily because of $60,000 of expenses accrued in the prior year to cover ongoing customer support costs associated with terminating this business by March, 1996. Selling, general, and administrative expenses increased $331,000, or 22.6% over the prior year comparable period. The contract programming business incurred increases amounting to $379,000, due to additional commission based compensation and the hiring of additional sales and recruiting employees. These new hires included those assigned to the Registrant's new office in Connecticut. This is in line with Registrant's plan for growth which seeks to focus on bringing in new accounts. The health care services business reduced expenses for the period due to the termination of the business in the middle of the current quarter. Interest and dividend income increased by $14,000 for the quarter, primarily because of an increase in short-term interest rates paid on the Registrant's treasury bills compared to the year ago quarter. The effective income tax rate decreased to 44.8% in the current quarter from 46.6% in the prior year period, mainly because of reduced non-deductible entertainment expenses in the current quarter. OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION, CONTINUED LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION Subject to continued profitability, the Registrant expects that cash flow generated from operations will be sufficient to provide the Registrant with adequate resources to meet all needs with respect to its existing business. In the event the Registrant requires additional funds, the Registrant expects to meet such needs with its cash and short term marketable securities as well as interest earned thereon, which the Registrant believes to be sufficient for the foreseeable future. Net cash flow used in operations resulted primarily from an increase in accounts receivable, which occurred partly because of the revenue increase and partly due to a longer collection cycle. This use of cash was partly offset by cash provided from net income. Cash flow provided or used by investing activities is affected mostly by the Registrant's decisions to either purchase United States Treasury Bills with maturities of three months or those with longer maturities. During the current quarter, the Registrant did not roll over some of its maturing treasury securities. This resulted in the funds being reclassified to cash and cash equivalents from marketable securities for financial statement purposes. Also, in the current year period, the contract programming office in New Jersey relocated to larger space to facilitate growth. This resulted in capital expenditures for new telephone equipment, computers and furniture. On July 18, 1995 the Board of Directors of the Registrant declared a cash dividend of $0.40 per share on Common Stock payable on August 28, 1995 to shareholders of record on July 31, 1995. The Registrant funded such dividend from its available cash and United States Treasury Bills. This dividend was declared due to the Registrant's favorable operating results achieved during fiscal 1995. The Registrant has not adopted a policy of paying dividends on a regular periodic basis. The Registrant's capital resource commitments at November 30,1995 consisted of lease obligations on its branch and corporate locations. The Registrant intends to finance these commitments from cash provided from operations. The Registrant has explored renegotiation and extension of the exclusive licensing agreement with the Construction Sciences Research Foundation, Inc. (CSRF) under which the Registrant markets construction specifications on magnetic media. As a result of such discussions, the Registrant does not presently believe that it will be able to extend the licensing agreement beyond its present term which expires March 1, 1996. In anticipation of the termination of such agreement, the Registrant has accrued expenses of approximately $240,000 which it deems adequate to cover ongoing customer support costs associated with terminating the construction specifications business. In July 1995, CSRF began to market an upgraded version of the construction specifications product which will be licensed through another party. The prospective offering of this product is expected to have a negative impact on construction specifications revenues for the remainder of the contract term. TERMINATION OF HEALTH CARE SERVICES BUSINESS In the second quarter of fiscal 1996, the Registrant determined to withdraw from the health care services business. The growth and profitability experienced had not matched what was expected when the business commenced. Small recent improvements in operating results notwithstanding, the Registrant had concluded that its resources were better utilized in the further development of the contract programming business. Item 6. Exhibits and Reports on Form 8k (a). Exhibit 27: Financial Data Schedule (b). Reports on Form 8k: None In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J. F. Hughes, Chairman, President and Treasurer John G. Sharkey, Vice President, Finance	10QSB	10QSB	1996-01-12T00:00:00	1996-01-12T13:42:28
0000912057-96-000444	0000912057-96-000444_0004.txt	THIS AGREEMENT is made as of this 31st day of August, 1994, by and between LEE PHARMACEUTICALS, INC., a California corporation ("Lee") and THE FLEETWOOD COMPANY, a Delaware corporation ("Fleetwood"). WHEREAS, Lee has acquired certain Assets, including the Products from Fleetwood pursuant to an Asset Purchase and Sale Agreement between Lee and Fleetwood, dated August 31, 1994 (the "Purchase Agreement"); NOW, THEREFORE, it is agreed by and between the parties hereto as follows: 1. DEFINITIONS. (a) "Products" means those Products set forth in Purchase Agreement. (b) "Net Sale Price" means the gross sales price paid by any independent purchaser of the Products less any discount, allowances or returns and taxes. (c) "Fiscal Period" shall mean the five (5) fiscal years commencing on September 1, 1994 and ending on August 31, 1999. (d) "Fiscal Year" shall mean each fiscal year during the Fiscal Period with the first Fiscal Year beginning on the first day in the Fiscal Period. (e) "Royalty Period" shall be each fiscal quarter during the Fiscal Period with the first Royalty Period beginning on the first day in the Fiscal Period. (f) "Territory" shall mean the United States, its territories and possessions including Puerto Rico and the U.S. Virgin Islands. (g) Other terms not defined herein shall have the meaning set forth in the Purchase Agreement. (a) ROYALTY RATE. Lee shall pay royalties to Fleetwood for all Products sold or otherwise disposed of subsequent to the date of this Agreement by Lee in the Territory during the Fiscal Period, at the rate equal to twelve percent (12%) of the Net Sales Price of each Product so sold during the Fiscal Period in the Territory (the "Royalties") ; provided, however, Lee shall pay a "Minimum Royalty" for the first three Fiscal Years as set forth in Section 2(b) hereof. To the extent that the aggregate amount of Royalties actually earned for any of such Royalty Period, or any prior Royalty Period, exceeds the Minimum Royalty due for such respective Royalty Period, such excess amounts which have not been previously used to credit towards a Minimum Royalty for a Royalty Period, shall be applied against the Minimum Royalty due in any subsequent Royalty Period. (b) MINIMUM AND MAXIMUM ROYALTIES. Notwithstanding Section 2(a) hereof, Lee shall pay Fleetwood Minimum Royalties in an amount equal to Two Hundred Forty-Seven Thousand Seven Hundred Twenty-Five Dollars ($247,725), payable in thirty-six (36) monthly installments, at the rate of Six Thousand Eight Hundred Eighty-One Dollars and Twenty-Five Cents ($6,881.25) beginning on September 30, 1994 and continuing on the last day of each month for the next thirty-five (35) months. In no case shall the Royalties payable under Section 2(a) hereof and this Section 2(b) exceed in the aggregate Two Hundred Forty- Seven Thousand Seven Hundred Twenty-Five Dollars ($247,725). (c) ROYALTY PAYMENT. The aggregate amount of Royalties accruing during each Royalty Period pursuant to Section 2(a) hereof is hereinafter referred to as the "Royalty Payment." The Royalty Payment shall be made by Lee to The Fleetwood Company, 1500 Brook Drive, Downers Grove, Illinois 60515-1093 (at such place as Fleetwood shall notify Lee in writing) within thirty (30) days of the end of each Royalty Period included within the Fiscal Period in which a sale or other disposition of a Product takes place in the Territory for such Royalty Period, at which time there shall be delivered to Fleetwood an accounting of the operations upon which such Royalty Payment is based, certified by an officer of Lee, which accounting and certification shall be in form and substance reasonably satisfactory to Fleetwood. (d) ROYALTY TERM. Unless otherwise terminated sooner, this Agreement and all obligations of Lee to pay Royalties on sales of the Product in the Territory shall terminate on August 31, 1999 (except payments due up to and including, but not paid by August 31, 1999) or when an aggregate of Two Hundred Forty-Seven Thousand Seven Hundred Twenty-Five Dollars ($247,725) of total royalty payment has been made. 3. FUTURE PATENTS. All inventions registered with the United States or any foreign patent office and any and all rights thereunder, both domestic and international, relating to the Products or the method of manufacturing, using or selling the Products that may be obtained, discovered or made by Lee during the term of this Agreement shall be the property of Lee and Fleetwood shall have no rights therein, except the rights to the Royalties. 4. PROTECTION OF CONFIDENTIAL INFORMATION. Lee and Fleetwood shall each take all steps which are necessary or reasonable to safeguard the secrecy and confidentiality of information related to the Products. 5. RIGHTS. After this Agreement terminates, Lee shall have the right to manufacture and sell anywhere in the world, the Products without payment of any further royalties. 6. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of California. 7. ENTIRE AGREEMENT. This Agreement and the Purchase Agreement contain the entire agreement of the parties with respect to the subject matter hereof. This Agreement may not be changed orally, but only by written agreement of both parties hereto. 8. SEVERABILITY. In the event that any provision of this Agreement is adjudicated invalid, illegal or unenforceable, such adjudication will not affect the validity, legality or enforceability of any other provision, and this Agreement will be construed as though such invalid, illegal or unenforceable provisions had never been contained herein. 9. RELATIONSHIP OF PARTIES. Nothing in this Agreement will be deemed to create a relationship of employment or agency or to constitute the parties as partners or joint venturers. 10. CAPTIONS. The underlined captions are included herein for convenience and do not constitute a part of this Agreement. 11. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. 12. EXPENSES OF PROCEEDINGS. In the event that any party hereto brings any type of proceeding to enforce the terms and conditions of this Agreement, the prevailing party in such proceeding shall be entitled to recover from the unsuccessful party all incidental costs and reasonable attorneys' and paralegal's fees incurred by said prevailing party. 13. NOTICES. Notices will be deemed given when received if sent by telecopy, hand delivery, or mailed, first class and postage prepaid to the following address or to such other address as either party may notify the other in writing: If to Lee: South El Monte, CA 91733-3312 Attention: Ronald G. Lee, President Jeffer, Mangels, Butler & Marmaro 2121 Avenue of the Stars Aronberg Goldgehn Davis & Garmisa One Chicago Plaza, Suite 3000 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.	10KSB40	EX-10.20	1996-01-12T00:00:00	1996-01-12T14:39:28
0000950109-96-000200	0000950109-96-000200_0011.txt	This letter constitutes the agreement between us with respect to compensation to be paid to PNC Bank, National Association ("PNC Bank") under the terms of a Custodian Services Agreement dated _________________, 1995 between PNC Bank and Weiss Treasury Fund ("you" or the "Fund"). Pursuant to Paragraph 11 of that Agreement, and in consideration of the services to be provided to each of the Fund's investment portfolios listed on Exhibit A of the Agreement, as such Exhibit A may be amended from time to time (each, a "Portfolio"), you will pay PNC Bank the following: 1. With respect to each portfolio, an annual custody fee of .015% for the first $100 million of average gross assets; and .01% of the average gross assets in excess of $100 million; exclusive of out-of-pocket expenses and transaction charges. Custody fees shall be calculated daily and paid monthly. 2. A transaction charge of $29.00 for each purchase or sale of a physical security or delivery of a physical security upon its maturity date or delivery of a physical security for reissuance; $10.00 for each purchase, sale, free receive or free deliver, or maturity or other book-entry transaction with respect to a Federal book-entry security, DTC eligible security, other book- entry security (other than a GNMA security) or a direct commercial paper issue; $18.00 for each purchase, sale, free receive or free delivery, or maturity or other book-entry transaction with respect to a GNMA security; $30.00 for each purchase, sale, exercise or expiration of an option contract position (round trip); $50.00 for each purchase, sale, exercise or expiration of a futures contract position (round trip); and $15.00 for each repurchase trade collateral tranche received from an institution other than PNC Bank (round trip). 3. PNC Bank's out-of-pocket expenses including, but not limited to, overnight express charges, Federal Reserve wire fees and global sub-custody services. 4. With respect to the per portfolio daily net overdrawn cash balances, a monthly charge shall be assessed based on the average federal funds rate for that month. 5. The minimum monthly fee shall be $1,250 for each portfolio, exclusive of out-of-pocket expenses and transaction charges. The minimum monthly fee for each Portfolio with respect to such Portfolio's first year of operations, exclusive of out-of-pocket expenses, shall be waived for start-up portfolios in accordance with the following step-in schedule: If during the next three years, PNC Bank is removed from the Agreement referenced above, the Fund shall pay any costs of time and material associated with the deconversion and PNC Bank will recoup 100% of the fees waived during the first two years. The fee for the period from the day of the year this fee letter is entered into until the end of that year shall be prorated according to the proportion which such period bears to the full annual period. If the foregoing accurately sets forth our agreement and you intend to be legally bound thereby, please execute a copy of this letter and return it to us.	N-1/A	EX-99.5	1996-01-12T00:00:00	1996-01-11T17:32:37
0000853183-96-000004	0000853183-96-000004_0000.txt	TEMPLETON REAL ESTATE SECURITIES FUND THIS STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1996, IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF TEMPLETON REAL ESTATE SECURITIES FUND DATED JANUARY 1, 1996, AS AMENDED FROM TIME TO TIME, WHICH MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST TO THE PRINCIPAL UNDERWRITER, 700 CENTRAL AVENUE, P.O. BOX 33030, TOLL FREE TELEPHONE: 800/DIAL BEN -Options on Securities and Stock Indices.............3 Investment Management and Other Services.............21 Purchase, Redemption and Pricing of -Special Net Asset Value Purchases..................32 Templeton Real Estate Securities Fund (the "Fund"), formerly Templeton Real Estate Trust, was organized as a Massachusetts business trust on July 17, 1989, and is registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end diversified management investment company. INVESTMENT POLICIES. The investment objectives and policies of the Fund are described in the Fund's Prospectus under the heading "General Description--Investment Objectives and Policies." REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the buyer of a security simultaneously commits to resell the security to the seller at an agreed-upon price and date. Under a repurchase agreement, the seller is required to maintain the value of the securities subject to the repurchase agreement at not less than their repurchase price. Templeton Global Advisors Limited (the "Investment Manager") will monitor the value of such securities daily to determine that the value equals or exceeds the repurchase price. Repurchase agreements may involve risks in the event of default or insolvency of the seller, including possible delays or restrictions upon the Fund's ability to dispose of the underlying securities. The Fund will enter into repurchase agreements only with parties who meet creditworthiness standards approved by the Board of Trustees, I.E., banks or broker-dealers which have been determined by the Investment Manager to present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase transaction. FUTURES CONTRACTS. The Fund may purchase and sell financial futures contracts. Although some financial futures contracts call for making or taking delivery of the underlying securities, in most cases these obligations are closed out before the settlement date. The closing of a contractual obligation is accomplished by purchasing or selling an identical offsetting futures contract. Other financial futures contracts by their terms call for cash settlements. The Fund may also buy and sell index futures contracts with respect to any stock or bond index traded on a recognized stock exchange or board of trade. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. At the time the Fund purchases a futures contract, an amount of cash, U.S. Government securities, or other highly liquid debt securities equal to the market value of the futures contract will be deposited in a segregated account with the Fund's Custodian. When writing a futures contract, the Fund will maintain with its Custodian liquid assets that, when added to the amounts deposited with a futures commission merchant or broker as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Fund's Custodian). OPTIONS ON SECURITIES AND STOCK INDICES. The Fund may write covered call and put options and purchase call and put options on securities or stock indices that are traded on United States and foreign exchanges and in the over-the-counter markets. An option on a security is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy a specified security (in the case of a call option) or to sell a specified security (in the case of a put option) from or to the writer of the option at a designated price during the term of the option. An option on a securities index gives the purchaser of the option, in return for the premium paid, the right to receive from the seller cash equal to the difference between the closing price of the index and the exercise price of the option. The Fund may write a call or put option only if the option is "covered." A call option on a security written by the Fund is covered if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its Custodian) upon conversion or exchange of other securities held in its portfolio. A call option on a security is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash or high grade U.S. Government securities in a segregated account with its Custodian. A put option on a security written by the Fund is "covered" if the Fund maintains cash or fixed-income securities with a value equal to the exercise price in a segregated account with its Custodian, or else holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The Fund will cover call options on stock indices by owning securities whose price changes, in the opinion of the Investment Manager, are expected to be similar to those of the index, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Nevertheless, where the Fund covers a call option on a stock index through ownership of securities, such securities may not match the composition of the index. In that event, the Fund will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. The Fund will cover put options on stock indices by segregating assets equal to the option's exercise price, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. The Fund will receive a premium from writing a put or call option, which increases the Fund's gross income in the event the option expires unexercised or is closed out at a profit. If the value of a security or an index on which the Fund has written a call option falls or remains the same, the Fund will realize a profit in the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of the portfolio securities being hedged. If the value of the underlying security or index rises, however, the Fund will realize a loss in its call option position, which will reduce the benefit of any unrealized appreciation in the Fund's stock investments. By writing a put option, the Fund assumes the risk of a decline in the underlying security or index. To the extent that the price changes of the portfolio securities being hedged correlate with changes in the value of the underlying security or index, writing covered put options on securities or indices will increase the Fund's losses in the event of a market decline, although such losses will be offset in part by the premium received for writing the option. The Fund may also purchase put options to hedge its investments against a decline in value. By purchasing a put option, the Fund will seek to offset a decline in the value of the portfolio securities being hedged through appreciation of the put option. If the value of the Fund's investments does not decline as anticipated, or if the value of the option does not increase, the Fund's loss will be limited to the premium paid for the option plus related transaction costs. The success of this strategy will depend, in part, on the accuracy of the correlation between the changes in value of the underlying security or index and the changes in value of the Fund's security holdings being hedged. The Fund may purchase call options on individual securities to hedge against an increase in the price of securities that the Fund anticipates purchasing in the future. Similarly, the Fund may purchase call options to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment, at a time when the Fund holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options, the Fund will bear the risk of losing all or a portion of the premium paid if the value of the underlying security or index does not rise. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. Trading could be interrupted, for example, because of supply and demand imbalances arising from a lack of either buyers or sellers, or the options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although the Fund may be able to offset to some extent any adverse effects of being unable to liquidate an option position, the Fund may experience losses in some cases as a result of such inability. FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign currency exchange rate risks, the Fund may enter into forward foreign currency exchange contracts and foreign currency futures contracts, as well as purchase put or call options on foreign currencies, as described below. The Fund may also conduct its foreign currency exchange transactions on a spot (I.E., cash) basis at the spot rate prevailing in the foreign currency exchange market. The Fund may enter into forward foreign currency exchange contracts ("forward contracts") to attempt to minimize the risk to the Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their customers. The Fund may enter into a forward contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of the security. In addition, for example, when the Fund believes that a foreign currency may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell an amount of the former foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. This second investment practice is generally referred to as "cross-hedging." Because in connection with the Fund's foreign currency forward transactions an amount of the Fund's assets equal to the amount of the purchase will be held aside or segregated to be used to pay for the commitment, the Fund will always have cash, cash equivalents or high quality debt securities available sufficient to cover any commitments under these contracts or to limit any potential risk. The segregated account will be marked-to-market on a daily basis. In addition, the Investment Manager does not intend to enter into such forward contracts if, as a result, the Fund will have more than 20% of the value of its total assets committed to such contracts. While these contracts are not presently regulated by the Commodity Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority to regulate forward contracts. In such event, the Fund's ability to utilize forward contracts in the manner set forth above may be restricted. Forward contracts may limit potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not engaged in such contracts. The Fund may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign portfolio securities and against increases in the dollar cost of foreign securities to be acquired. As is the case with other kinds of options, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and the Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuation in exchange rates although, in the event of rate movements adverse to the Fund's position, the Fund may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies to be written or purchased by the Fund will be traded on U.S. and foreign exchanges or over-the-counter. The Fund may enter into exchange-traded contracts for the purchase or sale for future delivery of foreign currencies ("foreign currency futures"). This investment technique will be used only to hedge against anticipated future changes in exchange rates which otherwise might adversely affect the value of the Fund's portfolio securities or adversely affect the prices of securities that the Fund intends to purchase at a later date. The successful use of currency futures will usually depend on the Investment Manager's ability to forecast currency exchange rate movements correctly. Should exchange rates move in an unexpected manner, the Fund may not achieve the anticipated benefits of foreign currency futures or may realize losses. STRUCTURED INVESTMENTS. Included among the issuers of debt securities in which the Fund may invest are entities organized and operated solely for the purpose of restructuring the investment characteristics of various securities. These entities are typically organized by investment banking firms which receive fees in connection with establishing each entity and arranging for the placement of its securities. This type of restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, of specified instruments and the issuance by that entity of one or more classes of securities ("Structured Investments") backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued Structured Investments to create securities with different investment characteristics such as varying maturities, payment interest rate provisions; the extent of the payments made with respect to Structured Investments is dependent on the extent of the cash flow on the underlying instruments. Because Structured Investments of the type in which the Fund anticipates investing typically involve no credit enhancement, their credit risk will generally be equivalent to that of the underlying instruments. The Fund is permitted to invest in a class of Structured Investments that is either subordinated or unsubordinated to the right of payment of another class. Subordinated Structured Investments typically have higher yields and present greater risks than unsubordinated Structured Investments. Although a Fund's purchase of subordinated Structured Investments would have a similar economic effect to that of borrowing against the underlying securities, the purchase will not be deemed to be leverage for purposes of the limitations placed on the extent of the Fund's assets that may be used for borrowing activities. Certain issuers of Structured Investments may be deemed to be "investment companies" as defined in the 1940 Act. As a result, a Fund's investment in these Structured Investments may be limited by the restrictions contained in the 1940 Act. Structured Investments are typically sold in private placement transactions, and there currently is no active trading market for Structured Investments. To the extent such investments are illiquid, they will be subject to the Fund's restrictions on investments in illiquid securities. INVESTMENT RESTRICTIONS. The Fund has imposed upon itself certain investment restrictions which, together with its investment objectives and policies, are fundamental policies except as otherwise indicated. No changes in the Fund's investment objectives, policies or investment restrictions (except those which are not fundamental policies) can be made without the approval of the Shareholders of the Fund. For this purpose, the provisions of the 1940 Act require the affirmative vote of the lesser of either (1) 67% or more of the Fund's Shares present at a Shareholders' meeting at which more than 50% of the outstanding Shares are present or represented by proxy or (2) more than 50% of the outstanding Shares of the Fund. In accordance with these restrictions, the Fund will not: 1. Invest more than 5% of its total assets in the securities of any one issuer (exclusive of U.S. Government securities). 2. Invest directly in real estate or interests in real estate (although it may purchase securities secured by real estate or interests therein, or issued by companies or investment trusts which invest in real estate or interests therein); invest in other open-end investment companies (except in connection with a merger, consolidation, acquisition or reorganization); invest in interests (other than publicly issued debentures or equity stock interests) in oil, gas or other mineral exploration or development programs; or purchase or sell commodity contracts (except futures contracts as described in the Fund's Prospectus). 3. Purchase or retain securities of any company in which officers of the Fund or of the Investment Manager, individually owning more than 1/2 of 1% of the securities of such company, in the aggregate own more than 5% of the securities of such company. 4. Purchase more than 10% of any class of securities of any one company, including more than 10% of its outstanding voting securities, or invest in any company for the purpose of exercising control or management. 5. Act as an underwriter; issue senior securities; purchase on margin or sell short, except that the Fund may make margin payments in connection with futures contracts. 6. Loan money apart from the purchase of a portion of an issue of publicly distributed bonds, debentures, notes and other evidences of indebtedness, although the Fund may enter into repurchase agreements and lend its portfolio securities. 7. Invest more than 5% of the value of its total assets in securities of issuers which have been in continuous operation less than three years. 8. Invest more than 15% of its total assets in securities of foreign companies that are not listed on a recognized United States or foreign securities exchange, including no more than 10% of its total assets in restricted securities and other securities (including repurchase agreements having more than seven days remaining to maturity and over-the-counter options purchased by the Fund and the assets used as cover for over-the-counter options written by the Fund) which are not restricted but which are not readily marketable (I.E., trading in the security is suspended or, in the case of unlisted securities, market makers do not exist or will not entertain bids or offers). 9. Concentrate its investments in any one industry, except that the Fund may invest 25% or more of its total assets in securities of companies principally engaged in or related to the real estate industry. 10. Borrow money, except that the Fund may borrow money from banks in an amount not exceeding 30% of the value of the Fund's total assets (not including the amount borrowed), or pledge, mortgage or hypothecate its assets for any purpose, except to secure borrowings and then only to an extent not greater than 15% of the Fund's total assets. Arrangements with respect to margin for futures contracts are not deemed to be a pledge of assets. 11. Participate on a joint or a joint and several basis in any trading account in securities. (See "Investment Objectives and Policies--Trading Policies" as to transactions in the same securities for the Fund and other Templeton Funds and 12. Invest more than 5% of its total assets in warrants whether or not listed on the New York or American Stock Exchanges, and more than 2% of its total assets in warrants that are not listed on those exchanges. Warrants acquired in units or attached to securities are not included in this restriction. The Fund has undertaken with a state securities commission that it will limit investments in illiquid securities to no more than 5% of its total assets. In addition, the Fund has no present intention of investing in collateralized mortgage obligations. Whenever any investment policy or investment restriction states a maximum percentage of the Fund's assets which may be invested in any security or other property, it is intended that such maximum percentage limitation be determined immediately after and as a result of the Fund's acquisition of such security or property. The investment restrictions do not preclude the Fund from purchasing the securities of any issuer pursuant to the exercise of subscription rights distributed to the Fund by the issuer, unless such purchase would result in a violation of restrictions 8 or 9. RISK FACTORS. The Fund has an unlimited right to purchase securities in any developed foreign country and may invest up to 10% of its assets in developing countries, if such securities are listed on an exchange, as well as a limited right to purchase such securities if they are unlisted. Investors should carefully the substantial risks involved in securities of companies and governments of foreign nations, which are in addition to the usual risks inherent in domestic investments. There may be less publicly available information about foreign companies comparable to the reports and ratings published about companies in the United States. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to United States companies. The Fund, therefore, may encounter difficulty in obtaining market quotations for purposes of valuing its portfolio and calculating its net asset value. Foreign markets have substantially less volume than the New York Stock Exchange ("NYSE") and securities of some foreign companies are less liquid and more volatile than securities of comparable United States companies. Commission rates in foreign countries, which are generally fixed rather than subject to negotiation as in the United States, are likely to be higher. In many foreign countries there is less government supervision and regulation of stock exchanges, brokers and listed companies than in the United States. Investments in companies domiciled in developing countries may be subject to potentially higher risks than investments in developed countries. These risks include (i) less social, political and economic stability; (ii) the small current size of the markets for such securities and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict the Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) foreign taxation; (v) the absence of developed legal structures governing private or foreign investment or allowing for judicial redress for injury to private property; (vi) the absence, until recently in certain Eastern European countries, of a capital market structure or market-oriented economy; and (vii) the possibility that recent favorable economic developments in Eastern Europe may be slowed or reversed by unanticipated political or social events in such countries. In addition, many countries in which a Fund may invest have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain countries. Moreover, the economies of some developing countries may differ favorably or unfavorably from the United States economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, reinvestment, resource self-sufficiency and balance of payments position. Investments in Eastern European countries may involve risks of nationalization, expropriation and confiscatory taxation. The Communist governments of a number of Eastern European countries expropriated large amounts of private property in the past, in many cases without adequate compensation, and there can be no assurance that such expropriation will not occur in the future. In the event of such expropriation, the Fund could lose a substantial portion of any investments it has made in the affected countries. Further, no accounting standards exist in Eastern European countries. Finally, even though certain Eastern European currencies may be convertible into United States dollars, the conversion rates may be artificial to the actual market values and may be adverse to Fund Shareholders. Investing in Russian companies involves a high degree of risk and special considerations not typically associated with investing in the United States securities markets, and should be considered highly speculative. Such risks include: (a) delays in settling portfolio transactions and risk of loss arising out of Russia's system of share registration and custody; (b) the risk that it may be impossible or more difficult than in other countries to obtain and/or enforce a judgment; (c) pervasiveness of corruption and crime in the Russian economic system; (d) currency exchange rate volatility and the lack of available currency hedging instruments; (e) higher rates of inflation (including the risk of social unrest associated with periods of hyper-inflation); (f) controls on foreign investment and local practices disfavoring foreign investors and limitations on repatriation of invested capital, profits and dividends, and on the Fund's ability to exchange local currencies for U.S. dollars; (g) the risk that the government of Russia or other executive or legislative bodies may decide not to continue to support the economic reform programs implemented since the dissolution of the Soviet Union and could follow radically different political and/or economic policies to the detriment of investors, including non-market-oriented policies such as the support of certain industries at the expense of other sectors or investors, or a return to the centrally planned economy that existed prior to the dissolution of the Soviet Union; (h) the financial condition of Russian companies, including large amounts of inter-company debt which may create a payments crisis on a national scale; (i) dependency on exports and the corresponding importance of international trade; (j) the risk that the Russian tax system will not be reformed to prevent inconsistent, retroactive and/or exorbitant taxation; and (k) possible difficulty in identifying a purchaser of securities held by the Fund due to the underdeveloped nature of the securities markets. There is little historical data on Russian securities markets because they are relatively new and a substantial proportion of securities transactions in Russia are privately negotiated outside of stock exchanges. Because of the recent formation of the securities markets as well as the underdeveloped state of the banking and telecommunications systems, settlement, clearing and registration of securities transactions are subject to significant risks. Ownership of shares (except where shares are held through depositories that meet the requirements of the 1940 Act) is defined according to entries in the company's share register and normally evidenced by extracts from the register or by formal share certificates. However, there is no central registration system for shareholders and these services are carried out by the companies themselves or by registrars located throughout Russia. These registrars are not necessarily subject to effective state supervision and it is possible for the Fund to lose its registration through fraud, negligence or even mere oversight. While the Fund will endeavor to ensure that its interest continues to be appropriately recorded either itself or through a custodian or other agent inspecting the share register and by obtaining extracts of share registers through regular confirmations, these extracts have no legal enforceability and it is possible that subsequent illegal amendment or other fraudulent act may deprive the Fund of its ownership rights or improperly dilute its interests. In addition, while applicable Russian regulations impose liability on registrars for losses resulting from their errors, it may be difficult for the Fund to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration. Furthermore, although a Russian public enterprise with more than 1,000 shareholders is required by law to contract out the maintenance of its shareholder register to an independent entity that meets certain criteria, in practice this regulation has not always been strictly enforced. Because of this lack of independence, management of a company may be able to exert considerable influence over who can purchase and sell the company's shares by illegally instructing the registrar to refuse to record transactions in the share register. This practice may prevent the Fund from investing in the securities of certain Russian companies deemed suitable by the Investment Manager. Further, this also could cause a delay in the sale of Russian company securities by the Fund if a potential purchaser is deemed unsuitable, which may expose the Fund to potential loss on the investment. The Fund endeavors to buy and sell foreign currencies on as favorable a basis as practicable. Some price spread on currency exchange (to cover service charges) may be incurred, particularly when the Fund changes investments from one country to another or when proceeds of the sale of Shares in U.S. dollars the purchase of securities in foreign countries. Also, some countries may adopt policies which would prevent the Fund from transferring cash out of the country or withhold portions of interest and dividends at the source. There is the possibility of cessation of trading on national exchanges, expropriation, nationalization or confiscatory taxation, withholding and other foreign taxes on income or other amounts, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign government securities, political or social instability, or diplomatic developments which could affect investments in securities of issuers in foreign nations. The Fund may be affected either unfavorably or favorably by fluctuations in the relative rates of exchange between the currencies of different nations, by exchange control regulations and by indigenous economic and political developments. Some countries in which the Fund may invest may also have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies have experienced a steady devaluation relative to the U.S. dollar. Any devaluations in the currencies in which the Fund's portfolio securities are denominated may have a detrimental impact on the Fund. Through the Fund's flexible policy, management endeavors to avoid unfavorable consequences and to take advantage of favorable developments in particular nations where from time to time it places the Fund's investments. The exercise of this flexible policy may include decisions to purchase securities with substantial risk characteristics and other decisions such as changing the emphasis on investments from one nation to another and from one type of security to another. Some of these decisions may later prove profitable and others may not. No assurance can be given that profits, if any, will exceed losses. The Trustees consider at least annually the likelihood of the imposition by any foreign government of exchange control restrictions which would affect the liquidity of the Fund's assets maintained with custodians in foreign countries, as well as the degree of risk from political acts of foreign governments to which such assets may be exposed. The Trustees also consider the degree of risk involved through the holding of portfolio securities in domestic and foreign securities depositories (see "Investment Management and Other Services--Custodian and Transfer Agent"). However, in the absence of willful misfeasance, bad faith or gross negligence on the part of the Investment Manager, any losses resulting from the holding of the Fund's portfolio securities in foreign countries and/or with securities depositories will be at the risk of the Shareholders. No assurance can be given that the Fund's appraisal of the risks will always be correct or that such exchange control restrictions or political acts of foreign governments might not occur. Additional risks may be involved with the Fund's special investment techniques, including loans of portfolio securities and borrowing for investment purposes. These risks are described under the heading "Investment Techniques" in the Prospectus. TRADING POLICIES. The Investment Manager and its affiliated companies serve as investment adviser to other investment companies and private clients. Accordingly, the respective portfolios of certain of these funds and clients may contain many or some of the same securities. When certain funds or clients are engaged simultaneously in the purchase or sale of the same security, the trades may be aggregated for execution and then allocated in a manner designed to be equitable to each party. The larger size of the transaction may affect the price of the security and/or the quantity which may be bought or sold for each party. If the transaction is large enough, brokerage commissions in certain countries may be negotiated below those otherwise chargeable. Sale or purchase of securities, without payment of brokerage commissions, fees (except customary transfer fees) or other remuneration in connection therewith, may be effected between any of these funds, or between funds and private clients, under procedures adopted pursuant to Rule 17a-7 under the 1940 Act. PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j) under the 1940 Act, who are employees of Franklin Resources, Inc. or their subsidiaries, are permitted to engage in personal securities transactions subject to the following general restrictions and procedures: (1) The trade must receive advance clearance from a Compliance Officer and must be completed within 24 hours after this clearance; (2) Copies of all brokerage confirmations must be sent to the Compliance Officer and within 10 days after the end of each calendar quarter, a report of all securities transactions must be provided to the Compliance Officer; (3) In addition to items (1) and (2), access persons involved in preparing and making investment decisions must file annual reports of their securities holdings each January and also inform the Compliance Officer (or other designated personnel) if they own a security that is being considered for a fund or other client transaction or if they are recommending a security in which they have an ownership interest for purchase or sale by a fund or other client. The name, address, principal occupation during the past five years and other information with respect to each of the Trustees and Principal Executive Officers of the Fund are as follows: NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS Chairman of the Board, president and chief executive officer of and craft centers); and a director of RBC Holdings (U.S.A.) Inc. (a bank holding company) and Bar-S Foods. Age 63. Chairman of Templeton Emerging Markets Investment Trust PLC; chairman of Templeton Latin America Investment Trust PLC; chairman of Darby Overseas Investments, Ltd. (an investment firm) (1994-present); director of the Amerada Hess Corporation, Capital Cities/ABC, Inc., Christiana Companies, and the H.J. Heinz Company; Secretary of the United States Department of the Treasury (1988-January 1993); and chairman of the board of Dillon, Read & Co. Inc. (investment banking) prior thereto. Age 65. adviser, National Bank of Canada, Toronto. Age 85. Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a Corporation. Age 63. NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS Ltd. (1986-1992); and chairman of Templeton Funds Management, Inc. (1974-1991). Age 74. Consultant for the Triangle Consulting Group; chairman of the board and chief executive officer of Florida Progress Corporation (1982-February 1990) and director of various of its subsidiaries; chairman and director of Precise Power Corporation; executive-in-residence of Eckerd College (1991-present); and a director of Checkers Drive-In Restaurants, Inc. Age 72. President, chief executive officer, and director of Franklin Resources, Inc.; chairman of the board and director of Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.; General Host Corporation, and Templeton Global Investors, Inc.; and officer and director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin and of 55 of the investment companies in the Franklin Templeton Group. Age 62. NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS Executive vice president and director of Franklin Resources, Inc.; president and director of Franklin Advisers, Inc.; executive vice president and director of Franklin Templeton Distributors, Inc.; and officer and/or director, trustee or managing general partner, as the case may be, of most other subsidiaries of Franklin Resources, Inc., and of 42 of the investment companies in the Franklin Templeton Group. Age 55. Director or trustee of various civic associations; formerly, economic analyst, U.S. Government. Age 66. Chairman of White River Corporation (information services); director of Fund America Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI Communications Corporation, Fusion Systems Corporation, Infovest Corporation, and Medimmune, Inc.; and formerly held the following positions: chairman of Hambrecht and Quist Group, director of H&Q Healthcare Investors and president of the National Association of Securities Dealers, Inc. Age 67. NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS Manager of personal investments (1978-present); chairman and chief executive officer of Landmark Banking Corporation (1969-1978); financial vice president of Florida Power and Light (1965-1969); vice president of The Federal Reserve Bank of Atlanta (1958-1965); and a director of various other business and nonprofit organizations. Age 66. President and director of Templeton Global Advisors Limited; chief investment officer of the global equity group for Templeton Worldwide, Inc.; president or vice president of other Templeton Funds; formerly, investment administrator with Roy West Trust Corporation (Bahamas) Limited (1984-1985). Age 35. Senior vice president, treasurer, and chief financial officer of Franklin Resources, Inc.; director and executive vice president of Templeton Investment Counsel, Inc.; director, chief executive officer, and president of Templeton Global Investors, Inc.; director or trustee, president or vice president of various Templeton Funds; accountant with Arthur Andersen & Company (1982-1983); and a member of the International Society of Financial Analysts and the American Institute of Certified Public Accounts. Age 35. Vice president, Portfolio Management/Research of Templeton Global Advisors Limited; formerly, investment officer, First Pennsylvania Investment Research (until 1989). Age 31. Vice president of the Templeton Funds; vice president and treasurer of Templeton Global Investors, Inc. and Templeton Worldwide, Inc.; assistant vice president of Franklin Templeton Distributors, Inc.; formerly, vice president and controller of the Keystone Group, Inc. Age 55. Templeton Global Investors, Inc.; vice president of Franklin Templeton Distributors, Inc.; secretary of the Templeton Funds; formerly, attorney, Dechert Price & Rhoads (1985-1988) and Freehill, Hollingdale & Page (1988); and judicial clerk, U.S. District Court (Eastern District of Virginia) (1984-1985). Age 42. Certified public accountant; treasurer of the Templeton Funds; senior vice president of Templeton Worldwide, Inc., Templeton Global Investors, Inc., and Templeton Funds Trust Company; formerly, senior tax manager with Ernst & Young (certified public accountants) (1977-1989). Age 41. Partner, Dechert Price & Rhoads. * These are Trustees who are "interested persons" of the Fund as that term is defined in the 1940 Act. Mr. Brady and Franklin Resources, Inc. are limited partners of Darby Overseas Partners, L.P. ("Darby Overseas"). Mr. Brady established Darby Overseas in February, 1994, and is Chairman and a shareholder of the corporate general partner of Darby Overseas. In addition, Darby Overseas and Templeton Global Advisors Limited are limited partners of Darby Emerging Markets Fund, L.P. There are no family relationships between any of the Trustees, except that Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. All of the Fund's Officers and Trustees also hold positions with other investment companies in the Franklin Templeton Group. No compensation is paid by the Fund to any officer or Trustee who is an officer, trustee or employee of the Investment Manager or its affiliates. Each Templeton Fund pays its independent directors and trustees and Mr. Brady an annual retainer and/or fees for attendance at Board and Committee meetings, the amount of which is based on the level of assets in each fund. Accordingly, the Fund currently pays the independent Trustees and Mr. Brady an annual retainer of $1,000 and a fee of $100 per meeting attended of the Board and its Committees. The independent Trustees and Mr. Brady are reimbursed for any expenses incurred in attending meetings, paid pro rata by each Franklin Templeton Fund in which they serve. No pension or retirement benefits are accrued as part of Fund expenses. The following table shows the total compensation paid to the Trustees by the Fund and by all investment companies in the Franklin Templeton Group: * For the fiscal year ended August 31, 1995. ** For the calendar year ended December 31, 1995. As of December 1, 1995 there were 9,923,824 Shares of the Fund outstanding, of which 4,419 Shares (0.045%) were owned beneficially, directly or indirectly, by all the Trustees and officers of the Fund as a group. As of December 1, 1995, to the knowledge of management, no person owned beneficially or of record 5% or more of the outstanding Shares, except Prudential Securities, FBO Christine T. Marks, owned 12,891 Class II Shares of the Fund (7% of the outstanding Class II Shares). INVESTMENT MANAGEMENT AND OTHER SERVICES INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of the Fund is Templeton Global Advisors Limited, a Bahamian corporation with offices in Nassau, Bahamas. On April 15, 1994, the Investment Manager assumed the investment management duties of Templeton Investment Counsel, Inc. ("TICI"), a Florida corporation, with respect to the Fund under the Investment Management Agreement. The Investment Management Agreement dated October 30, 1992 (the "Agreement") was approved by the Shareholders of the Fund on October 30, 1992, was last approved by the Board of Trustees, including a majority of the Trustees who were not parties to the Agreement or interested persons of any such party, at a meeting on December 5, 1995, and will run through December 31, 1996. The Agreement continues from year to year subject to approval annually by the Board of Trustees or by vote of a majority of the outstanding Shares of the Fund (as defined in the 1940 Act) and also, in either event, with the approval of a majority of those Trustees who are not parties to the Agreement or interested persons of any such party in person at a meeting called for the purpose of voting on such approval. The Agreement requires the Investment Manager to manage the investment and reinvestment of the Fund's assets. The Investment Manager is not required to furnish any personnel, overhead items or facilities for the Fund, including daily pricing or trading desk facilities, although such expenses are paid by investment advisers of some other investment companies. The Agreement provides that the Investment Manager will select brokers and dealers for execution of the Fund's portfolio transactions consistent with the Fund's brokerage policies (see "Brokerage Allocation"). Although the services provided by broker-dealers in accordance with the brokerage policies incidentally may help reduce the expenses of or otherwise benefit the Investment Manager and other investment advisory clients of the Investment Manager and of its affiliates, as well as the Fund, the value of such services is indeterminable and the Investment Manager's fee is not reduced by any offset arrangement by reason thereof. When the Investment Manager determines to buy or sell the same security for the Fund that the Investment Manager or certain of its affiliates have selected for one or more of the Investment Manager's other clients or for clients of its affiliates, the orders for all such securities trades may be placed for execution by methods determined by the Investment Manager, with approval by the Board of Trustees, to be impartial and fair, in order to seek good results for all parties (see "Investment Objectives and Policies -- Trading Policies"). Records of securities transactions of persons who know when orders are placed by the Fund are available for inspection at least four times annually by the Compliance Officer of the Fund so that the non-interested Trustees (as defined in the 1940 Act) can be satisfied that the procedures are generally fair and equitable to all parties. The Investment Manager also provides management services to numerous other investment companies or funds and accounts pursuant to management agreements with each fund or account. The Investment Manager may give advice and take action with respect to any of the other funds and accounts it manages, or for its own account, which may differ from action taken by the Investment Manager on behalf of the Fund. Similarly, with respect to the Fund, the Investment Manager is not obligated to recommend, purchase or sell, or to refrain from recommending, purchasing or selling any security that the Investment Manager and access persons, as defined by the 1940 Act, may purchase or sell for its or their own account or for the accounts of any other fund or account. Furthermore, the Investment Manager is not obligated to refrain from investing in securities held by the Fund or other funds or accounts which it manages or administers. Any transactions for the accounts of the Investment Manager and other access persons will be made in compliance with the Fund's Code of Ethics as described in the section "Investment Objectives and Policies -- Personal Securities Transactions." The Agreement provides that the Investment Manager shall have no liability to the Fund or any Shareholder of the Fund for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the performance by the Investment Manager of its duties under the Agreement, except liability resulting from willful misfeasance, bad faith or gross negligence on the Investment Manager's part or reckless disregard of its duties under the Agreement. The Agreement will terminate automatically in the event of its assignment, and may be terminated by the Fund at any time without payment of any penalty on 60 days' written notice, with the approval of a majority of the Trustees in office at the time or by vote of a majority of the outstanding voting securities of the Fund (as defined in the 1940 Act). MANAGEMENT FEES. For its services, the Fund pays the Investment Manager a monthly fee equal on an annual basis to 0.75% of its average daily net assets during the year. Each class of Shares pays a portion of the fee, determined by the proportion of the Fund that it represents. During the fiscal years ended August 31, 1995, 1994, and 1993, the Investment Manager (and prior to April 30, 1994, TICI, the Fund's previous investment manager) received from the Fund under the Agreement of $974,779, $733,198 and $341,213, respectively. The Investment Manager will comply with any applicable state regulations which may require the Investment Manager to make reimbursements to the Fund in the event that the Fund's aggregate operating expenses, including the management fee, but generally excluding interest, taxes, brokerage commissions and extraordinary expenses, are in excess of specific applicable limitations. The strictest rule currently applicable to the Fund is 2.5% of the first $30,000,000 of net assets, 2% of the next $70,000,000 of net assets and 1.5% of the remainder. THE INVESTMENT MANAGER. The Investment Manager is an indirect wholly owned subsidiary of Franklin, a publicly traded company whose shares are listed on the NYSE. Charles B. Johnson (a Trustee and Officer of the Fund) and Rupert H. Johnson, Jr. (a Trustee of the Fund) are principal shareholders of Franklin and own, respectively, approximately 20% and 16% of its outstanding shares. Messrs. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. BUSINESS MANAGER. Templeton Global Investors, Inc. performs certain administrative functions as Business Manager for the Fund, including: o providing office space, telephone, office equipment and o paying compensation of the Fund's officers for services o authorizing expenditures and approving bills for payment on behalf of the Fund; o supervising preparation of annual and semiannual reports to Shareholders, notices of dividends, capital gain distributions and tax credits, and attending to routine correspondence and other communications with o daily pricing of the Fund's investment portfolio and preparing and supervising publication of daily quotations of the bid and asked prices of the Fund's Shares, earnings reports and other o monitoring relationships with organizations serving the Fund, including the custodian and printers; o providing trading desk facilities for the Fund; o supervising compliance by the Fund with recordkeeping requirements under the 1940 Act and the rules and regulations thereunder, with state regulatory requirements, maintaining books and records for the Fund (other than those maintained by the custodian and transfer agent), and preparing and filing tax reports other than the Fund's income tax returns; o monitoring the qualifications of tax-deferred retirement plans providing for investment in Shares of o providing executive, clerical and secretarial help needed to carry out these responsibilities. For its services, the Business Manager receives a monthly fee equal on an annual basis to 0.15% of the first $200,000,000 of the Fund's average daily net assets, reduced to 0.135% annually of such net assets in excess of $200,000,000, further reduced to 0.1% annually of such net assets in excess of $700,000,000, and further reduced to 0.075% annually of such net assets in excess of $1,200,000,000. Each class of Shares pays a portion of the fee, determined by the proportion of the Fund that it represents. Since the Business Manager's fee covers services often provided by investment advisers to other funds, the Fund's combined expenses for advisory and administrative services together may be higher than those of some other investment companies. During the fiscal years ended August 31, 1995, 1994, and 1993, the Business Manager (and, prior to April 1, 1993, Templeton Funds Management, Inc., the previous business manager) received business management fees of $194,956, $146,640 and $68,243, respectively. The Business Manager is relieved of liability to the Fund for any act or omission in the course of its performance under the Business Management Agreement, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under the Agreement. The Business Management Agreement may be terminated by the Fund at any time on 60 days' written notice without payment of penalty, provided that such termination by the Fund shall be directed or approved by vote of a majority of the Trustees of the Fund in office at the time or by vote of a majority of the outstanding voting securities of the Fund, and shall terminate automatically and immediately in the event of its assignment. Templeton Global Investors, Inc. is an indirect wholly owned subsidiary of Franklin. CUSTODIAN AND TRANSFER AGENT. The Chase Manhattan Bank, N.A., serves as Custodian of the Fund's assets, which are maintained at the Custodian's principal office, MetroTech Center, Brooklyn, New York 11245, and at the offices of its branches and agencies throughout the world. The Custodian has entered into agreements with foreign sub-custodians approved by the Trustees pursuant to Rule 17f-5 under the 1940 Act. The Custodian, its branches and sub-custodians generally domestically, and frequently abroad, do not actually hold certificates for the securities in their custody, but instead have book records with domestic and foreign securities depositories, which in turn have book records with the transfer agents of the issuers of the securities. Compensation for the services of the Custodian is based on a schedule of charges agreed on from time to time. Franklin Templeton Investor Services, Inc. serves as the Fund's Transfer Agent. Services performed by the Transfer Agent include processing purchase, transfer and redemption orders; making dividend payments, capital gain distributions and reinvestments; and handling routine communications with Shareholders. The Transfer Agent receives from the Fund an annual fee of $13.74 per Shareholder account plus out-of-pocket expenses. This fee is adjusted each year to reflect changes in the Department of Labor Consumer Price Index. LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005, is legal counsel for the Fund. INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, serves as independent accountants for the Fund. Its audit services comprise examination of the Fund's financial statements and review of the Fund's filings with the Securities and Exchange Commission ("SEC") and the Internal Revenue Service ("IRS"). REPORTS TO SHAREHOLDERS. The Fund's fiscal year ends on August 31. Shareholders are provided at least semiannually with reports showing the Fund's portfolio and other information, including an annual report with financial statements audited by independent accountants. Shareholders who would like to receive an interim quarterly report may phone the Fund Information Department at 1-800/DIAL BEN. The Investment Management Agreement provides that the Investment Manager is responsible for selecting members of securities exchanges, brokers and dealers (such members, brokers and dealers being hereinafter referred to as "brokers") for the execution of the Fund's portfolio transactions and, when applicable, the negotiation of commissions in connection therewith. All decisions and placements are made in accordance with the following principles: 1. Purchase and sale orders are usually placed with brokers who are selected by the Investment Manager as able to achieve "best execution" of such orders. "Best execution" means prompt and reliable execution at the most favorable securities price, taking into account the other provisions hereinafter set forth. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, and the financial strength and stability of the broker. Such considerations are judgmental and are weighed by the Investment Manager in determining the overall reasonableness of brokerage commissions. 2. In selecting brokers for portfolio transactions, the Investment Manager takes into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by the Fund. 3. The Investment Manager is authorized to allocate brokerage business to brokers who have provided brokerage and research services, as such services are defined in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for the Fund and/or other accounts, if any, for which the Investment exercises investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to transactions to which fixed minimum commission rates are not applicable, to cause the Fund to pay a commission for effecting a securities transaction in excess of the amount another broker would have charged for effecting that transaction, if the Investment Manager in making the selection in question determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or the Investment Manager's overall responsibilities with respect to the Fund and the other accounts, if any, as to which it exercises investment discretion. In reaching such determination, the Investment Manager is not required to place or attempt to place a specific dollar value on the research or execution services of a broker or on the portion of any commission reflecting either of said services. In demonstrating that such determinations were made in good faith, the Investment Manager shall be prepared to show that all commissions were allocated and paid for purposes contemplated by the Fund's brokerage policy; that the research services provide lawful and appropriate assistance to the Investment Manager in the performance of its investment decision-making responsibilities; and that the commissions paid were within a reasonable range. The determination that commissions were within a reasonable range shall be based on any available information as to the level of commissions known to be charged by other brokers on comparable transactions, but there shall be taken into account the Fund's policies that (i) obtaining a low commission is deemed secondary to obtaining a favorable securities price, since it is recognized that usually it is more beneficial to the Fund to obtain a favorable price than to pay the lowest commission; and (ii) the quality, comprehensiveness and frequency of research studies which are provided for the Investment Manager are useful to the Investment Manager in performing its advisory services under its Agreement with the Fund. Research services provided by brokers to the Investment Manager are considered to be in addition to, and not in lieu of, services required to be performed by the Investment Manager under its Investment Management Agreement with the Fund. Research furnished by brokers through whom the Fund effects securities transactions may be used by the Investment Manager for any of its accounts, and not all such research may be used by the the Fund. When execution of portfolio transactions is allocated to brokers trading on exchanges with fixed brokerage commission rates, account may be taken of various services provided by the broker, including quotations outside the United States for daily pricing of foreign securities held in the Fund's portfolio. 4. Purchases and sales of portfolio securities within the United States other than on a securities exchange are executed with primary market makers acting as principal, except where, in the judgment of the Investment Manager, better prices and execution may be obtained on a commission basis or from other sources. 5. Sales of the Fund's Shares (which shall be deemed to include Shares of other companies registered under the 1940 Act which have either the same investment adviser or an investment adviser affiliated with the Fund's Investment Manager) made by a broker are one factor among others to be taken into account in deciding to allocate portfolio transactions (including agency transactions, principal transactions, purchases in underwritings or tenders in response to tender offers) for the account of the Fund to that broker; provided that the broker shall furnish "best execution," as defined in paragraph 1 above, and that such allocation shall be within the scope of the Fund's other policies as stated above; and provided further, that in every allocation made to a broker in which the sale of Shares is taken into account there shall be no increase in the amount of the commissions or other compensation paid to such broker beyond a reasonable commission or other compensation determined, as set forth in paragraph 3 above, on the basis of best execution alone or best execution plus research services, without taking account of or placing any value upon such sale of Shares. Insofar as known to management, no Trustee or officer of the Fund, nor the Investment Manager or Principal Underwriter or any person affiliated with either of them, has any material direct or indirect interest in any broker employed by or on behalf of the Fund. Franklin Templeton Distributors, Inc., the Fund's Principal Underwriter, is a registered broker-dealer, but has never executed any purchase or sale transactions for the Fund's portfolio or participated in any commissions on any such transactions, and has no intention of doing so in the future. The total brokerage commissions on the portfolio transactions for the Fund during the fiscal years ended August 31, 1995, 1994, and 1993, (not including any spreads or concessions on principal transactions) were $388,000, $412,000 and $156,000, respectively. All portfolio transactions are allocated to broker-dealers only when their prices and execution, in the judgment of the Investment Manager, are equal to the best available within the scope of the Fund's policies. There is no fixed method used in determining which broker-dealers receive which order or how many orders. PURCHASE, REDEMPTION AND PRICING OF SHARES The Prospectus describes the manner in which the Fund's Shares may be purchased and redeemed. See "How to Buy Shares of the Fund" and "How to Sell Shares of the Fund" in the Prospectus. Net asset value per Share is determined as of the scheduled closing of the NYSE (generally 4:00 p.m., New York time), every Monday through Friday (exclusive of national business holidays). The Fund's offices will be closed, and net asset value will not be calculated, on those days on which the NYSE is closed, which currently are: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business in New York on each day on which the NYSE is open. Trading of European or Far Eastern securities generally, or in a particular country or countries, may not take place on every New York business day. Furthermore, trading takes place in various foreign markets on days which are not business days in New York and on which the Fund's net asset value is not calculated. The Fund calculates net asset value per Share, and therefore effects sales, redemptions and repurchases of its Shares, as of the close of the NYSE once on each day on which that Exchange is open. Such calculation does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in such calculation and if events occur which materially affect the value of those foreign securities, they will be valued at fair market value as determined by the management and approved in good faith by the Board of Trustees. The Board of Trustees may establish procedures under which the Fund may suspend the determination of net asset value for the whole or any part of any period during which (1) the NYSE is closed other than for customary weekend and holiday closings, (2) trading on the NYSE is restricted, (3) an emergency exists as a result of which disposal of securities owned by the Fund is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or (4) for such other period as the SEC may by order permit for the protection of the holders of the Fund's Shares. OWNERSHIP AND AUTHORITY DISPUTES. In the event of disputes involving multiple claims of ownership or authority to control a Shareholder's account, the Fund has the right (but has no obligation) to: (1) freeze the account and require the written agreement of all persons deemed by the Fund to have a potential property interest in the account, prior to executing instructions regarding the account; or (2) interplead disputed funds or accounts with a court of competent jurisdiction. Moreover, the Fund may surrender ownership of all or a portion of an account to the IRS in response to a Notice of Levy. In addition to the special purchase plans described in the Prospectus, other special purchase plans also are available: TAX-DEFERRED RETIREMENT PLANS. The Fund offers its Shareholders the opportunity to participate in the following types of retirement plans: o For individuals whether or not covered by other o For simplified employee pensions; o For employees of tax-exempt organizations; and o For corporations, self-employed individuals and partnerships. Capital gains and income received by the foregoing plans generally are exempt from taxation until distribution from the plans. Investors considering participation in any such plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan. Additional information, including the fees and charges with respect to all of these plans, is available upon request to the Principal Underwriter. No distribution under a retirement plan will be made until Franklin Templeton Trust Company ("FTTC") receives the participant's election on IRS Form W-4P (available on request from FTTC) and such other documentation as it deems necessary, as to whether or not U.S. income tax is to be withheld from such distribution. INDIVIDUAL RETIREMENT ACCOUNT (IRA). All individuals (whether or not covered by qualified private or governmental retirement plans) may purchase Shares of the Fund pursuant to an IRA. However, contributions to an IRA by an individual who is covered by a qualified private or governmental plan may not be tax-deductible depending on the individual's income. Custodial services for IRAs are available through FTTC. Disclosure statements summarizing certain aspects of IRAs are furnished to all persons investing in such accounts, in accordance with IRS regulations. SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRA). For employers who wish to establish a simplified form of employee retirement program investing in Shares of the Fund, there are available Simplified Employee Pensions invested in IRA plans. Details and materials relating to these plans will be furnished upon request to the Principal Underwriter. RETIREMENT PLAN FOR EMPLOYEES OF TAX-EXEMPT ORGANIZATIONS (403(B)). Employees of public school systems and certain types of charitable organizations may enter into a deferred compensation arrangement for the purchase of Shares of the Fund without being taxed currently on the investment. Contributions which are made by the employer through salary reduction are excludable from the gross income of the employee. Such deferred compensation plans, which are intended to qualify under Section 403(b) of the Internal Revenue Code of 1986, as amended (the "Code"), are available through the Principal Underwriter. Custodial services are provided by FTTC. QUALIFIED PLAN FOR CORPORATIONS, SELF-EMPLOYED INDIVIDUALS AND PARTNERSHIPS. For employers who wish to purchase Shares of the Fund in conjunction with employee retirement plans, there is a prototype master plan which has been approved by the IRS. A "Section 401(k) plan" is also available. FTTC furnishes custodial services for these plans. For further details, including custodian fees and plan administration services, see the master plan and related material which is available from the Principal Underwriter. LETTER OF INTENT. Purchasers who intend to invest $50,000 or more in Class I Shares of the Fund or any other fund in the Franklin Group of Funds and the Templeton Family of Funds, except Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, Templeton Variable Products Series Fund, Franklin Valuemark Funds and Franklin Government Securities Trust (the "Franklin Templeton Funds"), within 13 months (whether in one lump sum or in installments, the first of which may not be less than 5% of the total intended amount and each subsequent installment not less than $25 unless the investor is a qualifying employee benefit plan (the "Benefit Plan"), including automatic investment and payroll deduction plans), and to beneficially hold the total amount of such Class I Shares fully paid for and outstanding simultaneously for at least one before the expiration of that period, should execute a Letter of Intent ("LOI") on the form provided in the Shareholder Application in the Prospectus. Payment for not less than 5% of the total intended amount must accompany the executed LOI unless the investor is a Benefit Plan. Except for purchases of Shares by a Benefit Plan, those Class I Shares purchased with the first 5% of the intended amount stated in the LOI will be held as "Escrowed Shares" for as long as the LOI remains unfulfilled. Although the Escrowed Shares are registered in the investor's name, his full ownership of them is conditional upon fulfillment of the LOI. No Escrowed Shares can be redeemed by the investor for any purpose until the LOI is fulfilled or terminated. If the LOI is terminated for any reason other than fulfillment, the Transfer Agent will redeem that portion of the Escrowed Shares required and apply the proceeds to pay any adjustment that may be appropriate to the sales commission on all Class I Shares (including the Escrowed Shares) already purchased under the LOI and apply any unused balance to the investor's account. The LOI is not a binding obligation to purchase any amount of Shares, but its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to an LOI may be included under a subsequent LOI executed within 90 days of such purchase. In this case, an adjustment will be made at the end of 13 months from the effective date of the LOI at the net asset value per Share then in effect, unless the investor makes an earlier written request to the Principal Underwriter upon fulfilling the purchase of Shares under the LOI. In addition, the aggregate value of any Shares, including Class II Shares, purchased prior to the 90-day period referred to above may be applied to purchases under a current LOI in fulfilling the total intended purchases under the LOI. However, no adjustment of sales charges previously paid on purchases prior to the 90-day period will be made. If an LOI is executed on behalf of a benefit plan (such plans are described under "How to Buy Shares of the Fund -- Net Asset Value Purchases (Both Classes)" in the Prospectus), the level and any reduction in sales charge for these employee benefit plans will be based on actual plan participation and the projected investments in the Franklin Templeton Funds under the LOI. Benefit Plans are not subject to the requirement to reserve 5% of the total intended purchase, or to any penalty as a result of the early termination of a plan, nor are Benefit Plans entitled to receive retroactive adjustments in price for investments made before executing LOIs. SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under "How to Buy Shares of the Fund - Description of Special Net Asset Value Purchases," certain categories of investors may purchase Class I Shares of the value (without a front-end or contingent deferred sales charge). Franklin Templeton Distributors, Inc. ("FTD") or one of its affiliates may make payments, out of its own resources, to securities dealers who initiate and are responsible for such purchases, as indicated below. FTD may make these payments in the form of contingent advance payments, which may require reimbursement from the securities dealers with respect to certain redemptions made within 12 months of the calendar month following purchase, as well as other conditions, all of which may be imposed by an agreement between FTD, or its affiliates, and the securities dealer. The following amounts will be paid by FTD or one of its affiliates, out of its own resources, to securities dealers who initiate and are responsible for (i) purchases of most equity and fixed-income Franklin Templeton Funds made at net asset value by certain designated retirement plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but less than $2 millon, plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most fixed-income Franklin Templeton Funds made at net asset value by non-designated retirement plans: 0.75% on sales of $1 million but less than $2 million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales of $100 million or more. These payment breakpoints are reset every 12 months for purposes of additional purchases. With respect to purchases made at net asset value by certain trust companies and trust departments of banks and certain retirement plans of organizations with collective retirement plan assets of $10 million or more, FTD, or one of its affiliates, out of its own resources, may pay up to 1% of the amount invested. Under agreements with certain banks in Taiwan, Republic of China, the Fund's Shares are available to such banks' discretionary trust funds at net asset value. The banks may charge service fees to their customers who participate in the discretionary trusts. Pursuant to agreements, a portion of such service fees may be paid to FTD, or an affiliate of FTD to help defray expenses of maintaining a service office in Taiwan, including expenses related to local literature fulfillment and communication facilities. REDEMPTIONS IN KIND. Redemption proceeds are normally paid in cash; however, the Fund may pay the redemption price in whole or in part by a distribution in kind of securities from the portfolio of the Fund, in lieu of cash, in conformity with rules of the SEC. In such circumstances, the securities distributed would be valued at the price used to compute the Fund's net asset value. If Shares are redeemed in kind, the redeeming Shareholder might incur brokerage costs in converting the assets into cash. The Fund is obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1% of its net assets during any 90-day period for any one Shareholder. The Fund intends normally to pay a dividend at least once annually representing substantially all of its net investment income and to distribute at least annually any realized capital gains. By so doing and meeting certain diversification of assets and other requirements of the Code, the Fund intends to qualify annually as a regulated investment company under the Code. The status of the Fund as a regulated investment company does not involve government supervision of management or of its investment practices or policies. As a regulated investment company, the Fund generally will be relieved of liability for United States Federal income tax on that portion of its net investment income (which includes, among other items, dividends and interest) and net realized capital gains which it distributes to its Shareholders. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement also are subject to a nondeductible 4% excise tax. To prevent application of the excise tax, the Fund intends to make distributions in accordance with the calendar year distribution requirement. Among other things, in order for the Fund to qualify as a regulated investment company, at least 90% of its income for each taxable year must be so-called "qualifying income" (e.g., interest, dividends, gains from the sale or other disposition of stocks and securities, and other income (including gains from options, futures, and forward contracts) derived with respect to the business of investing in stocks or securities). Certain of the debt securities acquired by the Fund may be secured in whole or in part by interests in real estate. If the Fund were to acquire real estate (by foreclosure, for example), income, if any, generated by that real estate (including rental income and gain on its disposition) may not be regarded as qualifying income. If the Fund's non-qualifying income for a taxable year exceeded 10% of its gross income, it would fail to qualify as a regulated investment company and it would be taxed in the same manner as an ordinary corporation. In that case, the Fund would be ineligible to deduct its distributions to its Shareholders and those distributions, to the extent derived from the Fund's current and accumulated earnings and profits, would constitute dividends (which may be eligible for the corporate dividends-received deduction) which are taxable to Shareholders as income, even though those distributions might otherwise, at least in part, have been treated in the Shareholder's hands as long-term capital gain. If the Fund fails to qualify as a regulated investment company in a given taxable year, it must distribute its earnings and profits accumulated in that year in order to qualify again as a regulated investment company. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To prevent application of the tax, the Fund must distribute or be deemed to have distributed with respect to each calendar year an amount equal to the sum of: (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year; (2) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for the 12-month period ending on October 31 of the calendar year; and (3) all taxable ordinary income and capital gains for previous years that were not distributed during such years. A distribution will be treated as paid on December 31 of the calendar year if it is declared by the Fund in October, November, or December of that year to Shareholders of record on a date in such a month and paid by the Fund during January of the following calendar year. Such distributions will be treated as received by Shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. Dividends of net investment income and net short-term capital gains are taxable to Shareholders as ordinary income. Distributions of net investment income may be eligible for the corporate dividends-received deduction to the extent attributable to the Fund's qualifying dividend income. However, the alternative minimum tax applicable to corporations may reduce the benefit of the dividends-received deduction. Distributions of net capital gains (the excess of net long-term capital gains over net short-term capital losses) designated by the Fund as capital gain dividends are taxable to Shareholders as long-term capital gains, regardless of the length of time the Fund's Shares have been held by a Shareholder, and are not eligible for the dividends-received deduction. Generally, dividends and distributions are taxable to Shareholders, whether received in cash or reinvested in Shares of the Fund. Any distributions that are not from the Fund's investment company taxable income or net capital gain may be characterized as a return of capital to Shareholders or, in some cases, as capital gain. Shareholders will be notified annually as to the Federal tax status of dividends and distributions they receive and any tax withheld thereon. Distributions by the Fund reduce the net asset value of the Fund Shares. Should a distribution reduce the net asset value below a Shareholder's cost basis, the distribution nevertheless would be taxable to the Shareholder as ordinary income or capital gain as described above, even though, from an investment standpoint, it may constitute a partial return of capital. In particular, investors should be careful to consider the tax implications of buying Shares just prior to a distribution by the Fund. The price of Shares purchased at that time includes the amount of the forthcoming distribution, but the distribution will generally be taxable to them. The Fund may invest in real estate investment trusts ("REITs") that hold residual interests in real estate mortgage investment conduits ("REMICs"). Under Treasury regulations that have not yet been issued, but may apply retroactively, a portion of the Fund's income from a REIT that is attributable to the REITs residual interest in a REMIC (referred to in the Code as an "excess inclusion") will be subject to Federal income tax in all events. These regulations are also expected to provide that excess inclusion income of a regulated investment company, such as the Fund, will be allocated to shareholders of the regulated investment company in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC residual interest directly. In general, excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii) will constitute unrelated business taxable income to entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on unrelated business income, thereby potentially requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income, and (iii) in the case of a foreign shareholder, will not qualify for any reduction in U.S. federal withholding tax. In addition, if at any time during any taxable year a "disqualified organization" (as defined in the Code) is a record holder of a share in a regulated investment company, then the regulated investment company will be subject to a tax equal to that portion of its excess inclusion income for the taxable year that is allocable to the disqualified organization, multiplied by the highest federal income tax rate imposed on corporations. The Investment Manager does not intend on behalf of the Fund to invest in REITs, a substantial portion of the assets of which consists of residual interests in REMICs. The Fund may invest in stocks of foreign companies that are classified under the Code as passive foreign investment companies ("PFICs"). In general, a foreign company is classified as a PFIC if at least one-half of its assets constitute investment-type assets or 75% or more of its gross income is investment-type income. Under the PFIC rules, an "excess distribution" received with respect to PFIC stock is treated as having been realized ratably over the period during which the Fund held the PFIC stock. The Fund itself will be subject to tax on the portion, if any, of the excess distribution that is allocated to the Fund's holding period in prior taxable years (and an interest factor will be added to the tax, as if the tax had actually been payable in such prior taxable years) even though the Fund distributes the corresponding income to Shareholders. Excess distributions include any gain from the sale of PFIC stock as well as certain distributions from a PFIC. All excess distributions are taxable as ordinary income. The Fund may be able to elect alternative tax treatment with respect to PFIC stock. Under an election that currently may be available, the Fund generally would be required to include in its gross income its share of the earnings of a PFIC on a current basis, regardless of whether any distributions are received from the PFIC. If this election were made, the special rules, discussed above, relating to the taxation of excess distributions, would not apply. In addition, another election may be available that would involve marking to market the Fund's PFIC shares at the end of each taxable year (and on certain other dates prescribed in the Code), with the result that unrealized gains are treated as though they were realized. If this election were made, tax at the fund level under the PFIC rules would generally be eliminated, but the Fund could, in limited circumstances, incur nondeductible interest charges. The Fund's intention to qualify annually as a regulated investment company may limit its elections with respect to PFIC shares. Because the application of the PFIC rules may affect, among other things, the character of gains, the amount of gain or loss and the timing of the recognition of income with respect to PFIC stock, as well as subject the Fund itself to tax on certain income from PFIC stock, the amount that must be distributed to Shareholders, and which will be taxed to Shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to a fund that did not invest in PFIC stock. Income received by the Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. If more than 50% of the value of the Fund's total assets at the close of its taxable year consists of securities of foreign corporations, the Fund will be eligible and intends to elect to "pass through" to the Fund's Shareholders the amount of foreign taxes paid by the Fund. Pursuant to this election, a Shareholder will be required to include in gross income (in addition to taxable dividends actually received) his pro rata share of the foreign taxes paid by the Fund, and will be entitled either to deduct (as an itemized deduction) his pro rata share of foreign income and similar taxes in computing his taxable income or to use it as a foreign tax credit against his U.S. Federal income tax liability, subject to limitations. No deduction for foreign taxes may be claimed by a Shareholder who does not itemize deductions, but such a Shareholder may be eligible to claim the foreign tax credit (see below). Each Shareholder will be notified within 60 days after the close of the Fund's taxable year whether the foreign taxes paid by the Fund will "pass through" for that year. Generally, a credit for foreign taxes is subject to the limitation that it may not exceed the Shareholder's U.S. tax attributable to his foreign source taxable income. For this purpose, if the pass-through election is made, the source of the Fund's income flows through to its Shareholders. With respect to the Fund, gains from the sale of securities will be treated as derived from U.S. sources and certain currency fluctuation gains, including fluctuation gains from foreign currency-denominated debt securities, receivables and payables, will be treated as ordinary income derived from U.S. sources. The limitation on the foreign tax credit is applied separately to foreign source passive income (as defined for purposes of the foreign tax credit), including the foreign source passive income passed through by the Fund. Shareholders may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by the Fund. Foreign taxes may not be deducted in computing alternative minimum taxable income and the foreign tax credit can be used to offset only 90% of the alternative minimum tax (as computed under the Code for purposes of this limitation) imposed on corporations and individuals. If the Fund is not eligible to make the election to "pass through" to its Shareholders its foreign taxes, the foreign income taxes it pays generally will reduce investment company taxable income and the distributions by the Fund will be treated as United States source income. Certain options, futures contracts and forward contracts in which the Fund may invest are "section 1256 contracts." Gains or losses on section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses ("60/40"); however, foreign currency gains or losses (as discussed below) arising from certain section 1256 contracts may be treated as ordinary income or loss. Also, section 1256 contracts held by the Fund at the end of each taxable year (and at certain other times prescribed pursuant to the Code) are "marked-to-market" with the result that unrealized gains or losses are treated as though they were realized. Generally, the hedging transactions undertaken by the Fund may result in "straddles" for U.S. Federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by the Fund. In addition, losses realized by the Fund on positions that are part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which the losses are realized. Because only a few regulations implementing the straddle rules have been promulgated, the tax consequences to the Fund of hedging transactions are not entirely clear. The hedging transactions may increase the amount of short-term capital gain realized by the Fund which is taxed as ordinary income when distributed to Shareholders. The Fund may make one or more of the elections available under the Code which are applicable to straddles. If the Fund makes any of the elections, the amount, character, and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules applied under certain of the elections may operate to accelerate the recognition of gains or losses from the affected straddle positions. Because application of the straddle rules may affect the character of gains or losses, defer losses and/or accelerate the recognition of gains or losses from the affected straddle positions, the amount which must be distributed to Shareholders and which will be taxed to Shareholders as ordinary income or long-term capital gain may be increased or decreased as compared to a fund that did not engage in such hedging transactions. Requirements relating to the Fund's tax status as a regulated investment company may limit the extent to which the Fund will be able to engage in transactions in options, futures contracts and forward contracts. Under the Code, gains or losses attributable to fluctuations in foreign currency exchange rates which occur between the time the Fund accrues income or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain financial contracts, forward contracts, and options, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. These gains and losses, referred to under the Code as "section 988" gains and losses, may increase or decrease the amount of the Fund's net investment income to be distributed to its Shareholders as ordinary income. For example, fluctuations in exchange rates may increase the amount of income that the Fund must distribute in order to qualify for treatment as a regulated investment company and to prevent application of an excise tax on undistributed income. Alternatively, fluctuations in exchange rates may decrease or eliminate income available for distribution. If section 988 losses exceed other net investment income during a taxable year, the Fund would not be able to make ordinary dividend distributions, or distributions made before the losses were realized would be recharacterized as a return of capital to Shareholders for Federal income tax purposes, rather than as an ordinary dividend, reducing each Shareholder's basis in his Fund Shares, or as a capital gain. Upon the sale or exchange of his Shares, a Shareholder will realize a taxable gain or loss depending upon his basis in the Shares. Such gain or loss will be treated as capital gain or loss if the Shares are capital assets in the Shareholder's hands, and generally will be long-term if the Shareholder's holding period for the Shares is more than one year and generally otherwise will be short-term. Any loss realized on a sale or exchange will be disallowed to the extent that the Shares disposed of are replaced (including replacement through the reinvesting of dividends and capital gain distributions in the Fund) within a period of 61 days beginning 30 days before and ending 30 days after the disposition of the Shares. In such a case, the basis of the Shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a Shareholder on the sale of Fund Shares held by the Shareholder for six months or less will be treated for Federal income tax purposes as a long-term capital loss to the extent of any distributions of long-term capital gains received by the Shareholder with respect to such Shares. Under certain circumstances, the sales charge incurred in acquiring Shares of the Fund may not be taken into account in determining the gain or loss on the disposition of those Shares. This rule applies where Shares of the Fund are exchanged within 90 days after the date they were purchased and new Shares of the Fund or another eligible regulated investment company are acquired without a sales charge or at a reduced sales charge. In that case, the gain or loss recognized on the exchange will be determined by excluding from the tax basis of the Shares exchanged all or a portion of the sales charge incurred in acquiring those Shares. This exclusion applies to the extent that the otherwise applicable sales charge with respect to the newly acquired Shares is reduced as a result of having incurred a sales charge initially. The portion of the sales charge affected by this rule will be treated as a sales charge paid for the new Shares. The Fund generally will be required to withhold Federal income tax at a rate of 31% ("backup withholding") from dividends paid, capital gain distributions, and redemption proceeds to Shareholders if (1) the Shareholder fails to furnish the Fund with the Shareholder's correct taxpayer identification number or social security number and to make such certifications as the Fund may require, (2) the IRS notifies the Shareholder or the Fund that the Shareholder has failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect, or (3) when required to do so, the Shareholder fails to certify that he is not subject to backup withholding. Any amounts withheld may be credited against the Shareholder's Federal income tax liability. Distributions also may be subject to state, local and foreign taxes. U.S. tax rules applicable to foreign investors may differ significantly from those outlined above. Shareholders are advised to consult their own tax advisers for details with respect to the particular tax consequences to them of an investment in the Fund. Franklin Templeton Distributors, Inc. ("FTD" or the "Principal Underwriter"), P.O. Box 33030, St. Petersburg, Florida 33733-8030, toll free telephone (800) 237-0738, is the Principal Underwriter of the Fund's Shares. FTD is a wholly owned subsidiary of Franklin. The Fund, pursuant to Rule 12b-1 under the 1940 Act, has adopted a Distribution Plan with respect to each class of Shares (the "Plans"). Under the Plan adopted with respect to Class I Shares, the Fund may reimburse the Principal Underwriter or others quarterly (subject to a limit of 0.25% per annum of the Fund's average daily net assets attributable to Class I Shares) for costs and expenses incurred by FTD or others in connection with any activity which is primarily intended to result in the sale of Fund Shares. Under the Plan adopted with respect to Class II Shares, the Fund will pay FTD or others quarterly (subject to a limit of $1.00% per annum of the Fund's average daily assets attributable to Class II Shares of which up to 0.25% of such net assets may be paid to dealers for personal service and/or maintenance of Shareholder accounts) for costs and expenses incurred by FTD or others in connection with any activity which is primarily intended to result in the sale of the Fund's Shares. Payments to FTD or others could be for various types of activities, including (1) payments to broker-dealers who provide certain services of value to the Fund's Shareholders (sometimes referred to as a "trail fee"); (2) reimbursement of expenses relating to selling and servicing efforts or of organizing and conducting sales seminars; (3) payments to employees or agents of the Principal Underwriter who engage in or support distribution of Shares; (4) payments of the costs of preparing, printing and distributing Prospectuses and reports to prospective investors and of printing and advertising expenses; (5) payment of dealer commissions and wholesaler compensation in connection with sales of Fund Shares and interest or carrying charges in connection therewith; and (6) such other similar services as the Fund's Board of Trustees determines to be reasonably calculated to result in the sale of Shares. Under the Plan adopted with respect to Class I Shares, the costs and expenses not reimbursed in any one given quarter (including costs and expenses not reimbursed because they exceed 0.25% of the Fund's average daily net assets attributable to Class I Shares) may be reimbursed in subsequent quarters or years. During the fiscal year ended August 31, 1995, FTD incurred costs and expenses of $353,806 in connection with distribution of Class I Shares of the Fund and $2,642 in connection with Class II Shares of the Fund. During the same period, the Fund made reimbursements in the amount of $328,175 pursuant to the Class I Plan and in the amount of $325,533 pursuant to the Class II Plan. As indicated above, unreimbursed expenses, which amount to $30,457 for Class I Shares of the Fund, may be reimbursed by the Fund during the fiscal year ending August 31, 1996 or in subsequent years. In the event that the Plan is terminated, the Fund will not be liable to FTD for any unreimbursed expenses that had been carried forward from previous months or years. During the fiscal year ended August 31, 1995, FTD spent, pursuant to the Plans, the following amounts on: compensation to dealers, $274,253 (Class I) and $193 (Class II); sales promotion, $0 (Class I and Class II); printing, $72,996 (Class I) and $17 (Class II); advertising, $0 (Class I and Class II); and wholesale costs and expenses, $6,557 (Class I) and $2,432 (Class II). The Distribution Agreement provides that the Principal Underwriter will use its best efforts to maintain a broad distribution of the Fund's Shares among bona fide investors and may sign selling agreements with responsible dealers, as well as sell to individual investors. The Shares are sold only at the Offering Price in effect at the time of sale, and the Fund receives not less than the full net asset value of the Shares sold. The discount between the Offering Price and the net asset value may be retained by the Principal Underwriter or it may reallow all or any part of such discount to dealers. During the fiscal years ended August 31, 1995, 1994, and 1993, FTD (and, prior to June 1, 1993, Templeton Funds Distributor, Inc.) retained of such discount $159,475, $422,672 and $141,190, or approximately 14.13%, 15.52% and 16%, respectively. The Distribution Agreement provides that the Fund shall pay the costs and expenses incident to registering and qualifying its Shares for sale under the Securities Act of 1933 and under the applicable Blue Sky laws of the jurisdictions in which the Principal Underwriter desires to distribute such Shares, and for preparing, printing and distributing prospectuses and reports to Shareholders. The Principal Underwriter pays the cost of printing additional copies of prospectuses and reports to Shareholders used for selling purposes. (The Fund pays costs of preparation, set-up and initial supply of the Fund's The Distribution Agreement is subject to renewal from year to year in accordance with the provisions of the 1940 Act and terminates automatically in the event of its assignment. The Distribution Agreement may be terminated without penalty by either party upon 60 days' written notice to the other, provided termination by the Fund shall be approved by the Board of Trustees or a majority (as defined in the 1940 Act) of the Shareholders. The Principal Underwriter is relieved of liability for any act or omission in the course of its performance of the Distribution Agreement, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations. FTD is the principal underwriter for the other Franklin Templeton Funds. The Shares have non-cumulative voting rights so that the holders of a plurality of the Shares voting for the election of Trustees at a meeting at which 50% of the outstanding Shares are present can elect all the Trustees and, in such event, the holders of the remaining Shares voting for the election of Trustees will not be able to elect any person or persons to the Board of Trustees. The Declaration of Trust provides that the holders of not less than two-thirds of the outstanding Shares of the Fund may remove a person serving as Trustee either by declaration in writing or at a meeting called for such purpose. The Trustees are required to call a meeting for the purpose of considering the removal of a person serving as Trustee if requested in writing to do so by the holders of not less than 10% of the outstanding Shares of the Fund. In addition, the Fund is required to assist Shareholder communication in connection with the calling of a Shareholder meeting to consider the removal of a Trustee. Under Massachusetts law, Shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration of Trust disclaims liability of the Shareholders, Trustees or officers of the Fund for acts or obligations of the Fund, which are binding only on the assets and property of the Fund. The Declaration of Trust provides for indemnification out of Fund property for all loss and expenses of any Shareholder held personally liable for the obligations of the Fund. The risk of a Shareholder incurring financial loss on account of Shareholder liability is limited to circumstances in which the Fund itself would be unable to meet its obligations and, thus, should be considered remote. The Fund may, from time to time, include its total return in advertisements or reports to Shareholders or prospective investors. Quotations of average annual total return for the Fund will be expressed in terms of the average annual compounded rate of return for periods in excess of one year or the total return for periods less than one year of a hypothetical investment in the Fund over a period of one, five and ten years (or, if less, up to the life of the Fund) calculated pursuant to the following formula: P(1 + T)n = ERV (where P = a hypothetical initial payment of $1,000, T = the average annual total return for periods of one year or more or the total return for periods of less than one year, n = the number of years, and ERV = the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period). All total return figures reflect the deduction of the maximum initial sales charge and deduction of a proportional share of Fund expenses on an annual basis, and assume that all dividends and distributions are reinvested when paid. The average annualized total return for the one-year and five-year periods ended August 31, 1995 and for the period from commencement of operations on September 12, 1989 to August 31, 1995 was -7.39%, 10.72%, and 6.90%, respectively, for Class I Shares. Performance information for the Fund may be compared, in reports and promotional literature, to: (i) the Standard & Poor's 500 Stock Index, Dow Jones Industrial Average, or other unmanaged indices so that investors may compare the Fund's results with those of a group of unmanaged securities widely regarded by investors as representative of the securities market in general; (ii) other groups of mutual funds tracked by Lipper Analytical Services, Inc., a widely used independent research firm which ranks mutual funds by overall performance, investment objectives and assets, or tracked by other services, companies, publications, or persons who rank mutual funds on overall performance or other criteria; and (iii) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Fund. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses. Performance information for the Fund reflects only the performance of a hypothetical investment in the Fund during the particular time period on which the calculations are based. Performance information should be considered in light of the Fund's investment objectives and policies, characteristics and quality of the portfolio and the market conditions during the given time period, and should not be considered as a representation of what may be achieved in the future. From time to time, the Fund and the Investment Manager may also refer to the following information: 1. The Investment Manager's and its affiliates' market share of international equities managed in mutual funds prepared or published by Strategic Insight or a similar statistical organization. 2. The performance of U.S. equity and debt markets relative to foreign markets prepared or published by Morgan Stanley Capital International or a similar financial organization. 3. The capitalization of U.S. and foreign stock markets as prepared or published by the International Finance Corporation, Morgan Stanley Capital International or a similar financial organization. 4. The geographic and industry distribution of the Fund's portfolio and the Fund's top ten holdings. 5. The gross national product and populations, including age characteristics, literacy rates, foreign investment improvements due to a liberalization of securities laws and a reduction of foreign exchange controls, and improving communication technology, of various countries as published by various statistical organizations. 6. To assist investors in understanding the different returns and risk characteristics of various investments, the Fund may show historical returns of various investments and published indices (E.G., Ibbotson Associates, Inc. Charts and Morgan Stanley EAFE - Index). 7. The major industries located in various jurisdictions as published by the Morgan Stanley Index. 8. Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder services. 9. Allegorical stories illustrating the importance of persistent long-term investing. 10. The Fund's portfolio turnover rate and its ranking relative to industry standards as published by Lipper Analytical Services, Inc. or Morningstar, Inc. 11. A description of the Templeton organization's investment management philosophy and approach, including its worldwide search for undervalued or "bargain" securities and its diversification by industry, nation and type of stocks or other securities. 12. Quotations from the Templeton organization's founder, Sir John Templeton,* advocating the virtues of diversification and long-term investing, including the following: o "Never follow the crowd. Superior performance is possible only if you invest differently from the crowd." o "Diversify by company, by industry and by country." o "Always maintain a long-term perspective." o "Invest for maximum total real return." o "Invest - don't trade or speculate." * Sir John Templeton sold the Templeton organization to Franklin Resources, Inc. in October, 1992 and resigned from the Fund's Board on April 16, 1995. He is no longer involved with the investment management process. o "Remain flexible and open-minded about types of investment." o "When buying stocks, search for bargains among quality stocks." o "Buy value, not market trends or the economic outlook." o "Diversify. In stocks and bonds, as in much else, there is safety in numbers." o "Do your homework or hire wise experts to help you." o "Aggressively monitor your investments." o "Learn from your mistakes." o "Outperforming the market is a difficult task." o "An investor who has all the answers doesn't even understand all the questions." o "There's no free lunch." o "And now the last principle: Do not be fearful or negative too often." In addition, the Fund and the Investment Manager may also refer to the number of Shareholders in the Fund or the aggregate number of shareholders of the Franklin Templeton Funds or the dollar amount of fund and private account assets under management in advertising materials. The financial statements contained in the Annual Report to Shareholders of Templeton Real Estate Securities Fund dated August 31, 1995 are incorporated herein by reference.	497	497	1996-01-12T00:00:00	1996-01-12T08:30:42
0000038009-96-000012	0000038009-96-000012_0000.txt	PROSPECTUS and Pricing Supplement No. 43 PROSPECTUS SUPPLEMENT, each Effective at 10:03 A.M. Dated October 10, 1995 January 12, 1996 U.S. $4,000,000,000 Rule 424 (b)(3) FORD MOTOR CREDIT COMPANY Statement No. Due from 9 Months to 30 Years from Date of Issue Interest payable each March 15 and September 15 and at Maturity Range of Maturities Per Annum More than 9 months to less than 1 year .......... 2.55% 1 year to less than 18 months................... 3.00 18 months to less than 2 years................... 3.05 2 years to less than 3 years..................... 5.35 3 years to less than 4 years..................... 5.55 4 years to less than 5 years..................... 5.75 5 years to less than 6 years..................... 5.90 6 years to less than 7 years..................... 6.00 7 years to less than 8 years..................... 6.10 8 years to less than 9 years..................... 6.25 9 years to less than 10 years.................... 6.35 10 years to less than 15 years................... 6.40 15 years to less than 20 years................... NA 20 years to less than 25 years................... NA 25 years to less than 30 years................... NA The interest rates on the Medium-Term Notes may be changed by Ford Motor Credit Company from time to time, but any such change will not affect the interest rate on any Medium-Term Note ordered prior to the effective time of the change. GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. DAIWA SECURITIES AMERICA INC. NOMURA SECURITIES INTERNATIONAL, INC.	424B3	424B3	1996-01-12T00:00:00	1996-01-12T16:12:02
0000950123-96-000102	0000950123-96-000102_0000.txt	<DESCRIPTION>SUPPLEMENT DATED 1/10/96 TO PROSPECTUS DTD. 2/1/95 Supplement dated January 10, 1996 to Prospectus dated February 1, 1995 On January 10, 1996, the Board of Directors of Schafer Value Fund, Inc. (the "Fund") approved a change in the name of the Fund to "Strong Schafer Value Fund, Inc." and certain changes in the administration of the Fund, including: * the appointment of Strong Capital Management, Inc. ("Strong") as the Fund's transfer agent, shareholder servicing agent and fund accounting services agent in replacement of Firstar Trust Company. These changes will be implemented during a transition period and are expected to be effective no later than March 1, 1996. * the appointment of Strong Funds Distributors, Inc., an affiliate of Strong, as the Fund's Distributor in replacement of Lazard Freres & Co. This change is expected to become effective immediately. Strong is located in Milwaukee, Wisconsin and currently manages approximately $17 billion in equity and fixed income assets, including the Strong Family of Funds, a family of 30 diversified and non-diversified no-load mutual funds. The Board of Directors of the Fund believes that these changes, when fully implemented, will result in higher service levels to the Fund's shareholders and the opportunity for the Fund's shareholders to participate in the benefits available to shareholders in the Stong Family of Funds, such as exchange privileges and 24-hour toll free telephone service. These changes will in no way affect the current investment approach or philosophy outlined in the accompanying Prospectus. Schafer Capital Management, Inc. (the "Adviser"), through its sole portfolio manager and controlling person, David K. Schafer, will continue in its role as the Fund's investment manager which it has served since the Fund's inception. On January 10, 1996, the Adviser entered into a letter of intent with Strong which provides for, among other things, the Adviser and Strong to negotiate agreements (i) designating Strong to assume responsibilities relating to the marketing of the Fund's shares and (ii) providing Strong the right to acquire, in the future, an interest in the Adviser subject to satisfaction of certain conditions, including applicable regulatory requirements. It is expected that Strong will immediately begin marketing the Fund as part of the Strong Family of Funds.	497	497	1996-01-12T00:00:00	1996-01-12T15:54:22
0000950134-96-000095	0000950134-96-000095_0000.txt	<DESCRIPTION>FORM 8-K DATED DECEMBER 28, 1995 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) CONTINENTAL MORTGAGE AND EQUITY TRUST (Exact name of registrant as specified in its charter) (State of Incorporation) (Commission (IRS Employer 10670 North Central Expressway, Suite 300, Dallas, TX 75234 (Address of principal executive officers) (Zip Code) Registrant's telephone number, including area code: (214) 692-4700 (Former name or former address, if changes since last report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On December 28, 1995, Continental Mortgage and Equity Trust (the "Trust") purchased Brookfield Corporate Center in Chantilly, Virginia for $3.5 million. The seller of the property was Reynolds Metals Development Company, a Delaware corporation. The property was constructed in 1990 and consists of 62,972 square feet that was 85% occupied on the date of purchase. The Trust paid $650,000 in cash and the seller provided mortgage financing in the amount of $2.8 million. The $3.5 million purchase price is approximately 1.9% of the Trust's assets at December 31, 1994. However, this purchase combined with other property purchases the Trust has made in 1995, exceeds 10% of the Trust's assets at December 31, 1994. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a)(3) The seller has informed the Trust that audited financial statements and supporting data relating to the property's operations for 1994 are not available. It is therefore impracticable to provide the required statement of operations for the properties acquired or pro forma financial information. The required information will be filed by amendment of this Form 8-K as soon as practicable, but not later than February 26, 1996. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized. Date: January 12, 1996 By: /s/ Thomas A. Holland	8-K	8-K	1996-01-12T00:00:00	1996-01-12T13:28:40
0000889812-96-000025	0000889812-96-000025_0002.txt	<DESCRIPTION>REPORT OF KPMG PEAT MARWICK LLP We have examined the accompanying description of the operations and control procedures of the BJB Investment Funds (Funds), entitled Procedures for Multiple Class Distribution and Calculation of Net Asset Value and Dividend/Distribution Determination (Control Procedures). Our examination included procedures to obtain reasonable assurance about whether (1) the accompanying description presents fairly, in all material respects, the Fund's Control Procedures, (2) the Control Procedures in the description were suitably designed to achieve the control objectives specified in the description, if those Control Procedures were complied with satisfactorily, and (3) such Control Procedures had been placed in operation as of October 31, 1995. The control objectives were specified by the Funds. Our examination was performed in accordance with standards established by the American Institute of Certified Public Accountants and included those procedures we considered necessary in the circumstances to obtain a reasonable basis for rendering our opinion. In our opinion, the accompanying description presents fairly, in all material respects, the relevant aspects of the Funds' Control Procedures that had been placed in operation as of October 31, 1995. Also, in our opinion, the policies and procedures, as described, are suitably designed to provide reasonable assurance that the specified control objectives would be achieved if the described Control Procedures were complied with satisfactorily. In addition to the procedures we considered necessary to render our opinion as expressed in the previous paragraph, we applied tests to policies and procedures to obtain evidence about their effectiveness in meeting the control objectives during the period from November 1, 1994 to October 31, 1995. In our opinion, the policies and procedures that were tested as described in the Control Procedures were operating with sufficient effectiveness to provide reasonable, but not absolute, assurance that the control objectives specified were achieved during the period from November 1, 1994 to October 31, 1995. The description of the Funds' Control Procedures is as of October 31, 1995, and information about tests of the operating effectiveness of specified procedures covers the periods described in the above paragraph. Any projection of such information to the future is subject to the risk that, because of change, the description may no longer portray the system in existence. The potential effectiveness of specified policies and procedures is subject to inherent limitations and accordingly, errors or irregularities may occur and not be detected. Furthermore, the projection of any conclusions, based on our findings, to future periods is subject to the risk that changes may alter the validity of such conclusions. This report is intended solely for the use of management of the Funds and the Securities and Exchange Commission as it relates to the annual reporting required under the order granted under Section 6(c) of the Investment Company Act of 1940 for an exemption from the provisions of Section 18(f), 18(g) and 18(i) of such Act and Rule 22c-1 thereunder and should not be used for any other purpose. PROCEDURES FOR MULTIPLE CLASS DISTRIBUTION AND CALCULATION OF NET ASSET VALUE AND DIVIDEND/DISTRIBUTION DETERMINATION The Fund has implemented a plan which allows the issuance of separate classes of shares under a Multiple Class Distribution System (the "System"). The System enables the Fund to offer shares for purchase by the public: Class A Shares - with an initial sales charge, subject to a fee pursuant to a distribution plan adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940 ("12b-1 Plan"); and Class B Shares - without an initial sales charge, subject to a fee pursuant to a distribution plan adopted in accordance with Rule 12b-1. Currently, the Class A and B shareholders pay a service fee to the distributor pursuant to the Funds' 12b-1 Plan at annual rates of up to 0.25% and 0.75% of their respective aggregate average daily net assets. In addition, Class B shareholders pay an annual distribution fee at an annual rate up to 0.25% of the aggregate average daily net assets. The Class A and B shares of the Funds have identical voting, dividend, liquidation and other rights, preferences, powers, restrictions, limitations, qualifications and terms and conditions, except as set forth below: o each class has a different designation; o each class has different sales charges; o each class of shares offered in connection with a 12b-1 Plan bears the expense of the payments with respect to such class; o each class of shares bears other class expenses, if any, specifically attributable to a particular class limited to: (a) transfer agent fees directly attributable to a specific class; (b) printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses and proxies to current shareholders; (c) litigation or other legal expenses relating solely to one class of shares; and (d) Trustees' fees incurred as a result of issues relating to one class of shares; o only the holders of the shares of the class involved are entitled to vote on matters pertaining to their respective 12b-1 Plan (for example, with respect to the adoption, amendment or termination of the 12b-1 Plan in accordance with the procedures set forth in Rule 12b-1); and o each class has different exchange privileges. Net Asset Value and Dividend/Distribution Determination PROCEDURES FOR MULTIPLE CLASS DISTRIBUTION AND CALCULATION OF NET ASSET VALUE AND DIVIDEND/DISTRIBUTION DETERMINATION The Funds maintain records that account for all classes of shares. The Class A and B shares are charged with a fee pursuant to their respective 12b-1 Plan on a daily basis. Thus, a separate Net Asset Value ("NAV") and dividends, if available, are calculated for each class of shares. Prior to determining the daily NAV or dividends, income and expense items are allocated to each class of shares. Investment income and unrealized and realized gains or losses are allocated daily to each class of shares based on the percentage of net assets. Such balances are accumulated by class of shares. On a daily basis, expenses are attributable to each class of shares depending on the nature of the expenditures. These expenditures fall into two categories: (1) expenses attributable to all classes that are allocated based on net assets at the beginning of the day (e.g., legal, audit, etc.), and (2) certain expenses that have a different cost for one class versus the others (e.g., 12b-1 fees) which are allocated to specific classes. The following expense items are calculated as indicated: Management Fees Multiply the beginning of the day's net assets for the Funds by the daily factor based on the annual approved fee rate. The net assets used will be based on the combined net assets of all classes of shares (i.e., the total net assets of the Funds). The daily amount calculated is allocated among classes based on their respective proportion to total combined net assets. 12b-1 Fees Calculate the current day's accrual by multiplying the beginning of the day's net assets for each respective class of shares by the daily factor based on the annual approved fee rate. All Other Expenses Determine the daily accrual from Fund level expense budget and allocate to each respective class of shares (for common expenses). Common expenses are allocated among classes based on their respective proportion to total combined net assets and class specific expenses are allocated to each specific class. In designing accounting procedures and controls regarding the allocation of income and expenses and the calculation of NAV and dividends and distributions for the respective classes of shares, the following objectives must be met: 1. Control policies and procedures provide reasonable assurance that class specific expenses incurred by each class of shares are allocated appropriately to each respective shares; 2. Control policies and procedures provide reasonable assurance that investment income, common operating expenses, and realized and unrealized capital gains and losses are allocated appropriately to each class of PROCEDURES FOR MULTIPLE CLASS DISTRIBUTION AND CALCULATION OF NET ASSET VALUE AND DIVIDEND/DISTRIBUTION DETERMINATION 3. Control policies and procedures provide reasonable assurance that dividend rates and daily NAV per share for each class of shares reflect the appropriate allocation of investment income, operating expenses and realized and unrealized capital gains and losses, including the appropriate amount of any class specific expenses charged to each respective class of shares. Set forth below are the control policies and procedures which have been implemented to satisfy the objectives described above. These policies and procedures presume that the normal control policies and procedures remain in effect at United Advisors, Inc., the Funds' transfer agent, and at the Funds, for all other daily fund accounting. Presented as Exhibit I is an example of the daily calculation (the "Allocation Worksheet") which is produced for each class of shares, regardless of their dividend policy, to assist in pricing the Funds. The primary purpose of the Allocation Worksheet is to compute the allocation percentages by class and to apply such percentages to the various components of the daily net investment income (except for expenses directly attributable to a particular class) and realized/unrealized gains/losses, and to assist in the determination of distributable net investment income and net realized gain and loss amounts. Additionally, the Allocation Worksheet allocates information from the Fund-level trial balance to arrive at the day's ending balances for each class. The Allocation Worksheet will be maintained for the Funds in total and by class in order to compute each class's NAV. The Allocation Worksheet also includes a calculation of each class's NAV and acts as an additional verification procedure. 1. Class-level expenses are allocated to the correct class of shares. 2. Income, fund-level expenses and realized/unrealized gains/losses are allocated properly to each class. 3. Dividend rates and daily per share NAVs for each class of shares reflect the proper allocation of income, expenses, and gain/loss amounts, including the proper amount of class-level expenses charged to each class of shares. 1. Class-level expenses are determined by rates ("12b-1 fees"). The rates for the 12b-1 fees are input into the Allocation Worksheet by the fund accountant. The Allocation Worksheet input is verified by a second individual. PROCEDURES FOR MULTIPLE CLASS DISTRIBUTION AND CALCULATION OF NET ASSET VALUE AND DIVIDEND/DISTRIBUTION DETERMINATION 2. Fund-level income, expenses and gains/losses are input into the total fund column of the Allocation Worksheet. The class-level allocation of fund-level income, expenses and gains/losses is calculated by the Allocation Worksheet based on the allocation percentages. The Allocation Worksheet input is verified by a second individual. 3. In order to calculate the allocation percentages the capital stock activity is reported by the transfer agent for each class on a trade date plus one basis. Information reported to the fund accountant by the transfer agent includes share and dollar opening balances, activity for the day, and closing balances. Control procedures within the transfer agent function are not included in this exhibit. 4. From the Allocation Worksheet the sum of each class's net assets, shares outstanding, net investment income, expenses, and gains/losses is agreed daily to the trial balance for the Fund. 5. Net assets used for allocation for each class are compared to the prior day's ending balance on the Allocation Worksheet adjusted for the day's activity (shares outstanding for each class are compared to daily summary sheets received from the transfer agent). 6. Relative amounts of NAV are checked by the fund accountant and supervisor for reasonableness against anticipated differences. 7. Performance of the above procedures is evidenced by the fund accountant and supervisor initialing the daily net asset value calculations on the Allocation Worksheet. PROCEDURES FOR MULTIPLE CLASS DISTRIBUTION AND CALCULATION OF NET ASSET VALUE AND DIVIDEND/DISTRIBUTION DETERMINATION Statements of Assets and Liabilities o Assets, liabilities and net assets will be disclosed on a combined basis. The composition of net assets will be presented as follows: Undistributed net investment income $_______ Accumulated net realized gains (losses) _______ Unrealized appreciation (depreciation) on investments _______ Paid in capital in excess of par value _______ o Net asset value per share data will be presented for each class. Net asset value and redemption price per share $_______ o A standard reporting format on a combined basis will be utilized with the addition of explicit disclosures on class specific expenses for distribution and shareholder servicing fees. Statements of Changes in Net Assets o A standard reporting format on a combined basis will be utilized with the addition of explicit disclosure of dividends and distributions paid to each class and transactions in fund shares for each class. PROCEDURES FOR MULTIPLE CLASS DISTRIBUTION AND CALCULATION OF NET ASSET VALUE AND DIVIDEND/DISTRIBUTION DETERMINATION o For each of the required reporting periods, various per share data and ratios (except for portfolio turnover which is calculated at the fund level) will be shown for each class. In addition to the standard footnotes, the notes to the financial statements will include additional disclosure as follows: o Footnote describing each class of shares and their respective attributes. o Footnote describing the distribution agreements will incorporate data on each class's 12b-1 fee arrangements ("Services Plan") including the amounts earned by the distributor for the period. o Footnote disclosing the transactions in fund shares will include the appropriate information for each class of shares for the most recent period and the prior year. Fund Class A Class B 1. Prior Day NAV per share $ xx.xxxx xx.xxxx 2. Shares outstanding prior day x,xxx.xx x,xxx.xx x,xxx.xx 3. Capital share activity (shares) x,xxx.xx x,xxx.xx x,xxx.xx 4. Adjusted shares outstanding x,xxx.xx x,xxx.xx x,xxx.xx 5. Adjusted net assets $ x,xxx.xx x,xxx.xx x,xxx.xx 6. Percentage net assets by class xx.xx% xx.xx% xx.xx% 7. Gross investment income (1) $ x,xxx.xx x,xxx.xx x,xxx.xx 8. Management fee(1) (x,xxx.xx) (x,xxx.xx) (x,xxx.xx) 9. 12b-1 fee(2) (x,xxx.xx) (x,xxx.xx) (x,xxx.xx) 10. Other expenses(1) (x,xxx.xx) (x,xxx.xx) (x,xxx.xx) 11. Total expenses (x,xxx.xx) (x,xxx.xx) (x,xxx.xx) 12. Daily net investment income x,xxx.xx x,xxx.xx x,xxx.xx 13. Dividend from net investment income (x,xxx.xx) (x,xxx.xx) (x,xxx.xx) 14. Undistributed net income (daily) x,xxx.xx x,xxx.xx x,xxx.xx 15. Capital stock activity (dollars) x,xxx.xx x,xxx.xx x,xxx.xx 16. Capital gain distribution (dollars) (x,xxx.xx) (x,xxx.xx) (x,xxx.xx) 17. Realized gain/(loss)(1) x,xxx.xx x,xxx.xx x,xxx.xx 18. Subtotal for daily net asset change x,xxx.xx x,xxx.xx x,xxx.xx 19. Unrealized gain/(loss)(1) x,xxx.xx x,xxx.xx x,xxx.xx 20. Daily net asset change x,xxx.xx x,xxx.xx x,xxx.xx 21. Prior day net assets x,xxx.xx x,xxx.xx x,xxx.xx 22. Current day net assets x,xxx.xx x,xxx.xx x,xxx.xx 23. NAV per share xx.xxxxx xx.xxxxx 24. Maximum sales load xx.xx% 23. Offering price per share(3) xx.xxxxx (1) Allocation based upon the percentage of net assets per share class. (2) Allocation based upon the service fee percentage for each class participating in the service plan. (3) Effective September 19,1995, Class A shares discontinued sales charges on purchases of shares. 1. Prior day NAV per share Prior day's net asset value by class; obtained from the prior day's Allocation Worksheet. 2. Shares outstanding prior day Prior day's shares outstanding by class; obtained from prior day's Allocation Worksheet. 3. Capital share activity (shares) Capital share activity by class (in shares); obtained from the transfer agent's daily capital share activity report. 4. Adjusted shares outstanding Current day's shares outstanding by class; sum of lines 2 and 3. 5. Adjusted net assets Current day's adjusted net assets by class; line 1 multiplied by line 4. 6. Percentage net assets by class Current day's percentage of net assets by class; class adjusted net assets divided by total fund adjusted net assets. 7. Gross investment income Current day's gross investment income; total fund amount obtained from trial balance; class amounts allocated based on class net asset percentages (line 6). 8. Management fee Current day's management fee; total fund amount obtained from trial balance; class amounts allocated based on class net asset percentages (line 6). 9. 12b-1 fee Current day's 12b-1 fee; class adjusted net assets multiplied by rate applicable to respective classes. 10. Other expense Current day's other allocated expenses; total fund amount obtained from trial balance; class amounts allocated based on class net asset percentages (line 6). 11. Total expenses Current day's total expenses by class; sum of lines 8 to 10. 12. Daily net investment income Current day's net investment income by class; line 7 less line 11. 13. Dividend from net investment income Current day's dividend from net funds' management, ratified by funds' trustees and recorded on ex-dividend date. 14. Undistributed net income (daily) Current day's net investment income not distributed by class; line 12 less line 13. 15. Capital share activity (dollars) Capital share activity by class (in dollars) obtained from the transfer agent's daily capital share activity report. 16. Capital gain distribution Current day's distributions from realized capital gains; calculated by funds' management, ratified by funds' trustees and recorded on ex-dividend date. 17. Realized gain/(loss) Current day's realized gain/(loss); total fund amount obtained from trial balance; class amounts allocated based on class net asset percentages (line 6). 18. Subtotal for daily net asset change Current day's change in net assets by class excluding current day's change in unrealized gain/(loss); sum of lines 14 to 17. 19. Unrealized gain/(loss) Current day's unrealized gain/(loss); total fund amount obtained by allocated based on class net asset percentages (line 6). 20. Daily net asset change Current day's change in net assets by class; line 18 plus line 19. 21. Prior day's net assets Prior day's net assets by class; obtained from prior day's Allocation Worksheet. 22. Current day's net assets Current day's net assets by class; line 20 plus line 21. 23. NAV per share Current day's NAV per share by class; line 22 divided by line 4. 24. Maximum sales load Sales load by class; obtained from funds' prospectus (if applicable). 25. Offering price per share Current day's offering price per share by class; line 23 divided by one minus line 24 (if applicable). Tests of Effectiveness of the Procedures for Multiple Class Distribution and Calculation of Net Asset Value Dividend/Distribution Determination Tests of Effectiveness of the Procedures for Multiple Class Distribution and Calculation of Net Asset Value Dividend/Distribution Determination	NSAR-B	EX-99.23(A)	1996-01-12T00:00:00	1996-01-12T17:25:06
0000950152-96-000083	0000950152-96-000083_0002.txt	<DESCRIPTION>COOKER RESTAURANT CORP 8-K EXHIBIT 99.2 THIS FIRST AMENDMENT is made and entered into as of this ____ day of October, 1995, by and between GMRI, INC., a Florida corporation (hereinafter referred to as "Seller"), and COOKER RESTAURANT CORPORATION, an Ohio corporation (hereinafter referred to as "Buyer"). A. Under date of October 20, 1995, Seller, as "Seller", and Buyer, as "Buyer", entered into that certain "Purchase and Sale Agreement" which is a document of independent relevance and significance which is hereby incorporated by this reference in its entirety and shall hereinafter be referred to as the "Agreement". Any quoted or other term used in this amendment not specifically otherwise defined herein shall have the same definition and meaning set forth and contained in the Agreement. B. Since execution of the Agreement, the parties have determined that certain amendments to the Agreement are in their respective best interests. C. The purpose of this instrument is to make certain modifications and amendments to the Agreement. NOW, THEREFORE, for and in consideration of the agreements and amendments herein contained, the parties hereby agree as follows: Section 1.A. INCORPORATION OF RECITALS. The foregoing Recitals portion of this instrument is hereby incorporated by this reference. Section 2.A. DELETION OF "POINT-OF-SALE SYSTEMS"; PURCHASE PRICE ADJUSTMENT. Seller and Buyer have agreed that "point-of-sale systems" shall be deleted from the Property agreed to be sold by Seller and purchased by Buyer. Accordingly, any reference to "point-of-sale systems" in the Agreement, specifically including, but not limited to the definition of FF&E in paragraph l.b. of the Agreement and the Bill of Sale comprising EXHIBIT "C" to the Agreement are hereby deleted. For each Property purchased by Buyer pursuant to the Agreement, Buyer shall receive a reduction in the purchase price of Ten Thousand Dollars ($10,000) for retention by Seller of the "point-of-sale systems". Accordingly, if Buyer purchases all six (6) Properties contemplated in the Agreement, the total Purchase Price reflected in paragraph 2. of the Agreement shall be $11,190,000 rather than the $11,250,000 therein reflected. If Buyer should purchase four (4) of the six (6) Properties, the reduction to the Purchase Price provided for in this Section2.A. shall be $40,000 rather than the $60,000 illustrated in the preceding sentence. Section 3.A. CLARIFICATION OF SUITABILITY PERIOD; AND DEPOSIT DUE DATE. The thirty (30) day suitability period reflected in paragraph 6. of the Agreement is hereby clarified and amended so that said thirty (30) day period commences on October 27, 1995. Paragraph 2. a. and 10. of the Agreement are hereby modified and amended by requiring Buyer to make the Deposit on the EFFECTIVE DATE instead of the FINAL EXECUTION DATE therein reflected. Section 4.A. EFFECT OF AMENDMENT. Except as expressly modified and amended herein, the Agreement shall be carried out as originally written. IN WITNESS WHEREOF, the parties have executed this First Amendment effective as of the day and year first above written. COOKER RESTAURANT CORPORATION, GMRI, INC., a Florida corporation ("Seller") By: /s/ G. A. Seelbinder By: /s/ Richard D. Halterman Print Name: G. A. Seelbinder Print Name: Richard D. Halterman Print Title: Chairman & CEO Print Title: Senior Vice President LAWYERS TITLE INSURANCE CORPORATION Case No. 95-000919 Received by Lawyers Title Insurance Corporation ("Escrow Agent") of Purchaser (as herein below defined), funds in the amount of $600,000.00 representing the deposit in accordance with the Contract for Sale and Purchase of Land (the "Contract"), dated, October 20th, 1995, between GMRI, INC. ("Seller"), and Cooker Restaurant Corporation ("Purchaser"). In consideration of the acceptance of this deposit by Escrow Agent and any other funds received by Escrow Agent pursuant to the Contract, Purchaser and Seller, by signing this Escrow Agreement, agree as follows: 1) That said funds are to be deposited immediately and held pending settlement of the transactions contemplated by the Contract. Said funds are to be invested as follows: The principal and interest thereon shall be disbursed in accordance with the Contract, or as directed in writing by Seller and Purchaser. 2) In the event either Seller or Purchaser shall claim default under the terms of the Contract, Escrow Agent will not be required to deliver the escrowed funds to either of the parties without the written consent of the other; or upon failure thereof, until the right of either of the parties to receive the escrowed funds shall be finally determined by a court of proper jurisdiction. 3) In the event of controversy or litigation arising out of this transaction which (1) results in any expense or attorney's fees to Escrow Agent, by virtue of such claim of default, controversy, or litigation, or (2) requires a declaratory judgment by proper court as to the disbursement of said escrowed funds, Escrow Agent is hereby authorized to deduct such expense or attorney's fees out of the escrowed funds, and to pay remaining balance over to the party entitled thereto as agreed upon by the parties, or as directed by a court of competent jurisdiction. 4) Seller and Purchaser hereby release and discharge Escrow Agent from all matters with respect to the subject matter hereof (except for gross negligence or intentional wrongdoing), and agree to indemnify and hold Escrow Agent harmless from and against all costs, damages, judgments, attorney's fees, expenses, obligations, and liabilities of any kind or nature which, in good faith, Escrow Agent may incur or sustain in connection with thisEscrow Agreement, and without limiting the generality of the foregoing, Escrow Agent. shall not incur any liability due to a delay in the electronic wire transfer of funds or with respect to any action taken or omitted in reliance upon any instrument, including any written notice or instructions provided for in the Contract or this Agreement, not only as to its due execution and the validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which the Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by a proper person or persons and to conform with the provisions of the Contract or this Agreement. 5) Any title insurance required by the Contract shall be provided by Lawyers Title Insurance Corporation. Escrow Agent shall be entitled to escrow fees of $ 0 to be paid as follows: 6) Seller and Purchaser hereby certify that they are aware the Federal Deposit Insurance Corporation (FDIC) coverages apply only to a cumulative maximum amount of $100,000 for each individual depositor for all of depositor's accounts at the same or related institution. Seller and Purchaser further understand that certain banking instruments, such as, but not limited to, repurchase agreements and letters of credit, are not covered at all by FDIC insurance. Further, Seller and Purchaser understand that Escrow Agent assumes no responsibility for, nor will Seller and Purchaser hold same liable for, any loss occurring which arises from the fact that the amount of the above account may cause the aggregate amount of any individual depositor's accounts to exceed $100,000 and that the excess amount is not insured by the Federal Deposit Insurance Corporation (FDIC). By: /s/ Eva M. Mosley GMRI, INC., a Florida corporation COOKER RESTAURANT CORPORATION, an Ohio By: /s/ Zil F. Parker By: /s/ David C. Sevig Title: Corporate Counsel Title: Vice President and CFO Federal I.D. Number: Federal I.D. Number:	8-K	EX-99.2	1996-01-12T00:00:00	1996-01-12T13:45:28
0000950133-96-000018	0000950133-96-000018_0000.txt	<DESCRIPTION>SYSTEMS TECHNOLOGY ASSOCIATES FORM 10-K, 5/31/95. ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. (Exact name of registrant as specified in its charter) (State of incorporation) (IRS Employer ID No.) (Address of Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class: Common Stock, $.50 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No The aggregate market value of the voting stock held by non-affiliates of the registrant as of August 31, 1995 was approximately $428,045. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The number of shares outstanding of the registrant's Common Stock, par value $.50 per share, as of August 31, 1995 was 3,424,363, and the shares outstanding of the registrant's Preferred Stock, par value $50.00 per share, was 2,000. The Company is a custom designer and manufacturer of electronic equipment used in the international telephone and telegraph industry. The motivation for the installation of international facilities is to increase international commerce and industry. At present, the most prevalent means for providing international telephone and telegraph is via commercial communication satellites. These commercial satellites act as a mirror to provide connections between various earth stations. However, for the service to be provided by any country desiring to avail itself of this capability, it must erect and install earth terminals. These are generally referred to as earth stations and serve as the international gateway for telephone and telegraph service. The customer base that STA serves is, in the main, government entities in each of the countries that provide such service. The United States of America is unique in that international telephone and telegraph is provided by commercial organizations. These include American Telephone and Telegraph (AT&T), MCI, Sprint, IDB and others. The rest of the world provides this service via government agencies and in most cases the same agencies provide mail services. They are referred to in the international telephone and telegraph communities as the Post, Telephone and Telegraph organizations (PTT's). These organizations as well as the United States commercial organizations are the customers that STA serves. The products developed and manufactured for sale and service by the Company and products of other company's resold by STA, are divided into four categories. These are: (1) electronic switching equipment similar to the central offices of the telephone company for both domestic and international telephone and telegraph service, (2) equipment that enables the domestic telephone offices, especially in the smaller countries, to originate and receive direct-dial international service, (3) devices to digitalize analog telephone service and transmit it over digital transmission facilities, and (4) equipment to support and enhance telephone communications. Since its inception, the Company has installed over 278 communications satellite ground support systems in more than 110 countries. As a result, much of the new business brought to the Company is repeat in nature from the same customers. This is customary since PTT's by tradition purchase additional equipment and expansion facilities from those suppliers with whom they are accustomed to doing business. It is the objective of the Company to continue to upgrade its product lines so that it can remain competitive in the international market. However, limited funds and a large debt load service requirement greatly restrict the Company's research efforts. The Company encounters competition in the sale of its products from both international and domestic (U.S.) sources. Among the international manufacturers which compete against STA are the Nippon Electric Company and Smith Jones in England. In the United States, STA faces competition from two companies, both of which are larger than STA. STA is a supplier of switching equipment that provides service for management of networks. The Company also manufactures and sells international gateway telephone equipment and signaling converters. When new international gateway facilities are erected, especially in an emerging country, their usefulness is sometimes limited due to lack of access to the domestic network for voice and data service. Often, the domestic system operates on a different dialing or signaling scheme than the international system. This means that the signals from the two systems must be made compatible. STA manufactures and offers a family of signaling converters that make possible the automatic connection between earth stations for international service and domestic networks. In addition, STA has recently started to resell the product line of a company that makes similar equipment. These devices permit either full automatic direct-dial connections or semi-automatic as may be required and determined by the PTT's to fit local practice. The Needs of the Satellite Network Geostationary satellites (satellites that appear to remain in one place above the earth) are an important facility for long distance communications. Because the satellite transmission path introduces a delay of several milliseconds, the signaling systems used for terrestrial communications are not suitable. Many of the user countries have not kept abreast of the available facilities and latest technologies. At present, there are many countries including those of the former Eastern Bloc that require increased international gateway capacity for voice, telex and data service. The signaling product lines sold by STA specifically address this market. The need for capacity falls into two categories. For those countries that have a suitable international gateway switching center, the limitation is usually in the ability of that center to provide international connections employing the Consultative Committee on International Telephone and Telegraph (CCITT), a part of the United Nations, No. 5 Signaling method. The Company has developed the CCITT No. 5 Signaling Converters to serve this market. In the second category, many countries have limited switching capacity. These organizations will require new international switching centers as well as special equipment for direct access to the international services. During the fiscal year ended May 31, 1995, the Company expended approximately $15,187 for research, development and software expense. The administrative offices and manufacturing facility of the Company are located at 14 Bryant Court, Sterling, Virginia and during fiscal year 1995, consisted of an aggregate of approximately 10,000 square feet. In December 1991, the Company renegotiated the lease to a month-to-month basis with a current rate at May 1995 of $4,500 per month for 10,000 square feet. In November 1995, the Company reduced its rent payment to $2,500 per month and intends to occupy only 5,000 square feet of its existing space. The Company believes that its present facilities are adequate for its current operations. It is believed that the Company's manufacturing facilities comply with all federal, state and local laws relating to the protection of the environment. The Company has developed expertise in the design and manufacture of its products. However, the Company has no patents or applications for patents pending. The Company prefers to protect its technology as proprietary software and hardware. As of May 31, 1995, the Company employed six(6) persons, none of whom were represented by a union. The Company believes that its relationship with its employees is good. The Company had been in default on two bank notes totaling $254,708 since April and May of 1989 with unpaid accrued interest of $92,092 as of December 31, 1992. The Bank had demanded payment of both notes which were secured by all of the assets of the Company. On December 31, 1992, the Company and the Bank reached an agreement referred to as the "Modified Debt Agreement" which, in effect, substantially reduced the principal balance and eliminated accrued interest if the Company made the required monthly payments and future principal reductions on schedule. The Modified Debt Agreement called for a reduced loan balance of $175,000 to be paid. Of that amount, $25,000 was paid immediately leaving a balance of $150,000. If the Company defaulted or went into bankruptcy, the original loan agreement and amounts originally owed then would have become enforceable. The Company made all required interest-only payments and, in addition, reduced the principal amount from $150,000 to $135,055 by August 1994. In September 1994, the Company was approached by its lending bank to make an offer to settle its existing $135,000 loan as the bank was planning to package this loan with others and sell it at auction. The Company borrowed $82,500 ($50,000 from Suburban National Bank) and applied $5,000 of its own funds towards the existing loan balance. The lending bank accepted the offer in complete satisfaction of the outstanding balance and the Company cancelled $47,555 still owed on the Modified Debt Agreement and $171,800 still carried as debt from the original loan for a total debt forgiveness of $219,355. During most of 1991, the Company failed to pay its payroll tax withholding obligation and its matching contribution. In October 1992, the Company reached a tentative agreement with the IRS to make monthly payments on these outstanding obligations. In early February 1993, the Company received final IRS approval of the installment agreement, thereby removing a major concern regarding the Company's continuing existence. The Company has paid all current payroll tax obligations since January 1992 in full and on time and has paid all of its past due payroll tax installments on time. On December 3, 1992, Avnet Computer, a division of Avnet, Inc., was awarded a Summary Judgment against Systems Technology Associates, Inc. for the sum of $35,798 plus interest. The Judgement relates to goods purchased on account by STA from Avnet in July 1991. In November 1993, STA reached an agreement with Avnet Computer on a total liability of $45,000 with monthly payments without interest to be made through July 1996. All payments have been made on time and the balance due at the end of November 1995 was $ 16,000. Item 4. Submission of Matters to a Vote of Security Holders There were no matters placed before the shareholders for vote during the fiscal year ended May 31, 1995. Item 5. Market for Registrant's Common Equity and Related Stockholder The Company's Common Stock is traded in the over-the-counter market. The following table sets forth the high and low bid prices for the Company's Common Stock on the over-the-counter market as reported by the National Quotation Bureau from March 1994 until November 1995. The quotations reflect inter-,dealers prices without retail markups, markdowns or commissions and may not represent actual transactions. As of August 31, 1995, there were approximately 742 holders of record of the Company's Common Stock. The Company has never paid a cash dividend on its Common Stock and it presently intends to retain any earnings for use in improving its capital position. Accordingly, it is anticipated that no cash dividends will be paid to the holders of Common Stock in the foreseeable future. Item 6. Selected Financial Data The following selected financial data for the periods indicated has been derived from the financial statements of the Company. This information should be read in conjunction with the related financial statements and notes thereto included elsewhere in this report. Item 7. Management's Discussion and Analysis of Financial Condition and 1995 was a year marked with both progress, disappointment and change. While the Company operated profitably for the third year in a row, both sales and operating income were below our expectations. The product line acquired from Coherent Communications did not achieve the sales level expected and the STA product lines saw lower demand. Thus, while the Company had hoped to show a substantial increase in sales over last year's $1,085,000, sales actually decreased slightly to $1, 000,021 and Operating Income dropped from $102,625 to $81,368. The Company believes it can improve and extend sales of the Coherent product line by introducing more pricing flexibility and a broader sales effort. Additionally, the Company will also focus on its existing installed customer base to sell upgrades, expansions and spares of its own product lines. In February 1995, Management met to assess the Company's strengths and weaknesses and to set a course based on this analysis. It was becoming clear that the old STA and Coherent product lines were becoming outmoded and, while sales of these products would continue for some time, demand would taper off instead of increasing over the next several years. Also, the Company did not have an experienced degreed engineer who could upgrade these products nor the funds to support such an effort as ongoing debt payments consume most of the Company's cash flow. The Company did have a large prospect and customer base which it felt it could successfully market to with newer or complimentary products. Thus, in March, the Company approached Coherent Communications about selling their digital Echo Canceller product line. Coherent accepted and this product line is now contributing to STA's sales. The Company also approached one of its former competitors about selling their products. The first sale of these products occurred in May and now contribute to sales on a level equal to STA's own product lines. With the change in sales mix, STA will manufacture less of the products it sells and will place less emphasis on engineering and more on building an aggressive sales organization. In September 1994, the Company was approached by its lending bank, First Union, to make an offer to settle its existing $135,000 loan as it was planning to package this loan with other loans and auction them off. The Company was able to borrow $82,500 ($50,000 from Tysons National Bank) and apply $5,000 of its own funds in an offer to First Union to settle its existing loan balance. First Union accepted the offer and the Company was able to cancel $47,555 still owed on the Modified Debt Agreement and $171,800 still carried as debt from the original loan for a total cancellation of $219,355. The combination of debt cancellation and the year's operating income produced $300,729 of Net Income. The Company's tax loss carryforward allowed the Company to forgo Income Tax payments of $111,600. Last year, the Company stated it hoped to obtain a positive Net Worth within two years. The First Union debt cancellation and earnings for this fiscal year has allowed the Company to reach that goal this year with a Net Worth as of May 31, 1995 of $55,194. While the Company has operated profitably for the last three years, almost all of these earnings have had to be applied to debt payments. This has largely stifled development of the Company and opportunity for the Company's employees. It has also kept Management under great stress as it has had to operate without sufficient cash resources. The Company needs to push its sales to a higher level to alleviate the debt payment pressures. Also, during the next year, in addition to funds provided by earnings, the Company hopes to convert at least some of its old product line inventory to cash through special and close-out sales. In addition, it is believed that a substantial amount of that inventory can be utilized through the acquired Coherent product line, also improving cash flow. There will be, however, some inventory write-offs as the Company assesses individual stock items over the next 12 to 18 months. The Company, having achieved a positive net worth again, will now aggressively pursue a plan to find a profitable entity that would find both the Company's public status and $3.5 million tax loss carryforward attractive. Continued profitability, it is hoped, will further increase the attractiveness of STA to another company. Item 8. Financial Statements and Supplementary Data Reference is made to the Financial Statements which are annexed hereto immediately following the signature page of this report. Item 9. Changes and Disagreements with Accountants on Accounting and Item 10. Directors and Executive Officers of the Registrant The following table sets forth certain information concerning the directors, executive officers and significant employees who held positions in the Company during fiscal year 1995. * Clyde C. Heasly, Jr. was elected to the Board of Directors and additionally assumed the office of Corporate Secretary on November 6, 1992. CLYDE C. HEASLY, JR., Director and Corporate Secretary, is retired from Data Card Corporation, Minneapolis, Minnesota, the world leader in plastic cards equipment and service. Mr. Heasly held various positions including Corporate Senior Vice President, President of Data Card Addressograph, Managing Director of Data Card Benelux, and President of Security Imprinter Corporation which he founded. Other assignments were with Control Data Corporation, Farrington Electronics and Intelligent Machines Research Corporation where he was involved in the early development and commercialization of optical character recognition (OCR). Mr. Heasly holds a Bachelor of Science degree in Electrical Engineering from the University of California, Berkeley, and has done graduate electrical engineering studies at George Washington University, Washington, DC. EDWARD P. MYERS, Director, is an Associate Professor teaching Computer Information Systems at the Alexandria campus of Northern Virginia Community College. Mr. Myers has been an active educator and business consultant for the past twelve years. Previously, he served in the United States Air Force retiring as a Lt. Colonel. During his Air Force career, Lt. Colonel Myers served on the Joint Chiefs of Staff, Air Staff, and Systems Command working with computers and application software. He holds a B.A. from Ohio Wesleyan and an M.B.A. from Michigan. TERRY A. SCOTT, Chairman of the Board and Chief Executive Officer, has been with the Company since December 11, 1991. Additionally, Mr. Scott was an Associate Professor of Finance at the Alexandria campus of the Northern Virginia Community College (NVCC) where he taught full time for eleven years. Mr. Scott resigned from NVCC on May 15, 1993 to devote his full time to STA in the position of President. Mr. Scott previously held positions as an Account Executive with Merrill Lynch and as a commercial loan credit analyst for the National Bank of Detroit. Mr. Scott holds a Bachelor degree in Business Administration from the Miami University of Ohio and an M.B.A. from Ohio State University. Mr. Scott also served in Vietnam as a Captain in the U.S. Army's Fifth Special Forces Group (Airborne) from 1969 to 1971. All directors are elected annually by the Company's shareholders and serve until their successors are duly elected and qualified. Officers are elected by the Board of Directors and serve at the discretion of the Board. Item 11. Management Remuneration & Transactions, Executive Compensation Management compensation for FY95 totaled $63,221, down from $73,355 in FY94 and $66,942 in FY93. Mr. Terry A. Scott, Chairman and President, received a total of $28,606 in FY94 and Mr. Furman A. McCormick, Vice President received $34,615. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth the equity security ownership of those persons known to management to own beneficially 5% or more of the total outstanding Common Stock as of the record date of August 31, 1995. Includes 6,540 shares held by Mr. Friedland's wife, Jean C. Friedland, 600 shares held by Jean C. Friedland in trust for their son, Bruce Friedland, and 24,500 shares held by Metrology, Inc. Based on an agreement concluded on October 26, 1993, STA has an option to acquire all of the shares owned by Mr. Friedland and Metrology for three years at $0.0625 per share and for $0.10 per share for two additional years. On June 1, 1994, Coherent Communications, as an STA designate, received 100,000 of these shares as partial payment to Coherent Communications Systems for inventory and equipment purchased and prepaid expenses relating to two product lines STA was licensed to manufacture and sell. While the change in Mr. Friedland's ownership was disclosed in STA's FY94 10-K, Mr. Friedland did not file a Form 4 disclosing such. *Includes 60,000 shares owned by T.A. Scott & Company, Inc., 95% owned by Mr. Scott and ownership of 7,100 shares in a limited partnership which owns 11,000 shares of STA Common Stock. The following table indicates the equity securities of the Company beneficially owned as of August 31, 1995 by the named Directors, and the Officers and Directors of the Company as a group. Item 13. Certain Relationships and Related Transactions Item 14. Exhibits, Financial Statement, Schedules and Reports on Form 8-K (a) 1. Report of Independent Certified Public Accountants Systems Technology Associates, Inc. (a) Balance Sheets at May 31, 1995 and 1994 (b) Statements of Income for the Years Ended May 31, 1993, 1994 and 1995 (c) Statements of Stockholders' Equity(Deficit) for the Years Ended May 31, 1993, 1994 and (d) Statements of Cash Flows for the Years Ended May 31, 1993, 1994, 1995 (e) Notes to Financial Statements Reference is made to the Exhibit Index to this Report immediately following the Financial Statement Schedules. A Form 8-K was filed on June 17, 1994, stating that STA was in substantive negotiations with another company for the acquisition of a product line. (Nothing developed from those discussions and they have been terminated) A Form 8-K was filed on June 24, 1994, stating that STA had terminated its audit relationship with Frederick S. Todman & Co. and had retained Councilor, Buchanan & Mitchell, P.C. for its 1994 audit. There were no outstanding disagreements with Todman & Co. on any audit or accounting issues. A Form 8-K was filed on October 12, 1994 stating that STA received an opportunity to "buy out" its existing bank debt at a substantial discount. STA was able to borrow $82,500 from outside sources (including a bank loan of $50,000) and for $87,500, the Company was able to extinguish the existing $135,000 loan and $171,800 of contingency debt still carried on the balance sheet. There were no loans of any kind of the Company to management. Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: December 29, 1995 By: /s/ TERRY A. SCOTT Dated: December 29, 1995 By: /s/ CLYDE C. HEASLY, JR. Clyde C. Heasley, Jr. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 3(a) Articles of Incorporation of Registrant. 3(b) By-Laws of Registrant. 4(a) Specimen Common Stock Certificate. 16 Letter Re: Change in Certifying Accountants Incorporated by reference from Exhibits to Registrants for S-18 Registration Statement, Registration No. 2-94042W. FOR THE YEAR ENDED MAY 31, 1995 [COUNCILOR, BUCHANAN & MITCHELL, P.C. LETTERHEAD] We have audited the accompanying balance sheets of Systems Technology Associates, Inc. as of May 31, 1995 and 1994, and the related statements of income, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. The statements of income, stockholders' equity (deficit), and cash flows for the year ended May 31, 1993, before the restatement described in Note 10, were audited by other auditors whose report dated July 23, 1993, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Systems Technology Associates, Inc. as of May 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 2 to the financial statements, prior to 1993, the Corporation suffered substantial recurring losses from operations which resulted in a large net capital deficiency. While the capital deficiency has been eliminated, total stockholders' equity remains insufficient in comparison to outstanding debt, which raises substantial doubt about the Corporation's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We also audited the adjustments described in Note 11 that were applied to restate the 1993 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. /s/ COUNCILOR, BUCHANAN & MITCHELL, P.C. MAY 31, 1995 AND 1994 MAY 31, 1995 AND 1994 See accompanying Notes to Financial Statements. SYSTEMS TECHNOLOGY ASSOCIATES, INC. Exhibit B FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993 See accompanying Notes to Financial Statements. 2 SYSTEMS TECHNOLOGY ASSOCIATES, INC. Exhibit C STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993 See accompanying Notes to Financial Statements. 3 SYSTEMS TECHNOLOGY ASSOCIATES, INC. Exhibit D FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993 See accompanying Notes to Financial Statements. 4 SYSTEMS TECHNOLOGY ASSOCIATES, INC. Exhibit D FOR THE YEARS ENDED MAY 31, 1995, 1994 AND 1993 Accrued interest payable totalling $95,921 on the First Union Bank note was reclassified from notes payable to accrued expenses to reflect the status of the liability at May 31, 1994. As part of Coherent Communications Systems Corporation's (Coherent) agreement to acquire shares of the Corporation's stock, Coherent contributed $6,400 in inventory, $13,600 in property and equipment and $5,000 in prepaid expenses for no additional consideration (see Note 9). Accordingly, capital in excess of par value was increased by $18,750 for these items, and treasury stock was reduced by $6,250. See accompanying Notes to Financial Statements. 5 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Systems Technology Associates, Inc. (the "Corporation") provides services and equipment in the telecommunications, data systems, and automated instrumentation fields to governments and the public sector. The following is a summary of significant accounting policies followed in the preparation and presentation of the accompanying financial statements. These policies conform to generally accepted accounting principles. Accounts receivable are reviewed periodically for consideration as to their collectibility. An allowance for doubtful accounts is established on those accounts deemed uncollectible under the specific write-off method. For the years ended May 31, 1995, 1994 and 1993, the Corporation charged $6,732, $4,704, and $-0-, respectively, against earnings to recognize those accounts whose collection was doubtful. Inventory is comprised of computer components and electronic equipment materials used in the manufacture of telephone system devices and is valued at the lower of cost or market with cost determined on a first-in, first-out (FIFO) basis. During the years ended May 31, 1995, 1994 and 1993, the Corporation marked down its inventory by $10,024, $-0-, and $33,508, respectively, as a result of obsolescence and lower of cost or market adjustment of certain items. Inventory is pledged as security against outstanding bank loans. NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued) Property and equipment are stated at cost. Depreciation is provided over the five year estimated useful lives of the assets under a method which approximates straight-line. Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Revenues on sales contracts are recognized under the percentage of completion method, measured by the percentage of costs incurred to date to estimated total costs for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. All of the Corporation's sales contracts are for a fixed price. The percentage of completion on each sales contract is reviewed periodically for a determination as to the revenue to be recognized. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates will change in the near term. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue and Cost Recognition (Continued) period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. In May 1991, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments" which requires disclosure of the fair value of all financial instruments, both assets and liabilities, for which it is practicable to estimate fair value. This statement is effective for fiscal years ending after December 15, 1995, for entities with less than $150 million in total assets t the time the Statement was issued. Management is currently reviewing the impact of SFAS 107. As of May 31, 1995, management does not expect it to have a material impact on the Corporation. NOTE 2 - GOING CONCERN The Corporation has incurred substantial operating losses since its public offering in 1985, which raises substantial doubt about its ability to continue as a going concern. The Corporation has negotiated with its creditors to arrive at reasonable payment terms and has been able to obtain forgiveness of certain portions of its liabilities. In addition to funds provided by earnings, the Corporation plans to convert NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 2 - GOING CONCERN (Continued) at least some of its old product line inventory to cash through special and close-out sales. The Corporation will also aggressively pursue a plan to increase its attractiveness to another company. Despite these efforts, there is no assurance that management will be successful in both meeting its debt obligations and funding current operations. The financial statements do not include any adjustments pertaining to the recoverability or classification of recorded assets or the amounts or classification of liabilities if such plans are not sufficient to fund operating cash shortfalls. NOTE 3 - PROPERTY AND EQUIPMENT A summary of property and equipment as of May 31, 1995 and 1994, is as follows: Depreciation expense for the years ended May 31, 1995, 1994 and 1993, was $9,461, $7,078 and $14,847, respectively. The property and equipment are pledged as security against the outstanding bank loan. NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 4 - NOTES PAYABLE Related parties and other notes payable as of May 31, 1995 and 1994, consist of the following: Terms of the notes payable are as follows: First Union Bank - $200,000 and $90,000 notes payable, originally dated January 1985 and May 1987, respectively. At December 31, 1992, total unpaid principal of $254,708 and accrued interest of $92,092 were addressed in a Settlement Agreement. When the Corporation performs in accordance with the terms of the Settlement Agreement, described hereinafter, the entire indebtedness will be settled for $175,000 (the "Modified Indebtedness" amount). The notes were secured by inventory, property and equipment, accounts receivable, and all other assets of the Corporation. Interest on the modified indebtedness was payable monthly at 8% through NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 4 - NOTES PAYABLE (Continued) at prime as of January 1, 1994 (6%), plus 2% for January 1 through December 31, 1994; at prime as of January 1, 1995, plus 2% for January 1 through December 31, 1995. A $25,000 principal payment was due and was paid on or before December 31, 1992; principal payments of $1,500 were due monthly beginning March 1994; additional principal payments equal to 20% of net income before provision for income taxes and extraordinary items are due within one month of receipt of annual audited financial statements. At October 7, 1994, total unpaid principal of $135,056 and accrued of interest of $932 was addressed in a Release and Settlement Agreement. The Corporation agreed to pay $88,460 to extinguish the remaining balance of the Modified Indebtedness amount. Tysons National Bank - $50,000 note payable dated October 7, 1994. Interest is variable and payable monthly at prime plus 2.25%. Principal payments of $1,042 are due monthly beginning November 1994, with payment in full due October 1998. The note is guaranteed by Mr. Terry A. Scott, an officer of the Corporation, and is collateralized by all business assets of the Corporation. Friedland and Metrology, Inc. Notes Metrology, Inc. - $25,000 unsecured demand note payable, issued December 1987, originally bearing interest at 10%. Metrology, Inc. is controlled by Mr. Friedland, formerly an officer and director of the Corporation. Marvin S. Friedland - $20,000, $25,000 and $6,000 unsecured demand notes payable, issued September - October 1989, originally bearing interest at 15%. Mr. Friedland was formerly an officer and director of the Corporation. NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 4 - NOTES PAYABLE (Continued) In October 1993, the Corporation entered into an agreement regarding these notes whereby the interest rate from date of issuance was reduced to 2% per annum. Accrued interest from the date of issuance was reduced through a $2,000 payment at the time of the modification and continued monthly payments of $1,000 beginning February 1994 until paid in full. For the year ended May 31, 1995, no principal payments were made. Interest accrues at 2% from September 1, 1993, until the outstanding balance due to IRS (see Note 6) is satisfied and then at 8% until the notes are paid in full. Principal payments will be made monthly at $2,000 beginning one month after the balance due to IRS is satisfied. Payments will be allocated between the Friedland and Metrology notes in proportion to the dollar values of the notes due each party. June Benning - $10,733 unsecured note payable, originally accruing interest at 15%. On May 5, 1993, an agreement was signed whereby interest prior to January 1, 1993, was forgiven; interest accrues at 10% after that date. Principal payments of no less than $1,000 per month will begin no later than one month after satisfaction of the balance due to IRS (Note 6). Mrs. Benning is the wife of a former officer and director of the Corporation. Walter Benning - $40,000 unsecured note payable, originally accruing interest at 15%. On May 5, 1993, an agreement was signed whereby interest will accrue at 8% beginning July 1, 1994; interest prior to that date is forgiven. Principal payments of not less than $1,000 per month will begin in the month following payoff of the balance due to IRS (Note 6) and payoff of the balance due to June Benning. Mr. Benning is a former officer and director of the Corporation. NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 4 - NOTES PAYABLE (Continued) Daniel N. Carter - $15,000 and $10,000 unsecured notes payable dated May 20, 1994, and October 1, 1994, respectively. Interest is payable monthly at 8% and 10% per annum, respectively; principal payments of $500 per month are due on the $15,000 note beginning September 30, 1994, with payment in full due May 20, 1995, and October 1, 1996, respectively. For the year ended May 31, 1995, three principal payments were made. Edward P. Myers - $10,000 unsecured note payable dated May 24, 1994. Interest is payable monthly at 8% per annum; principal payments of $500 per month are due beginning September 30, 1994, with payment in full due May 20, 1995. For the year ended May 31, 1995, three principal payments were made. Mr. Myers is a director of the Corporation. Terry A. Scott - $10,000, $12,500 and $10,000 unsecured notes payable dated May 24, 1994, October 7, 1994, and October 7, 1994. Interest is payable monthly at 8%, 10% and 10% per annum; principal payments of $500 per month are due beginning September 30, 1994, with payment in full due May 20, 1995, October 7, 1996, and October 7, 1995. For the year ended May 31, 1995, $1,650 in principal payments were made. Mr. Scott is an officer of the Corporation. John D. Sanders - $5,000 unsecured note payable, modified March 30, 1994, so that no interest will accrue until the outstanding balance due to IRS (Note 6) is satisfied. Interest will then accrue at prime plus 2% and reasonable efforts are to be made to pay off the loan and accrued interest as soon as possible. Mr. Sanders is a shareholder and former director of the Corporation. NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 4 - NOTES PAYABLE (Continued) Michael S. Juhasz - $18,600 unsecured note payable dated October 1, 1992, with principal originally due December 31, 1992, was orally modified so that monthly principal payments of $250 will be made until the entire debt is satisfied. Interest accrues at 5% on this debt. Avnet, Inc. - $45,000 payable in settlement of a judgment against the Corporation was established in November 1993. After an initial $5,000 payment in November 1993, monthly payments of $1,000 will be due through November 1995; monthly payments of $2,000 will be due through July 1996. Liability is secured by a lien on all assets of the Corporation. John F. Erickson - $10,000 unsecured note payable. Interest is payable monthly at 8% per annum; principal payments of $500 per month are due beginning September 25, 1994, with full payment due May 24, 1995. For the year ended May 31, 1995, three principal payments were made. Mr. Erickson is a shareholder of the Corporation. The principal maturities of related parties and notes payable for the subsequent five years are as follows: NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 5 - PAYROLL TAX OBLIGATION In October 1992, the Corporation signed an installment agreement with the Internal Revenue Service to pay delinquent payroll taxes and related penalties and interest. The Corporation is to make monthly payments of $3,000 for 36 months beginning October 1992, after which time the Corporation's financial circumstances will be reevaluated. At May 31, 1995, substantially all of the delinquent taxes were paid and $80,194 of penalties and interest are included in accrued expenses. In September 1995, the Internal Revenue Service ruled that the Corporation is to make monthly payments of $3,000 until all penalties and interest are paid in full. In March 1993, the Corporation and the Commonwealth of Virginia agreed upon a payment plan regarding delinquent payroll taxes and related penalties and interest. At May 31, 1995, no payroll taxes remain payable under this plan and $5,451 of penalties and interest are included in accrued expenses. NOTE 6 - STOCK OPTIONS The Corporation has issued stock options to various directors, an officer and a lender. Under the terms of the options, also discussed in Note 9, options for 30,000 and 77,500 shares are outstanding and exercisable at $.10 and $.25 per share, respectively. NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 6 - STOCK OPTIONS (Continued) A summary of stock option activity as of May 31, 1995 and 1994, is as follows: NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) Preferred Stock - The Corporation has issued 2,000 shares of preferred stock, $50 par value. The stock is nonvoting, may pay noncumulative dividends not to exceed $6 per annum, as set by the Board of Directors, and is redeemable at any time at the option of the Corporation at $100 per share. Dividends on preferred stock shall be payable out of retained earnings prior to the payment of any dividends on common stock. In the event of any corporate liquidation or dissolution, the preferred shareholders are entitled to be paid $100 per share of preferred stock, together with any declared but unpaid dividends on such shares, prior to any payment or distribution of assets to the common shareholders. Treasury Stock - During the year ended May 31, 1993, the Corporation purchased 10,250 and 62,906 shares of its stock at $.18 and $.055 plus commissions, respectively. During the year ended May 31, 1993, a total of 72,250 shares were issued to various employees as bonuses. During the year ended May 31, 1995, the NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Corporation purchased 100,000 shares of its common stock from a former officer and director at $.0625 per share. This block of stock was then reissued to Coherent Communications System Corporation ("Coherent") in exchange for inventory of $6,400, equipment for 13,600 and prepaid expenses of $5,000. The difference between the acquisition price ($6,250) and the subsequent sales price ($25,000) has been reflected as capital in excess of par value. At May 31, 1995 and 1994, the Corporation owned 906 shares with a carrying value of $50. NOTE 8 - OPERATING LEASE The Corporation leases its facilities under a month-to-month operating lease. Minimum annual rents for the years ended May 31, 1995, 1994 and 1993 were $54,000 for each year. In November 1995, the Corporation reduced its space by approximately 50%, with a proportionate decrease in minimum monthly rent. NOTE 9 - INCOME TAXES The Corporation has available net operating loss carryforwards approximating $3.5 million to apply against future taxable income. These carryforwards will expire over the years 2002 to 2008. The FASB released a statement on the method of accounting for income taxes, SFAS 109, which addresses the accounting problems faced when revenues, expenses, gains or losses are included in taxable income of an earlier or later year than the year in which they are recognized for financial statement purposes. The amounts of current taxes payable or refundable and deferred tax liabilities or assets to be NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 9 - INCOME TAXES (Continued) recognized at the date of the financial statements are the amounts which result from all events which have been recognized in the financial statements or tax returns as measured by the provisions of currently enacted tax laws. The Corporation's management has implemented this new standard effective June 1, 1993. There was no cumulative effect of the change in accounting principle to be recorded in determining net income for the year ended May 31, 1994, as a net operating loss carryforward was the only item which would have created a deferred tax asset to be recognized, and projected future net income was not considered realizable to offset the loss carryforward. The provision for income taxes attributable to continuing operations consists of the following components: The net deferred tax benefits in the accompanying balance sheets include the following components: NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 9 - INCOME TAXES (Continued) The provision for income taxes attributable to extraordinary items consists of the following components: NOTE 10 - RELATED PARTIES TRANSACTIONS Under an agreement dated October 25, 1993, the Corporation has an agreement with two shareholders whereby the Corporation or its designate has a three- year option to purchase the 636,213 shares held by the shareholders at $.0625 per share and an option for the following two years to purchase the shares at $.10 per share. The Corporation must exercise its option in blocks of 10,000 or more shares. As discussed in Note 8, the Corporation purchased 100,000 of its shares from a former officer and director at $.0625 per share. The Corporation entered into a License Agreement effective June 1, 1994, with Coherent whereby the Corporation acquired nonexclusive rights to use technology in connection with the manufacture and sale of telecommunications products. In consideration for these rights and the acquisition of certain inventory and equipment, the Corporation facilitated the transfer, through the exercise of options by Coherent as the Corporation's designate, of 100,000 common shares held by a shareholder to Coherent and paid $45,000. NOTES TO FINANCIAL STATEMENTS CONTINUED NOTE 10 - RELATED PARTIES TRANSACTIONS (Continued) In consideration for the advancement of funds under various promissory note agreements with an officer, a director and a vendor, options regarding the purchase of stock were granted to the lenders. The options grant the right to purchase a total of 77,500 shares of stock at $.25 per share for a two-year period ending October 1996. In July 1993, the Board authorized the issuance of options to purchase a total of 30,000 shares at $.10 per share to three Directors. As further described in Note 4, various related parties have loaned funds to the Corporation. A corporation controlled by a former officer and director of the Corporation forgave a claim in the amount of $112,500 during the year ended May 31, 1994. NOTE 11 - RESTATEMENT OF FORGIVENESS OF DEBT REVENUE Forgiveness of debt for the year ended May 31, 1993, presented on Exhibit B has been restated to reflect the revenue as an extraordinary item, net of related income tax effect. This restatement has no effect on income before extraordinary items or net income; earnings per share from extraordinary items increased from $.01 to $.03, while earnings per share from net income before extraordinary item decreased from $.02 to $.00.	10-K405	10-K	1996-01-12T00:00:00	1996-01-12T11:07:45
0000950131-96-000062	0000950131-96-000062_0000.txt	Pursuant to Section 13 or 15(d) of the Securities Exchange Act of l934 Date of Report (Date of earliest event reported)________________________________ (Exact name of registrant as specified in its charters) United States of America 0-16337 51-0269396 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Numbers) Identification No.) One Gateway Center, 300 King Street, Wilmington, Delaware 19801 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 302-656-5020 Exhibit Index on Page 5 The Registrant's hereby incorporates by reference the information contained in Exhibit 28 hereto in response to this Item 5. Item 7. Financial Statements and Exhibits. 28A. Monthly Servicer's Certificate - 8.40% Credit Card Certificates Series 1991-D, 6.25% Asset Backed Certificates Series 1992-E, Floating Rate Asset Backed Certificates Series 1993-F, Floating Rate Asset Backed Certificates Series 1993-G, Floating Rate Credit Card Certificates Series 1993-H, Floating Rate Asset Backed Certificates Series 1994-I, Floating Rate Asset Backed Certificates Series 1994-J, Floating Rate Credit Card Certificates Series 1994-K, 7.15% Credit Card Certificates Series 1994-L, Floating Rate Credit Card Certificates Series 1995-M, Floating Rate Credit Card Certificates Series 1995-N, Floating Rate Credit Card Certificates Series 1995-O and Floating Rate Credit Card Certificates Series 1995-P. 28B. Certificateholder's Payment Date Statement - First Chicago Master Trust II 8.40% Credit Card Certificates Series 1991-D. 28C. Certificateholder's Payment Date Statement - First Chicago Master Trust II 6.25% Asset Backed Certificates Series 1992-E. 28D. Certificateholder's Payment Date Statement - First Chicago Master Trust II Floating Rate Asset Backed Certificates Series 1993-F. 28E. Certificateholder's Payment Date Statement - First Chicago Master Trust II Floating Rate Asset Backed Certificates Series 1993-G. 28F. Certificateholder's Payment Date Statement - First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1993-H. 28G. Certificateholder's Payment Date Statement- First Chicago Master Trust II Floating Rate Asset Backed Certificates Series 1994-I. 28H. Certificateholder's Payment Date Statement- First Chicago Master Trust II Floating Rate Asset Backed Certificates Series 1994-J. 28I. Certificateholder's Payment Date Statement- First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1994-K. 28J. Certificateholder's Payment Date Statement- First Chicago Master Trust II 7.15% Credit Card Certificates Series 1994-L. 28K. Certificateholder's Payment Date Statement- First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1995-M. 28L. Certificateholder's Payment Date Statement- First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1995-N. 28M. Certificateholder's Payment Date Statement- First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1995-O. 28N. Certificateholder's Payment Date Statement- First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1995-P. Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: January 12, 1996 By /s/ Sharon A. Renchof 28A. Monthly Servicer's Certificate - First Chicago Master Trust II Series 1992-E, Floating Rate Asset Rate Credit Card Certificates Series 1993-H, Floating Rate Asset Backed Floating Rate Asset Backed Certificates Series 1994-J, Floating Rate Credit 7.15% Credit Card Certificates Series 1994-L, Floating Rate Credit Card Rate Credit Card Certificates Series 1995-N, Floating Rate Credit Card Floating Rate Credit Card Certificates Series 1995-P. Statement - First Chicago Master Trust II 8.40% Credit Card Certificates Series 1991-D. Statement - First Chicago Master Trust II 6.25% Asset Backed Certificates Series 1992-E. Statement - First Chicago Master Trust II Floating Rate Asset Backed Certificates Series 1993-F. Statement - First Chicago Master Trust II Floating Rate Asset Backed Certificates Series 1993-G. Statement - First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1993-H. Statement - First Chicago Master Trust II Floating Rate Asset Backed Certificates Series 1994-I. Statement - First Chicago Master Trust II Floating Rate Asset Backed Certificates Series 1994-J. Statement - First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1994-K. Statement - First Chicago Master Trust II 7.15% Credit Card Certificates Series 1994-L. Statement - First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1995-M. Statement - First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1995-N. Statement - First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1995-O. Statement - First Chicago Master Trust II Floating Rate Credit Card Certificates Series 1995-P. FIRST CHICAGO MASTER TRUST II The undersigned, duly authorized representatives of FCC National Bank ("FCCNB"), as Servicer pursuant to the Pooling and Servicing Agreement dated as of June 1, 1990, as amended and supplemented, (the "Pooling and Servicing Agreement") by and between FCCNB, as Seller and Servicer and Norwest Bank Minnesota, National Association, as Trustee, does hereby certify as follows: 1. Capitalized terms used in this Certificate have their respective meanings set forth in the Pooling and Servicing Agreement. 2. FCCNB is as of the date hereof the Seller and the Servicer under the Pooling and Servicing Agreement. 3. The undersigned are Servicing Officers. 4. The aggregate amount of Collections processed for the Due Period for this Distribution Date was equal to . . . . $1,639,049,048.92 5. (a) The aggregate amount of such Collections allocated to Principal Receivables for the Due Period for this Distribution Date was equal to . . . . . . . . . . . . . . . . $1,478,221,310.41 (b) The aggregate amount of such Collections allocated to Finance Charge Receivables for the Due Period for this Distribution Date was equal to . . . . . . . . . . . . . . . . $160,827,738.51 6. The aggregate Interchange Amount, (which will be included as Finance Charge Receivables for all Series), for this distribution date was equal to. . . . . . . . . . . . $19,343,790.01 7. The Invested Percentage of Collections for the Due Period was equal to for: Series 1991-D . . . . . . . . . . . . . . 8.667% Series 1992-E . . . . . . . . . . . . . . 8.667% Series 1993-F . . . . . . . . . . . . . . 6.067% Series 1993-G . . . . . . . . . . . . . . 2.600% Series 1993-H . . . . . . . . . . . . . . 6.067% Series 1994-I . . . . . . . . . . . . . . 4.333% Series 1994-J . . . . . . . . . . . . . . 4.333% Series 1994-K . . . . . . . . . . . . . . 4.333% Series 1994-L . . . . . . . . . . . . . . 4.333% Series 1995-M . . . . . . . . . . . . . . 4.953% Series 1995-N . . . . . . . . . . . . . . 4.953% Series 1995-O . . . . . . . . . . . . . . 4.953% Series 1995-P . . . . . . . . . . . . . . 4.953% 8. The Invested Percentage of Collections allocated to Finance Charge Receivables for the Due Period was equal to for: Series 1991-D . . . . . . . . . . . . . . 8.667% Series 1992-E . . . . . . . . . . . . . . 8.667% Series 1993-F . . . . . . . . . . . . . . 6.067% Series 1993-G . . . . . . . . . . . . . . 2.600% Series 1993-H . . . . . . . . . . . . . . 6.067% Series 1994-I . . . . . . . . . . . . . . 4.333% Series 1994-J . . . . . . . . . . . . . . 4.333% Series 1994-K . . . . . . . . . . . . . . 4.333% Series 1994-L . . . . . . . . . . . . . . 4.333% Series 1995-M . . . . . . . . . . . . . . 4.953% Series 1995-N . . . . . . . . . . . . . . 4.953% Series 1995-O . . . . . . . . . . . . . . 4.953% Series 1995-P . . . . . . . . . . . . . . 4.953% 9. The Invested Percentage with respect to the Investor Default Amount for the Due Period was equal to for: Series 1991-D . . . . . . . . . . . . . . 8.667% Series 1992-E . . . . . . . . . . . . . . 8.667% Series 1993-F . . . . . . . . . . . . . . 6.067% Series 1993-G . . . . . . . . . . . . . . 2.600% Series 1993-H . . . . . . . . . . . . . . 6.067% Series 1994-I . . . . . . . . . . . . . . 4.333% Series 1994-J . . . . . . . . . . . . . . 4.333% Series 1994-K . . . . . . . . . . . . . . 4.333% Series 1994-L . . . . . . . . . . . . . . 4.333% Series 1995-M . . . . . . . . . . . . . . 4.953% Series 1995-N . . . . . . . . . . . . . . 4.953% Series 1995-O . . . . . . . . . . . . . . 4.953% Series 1995-P . . . . . . . . . . . . . . 4.953% 10. The aggregate amount of drawings or payments, if any, under the Enhancement, if any, required to be made on the next succeeding Distribution Date is equal to for: Series 1991-D . . . . . . . . . . . . . . $0.00 Series 1992-E . . . . . . . . . . . . . . $0.00 Series 1993-F . . . . . . . . . . . . . . $0.00 Series 1993-G . . . . . . . . . . . . . . $0.00 Series 1993-H . . . . . . . . . . . . . . $0.00 Series 1994-I . . . . . . . . . . . . . . $0.00 Series 1994-J . . . . . . . . . . . . . . $0.00 Series 1994-K . . . . . . . . . . . . . . $0.00 Series 1994-L . . . . . . . . . . . . . . $0.00 Series 1995-M . . . . . . . . . . . . . . $0.00 Series 1995-N . . . . . . . . . . . . . . $0.00 Series 1995-O . . . . . . . . . . . . . . $0.00 Series 1995-P . . . . . . . . . . . . . . $0.00 11. The amount of interest due on the Cash Collateral Account loan, if applicable, required to be paid on the next Distribution Date is equal to for: Series 1991-D . . . . . . . . . . . . . . $46,666.67 Series 1992-E . . . . . . . . . . . . . . $56,388.89 Series 1993-F . . . . . . . . . . . . . . $42,875.00 Series 1993-G . . . . . . . . . . . . . . $18,375.00 Series 1993-H . . . . . . . . . . . . . . $39,401.74 Series 1994-I . . . . . . . . . . . . . . $21,427.78 Series 1994-J . . . . . . . . . . . . . . $22,555.56 Series 1994-K . . . . . . . . . . . . . . $29,531.25 Series 1994-L . . . . . . . . . . . . . . $21,355.72 Series 1995-M . . . . . . . . . . . . . . $0.00 Series 1995-N . . . . . . . . . . . . . . $0.00 Series 1995-O . . . . . . . . . . . . . . $0.00 Series 1995-P . . . . . . . . . . . . . . $0.00 12. The amount of Monthly Servicing Fee required to be paid on the next succeeding Distribution Date is equal to for: Series 1991-D . . . . . . . . . . . . . . $1,666,666.67 Series 1992-E . . . . . . . . . . . . . . $1,666,666.67 Series 1993-F . . . . . . . . . . . . . . $1,225,000.00 Series 1993-G . . . . . . . . . . . . . . $525,000.00 Series 1993-H . . . . . . . . . . . . . . $1,166,666.67 Series 1994-I . . . . . . . . . . . . . . $833,333.33 Series 1994-J . . . . . . . . . . . . . . $833,333.33 Series 1994-K . . . . . . . . . . . . . . $833,333.33 Series 1994-L . . . . . . . . . . . . . . $833,333.33 Series 1995-M . . . . . . . . . . . . . . $952,380.96 Series 1995-N . . . . . . . . . . . . . . $952,380.96 Series 1995-O . . . . . . . . . . . . . . $952,380.96 Series 1995-P . . . . . . . . . . . . . . $952,380.96 13. The aggregate amount payable to Investor Distribution Date in respect of interest is equal to for: Series 1991-D . . . . . . . . . . . . . . $7,000,000.00 Series 1992-E . . . . . . . . . . . . . . $5,208,333.33 Series 1993-F . . . . . . . . . . . . . . $3,920,000.00 Series 1993-G . . . . . . . . . . . . . . $1,648,000.00 Series 1993-H . . . . . . . . . . . . . . $3,857,777.78 Series 1994-I . . . . . . . . . . . . . . $2,742,222.22 Series 1994-J . . . . . . . . . . . . . . $2,764,444.44 Series 1994-K . . . . . . . . . . . . . . $2,750,000.00 Series 1994-L . . . . . . . . . . . . . . $2,979,166.67 Series 1995-M . . . . . . . . . . . . . . $3,149,206.36 Series 1995-N . . . . . . . . . . . . . . $3,110,793.65 Series 1995-O . . . . . . . . . . . . . . $3,151,394.61 Series 1995-P . . . . . . . . . . . . . . $3,123,127.31 14. The aggregate amount payable to Investor Distribution Date in respect of principal is equal to for: Series 1991-D . . . . . . . . . . . . . . $83,333,333.34 Series 1992-E . . . . . . . . . . . . . . $0.00 Series 1993-F . . . . . . . . . . . . . . $0.00 Series 1993-G . . . . . . . . . . . . . . $25,000,000.00 Series 1993-H . . . . . . . . . . . . . . $0.00 Series 1994-I . . . . . . . . . . . . . . $0.00 Series 1994-J . . . . . . . . . . . . . . $0.00 Series 1994-K . . . . . . . . . . . . . . $0.00 Series 1994-L . . . . . . . . . . . . . . $0.00 Series 1995-M . . . . . . . . . . . . . . $0.00 Series 1995-N . . . . . . . . . . . . . . $0.00 Series 1995-O . . . . . . . . . . . . . . $0.00 Series 1995-P . . . . . . . . . . . . . . $0.00 15. The excess, if any, of the First Chicago Amount over the Aggregate Principal Receivables required to be maintained pursuant to the Agreement . . . . . . . . . . . . . . . . $3,552,352,518.30 16. The First Chicago Amount for the Due Period divided by Aggregate Principal Receivables for the Due Period . . . . . . . . . 30.788% 17. The Minimum First Chicago Interest Percentage . . . . . . . . . . . . . . . . . . . 7.000% 18. Attached hereto is a true and correct copy of the statement required to be delivered by the Servicer on the date of this Certificate to the Trustee in respect of each Series outstanding pursuant to Section 5.02(a) of the Agreement, if applicable. 19. As of the date hereof, to the best knowledge of the undersigned, no default in the performance of the obligation of the Servicer under the Pooling and Servicing Agreement has occurred or is continuing except as follows: None. 20. As of the date hereof no Liquidation Event has been deemed to have occurred for the Due Period for this Distribution Date with respect to any Series. 21. As of the date hereof, to the best knowledge of the undersigned, no Lien has been placed on any of the Receivables other than the Lien granted by the Pooling and Servicing Agreement. 22. During the preceding calendar month, the number of newly - originated Accounts was 48,204. IN WITNESS WHEREOF, the undersigned have duly executed and delivered this certificate the date first set forth above. FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1991-D Supplement dated as of June 1, 1991 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the basis of aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1991-D Certificateholders on the Payment Date per $1,000 interest. . . . $90.333 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1991-D Certificates, per $1,000 interest . . . . . . . . . . $83.333 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1991-D Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $7.000 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1991-D Certificates. . . . . $143,732,296.40 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1991-D Certificates, per $1,000 interest. . . . $143.732 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the and by the Investor Certificates of all Series). . . . . . . . . . . . . . . $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1991-D Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $1,000,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1991-D Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 8.667% d. The Invested Percentage with respect to Principal Receivables for the Series 1991-D Certificates for the Due Period with respect to the current Distribution Date . . . . . . . 8.667% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1991-D Amount"). . . . . . . . . . . . . $5,695,554.22 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1991-D Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 The amount of the Monthly Servicing Fee payable by the Trust to the Servicer for the current Distribution Date . $1,666,666.67 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $120,000,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1991-D Certificates as of such Due Period . . . 12.000% The Pool Factor (which represents the ratio of the amount of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the amount of the Full Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multiplying the original denomination of the holder's Certificate by the Pool Factor . . . . . . . . . . . . 91.66666667% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1992-E Supplement dated as of August 1, 1992 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the basis of aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1992-E Certificateholders on the Payment Date per $1,000 interest. . . . $5.208 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1992-E Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1992-E Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.208 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1992-E Certificates. . . . . $15,615,400.00 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1992-E Certificates, per $1,000 interest. . . . $15.615 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the and by the Investor Certificates of all Series). . . . . . . . . . . . . . . $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1992-E Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $1,000,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1992-E Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 8.667% d. The Invested Percentage with respect to Principal Receivables for the Series 1992-E Certificates for the Due Period with respect to the current Distribution Date . . . . . . . 8.667% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1992-E Amount"). . . . . . . . . . . . . $5,695,554.22 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1992-E Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 The amount of the Monthly Servicing Fee payable by the Trust to the Servicer for the current Distribution Date . $1,666,666.67 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $120,000,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1992-E Certificates as of such Due Period . . . 12.000% The Pool Factor (which represents the ratio of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Initial Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multi- plying the original denomination of the holder's Certificate by the Pool Factor . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1993-F Supplement dated as of June 1, 1993 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1993-F Certificateholders on the Payment Date per $1,000 interest. . . . $5.600 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1993-F Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1993-F Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.600 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1993-F Certificates. . . . . $9,997,446.69 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1993-F Certificates, per $1,000 interest. . . . $14.282 d. Excess Principal Collections allocated in respect of the Series 1993-F Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1993-F Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $700,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1993-F Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 6.067% d. The Invested Percentage with respect to Principal Receivables for the Series 1993-F Certificates for the Due Period with respect to the current Distribution Date . . . . . . . 6.067% e. The Pre-Allocated Invested Amount for the Due period with respect to the current Distribution Date . . . . . . . $0.00 The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1993-F Amount"). . . . . . . . . . . . . $3,986,887.96 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1993-F Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 a. The amount of the Monthly Servicing Fee payable from Available Funds by the Trust to the Servicer with respect to the current Distribution Date . . . $291,666.67 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . $933,333.33 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $91,000,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1993-F Certificates as of such Due Period . . . 13.000% The Pool Factor (which represents the ratio of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Initial Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multi- plying the original denomination of the holder's Certificate by the Pool Factor . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1993-G Supplement dated as of June 1, 1993 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1993-G Certificateholders on the Payment Date per $1,000 interest. . . . $88.827 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1993-G Certificates, per $1,000 interest . . . . . . . . . . $83.333 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1993-G Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.493 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1993-G Certificates. . . . . $42,719,688.96 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1993-G Certificates, per $1,000 interest. . . . $142.399 d. Excess Principal Collections allocated in respect of the Series 1993-G Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1993-G Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $300,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1993-G Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 2.600% d. The Invested Percentage with respect to Principal Receivables for the Series 1993-G Certificates for the Due Period with respect to the current Distribution Date . . . . . . . 2.600% e. The Pre-Allocated Invested Amount for the Due period with respect to the current Distribution Date . . . . . . . $0.00 The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1993-G Amount"). . . . . . . . . . . . . $1,708,666.27 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1993-G Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 a. The amount of the Monthly Servicing Fee payable from Available Funds by the Trust to the Servicer with respect to the current Distribution Date . . . $125,000.00 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . $400,000.00 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $39,000,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1993-G Certificates as of such Due Period . . . 13.000% The Pool Factor (which represents the ratio of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Initial Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multi- plying the original denomination of the holder's Certificate by the Pool Factor . . 91.66666667% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1993-H Supplement dated as of August 1, 1993 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1993-H Certificateholders on the Payment Date per $1,000 interest. . . . $5.511 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1993-H Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1993-H Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.511 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1993-H Certificates. . . . . $10,201,613.35 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1993-H Certificates, per $1,000 interest. . . . $14.574 d. Excess Principal Collections allocated in respect of the Series 1993-H Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series) $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1993-H Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $700,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1993-H Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 6.067% d. The Invested Percentage with respect to Principal Receivables for the Series 1993-H Certificates for the Due Period with respect to the current Distribution Date . . . . . . . 6.067% e. The Pre-Allocated Invested Amount for the Due period with respect to the current Distribution Date . . . . . . . $0.00 The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1993-H Amount"). . . . . . . . . . . . . $3,986,887.96 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1993-H Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 a. The amount of the Monthly Servicing Fee payable from Available Funds by the Trust to the Servicer with respect to the current Distribution Date . . . $437,500.00 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . $729,166.67 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $91,000,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1993-H Certificates as of such Due Period . . . 13.000% The Pool Factor (which represents the ratio of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Initial Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multi- plying the original denomination of the holder's Certificate by the Pool Factor . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1994-I Supplement dated as of May 1, 1994 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1994-I Certificateholders on the Payment Date per $1,000 interest. . . . $5.484 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1994-I Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1994-I Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.484 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1994-I Certificates. . . . . $7,286,866.67 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1994-I Certificates, per $1,000 interest. . . . $14.574 d. Excess Finance Charge Collections allocated in respect of the Series 1994-I Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 e. Excess Principal Collections allocated in respect of the Series 1994-I Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1994-I Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $500,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1994-I Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 4.333% d. The Invested Percentage with respect to Principal Receivables for the Series 1994-I Certificates for the Due Period with respect to the current Distribution Date . . . . . 4.333% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1994-I Amount"). . . . . . . . . . . . . $2,847,777.11 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1994-I Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 a. The amount of the Monthly Servicing Fee payable from Available Funds by the Trust to the Servicer with respect to the current Distribution Date . . . $312,500.00 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . $520,833.33 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $62,500,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1994-I Certificates as of such Due Period . . . 12.500% The Pool Factor (which represents the ratio of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Initial Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multi- plying the original denomination of the holder's Certificate by the Pool Factor . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1994-J Supplement dated as of May 1, 1994 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1994-J Certificateholders on the Payment Date per $1,000 interest. . . . $5.529 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1994-J Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1994-J Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.529 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1994-J Certificates. . . . . $7,286,866.67 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1994-J Certificates, per $1,000 interest. . . . $14.574 d. Excess Finance Charge Collections allocated in respect of the Series 1994-J Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 e. Excess Principal Collections allocated in respect of the Series 1994-J Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1994-J Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $500,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1994-J Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 4.333% d. The Invested Percentage with respect to Principal Receivables for the Series 1994-J Certificates for the Due Period with respect to the current Distribution Date . . . . . 4.333% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1994-J Amount"). . . . . . . . . . . . . $2,847,777.11 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1994-J Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 a. The amount of the Monthly Servicing Fee payable from Available Funds by the Trust to the Servicer with respect to the current Distribution Date . . . $312,500.00 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . $520,833.33 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $65,000,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1994-J Certificates as of such Due Period . . . 13.000% The Pool Factor (which represents the ratio of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Initial Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multi- plying the original denomination of the holder's Certificate by the Pool Factor . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1994-K Supplement dated as of August 1, 1994 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1994-K Certificateholders on the Payment Date per $1,000 interest. . . . $5.500 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1994-K Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1994-K Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.500 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1994-K Certificates. . . . . $7,286,866.67 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1994-K Certificates, per $1,000 interest. . . . $14.574 d. Excess Finance Charge Collections allocated in respect of the Series 1994-K Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 e. Excess Principal Collections allocated in respect of the Series 1994-K Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1994-K Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $500,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1994-K Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 4.333% d. The Invested Percentage with respect to Principal Receivables for the Series 1994-K Certificates for the Due Period with respect to the current Distribution Date . . . . . 4.333% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1994-K Amount"). . . . . . . . . . . . . $2,847,777.11 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1994-K Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 a. The amount of the Monthly Servicing Fee payable from Available Funds by the Trust to the Servicer with respect to the current Distribution Date . . . $312,500.00 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . $520,833.33 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $72,500,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1994-K Certificates as of such Due Period . . . 14.500% The Pool Factor (which represents the ratio of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Initial Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multi- plying the original denomination of the holder's Certificate by the Pool Factor . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1994-L Supplement dated as of August 1, 1994 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Certificateholders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Series 1994-L Certificateholders on the Payment Date per $1,000 interest. . . . $5.958 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Series 1994-L Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Series 1994-L Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.958 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1994-L Certificates. . . . . $7,286,866.67 c. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Series 1994-L Certificates, per $1,000 interest. . . . $14.574 d. Excess Finance Charge Collections allocated in respect of the Series 1994-L Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 e. Excess Principal Collections allocated in respect of the Series 1994-L Certificates, if any. . . . . . . . . . . . . . . . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1994-L Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $500,000,000.00 c. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1994-L Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 4.333% d. The Invested Percentage with respect to Principal Receivables for the Series 1994-L Certificates for the Due Period with respect to the current Distribution Date . . . . . 4.333% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . $681,137,512.28 The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1994-L Amount"). . . . . . . . . . . . . $2,847,777.11 a. The amount of the Investor Charge-Offs per $1,000 interest after reimbursement of any such Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . $0.000 b. The amount attributable to Investor Charge-Offs, if any, by which the principal balance of the Series 1994-L Certificates exceeds the Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . $0.00 a. The amount of the Monthly Servicing Fee payable from Available Funds by the Trust to the Servicer with respect to the current Distribution Date . . . $312,500.00 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . $520,833.33 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account (the "Available Cash Collateral Amount") as of the end of the day on the current Distribution Date, after giving effect to all withdrawals, deposits and payments to be made in respect of the preceding Due Period . . . . . . . . . . . . . . . $57,500,000.00 c. The Available Cash Collateral Amount as computed in 7.b. as a percentage of the Invested Amount of the Series 1994-L Certificates as of such Due Period . . . 11.500% The Pool Factor (which represents the ratio of the Invested Amount on the last day of the month ending on the Record Date adjusted for Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Initial Invested Amount). The amount of a Certificateholder's pro rata share of the Invested Amount can be determined by multi- plying the original denomination of the holder's Certificate by the Pool Factor . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1995-M Supplement dated as of April 1, 1995 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Class A Certificate- holders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Class A Certificateholders on the Payment Date per $1,000 interest. . . . $5.491 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Class A Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Class A Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.491 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1995-M Certificates. . . . . $8,327,847.62 c. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Class A Certificates . . . $7,286,866.66 d. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Class A Certificates, per $1,000 interest. . . . $14.574 e. The amount of Excess Spread for the Due Period with respect to the current Distribution Date. . . . . . . . . . . . $2,377,372.09 f. The amount of Reallocated Principal Collections for the Due Period with respect to the current Distribution Date allocated in respect of the Class A Certificates . . . . . . . . . . $0.00 g. The amount of Excess Finance Charge Collections allocated in respect of the Series 1995-M Certificates, if any . . . $0.00 h. The amount of Excess Principal Collections allocated in respect of the Series 1995-M Certificates, if any . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1995-M Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $571,428,572.00 c. The amount of Principal Receivables in the Trust represented by the Class A Certificates (the "Class A Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . $500,000,000.00 d. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1995-M Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 4.953% e. The Invested Percentage with respect to Principal Receivables for the Series 1995-M Certificates for the Due Period with respect to the current Distribution Date. . . . 4.953% f. The Class A Floating Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 87.500% g. The Class A Principal Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 87.500% h. The Collateral Floating Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 12.500% i. The Collateral Principal Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 12.500% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . . . . $681,137,512.28 a. The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1995-M Amount"). . . . . . . . . . . . . . . . $3,254,602.41 b. The Class A Investor Default Amount. . $2,847,777.11 c. The Collateral Investor Default Amount. $406,825.30 a. The amount of the Class A Investor Charge-Offs per $1,000 interest after reimbursement of any such Class A Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $0.00 b. The amount attributable to Class A Investor Charge-Offs, if any, by which the principal balance of the Class A Certificates exceeds the Class A Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . . . . . . . . . . . . . . . . . $0.00 c. The amount of the Collateral Charge- Offs, if any, for the Due Period with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $0.00 a. The amount of the Monthly Servicing Fee payable by the Trust to the Servicer with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $357,142.86 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $595,238.10 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account as of the end of the day on the current Distribution Date, after giving effect to all with- drawals, deposits and payments to be made on such Distribution Date (the "Available Cash Collateral Amount" for the next Distribution Date) . . . $5,714,286.00 c. The amount as computed in 7.b as a percentage of the Class A Invested Amount after giving effect to all re- ductions thereof on the current Dist- ribution Date . . . . . . . . . . . . . 1.143% a. The Collateral Invested Amount for the current Distribution Date . . . . . . $71,428,572.00 b. The Collateral Invested Amount after giving effect to all withdrawals, deposits and payments on the current Distribution Date . . . . . . . . . . $71,428,572.00 a. The total Enhancement for the current Distribution Date . . . . . . . . . . . $77,142,858.00 b. The total Enhancement after giving ef- fect to all withdrawals, deposits and payments on the current Distribution Date . . . . . . . . . . . . . . . . . $77,142,858.00 The Pool Factor (which represents the ratio of the Class A Invested Amount on the last day of the month ending on the Record Date adjusted for Class A Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Class A Initial Invested Amount). The amount of a Class A Certificateholder's pro rata share of the Class A Invested Amount can be determined by multiplying the original denomination of the holder's Class A Certificate by the Pool Factor . . . . . . . . . . . . . . . . . . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1995-N Supplement dated as of April 1, 1995 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Class A Certificate- holders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Class A Certificateholders on the Payment Date per $1,000 interest. . . . $5.420 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Class A Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Class A Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.420 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1995-N Certificates. . . . . $8,327,847.62 c. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Class A Certificates . . . $7,286,866.66 d. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Class A Certificates, per $1,000 interest. . . . $14.574 e. The amount of Excess Spread for the Due Period with respect to the current Distribution Date. . . . . . . . . . . . $2,412,927.65 f. The amount of Reallocated Principal Collections for the Due Period with respect to the current Distribution Date allocated in respect of the Class A Certificates . . . . . . . . . . $0.00 g. The amount of Excess Finance Charge Collections allocated in respect of the Series 1995-N Certificates, if any . . . $0.00 h. The amount of Excess Principal Collections allocated in respect of the Series 1995-N Certificates, if any . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1995-N Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $571,428,572.00 c. The amount of Principal Receivables in the Trust represented by the Class A Certificates (the "Class A Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . $500,000,000.00 d. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1995-N Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 4.953% e. The Invested Percentage with respect to Principal Receivables for the Series 1995-N Certificates for the Due Period with respect to the current Distribution Date. . . . 4.953% f. The Class A Floating Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 87.500% g. The Class A Principal Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 87.500% h. The Collateral Floating Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 12.500% i. The Collateral Principal Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 12.500% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . . . . $681,137,512.28 a. The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1995-N Amount"). . . . . . . . . . . . . . . . $3,254,602.41 b. The Class A Investor Default Amount. . $2,847,777.11 c. The Collateral Investor Default Amount. $406,825.30 a. The amount of the Class A Investor Charge-Offs per $1,000 interest after reimbursement of any such Class A Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $0.00 b. The amount attributable to Class A Investor Charge-Offs, if any, by which the principal balance of the Class A Certificates exceeds the Class A Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . . . . . . . . . . . . . . . . . $0.00 c. The amount of the Collateral Charge- Offs, if any, for the Due Period with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $0.00 a. The amount of the Monthly Servicing Fee payable by the Trust to the Servicer with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $357,142.86 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $595,238.10 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account as of the end of the day on the current Distribution Date, after giving effect to all with- drawals, deposits and payments to be made on such Distribution Date (the "Available Cash Collateral Amount" for the next Distribution Date) . . . $5,714,286.00 c. The amount as computed in 7.b as a percentage of the Class A Invested Amount after giving effect to all re- ductions thereof on the current Dist- ribution Date . . . . . . . . . . . . . 1.143% a. The Collateral Invested Amount for the current Distribution Date . . . . . . $71,428,572.00 b. The Collateral Invested Amount after giving effect to all withdrawals, deposits and payments on the current Distribution Date . . . . . . . . . . $71,428,572.00 a. The total Enhancement for the current Distribution Date . . . . . . . . . . . $77,142,858.00 b. The total Enhancement after giving ef- fect to all withdrawals, deposits and payments on the current Distribution Date . . . . . . . . . . . . . . . . . $77,142,858.00 The Pool Factor (which represents the ratio of the Class A Invested Amount on the last day of the month ending on the Record Date adjusted for Class A Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Class A Initial Invested Amount). The amount of a Class A Certificateholder's pro rata share of the Class A Invested Amount can be determined by multiplying the original denomination of the holder's Class A Certificate by the Pool Factor . . . . . . . . . . . . . . . . . . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1995-O Supplement dated as of June 1, 1995 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Class A Certificate- holders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Class A Certificateholders on the Payment Date per $1,000 interest. . . . $5.482 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Class A Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Class A Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.482 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1995-O Certificates. . . . . $8,327,847.62 c. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Class A Certificates . . . $7,286,866.66 d. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Class A Certificates, per $1,000 interest. . . . $14.574 e. The amount of Excess Spread for the Due Period with respect to the current Distribution Date. . . . . . . . . . . . $2,381,816.54 f. The amount of Reallocated Principal Collections for the Due Period with respect to the current Distribution Date allocated in respect of the Class A Certificates . . . . . . . . . . $0.00 g. The amount of Excess Finance Charge Collections allocated in respect of the Series 1995-O Certificates, if any . . . $0.00 h. The amount of Excess Principal Collections allocated in respect of the Series 1995-O Certificates, if any . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1995-O Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $571,428,572.00 c. The amount of Principal Receivables in the Trust represented by the Class A Certificates (the "Class A Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . $500,000,000.00 d. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1995-O Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 4.953% e. The Invested Percentage with respect to Principal Receivables for the Series 1995-O Certificates for the Due Period with respect to the current Distribution Date. . . . 4.953% f. The Class A Floating Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 87.500% g. The Class A Principal Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 87.500% h. The Collateral Floating Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 12.500% i. The Collateral Principal Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 12.500% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . . . . $681,137,512.28 a. The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1995-O Amount"). . . . . . . . . . . . . . . . $3,254,602.41 b. The Class A Investor Default Amount. . $2,847,777.11 c. The Collateral Investor Default Amount. $406,825.30 a. The amount of the Class A Investor Charge-Offs per $1,000 interest after reimbursement of any such Class A Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $0.00 b. The amount attributable to Class A Investor Charge-Offs, if any, by which the principal balance of the Class A Certificates exceeds the Class A Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . . . . . . . . . . . . . . . . . $0.00 c. The amount of the Collateral Charge- Offs, if any, for the Due Period with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $0.00 a. The amount of the Monthly Servicing Fee payable by the Trust to the Servicer with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $357,142.86 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $595,238.10 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account as of the end of the day on the current Distribution Date, after giving effect to all with- drawals, deposits and payments to be made on such Distribution Date (the "Available Cash Collateral Amount" for the next Distribution Date) . . . $5,714,286.00 c. The amount as computed in 7.b as a percentage of the Class A Invested Amount after giving effect to all re- ductions thereof on the current Dist- ribution Date . . . . . . . . . . . . . 1.143% a. The Collateral Invested Amount for the current Distribution Date . . . . . . $71,428,572.00 b. The Collateral Invested Amount after giving effect to all withdrawals, deposits and payments on the current Distribution Date . . . . . . . . . . $71,428,572.00 a. The total Enhancement for the current Distribution Date . . . . . . . . . . . $77,142,858.00 b. The total Enhancement after giving ef- fect to all withdrawals, deposits and payments on the current Distribution Date . . . . . . . . . . . . . . . . . $77,142,858.00 The Pool Factor (which represents the ratio of the Class A Invested Amount on the last day of the month ending on the Record Date adjusted for Class A Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Class A Initial Invested Amount). The amount of a Class A Certificateholder's pro rata share of the Class A Invested Amount can be determined by multiplying the original denomination of the holder's Class A Certificate by the Pool Factor . . . . . . . . . . . . . . . . . . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . . . $0.00 FIRST CHICAGO MASTER TRUST II Under the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") dated as of June 1, 1990 by and between FCC National Bank, as Seller and Servicer ("FCCNB"), and Norwest Bank Minnesota, National Association, as Trustee, (the "Trustee"), as amended and supplemented by the Series 1995-P Supplement dated as of June 1, 1995 by and between FCCNB and the Trustee, FCCNB, as Servicer, is required to prepare certain information for each Payment Date regarding current distributions to Class A Certificate- holders and the performance of the First Chicago Master Trust II (the "Trust") during the previous period. The information which is required to be prepared with respect to the distribution on the January 16, 1996 Payment Date and with respect to the performance of the Trust during the Due Period for such Payment Date is set forth below. Certain of the information is presented on the aggregate amounts for the Trust as a whole. All capitalized terms used herein shall have the respective meanings set forth in the Pooling and Servicing Agreement. A. Information Regarding the Current Distribution (Stated on the Basis of $1000 Original Principal Amount). 1. The total amount of the distribution to Class A Certificateholders on the Payment Date per $1,000 interest. . . . $5.438 2. The amount of the distribution set forth in paragraph 1 above in respect of principal on the Class A Certificates, per $1,000 interest . . . . . . . . . . $0.000 3. The amount of the distribution set forth in paragraph 1 above in respect of interest on the Class A Certificates, per $1,000 interest. . . . . . . . . . . . . . . . $5.438 B. Information Regarding the Performance of the Trust. a. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Investor Certificates of all Series. $284,725,302.56 b. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Series 1995-P Certificates. . . . . $8,327,847.62 c. The aggregate amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of the Class A Certificates . . . $7,286,866.66 d. The amount of Collections of Receivables processed for the Due Period with respect to the current Distribution Date which were allocated in respect of Class A Certificates, per $1,000 interest. . . . $14.574 e. The amount of Excess Spread for the Due Period with respect to the current Distribution Date. . . . . . . . . . . . $2,404,038.76 f. The amount of Reallocated Principal Collections for the Due Period with respect to the current Distribution Date allocated in respect of the Class A Certificates . . . . . . . . . . $0.00 g. The amount of Excess Finance Charge Collections allocated in respect of the Series 1995-P Certificates, if any . . . $0.00 h. The amount of Excess Principal Collections allocated in respect of the Series 1995-P Certificates, if any . . . $0.00 a. Aggregate Principal Receivables for the Due Period with respect to the current Distribution Date (which reflects the Principal Receivables represented by the Exchangeable Seller's Certificate and by the Investor Certificates of all Series). $11,538,066,806.30 b. The amount of Principal Receivables in the Trust represented by the Series 1995-P Certificates (the "Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . . . . . $571,428,572.00 c. The amount of Principal Receivables in the Trust represented by the Class A Certificates (the "Class A Invested Amount") for the Due Period with respect to the current Distribution Date . . . . . . . $500,000,000.00 d. The Invested Percentage with respect to Interchange) and Defaulted Receivables for the Series 1995-P Certificates for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 4.953% e. The Invested Percentage with respect to Principal Receivables for the Series 1995-P Certificates for the Due Period with respect to the current Distribution Date. . . . 4.953% f. The Class A Floating Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 87.500% g. The Class A Principal Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 87.500% h. The Collateral Floating Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 12.500% i. The Collateral Principal Percentage for the Due Period with respect to the current Distribution Date . . . . . . . . . . . 12.500% The aggregate amount of outstanding balances in the Accounts which were 30 or more days delinquent as of the end of the Due Period for the current Distribution Date. . . . . . . . . . . . . . . . . . $681,137,512.28 a. The aggregate amount of all Defaulted Receivables written off as uncollectible during the Due Period with respect to the current Distribution Date allocable to the Series 1995-P Amount"). . . . . . . . . . . . . . . . $3,254,602.41 b. The Class A Investor Default Amount. . $2,847,777.11 c. The Collateral Investor Default Amount. $406,825.30 a. The amount of the Class A Investor Charge-Offs per $1,000 interest after reimbursement of any such Class A Investor Charge-Offs for the Due Period with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $0.00 b. The amount attributable to Class A Investor Charge-Offs, if any, by which the principal balance of the Class A Certificates exceeds the Class A Invested Amount as of the end of the day on the Record Date with respect to the current Distribution Date. . . . . . . . . . . . . . . . . . $0.00 c. The amount of the Collateral Charge- Offs, if any, for the Due Period with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $0.00 a. The amount of the Monthly Servicing Fee payable by the Trust to the Servicer with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $357,142.86 b. The amount of the Interchange Monthly Servicing Fee payable to the Servicer with respect to the current Distribution Date . . . . . . . . . . . . . . . . . $595,238.10 7. Available Cash Collateral Amount. a. The amount, if any, withdrawn from the Cash Collateral Account for the current Distribution Date (the "Withdrawal Amount") . . . . . $0.00 b. The amount available to be withdrawn from the Cash Collateral Account as of the end of the day on the current Distribution Date, after giving effect to all with- drawals, deposits and payments to be made on such Distribution Date (the "Available Cash Collateral Amount" for the next Distribution Date) . . . $5,714,286.00 c. The amount as computed in 7.b as a percentage of the Class A Invested Amount after giving effect to all re- ductions thereof on the current Dist- ribution Date . . . . . . . . . . . . . 1.143% a. The Collateral Invested Amount for the current Distribution Date . . . . . . $71,428,572.00 b. The Collateral Invested Amount after giving effect to all withdrawals, deposits and payments on the current Distribution Date . . . . . . . . . . $71,428,572.00 a. The total Enhancement for the current Distribution Date . . . . . . . . . . . $77,142,858.00 b. The total Enhancement after giving ef- fect to all withdrawals, deposits and payments on the current Distribution Date . . . . . . . . . . . . . . . . . $77,142,858.00 The Pool Factor (which represents the ratio of the Class A Invested Amount on the last day of the month ending on the Record Date adjusted for Class A Investor Charge-Offs set forth in B.5.a. above and for the distributions of principal set forth in A.2 above to the Class A Initial Invested Amount). The amount of a Class A Certificateholder's pro rata share of the Class A Invested Amount can be determined by multiplying the original denomination of the holder's Class A Certificate by the Pool Factor . . . . . . . . . . . . . . . . . . . 100.00000000% D. Deficit Controlled Amortization Amount. 1. The Deficit Controlled Amortization Amount for the preceding Due Period. . . . . . . . $0.00	8-K	8-K	1996-01-12T00:00:00	1996-01-12T13:09:27
0000845613-96-000004	0000845613-96-000004_0000.txt	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994. Commission File No. 0-12708 FRANKLIN SELECT REAL ESTATE INCOME FUND (Exact Name of Company as Specified in its Charter) (State or other jurisdiction or (I.R.S. Employer Identification number) P.O. Box 7777, San Mateo, CA 94403-7777 (415) 312-2000 (Address of principal and executive Office)Company's telephone number, including Securities registered pursuant to Section 12(b) of Act:* Title of each class Name of each exchange on which registered Common Stock Series A American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: On January 14, 1994, the Company registered and listed its Series A common stock on the American Stock Exchange. Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At January 31, 1995, 5,365,623 shares of the Company's Series A common stock were held by non-affiliates of the Company. The aggregate market value of the voting stock held by non-affiliates of the Company, based upon the closing price of $4.00 as of January 31, 1995, is $21,462,492. Indicate the number of shares outstanding of each of the issuer's classes of common stock at December 31, 1994: 5,383,439 shares of Series A common stock and 185,866 shares of Series B common stock. Documents Incorporated by Reference - Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1994, and Proxy Statement for use in connection with its Annual Meeting of Shareholders to be held on June 13, 1995, are incorporated by reference in Parts I, II, III and IV. F R A N K L I N S E L E C T R E A L E S T A T E I N C O M E F U N D R E A L E S T A T E P O R T F O L I O As of December 31, 1994, the Company had made two real estate investments. In September, 1989, the Company acquired a 60% undivided interest in the Shores Office Complex located in Redwood City, California, and in December, 1989, the Company acquired the Data General Building located in Manhattan Beach, California. An affiliated real estate investment trust, Franklin Real Estate Income Fund, owns the remaining 40% interest in the Shores. The Company's properties are not generally subject to any mortgage, lien or other encumbrance. The Company currently carries earthquake insurance coverage for its properties and intends to continue to carry earthquake coverage to the extent that it is available at economically reasonable rates. However, the Company's earthquake insurance coverage may, from time to time, be subject to substantial deductibles. At December 31, 1994, the Company's properties contained a total of 29 leases. The following schedule lists the portfolio's lease expiration dates and the related annual base rental income as of December 31, 1994. No. of Current % of Year Expiring sq. Ft.1 Base Rent 1 Annual Rent 1995 7 10,869 $ 231,000 6% 1996 5 16,517 316,000 8% 1997 3 50,981 926,000 24% 1998 5 13,858 289,000 7% 1999 5 71,396 1,446,000 37% 2000 2 11,399 239,000 6% 2008 1 22,400 301,000 8% 2012 1 3,600 148,000 4% 1 Total Square Feet and Annual Base Rent reflect the Company's 60% interest in The Shores. Two of the Company's tenants provide 10% or more of the Company's total revenues. Both tenants are located at the Data General Building. ------------------- ------------ -------------- -------------- --------------- Total Base Rent Annual Base Lease Principal Business Sq. Ft. at 12/31/94 Rent Expiration ------------------- ------------ -------------- -------------- --------------- Credit Union 48,123 $872,000 22% 11/30/97 Manufacturer 47,920 $974,000 25% 1/31/99 ------------------- ------------ -------------- -------------- --------------- R E A L E S T A T E P O R T F O L I O The credit union lease gives the tenant the right to cancel the lease on November 15, 1996, if it pays the Company a cancellation penalty of $218,000. Although the tenant has until February 15, 1996, to notify the Company of their intent to cancel the lease, to date, no such notice has been given, and a similar right to cancel the lease in 1995 was not exercised by the tenant. The credit union's main operations occupy a five-story building located adjacent to the Data General Building. The credit union leases their space from the Company on a full-service basis. The computer manufacturer is subject to a triple-net lease, which requires the tenant to pay their prorata share of real estate taxes, common area expenses and insurance, in addition to base rent. This lease also provides for two consecutive five-year renewal options. The tenant currently subleases approximately 53% of their office space. When their lease expires in 1999, they are unlikely to renew the subleased space. However, the Company has provided each of the subtenants with a lease option commencing upon the expiration of their subleases in 1999. Rental rates under the lease options, if exercised, will be set at prevailing market rates in 1999. The Company's portfolio represents in the aggregate 201,570 rentable square feet. For the years ended December 31, 1992, 1993 and 1994, the following table shows the number of lease agreements that the Company executed, the rentable square feet covered by the agreements, and the amount of tenant improvements and leasing commissions paid by the Company. The comparatively large amounts of tenant improvements incurred by the Company in 1992 and 1993 were due to the conversion of three floors of the Data General Building from an engineering research use to fully finished offices and a fitness facility. The Company incurred significant one-time costs to demolish the space back to the building shell, and install new improvements including sprinkler systems, demising walls, drop ceilings and complete office finish. Therefore, when the five-year lease covering two of the converted floors expires in November, 1997, management expects that the tenant improvement costs, if any, to renew or replace the tenant will be substantially less per square foot than the costs incurred in 1992 and 1993. At December 31, 1994, the Company's properties were 100% leased, which compares to 96% leased at the end of 1993. The following tables indicate the occupancy rates for each of the Company's properties and the average annual rental rates of the Company's leases at December 31 of each year. R E A L E S T A T E P O R T F O L I O 1 Reflects the Company's 60% interest in the Shores Office Complex. AVERAGE ANNUAL RENTAL RATES/SQ. FT.2 Year Data General3 The Shores 2. The average annual rental rates represent effective base rental income, as recorded on a GAAP basis for each year, excluding the amortization of lease buy-out payments, if any, divided by the average monthly occupied square feet. 3 The average annual rental rates at December 31, 1990, and 1991 for Data General represented triple-net leases, while the rates shown for 1992 through 1994 are a combination of triple-net and full-service leases. THE SHORES OFFICE COMPLEX OFFICE 138,546 SQ. FT. REDWOOD SHORES, CA. On September 1, 1989, the Company purchased a 60% undivided fee interest in the Shores Office Complex (the "Shores"). An affiliated real estate investment trust, Franklin Real Estate Income Fund ("FREIF"), acquired the remaining 40% fee interest as co-owner. This office complex consists of three buildings located at 100 Marine World Parkway, 1 Twin Dolphin Drive and 3 Twin Dolphin Drive, Redwood City, San Mateo County, California. The Company and FREIF acquired the Shores as tenants in common and have entered into a Co-Ownership Agreement which defines their respective rights and obligations with respect to the property. R E A L E S T A T E P O R T F O L I O Located in the Redwood Shores community of Redwood City, California and near the midpoint of the San Francisco Peninsula approximately 25 miles south of San Francisco, the Shores is part of a 1,465 acre master-planned, mixed-use development. Approximately 250 acres are devoted to commercial development including office buildings, shopping centers, medical buildings, and hotels. The remainder of Redwood Shores comprises residential properties, a 250 acre lagoon, and 200 acres of reserved open space. The area contains other existing and planned buildings which can be considered competitive with the Shores. The Company believes that the average effective rents provided by existing leases at the Shores are at current market rates for comparable space in the Redwood Shores area. During 1992 and continuing into 1993, the Redwood Shores office market experienced a decline in rental rates, resulting from over-building and the economic recession. These factors had a substantial impact on the Shores' cash flow. The property's operating income declined as leases and renewals were signed at lower rental rates, and while the Company incurred additional costs associated with replacing tenants. However, late in 1993 the market stabilized, and by the end of 1994 the area's vacancy rate had declined to less than 2%. As a result, effective market rental rates increased about 9% during 1994 and rent concessions have substantially ended. The Company believes that the long-term outlook for the Redwood Shores office market remains favorable. There are no competitive buildings currently under construction in the immediate vicinity, and the area continues to attract potential tenants. Rental rates are increasing and, with no speculative construction in progress, management expects this trend to continue in 1995. DATA GENERAL BUILDING OFFICE 118,443 SQ. FT. MANHATTAN BEACH, CA. In 1989, the Company purchased the Data General Building, a five-story office building located at 1500 Rosecrans Avenue, Manhattan Beach, Los Angeles County, California. The South Bay office market, which includes Manhattan Beach, stretches from Los Angeles International Airport south along the Pacific Ocean to Long Beach. The South Bay is dominated by aerospace and defense-related companies. Because many of the defense programs these companies are engaged in have been curtailed, their office space requirements have been substantially reduced, causing greater vacancies and lower market rental rates. Based on information from local sources, we believe that these trends will continue into 1995. The Manhattan Beach/El Segundo sub-market, which contains nearly ten million rentable square feet of office space, had a vacancy factor of 20% as of December, 31, 1994, compared to 18% in 1993 and 11% in 1992. However, when recovery begins, we expect that the Data General Building will benefit sooner than many other buildings in the area due to its desirable location in Manhattan Beach. The building's location has helped it maintain full occupancy despite the leasing market's soft condition. The Company believes that the effective rent provided by the computer manufacturer's lease, which expires in 1999, is greater than current market rates for comparable space in the Manhattan Beach area; the balance of the leases are at current market rates. All market vacancy and rental rate information for the Shores and Data General markets is based on reports from CB Commercial Real Estate Group. S E L E C T E D F I N A N C I A L I N F O R M A T I O N 1Per weighted average number of shares of Series A common stock outstanding. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes thereto. COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993 Net income for 1994 increased $245,000, or 20%, compared to 1993 mostly due to non-recurring expenses reported in 1993, related to the proposed consolidation. Property operations were substantially unchanged from 1993 when reported on the accrual basis; however, the Company's cash flow significantly improved in 1994, as reported in the Statement of Cash Flows. Net cash flow from operating activities increased to $3,021,000 in 1994 compared to $1,191,000 in 1993 and $2,606,000 in 1992. The improvement in 1994 reflects the Company's return to a stabilized level of cash flow after two years of operations which were impacted by tenant lease restructurings, free rent provided to new tenants and greater leasing commissions paid by the Company. Accounting standards require that the financial effect of these events be capitalized and amortized over the remaining terms of the leases. Therefore, large differences can arise between cash and accrual results. As the cost of these items is amortized, the opposite effect will occur causing reported rental income to be less than the cash received by the Company. Rental income decreased $114,000, or 3%, primarily due to a decrease in non-cash revenue recognized at the Data General Building. From 1992 to January, 1994, the Company recognized income related to a fee of $850,000 that the Company received in 1992 from a tenant that terminated their lease before expiration. The fee was recorded as advance rents and amortized over the remaining term of the tenant's lease. The amount of related income reported in the Company's financial statements for 1992, 1993 and 1994 was $268,000, $537,000 and $45,000, respectively. The fee is now fully amortized. In addition, the non-cash effect of straight-lining rental income for 1992, 1993 and 1994 was to increase or (decrease) reported income by $198,000, $499,000 and ($24,000), respectively. A significant portion of these amounts were caused by free rent periods provided to new tenants in the years indicated. Excluding the effects of lease buy-out amortization, rental income increased approximately $378,000, or 9%, in 1994 primarily due to an increase in the average occupancy rate for the Company's properties to 97% from 87% in 1993. Rental rates were substantially unchanged. Interest and dividend income decreased $82,000, or 18%, due to lower yields realized on investments in mortgage-backed securities, and to a lower average investment balance during 1994, reflecting the use of cash reserves in 1992 and 1993 for re-tenanting costs at the Data General Building. Total expenses decreased in 1994 by $441,000, or 12%, from $3,789,000 in 1993 to $3,348,000. The decrease in total expenses is attributable to the following factors: an increase in depreciation and amortization of $68,000, or 5%; a decrease in operating expenses of $142,000, or 11%; an increase in related party expenses of $42,000, or 13%; a decrease in consolidation expense, net, of $450,000, or 99%; an increase in general and administrative expense of $61,000, or 28%; and a decrease in loss on the sale of mortgage-backed securities of $20,000, or 61%. Depreciation and amortization increased $68,000 in 1994, reflecting tenant improvement costs at the Shores and the Data General Building related to new leases commencing late in 1993 and in 1994. Operating expenses decreased $142,000, primarily due to a partial refund of prior years' property taxes at the Data General Building totaling $209,000. This benefit was partially offset by an increase in utility costs of $70,000 as a result of an increase in occupancy at the same property. Related party expense increased $42,000, primarily due to an increase in property management fees which are based on cash receipts. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S Consolidation expense decreased $450,000 on a net basis due to the termination of the proposed merger in the fourth quarter of 1993. General and administrative expense increased $61,000 primarily as a result of an increase in legal and related costs and other nonrecurring costs incurred in connection with listing the Company's stock on the American Stock Exchange and the conversion to an infinite-life REIT of $75,000 and an increase in directors and officers insurance of $13,000. These increases were partially offset by a decrease in accounting and shareholder service costs of $26,000. Loss on sale of mortgage-backed securities decreased $20,000 reflecting a greater amount of mortgage-backed securities sold in 1993 in order to provide funds for tenant improvements. COMPARISON OF YEAR ENDED DECEMBER 31, 1993 TO YEAR ENDED DECEMBER 31, 1992 Net income for 1993 decreased $284,000, or 19%, compared to 1992 due to the following factors: an increase in rental revenue of $488,000; a decrease in interest and dividends of $271,000; an increase in depreciation and amortization of $406,000; an increase in operating expenses of $58,000; a decrease in related party expenses of $81,000; a decrease in consolidation expense of $18,000; an increase in general and administrative expense of $134,000; and an increase in loss on the sale of mortgage-backed securities of $2,000. Rental revenue increased $488,000, or 12%, primarily due to increased rental revenue at the Data General Building, as a result of an increase in average occupancy at the property. The average occupancy rate at the property during 1993 and 1992 was 91% and 79%, respectively. The occupancy rates at December 31, 1993, for the Data General Building and the Shores Office Complex were 100% and 90%, respectively. Interest and dividend income decreased $271,000, or 37%, due to lower yields realized on investments in mortgage-backed securities, and to a lower average investment balance during 1993, reflecting the use of funds for re-tenanting costs at the Data General Building. Total expenses increased in 1993 by $501,000, or 15%, from $3,288,000 in 1992 to $3,789,000. The increase in total expenses is attributable to the following factors: an increase in depreciation and amortization of $406,000, or 41%; an increase in operating expenses of $58,000, or 5%; a decrease in related party expenses of $81,000, or 19%; a decrease in consolidation expense, net, of $18,000, or 4%; an increase in general and administrative expense of $134,000, or 165%; and an increase in loss on the sale of mortgage-backed securities of $2,000, or 7%. Depreciation and amortization increased $406,000 in 1993, reflecting tenant improvement costs at the Data General Building related to new leases commencing late in 1992 and in 1993, covering 60% of the building's rentable space. Operating expenses increased $58,000, primarily due to increased utility expense at the Data General Building as a result of its improved occupancy. Related party expense decreased $81,000, primarily due to a decrease in property management fees of $56,000. Property management fees are based on collected rental revenue; therefore, the 1993 fees were impacted by free rent provided to a new tenant at the Data General Building. Also contributing to the decrease in related party expense was the discontinuance of an affiliated transfer agent and registrar for the Company's common stock. As of January 1, 1993, this service was assumed by an unaffiliated company, and the expense is now recorded under general and administrative expense. Consolidation expense decreased $18,000 on a net basis due to the termination of the proposed merger. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S General and administrative expense increased $134,000 primiarly due to the acquisition of directors and officers insurance coverage in 1993 of $78,000, the change in the transfer agent previously discussed of $38,000, nonrecurring costs associated with listing the Company's stock on the American Stock Exchange of $7,000 and accounting services of $14,000. The Company has entered into an agreement with the Advisor to administer the day-to-day operations of the Company. The agreement was amended on October 1, 1994, as described in Note 2 to the accompanying financial statements. For the years ended December 31, 1994, 1993 and 1992, the Company recorded $148,000, $126,000 and $136,000 respectively of advisory fee expense to the Advisor in accordance with the Advisory Agreement. The Company's properties are managed by Continental Property Management Co., ("CPMC"), an affiliate of the Advisor. For the years ended December 31, 1994, 1993 and 1992, the Company recorded $196,000, $159,000 and $216,000, respectively, of property management fee expense to CPMC in accordance with the Property Management Agreement. The Company's Board of Directors (including all of its Independent Directors) have determined, after review, that the compensation paid to the Advisor and to CPMC referenced above, as well as the reimbursements made by the Company to the Advisor reflected in Note 2 to the accompanying financial statements, are fair and reasonable to the Company. The Company's principal source of capital for the acquisition and major renovation of properties has been the proceeds from the initial public offering of its stock. The Company's funds from operations have been its principal source of capital for minor property improvements, leasing costs and the payment of quarterly dividends. At December 31, 1994, the Company's cash reserves aggregated $7,907,000. The Company's investment in mortgage-backed securities consists of GNMA FNMA and FMLMC adjustable rate pass-through certificates in which payments of principal and interest are guaranteed by GNMA, FNMA and FMLMC. However, changes in market interest rates may cause the securities market values to fluctuate, which could result in a gain or loss if the securities are sold before maturity. On September 22, 1994, the shareholders approved a proposal to convert the Company from a finite-life real estate investment trust to an infinite-life real estate investment trust and related changes to the objectives and policies of the Company and in the compensation to the Advisor. As a result of the conversion, the Company will have broader, growth-oriented investment and reinvestment policies than prior to the conversion. The Company is also expected to have greater potential for portfolio growth and diversification due to its ability to acquire additional properties with the proceeds from securities offerings, to issue stock in exchange for properties and to reinvest the net proceeds from the disposition or refinancing of properties (subject to REIT distribution requirements). The Company is currently examining the possibility of raising additional capital through arranging debt financing on its existing portfolio. Any capital raised in this manner would be used substantially to acquire additional properties. As of September 30, 1994, the Company had no formal borrowing arrangements with a bank and has no long-term debt. Each of the Company's properties is owned free and clear of mortgage indebtedness. Management continues to evaluate other properties for acquisition by the Company. In the foreseeable future, management believes that the Company's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of dividends. The Company currently has two leases that provide 10% or more of its total annual revenue as described under "Real Estate Portfolio - Significant Tenants". The tenants are located at the Data General Building and provide 25% and 22% of the Company's annual base rent under leases that expire in 1999 and 1997, respectively. If one of the tenants decided not to renew, or to default on their M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S would determine whether a reduction in the Company's quarterly dividend rate was warranted in light of the Company's dividend policy discussed below, then existing leasing market conditions and other factors deemed relevant by the Board of Directors . In connection with any lease renewal or new leasing, the Company would incur costs for tenant improvements and leasing commissions which would be funded first from operating cash flow and, if necessary, from cash reserves. Net cash flow provided by operating activities for the years ended December 31, 1994, 1993 and 1992 was $3,021,000, $1,191,000 and $2,606,000, respectively. The primary differences between the periods relate to free rent provided to tenants during 1993, leasing commissions paid 1993, and advance rent received by the Company in 1992, which was amortized as income through January of 1994. These activities are described in greater detail under "Results of Operations" above. Funds from Operations for the years ended December 31, 1994, 1993 and 1992 were $2,937,000, $2,624,000 and $2,502,000, respectively. The increase from 1992 to 1993 is primarily due to an increase in the average occupancy rate at the Data General Building. The increase from 1993 to 1994 primarily reflects consolidation expenses incurred in 1993, which reduced that year's results. These items are described more fully under "Results of Operations" above. The Company believes that Funds from Operations is helpful in understanding a property portfolio in that such calculation reflects income from operating expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations should not be considered an alternative to net income or any other GAAP measurement of performance, as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, Funds from Operations is net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures. The Company's management believes that inflation may have a positive effect on the Company's property portfolio, but this effect generally will not be fully realized until such properties are sold or exchanged. The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation. Dividends are declared quarterly at the discretion of the Board of Directors. The Company's present dividend policy is to at least annually evaluate the current dividend rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a dividend rate which: i) provides a stable dividend which is sustainable despite short term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as dividends consistent with the above listed objective; and iii)complies with the Internal Revenue Code requirement that a REIT annually pay out as dividends not less than 95% of its taxable income. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S During the years ended December 31, 1994, and 1993, the Company declared dividends totaling $2,207,000, or $.41 per share, and $2,154,000, or $.40 per share, respectively. Because depreciation is a non-cash expense, cash flow will typically be greater than earnings from operations and net earnings. Therefore, quarterly distributions will consistently be higher than quarterly earnings. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN SELECT REAL ESTATE INCOME FUND Date: JANUARY 9, 1996 By: s/ David P. Goss Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company, and in the capacities and on the dates indicated. s/David P. Goss Chief Executive Officer, January 9, 1996 David P. Goss and Director s/Lloyd D. Hanford, Jr. Director1 January 9, 1996 Lloyd D. Hanford, Jr. s/Egon H. Kraus Director1 January 9, 1996 s/Lawrence C. Werner Director1 January 9, 1996 s/E. Samuel Wheeler Director1 January 9, 1996	10-K/A	10-K	1996-01-12T00:00:00	1996-01-11T21:18:05
0000950152-96-000077	0000950152-96-000077_0000.txt	THE SECURITIES ACT OF 1933 (Exact name of registrant as specified in its charter) (State of Incorporation) (I.R.S. Employer of registrant's principal executive offices) DURAMETALLIC CORPORATION 1991 STOCK OPTION PLAN DURAMETALLIC CORPORATION EXECUTIVE INCENTIVE BONUS PLAN (Full title of the Plan) VICE PRESIDENT-SECRETARY AND GENERAL COUNSEL THE DURIRON COMPANY, INC. (Name, including zip code, and telephone number, including area code of agent for service) The Duriron Company, Inc. ("Duriron") filed the Registration Statement on Form S-4 (the "Registration Statement") with respect to which this Post-Effective Amendment No. 1 is being filed for the purpose of registering shares of Duriron's Common Stock, par value $1.25 per share ("Duriron Common Stock"), being issued by Duriron in connection with the merger of a wholly-owned subsidiary of Duriron into Durametallic Corporation ("Durametallic"). Under the terms of the Agreement and Plan of Merger (the "Merger Agreement") dated as of September 11, 1995 among Duriron, Wolverine Acquisition Corp. and Durametallic, at the effective time of the merger on November 30, 1995, each option outstanding under the Durametallic Corporation 1991 Stock Option Plan (the "Durametallic Option Plan") became exercisable for Duriron Common Stock, on the basis of 3.1132 shares of Duriron Common Stock for each share of Durametallic's Common Stock, $5.00 par value per share ("Durametallic Shares"), for which the option was exercisable prior to the effective time of the merger, at an exercise price per share equal to the exercise price per share in effect prior to the effective time of the merger divided by 3.1132. In addition, as required by the Merger Agreement, the Durametallic Corporation Executive Incentive Bonus Plan (the "Durametallic Bonus Plan") was amended to provide that, after the effective time of the merger, persons entitled to receive Durametallic Shares under the Durametallic Bonus Plan will receive, instead, on the same terms and conditions, Duriron Common Stock, on the basis of 3.1132 shares of Duriron Common Stock for each Durametallic Share otherwise issuable under the Durametallic Bonus Plan. This Post-Effective Amendment No. 1 on Form S-8 is being filed for the purpose of registering the offer and sale of the Duriron Common Stock (the "Plan Shares") that may be issued in lieu of Durametallic Shares upon the exercise of options granted under the Durametallic Option Plan and under the Durametallic Bonus Plan in accordance with the Merger Agreement. The 6,458,558 shares of Duriron Common Stock registered pursuant to the Registration Statement were sufficient to include the Plan Shares. INFORMATION REQUIRED IN THE REGISTRATION STATEMENT Item 3. Incorporation of Documents by Reference. The following documents filed by Duriron with the Securities and Exchange Commission (the "Commission") are incorporated herein by reference as of their respective dates of filing: (a) Duriron's Annual Report on Form 10-K for the year ended December 31, 1994. (b) Duriron's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995. (c) Duriron's Current Reports on Form 8-K filed with the Commission on September 11, 1995 and December 14, 1995. (d) The description of Duriron's Common Stock contained in the Registration Statement filed the Commission pursuant to Section 12 of the Exchange Act for the purpose of registering such stock (and any amendment or report filed for the purpose of updating such description). (e) The description of the rights to purchase Duriron's Series A Junior Participating Preferred Stock contained in the Registration Statement on Form 8-A dated August 13, 1986 filed with the SEC. All documents subsequently filed by Duriron pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act prior to the filing of a post-effective amendment which indicates that all Common Stock then remaining unsold hereunder shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such documents. Item 4. Description of Securities. Item 5. Interests of Named Experts and Counsel. Thompson Hine & Flory P.L.L. has provided a legal opinion to the Company with respect to the Duriron Common Stock issuable upon exercise of stock options granted under the Durametallic Option Plan and issuable under the Durametallic Bonus Plan and registered hereunder. Item 6. Indemnification of Directors and Officers. See Item 20 of the Registration Statement. Item 7. Exemption from Registration Claimed. See Index to Exhibits following the signature pages to this Post-Effective Amendment No. 1. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made of the securities registered hereby, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this 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; provided, however, that the undertakings set forth in paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. See also the undertakings set forth in paragraphs (a) and (b) under Item 22 of the Registration Statement. Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Post-Effective Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dayton, State of Ohio, on the 12th day of January, 1996. William M. Jordan, President and Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. The undersigned, by signing his name hereto, executes this Post-Effective Amendment No. 1 to Registration Statement on behalf of each of the above-named directors of the registrant pursuant to powers of attorney executed by the above-named persons and filed with the Securities and Exchange Commission. Incorporated by reference to a document previously filed with the Securities and Exchange Commission.	S-8 POS	S-8 POS	1996-01-12T00:00:00	1996-01-12T11:23:00
0000950144-96-000098	0000950144-96-000098_0000.txt	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 1995 (Exact name of registrant as specified in its charter) (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) (Address of principal executive offices) (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date. The number of outstanding shares of Common Stock, par value $0.10 per share, as of January 8, 1996 was 4,216,406. The consolidated financial statements included herein have been prepared by Reeds Jewelers, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K for the fiscal year ended February 28, 1995. REEDS JEWELERS, INC. AND SUBSIDIARIES REEDS JEWELERS, INC. AND SUBSIDIARIES REEDS JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS REEDS JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended February 28, 1995. Management of Reeds Jewelers, Inc. believes that the consolidated financial statements contained herein contain all adjustments necessary to present fairly the financial position, consolidated results of operations, and cash flows for the interim period. Management also believes that all adjustments so made are of a normal and recurring nature. Adjusted for 10% stock dividend on June 1, 1995. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND Net sales for the quarter ended November 30, 1995 were up 16% over the same quarter in 1994 to a third quarter record of $21,214,000. Comparable store sales, however, rose only 1% for the quarter. The number of sales transactions during the quarter increased 17%, but the average sale decreased slightly to $158 from $159. The Company operated 100 stores at November 30, 1994, compared to 79 at the same time in the previous year. Net sales for the nine month period increased 13% to $54,544,000 and same store sales increased 4% during the period. The increased sales year-to-date resulted from an 11% increase in customer transactions and an increase in the average transaction size to $147 from $144. On a trailing twelve-month basis, net sales through November 30, 1995 increased 13% over the same period through November 30, 1994, resulting from an 8% increase in transactions and a 5% increase in the average transaction to $147. Other revenues in the third quarter increased 8% to $2,268,000 over last year. Finance charges and credit insurance income from customer receivables accounted for 78% of other revenues. Year-to-date, other revenues increased 10% over the same period a year earlier, and finance charges and credit insurance income represented 79% of the total. Gross margins were 39% of net sales during the third quarter ended November 30, 1995, down from 42% in the same quarter last year. The newly-acquired Melart stores accounted for 10% of total net sales, but gross margins in those stores averaged 16% lower than the gross margins for all other stores because aggressive price promotions were used to begin stabilizing and rebuilding market share for the Melart stores. For the first nine months of the year, gross margins were 40% of net sales, down from 41% of net sales for the same period last year as a result of gross margins in the diamond category being 240 basis points (or 4%) lower than the same nine months last year. Gross margins were sacrificed to increase diamond sales to nearly 57% of net sales from nearly 53% of net sales for the first nine months of fiscal 1995 and fiscal 1994, respectively; as a result, diamond sales increased 22%, yielding a 17% increase in diamond gross profits. Selling, general, and administrative expenses increased in the third quarter to 40% of net sales from 39% a year ago. Advertising expenses for the quarter were 35% higher, increasing to nearly 5% of net sales from 4% of net sales. Salaries and wages increased 21% in the third quarter of 1995 over the third quarter of 1994, rising 80 basis points as a percentage of net sales. Year-to-date, SG&A expenses were 41% for both years. Advertising increased 13% for the nine months, but remained flat as a percentage of net sales. Salaries and wages for the first three quarters increased 16% and rose 42 basis points as a percentage of net sales. Bad debt expense was 4% and 5% of net sales for the quarters ended November 30, 1995 and 1994, respectively, and was 4% for both nine month periods. As a percentage of average customer receivables, bad debt was 2.5% in the current third quarter and 2.6% in the same quarter last year; for the first nine months of this year, bad debt was 5.9% of customer receivables, compared to 6.1% last year. Balances on delinquent accounts were about 33% higher at November 30, 1995 than they were at the same date in 1994, representing nearly 15% of total accounts receivable at November 30, 1995 compared to 12 % a year earlier; gross customer receivables were 7% higher at November 30, 1995 than a year earlier. The allowance for bad debts at November 30, 1995 and 1994 was 7.5%. The Company's credit extension and collection policies and criteria continue to be consistent with those used during the same periods last year. Interest expense was $94,000 higher in the third quarter and $229,000 higher in the first nine months than for the same periods last year. The increase resulted from increased average borrowings of approximately 10%. The Company's anticipated tax rate was 33% for both periods ending November 30, 1995 and 36% for both periods ended November 30, 1994; the actual rates of 22% and 31% for the quarter and nine months ended November 30, 1995, respectively, resulted from refunds of state income taxes. Net income after taxes was $219,000 ($0.05 per share and 1.0% of net sales) for the quarter ended November 30, 1995, compared to $681,000 ($0.16 per share and 3.7% of net sales) for the same quarter last year. For the first nine months, the Company earned $1,045,000 ($0.25 per share and 1.9% of net sales) compared to $1,418,000 ($0.34 per share and 2.9% of net sales) for the same period last year. Management expects comparable store sales to be flat or only slightly positive during the final quarter of the current fiscal year that will end February 29, 1996. Gross margin pressure is expected to continue, and gross margins may be 100-200 basis points lower than in the fourth fiscal quarter of last year because of competitive pressures and because of the desire to build market share in the very important Washington-Baltimore market. Management further expects no savings in SG&A expenses during the final fiscal quarter compared to the same period last year, but plans to begin adjusting advertising, payroll, and other expenses to sales levels in its newly-acquired and newly-opened stores now that the holiday selling season is over. Bad debt expense, as a percentage of accounts receivable, is expected to remain in line with levels experienced during the past three years. The Company's comparable stores (those stores operating for the entire 21 months since March 1, 1994) generally performed in line with expectations. Therefore in the coming year, management plans to focus its efforts on increasing the average sales volumes in its newly-acquired and newly-opened stores, and causing gross margins and certain expense ratios in those stores to be more in line with the performance of the Company's comparable stores. The Company generally follows the practice of passing on price changes to its customers. As a result, management believes its operations have not been materially affected by inflationary or deflationary forces during the periods reported herein. Working capital increased 5% to $45,374,000 at November 30, 1995 from $43,138,000 at November 30, 1994. However, the resulting ratio of current assets to current liabilities as of November 30, 1995 was 2.4 to 1, compared to 2.5 to 1 at the same date in the prior year. Customer receivables, net of allowance for doubtful accounts, were $34,109,000 and $31,630,000 at November 30, 1995 and 1994, respectively. The 8% increase resulted from 54% of total net sales being done on the Company's proprietary credit card and related finance charges and credit insurance fees. Credit extension and collection policies and criteria remained consistent during both years. Merchandise inventories were 8% higher at the end of the third quarter of 1995 than at the same time in the previous year. The entire increase in inventories resulted from the acquisition of The Melart Jewelers, Inc. Management expects inventory levels to be approximately 34% higher at year-end than at the end of last year, primarily as a result of the nearly 30% increase in the number of stores. In addition to the net effect of $3,690,000 for the acquisition of The Melart Jewelers, Inc., capital expenditures for the Company were $1,594,000 during the nine months ended November 30, 1995, compared to $2,382,000 for the same period in 1994. Expenditures during both periods were primarily for tenant improvements in new and remodeled stores and for additional office, security, and computer equipment. The Company opened five new stores during the first nine months of this year, and has closed one under-performing stores in the fourth quarter. The Company did not finalize its new $40,000,000 revolving credit facility with two commercial banks during December 1995, as expected, but does expect to close before the end of January 1996. At this time, management believes its credit lines are adequate to support its plans and knows of no other material events or uncertainties which would cause the financial information herein not to be indicative of the operating results or future financial condition of Reeds Jewelers, Inc. Item 2. Changes in Securities. Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders. Item 6. Exhibits and Reports on Form 8-K. 27 - Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. January 9, 1996 /s/ James R. Rouse	10-Q	10-Q	1996-01-12T00:00:00	1996-01-12T16:21:47
0000909230-96-000001	0000909230-96-000001_0001.txt	<DESCRIPTION>SHAREHOLDER SERVICES PLAN AND RELATED DOCUMENTS Introduction: It has been proposed that the above-captioned investment company (the "Fund") adopt a Shareholder Services Plan under which the Fund would pay the Fund's distributor (the "Distributor") for providing services to (a) shareholders of each series of the Fund or class of Fund shares set forth on Exhibit A hereto, as such Exhibit may be revised from time to time, or (b) if no series or classes are set forth on such Exhibit, shareholders of the Fund. The Distributor would be permitted to pay certain financial institutions, securities dealers and other industry professionals (collectively, "Service Agents") in respect of these services. The Plan is not to be adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act"), and the fee under the Plan is intended to be a "service fee" as defined in Article III, Section 26, of the NASD Rules of Fair Practice. The Fund's Board, in considering whether the Fund should implement a written plan, has requested and evaluated such information as it deemed necessary to an informed determination as to whether a written plan should be implemented and has considered such pertinent factors as it deemed necessary to form the basis for a decision to use Fund assets for such purposes. In voting to approve the implementation of such a plan, the Board has concluded, in the exercise of its reasonable business judgment and in light of applicable fiduciary duties, that there is a reasonable likelihood that the plan set forth below will benefit the Fund and its shareholders. The Plan: The material aspects of this Plan are as follows: 1. The Fund shall pay to the Distributor a fee at the annual rate set forth on Exhibit A in respect of the provision of personal services to shareholders and/or the maintenance of shareholder accounts. The Distributor shall determine the amounts to be paid to Service Agents and the basis on which such payments will be made. Payments to a Service Agent are subject to compliance by the Service Agent with the terms of any related Plan agreement between the Service Agent and the Distributor. 2. For the purpose of determining the fees payable under this Plan, the value of the net assets of the Fund or the net assets attributable to each series or class of Fund shares identified on Exhibit A, as applicable, shall be computed in the manner specified in the Fund's charter documents for the computation of net asset value. 3. The Board shall be provided, at least quarterly, with a written report of all amounts expended pursuant to this Plan. The report shall state the purpose for which the amounts were expended. 4. This Plan will become effective immediately upon approval by a majority of the Board members, including a majority of the Board members who are not "interested persons" (as defined in the Act) of the Fund and have no direct or indirect financial interest in the operation of this Plan or in any agreements entered into in connection with this Plan, pursuant to a vote cast in person at a meeting called for the purpose of voting on the approval of this Plan. 5. This Plan shall continue for a period of one year from its effective date, unless earlier terminated in accordance with its terms, and thereafter shall continue automatically for successive annual periods, provided such continuance is approved at least annually in the manner provided in paragraph 4 hereof. 6. This Plan may be amended at any time by the Board, provided that any material amendments of the terms of this Plan shall become effective only upon approval as provided in paragraph 4 hereof. 7. This Plan is terminable without penalty at any time by vote of a majority of the Board members who are not "interested persons" (as defined in the Act) of the Fund and have no direct or indirect financial interest in the operation of this Plan or in any agreements entered into in connection with this Plan. Name of Class average daily	485BPOS	EX-99	1996-01-12T00:00:00	1996-01-12T15:34:02
0000950129-96-000034	0000950129-96-000034_0001.txt	<DESCRIPTION>SCI 1993 LONG-TERM INCENTIVE STOCK OPTION PLAN 1993 LONG-TERM INCENTIVE STOCK OPTION PLAN The purpose of the Plan is to give Service Corporation International a competitive opportunity in attracting, retaining and motivating officers and employees and to provide the Company and its subsidiaries with the ability to provide incentives more directly linked to the profitability of the Company's businesses and increases in stockholder value. For purposes of the Plan, the following terms are defined as set forth below: a. "Affiliate" means a corporation or other entity controlled by the Company and designated by the Committee from time to time as such. b. "Board" means the Board of Directors of the Company. c. "Cause" means (i) a material breach by an optionee of his or her duties as an employee which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and its affiliated companies (other than a breach arising from the failure of the optionee to work as a result of incapacity due to physical or mental illness) and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the optionee of a felony involving malice which conviction has been affirmed on appeal or as to which the period in which an appeal can be taken has lapsed. d. "Change in Control" and "Change in Control Price" have the meanings set forth in Sections 6(b) and 6(c), respectively. e. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. f. "Commission" means the Securities and Exchange Commission or any successor agency. g. "Committee" means the Committee referred to in Section 2. h. "Company" means Service Corporation International, a Texas corporation. i. "Disability" means the inability of the optionee to perform his or her duties as an employee on a full-time basis as a result of incapacity due to mental or physical illness which continues for more than one year after the commencement of such incapacity, such incapacity to be determined by a physician selected by the Company or its insurers and acceptable to the optionee or the optionee's legal representative (such agreement as to acceptability not to be withheld unreasonably). j. "Disinterested Person" shall mean a member of the Board who qualifies as a disinterested person as defined in Rule 16b-3(c)(2), as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission and also qualifies as an "outside director" for purposes of Section 162(m) of the Code and the regulations promulgated thereunder. k. "Eligible Person" has the meaning stated in Section 4 of the Plan. l. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. m. "Fair Market Value" means, as of any given date, the average of the highest and lowest reported sales prices of the Stock on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which the Stock is listed or on NASDAQ. If there is no regular public trading market for such Stock, the Fair Market Value of the Stock shall be determined by the Committee in good faith. n. "Plan" means the Service Corporation International 1993 Long-Term Incentive Stock Option Plan, as set forth herein and as hereinafter amended from time to time. o. "Retirement" means retirement from active employment by the Company or any of its subsidiaries at or after age 55. p. "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. q. "Stock" means common stock, par value $1.00 per share, of the Company. r. "Stock Option" means an option granted under Section 5. s. "Termination of Employment" means the termination of the participant's employment with the Company and any subsidiary or Affiliate. An employee shall be deemed to have terminated employment if he or she ceases to perform services for the Company or its subsidiaries or Affiliates on a full-time basis, notwithstanding the fact that such employee continues to receive compensation or benefits pursuant to an employment contract or other agreement or arrangement with the Company or any of its subsidiaries or Affiliates. A participant on a non-medical leave of absence shall, unless such leave of absence is otherwise approved by the Committee, be deemed to incur a Termination of Employment. A participant employed by a subsidiary or an Affiliate shall also be deemed to incur a Termination of Employment if the subsidiary or Affiliate ceases to be such a subsidiary or Affiliate, as the case may be, and the participant does not immediately thereafter become an employee of the Company or another subsidiary or Affiliate. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. The Plan shall be administered by the Compensation Committee of the Board or such other committee of the Board, composed solely of not less than two Disinterested Persons, each of whom shall be appointed by and serve at the pleasure of the Board. If at any time no Committee shall be in office, the functions of the Committee specified in the Plan shall be exercised by the Board. The Committee shall have plenary authority to grant Stock Options pursuant to the terms of the Plan to officers and other key employees of the Company and its subsidiaries and Affiliates. Among other things, the Committee shall have the authority, subject to the terms of the Plan: (a) to select the Eligible Persons to whom Stock Options may from time to time be granted; (b) to determine the number of shares of Stock to be covered by each Stock Option granted hereunder; and (c) to determine the terms and conditions of any Stock Option granted hereunder including, but not limited to, the option price (subject to Section 5(a)) and any vesting condition, restriction or limitation (which may be related to the performance of the participant, the Company or any subsidiary or Affiliate), based on such factors as the Committee shall determine. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable, to interpret the terms and provisions of the Plan and any Stock Option issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. Any determination made by the Committee or pursuant to delegated authority pursuant to the provisions of the Plan with respect to any Stock Option shall be made in the sole discretion of the Committee or such delegate at the time of the grant of the Stock Option or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee or any appropriately delegated officer pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. STOCK SUBJECT TO PLAN. Subject to adjustment as provided herein, the total number of shares of Stock available for grant under the Plan shall be 4,650,000. Shares subject to a Stock Option under the Plan may be authorized and unissued shares or may be treasury shares. If any Stock Option terminates without being exercised, shares subject to such Stock Option shall not be available for further awards in connection with Stock Options under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, or extraordinary distribution with respect to the Stock or other change in corporate structure affecting the Stock, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the number, kind and option price of shares subject to outstanding Stock Options, and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; provided, however, that the number of shares subject to any Stock Option shall always be a whole number. Officers and employees of the Company, its subsidiaries and Affiliates who are responsible for or contribute to the management, growth and profitability of the business of the Company, its subsidiaries and Affiliates are eligible to be granted Stock Options under the Plan ("Eligible Persons"). Any Stock Option granted under the Plan shall be in the form attached hereto as Annex A, which is incorporated herein and made a part of the Plan, with such changes as the Committee may from time to time approve which are consistent with the Plan. None of the Stock Options granted under the Plan shall be "incentive stock options" within the meaning of Section 422 of the Code. The maximum number of shares of Stock that may be subject to Stock Options granted hereunder during the term of the Plan to any individual shall be 1,550,000. The grant of a Stock Option shall occur on the date the Committee selects an individual to be a participant in any grant of a Stock Option, determines the number of shares of Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option. Such selection shall be evidenced in the records of the Company whether in the minutes of the meetings of the Committee or by consent in writing. The Company shall notify a participant of any grant of a Stock Option, and a written option agreement or agreements shall be duly executed and delivered by the Company to the participant. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the option agreement, and shall not be less than the Fair Market Value of the Stock on the date of grant. (b) Option Term. The term of each Stock Option shall be 14 years, unless earlier terminated. (c) Exercisability. Except as otherwise provided herein, each Stock Option shall be exercisable during its term only if such Stock Option has vested and only after the fourth anniversary of its date of grant. (d) Vesting. Each Stock Option shall have assigned to it by the Committee a target price (the "Target Price") which will be used to provide for accelerated vesting of such Stock Option as set forth in the agreement evidencing such Stock Option. Any Stock Option that remains outstanding and unvested on the thirteenth anniversary of its date of grant shall vest at such time. (e) Method of Exercise. Subject to the provisions of this Section 5, Stock Options may be exercised, in whole or in part, by giving written notice of exercise to the Company specifying the number of shares of Stock subject to the Stock Option to be purchased. The option price of Stock to be purchased upon exercise of any Option shall be paid in full (i) in cash (by certified or bank check or such other instrument as the Company may accept), (ii) in the form of unrestricted Stock already owned by the optionee for six months or more and based on the Fair Market Value of the Stock on the date the Stock Option is exercised or (iii) by a combination thereof. If an optionee is subject to Section 16(b) of the Exchange Act, any election to make payment pursuant to clause (ii) of the preceding sentence shall comply with the requirements of Rule 16b-3(e). Payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price, and, if requested, the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall have all of the rights of a stockholder of the Company holding the Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends), only when the optionee has given written notice of exercise, has paid in full for such shares and, if requested, has given the representation described in Section 9(a). (f) Non-transferability of Stock Options. No Stock Option shall be transferable by the optionee other than (i) by will or by the laws of descent and distribution or (ii) pursuant to a qualified domestic relations order (as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder). All Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee or by the guardian or legal representative of the optionee or its alternate payee pursuant to such qualified domestic relations order, it being understood that the terms "holder" and "optionee" include the guardian and legal representative of the optionee named in the option agreement and any person to whom an option is transferred will or the laws of descent and distribution or pursuant to a qualified domestic relations order. The Committee may establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid or by whom any rights of the participant, after the participant's death, may be exercised. (g) Termination by Death, Disability or Retirement or by the Company Without Cause. If an optionee's employment terminates by reason of death, Disability or Retirement, or if such employment is terminated by the Company without Cause, in each case prior to the vesting of a Stock Option held by the optionee, the following provisions shall apply: (1) if termination by death or Disability or by the Company without Cause occurs on or prior to the fourth anniversary of the date of grant of such Stock Option, and if the Target Price vesting condition provided in such Stock Option is satisfied after such termination and on or prior to such fourth anniversary, such Stock Option shall be exercisable only during the period after the fourth anniversary of the date of grant and ending on the fifth anniversary of the date of grant and shall terminate at the close of business on such (2) if termination by death or Disability or by the Company without Cause occurs on or prior to the fourth anniversary of the date of grant of such Stock Option, and if the Target Price vesting condition provided in such Stock Option is not satisfied on or prior to such fourth anniversary, such Stock Option shall be exercisable only during the period after the 13th anniversary of the date of grant and ending upon the expiration of such Stock Option; (3) if termination by Retirement occurs on or prior to the fourth anniversary of the date of grant of such Stock Option, such Stock Option shall terminate (4) if termination by death, Disability or Retirement or by the Company without Cause occurs after the fourth anniversary of the date of grant of a Stock Option held by the optionee, such Stock Option shall be exercisable only during the period after the 13th anniversary of the date of grant and ending upon the expiration of such Stock Option. (h) Termination by the Company for Cause; Voluntary Termination. If an optionee's employment is terminated voluntarily by the optionee (other than through Retirement) or by the Company for Cause, in either case prior to the vesting of a Stock Option, such Stock Option shall terminate immediately. (i) Termination After Vesting. If an optionee's employment is terminated for any reason after a Stock Option has vested, the following provisions shall apply: (1) if such termination occurs prior to the fourth anniversary of the date of grant of such Stock Option, such Stock Option shall be exercisable during the 18-month period beginning on such fourth anniversary, and shall terminate at the end of such (2) if such termination occurs on or after the fourth anniversary of the date of grant of such Stock Option, such Stock Option shall be exercisable during the period beginning on the date of such termination and ending on the earlier of (x) the original termination date of such Stock Option and (y) the date that is 18 months after the date of termination of employment, and shall terminate at the end of such period. (j) Change in Control Cash Out. Notwithstanding any other provision of the Plan, upon the occurrence of a Change of Control all outstanding Stock Options shall immediately vest and become fully exercisable, and during the 60-day period from and after such Change in Control (the "Exercise Period"), an optionee shall have the right, in lieu of the payment of the exercise price for the shares of Stock being purchased under the Stock Option and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change in Control Price per share of Stock on the date of such election shall exceed the exercise price per share of Stock under the Stock Option (the "Spread") multiplied by the number of shares of Stock granted under the Stock Option as to which the right granted under this Section 5(j) shall have been exercised; provided, however, that if the Change in Control occurs within six months of the date of grant of a particular Stock Option held by an optionee who is an officer or director of the Company and is subject to Section 16(b) of the Exchange Act no such election shall be made by such optionee with respect to such Stock Option prior to six months from the date of grant. Notwithstanding any other provision hereof, if the end of such 60-day period from and after a Change in Control is within six months of the date of grant of a Stock Option held by an optionee who is an officer or director of the Company and is subject to Section 16(b) of the Exchange Act, such Stock Option shall be cancelled in exchange for a cash payment to the optionee, effected on the day which is six months and one day after the date of grant of such Option, equal to the Spread multiplied by the number of shares of Stock granted under the Stock Option. Notwithstanding the foregoing, if any right granted pursuant to this Section 5(j) would make a Change in Control transaction ineligible for pooling of interests accounting under APB No. 16 that but for this Section 5(j) would otherwise be eligible for such accounting treatment, the Committee shall have the authority to replace the cash payable pursuant to this Section 5(j) with Stock having a Fair Market Value equal to the cash that would otherwise be payable hereunder. For purposes of this paragraph (j) only, the date of grant of any Stock Option approved by the Committee on November 10, 1993 shall be deemed to be the date on which the Plan is approved by the Company's stockholders. (k) Initial Grants. The Committee granted on November 10, 1993 the following awards to the individuals listed below, in the share amounts and at the Target Prices and exercise prices indicated, subject to the approval of the stockholders of the Company: The foregoing individuals shall not be eligible to receive any additional awards under the Plan. SECTION 6. CHANGE IN CONTROL PROVISIONS. (a) Impact of Event. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control, any Stock Options outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested to the full extent of the original grant. (b) Definition of Change in Control. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (x) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following acquisitions of Outstanding Company Common Stock and Outstanding Company Voting Securities: (1) any acquisition directly from the Company (other than an acquisition pursuant to the exercise of a conversion privilege), (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any Person pursuant to a reorganization, merger or consolidation if, following such reorganization, merger or consolidation, the conditions described in clauses (1), (2) and (3) of subsection (iii) of this Section (ii) Individuals who, as of the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual who becomes a member of the Board subsequent to such effective date, whose election, or nomination for election by the Company's shareholders, was approved by (1) a vote of at least a majority of directors then comprising the Incumbent Board, or (2) a vote of at least a majority of the directors then constituting the Executive Committee of the Board at a time when such committee comprised at least five members and all members of such committee were either members of the Incumbent Board or considered as being members of the Incumbent Board, pursuant to clause (1) of this subparagraph (ii), shall be considered as though such individual were a member of the Incumbent Board; but, provided further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination"); excluding, however, such a Business Combination pursuant to which (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Outstanding Company Voting Securities immediately prior to such Business Combination own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or such corporation resulting from such Business Combination and any Person beneficially owning, immediately prior to such Business Combination, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) will beneficially own, directly or indirectly, 20% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) The approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (c) Change in Control Price. For purposes of the Plan, "Change in Control Price" means the higher of (i) the highest reported sales price, regular way, of a share of Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national securities exchange on which such shares are listed or on NASDAQ, as applicable, during the 60-day period prior to and including the date of a Change in Control and (ii) if the Change in Control is the result of a tender or exchange offer or a Business Combination, the highest price per share of Stock paid in such tender or exchange offer or Business Combination; provided, however, that in the case of a Stock Option which (A) is held by an optionee who is an officer or director of the Company and is subject to Section 16(b) of the Exchange Act and (B) was granted within 240 days of the Change in Control, then the Change in Control Price for such Stock Option shall be the Fair Market Value of the Stock on the date such Stock Option is exercised or cancelled. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the sole discretion of the Board. SECTION 7. TERM, AMENDMENT AND TERMINATION. The Plan will terminate on November 10, 2003. Stock Options outstanding as of November 10, 2003 shall not be affected or impaired by the termination of the Plan. The Committee shall have authority to amend the Plan without the approval of the Company's stockholders to take into account changes in law and tax and accounting rules, including Rule 16b-3 and Section 162(m) of the Code; provided that no amendment shall be made which would (i) impair the rights of an optionee under a Stock Option theretofore granted without the optionee's consent, except such an amendment made to cause the Plan to qualify for the exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the exemption provided by Rule 16b-3. SECTION 8. UNFUNDED STATUS OF PLAN. It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or make payments; provided, however, that, unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. (a) The Committee may require each person purchasing shares pursuant to a Stock Option to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Company shall not be required to issue or deliver any certificate or certificates for shares of Stock under the Plan prior to fulfillment of all of the following conditions: (1) the listing or approval for listing upon notice of issuance, of such shares on the New York Stock Exchange, Inc., or such other securities exchange as may at the time be the principal market (2) any registration or other qualification of such shares of the Company under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (3) the obtaining of any other consent, approval, or permit from any state or federal governmental agency which the Committee shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. (b) Nothing contained in the Plan shall prevent the Company or any subsidiary or Affiliate from adopting other or additional compensation arrangements for its employees. (c) The adoption of the Plan shall not confer upon any employee any right to continued employment nor shall it interfere in any way with the right of the Company or any subsidiary or Affiliate to terminate the employment of any employee at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for federal income tax purposes with respect to any Stock Option under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld by the Company with respect to such amount. Withholding obligations may be settled with Stock in an amount having a Fair Market Value not exceeding the minimum withholding tax payable by the participant with respect to the income recognized, including Stock that is subject to the Stock Option that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company, its subsidiaries and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. The Committee shall establish such procedures as it deems appropriate, including the making of irrevocable elections, for the settlement of withholding obligations with Stock. (e) In the case of a grant of a Stock Option to any employee of a Company subsidiary, the Company, may, if the Committee so directs, issue or transfer the shares of Stock covered by the Stock Option to the subsidiary, for such lawful consideration as the Committee may specify, upon the condition or understanding that the subsidiary will transfer the shares of Stock to the employee in accordance with the terms of the Stock Option specified by the Committee pursuant to the provisions of the Plan. (f) The Plan and all Stock Options made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Texas, without reference to principles of conflict of law. SECTION 10. EFFECTIVE DATE OF PLAN. Subject to the approval of the stockholders of the Company, the Plan shall be effective on November 10, 1993. THIS AGREEMENT dated as of the _______ day of _______________, between Service Corporation International, a Texas corporation (the "Company"), and _______________________________ (the "Employee"). W I T N E S S E T H: The Company has adopted the Service Corporation International 1993 Long-Term Incentive Stock Option Plan (the "Plan"). The Plan is made a part hereof with the same effect as if set forth in this Agreement. All capitalized terms that are used herein and not otherwise defined shall have the meanings set forth in the Plan. In consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: Subject to the provisions of this Agreement and to the Plan, the Company hereby grants to the Employee the right and option (the "Options") to purchase (i) __________ shares of common stock, par value $1.00 per share ("Common Stock"), of the Company at an exercise price of $ ________ per share and a Target Price of $________ per share and (ii) _________ shares of Common Stock at an exercise price of $ ________ per share and a Target Price of $ ________ per share. Any Option that is vested may be exercised in whole or in part at the times and in the manner set forth in the Plan; provided, however, that an Option may not be exercised at any one time as to fewer than 100 shares (or such number of shares as to which such Option is then exercisable if such number of shares is less than 100). Each Option granted hereunder shall vest in the circumstances set forth in the Plan or as set forth in this paragraph. During the four-year period commencing on the date of this Agreement each Option granted hereunder shall vest at such time as the Fair Market Value of the Common Stock shall have been equal to or greater than the Target Price with respect to such Option for each day in any period of 20 consecutive trading days. Any Option that has not vested at or prior to the close of business on the fourth anniversary of the date of this Agreement shall vest at the close of business on the thirteenth anniversary of the date of this Agreement if such Option has not previously terminated. 4. NO RIGHT TO EMPLOYMENT. Nothing in this Agreement or the Plan shall confer upon the Employee any right to continue in the employ of the Company or any of its affiliate corporations or interfere in any way with the right of the Company or any such affiliate corporation to terminate such employment at any time. 5. EFFECT OF CERTAIN CHANGES. (a) If there is any change in the number of issued shares of Common Stock through the declaration of stock dividends, or through recapitalization resulting in stock splits, or combinations or exchanges of such shares, the number of Options granted pursuant to this Agreement that have not been exercised or lapsed, and the price per share of such Options shall be proportionately adjusted by the Committee to reflect any increase or decrease in the number of shares of Common Stock, provided, however, that any fractional shares resulting from such adjustment shall be eliminated. (b) In the event of a change in the Common Stock of the Company as presently constituted, which is limited to a change of all of its authorized shares with a par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be a Common Stock within the meaning of this Agreement and the Plan. (c) To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. 6. PAYMENT OF TRANSFER TAXES, FEES AND OTHER EXPENSES. The Company agrees to pay any and all original issue taxes and stock transfer taxes that may be imposed on the issuance of shares acquired pursuant to exercise of the Options, together with any and all other fees and expenses necessarily incurred by the Company in connection therewith. No later than the date of exercise of any Options granted hereunder, the Employee shall pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the exercise of such Options and the Company shall, to the extent permitted or required by law, have the right to deduct from any payment of any kind otherwise due to the Employee, federal, state and local taxes of any kind required by law to be withheld upon the exercise of such Options. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Company at 1929 Allen Parkway, Houston, Texas 77219, Attention: General Counsel and to the Employee at the address set forth on the last page of this Agreement or at such other address as either party may hereafter designate in writing to the other. Except as otherwise provided hereunder, this Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company. 10. LAWS APPLICABLE TO CONSTRUCTION. The Options have been granted, executed and delivered in the State of Texas, and the interpretation, performance and enforcement of this Agreement, shall be governed by the laws of the State of Texas, as applied to contracts executed in and performed wholly within the State of Texas. In the event of any ambiguity in this Agreement, any term which is not defined in this Agreement, or any matters as to which this Agreement is silent, the Plan shall govern including, without limitation, the provisions thereof pursuant to which the Committee has the power, among others, to (i) interpret the Plan, (ii) prescribe, amend and rescind rules and regulations relating to the Plan and (iii) make all other determinations deemed necessary or advisable for the administration of the Plan. The headings of paragraphs herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any of the provisions of this Agreement. This Agreement may not be modified, amended or waived in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. IN WITNESS WHEREOF, THE COMPANY HAS CAUSED THIS AGREEMENT TO BE EXECUTED ON ITS BEHALF BY A DULY AUTHORIZED OFFICER AND THE EMPLOYEE HAS HEREUNTO SET HIS HAND.	S-8	EX-4.12	1996-01-12T00:00:00	1996-01-12T14:43:05
0000003545-96-000001	0000003545-96-000001_0000.txt	UNITED STATES SECURITIES AND EXCHANGE COMMISSION __X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES For three months ended November 30, 1995. _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES For the transition period from _____________________ to _______________________. (Exact name of registrant as specified in its charter) (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) P. O. Box 338, La Belle, FL 33935 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 813/675-2966 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. There were 7,027,827 shares of common stock, par value $1.00 per share, outstanding at January 12, 1996. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of financial statement presentation: The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Saddlebag Lake Resorts, Inc., after elimination of all significant intercompany balances and transactions. The accompanying unaudited condensed consolidated financial statements have been prepared on a basis consistent with the accounting principles and policies reflected in the Company's annual report for the year ended August 31, 1995. In the opinion of Management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recur- ring accruals) necessary for a fair presentation of its consolidated financial position at November 30, 1995 and August 31, 1995 and the consolidated results of operations and cash flows for the three months ended November 30, 1995 and 1994. The basic business of the Company is agriculture which is of a seasonal nature and subject to the influence of natural phenomena and wide price fluctuations. Fluctuation in the market prices for citrus fruit has caused the Company to recognize additional revenue from the prior year's crop totaling $482,211 in 1995 and $283,492 in 1994. The results of operations for the stated periods are not necessarily indicative of results to be expected for the full year. 2. Accounts and mortgage notes receivable: Mortgage notes receivable are recorded under the accrual method of accounting. Under this method, a sale is not recognized until payment is received, including interest, aggregating 10% of the contract sales price for residential properties and 20% for commercial properties. A summary of the Company's inventories (in thousands) is shown below: Unharvested fruit crop on trees $ 6,257 $ 6,027	10-Q	10-Q	1996-01-12T00:00:00	1996-01-12T09:15:45
0000898430-96-000107	0000898430-96-000107_0000.txt	<DESCRIPTION>FORM 8-K REPORT DATED 12/31/95 CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): DECEMBER 31, 1995 (Exact name of registrant as specified in its charter) (State or other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation or organization) Identification No.) (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 888-6000 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On December 31, 1995, the registrant's wholly-owned subsidiary, City National Bank ("CNB"), purchased all of the issued and outstanding stock of First Los Angeles Bank ("First LA"), a wholly-owned subsidiary of San Paolo U.S. Holding Co. ("SPUSH"), and immediately thereafter merged First LA with and into CNB. Prior to the acquisition, First LA was a California state-chartered commercial bank with 10 branches in Los Angeles and Orange Counties. Pursuant to the Stock Purchase Agreement dated August 17, 1995, the purchase price of the stock of First LA was $85 million. Immediately before the stock purchase, SPUSH purchased from First LA loans having aggregate recorded balances of approximately $77.5 million including accrued interest, less allocated loan loss reserves of approximately $6.5 million. At closing, CNB cancelled SPUSH's indebtedness to First LA of approximately $71 million generated by the loan purchase, and paid cash for the approximately $14 million balance of the purchase price. CNB's payment was funded from internal sources. The equipment and properties of First LA will be used by CNB in its banking business. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. It is impracticable to file the financial statements of First LA and the pro forma financial statements required by Item 7(a) and (b) with this current report. Such financial statements will be filed as an amendment hereto on or before March 15, 1996. (c) Exhibits (listed by numbers corresponding to Exhibit Table of Item 2.1 Stock Purchase Agreement dated August 17, 1995, by and among City National Bank, First Los Angeles Bank, San Paolo U.S. Holding Company and San Paolo Bank Holding S.P.A. (This Exhibit is incorporated by reference to Exhibit 10.20 filed with the Registrant's Quarterly Report on Form 10-Q for the three months ended September 2.2 Amendment to Stock Purchase Agreement dated December ____, 1995, by and among City National Bank, First Los Angeles Bank, San Paolo U.S. Holding Company and San Paolo Bank Holding S.P.A. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: January 11, 1996 /s/ Frank P. Pekny Vice President, Chief Financial Officer 2.2 Amendment to Stock Purchase Agreement dated December ____, 1995, by and among City National Bank, First Los Angeles Bank, San Paolo U.S. Holding Company and San Paolo Bank Holding S.P.A.	8-K	8-K	1996-01-12T00:00:00	1996-01-12T17:04:38
0000820206-96-000002	0000820206-96-000002_0000.txt	(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES For the quarterly period ended MARCH 31, 1995 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE CHANGE ACT OF 1934 For the transition period from to FRANKLIN REAL ESTATE INCOME FUND (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization)(I.R.S. Employer P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 312-2000 Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock Shares Outstanding as of March 31, 1995, Series A: 3,999,653 Common Stock Shares Outstanding as of March 31, 1995, Series B: 319,308 PART I - FINANCIAL INFORMATION and Analysis of Financial Condition Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes thereto. COMPARISON OF THE THREE MONTH PERIOD ENDED MARCH 31, 1995 AND 1994 Net income for the three month period ended March 31, 1995 increased $150,000, or 51%, as compared to the same period in 1994 due to the following factors: an increase in rental revenue of $100,000; an increase in interest and dividends of $1,000; a decrease in other income of $3,000; an increase in interest expense of $25,000; an increase in depreciation and amortization of $16,000; an increase in operating expenses of $16,000; an increase in related party expenses of $2,000; a decrease in general and administrative expense of $43,000, and a decrease in loss on the sale of mortgage-backed securities of $68,000. Explanations of the material changes are as follows: Rental revenue for the three month period ended March 31, 1995 increased $100,000, or 10%, primarily due to the recognition of rental income from the Glen Cove Shopping Center acquired on January 31, 1994 and improved occupancy rates at one of the Company's properties. The average occupancy rate of net rentable square feet for the three month periods ended March 31, 1995 and 1994 at the Shores Office Complex was 98% and 90%; at the Northport Buildings 97% and 97%, and at the Mira Loma Shopping Center 82% and 84%, respectively. Total expenses decreased for the three month period ended March 31, 1995 by $52,000, or 7%, from $738,000 in 1994 to $686,000. The decrease in total expenses is attributable to the following factors: an increase in interest expense of $25,000; an increase in depreciation and amortization of $16,000, or 6%; an increase in operating expenses of $16,000, or 7%; an increase in related party expense of $2,000, or 4%; a decrease in general and administrative expense of $43,000, or 47%, and a decrease in loss on sale of mortgage-backed securities of $68,000 or 100%. Interest expense increased $25,000 reflecting the issuance of an unsecured loan payable in January, 1994, related to the acquisition of the Glen Cove Center. This loan was converted into a secured mortgage note in June, 1994. Depreciation and amortization increased $16,000 and operating expenses increased $16,000 reflecting the acquisition of rental property in January, 1994. General and administrative expense decreased $42,000 due to a decrease in non-recurring consulting fees and legal expenses associated with the potential acquisitions of real estate that were passed in 1994. Loss on sale of mortgage-backed securities decreased $68,000 due to the sale of mortgage-backed securities in January, 1994. The proceeds were used to invest in rental property. PART I - FINANCIAL INFORMATION and Analysis of Financial Condition The Company's principal source of capital for the acquisition of properties was the proceeds from the initial public offering of its stock. The Company completed its property acquisition phase in 1994 and no further acquisitions are anticipated. The Company's funds from operations have been its principal source of capital for property improvements, leasing costs and the payments of quarterly dividends. At March 31, 1995, the Company's cash reserves, including mortgage backed securities, aggregated $1,796,000. As of March 31, 1995, one of the Company's properties was subject to secured financing with an outstanding balance of approximately $1,970,000. Otherwise, the Company's properties are owned free of any indebtedness. Interest on the note accrues at a variable rate of 1.5% in excess of the Union Bank Reference Rate. Monthly installments of principal and interest commenced August 1, 1994, and continue until maturity of the note on May 1, 1999. Principal installments are payable in the amount of $3,700 per month. The note may be prepaid in whole or in part at any time without penalty. For the foreseeable future, management believes that the Company's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of dividends. Net cash flow provided by operating activities for the three month period ended March 31, 1995 increased $71,000 to $787,000 compared to the same period in 1994 primarily due to improved operations at the Company's properties, and an additional month of cash flow from the Glen Cove Shopping Center purchased on January 31, 1994. Funds from Operations for the three month period ended March 31, 1995 and 1994 were $728,000 and $562,000, respectively. The increase is primarily due to the improvement in net income as described under "Results of Operations" above. The Company believes that Funds from Operations is helpful in understanding a property portfolio in that such calculation reflects income from operating activities and the properties' ability to support general operating expenses and interest expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to shareholders. Funds from Operations should not be considered an alternative to net income or any other GAAP measurement of performance or as an alternative to cash flows from operating, investing, or financing activities as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, Funds from Operations is net income ( computed in accordance with GAAP ), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures. The Company's management believes that inflation may have a positive effect on the Company's property portfolio, but this effect generally will not be fully realized until such properties are sold or exchanged. On some leases, the Company collects overage rents based on increased sales and increased base rentals as a result of cost of living adjustments. The Company's policy of PART I - FINANCIAL INFORMATION and Analysis of Financial Condition LIQUIDITY AND CAPITAL RESOURCES (Continued) leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation. Dividends are declared quarterly at the discretion of the Board of Directors. The Company's present dividend policy is to at least annually evaluate the current dividend rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a dividend rate which: i) provides a stable dividend which is sustainable despite short term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as dividends consistent with the above listed objective; and iii)complies with the Internal Revenue Code requirement that a REIT annually pay out as dividends not less than 95% of its taxable income. For the three-month period ended March 31, 1995, the Company declared dividends totaling $500,000. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN REAL ESTATE INCOME FUND By: /S/ DAVID P. GOSS	10-Q/A	10-Q	1996-01-12T00:00:00	1996-01-11T20:06:10
0000950116-96-000013	0000950116-96-000013_0000.txt	Supplement dated January 4, 1996 This supplement to the Prospectus dated December 23, 1994, as supplemented through September 15, 1995, provides new and additional information beyond that contained in the Prospectus and should be read in conjunction with such Prospectus. Unless otherwise indicated in this supplement, defined terms have the same meaning as in the Prospectus. On January 3, 1996, Morgan Stanley Group Inc. acquired Miller Anderson & Sherrerd, LLP (the "Adviser") in a transaction in which Morgan Stanley Asset Management Holdings Inc., an indirect wholly owned subsidiary of Morgan Stanley Group Inc., became the sole general partner of the Adviser. Morgan Stanley Asset Management Holdings Inc. and two other wholly owned subsidiaries of Morgan Stanley Group Inc. became the limited partners of the Adviser. In connection with this transaction, the Adviser entered into a new investment management agreement with MAS Funds dated as of January 3, 1996, which agreement was approved by the shareholders of each Portfolio at a special meeting held on October 6, 1995. The Adviser will retain its name and remain at its current location, One Tower Bridge, West Conshohocken, PA 19428. The Adviser will continue to provide investment counseling services to employee benefit plans, endowments, foundations, and other institutional investors. PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.	497	497	1996-01-12T00:00:00	1996-01-12T15:31:48
0000950146-96-000032	0000950146-96-000032_0001.txt	<DESCRIPTION>OPINION OF ROGER M. BARSUN I am General Counsel of Oakhurst Company, Inc., a Delaware corporation, (the "Company"), and in that capacity this opinion is delivered to you in connection with the registration statement on Form S-1 (as amended from time to time, the "Registration Statement") to be filed with the Securities and Exchange Commission on or about January 11, 1996 under the Securities Act of 1933 relating to 987,451 shares (the "Shares") of the common stock, $0.01 par value per share (the "Common Stock") of the Company offered by certain stockholders of the Company listed in the Registration Statement. I am familiar with the Company's Restated Certificate of Incorporation, its By-Laws and its corporate minute book as well as the Registration Statement. I have also examined such other documents, records and certificates and made such further investigation as I have deemed necessary for the purposes of this opinion. Based upon the foregoing, I am of the opinion that the Shares have been validly issued and are fully paid and non-assessable. I understand that this opinion is to be used in connection with the Registration Statement and accordingly I consent to the filing of this opinion as an exhibit to the Registration Statement. I further consent to the reference to me under the heading "Legal Matters" in the prospectus included in the Registration Statement.	S-1	EX-5.0	1996-01-12T00:00:00	1996-01-12T09:22:26
0000905729-96-000015	0000905729-96-000015_0000.txt	Under the Securities Exchange Act of 1934 COMMON STOCK $0.01 PAR VALUE (Title of Class of Securities) (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) (Date of Event Which Requires Filing of This Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with this statement [ ] The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act. 1) Names of Reporting Persons/S.S. or I.R.S. Identification Nos. of Above 2) Check the Appropriate Row if a Member of a Group (See Instructions) 4) Source of Funds Not applicable 5) Check if Disclosure of Legal Proceedings is Required Pursuant to Item 2(d) or 2(e) ____ 6) Citizenship or Place of Organization United States of America Number of (7) Sole Voting Power 420,000 Each (8) Shared Voting Power 0 (9) Sole Dispositive Power 420,000 (10) Shared Dispositive Power 0 11) Aggregate Amount Beneficially Owned by Each 12) Check if the Aggregate Amount in Row (11) Excludes 13) Percent of Class Represented by Amount in Row (11) 1.7% 14) Type of Reporting Person (See Instructions) IN ITEM 1. SECURITY AND ISSUER This statement relates to the $0.01 par value common stock of The Colonel's International, Inc. (the "Company"), whose executive offices are located at 620 South Platt Road, Milan, Michigan 48160. ITEM 2. IDENTITY AND BACKGROUND (b) Business address: G 9502 North Saginaw Road, Mt. Morris, (c) Mr. Mott is an investor in and owner of several privately held businesses primarily located in Flint, Michigan. (d) Mr. Mott has not been convicted in a criminal proceeding during the previous five years. (e) Mr. Mott has not been a party in a civil or administrative proceeding involving an alleged violation of any state or federal securities laws during the previous five years. (f) Mr. Mott is a citizen of the United States of America. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION No purchases of securities are being reported in this Schedule 13D. ITEM 4. PURPOSE OF TRANSACTION ITEM 5. INTEREST IN SECURITIES OF THE ISSUER (a) Mr. Mott owns a total of 420,00 shares of the Company's common stock. (b) The shares owned by Mr. Mott represent 1.7 percent of the outstanding shares of common stock of the Company. (e) Mr. Mott ceased to be the beneficial owner of more than 5 percent of the Company's shares of common stock on December 31, 1995. Effective December 31, 1995, The Colonel's, Inc. merged with a wholly-owned subsidiary of The Colonel's International, Inc. As consideration for the merger, The Colonel's International, Inc. issued 23,500,000 shares of common stock to shareholders of The Colonel's, Inc. Prior to the merger, Mr. Mott's 420,000 shares of the Company's common stock represented approximately 62 percent of the outstanding shares of common stock. As a result of the issuance of additional shares of the Company's common stock in connection with the merger, Mr. Mott's interest has been diluted to approximately 1.7 percent of the Company's outstanding common stock. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER Mr. Mott is not a party to any contracts, arrangements, understandings or relationships (legal or otherwise) with respect to any securities of the Company, including but not limited to transfer or voting of the securities, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies. ITEM 7. MATERIALS TO BE FILED AS EXHIBITS For the purpose of restatement, Schedule 13D, filed April 19, 1995, is filed as Appendix A hereto. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: January 9, 1996 /S/ CHARLES MOTT Under the Securities Exchange Act of 1934 COMMON STOCK $0.01 PAR VALUE (Title of Class of Securities) G 9502 North Saginaw Road (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) (Date of Event Which Requires Filing of This Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with this statement [X]. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act. 1) Names of Reporting Persons/S.S. or I.R.S. Identification Nos. of Above 2) Check the Appropriate Row if a Member of a Group (See Instructions) 4) Source of Funds PF 5) Check if Disclosure of Legal Proceedings is Required Pursuant to Item 2(d) or 2(e) ____ 6) Citizenship or Place of Organization United States of America Number of (7) Sole Voting Power 420,000 Each (8) Shared Voting Power 0 (9) Sole Dispositive Power 420,000 (10) Shared Dispositive Power 0 11) Aggregate Amount Beneficially Owned by Each Reporting 12) Check if the Aggregate Amount in Row (11) Excludes 13) Percent of Class Represented by Amount in Row (11) 62% 14) Type of Reporting Person (See Instructions) IN ITEM 1 SECURITIES AND ISSUER This statement relates to the April 6, 1995, acquisition of 420,000 shares of the $0.01 par value common stock of Brainerd International, Inc. (the "Company"), the address of the executive office of which is 17113 Minnetonka Boulevard, Suite 214, Minnetonka, Minnesota 55345. ITEM 2 IDENTITY AND BACKGROUND (b) Business address: G 9502 North Saginaw Road, Mt. Morris, (c) Mr. Mott is co-owner of a privately held retail business located in Mt. Morris, Michigan. (d) Mr. Mott has not been convicted in a criminal proceeding during the previous five years. (e) Mr. Mott has not been a party in a civil or administrative proceeding involving an alleged violation of any state or federal securities laws during the previous five years. (f) Mr. Mott is a citizen of the United States of America. ITEM 3 SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION The 420,000 shares were acquired from Donald J. Williamson and in exchange for a $949,200 promissory note of Mr. Mott payable with interest at an annual rate of 7% in monthly installments of $11,021.02. ITEM 4 PURPOSE OF TRANSACTION In September 1994, Mr. Williamson acquired 487,080 shares or approximately 71.9% of the Company's outstanding shares and Mr. Williamson became an officer and director of the Company. In February 1995, Mr. Williamson proposed to have the Company consolidate with The Colonel's, Inc., a manufacturer and supplier of replacement automotive bumpers and accessories which is wholly owned by Mr. Williamson and his wife. In March 1995, it was determined that Mr. Williamson's status as a principal shareholder, officer and director of the Company, would, under the laws applicable to the Company, prohibit the consolidation until September 1998. On April 6, 1995, Mr. Williamson resigned as an officer and director of the Company and sold 420,000 of his shares to Mr. Mott stating that it was his intention to propose the consolidation of the Company and the Colonel's, Inc., promptly following the completion of the sale. Mr. Mott's purchase of the shares is an investment. Mr. Mott has no present intention to seek to change the existing management of the Company. ITEM 5 INTEREST IN SECURITIES OF THE ISSUER. Prior to the acquisition of the 420,000 shares, Mr. Mott did not own shares of the Company. Mr. Mott holds the sole power to vote and dispose of the shares acquired. ITEM 6 CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER Mr. Williamson's sale of the 420,000 share to Mr. Mott was pursuant to a Stock Purchase Agreement dated April 6, 1995. The agreement contained representations and warranties by Mr. Williamson with respect to ownership of the shares and by Mr. Mott with respect to receipt of information concerning the Company including receipt of a draft registration statement concerning the consolidation of the Company and the Colonel's, Inc. Payment for the shares is to be made pursuant to the promissory note of Mr. Mott dated April 6, 1995, which note contemplates monthly payments of $11,021.02 which includes interest on the $949,200 principal sum at an annual rate of 7%. ITEM 7 MATERIALS TO BE FILED AS EXHIBITS Filed as an Exhibit is the April 6, 1995, Stock Purchase Agreement between Mr. Mott and Mr. Williamson. After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: April 11, 1995 /S/ CHARLES MOTT	SC 13D/A	SC 13D/A	1996-01-12T00:00:00	1996-01-12T17:29:04
0000950168-96-000040	0000950168-96-000040_0000.txt	(TO PROSPECTUS DATED NOVEMBER 24, 1995) SENIOR MEDIUM-TERM NOTES, SERIES E SUBORDINATED MEDIUM-TERM NOTES, SERIES E DUE NINE MONTHS OR MORE FROM DATE OF ISSUE NationsBank Corporation ("NationsBank" or the "Corporation") may from time to time offer its Senior Medium-Term Notes, Series E (the "Senior Notes"), and Subordinated Medium-Term Notes, Series E (the "Subordinated Notes" and, collectively with the Senior Notes, the "Notes"). NationsBank may sell up to $1,500,000,000 in aggregate initial offering price of Notes, subject to reduction from time to time after the date hereof at the option of NationsBank, including reduction as a result of the sale of other Debt Securities or Preferred Stock, or Common Stock (each as defined in the accompanying Prospectus) of NationsBank. The Senior Notes will rank equally with all other unsubordinated and unsecured indebtedness of the Corporation. The Subordinated Notes will be subordinated in right of payment to all Senior Indebtedness (as defined in the accompanying Prospectus) of the Corporation. Payment of principal of the Subordinated Notes may be accelerated only in the case of the bankruptcy of NationsBank. See "DESCRIPTION OF DEBT SECURITIES -- Subordination" and "DESCRIPTION OF DEBT SECURITIES -- Defaults and Rights of Acceleration" in the accompanying Prospectus. Each Note will mature on a day nine months or more from its date of issue and, as set forth in an applicable pricing supplement to this Prospectus Supplement (a "Pricing Supplement"), may be subject to redemption at the option of the Corporation or repaid at the option of the holder thereof prior to its stated maturity. Each Note will bear interest at a fixed rate (a "Fixed Rate Note") or at a floating rate (a "Floating Rate Note"), as set forth in the applicable Pricing Supplement. The interest rate or interest rate formula for each Note will be established by the Corporation at the time of issuance of such Note (the "Original Issue Date") and will be set forth therein and specified in the applicable Pricing Supplement. See "DESCRIPTION OF NOTES." Unless otherwise specified in the applicable Pricing Supplement, the Notes will be issued only in minimum denominations of $1,000 and any integral multiple in excess thereof, and Notes will be issued in book-entry form only, subject to certain exceptions listed herein, and will be represented by one or more global notes registered in the name of The Depository Trust Company ("DTC") or its nominee. Beneficial interests in Notes issued in book-entry form will be shown on, and transfer thereof will be effected only through, records maintained by DTC or its nominee and its participants. See "DESCRIPTION OF NOTES -- Book-Entry System." THE NOTES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NONBANKING AFFILIATE OF NATIONSBANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, THE COMMISSIONER OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT, ANY PRICING SUPPLEMENT HERETO, OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. (1) Unless otherwise specified in the applicable Pricing Supplement, each Note will be issued at 100% of its principal amount. (2) The Corporation will pay a commission to NationsBanc Capital Markets, Inc., Lehman Brothers, Lehman Brothers Inc., Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, or Salomon Brothers Inc (each an "Agent" and together, the "Agents") in the form of a discount to such Agent which, unless otherwise negotiated, will range from .125% to .750% of the principal amount of the Note (depending on its stated maturity date), for any Note sold through an Agent on an agency basis. The Company may also sell Notes at a discount to an Agent, as principal, for resale to investors and other purchasers. Unless otherwise specified in an applicable Pricing Supplement, any Note sold to an Agent as principal will be purchased by such Agent at a price equal to 100% of the principal amount thereof less a percentage of the principal amount equal to the commission applicable to an agency sale of a Note of identical maturity. See "PLAN OF DISTRIBUTION." (3) The Corporation has also agreed to indemnify the Agents against certain liabilities, including liabilities under the Securities Act of 1933, as amended. (4) Before deducting expenses payable by the Corporation estimated at $250,000, including reimbursement of certain expenses of the Agents. The Notes are being offered on a continuing basis by the Corporation through the Agents, each of which has agreed to use its reasonable efforts to solicit offers to purchase the Notes. The Corporation also may sell Notes to any Agent acting as principal for resale to investors or other purchasers, and has reserved the right to sell Notes directly to or through additional agents and to investors on its own behalf. The Notes will not be listed on any securities exchange, and there can be no assurance that the Notes offered by this Prospectus Supplement will be sold or that there will be a secondary market for the Notes or liquidity in the secondary market if one develops. The Corporation reserves the right to withdraw, cancel or modify the offer made hereby without notice. The Corporation or any Agent, if it solicits an offer on an agency basis, may reject any offer to purchase Notes, whether or not solicited, in whole or in part. See "PLAN OF DISTRIBUTION." NATIONSBANC CAPITAL MARKETS, INC. MERRILL LYNCH & CO. MORGAN STANLEY & CO. The date of this Prospectus Supplement is January 10, 1996. The following description of the particular terms of the Notes supplements, and to the extent inconsistent therewith, replaces, the description of the general terms and provisions of the Debt Securities (as defined in the accompanying Prospectus) set forth under the heading "DESCRIPTION OF DEBT SECURITIES" in the accompanying Prospectus. The following description will apply to all the Notes unless otherwise specified in the applicable Pricing Supplement. The Notes will be limited to $1,500,000,000 in aggregate principal amount, subject to reduction from time to time after the date hereof at the option of NationsBank, including reduction as a result of the sale of other Debt Securities or of Preferred Stock or Common Stock (each as defined in the accompanying Prospectus) of NationsBank. The Notes will be either Senior Notes or Subordinated Notes (referred to in the accompanying Prospectus as "Senior Debt Securities" and "Subordinated Debt Securities," respectively). The Senior Notes will constitute a single series of Senior Debt Securities to be issued under the Indenture dated as of January 1, 1995 (such Indenture, as it may be amended from time to time, the "Senior Indenture") between the Corporation and First Trust of New York, N.A., as successor Trustee to BankAmerica National Trust Company (the "Senior Trustee"). The Subordinated Notes will constitute a single series of Subordinated Debt Securities to be issued under the Indenture dated as of January 1, 1995 (such Indenture, as it may be amended from time to time, the "Subordinated Indenture") between the Corporation and The Bank of New York, as Trustee (the "Subordinated Trustee" and, together with the Senior Trustee, the "Trustees"). The Senior Indenture and the Subordinated Indenture are collectively referred to herein as the "Indentures." The Senior Notes will be unsecured and unsubordinated obligations of the Corporation and will rank equally with all unsecured senior debt of the Corporation. The Subordinated Notes will be unsecured and will be subordinate and junior in right of payment, to the extent and in the manner set forth in the Subordinated Indenture, to all Senior Indebtedness (as defined in the accompanying Prospectus) of the Corporation. See "DESCRIPTION OF DEBT SECURITIES -- Subordination" in the accompanying Prospectus. The Corporation had issued and outstanding $6.7 billion of senior debt instruments and $3.9 billion of subordinated debt instruments at September 30, 1995, including medium-term notes. The Corporation's subsidiaries had issued and outstanding $4.8 billion of senior debt instruments and $.3 billion of subordinated debt instruments at September 30, 1995. As of September 30, 1995, the Corporation had $2.6 billion of commercial paper and other short-term notes payable outstanding. During the nine months ended September 30, 1995, the amount of commercial paper and other short-term notes payable outstanding averaged $2.6 billion and ranged from a high of $2.8 billion to a low of $2.3 billion. At September 30, 1995, the Corporation had unused lines of credit aggregating $1.5 billion, principally to support commercial paper borrowings. There is no limitation in the Indentures on the amount of Senior Indebtedness (as defined in the accompanying Prospectus), Debt Securities or other obligations which may be issued by the Corporation. There is no right of acceleration of the payment of principal of the Subordinated Notes upon a default in the payment of principal of or interest on such Notes or in the performance of any covenant of the Corporation contained in the Subordinated Indenture. Payment of the principal of the Subordinated Notes may be accelerated only in the case of the bankruptcy of the Corporation. See "DESCRIPTION OF DEBT SECURITIES -- Defaults and Rights of Acceleration" in the accompanying Prospectus. Unless otherwise specified in an applicable Pricing Supplement, the Notes will be issuable in denominations of $1,000 and integral multiples in excess thereof. Unless otherwise specified in an applicable Pricing Supplement, Notes will be issued in fully registered book-entry form only and will be represented by one or more global securities registered in the name of DTC or its nominee. Generally, owners of beneficial interests in Notes issued in book-entry form will not be entitled to physical delivery of notes in certificated form and will not be considered the holders thereof. With respect to Notes issued in book-entry form, all references herein to "registered holders," "Registered Holders," "holders" or "Holders" will be to DTC or its nominee and not to owners of beneficial interests in such Notes. See "DESCRIPTION OF NOTES -- Book-Entry System." The Notes will be offered on a continuing basis and will mature on a day nine months or more from date of issue, as selected by the purchaser thereof and agreed to by the Corporation. In addition, Floating Rate Notes will mature on an Interest Payment Date (as hereinafter defined). Unless otherwise specified in Supplement, "Business Day" with respect to any Note means any day, other than a Saturday or Sunday, that (i) is not a day on which banking institutions are generally authorized or obligated by law to close in the City of New York and (ii) if such Note is a LIBOR Note (as hereinafter defined), is a London Banking Day. "London Banking Day" with respect to any Note means any day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. The Pricing Supplement relating to a Note will describe the following terms: (i) whether such Note is a Fixed Rate Note or a Floating Rate Note; (ii) the price (expressed as a percentage of the aggregate principal amount thereof) at which such Note will be issued; (iii) the Original Issue Date; (iv) the stated maturity date and, if applicable, whether such stated maturity date may be renewed at the option of the holder or extended by the Corporation, and if so, the Final Maturity Date (as hereinafter defined) and other terms with respect thereto; (v) if such Note is a Fixed Rate Note, the rate per annum at which such Note will bear interest; (vi) if such Note is a Floating Rate Note, the Base Rate, the Initial Interest Rate, the Interest Reset Period, the Interest Payment Dates, the Index Maturities, the Maximum Interest Rate, if any, the Minimum Interest Rate, if any, the Spread and/or Spread Multiplier, if any (each as hereinafter defined), and any other terms relating to the particular method of calculating the interest rate for such Note; (vii) whether the Note is an original issue discount Note, and, if so, the yield to maturity; (viii) whether such Note may be redeemed by the Corporation or repaid at the option of the registered holder prior to its stated maturity date and, if so, the provisions relating to such redemption or repayment; (ix) whether such Note is a Senior Note or a Subordinated Note; and (x) any other terms of such Note not inconsistent with the provisions of the applicable Indenture. PAYMENT OF PRINCIPAL AND INTEREST Unless otherwise specified in the applicable Pricing Supplement, (i) payments of principal of (and premium, if any, on) and any interest on Notes issued in book-entry form will be made in accordance with the arrangements from time to time in place between the Paying Agent (as hereinafter defined) and DTC or its nominee, as holder (see "DESCRIPTION OF NOTES -- Book-Entry System"), and (ii) payments of interest on Notes in certificated form, if any (other than interest payable at the Maturity Date (as hereinafter defined)), generally will be made by check mailed to the holders of such Notes as of the applicable record date at the address of the holders appearing on the Security Register of the Corporation with respect to such Notes. Unless otherwise specified in the applicable Pricing Supplement, principal (and premium, if any) and interest payable at the Maturity Date of a Note issued in certificated form will be paid by wire transfer of immediately available funds upon surrender of such Note at the corporate trust office of the applicable Trustee or Paying Agent. Unless otherwise specified in the applicable Pricing Supplement, the Notes will be issued in book-entry form only and will be represented by one or more fully registered global securities (each, a "Global Book-Entry Note") registered in the name of Cede & Co., as nominee of DTC. Under the book-entry system of DTC, purchases of Notes must be made by or through persons that have accounts with DTC ("Participants") or persons that may hold interests through Participants ("Indirect Participants"). Upon the issuance of a Global Book-Entry Note, DTC will credit, on its book-entry registration and transfer system, the respective principal amounts of the individual Notes represented by such Global Book-Entry Note to the accounts of Participants as designated by the applicable Agent. The ownership of beneficial interests in such Global Book-Entry Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC (with respect to interests of Participants), the records of Participants (with respect to interests of Indirect Participants) or on the records of Indirect Participants. So long as DTC, or its nominee, is the registered holder of a Global Book-Entry Note, DTC or its nominee will be considered the sole owner or holder of the Notes represented by such Global Book-Entry Note for all purposes under the applicable Indenture. Except as provided below, owners of beneficial interests in a Global Book-Entry Note will not be entitled to have Notes that are represented by such Global Book-Entry Note registered in their names, will not receive or be entitled to receive physical delivery of such Notes in certificated form and will not be considered the owners or holders thereof under the applicable Indenture. The laws of some states require that certain purchasers of securities take physical delivery of such securities in certificated form. Such transfer restrictions and such laws may impair the ability to own, transfer or pledge beneficial interests in a Global Book-Entry Note. DTC has advised the Corporation and the Agents as follows: DTC is a limited-purpose trust company organized under New York law, a "banking organization" within the meaning of New York law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code as in effect in the State of New York and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold securities deposited by its Participants and to facilitate the clearance and settlement of securities transactions among Participants in such securities through electronic computerized book-entry changes in accounts of the Participants, thereby eliminating the need for physical movement of securities certificates. DTC's direct Participants include securities brokers and dealers (including one or more of the Agents), banks (including certain subsidiaries of the Corporation), trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) have ownership interests in DTC. DTC is owned by a number of its Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Indirect access to DTC's book-entry system is also available to Indirect Participants, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. The rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission. To facilitate subsequent transfers, all securities deposited with DTC are registered in the name of DTC's partnership nominee, Cede & Co. The deposit of securities with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual beneficial owners of securities deposited with it such as the Notes; DTC's records reflect only the identity of the Participants to whose accounts such securities are credited, which may or may not be the beneficial owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Participants, by Participants to Indirect Participants, and by Participants and Indirect Participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Neither DTC nor Cede & Co. will consent or vote with respect to securities held by DTC. Under its usual procedures, DTC mails an omnibus proxy to an issuer as soon as possible after the record date. The omnibus proxy assigns Cede & Co.'s consenting or voting rights to those Participants to whose accounts the securities are credited on the record date (identified in a listing attached to the omnibus proxy). DTC can act only on behalf of Participants, who in turn act on behalf of Indirect Participants. Owners of beneficial interests in a Global Book-Entry Note that are not Participants or Indirect Participants but desire to purchase, sell or otherwise transfer ownership of such interests may do so only through Participants and Indirect Participants. In addition, the ability of owners of beneficial interests in a Global Book-Entry Note to pledge such interests to persons or entities that do not participate in the DTC system may be limited due to the lack of certificates for the Notes. Currently, DTC may only transmit and receive payments in U.S. dollars. Except as otherwise provided herein, the holder of a Global Book-Entry Note shall be the only person entitled to receive payments with respect to Notes represented by such Global Book-Entry Note. Accordingly, payments of principal of (and premium, if any, on) and any interest on individual Notes represented by a Global Book-Entry Note will be made only to DTC or its nominee, as the case may be, as the registered holder of the Global Book-Entry Note representing such Notes. DTC has advised the Corporation and the Agents that it is DTC's practice to credit Participants' accounts on the payable date in accordance with their respective holdings with respect to a Global Book-Entry Note as shown on DTC's records, unless DTC has reason to believe that it will not receive payment on such date. Payments by Participants to beneficial owners are governed by standing instructions and customary practices, as is the case with securities held in "street name." Such instructions will be the responsibility of such Participant and not of DTC, the Agents or the Corporation, subject to any statutory or regulatory requirements as may be in effect from time to time. The Corporation will in every case be discharged by payment to, or to the order of, DTC or its nominee, as the holder of such Global Book-Entry Note, of the amount so paid. Each of the persons shown in the records of DTC or its nominee as an owner of a beneficial interest therein must look solely to DTC or its nominee, as the case may be, for its share of any such payment so made by the Corporation. Neither the Corporation, the Trustee for such Notes, nor any Paying Agent, Security Registrar or Transfer Agent for such Notes will have any responsibility or liability for any aspect of the records relating to or payments made on account of owners of beneficial interests in a Global Book-Entry Note or for maintaining, supervising or reviewing any records relating to such beneficial interests. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of beneficial interests in Global Book-Entry Notes among its Participants, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. If DTC is at any time unwilling, unable or ineligible to continue as a depositary and a successor depositary is not appointed by the Corporation within 90 days, the Company will issue registered Notes in certificated form in exchange for beneficial interests in each Global Book-Entry Note. In addition, the Corporation may at any time determine not to have Notes represented by Global Book-Entry Notes and, in such event, will issue registered Notes in certificated form in exchange for Global Book-Entry Notes. In any such instance, an owner of a beneficial interest in a Global Book-Entry Note will be entitled to physical delivery in certificated form of Notes equal in principal amount to such beneficial interest and to have such Notes registered in its name. Unless otherwise indicated in the applicable Pricing Supplement, Notes so issued in certificated form will be issued in denominations of $1,000 or any integral multiple in excess thereof and will be issued in registered form only, without coupons. Notes issued in book-entry form through the facilities of DTC may be transferred or exchanged through a participating member of DTC. No service charge will be made for any registration of transfer or exchange of Notes issued in certificated form, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. PAYING AGENT, SECURITY REGISTRAR AND TRANSFER AGENT Until the Notes are paid, the Corporation will at all times maintain a Paying Agent, Security Registrar and Transfer Agent, which may or may not be the same person, for the Senior Notes and the Subordinated Notes. The Corporation has initially appointed The Bank of New York ("BNY"), as Paying Agent, Security Registrar and Transfer Agent with respect to the Senior Notes. As Subordinated Trustee, BNY will act in the same capacities for the Subordinated Notes. The Corporation reserves the right at any time to vary or terminate the appointment of any Paying Agent, Security Registrar and Transfer Agent, to appoint additional Paying Agents, Security Registrars and Transfer Agents and to approve any change in the office through which the Paying Agent, Security Registrar or Transfer Agent shall act. The Notes will bear interest at a fixed rate, at floating rates determined by reference to one or more of the Base Rates described below (which may be adjusted by a Spread and/or Spread Multiplier applicable to such Floating Rate Notes) or at any combination of fixed and floating rates until the principal thereof is paid. Interest, if any, will be payable as specified under "Fixed Rate Notes" and "Floating Rate Notes" below. Interest payable and punctually paid on any date on which interest is payable (an "Interest Payment Date") and on the stated maturity date (or New Maturity Date or Extended Maturity Date, as the case may be (each as hereinafter defined)) or upon earlier redemption or repayment (such stated maturity date, New Maturity Date or Extended Maturity Date, or date of redemption or repayment, as the case may be, being collectively hereinafter referred to as the "Maturity Date"), or on a later date on which payment may be made hereunder in respect of such Interest Payment Date, will be paid to the registered holder at the close of business on the Regular Record Date (as hereinafter defined) next preceding such Interest Payment Date; PROVIDED, HOWEVER, that the first payment of interest on any Note with an Original Issue Date (as set forth in the applicable Pricing Supplement) between a Regular Record Date and an Interest Payment Date or on an Interest Payment Date will be made on the Interest Payment Date following the next succeeding Regular Record Date to the registered holder on such next succeeding Regular Record Date; and PROVIDED, FURTHER, HOWEVER, that interest payable at the Maturity Date will be payable to the person to whom principal shall be payable. Unless otherwise specified in the applicable Pricing Supplement, the "Regular Record Date" with respect to any Interest Payment Date for a Note will be the date (whether or not a Business Day) 15 calendar days preceding such Interest Payment Date, except that the Regular Record Date for a March 15 Interest Payment Date for a Fixed Rate Note will always be the February 28 (whether or not a Business Day) immediately preceding such Interest Payment Date. Each Fixed Rate Note will bear interest from its Original Issue Date at the rate per annum stated on the face thereof, except as described below under "DESCRIPTION OF NOTES -- Extension of Maturity," until the principal amount thereof is paid. Unless otherwise specified in the applicable Pricing Supplement, interest on each Fixed Rate Note will be computed on the basis of a 360-day year of twelve 30-day months and will be payable semi-annually in arrears on June 15 and December 15 of each year during the term of the Note (each an "Interest Payment Date") and on the Maturity Date. If any Interest Payment Date or the Maturity Date of a Fixed Rate Note falls on a day that is not a Business Day, the payment will be made on the next succeeding Business Day as if it were made on the date such payment was due, and no additional interest will accrue on the amount so payable for the period from and after such Interest Payment Date or the Maturity Date, as the case may be. Interest payments will be in the amount of interest accrued from and including the next preceding Interest Payment Date (or from and including the Original Issue Date if no interest has been paid or duly provided for with respect to such Note) to but excluding the Interest Payment Date or Maturity Date, as the case may be. Each Floating Rate Note will bear interest from its Original Issue Date at the rates determined as described below until the principal amount thereof is paid. Unless otherwise specified in the applicable Pricing Supplement, interest on Floating Rate Notes will be determined by reference to an interest rate basis (the "Base Rate"), which may be (i) the CD Rate (a "CD Rate Note"), (ii) the Commercial Paper Rate (a "Commercial Paper Rate Note"), (iii) LIBOR (a "LIBOR Note"), (iv) the Federal Funds Rate (a "Federal Funds Rate Note"), (v) the Prime Rate (a "Prime Rate Note"), (vi) the Treasury Rate (a "Treasury Rate Note"), (vii) the CMT Rate (a "CMT Rate Note"), (viii) the Eleventh District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Note"), or (ix) such other Base Rate as may be set forth in the applicable Pricing Supplement and in such Note. The Base Rate will be based upon one or more selected Index Maturities (as hereinafter defined) and adjusted by a Spread and/or Spread Multiplier (each as hereinafter defined), if any, as specified in the applicable Pricing Supplement. The interest rate on each Floating Rate Note will be calculated by reference to the specified Base Rate, plus or minus the Spread and/or multiplied by the Spread Multiplier, if any. The "Index Maturity" is the period to maturity of the instrument or obligation with respect to which the Base Rate is calculated. The "Spread" is the number of basis points above or below the Base Rate applicable to such Floating Rate Note, and the "Spread Multiplier" is the percentage of the Base Rate applicable to the interest rate for such Floating Rate Note. The Spread, Spread Multiplier, Index Maturity and other variable terms of the Floating Rate Notes are subject to change by the Corporation from time to time, but, except as described below under "DESCRIPTION OF NOTES -- Extension of Maturity," no such change will affect any Floating Rate Note previously issued or as to which an offer to purchase has been accepted by the Corporation. As specified in the applicable Pricing Supplement, a Floating Rate Note may also have either or both of the following (in each case expressed as a rate per annum on a simple interest basis): (i) a maximum rate at which interest may accrue during any interest period ("Maximum Interest Rate") and (ii) a minimum rate at which interest may accrue during any interest period ("Minimum Interest Rate"). In addition to any such Maximum Interest Rate, the interest rate on a Floating Rate Note will in no event be higher than the maximum rate permitted by applicable law, as the same may be modified by United States law of general application. Under current New York law, the maximum rate of interest (for any loan in the amount of $250,000 or more) is 25% per annum on a simple interest basis. This limit may not apply to Notes in which $2,500,000 or more has been invested. The Corporation will appoint an agent (a "Calculation Agent") to calculate interest rates on Floating Rate Notes. BNY has been appointed Calculation Agent with respect to Floating Rate Notes unless otherwise specified in the applicable Pricing Supplement. The interest rate on each Floating Rate Note will be reset daily, weekly, monthly, quarterly, semi-annually or annually (such period being the "Interest Reset Period" for such Note and the first day of each Interest Reset Period being an "Interest Reset Date"), as specified in the applicable Pricing Supplement. Unless otherwise specified in the applicable Pricing Supplement and except as provided below, the Interest Reset Dates will be (i) in the case of Floating Rate Notes that reset daily, each Business Day; (ii) in the case of Notes (other than Treasury Rate Notes) that reset weekly, Wednesday of each week; (iii) in the case of Treasury Rate Notes that reset weekly, Tuesday of each week; (iv) in the case of Floating Rate Notes that reset monthly, the third Wednesday of each month; (v) in the case of Floating Rate Notes that reset quarterly, the third Wednesday of March, June, September and December of each year; (vi) in the case of Floating Rate Notes that reset semi-annually, the third Wednesday of each of two months of each year specified in the applicable Pricing Supplement; and (vii) in the case of Floating Rate Notes that reset annually, the third Wednesday of one month of each year specified in the applicable Pricing Supplement. If an Interest Reset Date for any Floating Rate Note would otherwise be a day that is not a Business Day, such Interest Reset Date will be postponed to the next succeeding Business Day, except that in the case of a LIBOR Note, if the next succeeding Business Day is in the next succeeding calendar month, such Interest Reset Date will be the next preceding Business Day. If a Treasury bill auction (as described below) will be held on any day that would otherwise be an Interest Reset Date for a Treasury Rate Note, then such Interest Reset Date will instead be the Business Day following such auction date. Unless otherwise specified in the applicable Pricing Supplement, the interest rate in effect with respect to a Floating Rate Note during the period commencing on an Interest Reset Date will be the rate determined on the "Calculation Date" by reference to the "Interest Determination Date." Unless otherwise provided in the applicable Pricing Supplement, the Interest Determination Date with respect to an Interest Reset Date for a CD Rate Note, Commercial Paper Rate Note, Federal Funds Rate Note, Prime Rate Note or CMT Rate Note will be the second Business Day preceding such Interest Reset Date; the Interest Determination Date with respect to an Interest Reset Date for a LIBOR Note will be the second London Banking Day preceding such Interest Reset Date; the Interest Determination Date with respect to an Interest Reset Date for an Eleventh District Cost of Funds Rate Note will be the last Business Day of the month immediately preceding such Interest Reset Date in which the Federal Home Loan Bank (the "FHLB") of San Francisco publishes the Index (as hereinafter defined); and the Interest Determination Date with respect to an Interest Reset Date for a Treasury Rate Note will be the day of the week in which such Interest Reset Date falls on which Treasury bills of the Index Maturity specified on the face of such Treasury Rate Note are auctioned. Treasury bills are normally sold at auction on Monday of each week. If such day is a legal holiday, the auction is normally held on the following Tuesday, except that such auction may be held on the preceding Friday. If, as the result of a legal holiday, an auction is so held on the preceding Friday, such Friday will be the Interest Determination Date with respect to the Interest Reset Date for a Treasury Note occurring in the succeeding week. Unless otherwise specified in the applicable Pricing Supplement, the "Calculation Date" pertaining to any Interest Determination Date shall be the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day or (ii) the Business Day next preceding the applicable Interest Payment Date or Maturity Date, as the case may be. Unless otherwise specified in the applicable Pricing Supplement, the interest rate in effect with respect to a Floating Rate Note on each day that is not an Interest Reset Date will be the interest rate determined as of the Interest Determination Date pertaining to the immediately preceding Interest Reset Date, and the interest rate in effect on any day that is an Interest Reset Date will be the interest rate determined as of the Interest Determination Date pertaining to such Interest Reset Date, subject in either case to any Maximum or Minimum Interest Rate limitation referred to above; PROVIDED, HOWEVER, that the interest rate in effect with respect to a Floating Rate Note for the period from the Original Issue Date to the initial Interest Reset Date (the "Initial Interest Rate") will be specified in the applicable Pricing Supplement, if available, and, unless otherwise specified in the applicable Pricing Supplement, the interest rate in effect for the ten calendar days immediately prior to the Maturity Date (with respect to any amount to be redeemed or repaid) will be the interest rate in effect on the tenth calendar day preceding such Maturity Date. The interest rate on a Floating Rate Note for the initial Interest Reset Period (as hereinafter defined) and for the final Interest Reset Period may be based upon a different Index Maturity and therefore may result in a different interest rate for either or both of such Interest Reset Periods, as set forth in the applicable Pricing Supplement. Interest on each Floating Rate Note will be payable monthly, quarterly, semi-annually or annually (the "Interest Payment Period"), as specified in the applicable Pricing Supplement. Unless otherwise specified in the applicable Pricing Supplement and except as provided below, the date or dates on which interest will be payable (each an "Interest Payment Date") will be (i) in the case of Floating Rate Notes with a monthly Interest Payment Period, the third Wednesday of each month; (ii) in the case of Floating Rate Notes with a Interest Payment Period, the third Wednesday of March, June, September and December of each year; (iii) in the case of Floating Rate Notes with a semi-annual Interest Payment Period, the third Wednesday of each of two months of each year specified in the applicable Pricing Supplement; (iv) in the case of Floating Rate Notes with an annual Interest Payment Period, the third Wednesday of one month of each year specified in the applicable Pricing Supplement; and (v) in each case, on the Maturity Date. Interest payments will be in the amount of interest accrued from and including the next preceding Interest Payment Date in respect of which interest has been paid or duly provided for (or from and including the Original Issue Date if no interest has been paid or duly provided for with respect to such Note) to but excluding the Interest Payment Date or the Maturity Date, as the case may be. However, in the case of Floating Rate Notes on which the interest rate is reset daily or weekly, unless otherwise specified in the applicable Pricing Supplement, interest payments on each Interest Payment Date will be in the amount of interest accrued from but excluding the Regular Record Date through which interest has been paid (or from and including the Original Issue Date if no interest has been paid or duly provided for with respect to such Note) to and including the Regular Record Date next preceding the applicable Interest Payment Date, except that the interest payment due on the Maturity Date will include interest accrued to but excluding such date. If any Interest Payment Date (other than the Maturity Date) for any Floating Rate Note would fall on a day that is not a Business Day with respect to such Note, such Interest Payment Date will be the following day that is a Business Day with respect to such Note, except that, in the case of a LIBOR Note, if such Business Day is in the next succeeding calendar month, such Interest Payment Date will be the immediately preceding day that is a Business Day with respect to such LIBOR Note. If the Maturity Date of any Floating Rate Note falls on a day that is not a Business Day, the payment of principal (and premium, if any) or interest may be made on the next Business Day as if it were made on the date such payment was due, and no additional interest will accrue on the amount so payable for the period from and after the Maturity Date. Unless otherwise specified in the applicable Pricing Supplement, accrued interest on any Floating Rate Note will be calculated by multiplying the principal amount of such Note by an accrued interest factor. Such accrued interest factor will be computed by adding the interest factor calculated for each day from and including the Original Issue Date, or from but excluding the last date to which interest has been paid, as the case may be, to and including the date for which accrued interest is being calculated. Unless otherwise specified in the applicable Pricing Supplement, the interest factor (expressed as a decimal) for each such day is computed by dividing the interest rate in effect on such day by the actual number of days in the year, in the case of Treasury Rate Notes or CMT Rate Notes, and by 360, in the case of other Floating Rate Notes. Unless otherwise specified in the applicable Pricing Supplement, all percentages resulting from any calculation on Floating Rate Notes will be rounded to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (E.G., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all dollar amounts used or resulting from such calculation on Floating Rate Notes will be rounded to the nearest cent (with one-half cent being rounded upward). Upon the request of the beneficial holder of any Floating Rate Note, the Calculation Agent will provide the interest rate then in effect and, if determined, the interest rate that will become effective as a result of a determination made for the next Interest Reset Date with respect to such Floating Rate Note. The Calculation Agent will also make certain calculations, specified below, on or prior to the Calculation Date. The interest rate that will become effective on each subsequent Interest Reset Date will be determined by the Calculation Agent (calculated with reference to the Base Rate and the Spread and/or Spread Multiplier, if any, specified in the applicable Pricing Supplement) as follows (such determination, in the absence of manifest error, to be binding upon all parties): CD RATE: Unless otherwise specified in the applicable Pricing Supplement, "CD Rate" means, with respect to an Interest Determination Date relating to a CD Rate Note (the "CD Rate Interest Determination Date"), the rate on such CD Rate Interest Determination Date for negotiable certificates of deposit having the Index Maturity specified in the applicable Pricing Supplement, as such rate is published by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") in "Statistical Release H.15(519), Selected Interest Rates," or any successor publication of the Federal Reserve Board ("H.15(519)"), under the heading "CDs (Secondary Market)." If H.15(519) is not so published by 3:00 p.m., New York City time, on the Calculation Date pertaining to such CD Rate Interest Determination Date, the CD Rate will be the rate on such CD Rate Interest Determination Date for negotiable certificates of deposit of the Index Maturity specified in the applicable Pricing Supplement, as published by the Federal Reserve Bank of New York in its daily statistical release "Composite 3:30 P.M. Quotations for U.S. Government Securities" ("Composite Quotations") under the heading "Certificates of Deposit." If by 3:00 p.m., New York City time, on such Calculation Date such rate is not yet published in Composite Quotations, the CD Rate for such CD Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the secondary market offered rates as of 10:00 a.m., New York City time, on such CD Rate Interest Determination Date, of three leading nonbank dealers in negotiable U.S. dollar certificates of deposit in The City of New York selected by the Calculation Agent for negotiable certificates of deposit in denominations of $5,000,000 of major United States money center banks with a remaining maturity closest to the Index Maturity specified in the applicable Pricing Supplement. However, if such dealers are not so quoting such rates, the CD Rate for such CD Rate Interest Determination Date will be the CD Rate in effect on such CD Rate Interest Determination Date. COMMERCIAL PAPER RATE: Unless otherwise specified in the applicable Pricing Supplement, "Commercial Paper Rate" means, with respect to an Interest Determination Date relating to a Commercial Paper Note (a "Commercial Paper Rate Interest Determination Date"), the Money Market Yield (as hereinafter defined) of the rate on such Commercial Paper Rate Interest Determination Date for commercial paper having the Index Maturity specified in the applicable Pricing Supplement as published in H.15(519) under the heading "Commercial Paper." If such rate is not so published by 3:00 p.m., New York City time, on the Calculation Date pertaining to such Commercial Paper Rate Interest Determination Date, the Commercial Paper Rate will be the Money Market Yield on such Commercial Paper Rate Interest Determination Date of the rate for commercial paper of the Index Maturity specified in the applicable Pricing Supplement as published in Composite Quotations under the heading "Commercial Paper." If by 3:00 p.m., New York City time, on such Calculation Date such rate is not yet published in Composite Quotations, the Commercial Paper Rate for such Commercial Paper Rate Interest Determination Date will be calculated by the Calculation Agent and will be the Money Market Yield of the arithmetic mean of the offered rates, as of 11:00 a.m., New York City time, on such Commercial Paper Rate Interest Determination Date of three leading dealers of commercial paper in The City of New York (which may include the Calculation Agent or its affiliates) selected by the Calculation Agent for commercial paper of the Index Maturity specified in the applicable Pricing Supplement placed for an industrial issuer whose bond rating is "AA" or the equivalent by a nationally recognized securities rating agency. However, if such dealers are not so quoting such rates, the Commercial Paper Rate for such Commercial Paper Rate Interest Determination Date will be the Commercial Paper Rate then in effect on such Commercial Paper Rate Interest Determination Date. "Money Market Yield" will be a yield calculated in accordance with the following formula: where "D" refers to the applicable per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal, and "M" refers to the actual number of days in the interest period for which interest is being calculated. LIBOR: Unless otherwise specified in the applicable Pricing Supplement, "LIBOR" means the rate determined by the Calculation Agent in accordance with the following provisions: (i) With respect to an Interest Determination Date relating to a LIBOR Note (a "LIBOR Interest Determination Date"), LIBOR will be "LIBOR Telerate" unless "LIBOR Reuters" is specified in the applicable pricing supplement. "LIBOR Telerate" is the rate for deposits in the LIBOR Currency (as defined below) having the Index Maturity designated in the applicable Pricing Supplement that appears on the Designated LIBOR Page (as defined below) specified in the applicable Pricing Supplement as of 11:00 a.m. London time, on that LIBOR Interest Determination Date. "LIBOR Reuters" is that rate which is the arithmetic mean of the offered rates (unless the specified Designated LIBOR Page by its terms provides only for a single rate, in which case such single rate shall be used) for deposits in the LIBOR Currency having the Index Maturity designated in the applicable Pricing Supplement that appear on the Designated LIBOR Page specified in the applicable Pricing Supplement as of 11:00 a.m. London time, on that LIBOR Interest Determination Date, if at least two such offered rates appear (unless, as aforesaid, only a single rate is required) on such Designated LIBOR Page. If the applicable LIBOR rate cannot be determined under this clause (i), LIBOR in respect of the related LIBOR Interest Determination Date will be determined as if the parties had specified the rate described in clause (ii) below. (ii) With respect to a LIBOR Interest Determination Date on which the applicable LIBOR rate cannot be determined under clause (i) above, the Calculation Agent will request the principal London offices of each of four major reference banks in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotation for deposits in the LIBOR Currency for the period of the Index Maturity designated in the applicable Pricing Supplement to prime banks in the London interbank market commencing on the applicable Interest Reset Date at approximately 11:00 a.m., London time, on such LIBOR Interest Determination Date and in a principal amount that is representative for a single transaction in such LIBOR Currency in such market at such time. If at least two such quotations are provided, LIBOR determined on such LIBOR Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two such quotations are provided, LIBOR for such LIBOR Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 a.m. (or such other time specified in the applicable Pricing Supplement), in the applicable Principal Financial Center (as defined below), on such LIBOR Interest Determination Date by three major banks in such Principal Financial Center selected by the Calculation Agent for loans in the LIBOR Currency to leading European banks, having the Index Maturity designated in the applicable Pricing Supplement commencing on the applicable Interest Reset Date and in a principal amount that is representative for a single transaction in such LIBOR Currency in such market at such time; PROVIDED, HOWEVER, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined on such LIBOR Interest Determination Date will be LIBOR then in effect on such LIBOR Interest Determination Date. "LIBOR Currency" means the currency (including composite currencies) specified in the applicable Pricing Supplement as the currency for which LIBOR shall be calculated. If no such currency is specified in the applicable Pricing Supplement, the LIBOR Currency shall be U.S. dollars. "Designated LIBOR Page" means either (a) if "LIBOR Telerate" is designated in the applicable Pricing Supplement, the display on the Dow Jones Telerate Service for the purpose of displaying the London interbank offered rates of major banks for the applicable LIBOR Currency, or (b) if "LIBOR Reuters" is designated in the applicable Pricing Supplement, the display on the Reuters Monitor Money Rates Service for the purpose of displaying the London interbank rates of major banks for the applicable LIBOR Currency. If neither LIBOR Telerate nor LIBOR Reuters is specified in the applicable Pricing Supplement, LIBOR for the applicable LIBOR Currency will be determined as if LIBOR Telerate (and, if the U.S. dollar is the LIBOR Currency, Page 3750) had been specified. "Principal Financial Center" will generally be the capital city of the country of the specified LIBOR Currency, except that with respect to U.S. dollars, Deutsche marks and ECUs, the Principal Financial Center shall be The City of New York, Frankfurt, and Luxembourg, respectively. FEDERAL FUNDS RATE: Unless otherwise specified in the applicable Pricing Supplement, "Federal Funds Rate" means, with respect to an Interest Determination Date relating to a Federal Funds Rate Note (a "Federal Funds Rate Interest Determination Date"), the rate on such Interest Determination Date for Federal Funds as published in H.15(519) under the heading "Federal Funds (Effective)." If H.15(519) is not so published by 3:00 p.m., New York City time, on the Calculation Date pertaining to such Federal Funds Rate Interest Determination Date, the Federal Funds Rate will be the rate on such Federal Funds Rate Interest Determination Date for Federal Funds as published in Composite Quotations under the heading "Federal Funds/Effective Rate." If by 3:00 p.m., New York City time, on such Calculation Date such rate is not yet published in Composite Quotations, the Federal Funds Rate for such Federal Funds Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the rates for the last transaction in overnight Federal Funds as of 9:00 a.m., New York City time, on such Federal Funds Rate Interest Determination Date quoted by each of three leading brokers of Federal Funds transactions in The City of New York selected by the Calculation Agent. However, if fewer than three such brokers are so quoting such rates, the Federal Funds Rate for such Federal Funds Rate Interest Determination Date with respect to any Federal Funds Rate Note will be the Federal Funds Rate then in effect on such Federal Funds Rate Interest Determination Date. PRIME RATE: Unless otherwise specified in the applicable Pricing Supplement, "Prime Rate" means, with respect to an Interest Determination Date relating to a Prime Rate Note (a "Prime Rate Interest Determination Date"), the rate set forth on such date in H.15(519) under the heading "Bank Prime Loan," or if not so published prior to 9:00 a.m., New York City time, on the Calculation Date pertaining to such Prime Rate Interest Determination Date, then the Prime Rate will be determined by the Calculation Agent and will be the arithmetic mean of the rates of interest publicly announced by each bank that appears on the Reuters Screen U.S. Prime 1 (as defined below) as such bank's prime rate or base lending rates as in effect for that Prime Rate Interest Determination Date. If fewer than four such rates but more than one such rate appear on the Reuters Screen U.S. Prime 1 for the Prime Rate Interest Determination Date, the Prime Rate will be determined by the Calculation Agent and will be the arithmetic mean of the prime rates, quoted on the basis of the actual number of days in the year divided by a 360-day year, as of the close of business on such Prime Rate Interest Determination Date by four major money center banks in The City of New York selected by the Calculation Agent. If fewer than two such rates appear on the Reuters Screen U.S. Prime 1, the Prime Rate will be determined by the Calculation Agent, as of the close of business on the Prime Rate Interest Determination Date, on the basis of the prime rates, as of the close of business on the Prime Rate Interest Determination Date, furnished in The City of New York by the appropriate number of substitute banks or trust companies organized and doing business under the laws of the United States, or any State thereof, having total equity capital of at least $500,000,000 and being subject to supervision or examination by Federal or State authority, selected by the Calculation Agent, to provide such rate or rates; PROVIDED, HOWEVER, that if the banks selected as aforesaid are not quoting as mentioned in this sentence, the Prime Rate for such Prime Rate Interest Determination Date will be the Prime Rate then in effect on such Prime Rate Interest Determination Date. "Reuters Screen U.S. Prime 1" means the display designated as page "U.S. Prime 1" on the Reuters Monitor Money Rates Service (or such other page as may replace the U.S. Prime 1 page on that service for the purpose of displaying prime rates or base lending rates of major United States banks). TREASURY RATE: Unless otherwise specified in the applicable Pricing Supplement, "Treasury Rate" means, with respect to an Interest Determination Date relating to a Treasury Rate Note (a "Treasury Rate Interest Determination Date"), the rate for the auction held on such Treasury Rate Interest Determination Date of direct obligations of the United States ("Treasury bills") having the Index Maturity specified in the applicable Pricing Supplement, as published in H.15(519) under the heading "U.S. Government Securities-Treasury bills-auction average (investment)." If such rate is not published by 3:00 p.m., New York City time, on the Calculation Date pertaining to such Treasury Rate Interest Determination Date, the Treasury Rate will be the auction average rate (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) on such Treasury Rate Interest Determination Date as otherwise announced by the United States Department of the Treasury, provided that if by 3:00 p.m., New York City time, on such Calculation Date, such rate is not yet published or reported as provided above or if no such auction is held on such Treasury Rate Interest Determination Date, then the Treasury Rate for such Treasury Rate Interest Determination Date will be a yield to maturity (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 p.m., New York City time, on such Treasury Rate Interest Determination Date, of three leading primary United States government securities dealers selected by the Calculation Agent for the issue of Treasury bills with a remaining maturity closest to the Index Maturity specified in the applicable Pricing Supplement. However, if such dealers are not so quoting such rates, the Treasury Rate for such Treasury Rate Interest Determination Date with respect to any Treasury Rate Note will be the Treasury Rate then in effect on such Treasury Date Interest Determination Date. CMT RATE: Unless otherwise specified in the applicable Pricing Supplement, "CMT Rate" means, with respect to an Interest Determination Date relating to a CMT Rate Note or any Floating Rate Note for which the interest rate is determined by reference to the CMT Rate (a "CMT Rate Interest Determination Date"), the rate displayed on the designated CMT Telerate Page under the caption "Treasury Constant Maturities. . . Federal Reserve Board Release H.15 . . . Mondays approximately 3:45 p.m.," under the column for the Designated CMT Maturity Index for (i) if the Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the week, or the month, as specified in the applicable Pricing Supplement, ended immediately preceding the week in which the Related CMT Rate Interest Determination Date occurs. If such rate is no longer displayed on the relevant page, or if not displayed by 3:00 p.m., New York City time, on the Calculation Date pertaining to such CMT Rate Interest Determination Date, then the CMT Rate for such CMT Rate Interest Determination Date will be such Treasury Constant Maturity Rate for the Designated CMT Maturity Index as published in the relevant H.15(519). If such rate is no longer published, or if not published by 3:00 p.m., New York City time, on such Calculation Date, then the CMT Rate for such CMT Rate Interest Determination Date will be such Treasury Constant Maturity Rate for the Designated CMT Maturity Index (or other United States Treasury rate for the Designated CMT Maturity Index) for the CMT Rate Interest Determination Date with respect to such Interest Reset Date as may then be published by either the Board of Governors of the Federal Reserve System or the United States Department of the Treasury that the Calculation Agent determines to be comparable to the rate formerly displayed on the Designated CMT Telerate Page and published in the relevant H.15(519). If such information is not provided by 3:00 p.m., New York City time, on such Calculation Date, then the CMT Rate for the CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity, based on the arithmetic mean of the secondary market closing offer side prices as of approximately 3:30 p.m., New York City time, on the CMT Interest Determination Date reported, according to their written records, by three leading primary United States government securities dealers (each, a "Referenced Dealer") in The City of New York selected by the Calculation Agent (from five such Referenced Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for the most recently issued direct, non-callable fixed rate obligations of the United States ("Treasury Note") with an original maturity of approximately the Designated CMT Maturity Index and a remaining term to maturity of not less than such Designated CMT Maturity Index minus one year. If the Calculation Agent cannot obtain three such Treasury Note quotations, the CMT Rate for such CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity based on the arithmetic mean of the secondary market offer side prices as of approximately 3:30 p.m., New York City time, on the CMT Rate Interest Determination Date of three Referenced Dealers in The City of New York (from five such Referenced Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for Treasury Notes with original maturity of the number of years that is the next highest to the Designated CMT Maturity Index and a remaining term to maturity closest to the Designated CMT Maturity Index and in an amount of at least $100,000,000. If three or four (and not five) of such Referenced Dealers are quoting as described above, then the CMT Rate will be based on the arithmetic mean of the offer prices obtained and neither the highest nor lowest of such quotes will be eliminated; PROVIDED, HOWEVER, that if fewer than three Referenced Dealers selected by the Calculation Agent are quoting as described herein, the CMT Rate will be the CMT Rate in effect on such CMT Rate Interest Determination Date. If two Treasury Notes with an original maturity as described in the third preceding sentence have remaining terms to maturity equally close to the Designated CMT Maturity Index, the quotes for the Treasury Rate Note with the shorter remaining term to maturity will be used. "Designated CMT Telerate Page" means the display on the Dow Jones Telerate Service on the page designated in the applicable Pricing Supplement (or any other page as may replace such page on that service for the purpose of displaying Treasury Constant Maturities as reported in H.15(519)), for the purpose of displaying Treasury Constant Maturity as reported in H.15(519). If no such page is specified in the applicable Pricing Supplement, the Designated CMT Telerate Page shall be 7052, for the most recent week. "Designated CMT Maturity Index" means the original period to maturity of the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20, or 30 years) specified in the applicable Pricing Supplement with respect to which the CMT Rate will be calculated. If no such maturity is specified in the applicable Pricing Supplement, the Designated CMT Maturity Index shall be two years. ELEVENTH DISTRICT COST OF FUNDS RATE: Unless otherwise specified in the applicable Pricing Supplement, "Eleventh District Cost of Funds Rate" means, with respect to an Interest Determination Date relating to an Eleventh District Cost of Funds Rate Note or any Floating Rate Note for which the interest rate is determined by reference to the Eleventh District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest Determination Date"), the rate equal to the monthly weighted average cost of funds for the calendar month preceding such Eleventh District Cost of Funds Rate Interest Determination Date as set forth under the caption "Eleventh District" on Telerate page 7058 as of 11:00 a.m., San Francisco time, on such Eleventh District Cost of Funds Rate Interest Determination Date. If such rate does not appear on the Telerate page 7058 on any related Eleventh District Cost of Funds Rate Interest Determination Date, the Eleventh District Cost of Funds Rate for such Eleventh District Cost of Funds Rate Interest Determination Date shall be the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District that was most recently announced (the "Index") by the FHLB of San Francisco as such cost of funds for the calendar month preceding the date of such announcement. If the FHLB of San Francisco fails to announce such rate for the calendar month next preceding such Eleventh District Cost of Funds Rate Interest Determination Date, then the Eleventh District Cost of Funds Rate for such Eleventh District Cost of Funds Rate Interest Determination Date will be the Eleventh District Cost of Funds Rate in effect on such Eleventh District Cost of Funds Rate Interest Determination Date. "Telerate Page 7058" means the display on the Dow Jones Telerate Service on such page (or such other page as may replace such page on that service for the purpose of displaying the Eleventh District Cost of Funds Rate) for the purpose of displaying the monthly average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District. The Corporation may from time to time offer renewable Notes ("Renewable Notes") that will mature on an Interest Payment Date as specified in an applicable Pricing Supplement unless the maturity of all (or if so indicated in such Pricing Supplement, a portion of) the principal amount of such Note is renewed in accordance with the procedures described below. Renewable Notes will be issued in book-entry form only. If the Corporation issues any such Renewable Notes, the following procedures will apply, unless otherwise specified in the applicable Pricing Supplement. On the dates in each year specified in the applicable Pricing Supplement (each such date, a "Renewal Date"), the maturity of such Renewable Note will be automatically extended to the next maturity date (each, a "New Maturity Date") specified in such Pricing Supplement, unless the holder of such Renewable Note elects to terminate the automatic extension of the maturity of such Renewable Note (or, if specified in the applicable Pricing Supplement, any portion thereof) by delivering a notice to such effect to the applicable Trustee (or any duly appointed Paying Agent) not less than 15 nor more than 30 days prior to the Renewal Date. An election to terminate the automatic extension of the maturity of a Renewable Note may be exercised with respect to less than the entire principal amount of such Renewable Note only if so specified in the applicable Pricing Supplement and only in such a principal amount, or integral multiple in excess thereof, as is specified in the applicable Pricing Supplement. Notwithstanding the foregoing, the maturity of any Renewable Note may not be extended beyond the final maturity date (the "Final Maturity Date") specified for such Renewable Notes in the applicable Pricing Supplement. If a holder elects to terminate the automatic extension of the maturity of any portion of the principal amount of a Renewable Note on any Renewal Date, such portion will become due and payable on the stated maturity date or New Maturity Date then in effect with respect to such Note, as the case may be. An election to terminate the automatic extension of the maturity of a Renewable Note shall be irrevocable and shall be binding on each holder of the Note. The renewal of the maturity of a Renewable Note will not affect the interest rate applicable to such Renewable Note. If a Note is represented by a Global Book-Entry Note, DTC or its nominee will be the holder of such Note and therefore will be the only entity that can exercise a right to terminate the automatic extension of a Note. In order to ensure that DTC or its nominee will timely exercise a right to terminate the automatic extension with respect to a particular Note, the beneficial owner of such Note must instruct the broker or other Participant or Indirect Participant through which it holds an interest in such Note to notify DTC of its desire to terminate the automatic extension of such Note. Different firms have different cut-off times for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other Participant or Indirect Participant through which it holds an interest in a Note in order to ascertain the cut-off time by which such an instruction must be given in order for timely notice to be delivered to DTC or its nominee. The Corporation may from time to time offer Notes whose stated maturity date may be extended at the option of the Corporation (an "Extendible Note") for one or more whole year periods (each an "Extension Period"), up to but not beyond the final maturity date (the "Final Maturity Date") specified for such Extendible Note in the applicable Pricing Supplement. If the Corporation issues any such Extendible Notes, the following procedures will apply, unless otherwise specified in the applicable Pricing Supplement. The Corporation may exercise such option with respect to an Extendible Note by notifying the applicable Trustee (or any duly appointed Paying Agent) of such exercise at least 45 but not more than 60 days prior to the stated maturity date originally in effect with respect to such Note (the "Initial Maturity Date") or, if the stated maturity date of such Note has already been extended, prior to the stated maturity date then in effect (an "Extended Maturity Date"). No later than 40 days prior to the Initial Maturity Date or an Extended Maturity Date, as the case may be (each, a "Maturity Date"), the applicable Trustee (or any duly appointed Paying Agent) will mail to the registered holder of such Extendible Note a notice (the "Extension Notice") relating to such Extension Period, first class mail, postage prepaid, setting forth (i) the election of the Corporation to extend the maturity of such Extendible Note, (ii) the new Extended Maturity Date, (iii) in the case of a Fixed Rate Note, the interest rate applicable to the Extension Period or, in the case of a Floating Rate Note, the Spread and/or Spread Multiplier applicable to the Extension Period, and (iv) the provisions, if any, for redemption during the Extension Period, including the date or dates on which, the period or periods during which and the price or prices at which such redemption may occur during the Extension Period. Upon the mailing by the applicable Trustee (or any duly appointed Paying Agent) of an Extension Notice to the holder of an Extendible Note, the maturity of such Note shall be extended automatically as set forth in the Extension Notice, and, except as modified by the Extension Notice and as described in the next paragraph, such Extendible Note will have the same terms as prior to the mailing of such Extension Notice. Notwithstanding the foregoing, not later than 20 days prior to the Maturity Date for an Extendible Note (or, if such date is not a Business Day, on the immediately succeeding Business Day), the Corporation may, at its option, revoke the interest rate, in the case of a Fixed Rate Note, or the Spread and/or Spread Multiplier, in the case of a Floating Rate Note, provided for in the Extension Notice and establish a higher interest rate, in the case of a Fixed Rate Note, or a higher Spread and/or Spread Multiplier, in the case of a Floating Rate Note, for the Extension Period by mailing or causing the applicable Trustee (or any duly appointed Paying Agent) to mail notice of such higher interest rate or higher Spread and/or Spread Multiplier, as the case may be, first class mail, postage prepaid, to the holder of such Note. Such notice shall be irrevocable. All Extendible Notes with respect to which the Maturity Date is extended will bear such higher interest rate, in the case of a Fixed Rate Note, or higher Spread and/or Spread Multiplier, in the case of a Floating Rate Note, for the Extension Period. If the Corporation elects to extend the maturity of an Extendible Note, the holder of such Note will have the option to elect repayment of such Note by the Corporation on the Maturity Date then in effect at a price equal to the principal amount thereof plus any accrued and unpaid interest to such date. In order for an Extendible Note to be so repaid on the Maturity Date, the Corporation must receive, at least 15 days but not more than 30 days prior to the Maturity Date then in effect with respect to the Note (i) the Note with the form "Option to Elect Repayment" on the reverse of the Note duly completed or (ii) a telegram, telex, facsimile transmission or a letter from a member of a national securities exchange or the National Association of Securities Dealers, Inc. (the "NASD") or a commercial bank or trust company in the United States setting forth the name of the holder of the Note, the principal amount of the Note, the principal amount of the Note to be repaid, the certificate number or a description of the tenor and terms of the Note, a statement that the option to repayment is being exercised thereby and a guarantee that the Note to be repaid, together with the duly completed form entitled "Option to Elect Repayment" on the reverse of the Note, will be received by the applicable Trustee (or any duly appointed Paying Agent) not later than the fifth Business Day after the date of such telegram, telex, facsimile transmission or letter, PROVIDED, HOWEVER, that such telegram, telex, facsimile transmission or letter shall only be effective if such Note and form duly completed are received by the applicable Trustee (or any duly appointed Paying Agent) by such fifth Business Day. Such option may be exercised by the holder of an Extendible Note for less than the aggregate principal amount of the Note then outstanding, provided that the principal amount of the Note remaining outstanding after repayment is an authorized denomination. If a Note is represented by a Global Book-Entry Note, DTC or its nominee will be the holder of such Note and therefore will be the only entity that can exercise a right to repayment. In order to ensure that DTC or its nominee will timely exercise a right to repayment with respect to a particular Note, the beneficial owner of such Note must instruct the broker or other Participant or Indirect Participant through which it holds an interest in such Note to notify DTC of its desire to exercise a right to repayment. Different firms have different cut-off times for accepting instructions from their customers and, accordingly, each beneficial owner should consult the broker or other Participant or Indirect Participant through which it holds an interest in a Note in order to ascertain the cut-off time by which such an instruction must be given in order for timely notice to be delivered to DTC or its nominee. The Pricing Supplement relating to each Note will indicate either that such Note cannot be redeemed prior to its stated maturity date or that such Note will be redeemable at the option of the Corporation on a date or dates specified prior to its stated maturity date and at a price or prices as set forth in the applicable Pricing Supplement, together with accrued interest to the date of redemption. The Corporation may redeem any of the Notes that are redeemable and remain outstanding either in whole or from time to time in part, upon not less than 30 nor more than 60 days' notice. If less than all of the Notes of the series with like tenor and terms are to be redeemed, the Notes to be redeemed will be selected by the Corporation pursuant to the terms of the respective Indentures. The Notes will not be subject to any sinking fund. The Pricing Supplement relating to each Note will indicate either that such Note cannot be repaid at the option of the holder prior to its stated maturity date or that such Note will be repayable at the option of the holder on a date or dates specified prior to its stated maturity date and at a price or prices as set forth in the applicable Pricing Supplement, together with accrued interest to the date of repayment. The Corporation may at any time purchase Notes at any price in the open market or otherwise. Notes so purchased by the Corporation may, at its discretion, be held, resold or surrendered to the applicable Trustee for cancellation. Any provisions with respect to the determination of a Base Rate, the specification of Base Rates, calculation of the interest rate applicable to a Floating Rate Note, its Interest Payment Dates or any other matter relating thereto or to any Fixed Rate Note may be modified by the terms as specified under "Other Provisions" on the face thereof or in an Addendum thereto, if so specified on the face of such Note and in the applicable Pricing Supplement. The following summary of the principal United States federal income tax consequences of the acquisition, ownership and disposition of Notes is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. The following discussion does not purport to deal with the federal tax consequences applicable to all categories of investors. In particular, the discussion does not deal with persons in special tax situations, such as dealers in securities, insurance companies, financial institutions or tax-exempt entities. It is based upon the United States federal tax laws and regulations as now in effect and as currently interpreted and does not take into account possible changes in such tax laws or such interpretations. It does not include any description of the tax laws of any state or local governments, or of any foreign government, that may be applicable to the Notes or holders thereof. Investors should consult their own tax advisors with respect to their particular circumstances. The term "United States Holder," as used herein, means a holder of a beneficial interest in a Note that is a United States person for United States federal income tax purposes or any other holder of a beneficial interest in a Note to the extent the income attributable to the Note is effectively connected with the holder's United States trade or business. PAYMENT OF INTEREST. Except as described below under "Original Issue Discount" and "Short-Term Notes," interest on a Note generally will be taxable to a holder that is a United States Holder as ordinary income at the time it accrues or is received in accordance with the United States Holder's method of accounting for tax purposes. PURCHASE, SALE AND RETIREMENT OF NOTES. Upon the sale, exchange, retirement or other disposition of a Note, a United States Holder will recognize gain or loss equal to the difference between the amount realized and the United States Holder's tax basis in the Note. A United States Holder's tax basis in a Note generally will be the United States Holder's cost for the Note, increased by any original issue discount or market discount (if the holder has elected to include accrued market discount in income on a current basis) previously included in income by such United States Holder with respect to such Note, and decreased by the amount of any bond premium previously amortized, and the amount of any payment (other than a payment of qualified stated interest) previously received by such United States Holder with respect to the Note. Gain or loss on the sale, exchange, retirement or other disposition of a Note generally will be a long-term capital gain or loss if the Note has been held for more than one year, except to the extent (as discussed below) that gain represents market discount not previously included in the holder's income. If a United States Holder has a tax basis for a Note that is less than its principal amount, the Note may be considered to have "market discount." As a general matter, gain realized on the disposition of a Note (or on the repayment of principal) is treated as ordinary income rather than capital gain to the extent of market discount accrued while the holder held the Note, although holders may elect to accrue market discount into income on a current basis. An election to accrue market discount will apply to all market discount obligations acquired by the holder on or after the first day of the first taxable year for which the election is made and may not be revoked without the consent of the Internal Revenue Service (the "IRS"). Market discount will be treated as accruing on a ratable basis or, at the election of the holder, based on a constant interest method. Furthermore, a holder of a Note having market discount may be required to defer the deduction of all or a portion of the interest expense on any indebtedness incurred or maintained to purchase or carry such Note until the maturity date of the Note or its earlier disposition in a taxable transaction unless the holder elects to include market discount in income on a current basis as described above. If a United States Holder has a tax basis for a Note that is greater than its principal amount, the Note may be considered to have "bond premium." The holder may elect to amortize such premium (as offsets to interest income) over the remaining life of the Note under a constant interest method. However, if such Note may be optionally redeemed after the holder acquires it at a price in excess of its principal amount, special rules would apply that could result in a deferral of the amortization of some bond premium until later in the term of the Note. With respect to a holder that does not elect to amortize bond premium, the amount of bond premium constitutes a capital loss when the bond matures or is sold. ORIGINAL ISSUE DISCOUNT. On January 27, 1994, the IRS issued final regulations (the "Final Regulations") under Sections 1271 through 1275 of the Internal Revenue Code of 1986, as amended (the "Code"), dealing with original issue discount ("OID") effective for debt instruments issued after April 4, December 15, 1994, the IRS released certain proposed regulations (the "Proposed Contingent Debt Regulations") that also deal with the OID provisions of the Code primarily as they apply to obligations with contingent interest. The Proposed Contingent Debt Regulations do not apply to debt obligations issued prior to the time, if at all, such proposed regulations are finally adopted. Since (i) such Proposed Contingent Debt Regulations have not been finally adopted and will not be effective until 60 days after final regulations are published in the Federal Register and (ii) the form in which they are adopted, if at all, may differ substantially from the Proposed Contingent Debt Regulations, the following summary of the federal income tax consequences of the Notes with respect to OID is based on the Final Regulations but not the Proposed Contingent Debt Regulations. EACH POTENTIAL PURCHASER OF A NOTE SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO IT. For United States federal income tax purposes, OID is the excess of the stated redemption price at maturity of a debt instrument (the sum of all payments required to be made on the debt instrument other than qualified stated interest payments) over its issue price (the first offering price to the public at which a substantial amount of the debt instrument is sold), if that excess equals or exceeds 1/4 of 1% of the debt instrument's stated redemption price at maturity multiplied by the number of complete years from its issue date to its maturity. The term "qualified stated interest" generally means stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually at a single fixed rate. In addition, under the Final Regulations if a Note bears interest for one or more accrual periods at a rate below the rate applicable for the remaining term of such Note (E.G., Notes with teaser rates or interest holidays), and if the greater of either the resulting foregone interest on such Note or the excess of the stated principal amount over its issue price equals or exceeds a DE MINIMIS amount, then the stated interest would be treated as OID rather than qualified stated interest. A United States Holder of a Note is required to include payments of qualified stated interest in income as interest at the time such payments are accrued or are received (in accordance with the United States Holder's method of accounting for tax purposes). A United States Holder of a Note with OID (an "OID Note") with a maturity of more than one year is required to include the OID in income before the receipt of cash attributable to that income, regardless of such United States Holder's method of accounting for tax purposes. The amount of OID includible in income by the initial United States Holder of an OID Note is the sum of the daily portions of the OID with respect to the Note for each day during the taxable year (or portion of the taxable year) in which the United States Holder held such OID Note. The daily portion is determined by allocating to each day in any "accrual period" a pro rata portion of the OID allocable to that accrual period. An accrual period may be of any length and the accrual periods may even vary in length over the term of the OID Note, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs either on the first day of an accrual period or on the final day of an accrual period. The amount of OID allocable to an accrual period is equal to the difference between (i) the product of the "adjusted issue price" of the OID Note at the beginning of the accrual period and its yield to maturity (computed generally on a constant yield method and compounded at the end of each accrual period, appropriately taking into account the length of the particular accrual period) and (ii) the amount of any qualified stated interest allocable to the accrual period. The "adjusted issue price" of an OID Note at the beginning of any accrual period is the sum of the issue price of the OID Note plus the amount of OID allocable to all prior accrual periods reduced by any payments on the Note that were not qualified stated interest. Under these rules, a United States Holder will generally have to include in income increasingly greater amounts of OID in successive accrual periods. A United States Holder who purchases an OID Note for an amount that is greater than its adjusted issue price as of the purchase date and less than or equal to the sum of all amounts payable on the OID Note after the purchase date other than payments of qualified stated interest, will be considered to have purchased the OID Note at an "acquisition premium." Under the acquisition premium rules, the amount of OID which such United States Holder must include in its gross income with respect to such Note for any taxable year (or portion thereof in which the United States Holder holds the Note) will be reduced (but not below zero) by the portion of the acquisition premium properly allocable to the period. Under the Final Regulations, Floating Rate Notes are subject to special rules whereby a Floating Rate Note will qualify as a "variable rate debt instrument" if (a) its issue price does not exceed the total noncontingent principal payments by more than a specified DE MINIMIS amount and (b) it provides for stated interest, paid or compounded at least annually, at current values of (i) one or more qualified floating rates, (ii) a single fixed rate and one or more qualified floating rates, (iii) a single objective rate or (iv) a single fixed rate and a single objective rate that is a qualified inverse floating rate. A "qualified floating rate" is any floating rate where variations in such rate can reasonably be expected to measure contemporaneous variations in the cost of newly borrowed funds in the currency in which the Floating Rate Note is denominated (E. G., the CD Rate, the Commercial Paper Rate, the Federal Funds Rate, LIBOR, the Prime Rate, the Treasury Rate, the CMT Rate or the Eleventh District Cost of Funds Rate). Although a multiple of a qualified floating rate will generally not itself constitute a qualified floating rate, a variable rate equal to the product of a qualified floating rate and a fixed multiple that is greater than zero but not more than 1.35 will constitute a qualified floating rate. A variable rate equal to the product of a qualified floating rate and a fixed multiple that is greater than zero but not more than 1.35, increased or decreased by a fixed rate, will also constitute a qualified floating rate. In addition, under the Final Regulations, two or more qualified floating rates that can reasonably be expected to have approximately the same values throughout the term of the Floating Rate Note (e.g., two or more qualified floating rates with values within 25 basis points of each other as determined on the Floating Rate Note's issue date) will be treated as a single qualified floating rate. Notwithstanding the foregoing, a variable rate that would otherwise constitute a qualified floating rate but which is subject to one or more restrictions such as a maximum numerical limitation (i.e., a cap) or a minimum numerical limitation (i.e., a floor) may, under certain circumstances, fail to be treated as a qualified floating rate under the Final Regulations. An "objective rate" is a rate that is not itself a qualified floating rate but which is determined using a single formula and which is based upon (i) one or more qualified floating rates, (ii) one or more rates where each rate would be a qualified floating rate for a debt instrument denominated in a currency other than the currency in which the Floating Rate Note is denominated, (iii) either the yield or changes in the price of one or more items of actively traded personal property (other than stock or debt of the issuer or a related party) or (iv) a combination of such rates. The Final Regulations also provide that other variable interest rates may be treated as objective rates if so designated by the IRS in the future. Despite the foregoing, a variable rate of interest on a Floating Rate Note will not constitute an objective rate if it is reasonably expected that the average value of such rate during the first half of the Floating Rate Note's term will be either significantly less than or significantly greater than the average value of the rate during the final half of the Floating Rate Note's term. A "qualified inverse floating rate" is any objective rate where such rate is equal to a fixed rate minus a qualified floating rate, as long as variations in the rate can reasonably be expected to inversely reflect contemporaneous variations in the cost of newly borrowed funds. The Final Regulations also provide that if a Floating Rate Note provides for stated interest at a fixed rate for an initial period of less than one year followed by a variable rate that is either a qualified floating rate or an objective rate and if the variable rate on the Floating Rate Note's issue date is intended to approximate the fixed rate (E.G., the value of the variable rate on the issue date does not differ from the value of the fixed rate by more than 25 basis points), then the fixed rate and the variable rate together will constitute either a single qualified floating rate or objective rate, as the case may be. If a Floating Rate Note that provides for stated interest at either a single qualified floating rate or a single objective rate throughout the term thereof qualifies as a "variable rate debt instrument" under the Final Regulations, then any stated interest on such Note which is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually will constitute qualified stated interest and will be taxed accordingly. Thus, a Floating Rate Note that provides for stated interest at either a single qualified floating rate or a single objective rate throughout the term thereof and that qualifies as a "variable rate debt instrument" under the Final Regulations will generally not be treated as having been issued with OID unless the Floating Rate Note is issued at a "true" discount (i.e., at a price below the Note's stated principal amount) in excess of a specified DE MINIMIS amount. OID on such a Floating Rate Note arising from "true" discount is allocated to an accrual period using the constant yield method described above by assuming that the variable rate is a fixed rate equal to (i) in the case of a qualified floating rate or qualified inverse floating rate, the value as of the issue date of the qualified floating rate or qualified inverse floating rate, or (ii) in the case of an objective rate (other than a qualified inverse floating rate), a fixed rate that reflects the yield that is reasonably expected for the Floating Rate Note. In general, any other Floating Rate Note that qualifies as a "variable rate debt instrument" will be converted into an "equivalent" fixed rate debt instrument for purposes of determining the amount and accrual of OID and qualified stated interest on the Floating Rate Note. The Final Regulations generally require that such a Floating Rate Note be converted into an "equivalent" fixed rate debt instrument by substituting any qualified floating rate or qualified inverse floating rate provided for under the terms of the a fixed rate equal to the value of the qualified floating rate or qualified inverse floating rate, as the case may be, as of the Floating Rate Note's issue date. Any objective rate (other than a qualified inverse floating rate) provided for under the terms of the Floating Rate Note is converted into a fixed rate that reflects the yield that is reasonably expected for the Floating Rate Note. In the case of a Floating Rate Note that qualifies as a "variable rate debt instrument" and provides for stated interest at a fixed rate in addition to either one or more qualified floating rates or a qualified inverse floating rate, the fixed rate is initially converted into a qualified floating rate (or a qualified inverse floating rate, if the Floating Rate Note provides for a qualified inverse floating rate). Under such circumstances, the qualified floating rate or qualified inverse floating rate that replaces the fixed rate must be such that the fair market value of the Floating Rate Note as of the Floating Rate Note's issue date is approximately the same as the fair market value of an otherwise identical debt instrument that provides for either the qualified floating rate or qualified inverse floating rate rather than the fixed rate. Subsequent to converting the fixed rate into either a qualified floating rate or a qualified inverse floating rate, the Floating Rate Note is then converted into an "equivalent" fixed rate debt instrument in the manner described above. Once the Floating Rate Note is converted into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the amount of OID and qualified stated interest, if any, are determined for the "equivalent" fixed rate debt instrument by applying the general OID rules to the "equivalent" fixed rate debt instrument, and a United States Holder of the Floating Rate Note will account for tax purposes for such OID and qualified stated interest as if the United States Holder held the "equivalent" fixed rate debt instrument. Each accrual period, appropriate adjustments will be made to the amount of qualified stated interest or OID assumed to have been accrued or paid with respect to the "equivalent" fixed rate debt instrument in the event that such amounts differ from the actual amount of interest accrued or paid on the Floating Rate Note during the accrual period. If a Floating Rate Note does not qualify as a "variable rate debt instrument" under the Final Regulations, then the Floating Rate Note may be treated as a contingent payment debt obligation. Certain of the Notes (i) may be redeemable at the option of the Corporation prior to their stated maturity (a "call option") and/or (ii) may be repayable at the option of the holder prior to their stated maturity (a "put option"). Notes containing such features may be subject to rules that differ from the general rules discussed above. Prospective purchasers of Notes with such features should consult their tax advisors because the OID consequences will depend, in part, on the particular terms and features of such Notes. A United States Holder may elect to include in gross income all interest that accrues on a Note by using the constant yield method applicable to OID, subject to certain limitations and exceptions. For purposes of this election, interest includes stated interest, acquisition discount, OID, DE MINIMIS OID, market discount, DE MINIMIS market discount and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. SHORT-TERM NOTES. Certain United States Holders (including banks, securities dealers, regulated investment companies and taxpayers that elect under Code Section 1282(b)(2) and that otherwise use the cash method of tax accounting, as well as all accrual method United States Holders) will be required to accrue into income on a current basis qualified stated interest and any OID with respect to Notes having a maturity of not more than one year ("Short-Term Notes"). (In that regard it should be noted that the Final Regulations treat none of the stated interest on a Short-Term Note as qualified stated interest, but instead treat such interest as part of the Short-Term Note's stated redemption price at maturity, thereby giving rise to OID.) OID on a Short-Term Note will be treated as accruing on a ratable basis or, at the election of the holder, on a constant interest basis. Other cash method holders of Short-Term Notes generally will not be required, but may elect under Section 1282(b)(2) of the Code, to accrue qualified stated interest and OID into income on a current basis. However, unless such holder so elects, such holder may not be allowed to deduct all of the interest paid or accrued on any indebtedness incurred or maintained to purchase or carry such Short-Term Note until the maturity date of the Note or its earlier disposition in a taxable transaction. In addition, such a non-electing cash method holder will be required to treat any gain realized on a sale, exchange or retirement of the Short-Term Note as ordinary income to the extent such gain does not exceed the OID accrued with respect to the Note during the period the holder held the Short-Term Note. In determining OID for such purposes, OID will be deemed to accrue on a ratable basis unless the holder elects accrual on a constant interest basis. A United States Holder of a Short-Term Note can elect to apply the rules in the preceding paragraph dealing with the current accrual of OID and the deferral of interest deductions by taking into account the amount of "acquisition discount," if any, with respect to the Note (rather than the amount of OID, if any, with respect to such Short-Term Note). Acquisition discount is the excess of the remaining stated redemption price at maturity of the Short-Term Note over the holder's tax basis in the Short-Term Note at the time of the acquisition. Acquisition discount will be treated as accruing on a ratable basis or, at the election of the holder, on a constant interest basis. A United States Holder's tax basis for a Short-Term Note generally will be the holder's purchase price for the Note, increased by any stated interest, OID or acquisition discount that the holder is required or has elected to accrue, into income currently under the rules described above and decreased by the amount of any bond premium previously amortized by such holder with respect to such Note, the amount of any payment of principal received by such holder with respect to the Note and, if the holder is required or has elected to accrue interest into income currently with respect to the Note, the amount of any payment of stated interest received by such holder with respect to the Note. The market discount rules will not apply to a Short-Term Note. Certain of the Notes may be redeemable prior to their maturity date at the option of either the Corporation or the holder. This redemption feature may affect the determination of whether a Note has a maturity of not more than one year and is thus a Short-Term Note. Purchasers of Notes with such features should carefully examine the applicable Pricing Supplement and should consult their own tax advisors with respect to such features. RENEWABLE NOTES AND EXTENDIBLE NOTES. The applicable Pricing Supplement will contain a discussion of any special United States Federal income tax rules with respect to any Renewable Notes or Extendible Notes. Except as otherwise discussed in the applicable Pricing Supplement, under the United States federal income tax laws as in effect on the date of this Prospectus Supplement and subject to the discussion of backup withholding below, payments of principal (and premium, if any) and interest, including any OID, by the Corporation or its agent (acting in its capacity as such) to any beneficial owner of a Note who is not a United States person (a "Non-United States Holder") will be not subject to United States federal withholding tax; PROVIDED, HOWEVER, that, in the case of interest, including any OID, (i) such beneficial owner does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Corporation entitled to vote, (ii) such beneficial owner is not a controlled foreign corporation for United States tax purposes that is related to the Corporation (directly or indirectly) through stock ownership, and (iii) either (A) the beneficial owner of the Note certifies to the Corporation or its agent, under penalties of perjury, that it is a Non-United States Holder and provides its name and address, or (B) a securities clearing organization, bank or other financial institution, that holds customers' securities in the ordinary course of its trade or business (a "financial institution") and holds the Note, certifies to the Corporation or its agent under penalties of perjury that such statement has been received from the beneficial owner by it or by a financial institution and furnishes the Corporation with a copy thereof. In the event a Floating Rate Note is issued which bears interest at a rate other than a rate determined by reference to a Base Rate explicitly referred to under "Floating Rate Notes," the applicable Pricing Supplement will describe whether interest (including OID) on such Note will be subject to federal withholding tax. If a Non-United States Holder is engaged in a trade or business in the United States and interest, including any OID, on the Note is effectively connected with the conduct of such trade or business, such holder, although exempt from the withholding tax discussed in the preceding paragraph (upon delivery of a properly executed IRS Form 4224), may be subject to United States federal income tax on such interest, and any OID, in the same manner as if it were a United States person. In addition, if such a holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits for the taxable year, subject to certain adjustments. In lieu of the certification described in the preceding paragraph, a Non-United States Holder with effectively connected interest income must provide the payor with a properly executed IRS Form 4224 to claim an exemption from United States federal withholding tax. Any capital gain or market discount realized upon retirement or disposition of a Note by a Non-United States Holder will not be subject to United States federal income or withholding taxes if (i) such gain is not effectively connected with a United States trade or business of the holder, and (ii) in the case of an individual, such holder is not present in the United States for 183 days or more in the taxable year of the retirement or disposition. BACKUP WITHHOLDING AND INFORMATION REPORTING The payment of principal and interest and the accrual of OID, if any, are generally subject to information reporting and possibly to "backup withholding" at a rate of 31%. Backup withholding may be required in respect of any payment on a Note to a beneficial owner who is a United States person (other than corporations and certain other exempt persons) if the beneficial owner fails to supply an accurate taxpayer identification number and to certify that such taxpayer identification number is correct, or if the United States Secretary of the Treasury determines that the beneficial owner has not reported all interest and dividend income required to be shown on his federal income tax return. Under current Treasury Regulations, backup withholding and information reporting will not apply to payments made to a Non-United States Holder of a Note with respect to which the beneficial owner has provided required certification that it is not a United States person as set forth in clause (iii) in the first paragraph under "Non-United States Holders," or has otherwise established an exemption (provided that the payor does not have actual knowledge that the beneficial owner is a United States person or that the conditions of any exemption are not in fact satisfied). Payments of the proceeds from the sale of a Note to or through a foreign office of a broker or the foreign office of a custodian, nominee or other dealer acting on behalf of the beneficial owner of a Note will not be subject to information reporting or backup withholding, except that if the broker, custodian, nominee or other dealer is a United States person, a controlled foreign corporation for United States tax purposes or a foreign person 50% or more of whose gross income is from a United States trade or business, information reporting will be required with respect to payments made to such owner unless the broker has documentary evidence in its files of the beneficial owner's foreign status and the broker has no actual knowledge to the contrary (or the beneficial owner otherwise establishes any exemption from such information reporting). Payment of the proceeds from a sale of a Note to or through the United States office of a broker is subject to information reporting and backup withholding, unless the beneficial owner certifies as to its non-United States status or otherwise establishes an exemption from information reporting and backup withholding. Any amounts withheld under the backup withholding rules from a payment to a beneficial owner would be refundable or allowable as a credit against such beneficial owner's United States federal income tax liability. For purposes of the preceding discussion, the term "United States person" means a citizen or resident of the United States, a corporation, partnership or other entity created or organized under the laws of the United States or an estate or trust the income of which is subject to United States federal income taxation regardless of its source, and "United States" means the United States of America (including the States and the District of Columbia). THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS. The beneficial owners may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. Consequently, prospective beneficial owners should consult their own tax advisors regarding the effect of state and local tax laws on purchase of the Notes. Under the terms of a Master United States Distribution Agreement dated as of January 10, 1996 (the "Distribution Agreement") between the Corporation and the Agents named therein or to be appointed thereunder, Notes are being offered on a continuing basis for sale by the Corporation through the Agents. Each Agent has agreed to utilize its reasonable efforts on an agency basis to solicit offers to purchase the Notes at 100% of the principal amount thereof, unless otherwise specified in an applicable Pricing Supplement. For each Note sold through an Agent as agent, and unless otherwise negotiated, the Corporation will pay a commission in the form of a discount to such Agent, ranging up to .750% of the principal amount of the Note. If agreed to by the Corporation and an Agent, an Agent may purchase a specified amount of the Notes, as principal, from the Corporation. Unless otherwise specified in an applicable Pricing Supplement, any Note sold to an Agent as principal will be purchased by such Agent at a price equal to 100% of the principal amount thereof less a percentage of the principal amount equal to the negotiated commission. The Corporation may also sell Notes directly to investors and other purchasers on its own behalf in those jurisdictions where it is authorized to do so, and, upon such sale, no Agent will be entitled to any commission as set forth herein. The Corporation also may appoint, and sell Notes from time to time to or through, one or more additional agents, acting either as agent or principal, on substantially the same terms as those applicable to the Agents. Any such additional agent shall, with respect to any such Notes, be deemed to be included in all references to an "agent" or "Agents" hereunder. In addition, the Corporation may sell Notes on an underwritten basis to a group of Agents acting as a syndicate of underwriters pursuant to a terms agreement; the terms and conditions of any such syndicated underwriting will be described in the Pricing Supplement relating to any such transaction. Notes purchased by the Agents as principal may be resold to investors and other purchasers at varying prices relating to prevailing market prices at the time of resale as determined by the Agent or, if so specified in an applicable Pricing Supplement, for resale at a fixed public offering price. An Agent may offer Notes it has purchased from the Corporation as principal to other dealers for resale to investors, and may allow any portion of the discount received in connection with such purchases from the Corporation to such dealers. After the initial public offering of Notes to be resold to investors and other purchasers, the public offering price (in the case of Notes to be resold on a fixed public offering price basis), the concession and the discount may be changed. Each Pricing Supplement will also contain the terms of the related Notes, including the names of any Agents, the method of distribution of such Notes, the price of the Notes, the net proceeds to the Corporation and any commissions or discounts paid or allowed with respect to the Notes. The Corporation reserves the right to withdraw, cancel or modify the offer made hereby without notice and may reject orders in whole or in part whether placed directly with the Corporation or through one of the Agents. Each Agent will have the right, in its discretion reasonably exercised, to reject any offer to purchase Notes received by it on an agency basis, in whole or in part. Unless otherwise provided in a Pricing Supplement, payment of the purchase price of the Notes will be required to be made in immediately available funds on the date of settlement. No Note will have an established trading market when issued. The Notes will not be listed on any securities exchange. The Agents may from time to time purchase and sell Notes in the secondary market, but are not obligated to do so, and there can be no assurance that there will be a secondary market for the Notes or liquidity in the secondary market if one develops. From time to time, the Agents may make a market in the Notes, but no Agent is obligated to do so, and may discontinue any market-making activity at any time. The Agents, whether acting as agent or principal, may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). The Corporation has agreed to indemnify the Agents against and to contribute to payments that the Agents may be required to make relating to certain liabilities, including liabilities under the Securities Act. The Corporation has also agreed to reimburse the Agents for certain expenses. NationsBanc Capital Markets, Inc. ("NCMI") is a direct, wholly owned subsidiary of NationsBank. Under Schedule E to the By-Laws ("Schedule E") of the NASD, when an NASD member, such as NCMI, participates in the distribution of an affiliated company's securities, the offering must be conducted in accordance with the applicable provisions of Schedule E. NationsBank is considered to be an "affiliate" (as such term is defined in Schedule E) of NCMI. The offer and sale of any Notes by NCMI will comply with the requirements of Schedule E regarding the underwriting of securities of affiliates and with any restrictions as may be imposed on NCMI by the Board of Governors of the Federal Reserve System. In addition, under Schedule E, no NASD member participating in offers and sales of the Notes may execute a transaction in the Notes in a discretionary account without the specific prior written approval of the member's customer. The Agents may from time to time engage in transactions with, or perform services for, the Corporation in the ordinary course of business. The Corporation may, in its sole discretion, suspend solicitations of purchases of the Notes through the Agents, acting as agent, for any period of time or permanently. NationsBank Corporation ("NationsBank" or the "Corporation") may offer from time to time its unsecured debt securities, which may be either senior (the "Senior Debt Securities") or subordinated (the "Subordinated Debt Securities" and, together with the Senior Debt Securities, the "Debt Securities"). NationsBank may sell up to $3,000,000,000 in aggregate initial offering price of Debt Securities (or the U.S. dollar equivalent thereof if any of the Debt Securities are denominated in a foreign currency or currency unit), which may be offered, separately or together, in one or more series, in amounts, at prices and on terms to be determined at the time of sale and set forth in an accompanying supplement to this Prospectus (a "Prospectus Supplement"). Pursuant to the terms of the Registration Statement of which this Prospectus constitutes a part, NationsBank may also offer and sell shares of its preferred stock (the "Preferred Stock"), which may be represented by depositary shares (the "Depositary Shares"), and shares of its common stock (the "Common Stock"). Any such Preferred Stock, Depositary Shares or Common Stock will be offered and issued pursuant to the terms of a separate Prospectus contained in such Registration Statement. The aggregate amount of Debt Securities that may be offered and sold pursuant hereto is subject to reduction as the result of the sale of any Preferred Stock, Depositary Shares or Common Stock pursuant to such separate Prospectus. The Senior Debt Securities will rank equally with all other unsubordinated and unsecured indebtedness of the Corporation. The Subordinated Debt Securities will be subordinate in right of payment to all existing and future Senior Indebtedness (as defined herein) of the Corporation. The Debt Securities may be denominated in U.S. dollars or in another currency or currency unit (such as the European Currency Unit), and the principal of (and premium, if any, on) or interest on the Debt Securities may be payable in U.S. dollars or such foreign currency or currency unit. The specific terms of each series of Debt Securities offered pursuant to this Prospectus, including the specific designation, aggregate principal amount, currency or currency unit in which the principal and any premium or interest may be payable, authorized denominations, maturity, any premium, any interest rate (which may be fixed or variable), any interest payment dates, any optional or mandatory redemption terms, any sinking fund provisions, any subordination terms, any terms for conversion (in the event that such series is convertible at the option of the holder or NationsBank into Preferred Stock, Depositary Shares, Common Stock or other Debt Securities), the form of such series, any securities exchange on which such Debt Securities may be listed, and any other terms of such series of Debt Securities will be set forth in the Prospectus Supplement relating to such series. The Debt Securities may be sold (i) through underwriting syndicates represented by managing underwriters, or by underwriters without a syndicate, with such underwriters to be designated at the time of sale; (ii) through agents designated from time to time; or (iii) directly by the Corporation. The names of any underwriters or agents of NationsBank involved in the sale of the Debt Securities, the public offering price or purchase price and any commissions or discounts will be set forth in the applicable Prospectus Supplement or a pricing supplement thereto. The net proceeds to the Corporation from such sale also will be set forth in such Prospectus Supplement. This Prospectus may not be used to consummate sales of Debt Securities unless accompanied by a Prospectus Supplement. THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR BANK DEPOSITS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NONBANKING AFFILIATE OF NATIONSBANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA (THE "COMMISSIONER") OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, THE COMMISSIONER 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 November 24, 1995. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, previously filed by the Corporation with the Securities and Exchange Commission (the "Commission") pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), are incorporated herein by reference: (a) The Corporation's Annual Report on Form 10-K for the year ended (b) The Corporation's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995; (c) The Corporation's Current Reports on Form 8-K filed January 26, 1995, February 21, 1995, March 2, 1995 (two reports on this date), March 21, 1995 (amended by Form 8-K/A Amendment No. 1 filed March 21, 1995), March 27, 1995, April 24, 1995, April 25, 1995, May 16, 1995, July 10, 1995, July 24, 1995, August 31, 1995, September 20, 1995, October 20, 1995 (two reports on this date) and November 9, 1995. (d) The description of the Corporation's Common Stock contained in its registration statement filed pursuant to Section 12 of the 1934 Act, and any amendment or report filed for the purpose of updating such description, including the Corporation's Current Report on Form 8-K filed on September 21, 1994. All reports and any definitive proxy or information statements filed by the Corporation with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Debt Securities offered hereby shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE CORPORATION WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). WRITTEN REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO JOHN E. MACK, SENIOR VICE PRESIDENT AND TREASURER, NATIONSBANK CORPORATION, NATIONSBANK CORPORATE CENTER, CORPORATE TREASURY DIVISION, CHARLOTTE, NORTH CAROLINA 28255. TELEPHONE REQUESTS MAY BE DIRECTED TO (704) 386-5972. NationsBank is subject to the informational requirements of the 1934 Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the following public reference facilities maintained by the Commission: 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, upon payment of prescribed rates. In addition, reports, proxy statements and other information concerning NationsBank may be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005 and at the offices of The Pacific Stock Exchange Incorporated, 301 Pine Street, San Francisco, California 94104. NationsBank is a bank holding company established as a North Carolina corporation in 1968 and is registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), with its principal assets being the stock of its subsidiaries. Through its national banking association subsidiaries (the "Banks") and its various non-banking subsidiaries, NationsBank provides banking and banking-related services, primarily throughout the Southeast and Mid-Atlantic states and Texas. The principal executive offices of NationsBank are located at NationsBank Corporate Center in Charlotte, North Carolina 28255. Its telephone number is (704) 386-5000. NationsBank provides a diversified range of banking and certain non-banking financial services and products through its various subsidiaries. NationsBank manages its activities through three major business units: the General Bank, the Global Finance unit and the Financial Services unit. The General Bank provides comprehensive services in the commercial and retail banking fields, including trust and private banking operations, the origination and servicing of home mortgage loans, the issuance and servicing of credit cards (through a Delaware subsidiary) and certain insurance services. The General Bank also offers full service brokerage services and discount brokerage services for its customers through subsidiaries of NationsBank. As of September 30, 1995, the General Bank had banking operations in the following jurisdictions (listed in declining order of total assets, with the approximate number of banking offices in parentheses): North Carolina and South Carolina (395); Texas (274); Maryland, Virginia and the District of Columbia (493); Florida (372); Georgia (187); and Tennessee and Kentucky (100). NationsBank also has a banking subsidiary in Delaware that issues and services credit cards. The General Bank also provides fully automated, 24-hour cash dispensing and depositing services throughout the states in which it is located through approximately 2,200 automated teller machines. The Global Finance unit provides to domestic and international customers comprehensive corporate banking and investment banking services, including loan syndication, treasury management and leasing; underwriting, trading or distributing a wide range of securities (including bank-eligible securities and, to a limited extent, bank-ineligible securities as authorized by the Federal Reserve Board under Section 20 of the Glass-Steagall Act); and options, futures, forwards and swaps on certain interest rate and commodity products, and spot and forward foreign exchange contracts. The Global Finance unit provides its services through various domestic offices as well as offices located in London, Frankfurt, Singapore, Mexico City, Grand Cayman, Nassau, Tokyo, Osaka, Paris and Hong Kong. In addition to these offices, the Global Finance unit has loan production offices located in New York City, Chicago, Los Angeles, Denver and Birmingham, Alabama. The Financial Services unit consists of NationsCredit Corporation, primarily a consumer finance subsidiary, and Greyrock Capital Group Inc. (formerly named Nations Financial Capital Corporation), primarily a commercial finance subsidiary. NationsCredit Corporation, which has approximately 300 offices located in 32 states, provides consumer and retail loan programs and also offers inventory financing to manufacturers, importers and distributors. Greyrock Capital Group Inc., which has approximately 79 offices located in 24 states, engages in commercial equipment leasing and makes commercial loans for debt restructuring, merger and acquisition, real estate financing, equipment acquisition and working capital purposes; it also acquires consumer loans secured by automobiles and real estate. As part of its operations, NationsBank regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions and other businesses of a type eligible for bank holding company investment. In addition, NationsBank regularly analyzes the values of, and submits bids for, the acquisition of customer-based funds and other liabilities and assets of such financial institutions and other businesses. As a general rule, NationsBank publicly announces such material acquisitions when a definitive agreement has been reached. GENERAL. As a registered bank holding company, NationsBank is subject to the supervision of, and to regular inspection by, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Banks are organized as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the "Comptroller"). The Banks are also subject to regulation by the Federal Deposit Insurance Corporation (the "FDIC") and other federal regulatory agencies. In addition to banking laws, regulations and regulatory agencies, NationsBank and its subsidiaries and affiliates are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the Corporation's operations, management and ability to make distributions. The following discussion summarizes certain aspects of those laws and regulations that affect NationsBank. The activities of NationsBank, and those of companies which it controls or in which it holds more than 5% of the voting stock, are limited to banking or managing or controlling banks or furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Generally, bank holding companies, such as NationsBank, are required to obtain prior approval of the Federal Reserve Board to engage in any new activity not previously approved by the Federal Reserve Board or to acquire more than 5% of any class of voting stock of any company. Bank holding companies are also required to obtain the prior approval of the Federal Reserve Board before acquiring more than 5% of any class of voting stock of any bank which is not already majority-owned by the bank holding company. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank holding company will be able to acquire banks in states other than its home state beginning September 29, 1995. The Interstate Banking and Branching Act also authorizes banks to merge across state lines, therefore creating interstate branches, beginning June 1, 1997. Under such legislation, each state has the opportunity to "opt out" of this provision, thereby prohibiting interstate branching in such states, or to "opt in" at an earlier time, thereby allowing interstate branching within that state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now able to open new branches in a state in which it does not already have banking operations, if the laws of such state permit such DE NOVO branching. Of those states in which the Banks are located, Maryland, North Carolina and Virginia have enacted legislation to "opt in," thereby permitting interstate branching prior to June 1, 1997, and Texas has adopted legislation to "opt out" of the interstate branching provisions (which Texas law currently expires on September 2, 1999). As previously described, NationsBank regularly evaluates merger and acquisition opportunities, and it anticipates that it will continue to evaluate such opportunities in light of the new legislation. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. In 1995, several bills have been introduced in Congress that would have the effect of broadening the securities underwriting powers of bank holding companies and possibly permitting bank holding companies to engage in nonfinancial activities. The likelihood and timing of any such proposals or bills being enacted and the impact they might have on NationsBank and its subsidiaries cannot be determined at this time. CAPITAL AND OPERATIONAL REQUIREMENTS. The Federal Reserve Board, the Comptroller and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common and qualifying preferred shareholders' equity, less certain intangibles and other adjustments. Tier 2 capital consists of subordinated and other qualifying debt, and the allowance for credit losses up to 1.25% of risk-weighted assets. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents qualifying total capital, at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is 4% and the minimum total capital ratio is 8%. The Corporation's Tier 1 and total risk-based capital ratios under these guidelines at September 30, 1995 were 7.16% and 11.23%, respectively. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3%, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3%. The Corporation's leverage ratio at September 30, 1995 was 5.96%. Management believes that NationsBank meets its leverage ratio requirement. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective Federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee that bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, each of the Banks is considered adequately or well capitalized. Banking agencies have recently adopted final regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as a part of the institution's regular safety and soundness examination. Banking agencies also have recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank's capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. After gaining experience with the proposed measurement process, those banking agencies intend to propose further regulations to establish an explicit risk-based capital charge for interest rate risk. DISTRIBUTIONS. The Corporation's funds for cash distributions to its shareholders are derived from a variety of sources, including cash and temporary investments. The primary source of such funds, however, is dividends received from its banking subsidiaries. The amount of dividends that each Bank may declare in a calendar year without approval of the Comptroller is the Bank's net profits for that year, as defined by statute, combined with its net retained profits, as defined, for the preceding two years. In addition, from time to time NationsBank applies for, and may receive, permission from the Comptroller for one or more of the Banks to declare special dividends. In 1995, the Banks can initiate dividend payments without prior regulatory approval of up to $1.0 billion plus an additional amount equal to their net profits for 1995 up to the date of any such dividend declaration. In addition to the foregoing, the ability of NationsBank and the Banks to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA as described above. Furthermore, the Comptroller may prohibit the payment of a dividend by a national bank if it determines that such payment would constitute an unsafe or unsound practice. The right of NationsBank, its shareholders and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries. SOURCE OF STRENGTH. According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. In the event of a loss suffered or anticipated by the FDIC -- either as a result of default of a banking or thrift subsidiary of NationsBank or related to FDIC assistance provided to a subsidiary in danger of default -- the other banking subsidiaries of NationsBank may be assessed for the FDIC's loss, subject to certain exceptions. The net proceeds from the sale of the Debt Securities will be used for general corporate purposes, including the Corporation's working capital needs, the funding of investments in, or extensions of credit to, its banking and nonbanking subsidiaries, possible acquisitions of other financial institutions or their assets or liabilities, possible acquisitions of or investments in other businesses of a type eligible for bank holding companies and possible reduction of outstanding indebtedness or repurchase of outstanding equity securities of the Corporation. Pending such use, the Corporation may temporarily invest the net proceeds in investment grade securities. The Corporation may, from time to time, engage in additional capital financings of a character and in amounts to be determined by the Corporation in light of its needs at such time or times and in light of prevailing market conditions. If the Corporation elects at the time of issuance of Debt Securities to make different or more specific use of proceeds other than that set forth herein, such use will be described in the applicable Prospectus Supplement. RATIOS OF EARNINGS TO FIXED CHARGES The following are the Corporation's consolidated ratios of earnings to fixed charges for the nine months ended September 30, 1995 and for each of the years in the five-year period ended December 31, 1994: For purposes of computing the consolidated ratios, earnings represent net income of the Corporation plus applicable income taxes and fixed charges, less capitalized interest and the equity in undistributed earnings of unconsolidated subsidiaries and associated companies. Fixed charges represent interest expense (exclusive of interest on deposits in one case and inclusive of such interest in the other), capitalized interest, amortization of debt discount and appropriate issuance costs and one-third (the amount deemed to represent an appropriate interest factor) of net rent expense under all lease commitments. The Corporation may offer and sell the Debt Securities in one or more of the following ways: (i) through underwriters or dealers; (ii) through agents; or (iii) directly by the Corporation to one or more purchasers. Such underwriters, dealers or agents may be affiliates of NationsBank. The Prospectus Supplement with respect to a particular offering of a series of Debt Securities will set forth the terms of the offering of such Debt Securities, including the name or names of any underwriters or agents with whom NationsBank has entered into arrangements with respect to the sale of such Debt Securities, the public offering or purchase price of such Debt Securities and the proceeds to the Corporation from such sales, and any underwriting discounts, agency fees or commissions and other items constituting underwriters' compensation, the initial public offering price, any discounts or concessions to be allowed or reallowed or paid to dealers and the securities exchange, if any, on which such Debt Securities may be listed. If underwriters are used in the offer and sale of Debt Securities, the Debt Securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The Debt Securities may be offered to the public either through underwriting syndicates represented by managing underwriters, or by underwriters without a syndicate, all of which underwriters in either case will be designated in the applicable Prospectus Supplement. Unless otherwise set forth in the applicable Prospectus Supplement, under the terms of the underwriting agreement, the obligations of the underwriters to purchase Debt Securities will be subject to certain conditions precedent and the underwriters will be obligated to purchase all the Debt Securities if any are purchased. Any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time. Debt Securities may be offered and sold directly by the Corporation or through agents designated by the Corporation from time to time. Any agent involved in the offer or sale of the Debt Securities with respect to which this Prospectus is delivered will be named in, and any commissions payable by the Corporation to such agent will be set forth in or calculable from, the applicable Prospectus Supplement or a pricing supplement thereto. Unless otherwise indicated in the Prospectus Supplement, any such agent will be acting on a best-efforts basis for the period of its appointment. If so indicated in the applicable Prospectus Supplement, the Corporation may authorize underwriters, dealers or agents to solicit offers by certain institutions to purchase Debt Securities from the Corporation at the public offering price set forth in such Prospectus Supplement pursuant to delayed delivery contracts ("Delayed Delivery Contracts") providing for payment and delivery on the date or dates stated in the Prospectus Supplement. Each Delayed Delivery Contract will be for an amount of Debt Securities not less than and, unless the Corporation otherwise agrees, the aggregate amount of Debt Securities sold pursuant to Delayed Delivery Contracts shall be not more than the respective minimum and maximum amounts stated in the Prospectus Supplement. Institutions with which Delayed Delivery Contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies and educational and charitable institutions, but shall in all cases be subject to the approval of the Corporation in its sole discretion. The obligations of the purchaser under any Delayed Delivery Contract to pay for and take delivery of Debt Securities will not be subject to any conditions except that (i) the purchase of Debt Securities by such institution shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such institution is subject; and (ii) any related sale of Debt Securities to underwriters shall have occurred. A commission set forth in the Prospectus Supplement will be paid to underwriters soliciting purchases of Debt Securities pursuant to Delayed Delivery Contracts accepted by the Corporation. The underwriters will not have any responsibility in respect of the validity or performance of Delayed Delivery Contracts. Any series of Debt Securities offered and sold pursuant to this Prospectus and the applicable Prospectus Supplement will be new issues of securities with no established trading market. Any underwriters to whom Debt Securities are sold by the Corporation for public offering and sale may make a market in such Debt Securities, but such underwriters will not be obligated to do so and may discontinue any market making at any time without notice. No assurance can be given as to the liquidity of the trading market for any Debt Securities. Any underwriter, dealer or agent participating in the distribution of any Debt Securities may be deemed to be an underwriter, as that term is defined in the Securities Act of 1933, as amended (the "1933 Act"), of the Debt Securities so offered and sold, and any discounts or commissions received by them from NationsBank and any profit realized by them on the sale or resale of the Debt Securities may be deemed to be underwriting discounts and commissions under the 1933 Act. Under agreements entered into with the Corporation, underwriters, dealers and agents may be entitled to indemnification by the Corporation against certain civil liabilities, including liabilities under the 1933 Act, or to contribution with respect to payments which the underwriters or agents may be required to make in respect thereof. The participation of an affiliate or subsidiary of NationsBank in the offer and sale of the Debt Securities will comply with the requirements of Schedule E to the By-laws of the National Association of Securities Dealers, Inc. (the "NASD") regarding the participation in a distribution of securities by an affiliate. No NASD member participating in offers and sales of the Debt Securities will execute a transaction in the Debt Securities in a discretionary account without the prior written specific approval of the member's customer. Underwriters, dealers and agents also may be customers of, engage in transactions with, or perform other services for the Corporation in the ordinary course of business. THE FOLLOWING DESCRIPTION OF THE TERMS OF THE DEBT SECURITIES SETS FORTH CERTAIN GENERAL TERMS AND PROVISIONS OF THE DEBT SECURITIES TO WHICH ANY PROSPECTUS SUPPLEMENT MAY RELATE. THE PARTICULAR TERMS OF THE DEBT SECURITIES OFFERED BY ANY PROSPECTUS SUPPLEMENT AND THE EXTENT, IF ANY, TO WHICH SUCH GENERAL PROVISIONS MAY APPLY TO THE DEBT SECURITIES SO OFFERED WILL BE DESCRIBED IN THE PROSPECTUS SUPPLEMENT RELATING TO SUCH DEBT SECURITIES. Any Senior Debt Securities offered hereby are to be issued under an Indenture dated as of January 1, 1995 (such Indenture, as it may be amended from time to time, the "Senior Indenture") between the Corporation and BankAmerica National Trust Company, Trustee (the "Senior Trustee"). Any Subordinated Debt Securities offered hereby are to be issued under an Indenture dated as of January 1, 1995 (such Indenture, as it may be amended from time to time, the "Subordinated Indenture") between the Corporation and The Bank of New York, Trustee (the "Subordinated Trustee" and, together with the Senior Trustee, the "Trustees"). A copy of the Senior Indenture and the Subordinated Indenture (each, an "Indenture" and together, the "Indentures") is incorporated by reference in the Registration Statement of which this Prospectus forms a part. The following summaries of certain provisions of the Indentures do not purport to be complete and are subject to and qualified in their entirety by reference to the provisions of the applicable Indentures. Whenever particular sections or defined terms of the Indentures are referred to, it is intended that such sections or defined items shall be incorporated herein by reference. Unless otherwise indicated, capitalized terms shall have the meanings ascribed to them in the Indentures. The respective Indentures provide that there is no limitation on the amount of debt securities that may be issued thereunder from time to time. The amount of Debt Securities that may be offered and sold pursuant to this Prospectus, however, is limited to the aggregate initial offering price of the securities registered under the Registration Statement of which this Prospectus forms a part, subject to reduction as the result of the sale by the Corporation of other securities under the Registration Statement. The Debt Securities will be direct, unsecured obligations of the Corporation. The Senior Debt Securities of each series will rank equally with all unsecured senior debt of the Corporation. The Subordinated Debt Securities of each series will be subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness (as hereinafter defined) of the Corporation. See "DESCRIPTION OF DEBT SECURITIES -- Subordination." The Debt Securities will be issued in fully registered form without coupons. Unless otherwise set forth in the applicable Prospectus Supplement, the Debt Securities denominated in U.S. dollars will be issued in denominations of $1,000 or an integral multiple thereof. The Debt Securities may be denominated in U.S. dollars or in another currency or currency unit. If any of the Debt Securities are denominated in a foreign currency or currency unit, or if principal of (or premium, if any) or any interest on any of the Debt Securities is payable in any foreign currency or currency unit, the authorized denominations, restrictions, tax consequences, specific terms and other information with respect to such issue of Debt Securities and such foreign currency or currency unit will be set forth in the Prospectus Supplement relating thereto. The Debt Securities may be issued in one or more series with the same or various maturities. Certain Debt Securities may be issued which provide for an amount less than the principal amount thereof to be due and payable in the event of an acceleration of the maturity thereof (each an "Original Issue Discount Security"). Original Issue Discount Securities may bear no interest or may bear interest at a rate which at the time of issuance is below market rates and will be sold at a discount (which may be substantial) below their stated principal amount. Certain Debt Securities may be deemed to be issued with original issue discount for United States Federal income tax purposes. The Prospectus Supplement with respect to any series of Debt Securities issued with such original issue discount will contain a discussion of Federal income tax considerations with respect thereto. The particular terms of each series of Debt Securities to be offered and sold will be described in the Prospectus Supplement relating to such Debt Securities, including: (1) the designation of the particular series; (2) the aggregate principal amount of such series which may be authenticated and delivered under the applicable Indenture; (3) the person to whom any interest on any Debt Security of the series shall be payable, if other than the person in whose name that Debt Security (or one or more predecessor Debt Securities) is registered at the close of business on the regular record date for such interest; (4) the date or dates on which the principal of the Debt Securities of such series is payable; (5) the rate or rates, and if applicable the method used to determine the rate, at which the Debt Securities of such series shall bear interest, if any, the date or dates from which such interest shall accrue, the date or dates on which such interest shall be payable and the record date or dates for the interest payable on any Debt Securities on any interest payment date; (6) the place or places at which, subject to the provisions of the applicable Indenture, the principal of (and premium, if any, on) and any interest on Debt Securities of such series shall be payable, any Debt Securities of the series may be surrendered for registration of transfer, and notices and demands to or upon the Corporation in respect of the Debt Securities of the series and the Indenture may be served; (7) the obligation, if any, of the Corporation to redeem or purchase Debt Securities of such series, at the option of the Corporation or at the option of a holder thereof, pursuant to any sinking fund or other redemption provisions and the period or periods within which, the price or prices at which and the terms and conditions upon which Debt Securities of the series may be so redeemed or purchased, in whole or in part; (8) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which any Debt Securities of such series shall be issuable; (9) if other than the principal amount thereof, the portion of the principal amount of Debt Securities of such series which shall be payable upon declaration of acceleration of the maturity thereof; (10) the currency, currencies or currency units, in which payment of the principal of (and premium, if any, on) and any interest on any Debt Securities of the series shall be payable if other than the currency of the United States of America and the manner of determining the equivalent thereof in the currency of the United States of America for purposes of the applicable Indenture; (11) if the principal of (and premium, if any, on) or any interest on the Debt Securities of the series are to be payable, at the election of the Corporation or a holder thereof, in one or more currencies or currency units, other than that or those in which the Debt Securities are stated to be payable, the currency or currencies in which payment of the principal of (and premium, if any, on) and any interest on Debt Securities of such series as to which such election is made shall be payable, and the periods within which and the terms and conditions upon which such election is to be made; (12) if the amount of payments of principal of (and premium, if any, on) or any interest on the Debt Securities of the series may be determined with reference to an index, the manner in which such amounts shall be determined; (13) whether the Debt Securities will be issued in book-entry only form; (14) the identification or method of selection of any interest rate calculation agents, exchange rate calculation agents or other agents with respect to Debt Securities of such series; (15) if either or both of Section 14.02 (defeasance) or Section 14.03 (covenant defeasance) of the applicable Indenture do not apply to the Debt Securities of the series; (16) any provisions relating to the extension of maturity of, or the renewal of, Debt Securities of such series and (17) any other terms of the Debt Securities of such series (which terms shall not be inconsistent with the provisions of the applicable Indenture). The ability of NationsBank to make payments of principal of and premium, if any, and interest on the Debt Securities may be affected by the ability of the Banks to pay dividends. The ability of the Banks, as well as of the Corporation, to pay dividends in the future currently is, and could be further, influenced by bank regulatory requirements and capital guidelines. See "SUPERVISION AND REGULATION." Neither the Senior Indenture nor the Subordinated Indenture contains provisions that would provide protection to holders of Debt Securities against a decline in credit quality resulting from takeovers, recapitalizations, the incurrence of additional indebtedness or similar restructurings by the Corporation. If credit quality declines as a result of such an event, or otherwise, the ratings of any Debt Securities then outstanding may be withdrawn or downgraded. The Debt Securities of any series may be convertible at the option of the holder or the Corporation, into Preferred Stock, Depositary Shares, Common Stock or other Debt Securities if the Prospectus Supplement relating to such series of Debt Securities so provides. In such case, the Prospectus Supplement relating to such series of Debt Securities will set forth (i) the period(s) during which such conversion may be elected, (ii) the conversion price payable and the number of shares or amount of Preferred Stock, Depositary Shares, Common Stock or other Debt Securities purchaseable upon conversion, and adjustments thereto, if any, in certain events, (iii) the procedures for electing such conversion and (iv) all other terms for such conversion (which terms shall not be inconsistent with the provisions of the applicable Indenture). At the option of the holder, subject to the terms of the applicable Indenture, Debt Securities of any series (other than Debt Securities issued in book-entry form) will be exchangeable for other Debt Securities of the same series and of an equal aggregate principal amount and tenor of any authorized denominations. Debt Securities may be presented for exchange as provided above, and Debt Securities may be presented for registration of transfer (with the form of transfer endorsed thereon duly executed), at the office of the Security Registrar or at the office of any transfer agent of the Corporation designated and maintained for such purpose with respect to Debt Securities of a series pursuant to the terms of the applicable Indenture, as referred to in an applicable Prospectus Supplement. Such transfer or exchange will be effected upon the Security Registrar or transfer agent, as the case may be, being satisfied with the documents of title and identity of the person making the request. No service charge shall be made for any exchange or registration of transfer of Debt Securities, but the Corporation may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. If a Prospectus Supplement refers to any transfer agents (in addition to the Security Registrar) designated by the Corporation with respect to any series of Debt Securities, the Corporation may at any time rescind the designation of any such transfer agent or approve a change in the location through which any such transfer agent acts, except that the Corporation will be required to maintain a transfer agent in each place of payment for such series. The Corporation may at any time designate additional transfer agents with respect to any series of Debt Securities. The Corporation shall not be required to (i) issue, exchange, or register the transfer of any Debt Security of any series to be redeemed for a period of 15 days next preceding any selection of such Debt Securities to be redeemed; or (ii) exchange or register the transfer of any Debt Security so selected, called or being called for redemption, except the unredeemed portion of any Debt Security being redeemed in part. For a discussion of restrictions on the exchange, registration and transfer of Book-Entry Securities, see "DESCRIPTION OF DEBT SECURITIES -- Book-Entry Securities." Unless otherwise indicated in an applicable Prospectus Supplement, principal of (and premium, if any, on) and any interest on Debt Securities will be payable, subject to any applicable laws and regulations, at the offices of such paying agents as the Corporation may designate from time to time pursuant to the applicable Indenture, except that, at the option of the Corporation, payment of any interest may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register. Unless otherwise indicated in an applicable Prospectus Supplement, payment of interest on a Debt Security on any interest payment date generally will be made to the person in whose name such Debt Security is registered at the close of business on the regular record date for such interest payment date. The Corporation has designated the principal corporate trust offices of the Senior Trustee and the Subordinated Trustee in the City of New York as the places where the Senior Debt Securities and Subordinated Debt Securities, respectively, may be presented for payment. The Corporation may at any time designate additional paying agents or rescind the designation of any paying agent or approve a change in the office through which any paying agent acts. Any other paying agents designated by the Corporation for the Debt Securities of each series will be named in an applicable Prospectus Supplement. If so specified in an applicable Prospectus Supplement, all or any portion of the Debt Securities of a series may be issued in book-entry form represented by one or more global Debt Securities in registered form ("Book-Entry Securities") to be deposited with, or on behalf of a depositary (a "Depositary") identified in the Prospectus Supplement relating to such series, for credit to the respective accounts of the beneficial owners of such Debt Securities (or to such other accounts as they may direct). The specific terms of the depositary arrangement with respect to any such series of Debt Securities will be described in the Prospectus Supplement relating to such series. Unless otherwise specified in the applicable Prospectus Supplement, the Corporation anticipates that the following provisions will apply to all depositary arrangements with a Depositary. Upon the issuance of a Book-Entry Security, the Depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of the Debt Securities represented by such Book-Entry Security to the accounts of institutions that have accounts with such depositary or its nominee ("participants"). The accounts to be credited shall be designated by the underwriters or agents of such Debt Securities or by the Corporation, if such Debt Securities are offered and sold directly by the Corporation. Ownership of beneficial interests in such Book-Entry Security will be limited to participants or persons that may hold interests through participants. Ownership of a beneficial interest in such a Book-Entry Security will be shown on, and the transfer of that ownership will be effected only through, records maintained by the Depositary or its nominee (with respect to participants' interests) for such Book-Entry Security or by participants or persons that hold through participants. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to acquire or transfer beneficial interests in a Book-Entry Security. So long as the Depositary for a Book-Entry Security, or its nominee, is the registered owner of such Book-Entry Security, such depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Debt Securities represented by such Book-Entry Security for all purposes under the Indenture governing such Debt Securities. Except as set forth below, owners of beneficial interests in such Book-Entry Security will not be entitled to have Debt Securities of the series represented by such Book-Entry Security registered in their names, will not receive or be entitled to receive physical delivery of Debt Securities of such series in definitive form and will not be considered the owners or holders thereof under the Indenture. Accordingly, each person owning a beneficial interest in a Book-Entry Security must rely on the procedures of the Depositary and, if such person is not a participant, on the procedures of the participant and, if applicable, the indirect participant, through which such person owns its interest, to exercise any rights of a holder under the Indenture. Payment of principal of (and premium, if any) and any interest on Debt Securities registered in the name of or held by a Depositary or its nominee will be made to the Depositary or its nominee, as the case may be, as the registered owner or the holder of the Book-Entry Security representing such Debt Securities. None of the Corporation, the Trustee, any paying agent, any authenticating agent or the Security Registrar for such Debt Securities will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Book-Entry Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Corporation expects that the Depositary for Debt Securities of a series, upon receipt of any payment of principal of (and premium, if any) and any interest on the Debt Securities represented by such Book-Entry Security, will credit immediately participants' accounts with payments in amounts proportionate to their respective holdings in principal amount of beneficial interest in such Book-Entry Security as shown on the records of such Depositary. The Corporation also expects that payments by participants to owners of beneficial interests in such Book-Entry Security held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in "street name." Such payments will be the responsibility of such participants. Unless and until it is exchanged in whole for Debt Securities in definitive form, a Book-Entry Security may not be transferred except as a whole by the Depositary for such Book-Entry Security to a nominee of such depositary or to another depositary or a nominee for such other depositary. If a Depositary for Debt Securities is at any time unwilling or unable to continue as depositary and a successor depositary is not appointed by the Corporation within 90 days, the Corporation will issue Debt Securities in definitive form in exchange for the Book-Entry Security or Book-Entry Securities representing all such Debt Securities. In addition, the Corporation may at any time and in its sole discretion determine not to have any Debt Securities represented by a Book-Entry Security and, in such event, will issue such Debt Securities in definitive form in exchange for the Book-Entry Security or Book-Entry Securities representing all such Debt Securities. In any such instance, an owner of a beneficial interest in a Book-Entry Security will be entitled to physical delivery in definitive form of Debt Securities of the series represented by such Book-Entry Security equal in principal amount to such beneficial interest and to have such Debt Securities registered in the name of the owner of such beneficial interest. The Subordinated Debt Securities are subordinate and subject, to the extent and in the manner set forth in the Subordinated Indenture, in right of payment to the prior payment in full of all Senior Indebtedness of the Corporation. "Senior Indebtedness" is defined by the Subordinated Indenture as any indebtedness for money borrowed (including all indebtedness of the Corporation for borrowed and purchased money of the Corporation, all obligations of the Corporation arising from off-balance sheet guarantees by the Corporation and direct credit substitutes, and obligations of the Corporation associated with derivative products such as interest and foreign exchange rate contracts and commodity contracts) that is outstanding on the date of execution of the Subordinated Indenture, or is thereafter created, incurred or assumed, for the payment of which the Corporation is at the time of determination responsible or liable as obligor, guarantor or otherwise, and all deferrals, renewals, extensions and refundings of any such indebtedness or obligations, other than the Subordinated Debt Securities or any other indebtedness as to which, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such indebtedness is subordinate in right of payment to any other indebtedness of the Corporation. The Prospectus Supplement relating to each series of Subordinated Debt Securities will set forth the aggregate amount of then outstanding Senior Indebtedness of the Corporation and any limitation on the issuance of additional Senior Indebtedness. No payment on account of principal of (and premium, if any, on) or interest, if any, on the Subordinated Debt Securities shall be made, and no Subordinated Debt Securities shall be purchased, either directly or indirectly, by the Corporation or any of its subsidiaries, if any default or event of default with respect to any Senior Indebtedness shall have occurred and be continuing and the Corporation and the Subordinated Trustee shall have received written notice thereof from the holders of at least 10 percent in principal amount of any kind or category of any Senior Indebtedness (or the representative or representatives of such holders) or the Subordinated Trustee shall have received written notice thereof from the Corporation. In the event that any Subordinated Debt Security is declared due and payable before the date specified therein as the fixed date on which the principal thereof is due and payable pursuant to the Subordinated Indenture, or upon any payment or distribution of assets of the Corporation of any kind or character to creditors upon any dissolution or winding up or total or partial liquidation or reorganization of the Corporation, all principal of (and premium, if any, on) and interest due or to become due upon all Senior Indebtedness shall first be paid in full before the holders of the Subordinated Debt Securities (the "Subordinated Debt Holders"), or the Subordinated Trustee, shall be entitled to retain any assets (other than shares of stock of the Corporation as reorganized or readjusted or securities of the Corporation or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated, at least to the same extent as the Subordinated Debt Securities, to the payment of all Senior Indebtedness which may at the time be outstanding, provided that the rights of the holders of the Senior Indebtedness are not altered by such reorganization or readjustment) so paid or distributed in respect of the Subordinated Debt Securities (for principal or interest, if any). Upon such dissolution or winding up or liquidation or reorganization, any payment or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities (other than shares of stock of the Corporation as reorganized or readjusted or securities of the Corporation or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated, at least to the same extent as the Subordinated Debt Securities, to the payment of all Senior Indebtedness which may at the time be outstanding, provided that the rights of the holders of the Senior Indebtedness are not altered by such reorganization or readjustment), to which the Subordinated Debt Holders or the Subordinated Trustee would be entitled, except for the subordination provisions of the Subordinated Indenture, shall be paid by the Corporation or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Subordinated Debt Holders or the Subordinated Trustee if received by them or it, directly to the holders of the Senior Indebtedness (pro rata to each such holder on the basis of the respective amounts of Senior Indebtedness held by such holder) or their representatives, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution is made to the Subordinated Debt Holders or to the Subordinated Trustee. Subject to the payment in full of all Senior Indebtedness, the Subordinated Debt Holders shall be subrogated (equally and ratably with the holders of all indebtedness of the Corporation which, by its express terms, ranks on a parity with the Subordinated Debt Securities and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Corporation applicable to the Senior Indebtedness until the Subordinated Debt Securities shall be paid in full. SALE OR ISSUANCE OF CAPITAL STOCK OF BANKS The Senior Indenture prohibits the issuance, sale or other disposition of capital stock, or securities convertible into or options, warrants or rights to acquire capital stock, of any Principal Subsidiary Bank (as defined below) or of any subsidiary which owns shares of capital stock, or securities convertible into or options, warrants or rights to acquire capital stock, of any Principal Subsidiary Bank, with the following exceptions: (a) sales of directors' qualifying shares; (b) sales or other dispositions for fair market value, if, after giving effect to such disposition and to conversion of any shares or securities convertible into capital stock of a Principal Subsidiary Bank, the Corporation would own directly or indirectly not less than 80% of each class of the capital stock of such Principal Subsidiary Bank (or any successor corporation thereto); (c) sales or other dispositions made in compliance with an order of a court or regulatory authority of competent jurisdiction; (d) any sale by a Principal Subsidiary Bank (or any successor corporation thereto) of additional shares of its capital stock to its shareholders at any price, so long as (i) prior to such sale the Corporation owns, directly or indirectly, shares of the same class and (ii) immediately after such sale, the Corporation owns, directly or indirectly, at least as great a percentage of each class of capital stock of such Principal Subsidiary Bank as it owned prior to such sale of additional shares; (e) any sale by a Principal Subsidiary Bank (or any successor corporation thereto) of additional securities convertible into shares of its capital stock to its shareholders at any price, so long as (i) prior to such sale the Corporation owns, directly or indirectly, securities of the same class and (ii) immediately after such sale the Corporation owns, directly or indirectly, at least as great a percentage of each class of such securities convertible into shares of capital stock of such Principal Subsidiary Bank as it owned prior to such sale of additional securities; (f) any sale by a Principal Subsidiary Bank (or any successor corporation thereto) of additional options, warrants or rights to subscribe for or purchase shares of its capital stock to its shareholders at any price, so long as (i) prior to such sale the Corporation owns, directly or indirectly, options, warrants or rights, as the case may be, of the same class and (ii) immediately after such sale, the Corporation owns, directly or indirectly, at least as great a percentage of each class of such options, warrants or rights, as the case may be, to subscribe for or purchase shares of capital stock of such Principal Subsidiary Bank as it owned prior to such sale of additional options, warrants or rights; or (g) any issuance of shares of capital stock, or securities convertible into or options, warrants or rights to subscribe for or purchase shares of capital stock, of a Principal Subsidiary Bank or any subsidiary which owns shares of capital stock, or securities convertible into or options, warrants or rights to acquire capital stock, of any Principal Subsidiary Bank, to the Corporation or a wholly owned subsidiary of the Corporation. A Principal Subsidiary Bank is defined in the Senior Indenture as any Bank (other than NationsBank of Delaware, National Association) with total assets equal to more than 10% of the Corporation's total consolidated assets. Under the terms of either Indenture, compliance with certain covenants or conditions of such Indenture may be waived by the holders of a majority in principal amount of the Debt Securities of all series to be affected thereby and at the time outstanding under that Indenture (including, in the case of holders of Senior Debt Securities, the covenant described above). Each Indenture contains provisions permitting the Corporation and the applicable Trustee to modify such Indenture or the rights of the holders of Debt Securities or coupons, if any, thereunder, with the consent of the holders of not less than 66 2/3% in aggregate principal amount of the Debt Securities of all series at the time outstanding under that Indenture and to be affected thereby (voting as one class), except that no such modification shall (a) extend the fixed maturity of, reduce the principal amount or redemption premium, if any, of, or reduce the rate of or extend the time of payment of interest on, any Debt Security without the consent of the holder of each security so affected, or (b) reduce the aforesaid percentage of Debt Securities, the consent of holders of which is required for any such modification, without the consent of the holders of all Debt Securities then outstanding under that Indenture. Each Indenture also provides that the Corporation and the respective Trustee may, from time to time, execute supplemental indentures in certain limited circumstances without the consent of any holders of outstanding Debt Securities. Each Indenture provides that in determining whether the holders of the requisite principal amount of the Debt Securities outstanding have given any request, demand, authorization, direction, notice, consent or waiver thereunder, (i) the principal amount of an Original Issue Discount Security that shall be deemed to be outstanding shall be the amount of the principal thereof that would be due and payable upon an event of default, and (ii) the principal amount of a Debt Security denominated in a foreign currency or currency unit shall be the U.S. dollar equivalent, determined on the date of original issuance of such Debt Security. MEETINGS AND ACTION BY SECURITYHOLDERS Each Indenture contains provisions for convening meetings of the holders of Debt Securities for certain purposes. A meeting may be called at any time by the Trustee in its discretion and shall be called by the Trustee upon request by the Corporation or the holders of at least 10% in aggregate principal amount of the Debt Securities outstanding of such series, in any case upon notice given in accordance with "Notices" below. Any resolution passed or decision taken at any meeting of holders of Debt Securities of any series duly held in accordance with the applicable Indenture, or such other action taken in accordance with the terms of the applicable Indenture, will be binding on all holders of Debt Securities of that series and the related coupons. DEFAULTS AND RIGHTS OF ACCELERATION An Event of Default is defined in the Subordinated Indenture generally as bankruptcy of the Corporation under Federal bankruptcy laws. An Event of Default is defined in the Senior Indenture generally as (i) the Corporation's failure to pay principal (or premium, if any) when due on any securities of a series, (ii) the Corporation's failure to pay interest on any securities of a series, within 30 days after the same becomes due, (iii) the Corporation's breach of any of its other covenants contained in the Senior Debt Securities or the Senior Indenture, which breach is not cured within 90 days after written notice by the Senior Trustee or by the holders of at least 25% in principal amount of the Senior Debt Securities then outstanding under the Senior Indenture and affected thereby, and (iv) certain events involving the bankruptcy, insolvency or liquidation of the Corporation. Each Indenture provides that if an Event of Default under the respective Indenture occurs and is continuing, either the respective Trustee or the holders of 25% in principal amount, or, if any such Debt Securities are Original Issue Discount Debt Securities, such lesser amounts as may be described in an applicable Prospectus Supplement, of the Debt Securities then outstanding under that Indenture (or, with respect to an Event of Default under the Senior Indenture due to a default in the payment of principal (or premium, if any) or interest or performance of any other covenant, the outstanding Debt Securities of all series affected by such default) may declare the principal amount of all of such Debt Securities to be due and payable immediately. Payment of principal of the Subordinated Debt Securities may not be accelerated in the case of a default in the payment of principal (or premium, if any) or interest or the performance of any other covenant of the Corporation. Upon certain conditions a declaration of an Event of Default may be annulled and past defaults may be waived by the holders of a majority in principal amount of the Debt Securities then outstanding (or of such series affected, as the case may be). COLLECTION OF INDEBTEDNESS, ETC. Each Indenture also provides that in the event of a failure by the Corporation to make payment of principal of or interest on the Debt Securities (and, in the case of payment of interest, such failure to pay shall have continued for 30 days), the Corporation will, upon demand of the respective Trustee, pay to it, for the benefit of the holders of the Debt Securities the amount then due and payable on the Debt Securities for principal and interest, with interest on the overdue principal and, to the extent payment of interest shall be legally enforceable, upon overdue installments of interest at the rate borne by the Debt Securities. Each Indenture further provides that if the Corporation fails to pay such amount forthwith upon such demand, the respective Trustee may, among other things, institute a judicial proceeding for the collection thereof. However, each Indenture provides that notwithstanding any other provision of the Indenture, the holder of any Debt Security shall have the right to institute suit for the enforcement of any payment of principal of and interest on such Debt Security on the respective stated maturities expressed in such Debt Security and that such right shall not be impaired without the consent of such holder. The holders of a majority in principal amount of the Debt Securities then outstanding under an Indenture shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee under that Indenture, provided that the holders shall have offered to the Trustee reasonable indemnity against expenses and liabilities. Each Indenture requires the annual filing by the Corporation with the respective Trustee of a certificate as to the absence of default and as to compliance with the terms of that Indenture. Except as otherwise provided in the applicable Indenture, notices to holders of Debt Securities will be given by first-class mail to the addresses of such holders as they appear in the Security Register. The Corporation and the Banks have from time to time maintained deposit accounts and conducted other banking transactions with The Bank of New York and BankAmerica National Trust Company and their affiliated entities in the ordinary course of business. Each of the Trustees also serves as trustee for certain series of the Corporation's outstanding indebtedness under other indentures. The legality of the Debt Securities will be passed upon for the Corporation by Smith Helms Mulliss & Moore, L.L.P., Charlotte, North Carolina, and for the underwriters or agents by Stroock & Stroock & Lavan, New York, New York. As of the date of this Prospectus, certain members of Smith Helms Mulliss & Moore, L.L.P. beneficially own approximately 50,000 shares of the Corporation's Common Stock. The consolidated financial statements of the Corporation incorporated in this Prospectus by reference to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION OR BY THE AGENTS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE CORPORATION SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. DUE NINE MONTHS OR MORE NATIONSBANC CAPITAL MARKETS, INC. MERRILL LYNCH & CO. MORGAN STANLEY & CO. (TO PROSPECTUS DATED NOVEMBER 24, 1995) SENIOR MEDIUM-TERM NOTES, SERIES E SUBORDINATED MEDIUM-TERM NOTES, SERIES E DUE NINE MONTHS OR MORE FROM DATE OF ISSUE NationsBank Corporation ("NationsBank" or the "Corporation") may from time to time offer its Senior Medium-Term Notes, Series E (the "Senior Notes"), and Subordinated Medium-Term Notes, Series E (the "Subordinated Notes" and, collectively with the Senior Notes, the "Notes"). NationsBank may sell up to $2,000,000,000 in aggregate initial offering price of Notes, subject to reduction from time to time after the date hereof at the option of NationsBank, including reduction as a result of the sale of other Debt Securities (as defined in the accompanying Prospectus) of NationsBank pursuant to the accompanying Prospectus. The Senior Notes will rank equally with all other unsubordinated and unsecured indebtedness of the Corporation. The Subordinated Notes will be subordinated in right of payment to all Senior Indebtedness (as defined in the accompanying Prospectus) of the Corporation. Payment of principal of the Subordinated Notes may be accelerated only in the case of the bankruptcy of NationsBank. See "DESCRIPTION OF DEBT SECURITIES -- Subordination" and "DESCRIPTION OF DEBT SECURITIES -- Defaults and Rights of Acceleration" in the accompanying Prospectus. Each Note will mature on a day nine months or more from its date of issue and, as set forth in an applicable pricing supplement to this Prospectus Supplement (a "Pricing Supplement"), may be subject to redemption at the option of the Corporation or repaid at the option of the holder thereof prior to its stated maturity. Each Note will bear interest at a fixed rate (a "Fixed Rate Note") or at a floating rate (a "Floating Rate Note"), as set forth in the applicable Pricing Supplement. The interest rate or interest rate formula for each Note will be established by the Corporation at the time of issuance of such Note (the "Original Issue Date") and will be set forth therein and specified in the applicable Pricing Supplement. See "DESCRIPTION OF NOTES." Unless otherwise specified in the applicable Pricing Supplement, the Notes will be issued only in minimum denominations of $1,000 and any integral multiple in excess thereof, and Notes will be issued in book-entry form only, subject to certain exceptions listed herein, and will be represented by one or more global notes registered in the name of The Depository Trust Company ("DTC") or its nominee. Beneficial interests in Notes issued in book-entry form will be shown on, and transfer thereof will be effected only through, records maintained by DTC or its nominee and its participants. See "DESCRIPTION OF NOTES -- Book-Entry System." THE NOTES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS, ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NONBANKING AFFILIATE OF NATIONSBANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION, THE COMMISSIONER OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT, ANY PRICING SUPPLEMENT HERETO, OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS SUPPLEMENT IS TO BE USED BY NATIONSBANC CAPITAL MARKETS, INC. ("NCMI"), A BROKER-DEALER AND A DIRECT WHOLLY-OWNED SUBSIDIARY OF NATIONSBANK, IN CONNECTION WITH OFFERS AND SALES RELATED TO SECONDARY MARKET TRANSACTIONS IN THE NOTES. NCMI OR ITS AFFILIATES MAY ACT AS PRINCIPAL OR AGENT IN SUCH TRANSACTIONS. ANY SUCH SALES WILL BE MADE AT NEGOTIATED PRICES RELATING TO PREVAILING MARKET PRICES AT THE TIME OF SALE OR OTHERWISE. The date of this Prospectus Supplement is January 10, 1996. This Prospectus Supplement and related Prospectus are to be used by NationsBanc Capital Markets, Inc. ("NCMI"), a broker-dealer and a direct wholly-owned subsidiary of NationsBank, in connection with offers and sales of the Notes in secondary market transactions at negotiated prices relating to prevailing prices at the time of sale or otherwise. NCMI may act as principal or agent in such transactions. The participation of NCMI in the offer and sale of the Notes complies with the requirements of Schedule E to the By-laws of the NASD regarding underwriting of securities of an affiliate. NCMI will not execute a transaction in the Notes in a discretionary account without the prior written specific approval of NCMI's customer. NCMI has no obligation to make a market in the Notes, and if commenced, may discontinue its market-making activities at any time without notice, at its sole discretion. Furthermore, NCMI may be required to discontinue its market-making activities during periods when the Corporation is seeking to sell certain of its securities or when NCMI, such as by means of its ownership by the Corporation, learns of material non-public information relating to the Corporation. NCMI would not be able to recommence its market-making activities until such sale has been completed or such information has become publicly available. It is not possible to forecast the impact, if any, that any such discontinuance may have on the market for the Notes. While other broker-dealers may make a market in the Notes from time to time, there can be no assurance that any other broker-dealer will do so at any time when NCMI discontinues its market-making activities. In addition, any such broker-dealer that is engaged in market-making activities may thereafter discontinue such activities at any time at its sole discretion. NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION, THE AGENTS OR NATIONSBANC CAPITAL MARKETS, INC. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE CORPORATION SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. THIS PROSPECTUS SUPPLEMENT AND THE RELATED PROSPECTUS ARE TO BE USED BY NATIONSBANC CAPITAL MARKETS, INC., A BROKER-DEALER AND A DIRECT WHOLLY-OWNED SUBSIDIARY OF THE CORPORATION, IN CONNECTION WITH OFFERS AND SALES RELATED TO SECONDARY MARKET TRANSACTIONS. DUE NINE MONTHS OR MORE	424B4	424B4	1996-01-12T00:00:00	1996-01-12T11:46:18
0000950109-96-000200	0000950109-96-000200_0009.txt	THIS AGREEMENT is made as of _________________, 1995 by and between PFPC INC., a Delaware corporation which is an indirect wholly owned subsidiary of PNC Bank Corp.("PFPC"), and WEISS TREASURY FUND, a Massachusetts business trust (the "Fund"). W I T N E S S E T H: WHEREAS, the Fund is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to its investment portfolios listed on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time (each a "Portfolio"), and PFPC wishes to furnish such services. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITIONS. AS USED IN THIS AGREEMENT: (a) "1933 Act" means the Securities Act of 1933, as amended. (b) "1934 Act" means the Securities Exchange Act of 1934, as amended. (c) "Authorized Person" means any officer of the Fund and any other person duly authorized by the Fund's Board of Trustees to give Oral and Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by PFPC. An Authorized Person's scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix. (d) "CEA" means the Commodities Exchange Act, as amended. (e) "Oral Instructions" mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person. (f) "SEC" means the Securities and Exchange Commission. (g) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act and the CEA. (h) "Shares" mean the shares of beneficial interest of any series or class of the Fund. (i) "Written Instructions" mean written instructions signed by an Authorized Person and received by PFPC. The instruc- tions may be delivered by hand, mail, tested telegram, cable, telex or facsimile sending device. 2. APPOINTMENT. The Fund hereby appoints PFPC to serve as transfer agent, registrar, dividend disbursing agent and shareholder servicing agent to the Fund in accordance with the terms set forth in this Agreement. PFPC accepts such appointment and agrees to furnish such services. 3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable, will provide PFPC with the following: (a) Certified or authenticated copies of the resolutions of the Fund's Board of Trustees, approving the appointment of PFPC or its affiliates to provide services to the Fund and approving this (b) A copy of the Fund's most recent effective registration (c) A copy of the advisory agreement with respect to each investment Portfolio of the Fund (each, a Portfolio); (d) A copy of the distribution agreement with respect to each class of Shares of the Fund; (e) A copy of each Portfolio's administration agreements if PFPC is not providing the Portfolio with such services; (f) Copies of any shareholder servicing agreements made in respect of the Fund or a Portfolio; and (g) Copies (certified or authenticated where applicable) of any and all amendments or supplements to the foregoing. 4. COMPLIANCE WITH RULES AND REGULATIONS. PFPC undertakes to comply with all applicable requirements of the Securities Laws and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder. Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by the Fund or any of its investment portfolios. (a) Unless otherwise provided in this Agreement, PFPC shall act only upon Oral and Written Instructions. (b) PFPC shall be entitled to rely upon any Oral and Written Instructions it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement. PFPC may assume that any Oral or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or of any vote, resolution or proceeding of the Fund's Board of Trustees or of the Fund's shareholders, unless and until PFPC receives Written Instructions to the contrary. (c) The Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions so that PFPC receives the Written Instructions by the close of business on the next day that such Oral Instructions are received. The fact that such confirming Written Instructions are not received by PFPC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral or Written Instructions reasonably appear to have been received from an Authorized Person, PFPC shall incur no liability to the Fund in acting upon such Oral or Written Instructions provided that PFPC's actions comply with the other provisions of this Agreement. 6. RIGHT TO RECEIVE ADVICE. (a) Advice of the Fund. If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral or Written Instructions, from the Fund. (b) Advice of Counsel. If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund's investment adviser or PFPC, at the option of PFPC). (c) Conflicting Advice. In the event of a conflict between directions, advice or Oral or Written Instructions PFPC receives from the Fund, and the advice it receives from counsel, PFPC may rely upon and follow the advice of counsel. In the event PFPC so relies on the advice of counsel, PFPC remains liable for any action or omission on the part of PFPC which constitutes willful misfeasance, bad faith, gross negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement. (d) Protection of PFPC. PFPC shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral or Written Instructions it receives from the Fund or from counsel in accordance with this Agreement and which PFPC believes, in good faith, to be consistent with those directions, advice or Oral or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions, advice or Oral or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC's properly taking or not taking such action. Nothing in this subsection shall excuse PFPC when an action or omission on the part of PFPC constitutes willful misfeasance, bad faith, gross negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement. 7. RECORDS; VISITS. The books and records pertaining to the Fund, which are in the possession or under the control of PFPC, shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations. The Fund and Authorized Persons shall have access to such books and records at all times during PFPC's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC to the Fund or to an Authorized Person, at the Fund's expense. 8. CONFIDENTIALITY. PFPC agrees on its own behalf and that of its employees to keep confidential all records of the Fund and information relating to the Fund and its shareholders (past, present and future), unless the release of such records or information is otherwise consented to, in writing, by the Fund. The Fund agrees that such consent shall not be unreasonably withheld and may not be withheld where PFPC may be exposed to civil or criminal contempt proceedings or when required to divulge such information or records to duly constituted authorities. 9. COOPERATION WITH ACCOUNTANTS. PFPC shall cooperate with the Fund's independent public accountants and shall take all reasonable actions in the performance of its obligations under this Agreement to ensure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund. 10. DISASTER RECOVERY. PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment. In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC's own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties or obligations under this Agreement. 11. COMPENSATION. As compensation for services rendered by PFPC during the term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed to from time to time in writing by the Fund and PFPC. 12. INDEMNIFICATION. The Fund agrees to indemnify and hold harmless PFPC and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, liabilities arising under the Securities Laws and any state and foreign securities and blue sky laws, and amendments thereto), and expenses, including (without limitation) attorneys' fees and disbursements, arising directly or indirectly from any action or omission to act which PFPC takes (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral or Written Instructions. Neither PFPC, nor any of its affiliates, shall be indemnified against any liability (or any expenses incident to such liability) arising out of PFPC's or its affiliates' own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under this Agreement. (a) PFPC shall be under no duty to take any action on behalf of the Fund except as specifically set forth herein or as may be specifically agreed to by PFPC in writing. PFPC shall be obligated to exercise care and diligence in the performance of its duties hereunder, to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement. PFPC shall be liable for any damages arising out of PFPC's performance of or failure to perform its duties under this Agreement to the extent such damages arise out of PFPC's willful misfeasance, bad faith, gross (b) Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) PFPC, shall not be liable for losses beyond its control, provided that PFPC has acted in accordance with the standard of care set forth above; and (ii) PFPC shall not be under any duty or obligation to inquire into and shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which PFPC reasonably believes to be genuine; or (B) subject to Section 10, delays or errors or loss of data occurring by reason of circumstances beyond PFPC's control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply. (c) Notwithstanding anything in this Agreement to the contrary, neither PFPC nor its affiliates shall be liable to the Fund for any consequential, special or indirect losses or damages which the Fund may incur or suffer by or as a consequence of PFPC's or its affiliates performance of the services provided hereunder, whether or not the likelihood of such losses or by PFPC or its affiliates. (a) Services Provided on an Ongoing Basis, If Applicable. (ii) Maintain proper shareholder registrations; (iii) Review new applications and correspond with shareholders to (iv) Direct payment processing of checks or wires; (v) Prepare and certify stockholder lists in conjunction with (vii) Prepare and mail to shareholders confirmation of activity; (viii) Provide toll-free lines for direct shareholder use, plus customer liaison staff for on-line inquiry response; (ix) Mail duplicate confirmations to broker-dealers of their clients' activity, whether executed through the broker-dealer or directly with PFPC; (x) Provide periodic shareholder lists and statistics to the (xi) Provide detailed data for underwriter/broker confirmations; (xii) Prepare periodic mailing of year-end tax and statement (xiii) Notify on a timely basis the investment adviser, accounting agent, and custodian of fund activity; and (xiv) Perform other participating broker-dealer shareholder services as may be agreed upon from time to time. (b) Services Provided by PFPC Under Oral or Written Instructions. (i) Accept and post daily Fund purchases and redemptions; (ii) Accept, post and perform shareholder transfers and (iii) Pay dividends and other distributions; (iv) Solicit and tabulate proxies; and (v) Issue and cancel certificates (when requested in writing by the shareholder). (c) Purchase of Shares. PFPC shall issue and credit an account of an investor, in the manner described in the Fund's prospectus, once it receives: (ii) Proper information to establish a shareholder account; and (iii) Confirmation of receipt or crediting of funds for such order to the Fund's custodian. (d) Redemption of Shares. PFPC shall redeem Shares only if that function is properly authorized by the certificate of incorporation or resolution of the Fund's Board of Trustees. Shares shall be redeemed and payment therefor shall be made in accordance with the Fund's prospectus. When the recordholder tenders Shares in proper form and directs the method of redemption. If Shares are received in proper form, Shares shall be redeemed before the funds are provided to PFPC from the Fund's custodian (the "Custodian"). If the recordholder has not directed that redemption proceeds be wired, when the Custodian provides PFPC with funds, the redemption check shall be sent to and made payable to the recordholder, unless: (i) the Surrendered certificate is drawn to the order of an assignee or holder and transfer authorization is signed by (ii) Transfer authorizations are signed by the recordholder when Shares are held in book-entry form. When a broker-dealer notifies PFPC of a redemption desired by a customer, and the Custodian provides PFPC with funds, PFPC shall prepare and send the redemption check to the broker-dealer and made payable to the broker-dealer on behalf of its customer. (e) Dividends and Distributions. Upon receipt of a resolution of the Fund's Board of Trustees authorizing the declaration and payment of dividends issue dividends and distributions declared by the Fund in Shares, or, upon shareholder election, pay such dividends and distributions in cash, if provided for in the Fund's prospectus. Such issuance or payment, as well as payments upon redemption as described above, shall be made after deduction and payment of the required amount of funds to be withheld in accordance with any applicable tax laws or other laws, rules or regulations. PFPC shall mail to the Fund's shareholders such tax forms and other information, or permissible substitute notice, relating to dividends and distributions paid by the Fund as are required to be filed and mailed by applicable law, rule or regulation. PFPC shall prepare, maintain and file with the IRS and other appropriate taxing authorities reports relating to all dividends above a stipulated amount paid by the Fund to its shareholders as required by tax or other law, rule or regulation. (i) PFPC may arrange, in accordance with the prospectus, for issuance of Shares obtained through: - Any pre-authorized check plan; and - Direct purchases through broker wire orders, checks and applications. (ii) PFPC may arrange, in accordance with the prospectus, for a shareholder's: - Exchange of Shares for shares of another fund with which the - Automatic redemption from an account where that shareholder participates in a automatic redemption plan; and/or - Redemption of Shares from an account with a checkwriting privilege. (g) Communications to Shareholders. Upon timely Written Instructions, PFPC shall mail all communications by the Fund to its shareholders, including: (ii) Confirmations of purchases and sales of Fund shares; (iii) Monthly or quarterly statements; (iv) Dividend and distribution notices; In addition, PFPC will receive and tabulate the proxy cards for the meetings of the Fund's shareholders. (h) Records. PFPC shall maintain records of the accounts for each shareholder showing the following information: (i) Name, address and United States Tax Identification or Social (ii) Number and class of Shares held and number and class of Shares for which certificates, if any, have been issued, including certificate numbers and denominations; (iii) Historical information regarding the account of each shareholder, including dividends and distributions paid and the date and price for all transactions on a shareholder's (iv) Any stop or restraining order placed against a shareholder's (v) Any correspondence relating to the current maintenance of a (vi) Information with respect to withholdings; and (vii) Any information required in order for the transfer agent to perform any calculations contemplated or required by this Agreement. (i) Lost or Stolen Certificates. PFPC shall place a stop notice against any certificate reported to be lost or stolen and comply with all applicable federal regulatory requirements for reporting such loss or alleged misappropriation. A new certificate shall be registered and issued only upon: (i) The shareholder's pledge of a lost instrument bond or such other appropriate indemnity bond issued by a surety company (ii) Completion of a release and indemnification agreement signed by the shareholder to protect PFPC and its affiliates. (j) Shareholder Inspection of Stock Records. Upon a request from any Fund shareholder to inspect stock records, PFPC will notify the Fund and the Fund will issue instructions granting or denying each such request. Unless PFPC has acted contrary to the Fund's instructions, the Fund agrees and does hereby, release PFPC from any liability for refusal of permission for a particular shareholder to inspect the Fund's stock records. (k) Withdrawal of Shares and Cancellation of Upon receipt of Written Instructions, PFPC shall cancel outstanding certificates surrendered by the Fund to reduce the total amount of outstanding shares by the number of shares surrendered by the Fund. 15. DURATION AND TERMINATION. This Agreement shall continue until terminated by the Fund or by PFPC on sixty (60) days' prior written notice to the other party. 16. SUCCESSOR. In the event that in connection with the termination of this Agreement, a successor to any of PFPC's duties or responsibilities hereunder is designated by the Fund by written notice to PFPC, PFPC will cooperate in the transfer of such duties and responsibilities and the Fund shall pay any reasonable expenses associated with transferring the books and records of the Fund. 17. NOTICES. All notices and other communications, including Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. Notices shall be addressed (a) if to PFPC, at 400 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at 4176 Burns Road, Palm Beach Gardens, Florida 33410, Attn:__________________ or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent during regular business hours, by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger or overnight mail, it shall be deemed to have been given on the day it is delivered. 18. AMENDMENTS. This Agreement, or any term thereof, may be changed or waived only by a written amendment, signed by the party against whom enforcement of such change or waiver is sought. 19. DELEGATION; ASSIGNMENT. PFPC may at its own expense assign its rights and delegate its duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee) promptly provide such information as the Fund may request, and respond to such questions as the Fund may ask, relative to the delegation (or assignment), including (without limitation) the capabilities of the delegate (or assignee). 20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 21. FURTHER ACTIONS. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof. (a) Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties and Oral Instructions. (b) Captions. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. (c) Governing Law. This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law. (d) Partial Invalidity. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. (e) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. (f) Facsimile Signatures. The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party. (g) Massachusetts Business Trust Disclaimer. The Fund is organized as a Massachusetts business trust, and references in this Agreement to the Fund mean and refer to the Trustees from time to time serving under its Declaration of Trust on file with the Secretary of State of the Commonwealth of Massachusetts, as the same may be amended from time to time, pursuant to which the Fund conducts its business. It is expressly agreed that the obligations of the Fund hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agent s or employees of the Fund, as provided in said Declaration of Trust. Moreover, if the Fund has more than one series, no series of the Fund other than the series on whose behalf a specified transaction shall have been undertaken shall be responsible for the obligations of the Fund, and persons engaging in transactions with the Fund shall look only to the assets of that series to satisfy those obligations. The execution and delivery of this Agreement has been authorized by the Trustees and signed by an authorized officer of the Fund, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by and of them but shall bind only the trust property of the Fund as provided in such Declaration of Trust. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. THIS EXHIBIT A, dated as of ____________________, 1995, is Exhibit A to that certain Transfer Agency Services Agreement dated as of _____________________, 1995 between PFPC Inc. and Weiss Treasury Fund. Weiss Treasury Only Money Market Fund	N-1/A	EX-99.3	1996-01-12T00:00:00	1996-01-11T17:32:37
0000897423-96-000005	0000897423-96-000005_0000.txt	<DESCRIPTION>TEREX CORPORATION SCHED. 13D AMEND. NO. 13 Under the Securities Exchange Act of 1934 Common Stock, Par Value $.01 Per Share (Title of Class of Securities) 201 Main Street, Suite 2600, Fort Worth, Texas 76102 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) (Date of Event which Requires Filing If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with the statement [ ]. The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). *The total number of shares reported herein is 712,900, which constitutes approximately 6.8% of the total number of shares outstanding, assuming, pursuant to Rule 13d-3(d)(1)(i) under the Act, that there are 10,479,200 shares of the Stock outstanding. The number of outstanding shares of the Stock reported in the Issuer's most recent quarterly report on Form 10-Q is 10,300,000. 1. Name of Reporting Person: 2. Check the Appropriate Box if a Member of a Group: 4. Source of Funds: WC 5. Check box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): 6. Citizenship or Place of Organization: Delaware 7. Sole Voting Power: 235,400 (1) Beneficially 8. Shared Voting Power: -0- Reporting 9. Sole Dispositive Power: 235,400 (1) 10. Shared Dispositive Power: -0- 11. Aggregate Amount Beneficially Owned by Each Reporting Person: 12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: 13. Percent of Class Represented by Amount in Row (11): 4.0% (3) 14. Type of Reporting Person: PN (1) Power is exercised through its sole general partner, EBD L.P. (2) Assumes conversion of 40,000 shares of the Issuer's Series A Cumulative Redeemable Convertible Preferred Stock into an aggregate of 90,000 shares of the Stock and the exercise of 40,000 warrants to purchase an aggregate of 89,200 shares of the Stock. (3) Assumes, pursuant to Rule 13d-3(d)(1)(i) under the Act, that there are 10,479,200 shares of the Stock outstanding. 1. Name of Reporting Person: 2. Check the Appropriate Box if a Member of a Group: 4. Source of Funds: Not Applicable 5. Check box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): 6. Citizenship or Place of Organization: Delaware 7. Sole Voting Power: 235,400 (1)(2) Beneficially 8. Shared Voting Power: -0- Reporting 9. Sole Dispositive Power: 235,400 (1)(2) 10. Shared Dispositive Power: -0- 11. Aggregate Amount Beneficially Owned by Each Reporting Person: 12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: 13. Percent of Class Represented by Amount in Row (11): 4.0% (4) 14. Type of Reporting Person: PN (1) Power is exercised through its two general partners, Dort A. Cameron, III and TMT-FW, Inc. (2) Solely in its capacity as the sole general partner of The Airlie Group L.P. (3) Assumes conversion of 40,000 shares of the Issuer's Series A Cumulative Redeemable Convertible Preferred Stock held by The Airlie Group, L.P. into an aggregate of 90,000 shares of the Stock and the exercise of 40,000 warrants to purchase an aggregate of 89,200 shares of the Stock held by The Airlie Group, L.P. (4) Assumes, pursuant to Rule 13d-3(d)(1)(i) under the Act, that there are 10,479,200 shares of the Stock outstanding. 1. Name of Reporting Person: 2. Check the Appropriate Box if a Member of a Group: 4. Source of Funds: PF 5. Check box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): 6. Citizenship or Place of Organization: Dort A. Cameron III is a citizen of the United States of America. 7. Sole Voting Power: 6,000 Beneficially 8. Shared Voting Power: 235,400 (1) Reporting 9. Sole Dispositive Power: 6,000 10. Shared Dispositive Power: 235,400 (1) 11. Aggregate Amount Beneficially Owned by Each Reporting Person: 12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: 13. Percent of Class Represented by Amount in Row (11): 4.0% (3) 14. Type of Reporting Person: IN (1) Solely in his capacity as one of two general partners of EBD L.P. with respect to all but 6,000 shares. (2) Assumes conversion of 40,000 shares of the Issuer's Series A Cumulative Redeemable Convertible Preferred Stock held by The Airlie Group, L.P. into an aggregate of 90,000 shares of the Stock and the exercise of 40,000 warrants to purchase an aggregate of 89,200 shares of the Stock held by The Airlie Group, L.P. (3) Assumes, pursuant to Rule 13d-3(d)(1)(i) under the Act, that there are 10,479,200 shares of the Stock outstanding. 1. Name of Reporting Person: 2. Check the Appropriate Box if a Member of a Group: 4. Source of Funds: Not Applicable 5. Check box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): 6. Citizenship or Place of Organization: Texas 7. Sole Voting Power: -0- Beneficially 8. Shared Voting Power: 235,400 (1)(2) Reporting 9. Sole Dispositive Power: -0- 10. Shared Dispositive Power: 235,400 (1)(2) 11. Aggregate Amount Beneficially Owned by Each Reporting Person: 12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: 13. Percent of Class Represented by Amount in Row (11): 4.0% (4) 14. Type of Reporting Person: CO (1) Power is exercised through its President, Thomas M. Taylor. (2) Solely in its capacity as one of two general partners of EBD L.P. (3) Assumes conversion of 40,000 shares of the Issuer's Series A Cumulative Redeemable Convertible Preferred Stock held by The Airlie Group, L.P. into an aggregate of 90,000 shares of the Stock and the exercise of 40,000 warrants to purchase an aggregate of 89,200 shares of the Stock held by The Airlie Group, L.P. (4) Assumes, pursuant to Rule 13d-3(d)(1)(i) under the Act, that there are 10,479,200 shares of the Stock outstanding. 1. Name of Reporting Person: 2. Check the Appropriate Box if a Member of a Group: 4. Source of Funds: Not Applicable 5. Check box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): 6. Citizenship or Place of Organization: Thomas M. Taylor is a citizen of the United States of America. 7. Sole Voting Power: 237,300 (1) Beneficially 8. Shared Voting Power: 235,400 (2) Reporting 9. Sole Dispositive Power: 237,300 (1) 10. Shared Dispositive Power: 235,400 (2) 11. Aggregate Amount Beneficially Owned by Each Reporting Person: 12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: 13. Percent of Class Represented by Amount in Row (11): 6.2% (5) 14. Type of Reporting Person: IN (1) Solely in his capacity as President of Thomas M. Taylor & Co. with respect to 237,300 shares. (2) Solely in his capacity as President of TMT-FW, Inc. (3) Solely in his capacity as President of TMT-FW, Inc. with respect to all but 237,300 shares. (4) Assumes conversion of 40,000 shares of the Issuer's Series A Cumulative Redeemable Convertible Preferred Stock held by The Airlie Group, L.P. into an aggregate of 90,000 shares of the Stock and the exercise of 40,000 warrants to purchase an aggregate of 89,200 shares of the Stock held by The Airlie Group, L.P. (5) Assumes, pursuant to Rule 13d-3(d)(1)(i) under the Act, that there are 10,479,200 shares of the Stock outstanding. 1. Name of Reporting Person: Thomas M. Taylor & Co. 2. Check the Appropriate Box if a Member of a Group: 4. Source of Funds: 00 - Margin Account 5. Check box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): 6. Citizenship or Place of Organization: Texas 7. Sole Voting Power: 237,300 (1) Beneficially 8. Shared Voting Power: -0- Reporting 9. Sole Dispositive Power: 237,300 (1) 10. Shared Dispositive Power: -0- 11. Aggregate Amount Beneficially Owned by Each Reporting Person: 12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: 13. Percent of Class Represented by Amount in Row (11): 2.3% 14. Type of Reporting Person: CO (1) Power is exercised through its President, Thomas M. Taylor. 1. Name of Reporting Person: 2. Check the Appropriate Box if a Member of a Group: 4. Source of Funds: PF 5. Check box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): 6. Citizenship or Place of Organization: Douglas K. Bratton is a citizen of the United States of America. 7. Sole Voting Power: 5,000 Beneficially 8. Shared Voting Power: -0- Reporting 9. Sole Dispositive Power: 5,000 10. Shared Dispositive Power: -0- 11. Aggregate Amount Beneficially Owned by Each Reporting Person: 12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: 13. Percent of Class Represented by Amount in Row (11): <0.1%(1) 14. Type of Reporting Person: IN 1. Name of Reporting Person: 2. Check the Appropriate Box if a Member of a Group: 4. Source of Funds: 00 - Contributions from its partners 5. Check box if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e): 6. Citizenship or Place of Organization: New York 7. Sole Voting Power: 50,000 (1) Beneficially 8. Shared Voting Power: -0- Reporting 9. Sole Dispositive Power: 50,000 (1) 10. Shared Dispositive Power: -0- 11. Aggregate Amount Beneficially Owned by Each Reporting Person: 12. Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares: 13. Percent of Class Represented by Amount in Row (11): 0.5% 14. Type of Reporting Person: PN (1) Power is exercised through its managing partner, Elizabeth C. Cameron. Pursuant to Rule 13d-2(a) of Regulation 13D-G of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Act"), the undersigned hereby amend their Schedule 13D Statement dated January 17, 1989, as amended by Amendment No. 1 dated April 26, 1991, Amendment No. 2 dated July 2, 1991, Amendment No. 3 dated June 23, 1992, Amendment No. 4 dated October 6, 1992, Amendment No. 5 dated November 23, 1992, Amendment No. 6 dated December 21, 1992, Amendment No. 7 dated April 2, 1993, Amendment No. 8 dated April 19, 1993, Amendment No. 9 dated December 22, 1993, Amendment No. 10 dated May 25, 1994, Amendment No. 11, dated October 4, 1995 and Amendment No. 12 dated October 19, 1995 (the "Schedule 13D"), relating to the Common Stock, par value $.01 per share, of Terex Corporation. Unless otherwise indicated, all defined terms used herein shall have the same meanings respectively ascribed to them in the Schedule 13D. ITEM 1. SECURITY AND ISSUER. ITEM 2. IDENTITY AND BACKGROUND. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. The source and amount of funds used or to be used by the Reporting Persons to purchase shares of the Stock are as follows: REPORTING PERSON SOURCE OF FUNDS AMOUNT OF FUNDS EBD Not Applicable Not Applicable DAC Personal Funds $ 61,350.00 TMT-FW Not Applicable Not Applicable TMT Not Applicable Not Applicable Taylor & Co. Margin Account at DKB Personal Funds $ 50,250.00 (1) As used herein, the term "Working Capital" includes income from the business operations of the entity plus sums borrowed from banks and brokerage firm margin accounts to operate such business in general. None of the funds reported herein as "Working Capital" were borrowed or otherwise obtained for the specific purpose of acquiring, handling, trading or voting the Stock. (2) Such sum includes $1,000,000 expended by TAG to purchase the shares of Preferred Stock and Warrants of the Issuer as described below in Item 4 under "Recent Transaction", but does not include any funds that may be expended by TAG to acquire additional shares of the Stock for $.01 per share upon exercise of such Warrants. This figure represents the total amount expended by TAG for all purchases of shares of the Stock, without subtracting sales. Therefore, such figure does not accurately reflect TAG's current net investment in shares of the Stock. The aggregate current net investment of TAG in shares of the Stock is $5,496,610.69. (3) Taylor & Co.'s cash obligations pursuant to such margin account purchases were satisfied with Working Capital. (4) This figure represents the total amount expended by Taylor & Co. for all purchases of shares of the Stock, without subtracting sales. Therefore, such figure does not accurately reflect Taylor & Co.'s current net investment in shares of the Stock. The aggregate current net investment of Taylor & Co. in shares of the Stock is $2,660,070.16. ITEM 4. PURPOSE OF TRANSACTION. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. Paragraph (a) of Item 5 hereby is amended in its entirety to read as follows: The aggregate number of shares of the Stock that TAG may, pursuant to Rule 13d-3 of the Act, be deemed to own beneficially is 414,600, which constitutes approximately 4.0% of the 10,479,200 shares of the Stock deemed outstanding pursuant to Rule 13d-3(d)(1)(i) under the Act. Because of its position as the sole general partner of TAG, EBD may, pursuant to Rule 13d-3 of the Act, be deemed to be the beneficial owner of 414,600 shares of the Stock, which constitutes approximately 4.0% of the 10,479,200 shares of the Stock deemed outstanding pursuant to Rule 13d- 3(d)(1)(i) under the Act. Because of his individual ownership of 6,000 shares of the Stock and his position as one of two general partners of EBD, DAC may, pursuant to Rule 13d-3 of the Act, be deemed to be the beneficial owner of 420,600 shares of the Stock, which constitutes approximately 4.0% of the 10,479,200 shares of the Stock deemed outstanding pursuant to Rule 13d-3(d)(1)(i) under the Act. Because of its position as one of two general partners of EBD, TMT-FW may, pursuant to Rule 13d-3 of the Act, be deemed to be the beneficial owner of 414,600 shares of the Stock, which constitutes approximately 4.0% of the 10,479,200 shares of the Stock deemed outstanding pursuant to Rule 13d- 3(d)(1)(i) under the Act. In his capacity as President and sole director of each of TMT-FW and Taylor & Co., TMT may, pursuant to Rule 13d-3 of the Act, be deemed to be the beneficial owner of 651,900 shares of the Stock in the aggregate, which constitutes approximately 6.2% of the 10,479,200 shares of the Stock deemed outstanding pursuant to Rule 13d-3(d)(1)(i) under the Act. The aggregate number of shares of the Stock that Taylor & Co. owns beneficially, pursuant to Rule 13d-3 of the Act, is 237,300, which constitutes approximately 2.3% of the outstanding shares of the Stock. The aggregate number of shares of the Stock that DKB owns beneficially, pursuant to Rule 13d-3 of the Act, is 5,000, which constitutes less than 0.1% of the outstanding shares of the Stock. The aggregate number of shares of the Stock that AAII owns beneficially, pursuant to Rule 13d-3 of the Act, is 50,000, which constitutes approximately 0.5% of the outstanding shares of the Stock. To the best knowledge of each of the Reporting Persons, other than as set forth above, none of the persons named in Item 2 herein is the beneficial owner of any shares of the Stock. Acting through its sole general partner, TAG has the sole power to vote or to direct the vote and to dispose or to direct the disposition of 235,400 shares of the Stock. In its capacity as the sole general partner of TAG, and acting through its general partners, EBD has the sole power to vote or to direct the vote and to dispose or to direct the disposition of 235,400 shares of the Stock. In his capacity as one of two general partners of EBD, DAC has the shared power to vote or to direct the vote and to dispose or to direct the disposition of 235,400 shares of the Stock. DAC has the sole power to vote or to direct the vote and to dispose or to direct the disposition of 6,000 shares of the stock. In its capacity as one of two general partners of EBD, and acting through its President and sole director, TMT-FW has the shared power to vote or to direct the vote and to dispose or to direct the disposition of 235,400 shares of the Stock. In his capacity as the President and sole director of TMT-FW, TMT has the shared power to vote or to direct the vote and to dispose or to direct the disposition of 235,400 shares of the Stock. In his capacity as the President and sole director of Taylor & Co., TMT has the sole power to vote or to direct the vote and to dispose or to direct the disposition of 237,300 shares of the Stock. Acting through its President, Taylor & Co. has the sole power to vote or to direct the vote and to dispose or to direct the disposition of 237,300 shares of the Stock. DKB has the sole power to vote or to direct the vote and to dispose or to direct the disposition of 5,000 shares of the Stock. Acting through its managing partner, AAII has the sole power to vote or to direct the vote and to dispose or to direct the disposition of 50,000 shares of the Stock. Paragraph (c) of Item 5 hereby is amended in its entirety to read as follows: (c) During the past 60 days, TAG has sold shares of the Stock in open market transactions on the New York Stock Exchange, as follows: NO. OF SHARES PRICE PER Except as set forth in this paragraph (c), to the best of the knowledge of each of the filing persons, none of the persons named in response to paragraph (a) has effected any transactions in the shares of the Stock during the past 60 days. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. Exhibit 99.1 -- Agreement Pursuant to Rule 13d-1(f)(l)(iii), filed herewith. Exhibit B -- Information with respect to the partners of Trailer, previously filed with Amendment No. 1 to the Schedule 13D. Exhibit C -- Loan Agreement dated as of July 13, 1989, between TAG and KCS, previously filed with Amendment No. 1 to the Schedule 13D. Exhibit D -- Promissory Note from KCS to TAG, previously filed with Amendment No. 1 to the Schedule 13D. Exhibit E -- Pledge Agreement between KCS and TAG, previously filed with Amendment No. 1 to the Schedule 13D. Exhibit F -- Agreement dated as of April 25, 1991, among TAG, Trailer, KCS, Holdings, Fruehauf and the Issuer, previously filed with Amendment No. 1 to the Schedule 13D. Exhibit G -- Power of Attorney of Trailer, previously filed with Amendment No. 2 to the Schedule 13D. Exhibit H -- Exchange Agreement by and among Fruehauf, TAG and Trailer, previously filed with Amendment No. 2 to the Schedule 13D. Exhibit I -- Exchange Agreement by and among Fruehauf, the Issuer, TAG, Trailer and KCS, previously filed with Amendment No. 2 to the Schedule 13D. Exhibit J -- Exchange Agreement by and among the Issuer, TAG, Trailer and KCS, previously filed with Amendment No. 2 to the Schedule 13D. Exhibit K -- Registration Rights Agreement by and among the Issuer, KCS, TAG and Trailer, previously filed with Amendment No. 2 to the Schedule 13D. Exhibit L -- Information with respect to the partners of AAII, previously filed with Amendment No. 3 to the Schedule 13D. Exhibit M -- Power of Attorney of David A. Sachs, previously field with Amendment No. 3 to the Schedule 13D. Exhibit N -- Power of Attorney of Karen R. Sachs, previously filed with Amendment No. 3 to the Schedule 13D. Exhibit O -- Power of Attorney of Douglas K. Bratton, previously filed with Amendment No. 3 to the Schedule 13D. Exhibit P -- Power of Attorney of Airlie Associates II, previously filed with Amendment No. 5 to the Schedule 13D. Exhibit Q -- Press Release of the Issuer issued on April 19, 1993, previously filed with Amendment No. 8 to the Schedule 13D. Exhibit 4.1 -- Letter Agreement dated December 20, 1993, between the Issuer and TAG, previously filed with Amendment No. 9 to the Schedule 13D. Exhibit 4.2 -- Certificate of Designation of Preferences and Rights of Series A Cumulative Redeemable Convertible Preferred Stock of the Issuer, previously filed with Amendment No. 9 to the Schedule 13D. Exhibit 4.3 -- Preferred Stock Registration Rights Agreement dated December 20, 1993, among the Issuer and the signatory parties thereto, previously filed with Amendment No. 9 to the Schedule 13D. Exhibit 4.4 -- Warrant Registration Rights Agreement dated December 20, 1993, among the Issuer and the signatory parties thereto, previously filed with Amendment No. 9 to the Schedule 13D. Exhibit 4.5 -- Warrant Agreement dated December 20, 1993, between the Issuer and Mellon Securities Trust Company, as Warrant Agent, previously filed with Amendment No. 9 to the Schedule 13D. After reasonable inquiry and to the best of our knowledge and belief, we certify that the information set forth in this statement is true, complete and correct. By: /s/ W. R. Cotham By: /s/ W. R. Cotham THOMAS M. TAYLOR & CO. DORT A. CAMERON III (1) (1) A Power of Attorney authorizing W. R. Cotham, et al., to act on behalf of Dort A. Cameron III previously has been filed with the Securities and Exchange Commission. (2) A Power of Attorney authorizing W. R. Cotham, et al., to act on behalf of Thomas M. Taylor previously has been filed with the Securities and Exchange Commission. (3) A Power of Attorney authorizing W. R. Cotham, et al., to act on behalf of Douglas K. Bratton previously has been filed with the Securities and Exchange Commission. (4) A Power of Attorney authorizing W. R. Cotham, et al., to act on behalf of Airlie Associates II previously has been filed with the Securities and Exchange Commission.	SC 13D/A	SC 13D/A	1996-01-12T00:00:00	1996-01-11T17:44:29
0000703351-96-000002	0000703351-96-000002_0000.txt	As filed with the Securities and Exchange Commission on January 11, 1996 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (Exact name of registrant as specified in its charter) (State of incorporation) (I.R.S. employer identification number) (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) (Name, address including zip code, and telephone number, including area code, of agent for service) Roger F. Thomson Bruce H. Hallett Executive Vice President & General Counsel Crouch & Hallett, L.L.P. 6820 LBJ Freeway 717 N. Harwood St. Dallas, Texas 75240 Suite 1400 Approximate date of commencement of proposed sale to the public: As soon as practicable upon the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to a dividend or interest reinvestment plans, please check the 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, other than securities offered only in connection with dividend or interest reinvestment plans, 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. [ ] (1) Estimated solely for purposes of calculating the amount of the registration fee pursuant to the provisions of Rule 457(c) under the Securities Act of 1933 based on the average of the high and low prices for the Common Stock as reported on the New York Stock Exchange on January 9, 1996. 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. SUBJECT TO COMPLETION DATED JANUARY 11, 1996 The 3,999,957 shares (the "Shares") of Common Stock of Brinker International, Inc., a Delaware corporation ("Brinker" or the "Company"), offered hereby are being sold by the Selling Stockholders. See "Selling Stockholders." The Company will not receive any of the proceeds from the sale of the Shares offered hereby. The Shares may be offered by the Selling Stockholders from time to time in open market transactions (which may include block transactions) or otherwise on the New York Stock Exchange, or in private transactions (including transactions involving a pledge of the Shares) at prices relating to prevailing market prices or at negotiated prices. The Selling Stockholders may effect such transactions by selling the Shares to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Stockholders and/or purchasers of the Shares for whom such broker-dealers may act as agent or to whom they sell as principal or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Stockholders and any broker-dealer acting in connection with the sale of the Shares offered hereby may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Act"), in which event any discounts, concessions or commissions received by them, which are not expected to exceed those customary in the types of transactions involved, or any profit on resales of the Shares by them, may be deemed to be underwriting commissions or discounts under the Act. The offering contemplated hereby will terminate as to the Shares upon the later to occur of the sale of all of the Shares or August 29, 1998. See "Selling Stockholders." Sales of the Shares by certain of the Selling Stockholders owning in the aggregate 3,129,615 Shares must comply with certain contractual volume restrictions. See "Selling Stockholders." The costs, expenses and fees incurred in connection with the registration of the Shares, which are estimated to be $30,000 (excluding selling commissions and brokerage fees incurred by the Selling Stockholders), will be paid by the Company. The Company has agreed to indemnify the Selling Stockholders against certain liabilities, including liabilities under the Act, and the Selling Stockholders have agreed to indemnify the Company against certain liabilities relating to information furnished by the Selling Stockholders to the Company and included in this Registration Statement. The last reported sale price of the Common Stock on the New York Stock Exchange on January 9, 1996 was $14.25 per share. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is January 11, 1996. The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "1934 Act") and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information concerning the Company can be inspected and copied at the public reference facilities maintained by the Commission at its offices at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 75 Park Place, New York, New York 10007. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, such material can be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The following documents filed by the Company with the Securities and Exchange Commission are incorporated in this Prospectus by reference: 1. The Company's Annual Report on Form 10-K for the fiscal year ended 2. The Company's Quarterly Report on Form 10-Q for the period ended 3. The Company's Report on Form 8-K filed with the Commission on November 3, 1995. All documents subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act prior to the termination of the offering of the shares of Common Stock hereunder shall be deemed to be incorporated herein by reference and shall be a part hereof from the date of the filing of such documents. Any statements contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or replaced for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or replaces such statement. Any such statement so modified or replaced shall not be deemed, except as so modified or replaced, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom a Prospectus is delivered, upon written or oral request of such person, a copy of the documents incorporated by reference herein, other than exhibits to such documents not specifically incorporated by reference. Such requests should be directed to Brinker International, Inc., 6820 LBJ Freeway, Dallas, Texas 75240, Attention: Investor Relations (telephone (214) 980-9917). Brinker is principally engaged in the operation and development of the Chili's Grill & Bar ("Chili's"), Romano's Macaroni Grill ("Macaroni Grill"), On The Border Cafes ("On the Border"), Cozymel's ("Cozymel's") and Maggiano's/Corner Bakery ("Maggiano's") restaurants. Brinker was organized under the laws of the State of Delaware in September 1983 to succeed to the business operated by Chili's, Inc., a Texas corporation, organized in August 1977. Brinker completed the acquisitions of Macaroni Grill, On The Border, Cozymel's and Maggiano's in November 1989, May 1994, July 1995 and August 1995, respectively. Chili's. Chili's establishments are full-service, Southwestern theme restaurants, featuring a casual atmosphere and a limited menu of freshly prepared chicken, beef and seafood entrees, hamburgers, ribs, fajitas, sandwiches, salads, appetizers and desserts, all of which are prepared fresh daily according to special Chili's recipes. Service personnel are dressed casually in jeans or slacks, knit shirts and aprons to reinforce the casual, informal environment. The decor of a Chili's restaurant consists of booth seating, tile-top tables, hanging plants and wood and brick walls covered with interesting memorabilia. Macaroni Grill. Macaroni Grill is an upscale Italian theme restaurant which specializes in family-style recipes and features seafood, meat, chicken and pasta entrees, salads, pizza, appetizers and desserts with a full-service bar in most restaurants. Exhibition cooking, wood-burning pizza ovens and rotisseries provide an enthusiastic and exciting environment in the restaurants. Macaroni Grill restaurants feature white linen-clothed tables, fireplaces, sous stations and prominent displays of wines. Service personnel are dressed in white, starched shirts and aprons, dark slacks and bright ties. On The Border. On The Border restaurants are full-service, casual Tex- Mex theme restaurants featuring Southwest mesquite-grilled specialties and traditional Tex-Mex entrees and appetizers served in generous portions at modest prices. On The Border restaurants feature an outdoor patio, a full- service bar, booth and table seating and brick and wood walls with a Southwest decor. On The Border restaurants also offer enthusiastic table service intended to minimize customer waiting time and facilitate table turnover while simultaneously providing customers with a satisfying casual dining experience. Cozymel's. Cozymel's restaurants are casual, upscale authentic Yucatan restaurants featuring fish, chicken, beef and pork entrees, appetizers, desserts and a full service bar featuring a wide variety of specialty frozen beverages. Cozymel's restaurants offer an authentic "Yucatan vacation" atmosphere, which includes a souvenir shop and an outdoor patio. Service personnel are dressed casually in colorful T-shirts and black pants. Maggiano's. Maggiano's restaurants are designed as classic re-creations of a New York City pre-war "Little Italy" dinner house, and the Corner Bakeries are designed as retail traditional old-world bread bakeries. The existing restaurants and Corner Bakeries are located in the Chicago metropolitan area. Each of the Maggiano's restaurants is a casual, full-service, Italian restaurant with a full lunch and dinner menu as well as a family-style menu, offering southern Italian appetizers; homemade breads; large portions of pasta, chicken, seafood, veal and steaks; and a full range of alcoholic beverages. The Maggiano's restaurants feature a casual atmosphere with black and white tile floors and a bakery. The Corner Bakeries are designed as a retail bakery in the traditional, old world bread bakery style. The Corner Bakeries offer homemade hearth- cooked loaves, rolls, muffins, cookies and specialty items made fresh daily, including, muffins, brownies and cookies. The breads offered by the Corner Bakeries include baguettes, country loaves and specialty breads such as raisin-nut, olive, chocolate-cherry, multi-grains and ryes. In addition, the Corner Bakeries also offer pizza, focaccia, sandwiches, soups and salads. The Company's principal offices are located at 6820 LBJ Freeway, Dallas, Texas 75240, and its telephone number is (214) 980-9917. On January 8, 1996, Brinker's system of company-operated and franchised units included 566 restaurants located in 46 states, Canada, Singapore, Malaysia, Indonesia, France, Australia, Egypt, Puerto Rico, Mexico and Great Britain. The Company's portfolio of restaurants is illustrated below: On August 29, 1995, Brinker completed the acquisition (the "Acquisition") of all of the outstanding shares of stock of Maggiano's Old Orchard, Inc. ("Maggiano's"). As a result of this Acquisition, the former stockholders of Maggiano's received a total of 3,999,957 shares of Brinker's Common Stock. The Selling Stockholders are the former stockholders of Maggiano's. The Company is registering the Shares of the Selling Stockholders pursuant to certain registration rights granted to them pursuant to an Agreement and Plan of Merger entered in connection with the Acquisition. The following table contains certain data regarding the beneficial ownership of the Company's Common Stock by the Selling Stockholders on December 31, 1995: (1) Assumes that all of the Shares are sold. (2) Assuming all of the Shares acquired pursuant to the Acquisition were sold, such Selling Stockholder would own less than 1% of the Company's Common Stock. (3) Less than 1%. (4) Mr. Centioli is a director of the Company and serves as the Senior Vice President--Maggiano's/Corner Bakery President. Of the shares indicated, 2,000 shares are owned by trusts for benefit of Mr. Centioli's children. Messrs. Melman, Centioli, Swinghamer, Haskell, Joast, Wattel, Tormey, Wolfgram and Jonathan Fox must sell their Shares acquired in the Acquisition in accordance with certain contractual volume limitations. In any year during the three-year period commencing on August 29, 1995, Messrs. Melman, Centioli, Swinghamer, Tormey, Wolfgram and Fox have agreed not to sell (whether pursuant to this registration statement or otherwise) more than one-third of the Shares offered hereby. In any year during the two-year period commencing on August 29, 1995, Messrs. Haskell, Joast and Wattel have agreed not to sell (whether pursuant to this registration statement or otherwise) more than one-half of the Shares offered hereby. The authorized capital stock of the Company consists of 250,000,000 shares of Common Stock, $0.10 par value, and 1,000,000 shares of Preferred Stock, $1.00 par value. At December 27, 1995, there were 76,617,908 shares of Common Stock of the Company outstanding and no shares of Preferred Stock outstanding. Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable. All holders of Common Stock have full voting rights and are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Votes may not be cumulated in the election of directors. Stockholders have no preemptive or subscription rights. The Common Stock is neither redeemable nor convertible, and there are no sinking fund provisions. Holders of Common Stock are entitled to dividends when and as declared by the Board of Directors from funds legally available therefor and are entitled, in the event of liquidation, to share ratably in all assets remaining after payment of liabilities. The rights of holders of Common Stock will be subject to any preferential rights of any Preferred Stock which may be issued in the future. Preferred Stock. The Board of Directors of the Company is authorized to issue Preferred Stock in one or more series and to fix the voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences. Transfer Agent and Registrar. Chemical Mellon Shareholder Services Group, Inc. is the transfer agent and registrar of the Company's Common Stock. The validity of the shares of Common Stock offered hereby has been passed upon by Crouch & Hallett, L.L.P., Dallas, Texas. The consolidated financial statements of Brinker International, Inc. and subsidiaries as of June 28, 1995 and June 29, 1994, and for each of the years in the three-year period ended June 28, 1995, have been incorporated by reference herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. To the extent that KPMG Peat Marwick LLP audits and reports on the consolidated financial statements of Brinker International, Inc. and subsidiaries issued at future dates, and consents to the use of their report thereon, such consolidated financial statements also will be incorporated by reference in the registration statement in reliance upon their report and said authority. INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution. The following expenses incurred in connection herewith will be paid by the Selling Stockholders: SEC registration fee $ 20,000 Legal fees and expenses 5,000 (1) All items other than SEC registration fee are estimated. Item 15. Indemnification of Directors and Officers. Section 145 of the General Corporation Law of the State of Delaware provides generally and in pertinent part that a Delaware corporation may indemnify its directors and officers against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with any suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) if, in connection with the matters in issue, they acted in good faith and in a manner they reasonably believed to be in, or not opposed to, the best interests of the corporation, and, in connection with any criminal suit or proceeding, if in connection with the matters in issue, they had no reasonable cause to believe their conduct was unlawful. Section 145 further provides that in connection with the defense or settlement of any action by or in the right of the corporation, a Delaware corporation may indemnify its directors and officers against expenses actually and reasonably incurred by them if, in connection with the matters in issue, they acted in good faith, in a manner they reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 permits a Delaware corporation to grant its directors and officers additional rights of indemnification through bylaw provisions and otherwise and to purchase indemnity insurance on behalf of its directors and officers. Article Ninth of the registrant's Certificate of Incorporation provides that no director shall be liable to the registrant or its stockholders for monetary damages for breach of fiduciary duty, provided that the liability of a director is not limited (i) for any breach of the director's duty of loyalty to the registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) any transaction from which such director derived an improper personal benefit. Article VI, Section 2 of the registrant's bylaws provides, in general, that the registrant shall indemnify its directors and officers under the circumstances defined in Section 145. The Company has obtained an insurance policy insuring the directors and officers of the Company against certain liabilities, if any, that arise in connection with the performance of their duties on behalf of the Company and its subsidiaries. 3(a) --Articles of Incorporation of the registrant. (1) 3(b) --Bylaws of the registrant. (1) 5 --Opinion of Crouch & Hallett, L.L.P. (2) 23(a)--Consent of KPMG Peat Marwick LLP. (2) 23(b)--Consent of Crouch & Hallett, L.L.P. (included in opinion filed as Exhibit 5). 25 --Power of Attorney (included on p. II-4). (1) Filed as an exhibit to Annual Report on Form 10-K for the fiscal year ended June 28, 1995. (2) Filed herewith. (a) The registrant hereby undertakes (1) to file, during any period in which offers or sales are being made of the Shares registered hereby, a post-effective amendment to this Registration Statement to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; (2) that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (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. (b) The registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Company's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by 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 by such director, officer, or controlling person in connection with the securities being registered, 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 Act and will be governed by the final adjudication of such issue. Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas and the State of Texas, on the 11th day of January, 1996. Debra L. Smithart, Executive Vice President Each of the undersigned hereby appoints Ronald A. McDougall and Debra L. Smithart, and each of them (with full power to act alone), as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the Securities and Exchange Commission under the Securities Act of 1933 any and all amendments and exhibits to this Registration Statement and any and all applications, instruments and other documents to be filed with the Securities and Exchange Commission pertaining to the registration of the securities covered hereby, with full power and authority to do and perform any and all acts and things whatsoever requisite or desirable. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed below by the following persons in the capacities and on January 11, 1996. /Ronald A. McDougall President, Chief Executive Ronald A. McDougall Officer and Director /Debra L. Smithart Executive Vice President, Chief Debra L. Smithart Financial Officer and Director (Principal /Norman E. Brinker Chairman of the Board /F. Lane Cardwell, Jr. Director F. Lane Cardwell, Jr. /Creed L. Ford, III Director We have served as counsel for Brinker International, Inc., a Delaware corporation (the "Company"), and certain stockholders of the Company (the "Selling Stockholders") in connection with the Registration Statement on Form S-3 covering the sale from time to time by the Selling Stockholders of a maximum of 3,999,957 shares (the "Shares") of Common Stock, $.10 par value, of the Company. We have examined such documents and questions of law as we have deemed necessary to render the opinion expressed below. Based upon the foregoing, we are of the opinion that the Shares are duly and validly issued, fully paid and non-assessable. We consent to the use of this opinion as Exhibit 5 to the Registration Statement. We consent to the use of our report incorporated herein by reference and to the reference to our firm under the heading "Experts" in the prospectus.	S-3	S-3	1996-01-12T00:00:00	1996-01-11T18:07:18
0000720875-96-000001	0000720875-96-000001_0002.txt	Salt Lake City, Utah 84121 Re: Registration Statement on Form S-8 relating to Amended and Restated 1992 Stock Option Plan (the "Plan") We have acted as counsel for Dynatronics Corporation, a Utah corporation (the "Company") in connection with the registration under the Securities Act of 1933, as amended (the "Act") of an additional number of shares to increase the number of shares registered under the Plan to an aggregate of 1,000,000 shares of the Company's Common Stock, no par value per share (the "Shares") to be issued in accordance with the terms of the Plan. In connection with the foregoing, we have examined originals or copies, certified or otherwise authenticated to our satisfaction, of such corporate records of the Company and other instruments and documents as we have deemed necessary to require as a basis for the opinion hereinafter expressed. We have assumed the genuineness of all signatures on original or certified copies and the conformity to original or certified copies of all copies submitted to us as conformed or reproduction copies. As to various questions of fact relevant to the opinion hereinafter expressed, we have relied upon certificates of public officials and statements or certificates of officers or representatives of the Company and others. Based upon the foregoing and in reliance thereon, it is our opinion that the Shares described in the above-referenced Registration Statement, when issued pursuant to the terms of the Plan, will be validly issued, fully paid and non-assessable. We consent to the filing of this opinion as an exhibit to the Registration Statement as amended. In giving this consent, we do not thereby admit that we come with the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. DURHAM, EVANS, JONES & PINEGAR, P.C. By /s/ Kevin R. Pinegar	S-8 POS	EX-5	1996-01-12T00:00:00	1996-01-12T13:26:18
0000950147-96-000013	0000950147-96-000013_0000.txt	Under the Securities and Exchange Act of 1934 Common Stock, Par Value $0.01 Per Share (Title of Class of Securities) (Name, Address and Telephone Number of Person Authorized to (Date of Event Which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Check the following box if a fee is being paid with this statement [X]. (A fee is not required only if the reporting person: (1) has a previous statement on file reporting beneficial ownership of more than five percent of the class of securities defined in Item 1; and (2) has filed no amendment subsequent thereto reporting beneficial ownership of less than five parent of such class. See Rule 13d-7.) Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. * The remainder of this cover page shall be filled out for a reporting person's initial filing on this for with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). CUSIP No. 843611 10 4 1) Names of Reporting Persons S.S. or I.R.S. Identification Nos. of Above Phelps Dodge Overseas Capital Corporation 2) Check the Appropriate Box if a Member of a Group (See Instructions) 4) Source of Funds (See Instructions) 5) Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) 6) Citizenship or Place of Organization Number of Shares (7) Sole Voting Power Each Report- (9) Sole Dispositive Power 11) Aggregate Amount Beneficially Owned by Each Reporting Person 12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See 13) Percent of Class Represented by Amount in Row (11) 14) Type of Reporting Person (See Instructions) CUSIP No. 843611 10 4 1) Names of Reporting Persons S.S. or I.R.S. Identification Nos. of Above 2) Check the Appropriate Box if a Member of a Group (See Instructions) 4) Source of Funds (See Instructions) 5) Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) 6) Citizenship or Place of Organization Number of Shares (7) Sole Voting Power Each Report- (9) Sole Dispositive Power 11) Aggregate Amount Beneficially Owned by Each Reporting Person 12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See 13) Percent of Class Represented by Amount in Row (11) 14) Type of Reporting Person (See Instructions) Item 1. Security and Issuer This statement relates to the Common Stock, par value $0.01 per share (the "Common Stock), of Southern Peru Copper Corporation, a Delaware corporation (the "Company"). The Company's principal executive offices are at Avenida Caminos del Inca No. 171, Chacarilia del Estanque, Santiago de Surco, Lima 33 Peru; and 180 Maiden Lane, New York, New York 10038. Item 2. Identity and Background This statement is being filed on behalf of Phelps Dodge Overseas Capital Corporation, a Delaware corporation ("Phelps Dodge Overseas") and Phelps Dodge Corporation, a New York corporation ("PDC"). Phelps Dodge Overseas is a wholly-owned subsidiary of PDC. The principal business of Phelps Dodge Overseas is to hold PDC's investment in the Company. The principal business of PDC is mining and manufacturing. The address of the principal business and office of Phelps Dodge Overseas and PDC is 2600 North Central Avenue, Phoenix, Arizona 85004. The name, business address, present principal occupation or employment, and citizenship of each director and executive officer of Phelps Dodge Overseas is set forth on Schedule A attached hereto. The name, business address, present principal occupation or employment, and citizenship of each director and executive officer of PDC is set forth on Schedule B attached hereto. During the past five years, neither Phelps Dodge Overseas nor PDC nor any other person controlling either Phelps Dodge Overseas or PDC, nor, to the best knowledge of Phelps Dodge Overseas or PDC, any of the persons listed on Schedules A and B attached hereto, has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or has been a party to any civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violations with respect to such laws. Item 3. Source and Amount of Funds or Other Phelps Dodge Overseas acquired an interest in the Common Stock in connection with an exchange offer (the "Exchange Offer") conducted by the Company, pursuant to which the Company offered to exchange its Common Stock for any and all outstanding labor shares (the "Labor Shares") of the Peruvian Branch (the "Branch") of Southern Peru Limited, a Delaware corporation having substantially all of its operating assets in Peru ("SP Limited"). The Company was formed to conduct the Exchange Offer and to act as a holding company for SP Limited, which conducts copper mining operations in Peru through the Branch. The Branch consists of substantially all of the assets and liabilities of SP Limited associated with its copper operations in Peru. Pursuant to the Branch's registration with the Peruvian government as a branch of a foreign mining company, the Branch is deemed to have equity capital, of which SP Limited, prior to the Exchange Offer, owned 82.69%. The remaining equity interest was represented by the Labor Shares. The Branch was required to issue the Labor Shares to its employees as part of a profit-sharing system under Peruvian law. In connection with the Exchange Offer, Phelps Dodge Overseas and the other stockholders of SP Limited (together, the "Founding Stockholders") exchanged their common shares of SP Limited for Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), of the Company (the "Founding Stockholder Exchange"). The Founding Stockholder Exchange was effected separately from the Exchange Offer in a private transaction exempt from registration under Section 4(2) of the Securities Exchange Act of 1933, as amended. Each Founding Stockholder is entitled at any time to convert shares of Class A Common Stock into shares of Common Stock. Additionally, Class A Common Stock automatically converts into Common Stock in the event that record or beneficial ownership of Class A Common Stock is transferred to any person other than another Founding Stockholder or an affiliate thereof. All shares of Class A Common Stock will automatically convert into Common Stock in the event that the total number of shares of Class A Common Stock represents less than 35% of the total number of shares of Class A Common Stock and Common Stock then outstanding. Item 4. Purpose of Transaction The Exchange Offer was conducted in order to (i) provide holders of Labor Shares with an opportunity to receive securities of the Company which are listed on both the New York Stock Exchange and the Lima Stock Exchange, (ii) establish public trading markets in the United States and Peru for the Company's Common Stock, (iii) simplify the Company's consolidated capital structure, and (iv) provide the Company with improved access to capital markets. The Founding Stockholder Exchange was conducted in order to achieve the goal of providing holders of Labor Shares with representation on the Board of Directors of the Company while maintaining ultimate stockholder direction in the hands of the Founding Stockholders. Phelps Dodge Overseas held its shares in SP Limited, and acquired its shares of Class A Common Stock of the Company, for investment purposes. Depending upon market and other conditions, Phelps Dodge Overseas or PDC may acquire additional securities of the Company or may dispose of all or a portion of the securities of the Company now owned or hereafter acquired. Other than as described above, Phelps Dodge Overseas or PDC has no plans or proposals which relate to or would result in: (a) the acquisition by any person of additional securities of the Company, or the disposition of securities of the Company; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or any of its subsidiaries; (d) any change in the present Board of Directors or management of the Company, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the Board; (e) any material change in the present capitalization or dividend policy of the Company; (f) any other material change in the Company's business or corporate structure; (g) changes in the Company's charter, bylaws or instruments corresponding thereto or other action which may impede the acquisition of control of the Company by any person; (h) causing a class of securities of the Company to be delisted from a national securities exchange or cease to be authorized to be quoted in an inter-dealer quotation system or a registered national securities association; (i) a class of equity securities of the Company becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Act; or (j) any action similar to those enumerated above. Item 5. Interest in Securities of the Issuer (a) Through its right to convert its Class A Common Stock into Common Stock, Phelps Dodge Overseas may be deemed to be the beneficial owner of 11,173,796 shares of Common Stock, representing 13.9% of the equity capital of the Company. As the parent company of Phelps Dodge Overseas, PDC may also be deemed to be the beneficial owner of 11,173,796 shares of Common Stock, representing 13.9% of the equity capital of the Company. To the best knowledge of Phelps Dodge Overseas and PDC, none of the persons listed on Schedules A or B attached hereto is the beneficial owner of any shares of Common Stock. (b) In the event that its Class A Common Stock were converted into Common Stock, Phelps Dodge Overseas and PDC would have the shared power to vote or to direct the vote, and shared power to dispose or direct the disposition, of such Common Stock. (c) On January 2, 1996, the Exchange Offer and the Founding Stockholder Exchange were completed, resulting in the acquisition by Phelps Dodge Overseas of 11,173,796 shares of Class A Common Stock of the Company. Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer Each of the Founding Stockholders, in connection with the Exchange Offer, has entered into the Stockholders' Agreement. The Stockholders' Agreement contemplates, among other things, that the Board of Directors of the Company will be composed of 15 members, one of whom is the President of the Company. Under the terms of the Stockholders' Agreement, each Founding Stockholder will have the right to nominate that number of 12 directors which is in proportion to the percentage of Class A Common Stock owned by it (or its affiliates) out of the aggregate Class A Common Stock then owned by all holders of Class A Common Stock (without any minimum required number of shares), rounded to the nearest whole Board member with 0.5 being rounded up. In the event that the foregoing rounding procedure would permit the Founding Stockholders as a group to nominate (i) more than 12 directors, then the Founding Stockholder whose fractional interest in a director shall represent the smallest fraction of a whole number that was rounded up shall not be entitled to nominate a director with respect to that fractional interest or (ii) less than 12 directors, then the Founding Stockholder whose fractional interest in a director shall represent the largest fraction of a whole number that was rounded down shall be entitled to nominate a director with respect to that fractional interest. In the event the procedure described in the immediately preceding sentence would not result in 12 directors being nominated by the Founding Stockholders as a group, the procedure described in the foregoing sentence shall be repeated among the Founding Stockholders not affected by the previous application of such procedure, as may be necessary to achieve the required result. Each of the Foregoing Stockholders will vote its shares of Class A Common Stock in favor of the directors nominated in accordance with the above provisions. The Founding Stockholders have also agreed to nominate and vote for the President as a director. The Stockholders' Agreement will terminate, and each share of Class A Common Stock will automatically convert into one share of Common Stock (voting share for share as a single class on all matters including election of directors), if at any time the number of shares of Class A Common Stock owned by the Founding Stockholders (or affiliates of the Founding Stockholders) shall be less than 35% of the outstanding shares of Class A Common Stock and Common Stock of the Company. In addition, the rights and obligations of each Founding Stockholder under the Stockholders' Agreement will terminate in the event such Founding Stockholder (or its affiliates) shall cease to own shares of Class A Common Stock. The Stockholders' Agreement replaced a prior agreement (the "Prior Agreement") among the Founding Stockholders which governed the election of directors and other matters. The Founding Stockholders have agreed to terminate a provision in the Prior Agreement relating to the acquisition of mining concessions by the Founding Stockholders within a specified area in Southern Peru, in which certain mines are located. The Company and the Founding Stockholders have agreed that each of the Founding Stockholders may acquire mining concessions within this area for its own account. The Stockholders' Agreement is attached as Exhibit 1 hereto and is incorporated herein by reference. The foregoing description of the Stockholders' Agreement is qualified in its entirety by reference to the text of the Stockholders' Agreement. Item 7. Material to be Filed as Exhibits Exhibit 1 -- Stockholders' Agreement Exhibit 2 -- Joint Filing Agreement After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. By: /s/ Thomas M. Foster By: /s/ Thomas M. Foster DIRECTORS AND EXECUTIVE OFFICERS OF PHELPS DODGE OVERSEAS CAPITAL CORPORATION The name, business address, title, present principal occupation or employment, and citizenship of each of the directors and executive officers of Phelps Dodge Corporation are set forth below. Unless otherwise indicated, the business address of each person listed below is 2600 North Central Avenue, Phoenix, Arizona 85004. Unless otherwise indicated, each person listed below is a United States citizen. Chairman of the Board, President DIRECTORS AND EXECUTIVE OFFICERS OF The name, business address, title, present principal occupation or employment, and citizenship of each of the directors and executive officers of Phelps Dodge Corporation are set forth below. Unless otherwise indicated, the business address of each person listed below is 2600 North Central Avenue, Phoenix, Arizona 85004. Unless otherwise indicated, each person listed below is a United States citizen. Retired Chairman of the Board Chairman of the Board and New York, New York 10177 Chairman of the Board and America West Airlines, Inc. 4000 East Sky Harbor Boulevard Chairman and Chief Executive Officer Wells Fargo & Company and Wells Fargo Bank, National Association President and Chief Executive Officer Burlington Northern Santa Fe Corporation Retired Chairman of the Board and former Chief Executive Officer Chairman of the Board, President Chairman of the Board, President Senior Vice President and Chief Inc. and Phelps Dodge Overseas 2 Joint Filing Agreement between	SC 13D	SC 13D	1996-01-12T00:00:00	1996-01-12T15:05:17
0000823535-96-000006	0000823535-96-000006_0001.txt	STATEMENTS OF ASSETS AND LIABILITIES Net asset value, offering price and redemption price per share ($40,000/4,000 shares) Net asset value, offering price and redemption price per share ($40,000/4,000 shares) Net asset value, offering price and redemption price per share ($40,000/4,000 shares) NOTE 1: Fidelity Target Timeline 1999, Fidelity Target Timeline 2001 and Fidelity Target Timeline 2003 (the funds) are funds of Fidelity Boston Street Trust (the trust) and are authorized to issue an unlimited number of shares. The trust, which is registered under the Investment Company Act of 1940, as amended (the 1940 Act) as an open-end management investment company, was originally organized as a limited partnership in the State of Delaware on October 13, 1987, and was converted to a Massachusetts business trust on December 31, 1989. Fidelity Target Timeline 1999, Fidelity Target Timeline 2001 and Fidelity Target Timeline 2003 are the only funds in the trust. The funds have had no operations to date other than matters relating to their organization and registration and the sale and issuance by each fund to Fidelity Management & Research Company (FMR) of 4,000 shares for an aggregate purchase price of $40,000. NOTE 2: FMR, the funds' investment adviser, will bear all organizational expenses except the fees for registering and qualifying the trust and its shares for distribution under Federal and state securities laws, which will be borne by each fund and amortized over one year. Fees and expenses for the initial registration of shares of each fund are estimated to be $39,000 for each fund. NOTE 3: The funds have entered into a management agreement with FMR, pursuant to which FMR will, among other things, super- vise the funds' investment program and monitor the performance of the funds' service providers. Each fund pays FMR a monthly basic fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of each fund.	485BPOS	EX-99.B24A1	1996-01-12T00:00:00	1996-01-12T16:08:42
0000950103-96-000018	0000950103-96-000018_0000.txt	Under the Securities Exchange Act of 1934 (Title of Class of Securities) Vice President, General Counsel and Secretary (Name, Address and Telephone Number of Person Authorized to Receive Notices (Date of Event which Requires Filing of If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(b)(3) or (4), check the following: [ ]. Check the following box if a fee is being paid with this statement: [X]. Exhibit Index at Page 16 \|CUSIP No. 843611 10 4 \| \| Page 2 of 27 Pages \| \| 1 \| NAME OF REPORTING PERSON \| \| \| S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSON \| \| \| ASARCO Incorporated Employer ID No. 13-492440 \| \| 2 \| CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP \| \| \| (a) \|_\| \| \| \| (b) \|x\| \| \| 3 \| SEC USE ONLY \| \| 4 \| SOURCE OF FUNDS \| \| 5 \| CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED _ \| \| \| PURSUANT TO ITEMS 2(d) or 2(E) \|_\| \| \| 6 \| CITIZENSHIP OR PLACE OF ORGANIZATION \| \| \| New Jersey \| \| \| 7 \| SOLE VOTING POWER \| \| \| \| 43,348,949 \| \| SHARES \| 8 \| SHARED VOTING POWER \| \| BENEFICIALLY \| \| 0 \| \| EACH \| 9 \| SOLE DISPOSITIVE POWER \| \| REPORTING \| \| 43,348,949 \| \| WITH \| 10 \| SHARED DISPOSITIVE POWER \| \| \| \| 0 \| \| 11 \| AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON \| \| 12 \| CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES _ \| \| \| CERTAIN SHARES \|_\| \| \| 13 \| PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) \| \| \| 54.1% of total Common Shares; 63.0% of Class A Common Stock \| \| 14 \| TYPE OF REPORTING PERSON \| Item 1. Security and Issuer. The class of equity securities to which this statement relates is the common stock, $0.01 par value per share (the "Common Stock") and the Class A Common Stock, $0.01 par value per share (the "Class A Common Stock" and, together with the Common Stock, the "Common Shares") of Southern Peru Copper Corporation, a Delaware corporation (the "Company"). The principal executive offices of the Company are located at 180 Maiden Lane, New York, New York 10038. Item 2. Identity and Background. The name of the person filing this statement is ASARCO Incorporated, a New Jersey corporation ("Asarco"). The address of the principal offices of Asarco is 180 Maiden Lane, New York, New York 10038. The name, business address, present principal occupation or employment, and citizenship of each director and executive officer of Asarco is set forth on Schedule A. Asarco is a producer of nonferrous metals, principally copper, lead, zinc, silver and gold. Asarco also produces specialty chemicals and minerals and provides environmental services. During the last five years, neither Asarco nor, to the best of its knowledge, any of the persons listed on Schedule A attached hereto, has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. Item 3. Source and Amount of Funds or Other Consideration. In connection with a reorganization of Southern Peru Copper Corporation, Asarco and the other founding stockholders of Southern Peru Limited, Cerro Trading Company, Inc. ("Cerro") and Phelps Dodge Overseas Capital Corporation ("Phelps Dodge") (collectively, the "Founding Stockholders") surrendered 41,436,360 shares, 13,600,334 shares and 10,680,799 shares, respectively, of Southern Peru Limited representing 100% of the outstanding shares of Southern Peru Limited, in exchange for shares of Class A Common Stock of the Company (the "Founding Stockholder Exchange"). Item 4. Purpose of Transaction. In connection with the Founding Stockholder Exchange, the Company conducted an exchange offer (the "Exchange Offer") pursuant to which it offered to exchange Common Stock for outstanding labor shares of the Peruvian Branch of Southern Peru Limited. The Exchange Offer was conducted in order to (i) provide holders of labor shares with an opportunity to receive securities of the Company which are listed on the New York Stock Exchange and the Lima Stock Exchange, (ii) establish public trading markets in the United States and in Peru for the Company's Common Stock, (iii) simplify the Company's consolidated capital structure and (iv) provide the Company in the future with improved access to the capital markets. The Founding Stockholder Exchange was conducted in order to provide holders of labor shares with representation on the Board of Directors of the Company while maintaining ultimate stockholder direction in the hands of the Founding Stockholders. On January 2, 1996, the Company completed the Exchange Offer. Asarco held its shares in Southern Peru Limited as a long-term investment and has acquired the Class A Common Stock of the Company with the same intent. Except as set forth above, Asarco has no plans or proposals which relate to or would result in any of the transactions described in subparagraphs (a) through (j) of Item 4 of Schedule 13D. Item 5. Interest in Securities of the Company. (a) Asarco has acquired and, for the purpose of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), beneficially owns 43,348,949 Common Shares, representing approximately 54% of the outstanding Common Shares of the Company and 63.05% of the outstanding Class A Common Stock of the Company. Class A Common Stock is convertible on a one-for-one basis to Common Stock at the option of the holder or automatically upon the sale or transfer of the Class A Common Stock to a non-affiliate of a Founding Stockholder. Asarco believes certain of its executive officers beneficially own Common Stock as set forth in Schedule C. Except as set forth herein, neither Asarco, nor, to the best of its knowledge, any individuals named in Schedule A hereto, except for those individuals named in Schedule C hereto, beneficially owns any Common Shares. (b) Asarco has sole power to vote and to dispose of 43,348,949 Shares of Class A Common Stock. Except with respect to the election of directors or as required by law, the Common Stock and Class A Common Stock vote together as a single class. (c) Information concerning acquisitions of Common Shares since November 2, 1995 is set forth on Schedule B. Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Company. Each of the Founding Stockholders has entered into a Stockholders' Agreement pursuant to which each Founding Stockholder has the right to nominate that number of 12 directors of the Company which is in proportion to the percentage of Class A Common Stock owned by such Founding Stockholder (or its affiliates) out of the aggregate Class A Common Stock then owned by all holders of Class A Common Stock (without any minimum required number of shares). The foregoing is qualified in its entirety by reference to the Stockholders' Agreement which is filed as Exhibit 1 hereto and incorporated herein by reference. Except for the Stockholders' Agreement described above, to the best knowledge of Asarco, there are no contracts, arrangements, understandings or relationships (legal or otherwise) between the persons enumerated in Item 2, and any other person, with respect to any securities of the Company, including, but not limited to, transfer or voting of any of the securities, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies. Item 7. Material to be Filed as Exhibits. Exhibit 1: Stockholders' Agreement dated as of January 2, 1996 among the Company, Southern Peru Limited and the Founding Stockholders. After reasonable inquiry and to the best knowledge and belief of the undersigned, the undersigned certifies that the information set forth in this statement is true, complete and correct. By: /s/ Kevin R. Morano DIRECTORS AND EXECUTIVE OFFICERS OF The name, title, present principal occupation or employment and business address of each of the directors and executive officers of ASARCO Incorporated ("Asarco") are set forth below. If no business address is given, the director's or officer's business address is Asarco's address. Unless otherwise indicated, each occupation following an individual's name refers to Asarco. Unless otherwise indicated, all of the persons listed below are citizens of the United States of America. Chairman of the Board, Chief Executive Officer and President Director of Texaco Inc., International Paper Company, and M.I.M. Holdings New York, New York 10178 Chairman of the Board and Chairman of the Executive Committee 455 N. Cityfront Plaza Drive Woodcliff Lake, New Jersey 07675 Director of NBD Bancorp, Inc. and Village of Golf, Florida 33436 Director of Corning Incorporated and PaineWebber Group Inc. Chairman, President and Chief Executive Officer New York, New York 10022 President and Chief Executive Officer Don Ward & Co. Chairman and Chief Executive Officer Chairman of the Board and Chief Executive Officer The Great Atlantic & Pacific Tea Company, Inc. Executive Officers (Who Are Not Directors) Vice President and General Counsel Vice President and Chief Financial Officer of the Company Since November 2, 1996 by Asarco The acquisition of Class A Common Stock set forth below was made by Asarco. Date of of Shares Nature of Per Purchase Transaction Acquired Purchase Share Price ----------- --------- --------- ----- --------- 1/2/96 43,348,949 Exchange n/a n/a BENEFICIAL OWNERSHIP OF COMMON STOCK BY CERTAIN EXECUTIVE OFFICERS OF ASARCO Asarco believes certain of its executive officers beneficially own Common Stock acquired January 5-8, 1996, through open market purchases with personal funds as follows: Name: Richard de J. Osborne Beneficial Ownership: Voting and investment power Beneficial Ownership: Sole voting and investment power Beneficial Ownership: Sole voting and investment power Beneficial Ownership: Sole voting and investment power Beneficial Ownership: Sole voting and investment power Beneficial Ownership: Sole voting and investment power Beneficial Ownership: Sole voting and investment power Price per Share: 16 1/8 Beneifical Ownership: Voting and investment power Price per Share: 15 1/8 Beneficial Ownership: Sole voting and investment power Price per Share: 16 1/8 Beneficial Ownership: 500 shares -- Voting and investment power shared with spouse 300 shares -- Sole voting and 100 shares -- Voting and by spouse, with Mr. Dowd	SC 13D	SC 13D	1996-01-12T00:00:00	1996-01-12T14:27:42
0000950144-96-000097	0000950144-96-000097_0000.txt	<DESCRIPTION>RSI HOLDINGS INC 10QSB 11/30/95 U. S. Securities and Exchange Commission X Quarterly Report pursuant to Section 13 or 15 (d) of the --- Securities Exchange Act of 1934 For the Quarterly Period Ended November 30, 1995 or --- Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Transition Period From to (Exact name of small business issuer as specified in its charter) (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 245 E. Broad Street, Suite A, P. O. Box 6847 (Address of principal executive offices) Former name, former address and former fiscal year, if changed since last report. Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock - $.01 Par Value -- 7,994,292 shares outstanding as of January Transitional Small Business Disclosure Format (check one); CONDENSED CONSOLIDATED STATEMENT OF NET ASSETS IN CHANGES IN NET ASSETS IN LIQUIDATION (Unaudited) Three Months Ended November 30, 1995 and 1994 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION As of August 31, 1994, RSI Holdings, Inc. (the "Company") adopted the liquidation basis of accounting. The Company had experienced significant recurring losses and the Company was notified by its primary supplier of turf care products that after October 31, 1994, the Company would no longer be authorized to sell its products. Because substantially all of the Company's assets were related to the turf care business and the Company would no longer be authorized to sell the products of its major supplier, it was concluded by the Board of Directors of the Company and announced on July 29, 1994 that the Company should cease its existing business operations and sell its operating assets as of August 31, 1994. Since August of 1994, the Company has been actively seeking to sell its assets. The shareholders approved the sale of substantially all its assets at its annual meeting held on January 17, 1995. As a result of the decision to sell the operating assets of the Company and the subsequent efforts to sell all of the operating assets, the Company changed its basis of accounting for its financial statements at August 31, 1994 from the going concern basis of accounting to the liquidation basis of accounting in accordance with generally accepted accounting principles. Consequently, assets have been valued at estimated net realizable value and liabilities are presented at their estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of assets and liabilities necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the liquidation. The actual realization of assets and settlement of liabilities could be higher or lower than amounts indicated and is based upon management estimates as of the date of the financial statements. In addition, as described in Note B, significant uncertainties exist with respect to the outcome of litigation in which the Company is a defendant. No provision has been made as of November 30, 1995 for any liability that may result upon ultimate resolution of these litigation matters. The statement of consolidated net assets in liquidation as of November 30, 1995 includes approximately $442,000 of costs that the Company estimates will be incurred during the period of liquidation, based on management's assumption that the liquidation process will be completed by December 1996. The Company's estimate of the period required to sell its remaining assets and resolve the remaining contingencies is based on management's best estimates, and the liquidation period may be shorter than projected or it may be extended beyond the projected period. The accompanying unaudited condensed consolidated financial statements at November 30, 1995 have been prepared in accordance with generally accepted accounting principles for interim financial information under the liquidation basis of accounting and with the instructions to Form 10 - QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation on the liquidation basis have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10 - KSB for the year ended August 31, 1995. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued In 1987, Triple A Machine Shop, Inc. ("Triple A") purchased property at 2801 Giant Road in Richmond, California from Wiegmann & Rose International Corp. ("Wiegmann & Rose"), a wholly-owned subsidiary of the Company. As part of this transaction, Wiegmann & Rose agreed to prepare a proposed plan of abatement for environmental contamination at the property, submit it to the Regional Water Quality Control Board, and upon approval, implement the abatement plan. Soon afterwards, consultants for Wiegmann & Rose prepared a proposed plan of abatement and submitted it to the Regional Board. However, the California Department of Health Services asserted jurisdiction over the matter, demanded that Wiegmann & Rose investigate the possibility of buried drums at the property, and initiated a planning process that produced a Remedial Investigation and Feasibility Study, Remedial Action Plan, and Community Relations Plan. Buried drums, which contained various substances including solvents and other volatile organic compounds ("VOCs") were found and removed in 1988. Planning and remediation continued for solvents that had leaked from the drums and for heavy metals that had also been disposed of at the property. In 1988, Wiegmann & Rose filed suit against NL Industries, Inc. ("NL") and Esselte Pendaflex Corporation ("Esselte"), and alleged that these two defendants were responsible for the contamination on the property. NL and Esselte filed third-party complaints against Triple A. This litigation was resolved December 31, 1991 through the entry of a consent decree (the "1991 Decree") that required NL to abate the contamination at Site R on the property diligently and to the satisfaction of the regulatory agencies. In effect, NL took over Wiegmann & Rose's obligations under its agreement with Triple A with respect to Site R. ("Site R" is the phrase used to describe the portion of the property formerly owned by Wiegmann & Rose that by 1987 had been targeted by the regulatory agencies for investigation and remediation.) During July of 1993, Triple A sued Wiegmann & Rose and RSI Corporation, the former parent corporation of Wiegmann & Rose and of the Company, and which is now known as Delta Woodside Industries, Inc. ("Delta Woodside"), alleging that Wiegmann & Rose breached the sales contract, breached the covenant of good faith and fair dealing implied in the contract, and maintained a continuing nuisance on the property as a result of a failure to abate the contamination within a reasonable time. In connection with the distribution of the Company's Common Stock to the shareholders of RSI Corporation in 1989, the Company indemnified RSI Corporation against certain types of potential liabilities and expenses, including those arising in connection with the lawsuit by Triple A. Triple A's complaint seeks special damages in excess of $2,700,000, general damages according to proof, and punitive damages of $1,000,000. The Triple A action, which was filed in the Contra Costa County, California Superior Court on July 19, 1993, was removed to the federal district court for the Northern District of NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued California on August 25, 1993, and Wiegmann & Rose answered the complaint. The court granted Wiegmann & Rose's motion to reopen its previous litigation against NL, which was made with the intention of obtaining from the court a determination that NL had complied with the 1991 Decree (and therefore that Wiegmann & Rose had complied with its obligations to Triple A), or, failing that, that NL had failed to comply with the 1991 Decree (and therefore is responsible for any damages for events following the entry of the 1991 Decree). Wiegmann & Rose did not cause any of the contamination on the site. In addition, the Company had diligently proceeded to abate the contamination through the date of the 1991 Decree, and the terms of the 1991 Decree required NL, not the Company, to abate the contamination on Site R diligently and to the satisfaction of regulatory agencies. Based upon these facts, management believes that the allegations of Triple A are without merit, and is contesting the case vigorously. In April 1994, the court granted Wiegmann & Rose's motion for partial summary judgment, which effectively relieved Wiegmann & Rose from liability for events occurring before the entry of the 1991 Decree with respect to Site R. Wiegmann & Rose had argued, and the court apparently agreed, that in the 1991 Decree Triple A had released Wiegmann & Rose "for any and all liability for costs paid and services performed . . . through the date of this Decree that are related to remediation of hazardous substances at Site R or to this action." For events occurring after the date of its entry, the 1991 Decree provides that NL is principally responsible for the remediation of the portion of the property known as Site R, although Wiegmann & Rose retains liability in the event that NL does not perform. The 1991 Decree did not address the liability of any party with respect to portions of the property outside Site R. Resolution of this case has been delayed because of a disagreement between Triple A and NL about which of them should be responsible for future maintenance of a protective cap installed at Site R. Triple A has suggested that it may dismiss the suit if this issue is resolved, and a settlement conference is expected within the next few months. Since the 1991 Decree, NL has been working towards completion of the remediation of Site R, and during 1994 requested that the California Environmental Protection Agency, Department of Toxic Substances Control ("California DTSC") declare that the remediation of Site R is complete. The California DTSC has requested additional commitments from NL and Triple A on future operation, maintenance, and sampling of Site R. The Company believes that NL has the financial ability to remediate Site R. This belief is based upon the Company's knowledge of the remediation of Site R that NL has performed to date, and upon the Company's review of the quarterly report of NL on Form 10-Q for the fiscal quarter ended September 30, 1995 (the "September 10-Q"). The September 10-Q indicates that, at September 30, 1995, the working capital of NL was $241,518,000 and that NL's working capital ratio was 2.0 to 1.0. During 1994 NL reported to the California DTSC that it had discovered additional contamination in the form of elevated levels of petroleum hydrocarbons or VOC's on the property at issue but adjacent to Site R. Such property is now owned by Triple A. Because the contamination is not within the boundaries of Site R, NL has taken the position to the California NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued DTSC that it is not responsible for the remediation of this contamination. The extent of the contamination, the estimated cost of its remediation, and Wiegmann & Rose's responsibility for it have not yet been determined, but the cleanup costs and legal expenses related to this additional contamination could be significant and could materially and adversely affect the Company's financial position. The California DTSC has not yet requested remediation of this area of additional contamination. In the event that a claim is asserted against Wiegmann & Rose in connection with this additional contamination, Wiegmann & Rose expects to take the position that NL is primarily responsible for the additional contamination. However, no assurance can be given that Wiegmann & Rose will be successful in this matter and, if the matter were litigated, the litigation could take years and be very expensive to the Company. During the three months ended November 30, 1995, the Company incurred approximately $4,000 in legal and other expenses related to the Triple A lawsuit. Wiegmann & Rose is also one of numerous defendants with respect to seven claims for exposure to asbestos, arising in the normal course of business. Six of these claims have been dismissed without prejudice with respect to Wiegmann & Rose, and the applicable statute of limitations has passed with respect to two of the dismissed claims. The six dismissed claims are made in the following lawsuits, in each case seeking unspecified damages for injury allegedly due to asbestos exposure: (i) Brophy v. Abex et al. (filed April 9, 1992), pending in the San Francisco, California Superior Court, seeks damages for wrongful death allegedly due to asbestos exposure. Wiegmann & Rose has been dismissed without prejudice in this action and the applicable statute of limitations has now passed, barring any subsequent action by the plaintiff against Wiegmann & Rose. (ii) Canga v. Abex et al. (filed March 18, 1993), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. Wiegmann & Rose has been dismissed without prejudice in this action. (iii) Jordison v. Abex et al. (filed January 21, 1994), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. The case against Wiegmann & Rose has been dismissed without prejudice. (iv) Barnes v. Abex et al. (filed December 3, 1993), pending in the San Francisco Superior Court, seeks damages for wrongful death allegedly due to asbestos exposure. The case against Wiegmann & Rose has been dismissed without prejudice, and the applicable statute of limitation has passed, barring any subsequent action by plaintiff against Wiegmann & Rose. (v) Richardson v. Abex et al. (filed August 5, 1993), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. The case against Wiegmann & Rose has been dismissed without prejudice. (vi) Sorensen v. Abex et al. (filed July 20, 1993), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. The case against Wiegmann & Rose has been dismissed without prejudice. The one undismissed case, Hall v. Abex et al. (filed February 25, 1994), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. The plaintiffs, husband and wife, allege that the husband was exposed to asbestos in Wiegmann & Rose's products and/or that he was exposed to asbestos on Wiegmann & Rose's NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued premises. Demand has been made upon the plaintiffs to dismiss Wiegmann & Rose from the action. Discovery is incomplete, and the plaintiff husband was deposed in January 1995. Plaintiff husband testified that he was present on Wiegmann & Rose premises on several occasions, to oversee repairs and manufacturing being conducted by Wiegmann & Rose for his employer, Standard Oil, and to conduct certain tests on the machines and equipment being repaired by Wiegmann & Rose. Plaintiff husband, however, provided no testimony establishing a nexus between Wiegmann & Rose and any alleged asbestos exposure, other than his unsubstantiated belief. Discovery is incomplete, and the Company intends to defend this case vigorously. Plaintiffs in this action have made a settlement offer for a total of $2,998 to settle their claims against Wiegmann & Rose, but Wiegmann & Rose has not yet responded to this offer. Wiegmann & Rose is one of approximately one hundred defendants in this case. Based upon financial information known to the Company, the Company believes that, in each of the above cases, several of the other defendants have greater financial resources than the Company. As to the asbestos claims, the Company believes substantial defenses are available. This belief is based upon the advice of the Company's counsel as to the existence of defenses stemming from the failure of the plaintiffs to establish asbestos exposure related to Wiegmann & Rose. The Company has contacted its two primary insurance companies relating to the environmental and asbestos claims against Wiegmann & Rose described above. One insurance company has denied coverage with respect to the environmental claims, but the other insurance company is reimbursing the Company for a portion of its defense costs related to the environmental matter under a reservation of rights. Both insurance companies are also, under a reservation of rights, reimbursing the Company for a portion of its defense costs related to the asbestos claims. The Company has received $4,000 from its insurers during the three months ended November 30, 1995 in payment of certain of its defense costs incurred with respect to these claims. The Company believes that the likelihood of continued recovery of defense costs relating to these claims pursuant to its current arrangements with these insurance companies is probable, but there can be no assurance that insurance coverage will be available to reimburse the Company to any extent for any damages or costs it must pay as a result of the settlement or adjudication of these claims. RSI Corporation (now Delta Woodside), the former parent corporation of the Company, and Sparjax Corporation, RSI Corporation's now-dissolved subsidiary, are among several defendants in a lawsuit filed on July 29, 1993 by Holiday Inns, Inc. in the Circuit Court of the Fourth Judicial Circuit for Duval County, Florida. In connection with the distribution of the Company's Common Stock to the shareholders of RSI Corporation in 1989, the Company indemnified RSI Corporation against certain types of potential liabilities and expenses, including those arising in connection with the lawsuit by Holiday Inns, Inc. This suit seeks indemnification for payments made or to be made by NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued the guarantor, to the lessor for obligations under a land lease agreement allegedly in default. The lease agreement was commenced in 1967 and has a term of ninety-nine years. The lessor under the lease agreement was originally Fernandina Contractors, Inc., and by assignment is currently Sam Spevak. Holiday Inns, Inc. was the original lessee under the lease agreement. Payments under the lease agreement are the greater of $24,000 annually or the highest average annual payments during any five-year period during the first twenty (20) years of the lease, using a percentage of income formula. The lessee's interest in the lease agreement has been assigned to a series of parties including RSI Corporation and Sparjax Corporation. RSI Corporation was the lessee under the lease agreement from June, 1979 to August, 1979, and Sparjax Corporation was the lessee thereunder from August, 1979 to January, 1981. The current lessee is American Hotel Investors, Inc. ("AHI"). AHI allegedly has failed to make lease payments due under the lease agreement and otherwise to comply with its obligations under the lease agreement. Holiday Inns, Inc. has alleged that Sparjax Corporation, which is the assignee of the lease agreement from RSI Corporation, is in breach of a written Indemnification Agreement executed by Sparjax Corporation in favor of Holiday Inns, Inc. upon its assumption of the lease agreement in 1979. All of the outstanding common stock of Sparjax Corporation was acquired by RSI Corporation during fiscal 1983, and Sparjax Corporation was dissolved by forfeiture during fiscal 1990. In connection with such dissolution, no material assets were distributed from Sparjax Corporation to RSI Corporation. Other than as described herein, there is no contractual relationship whatsoever between RSI Corporation and Holiday Inns, Inc. On or about September 23, 1992, Sam Spevak filed a lawsuit against Holiday Inns, Inc. for allegedly failing to pay monthly rent under the lease agreement. This lawsuit is pending in the Circuit Court of the Fourth Judicial Circuit, in and for Duval County, Florida. On May 4, 1993, Sam Spevak filed a Second Amended Complaint seeking from Holiday Inns, Inc. unpaid rent, unpaid taxes, interest, attorney fees and costs. On November 19, 1993, Sam Spevak filed a Third Amended Complaint in the Court seeking from Holiday Inns, Inc. unpaid rent, unpaid taxes, attorneys fees and costs, and seeking a declaratory judgment against Holiday Inns, Inc. to establish whether or not Holiday Inns, Inc. is liable for costs of repair and maintenance to the leased premises. Holiday Inns, Inc. amended its complaint to assert similar claims against all subsequent lessees (including RSI Corporation and Sparjax Corporation) under the lease agreement, seeking indemnification against sums paid or to be paid to Sam Spevak pursuant to his lawsuit. Currently Holiday Inns, Inc. claims to have paid the lessor in excess of $260,000 to date as a result of the lawsuit. The Company has no independent information with respect to the particulars of the payment of this sum. The most recent activity in the case has been a cross-claim filed by Mr. Donald Roberts against all assignees of W. M. R., Inc., including RSI Corporation and Sparjax Corporation. Mr. Roberts was an individual guarantor of W. M. R., Inc.'s obligations under the land lease. Counsel for RSI Corporation and Sparjax Corporation have moved to dismiss Mr. Roberts' cross-claims and the court has granted these motions, without prejudice. Counsel for Sparjax Corporation and RSI Corporation have informed the Company that the cross-claims do not raise any new NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued substantive issues, but merely seek indemnification from all assignees in the event that Mr. Roberts is required to pay Holiday Inns, Inc. on his individual guaranty. The potential maximum amount of Holiday Inns, Inc.'s exposure for rent under the lease, reduced to present value, has been estimated by counsel to be approximately $3,500,000. In addition, should the court determine that Holiday Inns, Inc. has an obligation to pay the cost of repairs and maintenance incurred to date and throughout the balance of the lease term, the amount of such costs could be substantial but cannot be quantified with any reasonable degree of accuracy. The Company believes the existing motel property is in a state of disrepair such that it is not commercially usable. RSI Corporation denies its alleged liability to Holiday Inns, Inc. and intends to defend this matter vigorously. Upon a motion of counsel for RSI Corporation, Holiday Inns, Inc.'s claims against RSI Corporation were dismissed without prejudice, but Holiday Inns, Inc. has filed an Amended Complaint to reinstate certain of its claims, and to add a claim for equitable subrogation, against RSI Corporation and Sparjax Corporation. Counsel for RSI Corporation and Sparjax Corporation has answered the equitable subrogation claim, and has moved for dismissal with prejudice with respect to the claims that have previously been dismissed. The deposition of James "Duke" Williams, a critical witness in the case, has now been taken. Mr. Williams was involved in a contract to assume the lease from Holiday Inns, Inc., which contract was later canceled by Holiday Inns, Inc. The parties are presently scheduling the depositions of other important fact witnesses. These include Mr. Spevak and several of the lesser officers of Holiday Inns, Inc. who were involved in the negotiations to cancel the lease with Mr. Williams. The mediation conference held in January, 1995 was not successful. No trial date has been set. If found liable for any sum as a result of Holiday Inns, Inc.'s claims, the Company believes RSI Corporation and Sparjax Corporation would have a claim in equity against AHI, the current and allegedly defaulting lessee under the lease agreement, and its principal shareholders, who guaranteed AHI's obligations under the lease. AHI is a private corporation and the Company has no information regarding the financial ability of AHI or its principal shareholders to perform AHI's obligations under the lease or to reimburse any third party for any payments made under the lease as a result of the lawsuit described above. The ultimate outcome of this matter is not known. No provision has been made in the accompanying financial statements for any liability which may result from this matter. On January 12, 1995, a Mr. Cesar A. Cuenca served a complaint against the Company in the 11th Judicial Circuit Court, Dade County, Florida seeking damages in excess of the minimal jurisdictional amount of the Court, exclusive of costs and interest, and demanding costs of the action together with such further relief as the Court shall deem fit. The Plaintiff alleges that he was injured while operating a vehicle that was sold by the Company. The Complaint NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued the manufacturer of the vehicle. The manufacturer has accepted, under reservation of rights, defense of the Company regarding this matter. This matter is still in the discovery stage. The plaintiff recently amended the complaint to add the School Board of Dade County as a defendant for negligent maintenance of the subject premises. The Company believes, based on the arrangements with the manufacturer of the vehicle and the Company's own insurance, that this action should not have a material adverse effect on the Company's financial position. On February 4, 1994, a Mr. Everette Moncur and Edwina Moncur, his wife, served a complaint against the Company in the 17th Judicial Circuit Court, Broward County, Florida seeking damages in excess of $15,000 for injuries sustained while operating a turf care product sold by the Company. The complaint also named the manufacturer of the product. The manufacturer and its insurance carrier have accepted defense of the Company regarding this matter. The Company believes, based on the arrangements with the manufacturer, the manufacturer's insurance company, and the Company's own insurance, that this action should not have a material adverse effect on the Company's financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION During July of 1994, the Company was notified by the Jacobsen Division of Textron, Inc. ("Jacobsen"), its principal supplier of turf care products, that after October 31, 1994 the Company would no longer be authorized to sell Jacobsen products. Because substantially all of the Company's assets were related to the turf care business and the Company would no longer be authorized to sell the products of its primary supplier, the Board of Directors determined in July of 1994 that the Company should cease its existing business operations and sell the operating assets of the Company. Accordingly, the Company ceased substantially all of its existing business operations by August 31, 1994. The Company received shareholder approval of its plan to sell substantially all of the Company's assets (the "Sale of Assets") at its annual meeting of shareholders held on January 17, 1995. As discussed below, the Sale of Assets plan has not yet been fully consummated. The holders of an aggregate of 167,591 shares of Common Stock dissented from the Sale of Assets. These holders are entitled under North Carolina law to receive the "fair value" of their shares of Common Stock as determined in accordance with North Carolina law. The Company has not yet determined the "fair value" of these shares. It intends to make this determination promptly following the sale of the two substantial remaining real estate holdings of the Company, described further below, as part of the consummation of the Sale of Assets. Although these parcels are being offered for sale, the Company has not yet been able to sell these properties at prices deemed acceptable by the Company, and is unable to predict when and if these parcels may be sold. Because the Company decided in 1994 that it should cease its existing business operations and sell substantially all of its operating assets, the Company has reported its financial position on the liquidation basis of accounting for the three months ended November 30, 1995. In the liquidation basis of accounting, assets are valued at their net realizable value (rather than at their net historical cost), and liabilities include estimated costs associated with carrying out the sale of substantially all of the assets of the Company. At August 31, 1994, management believed that it would be able to complete the Sale of Assets by December 31, 1995, and the costs estimated at that time by the Company to be incurred during the period of liquidation were based upon that assumption. However, certain properties of the Company have not been sold, and the Company has extended the period of liquidation. Management currently estimates that it will be able to complete the Sale of Assets by December 31, 1996, though there can be no assurance that this goal will be achieved. See the section entitled "Property and Equipment" for a discussion of the Company's efforts to sell its remaining properties. At the end of fiscal year 1995, net assets were higher than at the end of fiscal year 1994 by ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (continued) $213,000. This increase reflects the changes in the Company's estimates of the following items: increase of rental income of $280,000, increase of interest earned of $58,000, increase in recovery from insurance companies of legal fees paid in the amount of $134,000, increase in collections of accounts receivable in the amount of $36,000, and an increase in estimated costs during the period of liquidation of $295,000. The increase in estimated costs during the period of liquidation results primarily from extending the period of liquidation from December 31, 1995 to December 31, 1996. The Company's estimate of net assets in liquidation increased $19,000 during the three months ended November 30, 1995. The principal reason for the increase was the increase in estimated rental income relating to the unsold property located in Fort Lauderdale, Florida and Tampa, Florida. At November 30, 1995, the Company had accrued $338,000 to record all known expenses incurred through November 30, 1995, but not yet paid. As of November 30, 1995 the Company's estimated costs to be incurred during the remaining period of liquidation through December 31, 1996 were $442,000 as compared to $544,000 at August 31, 1995. This reduction of $102,000 resulted primarily from payments made by the Company and adjustments to expense categories based on costs incurred during the three months ended November 30, 1995. These costs include costs expected to be incurred in connection with the consummation of the Sale of Assets during the liquidation period through December 31, 1996, including anticipated legal fees ($93,000), accounting and auditing fees ($29,000), salaries ($156,000), lease commitments ($25,000), property taxes ($46,000), insurance and other overhead items ($36,000), shareholder relation expenses ($15,000), administrative office expenses ($8,000), and the Company's estimate of unforeseen costs ($34,000) that the Company expects to incur during the remaining liquidation period through December 31, 1996. These amounts are only estimates, however, and there is no assurance that management will be able to complete the Sale of Assets during this period or that known and unknown contingencies will not require the Company to make significant additional expenditures. FINANCIAL POSITION AT NOVEMBER 30, 1996 The Company's activities during the period beginning in September of 1994 through November 1995 have consisted primarily of implementing the Sale of Assets. The following paragraphs describe such activities and the composition of the net assets of the Company at November 30, 1995. Cash and cash equivalents in the amount of $1,357,000 as of November 30, 1995 included United States treasury bills with a maturity of three months when purchased and having a cost basis of $1,122,000. Cash in excess of the amounts invested in United States treasury bills is invested as available in a bank master note, which may be liquidated by the Company to meet its cash needs on a daily basis. The Company earned $21,000 on its investments during the three months ended November 30, 1995. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (continued) As of November 30, 1995, the Company's estimate of the net realizable value of total accounts receivable was $28,000, as compared to $27,000 at August 31, 1995. The $1,000 increase in the estimate of net realizable value at November 30, 1995 as compared to August 31, 1995 is the result of amounts collected subsequent to November 30, 1995. Collections of accounts receivable during the three months ended November 30, 1995 were $11,000 ($4,000 from former customers). The remaining accounts receivable as at November 30, 1995 have a face value of $118,000, but have been reduced by an aggregate of $90,000 to reflect the Company's estimate of the net realizable value of the accounts receivable. Of these remaining accounts receivable, accounts receivable with a face value of $92,000 were due from former customers, and the remaining $26,000 in face value of accounts receivable consists of miscellaneous receivables arising in the ordinary course of business. The Company is using its best efforts to collect the remaining amounts owed to it. There is no assurance, however, that the Company will be successful in its collection efforts. The Company has experienced difficulty in collecting these remaining accounts receivable. Unpaid amounts at November 30, 1995 of approximately $89,000 in face value of accounts receivable are in the hands of either attorneys or collection agencies to collect. The fees of such attorneys and collection agencies for collection are up to approximately 40% of the amount recovered. The Company will attempt to recover its collection costs from the customers, but there is no assurance that it will be successful in these efforts. The remaining $29,000 in face value of accounts receivable are the subject of the Company's collection efforts. The Company's remaining unsold real properties are owned by RSI Holdings of Florida, Inc. (" RSI Florida"), and consist of 2.5 acres of land with a 59,000 square foot building in Fort Lauderdale, Florida, and 2.03 acres of land with a 22,000 square foot building in Tampa, Florida. These properties were utilized by RSI Florida as warehouse, office and showroom space for the sale of turf care equipment prior to the cessation of the Company's business activities in August of 1994. The properties have an estimated liquidation value of $1,559,000 (net of estimated selling expenses), and are not subject to any debt. The estimated liquidation values are based in part upon an independent appraisal of the Fort Lauderdale property, dated March 11, 1994, indicating a market value for that property of $1,200,000, and an independent appraisal of the Tampa property, dated March 21, 1994 (updated effective October 10, 1995), indicating a market value for that property of $530,000, which appraisals and market values have not been independently verified by the Company (the "Appraisals"). The Appraisals each assume a "reasonable" marketing time for each property (assumed to be six months to one year by the Fort Lauderdale appraisal and one year with respect to the Tampa property), as well as various other material assumptions set forth in the Appraisals, as bases for the estimated value of each property. There is no assurance that the Company will realize sales prices for the properties comparable to the values estimated for each property by the Appraisals or that the other assumptions set forth in the Appraisals will prove to be accurate to any extent. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (continued) The Company has been unable to sell these properties to date at prices deemed acceptable to the Company, but is actively engaged in marketing the properties. The properties are listed for sale with Florida commercial real estate brokers at prices somewhat higher than the market values indicated by the Appraisal for each property. During fiscal 1995 the Company entered letters of intent to sell the Fort Lauderdale property with two different potential purchasers at prices somewhat below but comparable to the property's value indicated by its Appraisal. These offers were deemed acceptable by the Company, but were withdrawn due to failure to obtain the necessary rezoning in one case and failure to obtain acceptable financing in the other. As reported in the August 31, 1995 Form 10-KSB, the Company has negotiated with an adjoining landowner with respect to sale of the Fort Lauderdale property at a price comparable to the first two offers, but no agreements could be reached with respect to selling price and negotiations have now discontinued with such adjoining landowner with respect to the sale of such property. The Company is currently holding discussions with another prospective buyer with respect to the sale of the Fort Lauderdale property, but there is no assurance that the current discussions will result in the sale of such property. With respect to the Tampa property, during fiscal 1995 the Company engaged in negotiations with two serious potential buyers out of a number of interested parties, but one of these parties has located an alternative site and the other party has discontinued negotiations with the Company for the property. In addition, the Company has received oral expressions of interest from Tresca Industries, the current lessee of the Tampa property, and has received a written offer from another potential buyer, but neither of these offers is at a price deemed acceptable by the Company. The Company believes, in light of the fact that its current liquidity requirements are met by its existing cash and cash equivalents, that it is in the best interest of the Company to continue to hold these properties in an attempt to realize their market values. The level of interest in the properties, as well as the nature of the markets in which the properties are located, lead the Company to believe that, given adequate marketing time, there is a reasonable likelihood that the Company will be able to realize sale prices comparable to the values for the properties indicated by the Appraisals. However, there can be no assurance that the Company will be successful in locating buyers for these properties at such prices. Further, in the event expenses and costs arising out of the Company's contingent liabilities or other expenses of liquidation exceed its liquid resources, the Company may be forced to reduce the price of either or both of these properties in order to induce a rapid sale. There is no assurance that any buyer will be available even at such reduced prices. See Part II, Item 1 - "Legal Proceedings." PLANNED ACTIVITIES DURING THE PERIOD OF LIQUIDATION During the remainder of the period of liquidation (currently estimated to end December 31, 1996), proceeds of the Sale of Assets will continue to be applied first to the payment of expenses related to the liquidation of the Company's assets, next to pay or make provisions for the payment of contingent liabilities of the Company, and next to pay "fair value" to the holders of the 167,591 shares of Common Stock dissenting from the Sale of Assets. There is no assurance that the Company's proceeds from the sale of its remaining assets will be sufficient to cover these expenses. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (continued) The Company currently intends to use the assets, if any, remaining after the consummation of the Sale of Assets and the payment or provision for payment of the foregoing items to acquire, invest in, or commence another business enterprise. In addition to continuing to implement the liquidation of the Company's assets, the Company plans during the remainder of the period of liquidation to continue to seek to identify a suitable new business in which to engage or invest. The Company has reviewed a number of potential business opportunities, and has held discussions with respect to certain of such opportunities, but to date no suitable business enterprise has been identified by the Company. As discussed below under "Cash and Cash Equivalents," the Company has substantial cash liquidity, and anticipates that such cash resources will be sufficient to enable the Company to pay ordinary expenses expected to arise during the remaining period of liquidation of Company assets and identification of a new business enterprise in which to engage or invest. Further, the Company currently anticipates that it will be able to sell its remaining assets (other than cash and cash equivalents) by December 31, 1996, which sales will provide additional liquidity to the Company. There can be no assurance, however, that the Company will be able to sell the remainder of its assets or to identify a suitable business in which to engage or invest during this period. If this transition period is extended, the Company may not have sufficient proceeds to cover its anticipated expenses, and may be required to register under the Investment Company Act of 1940, as amended, during such period. The Company is unable to predict with certainty when the Fort Lauderdale property and Tampa property will be sold, but has estimated costs during the remaining period of liquidation based on such sales occurring by December 31, 1996. In addition to its ordinary expenses, the Company will continue to incur legal expenses relating to its contingent liabilities. The Company plans to continue to attempt to settle its contingent liabilities during the remainder of its period of liquidation, but it cannot estimate when these will be settled or the ultimate outcome of the lawsuits or environmental matters described below under Item 1 of Part II, "Legal Proceedings" or of any unknown contingencies. There can be no assurance that the Company's cash balances will be sufficient to allow it to meet its recorded liabilities and any known or unknown contingent liabilities. The ultimate outcome of these contingencies is not known. No provision has been made in the accompanying financial statements for any liability which may result from these matters, except for an estimate of the legal costs that the Company expects to incur in the defense of these matters. Cash and cash equivalents in the amount of $1,357,000 as of November 30, 1995 included United States treasury bills with a maturity of three months when purchased and having a cost basis of $1,122,000. Cash in excess of the amounts invested in United States treasury bills is invested as available in a bank master note, which may be liquidated by the Company to meet its ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (continued) cash needs on a daily basis. The Company earned $21,000 on its investments during the three months ended November 30, 1995. The Company's $500,000 revolving unsecured line of credit (the "Line of Credit") expired on December 31, 1995. Terms of the Line of Credit specified interest at the bank's prime rate and could only be used to meet the Company's short-term obligations during the period of consummation of its Sale of Assets. The Line of Credit was not used by the Company. The Line of Credit did not contain any financial covenants, and was guaranteed by Mr. Buck Mickel, Chairman of the Board of Directors, Chief Executive Officer, and a shareholder of the Company. The Company does not believe that it will need a line of credit during the remaining period of liquidation. In 1987, Triple A Machine Shop, Inc. ("Triple A") purchased property at 2801 Giant Road in Richmond, California from Wiegmann & Rose International Corp. ("Wiegmann & Rose"), a wholly-owned subsidiary of the Company. As part of this transaction, Wiegmann & Rose agreed to prepare a proposed plan of abatement for environmental contamination at the property, submit it to the Regional Water Quality Control Board, and upon approval, implement the abatement plan. Soon afterwards, consultants for Wiegmann & Rose prepared a proposed plan of abatement and submitted it to the Regional Board. However, the California Department of Health Services asserted jurisdiction over the matter, demanded that Wiegmann & Rose investigate the possibility of buried drums at the property, and initiated a planning process that produced a Remedial Investigation and Feasibility Study, Remedial Action Plan, and Community Relations Plan. Buried drums, which contained various substances including solvents and other volatile organic compounds ("VOCs") were found and removed in 1988. Planning and remediation continued for solvents that had leaked from the drums and for heavy metals that had also been disposed of at the property. In 1988, Wiegmann & Rose filed suit against NL Industries, Inc. ("NL") and Esselte Pendaflex Corporation ("Esselte"), and alleged that these two defendants were responsible for the contamination on the property. NL and Esselte filed third-party complaints against Triple A. This litigation was resolved December 31, 1991 through the entry of a consent decree (the "1991 Decree") that required NL to abate the contamination at Site R on the property diligently and to the satisfaction of the regulatory agencies. In effect, NL took over Wiegmann & Rose's obligations under its agreement with Triple A with respect to Site R. ("Site R" is the phrase used to describe the portion of the property formerly owned by Wiegmann & Rose that by 1987 had been targeted by the regulatory agencies for investigation and remediation.) During July of 1993, Triple A sued Wiegmann & Rose and RSI Corporation, the former parent corporation of Wiegmann & Rose and of the Company, and which is now known as Delta Woodside Industries, Inc. ("Delta Woodside"), alleging that Wiegmann & Rose breached the sales contract, breached the covenant of good faith and fair dealing implied in the contract, and maintained a continuing nuisance on the property as a result of a failure to abate the contamination within a reasonable time. In connection with the distribution of the Company's Common Stock to the shareholders of RSI Corporation in 1989, the Company indemnified RSI Corporation against certain types of potential liabilities and expenses, including those arising in connection with the lawsuit by Triple A. Triple A's complaint seeks special damages in excess of $2,700,000, general damages according to proof, and punitive damages of $1,000,000. The Triple A action, which was filed in the Contra Costa County, California Superior Court on July 19, 1993, was removed to the federal district court for the Northern District of California on August 25, 1993, and Wiegmann & Rose answered the complaint. The court granted Wiegmann & Rose's motion to reopen its previous litigation against NL, which was made with the intention of obtaining from the court a determination that NL had complied with the 1991 Decree (and therefore that Wiegmann & Rose had complied with its obligations to Triple A ), or, failing that, that NL had failed to comply with the 1991 Decree (and therefore is responsible for any damages for events following the entry of the 1991 Decree). Wiegmann & Rose did not cause any of the contamination on the site. In addition, the Company had diligently proceeded to abate the contamination through the date of the 1991 Decree, and the terms of the 1991 Decree required NL, not the Company, to abate the contamination on Site R diligently and to the satisfaction of regulatory agencies. Based upon these facts, management believes that the allegations of Triple A are without merit, and is contesting the case vigorously. In April 1994, the court granted Wiegmann & Rose's motion for partial summary judgment, which effectively relieved Wiegmann & Rose from liability for events occurring before the entry of the 1991 Decree with respect to Site R. Wiegmann & Rose had argued, and the court apparently agreed, that in the 1991 Decree Triple A had released Wiegmann & Rose "for any and all liability for costs paid and services performed . . . through the date of this Decree that are related to remediation of hazardous substances at Site R or to this action." For events occurring after the date of its entry, the 1991 Decree provides that NL is principally responsible for the remediation of the portion of the property known as Site R, although Wiegmann & Rose retains liability in the event that NL does not perform. The 1991 Decree did not address the liability of any party with respect to portions of the property outside Site R. Resolution of this case has been delayed because of a disagreement between Triple A and NL about which of them should be responsible for future maintenance of a protective cap installed at Site R. Triple A has suggested that it may dismiss the suit if this issue is resolved, and a settlement conference is expected within the next few months. Since the 1991 Decree, NL has been working towards completion of the remediation of Site R, and during 1994 requested that the California Environmental Protection Agency, Department of Toxic Substances Control ("California DTSC") declare that the remediation of Site R is complete. The California DTSC has requested additional commitments from NL and Triple A on future operation, maintenance, and sampling of Site R. The Company believes that NL has the financial ability to remediate Site R. This belief is based upon the Company's knowledge of the remediation of Site R that NL has performed to date, and upon the Company's review of the quarterly report of NL on Form 10-Q for the fiscal quarter ended September 30, 1995 (the "September 10-Q"). The September 10-Q indicates that, at September 30, 1995, the working capital of NL was $241,518,000 and that NL's working capital ratio was 2.0 to 1.0. During 1994 NL reported to the California DTSC that it had discovered contamination in the form of elevated levels of petroleum hydrocarbons or VOC's on the property at issue but adjacent to Site R. Such property is now owned by Triple A. Because the contamination is not within the boundaries of Site R, NL has taken the position to the California DTSC that it is not responsible for the remediation of this contamination. The extent of the contamination, the estimated cost of its remediation, and Wiegmann & Rose's responsibility for it have not yet been determined, but the cleanup costs and legal expenses related to this additional contamination could be significant and could materially and adversely affect the Company's financial position. The California DTSC has not yet requested remediation of this area of additional contamination. In the event that a claim is asserted against Wiegmann & Rose in connection with this additional contamination, Wiegmann & Rose expects to take the position that NL is primarily responsible for the additional contamination. However, no assurance can be given that Wiegmann & Rose will be successful in this matter and, if the matter were litigated, the litigation could take years and be very expensive to the Company. During the three months ended November 30, 1995, the Company incurred approximately $4,000 in legal and other expenses related to the Triple A lawsuit. Wiegmann & Rose is also one of numerous defendants with respect to seven claims for exposure to asbestos, arising in the normal course of business. Six of these claims have been dismissed without prejudice with respect to Wiegmann & Rose, and the applicable statute of limitations has passed with respect to two of the dismissed claims. The six dismissed claims are made in the following lawsuits, in each case seeking unspecified damages for injury allegedly due to asbestos exposure: (i) Brophy v. Abex et al. (filed April 9, 1992), pending in the San Francisco, California Superior Court, seeks damages for wrongful death allegedly due to asbestos exposure. Wiegmann & Rose has been dismissed without prejudice in this action and the applicable statute of limitations has now passed, barring any subsequent action by the plaintiff against Wiegmann & Rose. (ii) Canga v. Abex et al. (filed March 18, 1993), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. Wiegmann & Rose has been dismissed without prejudice in this action. (iii) Jordison v. Abex et al. (filed January 21, 1994), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. The case against Wiegmann & Rose has been dismissed without prejudice. (iv) Barnes v. Abex et al. (filed December 3, 1993), pending in the San Francisco Superior Court, seeks damages for wrongful death allegedly due to asbestos exposure. The case against Wiegmann & Rose has been dismissed without prejudice, and the applicable statute of limitation has passed, barring any subsequent action by plaintiff against Wiegmann & Rose. (v) Richardson v. Abex et al. (filed August 5, 1993), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. The case against Wiegmann & Rose has been dismissed without prejudice. (vi) Sorensen v. Abex et al. (filed July 20, 1993), pending in the San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. The case against Wiegmann & Rose has been dismissed without prejudice. The one undismissed case, Hall v. Abex et al. (filed February 25, San Francisco Superior Court, seeks damages for personal injuries allegedly due to asbestos exposure. The plaintiffs, husband and wife, allege that the husband was exposed to asbestos in Wiegmann & Rose's products and/or that he was exposed to asbestos on Wiegmann & Rose's premises. Demand has been made upon the plaintiffs to dismiss Wiegmann & Rose from the action. Discovery is incomplete, and the plaintiff husband was deposed in January 1995. Plaintiff husband testified that he was present on Wiegmann & Rose premises on several occasions to oversee repairs and manufacturing being conducted by Wiegmann & Rose for his employer, Standard Oil, and to conduct certain tests on the machines and equipment being repaired by Wiegmann & Rose. Plaintiff husband, however, provided no testimony establishing a nexus between Wiegmann & Rose and any alleged asbestos exposure, other than his unsubstantiated belief. Discovery is incomplete, and the Company intends to defend this case vigorously. Plaintiffs in this action have made a settlement offer for a total of $2,998 to settle their claims against Wiegmann & Rose, but Wiegmann & Rose has not yet responded to this offer. Wiegmann & Rose is one of approximately one hundred defendants in this case. Based upon financial information known to the Company, the Company believes that, in each of the above cases, several of the other defendants have greater financial resources than the Company. As to the asbestos claims, the Company believes substantial defenses are available. This belief is based upon the advice of the Company's counsel as to the existence of defenses stemming from the failure of the plaintiffs to establish asbestos exposure related to Wiegmann & Rose. The Company has contacted its two primary insurance companies relating to the environmental and asbestos claims against Wiegmann & Rose described above. One insurance company has denied coverage with respect to the environmental claims, but the other insurance company is reimbursing the Company for a portion of its defense costs related to the environmental matter under a reservation of rights. Both insurance companies are also, under a reservation of rights, reimbursing the Company for a portion of its defense costs related to the asbestos claims. The Company has received $4,000 from its insurers during the three months ended November 30, 1995 in payment of certain of its defense costs incurred with respect to these claims. The Company believes that the likelihood of continued recovery of defense costs relating to these claims pursuant to its current arrangements with these insurance companies is probable, but there can be no assurance that insurance coverage will be available to reimburse the Company to any extent for any damages or costs it must pay as a result of the settlement or adjudication of these claims. RSI Corporation (now Delta Woodside), the former parent corporation of the Company, and Sparjax Corporation, RSI Corporation's now-dissolved subsidiary, are among several defendants in a lawsuit filed on July 29, 1993 by Holiday Inns, Inc. in the Circuit Court of the Fourth Judicial Circuit for Duval County, Florida. In connection with the distribution of the Company's Common Stock to the shareholders of RSI Corporation in 1989, the Company indemnified RSI Corporation against certain types of potential liabilities and those arising in connection with the lawsuit by Holiday Inns, Inc. This suit seeks indemnification for payments made or to be made by Holiday Inns, Inc., as the guarantor, to the lessor for obligations under a land lease agreement allegedly in default. The lease agreement was commenced in 1967 and has a term of ninety-nine years. The lessor under the lease agreement was originally Fernandina Contractors, Inc., and by assignment is currently Sam Spevak. Holiday Inns, Inc. was the original lessee under the lease agreement. Payments under the lease agreement are the greater of $24,000 annually or the highest average annual payments during any five-year period during the first twenty (20) years of the lease, using a percentage of income formula. The lessee's interest in the lease agreement has been assigned to a series of parties including RSI Corporation and Sparjax Corporation. RSI Corporation was the lessee under the lease agreement from June, 1979 to August, 1979, and Sparjax Corporation was the lessee thereunder from August, 1979 to January, 1981. The current lessee is American Hotel Investors, Inc. ("AHI"). AHI allegedly has failed to make lease payments due under the lease agreement and otherwise to comply with its obligations under the lease agreement. Holiday Inns, Inc. has alleged that Sparjax Corporation, which is the assignee of the lease agreement from RSI Corporation, is in breach of a written Indemnification Agreement executed by Sparjax Corporation in favor of Holiday Inns, Inc. upon its assumption of the lease agreement in 1979. All of the outstanding common stock of Sparjax Corporation was acquired by RSI Corporation during fiscal 1983, and Sparjax Corporation was dissolved by forfeiture during fiscal 1990. In connection with such dissolution, no material assets were distributed from Sparjax Corporation to RSI Corporation. Other than as described herein, there is no contractual relationship whatsoever between RSI Corporation and Holiday Inns, Inc. On or about September 23, 1992, Sam Spevak filed a lawsuit against Holiday Inns, Inc. for allegedly failing to pay monthly rent under the lease agreement. This lawsuit is pending in the Circuit Court of the Fourth Judicial Circuit, in and for Duval County, Florida. On May 4, 1993, Sam Spevak filed a Second Amended Complaint seeking from Holiday Inns, Inc. unpaid rent, unpaid taxes, interest, attorney fees and costs. On November 19, 1993, Sam Spevak filed a Third Amended Complaint in the Court seeking from Holiday Inns, Inc. unpaid rent, unpaid taxes, attorneys fees and costs, and seeking a declaratory judgment against Holiday Inns, Inc. to establish whether or not Holiday Inns, Inc. is liable for costs of repair and maintenance to the leased premises. Holiday Inns, Inc. amended its complaint to assert similar claims against all subsequent lessees (including RSI Corporation and Sparjax Corporation) under the lease agreement, seeking indemnification against sums paid or to be paid to Sam Spevak pursuant to his lawsuit. Currently Holiday Inns, Inc. claims to have paid the lessor in excess of $260,000 to date as a result of the lawsuit. The Company has no independent information with respect to the particulars of the payment of this sum. The most recent activity in the case has been a cross-claim filed by Mr. Donald Roberts against all assignees of W. M. R., Inc., including RSI Corporation and Sparjax Corporation. Mr. Roberts was an individual guarantor of W. M. R., Inc.'s obligations under the land lease. Counsel for RSI Corporation and Sparjax Corporation have moved to dismiss Mr. Roberts' cross-claims and the court has granted these motions, without prejudice. Counsel for Sparjax Corporation and RSI Corporation have informed the Company that the cross-claims do not raise any new substantive issues, but merely seek indemnification from all assignees in the event that Mr. Roberts is required to pay Holiday Inns, Inc. on his individual guaranty. The potential maximum amount of Holiday Inns, Inc.'s exposure for rent under the lease, reduced to present value, has been estimated by counsel to be approximately $3,500,000. In addition, should the court determine that Holiday Inns, Inc. has an obligation to pay the cost of repairs and maintenance incurred to date and throughout the balance of the lease term, the amount of such costs could be substantial but cannot be quantified with any reasonable degree of accuracy. The Company believes the existing motel property is in a state of disrepair such that it is not commercially usable. RSI Corporation denies its alleged liability to Holiday Inns, Inc. and intends to defend this matter vigorously. Upon a motion of counsel for RSI Corporation, Holiday Inns, Inc.'s claims against RSI Corporation were dismissed without prejudice, but Holiday Inns, Inc. has filed an Amended Complaint to reinstate certain of its claims, and to add a claim for equitable subrogation, against RSI Corporation and Sparjax Corporation. Counsel for RSI Corporation and Sparjax Corporation has answered the equitable subrogation claim, and has moved for dismissal with prejudice with respect to the claims that have previously been dismissed. The deposition of James "Duke" Williams, a critical witness in the case, has now been taken. Mr. Williams was involved in a contract to assume the lease from Holiday Inns, Inc., which contract was later canceled by Holiday Inns, Inc. The parties are presently scheduling the depositions of other important fact witnesses. These include Mr. Spevak and several of the lesser officers of Holiday Inns, Inc. who were involved in the negotiations to cancel the lease with Mr. Williams. The mediation conference held in January, 1995 was not successful. No trial date has been set. If found liable for any sum as a result of Holiday Inns, Inc.'s claims, the Company believes RSI Corporation and Sparjax Corporation would have a claim in equity against AHI, the current and allegedly defaulting lessee under the lease agreement, and its principal shareholders, who guaranteed AHI's obligations under the lease. AHI is a private corporation and the Company has no information regarding the financial ability of AHI or its principal shareholders to perform AHI's obligations under the lease or to reimburse any third party for any payments made under the lease as a result of the lawsuit described above. The ultimate outcome of this matter is not known. No provision has been made in the accompanying financial statements for any liability which may result from this matter. On January 12, 1995, a Mr. Cesar A. Cuenca served a complaint against the Company in the 11th Judicial Circuit Court, Dade County, Florida seeking damages in excess of the minimal jurisdictional amount of the Court, exclusive of costs and interest, and demanding costs of the action together with such further relief as the Court shall deem fit. The Plaintiff alleges that he was injured while operating a vehicle that was sold by the Company. The Complaint also named the manufacturer of the vehicle. The manufacturer has accepted, under reservation of rights, defense of the Company regarding this matter. This matter is still in the discovery stage. The plaintiff recently amended the complaint to add the School Board of Dade County as a defendant for negligent maintenance of the subject premises. The Company believes, based on the arrangements with the manufacturer of the vehicle and the Company's own insurance, that this action should not have a material adverse effect on the Company's financial position. On February 4, 1994, a Mr. Everette Moncur and Edwina Moncur, his wife, served a complaint against the Company in the 17th Judicial Circuit Court, Broward County, Florida seeking damages in excess of $15,000 for injuries sustained while operating a turf care product sold by the Company. The complaint also named the manufacturer of the product. The manufacturer and its insurance carrier have accepted defense of the Company regarding this matter. The Company believes, based on the arrangements with the manufacturer, the manufacturer's insurance company, and the Company's own insurance, that this action should not have a material adverse effect on the Company's financial position. ITEM 2. CHANGES IN SECURITIES* ITEM 3. DEFAULTS UPON SENIOR SECURITIES* ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS* *Items 2, 3, 4 and 5 are not presented as they are not applicable or the information required thereunder is substantially the same as information previously reported. ITEM 6. EXHIBITS AND REPORTS ON FORM 8- K 3.1 Articles of Incorporation of RSI Holdings, Inc., as amended: Incorporated by reference to Exhibits 3.2 and 3.2.2 to the Registration Statement on Form S-4 of RSI Corporation and Porter Brothers, Inc., File No. 33-30247 (the "Form S-4"). 3.1.1 Articles of Amendment and Certificate of Reduction of Capital of Porter Brothers, Inc.: Incorporated by reference to Exhibit 4.1 to the Form 8-K of the Registrant filed with the Securities and Exchange Commission on November 28, 1989, File No. 0-7067. 3.2.1 By-laws of RSI Holdings, Inc., as amended: Incorporated by reference to Exhibit 3.2.1 to the Form S-4. 3.2.2 Amendment to By-laws of RSI Holdings, Inc. Incorporated by reference to Exhibit 4.2.2 to the Form 10-QSB of the Registrant file with the Securities and Exchange Commission on January 13, 1995 4.1 Specimen of Certificate for RSI Holdings, Inc., common stock: Incorporated by reference to Exhibit 4.1.2 to the Form S-4. 4.2 See Exhibits 3.1, 3.1.1, 3.2.1 and 3.2.2. 27 Financial Data Schedule (For SEC use only) (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the three months ended November 30, 1995. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. January 12, 1996 /s/ Joe F. Ogburn (Date) Joe F. Ogburn, Vice President and Treasurer	10QSB	10QSB	1996-01-12T00:00:00	1996-01-12T16:13:46
0000950156-96-000038	0000950156-96-000038_0000.txt	<DESCRIPTION>LANDMARK CALIFORNIA TAX FREE RESERVES File Nos. 33-44749 and 811-4596 LANDMARK CALIFORNIA TAX FREE RESERVES (A member of the Landmark(SM) Family of Funds) This Prospectus describes Landmark California Tax Free Reserves, a mutual fund in the Landmark Family of Funds. The Fund is a type of mutual fund commonly referred to as a "double tax-exempt money market fund." Citibank, N.A. is the investment adviser of the Fund. INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THE FUND ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; HOWEVER, THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO. PROSPECTIVE INVESTORS SHOULD ALSO BE AWARE THAT SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. This Prospectus concisely sets forth information about the Fund that a prospective investor should know before investing. A Statement of Additional Information dated January 2, 1996 (and incorporated by reference in this Prospectus) has been filed with the Securities and Exchange Commission. Copies of the Statement of Additional Information may be obtained without charge, and further inquiries about the Fund may be made, by contacting the investor's shareholder servicing agent (see inside back cover for address and phone number). Condensed Financial Information .......................................... 4 Valuation of Shares ...................................................... 7 Net Income and Distributions ............................................. 9 Appendix A -- Permitted Investments and Investment Practices ............................................... 14 Appendix B -- Ratings of Municipal Obligations ........................... 16 Appendix C -- Taxable Equivalent Yield Tables ............................ 19 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. INVESTORS SHOULD READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE REFERENCE. See the body of the Prospectus for more information on the topics discussed in this summary. THE FUND: This Prospectus describes Landmark California Tax Free Reserves, a double tax-exempt money market mutual fund. INVESTMENT OBJECTIVES AND POLICIES: To provide its shareholders with high levels of current income exempt from both federal and California personal income taxes, preservation of capital and liquidity. The Fund invests primarily in short-term, high quality obligations issued by state and municipal governments and by public authorities, the interest on which is exempt from federal income taxes ("Municipal Obligations"), including obligations of the State of California and its political subdivisions. There can be no assurance that the Fund will achieve its objectives. INVESTMENT ADVISER AND DISTRIBUTOR: Citibank, N.A. ("Citibank" or the "Adviser"), a wholly-owned subsidiary of Citicorp, is the investment adviser. Citibank and its affiliates manage more than $73 billion in assets worldwide. The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the "Distributor") is the distributor of shares of the Fund. See "Management." PURCHASES AND REDEMPTIONS: Customers of Shareholder Servicing Agents may purchase and redeem shares of the Fund on any Business Day. See "Purchases" and "Redemptions." PRICING: Shares of the Fund are purchased and redeemed at net asset value (normally $1.00 per share) without a sales load or redemption fees. While there are no sales loads, shares of the Fund are subject to a distribution fee. See "Purchases," "Redemptions" and "Management -- Distribution Arrangements." EXCHANGES: Shares may be exchanged for shares of most other Landmark Funds. See "Exchanges." DIVIDENDS: Declared daily and distributed monthly. Shares begin accruing dividends on the day they are purchased. See "Net Income and Distributions." REINVESTMENT: Dividends may be received either in cash or in Fund shares at net asset value, subject to the policies of a shareholder's Shareholder Servicing Agent. See "Net Income and Distributions." WHO SHOULD INVEST: The Fund is designed for investors seeking liquidity, preservation of capital and current income exempt from federal income taxes, and for whom long-term capital growth is not a consideration. The Fund is also designed for investors seeking income exempt from California personal income taxes and who are willing to bear the increased risk of an investment portfolio which is concentrated in obligations of the State of California and its political subdivisions. See "Investment Information." RISK FACTORS: There can be no assurance that the Fund will achieve its investment objectives. In addition, while the Fund intends to maintain a stable net asset value of $1.00 per share, there can be no assurance that the Fund will be able to do so. Investments in high quality, short-term instruments may, in many circumstances, result in a lower yield than would be available from investments with a lower quality or a longer term. The Fund is a non-diversified mutual fund, which means that it is not subject to any statutory restrictions under the Investment Company Act of 1940 limiting the investment of its assets in one or relatively few issuers. The Fund may therefore invest a relatively high percentage of its assets in the obligations of a limited number of issuers. Also, the Fund may invest 25% or more of its assets in securities of issuers in similar or related industries or issuers located in the same state. Under normal circumstances, the Fund invests primarily in obligations of the State of California and its political subdivisions. As a result, the Fund is more acceptible to any single economic, political or regulatory occurrence. Certain investment practices also may entail special risks. Prospective investors should read "Risk Considerations" for more information about risk factors. The following table summarizes estimated shareholder transaction and annual operating expenses for shares of the Fund.* SHAREHOLDER TRANSACTION EXPENSES ................................. None ANNUAL FUND OPERATING EXPENSES, AFTER FEE WAIVERS AND REIMBURSEMENTS (AS A PERCENTAGE OF AVERAGE NET ASSETS): Investment Management Fee(1) ..................................... .09% Administrative Services Fees(1) ................................ .00% Shareholder Servicing Agent Fees ............................... .25% Other Operating Expenses ....................................... .31% Total Fund Operating Expenses(1) ................................. .65% * This table is intended to assist investors in understanding the various costs and expenses that a shareholder of the Fund will bear, either directly or indirectly. The table shows the fees paid by the Fund to various service providers after giving effect to expected voluntary partial fee waivers. (1) Absent fee waivers and reimbursements, investment management fees, 12b-1 fees, administrative services fees and total fund operating expenses would be .20%, .20%, .25% and 1.21%, respectively. There can be no assurance that the fee waivers and reimbursements reflected in the table will continue at their present levels. Under the administrative services plan adopted by the Fund, the aggregate of the fee paid to the Administrator, the fees paid to the Shareholder Servicing Agents and the fee paid to the Distributor under the rule 12b-1 distribution plan (not including the .10% portion of the fee that may be charged in anticipation of or reimbursement for print or electronic media advertising, see "Distribution Arrangements" below) may not exceed .60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. Individual components of the aggregate may vary from time to time. For more information on costs and expenses, see "Management" and "General Information -- Expenses." (2) Fees under the 12b-1 distribution plan are asset-based sales charges. Long-term shareholders in the Fund could pay more in sales charges than the economic equivalent of the maximum front-end sales charges permitted by the National Association of Securities Dealers, Inc. EXAMPLE: A shareholder of the Fund would pay the following expenses on a $1,000 investment, assuming redemption at the end of each period indicated below: ONE YEAR THREE YEARS FIVE YEARS TEN YEARS The Example assumes that all dividends are reinvested, and expenses are based on the Fund's fiscal year ended August 31, 1995, after waivers and reimbursements. If waivers and reimbursements were not in place, the amounts in the Example would be $12, $38, $67 and $147, respectively. The assumption of a 5% annual return is required by the Securities and Exchange Commission for all mutual funds, and is not a prediction of the Fund's future performance. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE FUND. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The following table provides condensed financial information about the Fund for the periods indicated. This information should be read in conjunction with the financial statements appearing in the Fund's Annual Report to Shareholders, which are incorporated by reference in the Statement of Additional Information. The financial statements and notes, as well as the table below, covering periods through August 31, 1995 have been audited by Deloitte & Touche LLP, independent certified public accountants, whose report is included in the Fund's Annual Report. Copies of the Annual Report may be obtained without charge from an investor's Shareholder Servicing Agent (see inside of back cover for address and phone number). of period ............... $1.00000 $1.00000 $1.00000 $1.00000 Net investment income ..... 0.03434 0.02288 0.02467 0.01304 investment income ....... (0.03434) (0.02288) (0.02467) (0.01304) Net Asset Value, end of period .................. $1.00000 $1.00000 $1.00000 $1.00000 Net assets, end of period (000's omitted) ......... $51,832 $52,863 $37,808 $16,295 average net assets ...... 0.30% 0.25% 0.00% 0.00%* assets .................. 3.43% 2.30% 2.42% 2.71%* Total return .............. 3.49% 2.31% 2.50% 2.75%* Note: If agents of the Fund had not voluntarily waived all or a portion of their fees from the Fund and the Administrator had not voluntarily assumed expenses for the periods indicated, the ratios and net investment income per share would have been as follows: share ................... $0.02513 $0.01423 $0.01121 $0.00279 RATIOS: assets .................. 1.21% 1.12% 1.32% 2.13%* average net assets ...... 2.51% 1.43% 1.10% 0.58%* + For the period from the start of business, March 10, 1992, to August 31, 1992. Investment Objectives: The investment objectives of the Fund are to provide its shareholders with high levels of current income exempt from both federal and California personal income taxes, preservation of capital and liquidity. The investment objectives of the Fund may not be changed without approval by the Fund's shareholders. Of course, there can be no assurance that the Fund will achieve its investment objectives. INVESTMENT POLICIES: The Fund seeks its objectives by investing primarily in short-term, high quality fixed rate and variable rate obligations issued by or on behalf of states and municipal governments and their authorities, agencies, instrumentalities and political subdivisions, the interest on which is exempt from federal income taxes (these securities are referred to as "Municipal Obligations"). As a fundamental policy, the Fund invests at least 80% of its assets, under normal circumstances, in the following types of Municipal Obligations and in participation interests in these obligations issued by banks, insurance companies or other financial institutions ("Participation Interests"): (1) Municipal bonds that at the date of purchase are rated Aa or better by Moody's Investors Service, Inc. ("Moody's") or AA or better by Standard & Poor's Rating Group ("S&P") or Fitch Investors Service, Inc. ("Fitch"), or are unrated but are of comparable quality as determined by the Adviser on the basis of a credit evaluation of the obligor, or of the bank issuing the Participation Interest or guarantee of the bonds, or of any insurance issued in support of the bonds or the Participation Interest; (2) Municipal notes that at the date of purchase are rated MIG2/VMIG2 or better by Moody's, SP-2 or better by S&P or F-2 or better by Fitch, or are unrated but are of comparable quality as determined by the Adviser; and (3) Municipal commercial paper that at the date of purchase is rated Prime-2 or better by Moody's, A-2 or better by S&P or F-2 or better by Fitch, or is unrated but is of comparable quality as determined by the Adviser. See Appendix A for an explanation of Municipal Obligations and Appendix B for an explanation of ratings of Municipal Obligations. Under normal circumstances, the Fund invests at least 65% of its assets in Municipal Obligations the interest on which is exempt from both federal and California personal income taxes (these securities are referred to as "California Municipal Obligations"). The Fund is a "double tax-exempt money market fund." California Municipal Obligations include Municipal Obligations of the State of California and its political subdivisions and of Puerto Rico and other U.S. territories and their political subdivisions. To the extent that acceptable California Municipal Obligations are not available to the Fund, the Fund may purchase Municipal Obligations issued by issuers in other states. The interest on these securities will be subject to California personal income taxes. Although the Fund attempts to invest all of its assets in Municipal Obligations, the Fund may invest up to 20% of its assets in taxable securities (such as U.S. Government obligations or certificates of deposit of domestic banks). Any taxable securities in which the Fund invests are of comparable quality to the Municipal Obligations in which the Fund invests. In determining the tax status of interest on Municipal Obligations, the Adviser relies on opinions of bond counsel who may be counsel to the issuer. $1.00 NET ASSET VALUE. The Fund employs specific investment policies and procedures designed to maintain a constant net asset value of $1.00 per share. There can be no assurance, however, that a constant net asset value will be maintained on a continuing basis. See "Net Income and Distributions." 90-DAY AVERAGE MATURITY. All of the Fund's investments mature in 397 days or less from the date of purchase, have a variable rate of interest adjusted no less frequently than every 397 days, or are purchased pursuant to a repurchase agreement which provides for repurchase by the seller within 397 days from the date of purchase. The average maturity of the Fund's investments (on a dollar-weighted basis) is 90 days or less. All of the Fund's investments are "eligible securities" within the meaning of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), and are determined by the Adviser to present minimal credit risks. Investment in high quality, short-term instruments may, in many circumstances, result in a lower yield than would be available from investment in instruments with a lower quality or a longer term. PERMITTED INVESTMENTS. Uninvested cash reserves may be held temporarily for the Fund pending investment. The Fund may borrow from banks up to 15% of its total assets for temporary or emergency purposes. For more information regarding permitted investments and investment practices, see Appendix A. The Fund will not necessarily invest or engage in each of the investments and investment practices in Appendix A but reserves the right to do so. INVESTMENT IN ANOTHER INVESTMENT COMPANY. The Fund may, in the future, seek its investment objectives by investing all of its investable assets in an open-end management investment company having the same investment objectives and policies and substantially the same investment restrictions as those of the Fund. This investment would be made only if the Fund's Trustees believe that the aggregate per share expenses of the Fund and such other investment company would be less than or approximately equal to the expenses which the Fund would incur if the assets of the Fund were to continue to be invested directly in portfolio securities. INVESTMENT RESTRICTIONS. The Statement of Additional Information contains a list of specific investment restrictions which govern the Fund's investment policies. Certain of these specific restrictions may not be changed without shareholder approval. Except as otherwise indicated, the Fund's investment restrictions and policies may be changed without shareholder approval. If a percentage or rating restriction (other than a restriction as to borrowing) is adhered to at the time an investment is made, a later change in percentage or rating resulting from changes in the Fund's securities will not be a violation of policy. BROKERAGE TRANSACTIONS. The primary consideration in placing the Fund's security transactions with broker-dealers for execution is to obtain and maintain the availability of execution at the most favorable prices and in the most effective manner possible. The risks of investing in the Fund vary depending upon the nature of the securities held, and the investment practices employed, on its behalf. Certain of these risks are described below. NON-DIVERSIFIED STATUS. The Fund is a non-diversified mutual fund. This means that it is not subject to any statutory restrictions under the 1940 Act limiting the investment of its assets in one or relatively few issuers (although certain diversification requirements are imposed by the Internal Revenue Code). Since the Fund may invest a relatively high percentage of its assets in the obligations of a limited number of issuers, the value of shares of the Fund may be more susceptible to any single economic, political or regulatory occurrence than the value of shares of a diversified mutual fund would be. The Fund also may invest 25% or more of its assets in securities the issuers of which are located in the same state or the interest on which is paid from revenues of similar type projects or that are otherwise related in such a way that a single economic, business or political development or change affecting one of the securities would also affect other securities. Investors should consider the greater risk inherent in these policies when compared with a more diversified mutual fund. "CONCENTRATION" IN PARTICIPATION INTERESTS. The Fund may invest more than 25% of its assets in Participation Interests in Municipal Obligations which are secured by bank letters of credit or guarantees. Banks are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of this industry is largely dependent upon the availability and cost of capital funds for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of this industry and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank's ability to meet its obligations under a letter of credit or guarantee. For additional information concerning variable rate instruments and Participation Interests, see Appendix A. INVESTMENT PRACTICES. Certain of the investment practices employed for the Fund may entail certain risks. See Appendix A. RISKS AFFECTING INVESTMENTS IN CALIFORNIA MUNICIPAL OBLIGATIONS. The Fund intends to invest a high proportion of its assets in California Municipal Obligations. Payment of interest and principal of these Municipal Obligations is dependent on the continuing ability of issuers in California and obligors of state, municipal and public authority debt obligations to meet their obligations. Investors in the Fund should consider the greater risks inherent in the Fund's concentration in these obligations when compared with the safety that comes with a less geographically concentrated investment portfolio. The Adviser believes that by maintaining the Fund's investment portfolio in liquid, short-term high quality California Municipal Obligations, including Participation Interests and other variable rate instruments that have high quality credit support from banks, insurance companies or other financial institutions, the Fund is somewhat insulated from the credit risks that may exist for long-term California Municipal Obligations. Investors should be aware of special economic factors affecting California before investing in the Fund. While these factors are summarized below, a more detailed description is set forth in the Statement of Additional Information and the Appendix thereto (see "Investment Objectives, Policies and Restrictions -- Risk Factors Affecting Investment in California Municipal Obligations" in the Statement of Additional Information). The information below and in the Statement of Additional Information is a summary of certain information contained in official statements of issuers of California Municipal Obligations and does not purport to be complete. The Fund is not responsible for the accuracy or timeliness of this information. The State of California and other issuers of California Municipal Obligations have experienced severe financial difficulties. In December, 1994, Orange County, California and its pooled investment funds filed for protection under the federal Bankruptcy Code. Orange County's financial difficulties could continue to adversely affect other issues and issuers of California Municipal Obligations. The financial difficulties of the State of California, Orange County and other issuers have resulted in the credit ratings of certain of their obligations being downgraded by certain rating agencies. There can be no assurance that credit ratings on obligations of the State of California and other California Municipal Obligations will not be downgraded further. Many of the California Fund's Municipal Obligations are likely to be obligations of California governmental issuers which rely in whole or in part, directly or indirectly, on real property taxes as a source of revenue. Starting in mid-1990, the State of California entered a sustained economic recession which was the most severe recession in the State since the 1930s. The State of California ended its 1991, 1992, 1993 and 1994 fiscal years with substantial accumulated deficits. An estimate based on economic forecasts and projections of major tax sources made in the California Department of Finance's May 1995 Revision of General Fund Revenues and Expenditures and on a variety of other assumptions anticipated that the State will end its 1995-1996 fiscal year with a small positive balance in the budget reserve. Such assumptions and projections may be affected by many factors, and there can be no assurance that the estimate will be met. "Proposition Thirteen" and similar California constitutional and statutory amendments and initiatives in recent years have restricted the ability of California taxing entities to increase real property tax revenues. Other initiative measures approved by California voters in recent years, through limiting various other taxes, have resulted in a substantial reduction in state revenues. Decreased state revenues may result in reductions in allocations of state revenues to local governments. Investors also should compare the yield available on a portfolio of single state issues with the yield of a more diversified portfolio including other state issues before making an investment decision. For a comparison of yields on Municipal Obligations and taxable securities, see Appendix C. Net asset value per share of the Fund is determined each day the New York Stock Exchange is open for trading (a "Business Day"). This determination is made once each day as of 12:00 noon, Eastern time, by adding the market value of all of the Fund's securities and other assets, then subtracting the liabilities charged to the Fund, and then dividing the result by the number of the Fund's outstanding shares. The Fund attempts to stabilize the net asset value of its shares at $1.00 by valuing portfolio securities using the amortized cost method; however, there can be no assurance that the Fund's net asset value will always remain at $1.00 per share. The net asset value per share is effective for orders received and accepted by the Fund's distributor, LFBDS, prior to its calculation. The amortized cost method involves valuing a security at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of a security is higher or lower than the price the Fund would receive if the security were sold. Shares of the Fund are offered continuously and may be purchased on any Business Day without a sales load at the shares' net asset value next determined after an order is transmitted to and accepted by the Distributor. Shares may be purchased either through a securities broker which has a sales agreement with the Distributor or through a bank or other financial institution which has an agency agreement with the Distributor. Shares of the Fund are being offered exclusively to customers of a Shareholder Servicing Agent (i.e., a financial institution, such as a federal or state-chartered bank, trust company, savings and loan association or savings bank, or a securities broker, that has entered into a shareholder servicing agreement concerning the Fund). The Fund and the Distributor reserve the right to reject any purchase order and to suspend the offering of Fund shares for a period of time. While there is no sales load imposed on shares of the Fund, the Distributor receives fees from the Fund pursuant to a Distribution Plan. See "Management -- Distribution Arrangements." Each shareholder's account is established and maintained by his or her Shareholder Servicing Agent, which will be the shareholder of record of the Fund. Each Shareholder Servicing Agent may offer services to its customers such as pre-authorized or automatic purchase and redemption programs and "sweep" checking programs, and may establish its own terms, conditions and charges with respect to services it offers to its customers. Charges for these services may include fixed annual fees and account maintenance fees. The effect of any of these fees will be to reduce the net return on the investment of customers of that Shareholder Servicing Agent. Shareholder Servicing Agents will not transmit purchase orders to the Distributor until they have received the purchase price in federal or other immediately available funds. If Fund shares are purchased by check, there will be a delay (usually not longer than two business days) in transmitting the purchase order until the check is converted into federal funds. Shares of the Fund may be exchanged for shares of the other Landmark Funds that are made available by a shareholder's Shareholder Servicing Agent, or may be acquired through an exchange of shares of those funds. No initial sales charge is imposed on shares being acquired through an exchange unless the shares being acquired are subject to a sales charge that is greater than the current sales charge of the Fund (in which case an initial sales charge will be imposed at a rate equal to the difference). Contingent deferred sales charges may apply to redemptions of some shares of other Landmark Funds disposed of or acquired through an exchange. Shareholders must place exchange orders through their Shareholder Servicing Agents, and may do so by telephone if their account applications so permit. For more information on telephone transactions see "Redemptions." All exchanges will be effected based on the relative net asset values per share next determined after the exchange order is received by the Distributor. See "Valuation of Shares." Shares of the Fund may be exchanged only after payment in federal funds for the shares has been made. This exchange privilege may be modified or terminated at any time, upon at least 60 days' notice when such notice is required by SEC rules, and is available only in those jurisdictions where such exchanges legally may be made. See the Statement of Additional Information for further details. Before making any exchange, shareholders should contact their Shareholder Servicing Agents to obtain more information and prospectuses of the Landmark Funds to be acquired through the exchange. Fund shares may be redeemed at their net asset value (normally $1.00 per share) next determined after a redemption request in proper form is received by a shareholder's Shareholder Servicing Agent. Shareholders may redeem shares of the Fund only by authorizing their Shareholder Servicing Agents to redeem such shares on their behalf through the Distributor. REDEMPTIONS BY MAIL. Shareholders may redeem Fund shares by sending written instructions in proper form (as determined by a shareholder's Shareholder Servicing Agent) to their Shareholder Servicing Agents. Shareholders are responsible for ensuring that a request for redemption is in proper form. REDEMPTIONS BY TELEPHONE. Shareholders may redeem or exchange Fund shares by telephone, if their account applications so permit, by calling their Shareholder Servicing Agents. During periods of drastic economic or market changes or severe weather or other emergencies, shareholders may experience difficulties implementing a telephone exchange or redemption. In such an event, another method of instruction, such as a written request sent via an overnight delivery service, should be considered. The Fund and each Shareholder Servicing Agent will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures may include recording of the telephone instructions and verification of a caller's identity by asking for his or her name, address, telephone number, Social Security number, and account number. If these or other reasonable procedures are not followed, the Fund or the Shareholder Servicing Agent may be liable for any losses to a shareholder due to unauthorized or fraudulent instructions. Otherwise, the shareholder will bear all risk of loss relating to a redemption or exchange by telephone. PAYMENT OF REDEMPTIONS. The proceeds of a redemption are paid in federal funds normally on the Business Day the redemption is effected, but in any event within seven days. If a shareholder requests redemption of shares which were purchased recently, the Fund may delay payment until it is assured that good payment has been received. In the case of purchases by check, this can take up to ten days. See "Determination of Net Asset Value" in the Statement of Additional Information regarding the Fund's right to pay the redemption price in kind with securities (instead of cash). Questions about redemption requirements should be referred to the shareholder's Shareholder Servicing Agent. The right of any shareholder to receive payment with respect to any redemption may be suspended or the payment of the redemption price postponed during any period in which the New York Stock Exchange is closed (other than weekends or holidays) or trading on the Exchange is restricted or if an emergency exists. The Fund's net income is determined each Business Day (and on such other days as is necessary in order to comply with the 1940 Act). This determination is made once during each such day as of 12:00 noon, Eastern time. All the Fund's net income is declared as a dividend to shareholders of record at the time of such determination. Shares begin accruing dividends on the day they are purchased, and accrue dividends up to and including the day prior to redemption. Dividends are distributed monthly on or prior to the last business day of each month. Unless a shareholder elects to receive dividends in cash (subject to the policies of the shareholder's Shareholder Servicing Agent), dividends are distributed in the form of full and fractional additional Fund shares at the rate of one share of the Fund for each one dollar of dividend income. Since the Fund's net income is declared as a dividend each time the Fund's net income is determined, the net asset value per share of the Fund is expected to remain at $1.00 per share immediately after each such determination and dividend declaration. Any increase in the value of a shareholder's investment in the Fund, representing the reinvestment of dividend income, is reflected by an increase in the number of shares of the Fund in the shareholder's account. Because of the short-term maturities of the portfolio investments of the Fund, the Fund does not expect to realize long-term capital gains or losses. Any net realized short-term capital gains will be declared and distributed to the Fund's shareholders annually after the close of the Fund's fiscal year. Distributions of short-term capital gains are taxable to shareholders as described in "Tax Matters". Any realized short-term capital losses will be offset against short-term capital gains or, to the extent possible, utilized as capital loss carryover. The Fund may distribute short-term capital gains more frequently than annually, reduce shares to reflect capital losses or make distributions of capital if necessary in order to maintain the Fund's net asset value of $1.00 per share. It is expected that the Fund will have a positive net income at the time of each determination thereof. If for any reason the Fund's net income is a negative amount, which could occur, for instance, upon default by an issuer of a portfolio security, the Fund would first offset the negative amount with respect to each shareholder account from the dividends declared during the month with respect to those accounts. If and to the extent that negative net income exceeds declared dividends at the end of the month, the Fund would reduce the number of outstanding Fund shares by treating each shareholder as having contributed to the capital of the Fund that number of full and fractional shares in his or her account which represents his or her share of the amount of such excess. Each shareholder would be deemed to have agreed to such contribution in these circumstances by his or her investment in the Fund. TRUSTEES AND OFFICERS: The Fund is supervised by its own Board of Trustees. A majority of the Trustees are not affiliated with the Adviser. More information on the Trustees and officers of the Fund appears under "Management" in the Statement of Additional Information. INVESTMENT ADVISER: CITIBANK. The Fund draws on the strength and experience of Citibank. Citibank offers a wide range of banking and investment services to customers across the United States and throughout the world, and has been managing money since 1822. Its portfolio managers are responsible for investing in money market, equity and fixed income securities. Citibank and its affiliates manage more than $73 billion in assets worldwide, including the Landmark Funds and Portfolios. Citibank is a wholly-owned subsidiary of Citicorp. Citibank manages the assets of the Fund pursuant to an investment advisory agreement (the "Advisory Agreement"). Subject to policies set by the Fund's Trustees, Citibank makes investment decisions for the Fund. ADVISORY FEES. For its services under the Advisory Agreement, the Adviser receives investment advisory fees, which are accrued daily and paid monthly, of 0.20% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. The Adviser has voluntarily agreed to waive all or a portion of its investment advisory fee. For the fiscal year ended August 31, 1995, the investment advisory fees payable to Citibank from the Fund were $91,878, all of which was voluntarily waived. BANKING RELATIONSHIPS. Citibank and its affiliates may have deposit, loan and other relationships with the issuers of securities purchased on behalf of the Fund, including outstanding loans to such issuers which may be repaid in whole or in part with the proceeds of securities so purchased. Citibank has informed the Fund that, in making its investment decisions, it does not obtain or use material inside information in the possession of any division or department of Citibank or in the possession of any affiliate of Citibank. BANK REGULATORY MATTERS. The Glass-Steagall Act prohibits certain financial institutions, such as Citibank, from underwriting securities of open-end investment companies, such as the Fund. Citibank believes that its services under the Advisory Agreement and the activities performed by it or its affiliates as Shareholder Servicing Agents and sub-administrator are not underwriting and are consistent with the Glass-Steagall Act and other relevant federal and state laws. However, there is no controlling precedent regarding the performance of the combination of investment advisory, shareholder servicing and sub-administrative activities by banks. State laws on this issue may differ from applicable federal law and banks and financial institutions may be required to register as dealers pursuant to state securities laws. Changes in either federal or state statutes or regulations, or in their interpretations, could prevent Citibank or its affiliates from continuing to perform these services for the Fund. If Citibank or its affiliates were to be prevented from acting as the Adviser, sub-administrator or a Shareholder Servicing Agent, the Fund would seek alternative means for obtaining these services. The Fund does not expect that shareholders would suffer any adverse financial consequences as a result of any such occurrence. ADMINISTRATIVE SERVICES PLAN: The Fund has an administrative services plan (the "Administrative Services Plan") which provides that the Fund may obtain the services of an administrator, a transfer agent, a custodian, a fund accountant and one or more Shareholder Servicing Agents, and may enter into agreements providing for the payment of fees for such services. Under the Administrative Services Plan, the total of the fees paid to the Fund's Administrator and Shareholder Servicing Agents and the distribution fee paid to the Distributor (other than any fee concerning electronic or other media advertising) may not exceed 0.60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. Within this overall limitation, individual fees may vary. See "Administrator," "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund Accountant." ADMINISTRATOR: LFBDS provides certain administrative services to the Fund under an administrative services agreement. These administrative services include providing general office facilities, supervising the overall administration of the Fund, and providing persons satisfactory to the Board of Trustees to serve as Trustees and officers of the Fund. Such Trustees and officers may be directors, officers or employees of LFBDS or its affiliates. For these services, the Administrator receives fees accrued daily and paid monthly of 0.25% of the average daily net assets of the Fund on an annualized basis for the Fund's then-current fiscal year. However, the Administrator has voluntarily agreed to waive all or a portion of the fees payable to it. LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc. "Landmark" is a service mark of LFBDS. SUB-ADMINISTRATOR: Pursuant to a sub-administrative services agreement, Citibank performs such sub-administrative duties for the Fund as from time to time are agreed upon by Citibank and LFBDS. Citibank's compensation as sub- administrator is paid by LFBDS. SHAREHOLDER SERVICING AGENTS: The Fund has entered into separate shareholder servicing agreements with each Shareholder Servicing Agent pursuant to which that Shareholder Servicing Agent provides shareholder services, including answering customer inquiries, assisting in processing purchase, exchange and redemption transactions and furnishing Fund communications to shareholders. For these services, each Shareholder Servicing Agent receives a fee from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund represented by shares owned by investors for whom such Shareholder Servicing Agent maintains a servicing relationship. Some Shareholder Servicing Agents may impose certain conditions on their customers in addition to or different from those imposed by the Fund, such as requiring a minimum initial investment or charging their customers a direct fee for their services. Each Shareholder Servicing Agent has agreed to transmit to its customers who are shareholders of the Fund appropriate prior written disclosure of any fees that it may charge them directly and to provide written notice at least 30 days prior to imposition of any transaction fees. TRANSFER AGENT, CUSTODIAN AND FUND ACCOUNTANT: State Street Bank and Trust Company acts as transfer agent, dividend disbursing agent and custodian for the Fund. State Street also provides fund accounting services to the Fund and calculates the daily net asset value of the Fund. DISTRIBUTION ARRANGEMENTS: LFBDS is the Distributor of the Fund's shares and also serves as distributor for each of the other Landmark Funds and as a Shareholder Servicing Agent for certain investors. As Distributor, LFBDS bears the cost of compensating personnel involved in the sale of shares of the Fund and bears all costs of travel, office expenses (including rent and overhead) and equipment. In those states where LFBDS is not a registered broker-dealer, shares of the Fund are sold through Signature Broker-Dealer Services, Inc., as dealer. Under a plan of distribution for the Fund (the "Plan"), the Fund pays the Distributor a fee at an annual rate not to exceed 0.10% of the average daily net assets of the Fund. The Plan also permits the Fund to pay the Distributor an additional fee (not to exceed 0.10% of the average daily net assets of the Fund) in anticipation of or as reimbursement for print or electronic media advertising expenses incurred in connection with the sale of Fund shares. However, the Distributor has agreed to waive a portion of these fees. The Plan was adopted in accordance with Rule 12b-1 under the 1940 Act. The Fund and the Distributor provide to the Trustees quarterly a written report of amounts expended pursuant to the Plan and the purposes for which the expenditures were made. From time to time LFBDS may make payments for distribution and/or shareholder servicing activities out of its past profits or any other sources available to it. FEDERAL INCOME TAXES: This discussion of taxes is for general information only. Investors should consult their own tax advisers about their particular situations. The Fund intends to meet requirements of the Internal Revenue Code applicable to regulated investment companies so that it will not be liable for any federal income or excise taxes. The Fund expects that most of its net income will be attributable to interest on Municipal Obligations and as a result most of the Fund's dividends to shareholders will be excludable from shareholders' gross income. However, the Fund may invest from time to time in taxable securities, and certain Fund dividends may be subject to the federal alternative minimum tax. It is also possible, but not intended, that the Fund may realize short-term or long-term capital gains or losses. Generally, distributions from the Fund's short-term capital gains will be taxed as ordinary income, and distributions from long-term net capital gains will be taxed as such regardless of how long the shares of the Fund have been held. Dividends and distributions are treated in the same manner for federal tax purposes whether they are paid in cash or as additional shares. Fund dividends of tax-exempt income are taken into account in determining the amount of a shareholder's social security and railroad retirement benefits that may be subject to federal income tax. No deduction may be claimed for interest on indebtedness incurred or carried for the purpose of purchasing or holding Fund shares. Investors who are, or who are related to, "substantial users" of facilities financed by private activity bonds should consult their tax advisers before buying Fund shares. Early each year, the Fund will notify its shareholders of the amount and federal tax status of distributions paid to shareholders for the preceding year. The account application asks each new shareholder to certify that the shareholder's Social Security or taxpayer identification number is correct and that the shareholder is not subject to 31% backup withholding for failing to report income to the IRS. The Fund may be required to withhold (and pay over to the IRS for the shareholder's credit) 31% of certain distributions paid to shareholders who fail to provide this information or otherwise violate IRS regulations. STATE AND LOCAL TAXES: Except as noted below, Fund dividends which are excludable from shareholders' gross income for federal income tax purposes may not necessarily be exempt from the income or other tax laws of any state or local taxing authority. Investors should consult their own tax advisers in this regard. Under existing California law, as long as at the end of each quarter of the Fund's fiscal year the Fund continues to qualify for the special federal income tax treatment afforded regulated investment companies and at least 50% of the value of the Fund's assets consists of California Municipal Obligations, shareholders of the Fund will be able to exclude from income, for California personal income tax purposes, dividends received from the Fund which are derived from income (less related expenses) from the California Municipal Obligations of the Fund. These dividends must be designated as such by the Fund by written notice to shareholders within 60 days after the close of that fiscal year. Fund performance may be quoted in advertising, shareholder reports and other communications in terms of yield, effective yield, tax equivalent yield, total rate of return or tax equivalent total rate of return. All performance information is historical and is not intended to indicate future performance. Yields and total rates of return fluctuate in response to market conditions and other factors. The Fund may provide its period and average annualized "total rates of return" and "tax equivalent total rates of return." The "total rate of return" refers to the change in the value of an investment in the Fund over a stated period and is compounded to include the value of any shares purchased with any dividends or capital gains declared during such period. Period total rates of return may be "annualized." An "annualized" total rate of return assumes that the period total rate of return is generated over a one-year period. The "tax equivalent total rate of return" refers to the total rate of return that a fully taxable money market fund would have to generate in order to produce an after-tax total rate of return equivalent to that of the Fund. The use of a tax equivalent total rate of return allows investors to compare the total rates of return of the Fund, the dividends from which are exempt from federal personal income taxes, with the total rates of return of funds the dividends from which are not so tax exempt. The Fund may provide annualized "yield," "effective yield" and "tax equivalent yield" quotations. The "yield" of the Fund refers to the income generated by an investment in the Fund over a seven-day period (which period is stated in any such advertisement or communication). This income is then annualized; that is, the amount of income generated by the investment over that period is assumed to be generated each week over a 365-day period and is shown as a percentage of the investment. The "effective yield" is calculated similarly, but when annualized the income earned by the investment during that seven-day period is assumed to be reinvested. The effective yield is slightly higher than the yield because of the compounding effect of this assumed reinvestment. The "tax equivalent yield" refers to the yield that a fully taxable money market fund would have to generate in order to produce an after-tax yield equivalent to that of the Fund. The use of a tax equivalent yield allows investors to compare the yield of the Fund, the dividends from which are exempt from federal personal income tax, with yields of funds the dividends from which are not so tax exempt. The Fund may also provide yield, effective yield and tax equivalent yield quotations for longer periods. Of course, any fees charged by a shareholder's Shareholder Servicing Agent will reduce that shareholder's net return on his or her investment. See the Statement of Additional Information for more information concerning the calculation of yield and total rate of return quotations for the Fund. ORGANIZATION: Landmark California Tax Free Reserves is a non-diversified series of Landmark Multi-State Tax Free Funds (the "Trust"). The Trust is a Massachusetts business trust which was organized on August 30, 1985; it was known as Landmark New York Tax Free Reserves until its name was changed effective December 18, 1991. The Trust is a non-diversified, open-end management investment company registered under the 1940 Act. There are presently two active series of the Trust in addition to the Fund. Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for the trust's obligations. However, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the trust itself was unable to meet its obligations. VOTING AND OTHER RIGHTS: The Trust may issue an unlimited number of shares, may create new series of shares and may divide shares in each series into classes. Each share of the Trust gives the shareholder one vote in Trustee elections and other matters submitted to shareholders for vote. All shares of each series of the Trust have equal voting rights except that, in matters affecting only a particular series, only shares of that particular series are entitled to vote. At any meeting of shareholders of the Fund, a Shareholder Servicing Agent may vote any shares of which it is the holder of record and for which it does not receive voting instructions proportionately in accordance with the instructions it receives for all other shares which that Shareholder Servicing Agent is the holder of record. The Trust's activities are supervised by its Board of Trustees. As a Massachusetts business trust, the Trust is not required to hold annual shareholder meetings. Shareholder approval will usually be sought only for changes in the Fund's fundamental investment restrictions and for the election of Trustees under certain circumstances. Trustees may be removed by shareholders under certain circumstances. Each share of the Fund is entitled to participate equally in dividends and other distributions and the proceeds of any liquidation of the Fund. CERTIFICATES: The Fund's Transfer Agent maintains a share register for shareholders of record, i.e., Shareholder Servicing Agents. Share certificates are not issued. EXPENSES: For the fiscal year ended August 31, 1995, total operating expenses of the Fund, after giving effect to fee waivers and reimbursements, were 0.30% of the Fund's average daily net assets for that fiscal year. All fee waivers and reimbursements are voluntary and may be reduced or terminated at any time. The Statement of Additional Information dated the date hereof contains more detailed information about the Fund, including information related to (i) investment policies and restrictions, (ii) the Trustees, officers, Adviser and Administrator, (iii) securities transactions, (iv) the Fund's shares, including rights and liabilities of shareholders, (v) the methods used to calculate performance information, (vi) programs for the purchase of shares, and (vii) the determination of net asset value. No person has been authorized to give any information or make any representations not contained in this Prospectus in connection with the offering made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Fund or its distributor. This Prospectus does not constitute an offering by the Fund or its distributor in any jurisdiction in which such offering may not lawfully be made. MUNICIPAL BONDS. Municipal bonds are debt obligations of states, cities, municipalities and municipal agencies and authorities which generally have a maturity at the time of issue of one year or more and which are issued to raise funds for various public purposes, such as construction of a wide range of public facilities, refunding outstanding obligations or obtaining funds for institutions and facilities. The two principal classifications of municipal bonds are "general obligation" and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. The principal of and interest on revenue bonds are payable from the income of specific projects or authorities and generally are not supported by the issuer's general power to levy taxes. In some cases, revenues derived from specific taxes are pledged to support payments on a revenue bond. In addition, certain kinds of private activity bonds ("IDBs") are issued by or on behalf of public authorities to provide funding for various privately operated industrial facilities, such as warehouse, office, plant and store facilities and environmental and pollution control facilities. IDBs are, in most cases, revenue bonds. The payment of the principal and interest on IDBs usually depends solely on the ability of the user of the facilities financed by the bonds or other guarantor to meet its financial obligations and, in certain instances, the pledge of real and personal property as security for payment. Many IDBs may not be readily marketable; however, the IDBs or the participation certificates in IDBs purchased by the Fund will have liquidity because they generally will be supported by demand features to "high quality" banks, insurance companies or other financial institutions. MUNICIPAL NOTES. There are four major varieties of state and municipal notes: Tax and Revenue Anticipation Notes ("TRANs"); Tax Anticipation Notes ("TANs"); Revenue Anticipation Notes ("RANs"); and Bond Anticipation Notes ("BANs"). TRANs, TANs and RANs are issued by states, municipalities and other tax-exempt issuers to finance short-term cash needs or, occasionally, to finance construction. Many TRANs, TANs and RANs are general obligations of the issuing entity payable from taxes or designated revenues, respectively, expected to be received within the related fiscal period. BANs are issued with the expectation that their principal and interest will be paid out of proceeds from renewal notes or bonds to be issued prior to the maturity of the BANs. BANs are issued by both general obligation and revenue bond issuers usually to finance such items as land acquisition, facility acquisition and/or construction and capital improvement projects. VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS. Variable rate instruments provide for a periodic adjustment in the interest rate paid on the instrument and usually permit the holder to receive payment of principal and accrued interest upon a specified number of day's notice. Variable rate instruments in which the Fund may invest include participation interests in Municipal Obligations owned by a bank, insurance company or other financial institution or affiliated organization ("Participation Interests"). A variable rate instrument or a Participation Interest may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank, or an insurance policy of an insurance company. See "Stand-by Commitments." Purchase of a Participation Interest may involve the risk that the Fund will not be deemed to be the owner of the underlying Municipal Obligation for purposes of the ability to claim tax exemption of interest paid on that Municipal Obligation. If interest rates rise or fall, the rates payable on variable rate instruments will generally be readjusted. As a result variable rate instruments do not offer the same opportunity for capital appreciation or loss as fixed rate instruments. STAND-BY COMMITMENTS. When the Fund purchases Municipal Obligations it may also acquire stand-by commitments from banks with respect to such Municipal Obligations. The Fund also may acquire stand-by commitments from broker-dealers. Under a stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's option a specified Municipal Obligation at a specified price. A stand-by commitment is the equivalent of a "put" option with respect to a particular Municipal Obligation. The Fund intends to acquire stand-by commitments solely to facilitate liquidity. Stand-by commitments are subject to certain risks, which include the ability of the issuer of the commitment to pay for the Municipal Obligations at the time the commitment is exercised, the fact that the commitment is not marketable, and that the maturity of the underlying security will generally be different from that of the commitment. "WHEN-ISSUED" SECURITIES. In order to ensure the availability of suitable securities, the Fund may purchase securities on a "when-issued" or on a "forward delivery" basis, which means that the securities would be delivered to the Fund at a future date beyond customary settlement time. Under normal circumstances, the Fund takes delivery of the securities. In general, the purchaser does not pay for the securities until received and does not start earning interest until the contractual settlement date. While awaiting delivery of the securities, the Fund establishes a segregated account consisting of cash, cash equivalents or high quality debt securities equal to the amount of the Fund's commitments to purchase "when-issued" securities. An increase in the percentage of the Fund's assets committed to the purchase of securities on a "when-issued" basis may increase the volatility of its net asset value. REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. Repurchase agreements are transactions in which an institution sells the Fund a security at one price, subject to the Fund's obligation to resell and the selling institution's obligation to repurchase that security at a higher price normally within a seven day period. There may be delays and risks of loss if the seller is unable to meet its obligation to repurchase. Repurchase agreements may involve Municipal Obligations or other securities. RESTRICTED SECURITIES. The Fund may purchase restricted securities that are not registered for sale to the general public. Provided that a dealer or institutional trading market in such securities exists, these restricted securities are not treated as illiquid securities for purposes of the Fund's investment limitations. Institutional trading in restricted securities is relatively new, and the liquidity of the Fund's investments could be impaired if trading does not develop or declines. PRIVATE PLACEMENTS AND ILLIQUID INVESTMENTS. The Fund may invest up to 10% of its net assets in securities for which there is no readily available market. These illiquid securities may include privately placed restricted securities for which no institutional market exists. The absence of a trading market can make it difficult to ascertain a market value for illiquid investments. Disposing of illiquid investments may involve time-consuming negotiation and legal expenses, and it may be difficult or impossible for the Fund to sell them promptly at an acceptable price. The ratings of Moody's Investors Service, Inc., Standard & Poor's Ratings Group and Fitch Investors Service, Inc. represent their opinions as to the quality of various debt obligations. It should be emphasized, however, that ratings are not absolute standards of quality. Consequently, Municipal Obligations with the same maturity, coupon and rating may have different yields while Municipal Obligations of the same maturity and coupon with different ratings may have the same yield. As described by the rating agencies. Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST LONG-TERM DEBT RATINGS: Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and generally are referred to as "gilt edged". Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa -- Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, or fluctuation of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities. Note: Those bonds in the Aa group which Moody's believes possess the strongest investment attributes are designated by the symbol Aa 1. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES: Moody's ratings for state and municipal short-term obligations are designated Moody's Investment Grade ("MIG"). Such ratings recognize the differences between short-term credit risk and long-term risk. A short-term rating ("VMIG") may also be assigned to variable rate demand obligations. Factors affecting the liquidity of the borrower and short-term cyclical elements are critical in short-term ratings, while other factors of major importance in bond risk, long-term secular trends, for example, may be less important over the short run. Symbols used are as follows: MIG 1/VMIG 1 -- Notes bearing this designation are of the best quality, with strong protection from established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. MIG 2/VMIG 2 -- Notes bearing this designation are of high quality, with margins of protection ample although not so large as in the preceding group. DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TWO HIGHEST COMMERCIAL PAPER RATINGS: Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually senior short-term obligations not having an original maturity in excess of one year. Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of senior short-term debt obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: (1) leading market positions in well established industries; (2) high rates of return on funds employed; (3) conservative capitalization structures with moderate reliance on debt and ample asset protection; (4) broad margins in earnings coverage of fixed financial charges and high internal cash generation; and (5) well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST LONG-TERM DEBT RATINGS: AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA -- Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus or minus sign to show relative standing within the AA rating category. DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES: A Standard & Poor's note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment: -- Amortization schedule (the larger the final maturity relative to other maturities the more likely it will be treated as a note). -- Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note). Note rating symbols are as follows: SP-1 -- Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are given a plus (+) designation. SP-2 -- Satisfactory capacity to pay principal and interest. DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S TWO HIGHEST COMMERCIAL PAPER RATINGS: A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. A -- Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety. A-1 -- This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. A-2 -- Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated A-1. DESCRIPTION OF STANDARD & POOR'S RATINGS GROUP'S DUAL RATINGS: Standard & Poor's assigns "dual" ratings to all debt issues that have as part of their structure a put option or demand feature. The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the put option or demand feature. The long-term debt rating symbols are used for bonds to denote the long-term maturity and the commercial paper rating symbols are used to denote the put option (for example, "AAA/A-1+"). For demand debt, the note rating symbols are used with the commercial paper rating symbols (for example, "SP-1+/A-1+"). DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S TWO HIGHEST BOND RATINGS: The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer's future financial strength and credit quality. AAA -- Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA -- Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+". Plus (+) or Minus (-): The AA rating may be modified by the addition of a plus or minus sign to show relative standing within the AA rating category. DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S THREE HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES: The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+". F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-2+" and "F-1" ratings. DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S THREE HIGHEST COMMERCIAL PAPER RATINGS: The short-term rating places greater emphasis than a long-term rating on the existence of liquidity necessary to meet the issuer's obligations in a timely manner. F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+". F-2 -- Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned "F-1+" and "F-1" ratings. (RATES FOR 1995++ UNDER FEDERAL AND CALIFORNIA PERSONAL INCOME TAX LAWS) The tables below show the approximate taxable bond yields which are equivalent to tax-exempt bond yields under 1995 federal and California personal income tax laws. SUCH YIELDS MAY DIFFER UNDER THE LAWS APPLICABLE TO SUBSEQUENT YEARS IF THE EFFECT OF ANY SUCH LAW IS TO CHANGE ANY TAX BRACKET OR THE AMOUNT OF TAXABLE INCOME WHICH IS APPLICABLE TO A TAX BRACKET. Separate calculations, showing the applicable taxable income brackets, are provided for investors who file joint returns and for investors who file individual returns. While it is expected that a substantial portion of the dividends paid to shareholders of the Fund will be exempt from federal and California personal income taxes, portions of such dividends from time to time may be subject to federal income taxes and/or California personal income taxes. FOR CITIBANK NEW YORK RETAIL BANKING AND BUSINESS AND PROFESSIONAL CUSTOMERS: Citibank, N.A. 450 West 33rd Street, New York, NY 10001 (212) 564-3456 or (800) 846-5300 P.O. Box 5130, New York, NY 10126-5130 Call Your Citigold Executive, or in NY or CT (800) 285-1701, or for all other states (800) 285-1707 FOR CITIBANK PRIVATE BANKING CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 Call Your Citibank Private Banking Account Officer, Registered Representative or (212) 559-5959 FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 FOR CITIBANK NORTH AMERICAN INVESTOR SERVICES CLIENTS: Citibank, N.A. 111 Wall Street, New York, NY 10043 Call Your Account Manager or (212) 657-9100 FOR CITICORP INVESTMENT SERVICES CUSTOMERS: One Court Square, Long Island City, NY 11120 Call Your Investment Consultant or (800) 846-5200 (212) 736-8170 in New York City New York Tax Free Reserves National Tax Free Income Fund New York Tax Free Income Fund Emerging Asian Markets Equity Fund C. Oscar Morong, Jr., Chairman William S. Woods, Jr. Affiliated Person of Administrator and Distributor 153 East 53rd Street, New York, NY 10043 The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue, Boston, MA 02116 State Street Bank and Trust Company 225 Franklin Street, Boston, MA 02110 125 Summer Street, Boston, MA 02110 150 Federal Street, Boston, MA 02110 CATR/P/96/RB Printed on Recycled Paper [Recycle Symbol] LANDMARK CALIFORNIA TAX FREE RESERVES (A member of the LandmarkSM Family of Funds) Landmark California Tax Free Reserves (the "Fund") is a separate series of Landmark Multi-State Tax Free Funds (the "Trust"). The address and telephone number of the Trust are 6 St. James Avenue, Boston, Massachusetts 02116, (617) 423-1679. FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, CITIBANK, N.A. OR ANY OF ITS AFFILIATES, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. Determination of Net Asset Value 15 Description of Shares, Voting Rights Certain Additional Tax Matters 26 This Statement of Additional Information sets forth information which may be of interest to investors but which is not necessarily included in the Fund's Prospectus, dated January 2, 1996, by which shares of the Fund are offered. This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained by an investor without charge by contacting the Fund's Distributor (see back cover for address and phone number). THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. The Trust is a no-load, non-diversified, open-end management investment company which was organized as a business trust under the laws of the Commonwealth of Massachusetts on August 30, 1985. The Trust was known as "Landmark New York Tax Free Reserves" until its name was changed on December 18, 1991. Shares of the Trust are divided into three separate series, one of which, the Fund, is described in this Statement of Additional Information. References in this Statement of Additional Information to the Prospectus are to the Prospectus, dated January 2, 1996, of the Fund by which shares of the Fund are offered. The Fund is a type of mutual fund commonly referred to as a "double tax-exempt money market fund." The net asset value of each of the Fund's shares is expected to remain constant at $1.00, although there can be no assurance that this will be so on a continuing basis. (See "Determination of Net Asset Value.") Citibank, N.A. ("Citibank" or the "Adviser") is the investment adviser to the Fund. The Adviser manages the investments of the Fund from day to day in accordance with the Fund's investment objectives and policies. The selection of investments for the Fund, and the way they are managed, depend on the conditions and trends in the economy and the financial marketplaces. The Landmark Funds Broker-Dealer Services, Inc. ("LFBDS" or the "Administrator"), the administrator of the Trust, supervises the overall administration of the Trust. The Board of Trustees of the Trust provides broad supervision over the affairs of the Trust. Shares of the Fund are continuously sold by LFBDS, the Fund's distributor (the "Distributor"), only to investors who are customers of a financial institution, such as a federal or state-chartered bank, trust company, savings and loan association or savings bank, or a securities broker, that has entered into a shareholder servicing agreement with the Trust (collectively, "Shareholder Servicing Agents"). Although shares of the Fund are sold without a sales load, LFBDS may receive a fee from the Fund pursuant to a Distribution Plan adopted in accordance with Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"). 2. INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS The investment objectives of the Fund are to provide its shareholders with high levels of current income exempt from federal and California personal income taxes, preservation of capital and liquidity. The investment objectives of the Fund may not be changed without approval by the Fund's shareholders. Of course, there can be no assurance that the Fund will achieve its investment objectives. The Fund seeks its investment objectives by investing primarily in short-term, high quality fixed rate and variable rate obligations issued by or on behalf of the State of California, and other states, territories and possessions of the United States and their authorities, agencies, instrumentalities and political subdivisions, the interest on which is exempt from federal income taxes, including participation interests in such obligations issued by banks, insurance companies or other financial institutions. (These securities, whether or not the interest thereon is subject to the federal alternative minimum tax, are referred to herein as "Municipal Obligations"). Dividends paid by the Fund which are attributable to interest income on tax-exempt obligations of the State of California and its political subdivisions, and of Puerto Rico, other U.S. territories and their political subdivisions ("California Municipal Obligations"), will be exempt from federal and California personal income taxes. The Fund may purchase Municipal Obligations issued by other states, their agencies and instrumentalities, the interest income on which will be exempt from federal income tax but will be subject to California personal income taxes. In determining the tax status of interest on Municipal Obligations and California Municipal Obligations, the Adviser relies on opinions of bond counsel who may be counsel to the issuer. Under normal circumstances, the Fund invests at least 65% of its assets in California Municipal Obligations, although the exact amount of the Fund's assets invested in such securities varies from time to time. Although the Fund attempts to invest 100% of its assets in Municipal Obligations, the Fund may invest up to 20% of its total assets in securities the interest income on which is subject to federal, state and local income tax or the federal alternative minimum tax. The Fund may invest more than 25% of its assets in participation interests issued by banks in industrial development bonds and other Municipal Obligations. In view of this possible "concentration" in bank participation interests, an investment in the Fund should be made with an understanding of the characteristics of the banking industry and the risks which such an investment may entail. (See "Variable Rate Instruments and Participation Interests" hereafter.) Uninvested cash reserves may be held temporarily for the Fund pending investment. The Fund's investments may include "when-issued" and "forward delivery" Municipal Obligations, stand-by commitments and taxable repurchase agreements. The Trust's Board of Trustees has determined that the term "high quality" means Municipal Obligations which at the time of purchase are rated within the AAA or AA categories by Standard & Poor's Rating Group ("Standard & Poor's") or Fitch Investors Service, Inc. ("Fitch") or within the Aaa or Aa categories by Moody's Investors Service, Inc. ("Moody's") in the case of bonds; MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch in the case of notes; A-1+, A-1 or A-2 by Standard & Poor's or Prime-1, Prime-2 by Moody's or F-1+, F-1 or F-2 by Fitch, in the case of tax-exempt commercial paper; or which are unrated but are determined to be of comparable quality by or on behalf of the Trust's Board of Trustees on the basis of a credit evaluation of the obligor or of the bank issuing a participation interest, letter of credit or guarantee, or insurance policy issued in support of the Municipal Obligations or participation interests. (See "Variable Rate Instruments and Participation Interests" below.) Such instruments may produce a lower yield than would be available from less highly rated instruments. The Trust's Board of Trustees has determined that Municipal Obligations which are backed by the full faith and credit of the U.S. Government will be considered to have a rating equivalent to Moody's Aaa. (See "Ratings of Municipal Obligations" in Appendix B to the Prospectus.) All of the Fund's investments mature or are deemed to mature within 397 days from the date of acquisition and the average maturity of the investments in the Fund's portfolio (on a dollar-weighted basis) is 90 days or less. The maturities of variable rate instruments held in the Fund's portfolio are deemed to be the longer of the period remaining until the next interest rate adjustment or the period until the Fund would be entitled to payment pursuant to demand rights, a letter of credit, guarantee or insurance policy or a right to tender or put the instrument, although the stated maturities may be in excess of 397 days. (See "Variable Rate Instruments and Participation Interests" below.) As a non-diversified investment company, the Fund is not subject to any statutory restrictions under the 1940 Act with respect to limiting the investment of its assets in one or relatively few issuers. This concentration may present greater risks than in the case of a diversified company. However, the Fund intends to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In order so to qualify under current law, at the close of each quarter of the Fund's taxable year, at least 50% of the value of the Fund's total assets must be represented by cash, U.S. Government securities, investment company securities and other securities limited in respect of any one issuer (or related issuers) to not more than 5% in value of the total assets of the Fund and not more than 10% of the outstanding voting securities of such issuer. In addition, and again under current law, at the close of each quarter of its taxable year, not more than 25% in value of the Fund's total assets may be invested in securities, other than U.S. Government securities, of one issuer (or related issuers). For a general discussion of Municipal Obligations and an explanation of the ratings of Municipal Obligations by Moody's, Standard & Poor's and Fitch, see Appendix A and B to the Fund's Prospectus. For a comparison of yields on such Municipal Obligations and taxable securities, see the "Taxable Equivalent Yield Tables" in Appendix C to the Prospectus. Except as stated below, the Fund's investment policies are not fundamental and may be changed by the Board of Trustees of the Trust without approval by the Fund's shareholders. As a fundamental policy, the Fund invests at least 80% of its assets, under normal circumstances, in: (1) Municipal bonds with remaining maturities of 397 days or less that are rated at the date of purchase within the Aaa or Aa categories by Moody's or within the AAA or AA categories by Standard & Poor's or Fitch or, if not rated by any of these rating agencies, are of comparable quality as determined by the Adviser on the basis of the credit evaluation of the obligor on the bonds or of the bank issuing a participation interest or guarantee or of any insurance policy issued in support of the bonds or the participation interests. (2) Municipal notes with remaining maturities of 397 days or less that are rated at the date of purchase MIG 1/VMIG 1 or MIG 2/VMIG 2 by Moody's, SP-1+, SP-1 or SP-2 by Standard & Poor's or F-1+,F-1 or F-2 by Fitch or, if not rated by any of these rating agencies, are of comparable quality as determined by the Adviser. The principal kinds of municipal notes are tax and revenue anticipation notes, tax anticipation notes, bond anticipation notes and revenue anticipation notes. Notes sold in anticipation of collection of taxes, a bond sale or receipt of other revenues are usually general obligations of the issuing municipality or agency. The Fund's investments may be concentrated in municipal obligations of California issuers. (3) Municipal commercial paper that is rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch or, if not rated by any of these rating agencies, is of comparable quality as determined by the Adviser. Issues of municipal commercial paper typically represent very short-term, unsecured, negotiable promissory notes. These obligations are often issued to meet seasonal working capital needs of municipalities or to provide interim construction financing and are paid from general revenues of municipalities or are refinanced with long-term debt. In most cases municipal commercial paper is backed by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks or other institutions which may be called upon in the event of default by the issuer of the commercial paper. Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease to be rated or its rating may be reduced below the minimum required for purchase for the Fund. Neither event will require sale of such Municipal Obligation by the Fund (other than variable rate instruments which must be sold if they are not "high quality"), but the Adviser will consider such event in determining whether the Fund should continue to hold the Municipal Obligation. To the extent that the ratings given to the Municipal Obligations or other securities held by the Fund are altered due to changes in either the Moody's or Standard & Poor's ratings systems (see Appendix B to the Prospectus for an explanation of these rating systems), the Adviser will adopt such changed ratings as standards for its future investments in accordance with the investment policies contained in the Prospectus. Certain Municipal Obligations issued by instrumentalities of the U.S. Government are not backed by the full faith and credit of the U.S. Treasury but only by the creditworthiness of the instrumentality. The Trust's Board of Trustees has determined that any Municipal Obligation that depends directly, or indirectly through a government insurance program or other guarantee, on the full faith and credit of the U.S. Government will be considered to have a rating in the highest category. Where necessary to ensure that the Municipal Obligations are of "high quality" (i.e., within the two highest ratings assigned by any major rating service), or where the obligations are not freely transferable, the Fund will require that the obligation to pay the principal and accrued interest be backed by an unconditional irrevocable bank letter of credit, a guarantee, insurance policy or other comparable undertaking of an approved financial institution. The Fund may invest 25% or more of its assets in securities that are related in such a way that an economic, business or political development or change affecting one of the securities would also affect the other securities including, for example, securities the interest upon which is paid from revenues of similar type projects, or securities the issuers of which are located in the same state. VARIABLE RATE INSTRUMENTS AND PARTICIPATION INTERESTS Variable rate instruments that the Fund may purchase are tax-exempt Municipal Obligations (including municipal notes and municipal commercial paper) that provide for a periodic adjustment in the interest rate paid on the instrument and permit the holder to receive payment upon a specified number of days' notice of the unpaid principal balance plus accrued interest either from the issuer or by drawing on a bank letter of credit, a guarantee or an insurance policy issued with respect to such instrument or by tendering or "putting" such instrument to a third party. The variable rate instruments in which the Fund's assets may be invested are payable upon a specified period of notice which may range from one day up to one year. The terms of the instruments provide that interest rates are adjustable at intervals ranging from daily to up to one year and the adjustments are based upon the prime rate of a bank or other appropriate interest rate adjustment index as provided in the respective instruments. The Fund will decide which variable rate instruments it will purchase in accordance with procedures prescribed by the Board of Trustees to minimize credit risks. An unrated variable rate instrument may be determined to meet the Fund's high quality criteria if it is backed by a letter of credit or guarantee or a right to tender or put the instrument to a third party or is insured by an insurer that meets the high quality criteria for the Fund discussed above or on the basis of a credit evaluation of the underlying obligor. If the credit of the obligor is of "high quality," no credit support from a bank or other financial institution will be necessary. Each unrated variable rate instrument will be evaluated on a quarterly basis to determine that it continues to meet the Fund's high quality criteria. If an instrument is ever deemed to be of less than high quality, the Fund either will sell it in the market or exercise the liquidity feature described below. Variable rate instruments in which the Fund may invest include participation interests in variable rate, Municipal Obligations owned by a bank, insurance company or other financial institution or affiliated organizations. Although the rate of the underlying Municipal Obligations may be fixed, the terms of the participation interest may result in the Fund receiving a variable rate on its investment. A participation interest gives the Fund an undivided interest in the Municipal Obligation in the proportion that the Fund's participation bears to the total principal amount of the Municipal Obligation and provides the liquidity feature. Each participation may be backed by an irrevocable letter of credit or guarantee of, or a right to put to, a bank (which may be the bank issuing the participation interest, a bank issuing a confirming letter of credit to that of the issuing bank, or a bank serving as agent of the issuing bank with respect to the possible repurchase of the participation interest) or insurance policy of an insurance company that has been determined by or on behalf of the Board of Trustees of the Trust to meet the prescribed quality standards of the Fund. The Fund has the right to sell the participation interest back to the institution or draw on the letter of credit or insurance after a specified period of notice, for all or any part of the full principal amount of the Fund's participation in the security, plus accrued interest. The Fund intends to exercise the liquidity feature only (1) upon a default under the terms of the bond documents, (2) as needed to provide liquidity to the Fund in order to make redemptions of Fund shares, or (3) to maintain a high quality investment portfolio. In some cases, this liquidity feature may not be exercisable in the event of a default on the underlying Municipal Obligations; in these cases, the underlying Municipal Obligations must meet the Fund's high credit standards at the time of purchase of the participation interest. Issuers of participation interests will retain a service and letter of credit fee and a fee for providing the liquidity feature, in an amount equal to the excess of the interest paid on the instruments over the negotiated yield at which the participations were purchased by the Fund. The total fees generally range from 5% to 15% of the applicable prime rate or other interest rate index. With respect to insurance, the Fund will attempt to have the issuer of the participation interest bear the cost of the insurance, although the Fund retains the option to purchase insurance if necessary, in which case the cost of insurance will be an expense of the Fund subject to the expense limitation of 2 1/2% of the first $30 million of the Fund's average net assets, 2% of the next $70 million and 1 1/2% of the Fund's average net assets in excess of $100 million. The Adviser has been instructed by the Trust's Board of Trustees to monitor continually the pricing, quality and liquidity of the variable rate instruments held by the Fund, including the participation interests, on the basis of published financial information and reports of the rating agencies and other bank analytical services to which the Fund may subscribe. Although participation interests may be sold, the Fund intends to hold them until maturity, except under the circumstances stated above. In view of the "concentration" of the Fund in bank participation interests in Municipal Obligations secured by bank letters of credit or guarantees, an investment in the Fund should be made with an understanding of the characteristics of the banking industry and the risks which such an investment may entail. Banks are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments which may be made and interest rates and fees which may be charged. The profitability of this industry is largely dependent upon the availability and cost of capital funds for the purpose of financing lending operations under prevailing money market conditions. Also, general economic conditions play an important part in the operation of this industry and exposure to credit losses arising from possible financial difficulties of borrowers might affect a bank's ability to meet its obligations under a letter of credit. Periods of high inflation and periods of economic slowdown, together with the fiscal measures adopted to attempt to deal with them, have brought wide fluctuations in interest rates. When interest rates rise, the value of fixed income securities generally falls, and vice versa. While this is true for variable rate instruments generally, the variable rate nature of the underlying instruments should minimize these changes in value. Accordingly, as interest rates decrease or increase, the potential for capital appreciation and the risk of potential capital depreciation is less than would be the case with a portfolio of fixed income securities. Because the adjustment of interest rates on the variable rate instruments is made in relation to movements of various interest rate adjustment indices, the variable rate instruments are not comparable to long-term fixed rate securities. Accordingly, interest rates on the variable rate instruments may be higher or lower than current market rates for fixed rate obligations of comparable quality with similar maturities. Because of the variable rate nature of the instruments, when prevailing interest rates decline the Fund's yield will decline and its shareholders will forego the opportunity for capital appreciation. On the other hand, during periods when prevailing interest rates increase, the Fund's yield will increase and its shareholders will have reduced risk of capital depreciation. For purposes of determining whether a variable rate instrument held by the Fund matures within 397 days from the date of its acquisition, the maturity of the instrument will be deemed to be the longer of (1) the period required before the Fund is entitled to receive payment of the principal amount of the instrument after notice or (2) the period remaining until the instrument's next interest rate adjustment. The maturity of a variable rate instrument will be determined in the same manner for purposes of computing the Fund's dollar-weighted average portfolio maturity. New issues of certain Municipal Obligations frequently are offered on a "when-issued" or "forward delivery" basis. The payment obligation and the interest rate that will be received on the Municipal Obligations are each fixed at the time the buyer enters into the commitment although settlement, i.e., delivery of and payment for the Municipal Obligations, takes place beyond customary settlement time (but normally within 45 days after the date of the Fund's commitment to purchase). Although the Fund will only make commitments to purchase "when-issued" or "forward delivery" Municipal Obligations with the intention of actually acquiring them, the Fund may sell these securities before the settlement date if deemed advisable by the Adviser. Municipal Obligations purchased on a "when-issued" or "forward delivery" basis and the securities held in the Fund's portfolio are subject to changes in value based upon the public's perception of the credit-worthiness of the issuer and changes, real or anticipated, in the level of interest rates. The value of these Municipal Obligations and securities generally change in the same way, that is, both experience appreciation when interest rates decline and depreciation when interest rates rise. Purchasing Municipal Obligations on a "when-issued" or "forward delivery" basis can involve a risk that the yields available in the market on the settlement date may actually be higher or lower than those obtained in the transaction itself. A separate account of the Fund consisting of cash or liquid debt securities equal to the amount of the "when-issued" or "forward delivery" commitments will be established at the Fund's custodian bank. For the purpose of determining the adequacy of the securities in the account, the deposited securities will be valued at market value. If the market value of such securities declines, additional cash or highly liquid securities will be placed in the account daily so that the value of the account will equal the amount of the Fund's commitments. On the settlement date of the "when-issued" or "forward delivery" securities, the Fund's obligations will be met from then-available cash flow, sale of securities held in the separate account, sale of other securities or, although not normally expected, from sale of the "when-issued" or "forward delivery" securities themselves (which may have a value greater or lesser than the Fund's payment obligations). Sale of securities to meet such obligations may result in the realization of capital gains or losses, which are not exempt from federal income tax. When the Fund purchases Municipal Obligations it may also acquire stand-by commitments from banks with respect to such Municipal Obligations. The Fund also may acquire stand-by commitments from broker-dealers. Under the stand-by commitment, a bank or broker-dealer agrees to purchase at the Fund's option a specified Municipal Obligation at a specified price. A stand-by commitment is the equivalent of a "put" option acquired by the Fund with respect to a particular Municipal Obligation held in the Fund's portfolio. The amount payable to the Fund upon the exercise of a stand-by commitment normally would be (1) the acquisition cost of the Municipal Obligation (excluding any accrued interest paid on the acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period the Fund owned the security, plus (2) all interest accrued on the security since the last interest payment date during the period the security was owned by the Fund. Absent unusual circumstances relating to a change in market value, the Fund would value the underlying Municipal Obligation at amortized cost. Accordingly, the amount payable by a bank or dealer during the time a stand-by commitment is exercisable would be substantially the same as the market value of the underlying Municipal Obligation. The Fund values stand-by commitments at zero for purposes of computing the value of its net assets. The stand-by commitments that the Fund may enter into are subject to certain risks, which include the ability of the issuer of the commitment to pay for the securities at the time the commitment is exercised and the fact that the commitment is not marketable by the Fund and the maturity of the underlying security will generally be different from that of the commitment. Although the Fund attempts to invest 100% of its net assets in tax-exempt Municipal Obligations, the Fund may invest up to 20% of the value of its net assets in securities of the kind described below, the interest income on which is subject to federal income tax. Circumstances in which the Fund may invest in taxable securities include the following: (a) pending investment of proceeds of sales of Fund shares or of portfolio securities; (b) pending settlement of purchases of portfolio securities; (c) to maintain liquidity for the purpose of meeting anticipated redemptions; and (d) when, in the opinion of the Fund's investment adviser, it is advisable to do so because of adverse market conditions affecting the market for Municipal Obligations. The kinds of taxable securities in which the Fund's assets may be invested are limited to the following short-term, fixed-income securities (maturing in 397 days or less from the time of purchase): (1) obligations of the U.S. Government or its agencies, instrumentalities or authorities; (2) commercial paper rated Prime-1 or Prime-2 by Moody's, A-1+, A-1 or A-2 by Standard & Poor's or F-1+, F-1 or F-2 by Fitch; (3) certificates of deposit of U.S. banks with assets of $1 billion or more; and (4) repurchase agreements with respect to any Municipal Obligations or other securities which the Fund is permitted to own. The Fund's assets may also be invested in Municipal Obligations which are subject to an alternative minimum tax. The Fund may invest assets in instruments subject to repurchase agreements only with member banks of the Federal Reserve System or "primary dealers" (as designated by the Federal Reserve Bank of New York) in U.S. Government securities. Under the terms of a typical repurchase agreement, the Fund would acquire an underlying debt instrument for a relatively short period (usually not more than one week) subject to an obligation of the seller to repurchase and the Fund to resell the instrument at a fixed price and time, thereby determining the yield during the Fund's holding period. This results in a fixed rate of return insulated from market fluctuations during such period. A repurchase agreement is subject to the risk that the seller may fail to repurchase the security. Repurchase agreements may be deemed to be loans under the 1940 Act. All repurchase agreements entered into by the Fund shall be fully collateralized at all times during the period of the agreement in that the value of the underlying security shall be at least equal to the amount of the loan, including the accrued interest thereon, and the Fund or its custodian or sub-custodian shall have possession of the collateral, which the Trust's Board of Trustees believes will give it a valid, perfected security interest in the collateral. Whether a repurchase agreement is the purchase and sale of a security or a collateralized loan has not been definitively established. This might become an issue in the event of the bankruptcy of the other party to the transaction. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute collateral for the seller's obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs in connection with the disposition of the collateral. The Trust's Board of Trustees believes that the collateral underlying repurchase agreements may be more susceptible to claims of the seller's creditors than would be the case with securities owned by the Fund. Repurchase agreements will give rise to income which will not qualify as tax-exempt income when distributed by the Fund. The Fund will not invest in a repurchase agreement maturing in more than seven days if any such investment together with illiquid securities held by the Fund exceed 10% of the Fund's total net assets. (see "Investment Restrictions: Investment Restriction Number (6) hereafter.) Repurchase agreements are also subject to the same risks described herein with respect to stand-by commitments. The Fund intends to invest a high proportion of its assets in California Municipal Obligations. Payment of interest and preservation of principal is dependent upon the continuing ability of California issuers and/or obligors of state, municipal and public authority debt obligations to meet their obligations thereunder. For information concerning California Municipal Obligations, see the Appendix to this Statement of Additional Information. The Adviser believes that by maintaining the Fund's investment portfolio in liquid, short-term, high quality investments, including participation interests and other variable rate instruments that have high quality credit support from banks, insurance companies or other financial institutions, the Fund is somewhat insulated from the credit risks that may exist for long-term California Municipal Obligations. The summary set forth above and in the Appendix is included for the purpose of providing a general description of the State of California credit and financial conditions. This summary is based on information from statements of issuers of California Municipal Obligations and does not purport to be complete. The Trust is not responsible for the accuracy or timeliness of this information. The Trust has adopted the following policies with respect to the Fund which may not be changed without approval by a "majority of the outstanding shares" of the Fund, which as used in this Statement of Additional Information, means the vote of the lesser of (i) 67% or more of the shares of the Fund present at a meeting, if the holders of more than 50% of the outstanding "voting securities" of the Fund are present or represented by proxy, or (ii) more than 50% of the outstanding "voting securities" of the Fund. The term "voting securities" as used in this paragraph has the same meaning as in the 1940 Act. The Fund will vote the shares held by its shareholders who do not give voting instructions in the same proportion as the shares of the Fund's shareholders who do give voting instructions. Shareholders of the Fund who do not vote will have no effect on the outcome of these matters. The Trust may not with respect to the Fund: (1) Make investments other than as described under "Investment Policies" above or any other form of federal tax-exempt investment which meets the Fund's high quality criteria, as determined by the Board of Trustees and which is consistent with the Fund's investment objectives and policies (provided, however, that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objective and policies and substantially the same investment restrictions as the Fund). (2) Borrow money. This restriction shall not apply to borrowings from banks for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests that might otherwise require the untimely disposition of securities, in an amount up to 15% of the value of the Fund's total assets (including the amount borrowed) valued at market less liabilities (not including the amount borrowed) at the time the borrowing was made. While borrowings exceed 5% of the value of the Fund's total assets, the Trust will not make any investments on behalf of the Fund. Interest paid on borrowings will reduce net income. (3) Pledge, hypothecate, mortgage or otherwise encumber the Fund's assets, except in an amount up to 15% of the value of the Fund's total assets and only to secure borrowings for temporary or emergency purposes. (4) Sell securities short or purchase securities on margin, or engage in the purchase and sale of put, call, straddle or spread options or in writing such options, except to the extent that securities subject to a demand obligation and stand-by commitments may be purchased as set forth under "Investment Policies" above. (5) Underwrite the securities of other issuers, except insofar as the Trust may be deemed an underwriter under the Securities Act of 1933 in disposing of a portfolio security of the Fund (provided, however, that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objective and policies and substantially the same investment restrictions as the Fund). (6) The Trust will not invest on behalf of the Fund in a repurchase agreement maturing in more than seven days if any such investment together with other illiquid securities held by the Fund exceed 10% of the Fund's total net assets. (7) Purchase or sell real estate, real estate investment trust securities, commodities or commodity contracts, or oil and gas interests, but this shall not prevent the Trust from investing in Municipal Obligations secured by real estate or interests in real estate. (8) Make loans to others, except through the purchase of portfolio investments, including repurchase agreements, as described under "Investment Policies" above. (9) Purchase more than 10% of all outstanding voting securities of any one issuer or invest in companies for the purpose of exercising control, except that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objective and policies and substantially the same investment restrictions as the Fund. (10) Invest more than 25% of the Fund's assets in the securities of "issuers" in any single industry, provided that the Trust may invest more than 25% of the Fund's assets in bank participation interests and there shall be no limitation on the purchase of those Municipal Obligations and other obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, except that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objectives and policies and substantially the same investment restrictions as the Fund. When the assets and revenues of an agency, authority, instrumentality or other political subdivision are separate from those of the government creating the issuing entity and a security is backed only by the assets and revenues of the entity, the entity would be deemed to be the sole issuer of the security. Similarly, in the case of a private activity bond, if that bond is backed only by the assets and revenues of the non-governmental user, then such non-governmental user would be deemed to be the sole issuer. If, however, in either case, the creating government or some other entity, such as an insurance company or other corporate obligor, guarantees a security or a bank issues a letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. (11) Invest in securities of other investment companies, except the Trust may purchase on behalf of the Fund unit investment trust securities (i.e., securities issued by an investment company which (i) is organized under a trust indenture or contract of custodianship or similar instrument, (ii) does not have a board of directors, and (iii) issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities) where such unit trusts meet the investment objectives and policies of the Fund and then only up to 5% of the Fund's net assets, except as they may be acquired as part of a merger, consolidation or acquisition of assets, except that the Trust may invest all or substantially all of the Fund's assets in another registered investment company having the same investment objectives and policies and substantially the same investment restrictions as the Fund. As of the date of this Statement of Additional Information, the Trust has no intention of investing in unit investment trust securities on behalf of the Fund. For purposes of the investment restrictions described in (9) and (10) above, the issuer of a tax-exempt security is deemed to be the entity (public or private) ultimately responsible for the payment of principal of and interest on the security. If, however, the acting government or some other entity, such as an insurance company or other corporate obligor, guarantees a security or a bank issues a Letter of Credit, such a guarantee or Letter of Credit may, in accordance with applicable Securities and Exchange Commission ("SEC") rules, be considered a separate security and treated as an issue of such government, other entity or bank. If a percentage restriction or a rating restriction (other than a restriction as to borrowing) on investment or utilization of assets set forth above is adhered to at the time an investment is made or assets are so utilized, a later change in percentage resulting from the changes in the value of the portfolio securities or a later change in the rating of a portfolio security will not be considered a violation of such policy. Any current yield quotation of the Fund which is used in such a manner as to be subject to the provisions of Rule 482(d) under the Securities Act of 1933, as amended, consists of an annualized historical yield, carried at least to the nearest hundredth of one percent, based on a specific seven calendar day period and is calculated by dividing the net change in the value of an account having a balance of one share at the beginning of the period by the value of the account at the beginning of the period and multiplying the quotient by 365/7. For this purpose the net change in account value would reflect the value of additional shares purchased with dividends declared on the original share and dividends declared on both the original share and any such additional shares, but would not reflect any realized gains or losses from the sale of securities or any unrealized appreciation or depreciation on portfolio securities. In addition, any effective yield quotation of the Fund so used shall be calculated by compounding the current yield quotation for such period by multiplying such quotation by 7/365, adding 1 to the product, raising the sum to a power equal to 365/7, and subtracting 1 from the result. Any tax equivalent yield quotation of the Fund is calculated as follows: If the entire current yield quotation for such period is tax-exempt, the tax equivalent yield will be the current yield quotation divided by 1 minus a stated income tax rate or rates. If a portion of the current yield quotation is not tax-exempt, the tax equivalent yield will be the sum of (a) that portion of the yield which is tax-exempt divided by 1 minus a stated income tax rate or rates and (b) the portion of the yield which is not tax-exempt. A total rate of return quotation for the Fund is calculated for any period by (a) dividing (i) the sum of the net asset value per share on the last day of the period and the net asset value per share on the last day of the period of shares purchasable with dividends and capital gains distributions declared during such period with respect to a share held at the beginning of such period and with respect to shares purchased with such dividends and capital gains distributions, by (ii) the public offering price on the first day of such period, and (b) subtracting 1 from the result. Any annualized total rate of return quotation is calculated by (x) adding 1 to the period total rate of return quotation calculated above, (y) raising such sum to a power which is equal to 365 divided by the number of days in such period, and (z) subtracting 1 from the result. Any tax equivalent total rate of return quotation of the Fund is calculated as follows: If the entire current total rate of return quotation for such period is tax-exempt, the tax equivalent total rate of return will be the current total rate of return quotation divided by 1 minus a stated income tax rate or rates. If a portion of the current total rate of return quotation is not tax-exempt, the tax equivalent total rate of return will be the sum of (a) that portion of the total rate of return which is tax-exempt divided by 1 minus a stated income tax rate or rates and (b) the portion of the total rate of return which is not tax-exempt. Set forth below is total rate of return information, assuming that dividends and capital gains distributions, if any, were reinvested, for the Fund for the periods indicated, at the beginning of which periods no sales charges were applicable to purchases of shares of the Fund (unless otherwise indicated). The annualized yield of the Fund for the seven-day period ended August 31, 1995 was 3.35%, the effective compound annualized yield of the Fund for such period was 3.40% and the annualized tax equivalent yield of the Fund for such period was 5.61% (assuming (i) a combined California State and federal tax bracket of 46.24% and (ii) that 90% of the Fund's assets were invested in California Municipal Obligations). 4. DETERMINATION OF NET ASSET VALUE The net asset value of each of the shares of the Fund is determined on each day on which the New York Stock Exchange is open for trading. This determination is made once during each such day as of 12:00 noon, Eastern time, by dividing the value of the Fund's net assets (i.e., the value of its assets less its liabilities, including expenses payable or accrued) by the number of shares of the Fund outstanding at the time the determination is made. As of the date of this Statement of Additional Information, the NYSE is open for trading every weekday except for the following holidays (or the days on which they are observed): New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. It is anticipated that the net asset value of each share of the Fund will remain constant at $1.00 and, although no assurance can be given that it will be able to do so on a continuing basis, as described below, the Fund employs specific investment policies and procedures to accomplish this result. The securities held by the Fund are valued at their amortized cost. Amortized cost valuation involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. If fluctuating interest rates cause the market value of the securities held by the Fund to deviate more than 1/2 of 1% from their value determined on the basis of amortized cost, the Board of Trustees of the Trust will consider whether any action should be initiated, as described in the following paragraph. Although the amortized cost method provides certainty in valuation, it may result in periods during which the stated value of an instrument is higher or lower than the price the Fund would receive if the instrument were sold. Pursuant to the rules of the Securities and Exchange Commission, the Trust's Board of Trustees has established procedures to stabilize the value of the Fund's net assets within 1/2 of 1% of the value determined on the basis of amortized cost. These procedures include a review of the extent of any such deviation of net asset value, based on available market rates. Should that deviation exceed 1/2 of 1%, the Trust's Board of Trustees will consider whether any action should be initiated to eliminate or reduce material dilution or other unfair results to investors in the Fund. Such action may include withdrawal in kind, selling securities prior to maturity and utilizing a net asset value as determined by using available market quotations. The Fund maintains a dollar-weighted average maturity of 90 days or less, does not purchase any instrument with a remaining maturity greater than 397 days or subject to a repurchase agreement having a duration of greater than 397 days, and limits its investments, including repurchase agreements, to those U.S. dollar-denominated instruments that are determined by the Adviser to present minimal credit risks and comply with certain reporting and recordkeeping procedures. The Trust also has established procedures to ensure that securities purchased by it meet the high quality criteria described above in "Investment Policies." Subject to compliance with applicable regulations, the Trust has reserved the right to pay the redemption price of shares of the Fund, either totally or partially, by a distribution in kind of readily marketable securities (instead of cash). The securities so distributed would be valued at the same amount as that assigned to them in calculating the net asset value for the shares or beneficial interests being sold. If a holder of shares or beneficial interests received a distribution in kind, such holder could incur brokerage or other charges in converting the securities to cash. The Trust may suspend the right of redemption or postpone the date of payment for shares of the Fund for more than seven days during any period when (a) trading in the markets the Fund normally utilizes is restricted, or an emergency, as defined by the rules and regulations of the SEC, exists making disposal of the Fund's investments or determination of its net asset value not reasonably practicable; (b) the NYSE is closed (other than customary weekend and holiday closings); or (c) the SEC has by order permitted such suspension. The Trustees and officers of the Trust, their ages and their principal occupations during the past five years are set forth below. Their titles may have varied during that period. Asterisks indicate that those Trustees and officers are "interested persons" (as defined in the 1940 Act) of the Trust. Unless otherwise indicated below, the address of each Trustee and officer is 6 St. James Avenue, Boston, Massachusetts. H. B. ALVORD; 73 -- Treasurer - Tax Collector, County of Los Angeles (retired, March, 1984); Trustee, The 59 Wall Street Trust and The 59 Wall Street Fund, Inc. (Registered Investment Companies). His address is P.O. Box 1812, Pebble Beach, California. ELLIOTT J. BERV; 52 -- Chairman and Director, Catalyst, Inc. (Management Consultants) (since August, 1992); President, Chief Operating Officer and Director, Deven International, Inc. (International Consultants) (June, 1991 to July, 1992); President and Director, Elliott J. Berv & Associates (Management Consultants) (since May, 1984). His address is 15 Stornoway Drive, Cumberland Foreside, Maine. PHILIP W. COOLIDGE; 44* -- President of the Trust; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988). MARK T. FINN; 52 -- President and Director, Delta Financial, Inc. (since June, 1983); Chairman of the Board and Chief Executive Officer, FX 500 Ltd. (Commodity Trading Advisory Firm) (since April, 1990); Director, Vantage Consulting Group, Inc. (since October, 1988). His address is 3500 Pacific Avenue, P.O. Box 539, Virginia Beach, Virginia. RILEY C. GILLEY; 69 -- Vice President and General Counsel, Corporate Property Investors (December, 1988 to September, 1991); Retired Partner, Breed, Abbott & Morgan (Attorneys) (Retired, December, 1987). His address is 4041 Gulf Shore Boulevard North, Naples, Florida. DIANA R. HARRINGTON; 55 -- Professor, Babson College (since September, 1993); Visiting Professor, Kellogg Graduate School of Management, Northwestern University (September, 1992 to September, 1993); Professor, Darden Graduate School of Business, University of Virginia (September, 1978 to September, 1993); Consultant to Kidder, Peabody & Co. Incorporated (since January, 1990). Her address is 120 Goulding Street, Holliston, Massachusetts. SUSAN B. KERLEY; 44 -- President, Global Research Associates, Inc. (Investment Research) (since August, 1990); Manager of Special Investments, Rockefeller & Co. (April, 1988 to August, 1990); Director of Research, Rogers, Casey & Barksdale (Investment Research and Consulting) (November, 1983 to March, 1988); Director, New York Life Insurance Company (Institutional Mutual Funds) (since December, 1990). Her address is P.O. Box 9572, New Haven, Connecticut. C. OSCAR MORONG, JR.; 60 -- Chairman of the Board of Trustees of the Trust; Managing Director, Morong Capital Management (since February, 1993); Senior Vice President and Investment Manager, CREF Investments, Teachers Insurance & Annuity Association (retired January, 1993). His address is 1385 Outlook Drive West, Mountainside, New Jersey. WALTER E. ROBB, III; 69 -- President, Benchmark Advisors, Inc. (Corporate Financial Advisors) (since 1989); Trustee of certain registered investment companies in the MFS Family of Funds. His address is 35 Farm Road, Sherborn, Massachusetts. E. KIRBY WARREN; 61 -- Professor of Management, Graduate School of Business, Columbia University (since 1987). His address is Columbia University, Graduate School of Business, 725 Uris Hall, New York, New York. WILLIAM S. WOODS, JR.; 75 -- Vice President - Investments, Sun Company (retired, April, 1984). His address is 35 Colwick Road, Cherry Hill, New Jersey. PHILIP W. COOLIDGE; 44* -- President of the Trust; Chairman, Chief Executive Officer and President, Signature Financial Group, Inc., and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988). DAVID G. DANIELSON; 30; Assistant Treasurer of the Trust; Assistant Manager, Signature Financial Group, Inc. since May 1991; Graduate Student, Northeastern University from April 1990 to March 1991. JOHN R. ELDER; 47 -- Treasurer of the Trust; Vice President, Signature Financial Group, Inc. (since April 1995); Treasurer, Phoenix Family of Mutual Funds (Phoenix Home Life Mutual Insurance Company) (from 1983 to March 1995). LINDA T. GIBSON; 30* -- Assistant Secretary of the Trust; Legal Counsel, Signature Financial Group, Inc. (since June 1991); law student, Boston University School of Law (from September 1989 to May 1992); Product Manager, Signature Financial Group, Inc. (January 1989 to September 1989). JAMES S. LELKO; 30; Assistant Treasurer of the Trust; Assistant Manager, Signature Financial Group, Inc. since January 1993; Senior Tax Compliance Accountant, Putnam Companies since prior to December 1992. THOMAS M. LENZ; 37 -- Secretary of the Trust; Vice President and Associate General Counsel, Signature Financial Group, Inc. (since November 1989); Attorney, Ropes & Gray (September 1984 to November 1989). MOLLY S. MUGLER; 44* -- Assistant Secretary of the Trust; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc. (since December, 1988); Assistant Secretary, The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988). BARBARA M. O'DETTE; 36* -- Assistant Treasurer of the Trust; Assistant Treasurer, Signature Financial Group, Inc. and The Landmark Funds Broker-Dealer Services, Inc. (since December, 1988). ANDRES E. SALDANA; 33; Assistant Secretary of the Trust; Legal Counsel and Assistant Secretary, Signature Financial Group, Inc. since November 1992; Attorney, Ropes & Gray from September 1990 to November 1992. DANIEL E. SHEA; 33; Assistant Treasurer of the Trust; Assistant Manager of Fund Administration, Signature Financial Group, Inc. since November 1993; Supervisor and Senior Technical Advisor, Putnam Investments since prior to 1990. The Trustees and officers of the Trust also hold comparable positions with certain other funds for which LFBDS or an affiliate serves as the distributor or administrator. As of December 15, 1995, all Trustees and officers as a group owned less than 1% of the Fund's outstanding shares. As of the same date, more than 95% of the outstanding shares of the Fund were held of record by Citibank, N.A. or an affiliate, as a Shareholder Servicing Agent of the Fund, for the accounts of their respective clients. The Declaration of Trust of the Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust unless, as to liability to the Trust or its investors, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices, or unless with respect to any other matter it is finally adjudicated that they did not act in good faith in the reasonable belief that their actions were in the best interests of the Trust. In the case of settlement, such indemnification will not be provided unless it has been determined by a court or other body approving the settlement or other disposition, or by a reasonable determination, based upon a review of readily available facts, by vote of a majority of disinterested Trustees of the Trust, or in a written opinion of independent counsel, that such officers or Trustees have not engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of their duties. Citibank manages the assets of the Trust pursuant to an investment advisory agreement (the "Advisory Agreement"). Subject to such policies as the Board of Trustees of the Trust may determine, the Adviser manages the securities of the Fund and makes investment decisions for the Fund. The Adviser furnishes at its own expense all services, facilities and personnel necessary in connection with managing the Fund's investments and effecting securities transactions for the Fund. The Advisory Agreement will continue in effect as long as its continuance is specifically approved at least annually by the Board of Trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Fund, and, in either case, by a majority of the Trustees of the Trust who are not parties to the Advisory Agreement or interested persons of any such party, at a meeting called for the purpose of voting on the Advisory Agreement. The Advisory Agreement provides that the Adviser may render services to others. The Advisory Agreement is terminable without penalty on not more than 60 days' nor less than 30 days' written notice by the Trust when authorized either by a vote of a majority of the outstanding voting securities of the Fund or by a vote of a majority of the Board of Trustees of the Trust, or by the Adviser on not more than 60 days' nor less than 30 days' written notice, and will automatically terminate in the event of its assignment. The Advisory Agreement provides that neither the Adviser nor its personnel shall be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of security transactions for the Fund, except for willful misfeasance, bad faith or gross negligence or reckless disregard of its or their obligations and duties under the Advisory Agreement. The Prospectus contains a description of the fees payable to the Adviser for services under the Advisory Agreement. The Adviser has voluntarily agreed to waive a portion of the fees payable to it under the Advisory Agreement on a month-to-month basis. For the fiscal years ended August 31, 1993, 1994 and 1995, the fees payable to the Adviser under the Advisory Agreement were $51,757, $84,862 and $91,878 (all of which were voluntarily waived). Pursuant to an Administrative Services Agreement (the "Administrative Services Agreement"), LFBDS provides the Trust with general office facilities and LFBDS supervises the overall administration of the Trust, including, among other responsibilities, the negotiation of contracts and fees with, and the monitoring of performance and billings of, the independent contractors and agents of the Trust; the preparation and filing of all documents required for compliance by the Trust with applicable laws and regulations; and arranging for the maintenance of books and records of the Trust. The Administrator provides persons satisfactory to the Board of Trustees of the Trust to serve as Trustees and officers of the Trust. Such Trustees and officers may be directors, officers or employees of LFBDS or its affiliates. The Prospectus contains a description of the fees payable to the Administrator under the Administrative Services Agreement. For the fiscal years ended August 31, 1993, 1994 and 1995, the fees payable to LFBDS from the Fund under the Administrative Services Agreement and a prior administrative services agreement were $25,878, $63,646 and $68,908 (all of which were voluntarily waived). The Administrative Services Agreement with the Trust acknowledges that the names "Landmark" and "Landmark Funds" are the property of the Administrator and provides that if LFBDS ceases to serve as the Administrator of the Trust, the Trust and the Fund will change their respective names so as to delete the word "Landmark" or the words "Landmark Funds." The Administrative Services Agreement with the Trust also provides that LFBDS may render administrative services to others and may permit other investment companies in addition to the Trust to use the word "Landmark" or the words "Landmark Funds" in their names. The Administrative Services Agreement with the Trust continues in effect if such continuance is specifically approved at least annually by the Trust's Board of Trustees or by a vote of a majority of the outstanding voting securities of the Trust and, in either case, by a majority of the Trustees of the Trust who are not interested parties of the Trust or the Administrator. The Administrative Services Agreement with the Trust terminates automatically if it is assigned and may be terminated as to the Fund by the Trust without penalty by vote of a majority of the outstanding voting securities of the Fund or by either party on not more than 60 days' nor less than 30 days' written notice. The Administrative Services Agreement with the Trust also provides that neither the Administrator nor its personnel shall be liable for any error of judgment or mistake of law or for any act or omission in the administration or management of the Trust, except for willful misfeasance, bad faith or gross negligence in the performance of its or their duties or by reason of reckless disregard of its or their obligations and duties under the Administrative Services Agreement. The Administrator has agreed to reimburse the Fund for its operating expenses (exclusive of interest, taxes, brokerage, and extraordinary expenses) which in any year exceed the limits prescribed by any state in which the Fund's shares are qualified for sale. The expenses incurred by the Fund for distribution purposes pursuant to the Trust's Distribution Plan are included within such operating expenses only to the extent required by any state in which the Fund's shares are qualified for sale. The Trust may elect not to qualify the Fund's shares for sale in every state. The Trust believes that currently the most restrictive expense ratio limitation imposed by any state is 2 1/2% of the first $30 million of the Fund's average net assets for its then-current fiscal year, 2% of the next $70 million of such assets, and 1 1/2% of such assets in excess of $100 million. For the purpose of this obligation to reimburse expenses, the Fund's annual expenses are estimated and accrued daily, and any appropriate estimated payments will be made by the Administrator. Subject to the obligation of the Administrator to reimburse the Fund for its excess expenses as described above, the Trust has, under its Administrative Services Agreement, confirmed its obligation for payment of all other expenses of the Fund. LFBDS is a wholly-owned subsidiary of Signature Financial Group, Inc. Pursuant to a Sub-Administrative Services Agreement (the "Sub-Administrative Agreement"), Citibank performs such sub-administrative duties for the Trust as are from time to time agreed upon by Citibank and LFBDS. Citibank's sub-administrative duties may include providing equipment and clerical personnel necessary for maintaining the organization of the Trust, participation in preparation of documents required for compliance by the Trust with applicable laws and regulations, preparation of certain documents in connection with meetings of Trustees and shareholders of the Trust, and other functions which would otherwise be performed by the Administrator as set forth above. For performing such sub-administrative services, Citibank receives such compensation as is from time to time agreed upon by LFBDS and Citibank, not in excess of the amount paid to the Administrator for its services under the Administrative Services Agreement. All such compensation is paid by LFBDS. The Trust, on behalf of the Fund, has adopted a Distribution Plan (the "Distribution Plan") in accordance with Rule 12b-1 under the 1940 Act after having concluded that there is a reasonable likelihood that the Distribution Plan will benefit the Fund and its shareholders. The Distribution Plan provides that the Trust shall pay a distribution fee to the Distributor at an annual rate not to exceed 0.10% of the Fund's average daily net assets for distribution of the Fund's shares (exclusive of any advertising expenses incurred by the Distributor in connection with the sale of shares of the Fund). The Distributor may use all or any portion of such fee to pay for Fund expenses of printing prospectuses and reports used for sales purposes, expenses of the preparation and printing of sales literature and other distribution-related expenses. The Trust is also permitted to pay the Distributor an additional fee not to exceed 0.10% per annum of the Fund's average daily net assets in anticipation of, or as reimbursement for, print or electronic media advertising expenses incurred in connection with the sale of shares of the Fund. No payments under the Distribution Plan will be made to Shareholder Servicing Agents although Shareholder Servicing Agents receive payments under the Administrative Services Plan referred to below. The Distribution Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Trust's Trustees and a majority of the Trust's Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreement related to the Plan ("Qualified Trustees"). The Distribution Plan requires that the Trust and the Distributor shall provide to the Board of Trustees, and the Board of Trustees shall review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Distribution Plan. The Distribution Plan further provides that the selection and nomination of the Qualified Trustees is committed to the discretion of the disinterested Trustees (as defined in the 1940 Act) then in office. The Distribution Plan may be terminated with respect to the Fund at any time by a vote of a majority of the Trust's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Distribution Plan may not be amended to increase materially the amount of the Fund's permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Fund and may not be materially amended in any case without a vote of the majority of both the Trustees and the Qualified Trustees. The Distributor will preserve copies of any plan, agreement or report made pursuant to the Distribution Plan for a period of not less than six years from the date of the Plan, and for the first two years the Distributor will preserve such copies in an easily accessible place. As contemplated by the Distribution Plan, LFBDS acts as the agent of the Fund in connection with the offering of shares of the Fund pursuant to a Distribution Agreement (the "Distribution Agreement"). After the prospectus and periodic reports have been prepared, set in type and mailed to existing shareholders, the Distributor pays for the printing and distribution of copies of the prospectuses and periodic reports which are used in connection with the offering of shares of the Fund to prospective investors. The Prospectus contains a description of fees payable to the Distributor under the Distribution Agreement. For the fiscal years ended August 31, 1993, 1994 and 1995, the fees payable to the Distributor under the Distribution Agreement were $25,878, $21,215 and $22,969 (all of which were voluntarily waived). SHAREHOLDER SERVICING AGENTS, TRANSFER AGENT AND CUSTODIAN The Trust has adopted an Administrative Services Plan (the "Administrative Plan") which provides that the Trust may obtain the services of an administrator, a transfer agent, a custodian and one or more Shareholder Servicing Agents, and may enter into agreements providing for the payment of fees for such services. Under the Administrative Plan, the aggregate of the fee paid to the Administrator from the Fund, the fees paid to the Shareholder Servicing Agents from the Fund and the distribution fee paid from the Fund to the Distributor under the Distribution Plan may not exceed 0.60% of the Fund's average daily net assets on an annualized basis for the Fund's then-current fiscal year. The Administrative Plan continues in effect if such continuance is specifically approved at least annually by a vote of both a majority of the Trust's Trustees and a majority of the Trust's Trustees who are not "interested persons" of the Trust and who have no direct or indirect financial interest in the operation of the Administrative Plan or in any agreement related to such Plan ("Qualified Trustees"). The Administrative Plan requires that the Trust provide to the Trust's Board of Trustees and the Trust's Board of Trustees review, at least quarterly, a written report of the amounts expended (and the purposes therefor) under the Administrative Plan. The Administrative Plan may be terminated at any time with respect to the Fund by a vote of a majority of the Trust's Qualified Trustees or by a vote of a majority of the outstanding voting securities of the Fund. The Administrative Plan may not be amended to increase materially the amount of permitted expenses thereunder without the approval of a majority of the outstanding voting securities of the Fund and may not be materially amended in any case without a vote of the majority of both the Trust's Trustees and the Qualified Trustees. The Trust has entered into a shareholder servicing agreement (a "Servicing Agreement") with each Shareholder Servicing Agent and a Transfer Agency and Service Agreement and a Custodian Agreement with State Street Bank and Trust Company ("State Street") pursuant to which State Street acts as transfer agent and custodian and performs fund accounting services for the Trust. For additional information, including a description of fees paid to the Shareholder Servicing Agents under the Servicing Agreements, see "Shareholder Servicing Agents" and "Transfer Agent, Custodian and Fund Accountant" in the Prospectus. For the fiscal years ended August 31, 1994 and 1995, the aggregate fees payable by the Fund to Shareholder Servicing Agents under the Administrative Services Plan were $169,723 and $183,755 (all of which were voluntarily waived). The Fund's purchases and sales of its portfolio securities usually are principal transactions. Portfolio securities are normally purchased directly from the issuer or from an underwriter or market maker for the securities. There usually are no brokerage commissions paid for such purchases. The Fund does not anticipate paying brokerage commissions. Any transaction for which the Fund pays a brokerage commission will be effected at the best price and execution available. Purchases from underwriters of portfolio securities include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market makers include the spread between the bid and asked price. Allocation of transactions, including their frequency, to various dealers is determined by the Adviser in its best judgment and in a manner deemed to be in the best interest of investors in the Fund rather than by any formula. The primary consideration is prompt execution of orders in an effective manner at the most favorable price. Investment decisions for the Fund will be made independently from those for any other account, series or investment company that is or may in the future become managed by the Adviser or its affiliates. If, however, the Fund and other investment companies, series or accounts managed by the Adviser are contemporaneously engaged in the purchase or sale of the same security, the transactions may be averaged as to price and allocated equitably to each account. In some cases, this policy might adversely affect the price paid or received by the Fund or the size of the position obtainable for the Fund. In addition, when purchases or sales of the same security for the Fund and for other investment companies or series managed by the Adviser occur contemporaneously, the purchase or sale orders may be aggregated in order to obtain any price advantages available to large denomination purchases or sales. No portfolio transactions are executed with the Adviser, or with any affiliate of the Adviser, acting either as principal or as broker. 7. DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES The Trust's Declaration of Trust permits the Trust's Board of Trustees to issue an unlimited number of full and fractional Shares of Beneficial Interest (without par value) and to divide or combine the shares into a greater or lesser number of shares without thereby changing the proportionate beneficial interests in that series. Each share of the series represents an equal proportionate interest in the series with each other share. Upon liquidation or dissolution of the Fund, the Fund's shareholders are entitled to share pro rata in the Fund's net assets available for distribution to its shareholders. The Trust reserves the right to create and issue additional series of shares, in which case the shares of each series would participate pro rata in the earnings, dividends and distribution of net assets of the particular series upon the liquidation or dissolution of the series. Shares of each series would be entitled to vote separately to approve advisory agreements or changes in investment policy, but shares of all series could vote together in the election or selection of Trustees and accountants for the Fund. Shareholders are entitled to one vote for each share held on matters on which they are entitled to vote. Shareholders in the Trust do not have cumulative voting rights, and shareholders owning more than 50% of the outstanding shares of the Trust may elect all of the Trustees of the Trust if they choose to do so and in such event the other shareholders in the Trust would not be able to elect any Trustee. The Trust is not required to and has no current intention to hold annual meetings of shareholders but the Trust will hold special meetings of shareholders when in the judgment of the Trust's Trustees it is necessary or desirable to submit matters for a shareholder vote. Shareholders have under certain circumstances (e.g., upon application and submission of certain specified documents to the Trustees by a specified number of shareholders) the right to communicate with other shareholders in connection with requesting a meeting of shareholders for the purpose of removing one or more Trustees. Shareholders also have the right to remove one or more Trustees without a meeting by a declaration in writing by a specified number of shareholders. No material amendment may be made to the Trust's Declaration of Trust without the affirmative vote of the holders of a majority of its outstanding shares. The Trust's Declaration of Trust provides that, at any meeting of shareholders of the Trust or of any series of the Trust, a Shareholder Servicing Agent may vote any shares of which it is the holder of record and for which it does not receive voting instructions proportionately in accordance with the instructions it receives for all other shares of which it is the holder of record. Shares have no preference, pre-emptive or conversion or similar rights. Shares, when issued, are fully paid and non-assessable, except as set forth below. The Trust may enter into a merger or consolidation, or sell all or substantially all of its assets, if approved by the vote of the holders of two-thirds of its outstanding shares voting as a single class, except that if the Trustees of the Trust recommend such sale of assets, merger or consolidation, the approval by a vote of the holders of a majority of the Trust's outstanding voting securities would be sufficient. The Trust may be terminated (i) by a vote of a majority of the outstanding voting securities of the Trust or (ii) by the Trustees by written notice to the shareholders of the Trust. If not so terminated, the Trust will continue indefinitely. Share certificates will not be issued. The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a business trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides for indemnification and reimbursement of expenses out of the Trust property for any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust also provides that the Trust shall maintain appropriate insurance (e.g., fidelity bonding and errors and omissions insurance) for the protection of the Trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations. The Trust's Declaration of Trust further provides that obligations of the Trust are not binding upon the Trust's Trustees individually but only upon the property of the Trust and that the Trust's Trustees will not be liable for any action or failure to act, but nothing in the Declaration of Trust protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. 8. CERTAIN ADDITIONAL TAX MATTERS The Fund has elected to be treated and intends to qualify each year as a "regulated investment company" under Subchapter M of the Code, by meeting all applicable requirements of Subchapter M, including requirements as to the nature of the Fund's gross income, the amount of Fund distributions (as a percentage of both the Fund's overall income and its tax-exempt income), and the composition and holding period of the Fund's portfolio assets. Provided all such requirements are met and all of the Fund's net investment income and realized capital gains are distributed to shareholders in accordance with the timing requirements imposed by the Code, no federal income or excise taxes will be required to be paid by the Fund. If the Fund should fail to qualify as a regulated investment company for any year, the Fund would incur a regular corporate federal income tax upon its taxable income and Fund distributions would generally be taxable as ordinary dividend income to shareholders. The portion of the Fund's distributions of net investment income that is attributable to interest from tax-exempt securities will be designated by the Fund as an "exempt-interest dividend" under the Code and will generally be exempt from federal income tax in the hands of shareholders so long as at least 50% of the total value of the Fund's assets consists of tax-exempt securities at the close of each quarter of the Fund's taxable year. Distributions of tax-exempt interest earned from certain securities may, however, be treated as an item of tax preference for shareholders under the federal alternative minimum tax, and all exempt-interest dividends may increase a corporate shareholder's alternative minimum tax. Unless the Fund provides shareholders with actual monthly percentage breakdowns, the percentage of income designated as tax exempt will be applied uniformly to all distributions by the Fund of net investment income made during each fiscal year of the Fund and may differ from the percentage of distributions consisting of tax-exempt interest in any particular month. Shareholders are required to report exempt-interest dividends received from the Fund on their federal income tax returns. Because the Fund expects to earn primarily interest income, it is expected that no Fund distributions will qualify for the dividends-received deduction for corporations. 9. INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS Deloitte & Touche LLP are the independent certified public accountants for the Fund, providing audit services and assistance and consultation with respect to the preparation of filings with the Securities and Exchange Commission. The audited financial statements of the Fund (Portfolio of Investments at August 31, 1995, Statement of Assets and Liabilities at August 31, 1995, Statement of Operations for the years ended August 31, 1995 and 1994, Statement of Changes in Net Assets for each of the years ended August 31, 1995 and August 31, 1994, Financial Highlights for each of the years in the three-year period ended August 31, 1995; and for the period from March 10, 1992 (commencement of operations) to August 31, 1992, Notes to Financial Statements and Independent Auditor's Report), which are included in the Annual Report to Shareholders of the Fund, are incorporated by reference into this Statement of Additional Information and have been so incorporated in reliance upon the report of Deloitte & Touche LLP. A copy of the Annual Report accompanies this Statement of Additional Information. The following information is a summary of special factors affecting investments in California Municipal Obligations. The sources of payment for such obligations and the marketability thereof may be affected by financial or other difficulties experienced by the State and certain of its municipalities and public authorities. This information does not purport to be a complete description and is based on information from statements relating to offerings of California issuers. Landmark California Tax Free Reserves is not responsible for the accuracy or timeliness of this information. Starting in mid-1990, the State of California (the "State") entered a sustained economic recession, somewhat later than the rest of the nation. It was the most severe recession in the State since the 1930s, with job losses estimated at over 800,000, particularly in the manufacturing (predominately aerospace), services and construction sectors. The greatest effects were felt in Southern California. A significant portion of these losses were linked to post-Cold War cuts in the federal defense budget and military base closures. The trough of the recession is estimated to have occurred in late 1993, again later than for the nation as a whole. Although a steady recovery has been underway since 1994, pre-recession employment levels are not expected to be reached until later in the decade. Northridge Earthquake. On January 17, 1994, a major earthquake measuring an estimated 6.8 on the Richter Scale struck the Los Angeles metropolitan area, centered in the Northridge area of the City of Los Angeles. Significant property damage, estimated at $15-20 billion, occurred to private and public facilities in a four-county area including northern Los Angeles County, Ventura County and parts of Orange and San Bernardino Counties. These counties were declared State and federal disaster areas. Much of this damage will be compensated by insurance or government aid. The effects of the earthquake are not expected to have a material impact on the State's overall economic performance. Damage to State-owned facilities included transportation corridors and facilities such as Interstate Highways 5 and 10 and State Highways 14, 118 and 210. Major highways have now been reopened. The campus of California State University at Northridge, located very near the epicenter, suffered an estimated $350 million damage and was closed for a short time, but has been reopened. The State and federal governments have committed to providing assistance to local governments, individuals and businesses suffering damage as a result of the earthquake, as well as to providing for the repair and replacement of State-owned facilities. The federal government is providing substantial earthquake assistance, totaling over $9.5 billion. On December 6, 1994, Orange County, California (the "County"), together with its pooled investment funds (the "Pools") filed for protection under Chapter 9 of the federal Bankruptcy Code, after reports that the Pools had suffered significant market losses in their investments, causing a liquidity crisis for the Pools and the County. More than 180 other public entities, most of which, but not all, are located in the County, were also depositors in the Pools. The County has reported the Pools' loss at about $1.69 billion, or about 23 percent of their initial deposits of approximately $7.5 billion. Many of the entities which deposited moneys in the Pools, including the County, faced interim and/or extended cash flow difficulties because of the bankruptcy filing and may be required to reduce programs or capital projects. As a result of the deterioration in the State's budget and cash situation in fiscal years 1991-92 and 1992-93, rating agencies reduced the State's credit rating. On December 13, 1991, Standard & Poor's Ratings Group ("S&P") lowered its rating of the State's general obligation bonds from AAA to AA and did so again on July 15, 1992 from AA to A+. On February 11, 1992, Moody's Investors Service ("Moody's") reduced its rating of the same debt from Aaa to Aa1 and on July 6, 1992, Moody's again dropped its rating from Aa1 to Aa. On February 14, 1992, Fitch Investors Service, Inc. ("Fitch") downgraded California's general obligation bonds to AA+ from AAA and on September 25, 1992, lowered its rating from AA+ to AA. On July 15, 1994, all three of the rating agencies again lowered their ratings of the State's general obligation bonds. Moody's lowered its rating from "Aa" to "A1," S&P lowered its rating from "A+" to "A" and termed its outlook as "stable," and Fitch lowered its rating from "AA" to "A." As of July 15, 1994 Moody's, S&P and Fitch assigned their municipal bond ratings of A1, A and A, respectively, to the State's general obligation bonds. Each such rating reflects only the views of the respective rating agency, and an explanation of the significance of such rating may be obtained from such rating agency. There is no assurance that such ratings will continue for any given period of time or that they will not be revised or withdrawn entirely by such rating agency if, in the judgment of such rating agency, circumstances so warrant. A downward revision or withdrawal of any such rating may have an adverse effect on the market price of the State's general obligation bonds. CONSTITUTIONAL LIMITS ON SPENDING AND TAXES The State is subject to an annual appropriations limit imposed by Article XIII B of the State Constitution (the "Appropriations Limit"). Article XIII B prohibits the State from spending "appropriations subject to limitation" in excess of the Appropriations Limit. Article XIII B, originally adopted in 1979, was modified substantially by Propositions 98 and 111 of 1988 and 1990, respectively. See "Proposition 98" below. "Appropriations subject to limitation," with respect to the State, are authorizations to spend "proceeds of taxes," which consist of tax revenues, and certain other funds, including proceeds from regulatory licenses, user charges or other fees to the extent that such proceeds exceed "the cost reasonably borne by that entity in providing the regulation, product or service," but "proceeds of taxes" exclude most State subventions to local governments, tax refunds and some benefit payments such as unemployment insurance. No limit is imposed on appropriations of funds which are not "proceeds of taxes," such as reasonable user charges or fees and certain other non-tax funds. Not included in the Appropriations Limit are appropriations for the debt service costs of bonds existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government and, pursuant to Proposition 111, appropriations for qualified capital outlay projects and appropriations of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels. In addition, a number of recent initiatives were structured or proposed to create new tax revenues dedicated to certain specific uses, with such new taxes expressly exempted from the Article XIII B limits (for example, increased cigarette and tobacco taxes enacted by Proposition 99 in 1988). The Appropriations Limit may also be exceeded in cases of emergency. However, unless the emergency arises from civil disturbance or natural disaster declared by the Governor, and the appropriations are approved by two-thirds of the Legislature, the Appropriations Limit for the next three years must be reduced by the amount of the excess. The State's Appropriations Limit in each year is based on the limit for the prior year, adjusted annually for changes in California per capita personal income and changes in population, and adjusted, when applicable, for any transfer of financial responsibility of providing services to or from another unit of government. The measurement of change in population is a blended average of statewide overall growth, and change in attendance at local school and community college ( "K-14") districts. As amended by Proposition 111, the Appropriations Limit is tested over consecutive two-year periods. Any excess of the aggregate "proceeds of taxes" received over such two-year period above the combined Appropriations Limits for those two years is divided equally between transfers to K-14 districts and refunds to taxpayers. On November 8, 1988, voters of the State approved Proposition 98, a combined initiative constitutional amendment and statute called the "Classroom Instructional Improvement and Accountability Act." Proposition 98 changed State funding of public education below the university level and the operation of the State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum share of General Fund revenues. Under Proposition 98 (as modified by Proposition 111, which was enacted on June 5, 1990), K-14 schools are guaranteed the greater of (a) in general, a fixed percent of General Fund revenues (Test 1"), (b) the amount appropriated to K-14 schools in the prior year, adjusted for changes in the cost of living (measured as in Article XIII B by reference to California per capita personal income) and enrollment ("Test 2"), or (c) a third test, which would replace Test 2 in any year when the percentage growth in per capital General Fund revenues plus one half of one percent is less than the percentage growth in California per capita personal income ("Test 3"). Under Test 3, schools would receive the amount appropriated in the prior year adjusted for changes in enrollment and per capita General Fund revenues, plus an additional small adjustment factor. If Test 3 is used in any year, the difference between Test 3 and Test 2 would become a "credit" to schools which would be the basis of payments in future years when per capita General Fund revenue growth exceeds per capita personal income growth. Legislation adopted prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98, determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent of the General Fund tax revenues, based on 1986-87 appropriations. However, that percentage has been adjusted to 34 percent to account for a subsequent redirection of local property taxes, since such redirection directly affects the share of General Fund revenues to schools. The following is a summary of the State's major revenue sources. The California personal income tax, which in 1993-94 contributed about 44 percent of General Fund revenues, is closely modeled after the federal income tax law. It is imposed on net taxable income (gross income less exclusions and deductions). The tax is progressive with rates ranging from 1 to 11 percent. Personal, dependent, and other credits are allowed against the gross tax liability. In addition, taxpayers may be subject to an alternative minimum tax ("AMT") which is much like the federal AMT. Legislation enacted in July 1991 added two new marginal tax rates, at 10 percent and 11 percent, effective for tax years 1991 through 1995. After 1995, the maximum personal income tax rate is scheduled to return to 9.3 percent, and the AMT rate is scheduled to drop from 8.5 percent to 7 percent. The personal income tax is adjusted annually by the change in the consumer price index to prevent taxpayers from being pushed into higher tax brackets without a real increase in income. The sales tax is imposed upon retailers for the privilege of selling tangible personal property in California. Sales tax accounted for about 35 percent of General Fund revenue in 1993-94. Most retail sales and leases are subject to the tax. However, exemptions have been provided for certain essentials such as food for home consumption, prescription drugs, gas, electricity and water. Other exemptions provide relief for a variety of sales ranging from custom computer software to aircraft. Bank and corporation tax revenues, which comprised about 12 percent of General Fund revenue in 1993-94, are derived from the following taxes: 1. The franchise tax and the corporate income tax are levied at a 9.3 percent rate on profits. The former is imposed on corporations for the privilege of doing business in California, while the latter is imposed on corporations which do not do business in the State but which derive income from California sources. 2. Banks and other financial corporations pay an additional tax at the rate of approximately 1.7 percent on their net income. This tax is in lieu of all State and local taxes except those on real property, motor vehicles and business licenses. The majority of insurance written in California is subject to a 2.35 percent gross premium tax. For insurers, this premium tax takes the place of all other state and local taxes except those on real property and motor vehicles. Exceptions to the 2.35 percent rate are certain pension and profit-sharing plans which are taxed at the lesser rate of 0.50 percent, surplus lines at 3 percent and ocean marine insurers at 5 percent of underwriting profits. Insurance taxes comprised approximately 3 percent of General Fund revenues in 1993-94. Other tax sources for the General Fund include: Estate, Inheritance and Gift Taxes, Cigarette Taxes, Alcoholic Beverage Taxes and Horse Racing Revenues. These other tax sources total approximately 3 percent of General Fund revenues in the 1993-94 Fiscal Year. The California Constitution, codes and statutes specify the uses of certain revenue. Such receipts are accounted for in various special funds. In general, Special Fund revenues comprise three categories of income: 1. Receipts from tax levies which are allocated to specified functions, such as motor vehicle taxes and fees and certain taxes on tobacco products. 2. Charges for special services to specific functions, including such items as business and professional license fees. 3. Rental royalties and other receipts designated for particular purposes (for example, oil and gas royalties). On November 8, 1988, voters approved Proposition 99, which imposed, as of January 1, 1989, an additional 25 cents per pack excise tax on cigarettes, and a new, equivalent excise tax on other tobacco products. The initiative requires that funds from this tax be allocated to health related, environmental and educational programs. The Legislature has, a part of the 1994-95 and 1995-96 Budget Acts redirected part of the Proposition 99 funds to indigent health care. These actions have been blocked by court orders, and, as regards the 1995-96 Fiscal Year, are in litigation. Legislation enacted in 1993 added an additional 2 cents per pack excise tax for the purpose of funding breast cancer research. The State is a respondent/defendant in two cases filed by the American Lung Association and the Americans for Nonsmokers' Rights (American Lung Association v. Wilson; Americans for Nonsmokers' Rights v. State of California). These cases challenge the amendment of statutes prescribing specific percentages of tobacco tax revenues to be placed in accounts to be used for health education and research programs, as well as the appropriation of approximately $63 million in tobacco tax funds for medical treatment programs, pursuant to legislation enacted in July 1995. In September 1995, the Sacramento County Superior Court issued a preliminary injunction, confirming an earlier temporary restraining order, prohibiting the State from issuing, negotiating or processing warrants from the challenged appropriations. A hearing on the petition for writ of mandate is anticipated to be scheduled, which the State will contest. PRIOR FISCAL YEARS' FINANCIAL RESULTS FISCAL YEARS PRIOR TO 1994-95 In the years following the enactment of the federal Tax Reform Act of 1986, and conforming changes to the State's tax laws, taxpayer behavior became much more difficult to predict, and the State experienced a series of fiscal years in which revenue came in significantly higher or lower than original estimates. From the late 1980's until 1992-93, the State had a period of budget imbalance. Starting in the 1990-91 Fiscal Year and for each fiscal year thereafter, each budget required multibillion dollar actions to bring projected revenues and expenditures into balance and to close large "budget gaps" which were identified. Despite these budget actions, the effects of the recession led to large, unanticipated deficits in the budget reserve, the Special Fund for Economic Uncertainties or SFEU, as compared to projected positive balances. The State's cash condition became so serious in late spring of 1992 that the State Controller was required to issue revenue anticipation warrants maturing in the following fiscal year in order to pay the State's continuing obligations. The 1994-95 Fiscal Year represented the fourth consecutive year the Governor and the Legislature were faced with a very difficult budget environment to produce a balanced budget. The Governor's Budget Proposal, as updated in May and June, 1994, recognized that the accumulated deficit could not be repaid in one year, and proposed a two-year solution designed to eliminate the accumulated budget deficit, estimated at about $1.8 billion on June 30, 1994, by June 30, 1996. The 1994-95 Budget Act, signed by the Governor on July 8, 1994, projected revenues and transfers of $41.9 billion, $2.1 billion more than actual revenues received in 1993-94, and expenditure of $40.9 billion, an increase of $1.6 billion from the prior year. The revenue estimate partly reflected the Administration's forecast of an improving economy. The principal features of the 1994-95 Budget Act were the following: 1. Receipt of additional federal aid of about $760 million for costs of refugee assistance and medical care for illegal immigrants. Analysis of the federal Fiscal Year 1995 budget by the Department of Finance indicates that about $98 million was appropriated for California to offset costs of incarceration of illegal immigrants, less than the $356 million which was assumed in the State's 1994-95 Budget Act. Because of timing considerations in applying for these federal funds, the Department of Finance estimates that about $33 million of these funds will be received during the State's 1994-95 Fiscal Year, with the balance received in the following fiscal year. It does not appear that the federal budget contains any of the additional $400 million in funding for refugee assistance and health costs which were also assumed in the 1994-95 Budget Act. 2. Reductions of approximately $1.1 billion in health and welfare costs. Certain of these actions have been blocked so far by legal challenges. See below. Deanna Beno, et al. v. Donna Shalala, et al. See discussion following "Current State Budget" section. Welch v. Anderson. See discussion following "Current State Budget" section. 3. A General Fund increase of approximately $38 million in support for the University of California and $65 million for California State University, accompanied by student fee increases for both the University of California and California State University. 4. Proposition 98 funding for K-14 schools was increased by $526 million from 1993-94 Fiscal Year levels, representing an increase for enrollment growth and inflation. Consistent with previous budget agreements, Proposition 98 funding provided approximately $4,217 per student for K-12 schools, equal to the level in the prior three years. 5. Additional miscellaneous cuts ($500 million), fund transfers ($255 million), and adjustment to prior years' legislation concerning property tax shifts for local governments ($300 million). The 1994-95 Budget Act contained no tax increases. Under legislation enacted for the 1993-94 Budget Act, the renters' tax credit was suspended for two years (1993 and 1994). A ballot proposition to permanently restore the renters' tax credit after this year failed at the June, 1994 election. The Legislature enacted a further one-year suspension of the renters' tax credit, for 1995, saving about $390 million in the 1995-96 Fiscal Year. Reports by the Department of Finance in May, 1995, indicate that, with economic recovery well underway in the State, General Fund revenues for the entire 1994-95 Fiscal Year were above projection, and expenditures were below projections because of slower than anticipated health/welfare caseload growth and school enrollments. The aggregate effect improved the budget picture by about $500 million, leaving an estimated budget deficit of about $630 million on June 30, 1995. The discussion below of the 1995-96 fiscal year budget is based on estimates and projections of revenues and expenditures for the current fiscal year and must not be construed as a statement of fact. These estimates and projections are based upon various assumptions which may be affected by numerous factors, including future economic conditions in the State and the nation, and there can be no assurance that the estimates will be achieved. See "Economic Considerations" below. For the first time in four years, the State entered the upcoming fiscal year with strengthening revenues and reduced caseload growth based on an improving economy. The State entered the 1995-96 Budget negotiations with the smallest nominal "budget gap" to be closed in many years. However, the serious policy differences between the Governor and Legislature prevented timely enactment of the budget. The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34 days after the start of the fiscal year. The Budget Act projects General Fund revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior year. Expenditures are budgeted at $43.4 billion, a 4 percent increase. The Department of Finance projects that, after repaying the last of the carryover budget deficit, there will be a positive balance of $28 million in the budget reserve, the Special Fund for Economic Uncertainties, on June 30, 1996. The Budget Act also projects Special Fund revenues of $12.7 billion and appropriates Special Fund expenditures of $13.0 billion. The Department of Finance projects cash flow borrowings in the 1995-96 Fiscal Year will be the smallest in many years, comprising about $2 billion of notes to be issued in April, 1996, and maturing by June 30, 1996. With full payment of $4 billion of revenue anticipation warrants on April 25, 1995, the Department sees no further need for borrowing over the end of the fiscal year. The available internal borrowable cash resources of the General Fund on June 30, 1996, are projected at almost $2 billion. The State Controller has commented on this estimate, and will reexamine this cushion on October 16, 1995, in the third step of the Budget Adjustment Law process. The following are the principal features of the 1995-96 Budget Act: 1. Proposition 98 funding for schools and community colleges will increase by about $1.0 billion (General Fund) and $1.2 billion total above revised 1994-95 levels. Because of higher-than-projected revenues in 1994-95, an additional $543 million ($91 per K-12 ADA) is appropriated to the 1994-95 Proposition 98 entitlement. A large part of this is a block grant of about $54 per pupil for any one-time purpose. Per-pupil expenditures are projected to increase by another $125 in 1995-96 to $4,435. For the first time in several years, a full 2.7 percent cost of living allowance is funded. The budget compromise anticipates a settlement of the CTA v. Gould litigation. 2. Cuts in health and welfare costs totaling about $0.9 billion. some of these cuts (totaling about $500 million) would require federal legislative approval. A federal Court of Appeals in the case of Deanna Beno, et al. v. Donna Shalala, et al., reversing a trial court ruling in favor of the State, recently determined that the Secretary of the United States Department of Health and Human Services violated the Federal Administrative Procedure Act when she approved California's Assistance Payment Demonstration Project, which, in part, granted California a waiver from complying with requirements for state participation in the federal program for medical assistance (Medicaid). The waiver had allowed California to reduce payments under the Aid to Families with Dependent Children program (AFDC) below 1988 payment levels without violating Medicaid requirements relating to maintenance of AFDC payment levels. The Court of Appeals remanded the case to the trial court with instructions to remand the demonstration project to the Secretary for additional consideration of objections raised by the plaintiffs. The State has submitted a renewed waiver request to the Secretary, which is currently pending. The effect of the court's decision on California is uncertain at this time. One of the features of the 1994-95 Budget Act is a 2.3 percent reduction in AFDC payments. In Welch v. Anderson, on August 19, 1994, the San Francisco Superior Court issued a preliminary injunction against the California Director of Social Services to prevent the 2.3 percent AFDC cuts from becoming effective September 1, 1994. The case has been appealed, and on August 16, 1995, the appellate court upheld the issuance of the preliminary injunction. The case on the merits remains pending. 3. A 3.5 percent increase in funding for the University of California ($90 million General Fund) and the California State University system ($24 million General Fund). 4. The Budget assumes receipt of $473 million in new federal aid for costs of illegal immigrants, above commitments already made by the federal government. This amount is much less than estimates made in the summer of 1994 as part of the two-year budget proposal, and somewhat lower than the estimates in the January 1995 Governor's Budget. 5. General Fund support for the Department of Corrections is increased by about 8 percent over the prior year, reflecting estimates of increased prison population, but funding is less than proposed in the Governor's Budget. In Jernigan & Burleson v. State, filed in federal district court, the prison inmate plaintiffs claim they are entitled to minimum wages while working for the Prison Industry Authority. The inmates claim the State has violated the Fair Labor Standards Act (the "FLSA"). Plaintiffs are seeking back pay for the period from August 1990 onward, and liquidated damages, for a total of approximately $350 million. In June 1995, the district court ruled that the inmates are not employees under FLSA. The decision has been appealed to the Ninth Circuit Court of Appeals. Economic developments in California and the nation have unfolded close to the economic forecasts contained in the Governor's January Budget. As anticipated, the national economy has slowed in its growth, but this slowdown has not thwarted California's economic recovery, which continues and is evident in a broad range of the State's industries. Similar to other economic forecasts, the May 1995 Revision to the 1995-96 Governor's Budget projects that California's economy will continue to out-perform the nation's economy in both employment and personal income growth through 1995 and in 1996. The following excerpts are from the May 1995 Revision discussion of economic conditions. The U.S. economy turned in a strong performance in 1994, with real gross domestic product (GDP) up 4.1 percent on average, capped by a 5.1-percent growth spurt in the fourth quarter. But the early months of 1995 have brought unmistakable signs of a slowing in economic growth. Advance estimates of first quarter GDP indicate that the economy grew at a 2.8-percent pace, and much of the gain reflected the largest buildup in inventories in nearly 11 years. Final sales--excluding the effects of inventory movements--rose at a tepid 1.7-percent pace, down sharply from the fourth quarter's 5.7-percent rate. There are a number of positive elements in the outlook which will almost certainly keep the current slowdown from turning into a full-fledged downturn. For one thing, business fixed investment remains strong, especially for high-tech equipment outlays. Real producers' durable equipment spending surged at a 21-percent annual rate in the first quarter, following gains of 18 percent and more than 19 percent in the last two quarters of 1994. Spending on technology helps reduce costs and boost productivity--key elements in maintaining profitability as final demand slows. These strong gains in high-tech equipment spending are particularly important for California's electronics industry. Although consumers are more cautious, the fundamentals of income and employment remain sound. Income gains outpaced household spending in the first quarter, and lower interest rates will eventually lead to increased purchases of big-ticket goods and housing. The interest rate outlook has improved dramatically since the beginning of the year. Interest rates on longer term securities, including mortgages, are down more than a full percentage point since mid-December. The weaker economy and continued good news on inflation should all but rule out a further Federal Reserve hike in short-term rates. This forecast expects both short- and long-term interest rates to decline later this year and in early 1996. On the inflation front, most non-food commodity prices have eased off early-year peaks due to slower economic growth, although there is some expectation of climbing oil prices. Compensation costs, including wages and benefits, rose at a record slow pace in the first quarter of 1995, reflecting among other factors, a dramatic slowing in medical premiums. California's floods are placing upward pressure on fresh fruit and vegetable prices, but bumper Midwest grain crops in 1994 point to lower meat and poultry prices this year. The conclusion is that consumer price inflation will likely hover in the 3 percent zone in 1995 and 1996, very much in line with experience of the last three years. The key question in the California outlook is the extent to which the U.S. slowdown will affect the state's economic recovery. Since the emerging U.S. slowdown was anticipated in the January Budget forecast, there is little reason to alter the basic view of California's prospects over the next 18 months. Job growth is still expected to be near 200,000 this year and about 300,000 in 1996. Personal income is expected to increase by 6.7 percent in 1995 and by approximately 6 percent next year. With inflation in California below 2 percent this year and around 3 percent in 1996, these income gains point to solid real growth in the state's economy. California's economy would perform even better were it not for the softening in US activity. But there are several good reasons to expect the state to escape the major impact of the slower national economy: o California's late entry into the economic upturn implies considerable pent-up demand for motor vehicles and other consumer durable goods, as well as housing. o Lower interest rates will provide and extra boost to housing and big-ticket consumer purchases later this year and in 1996 o The strength of business equipment purchases is a plus for California. In addition, home computes comprise the one buoyant segment of US consumer durable spending, and California is the leader in the manufacture of computers for the home market (as well as the chips inside them). o The effects of defense spending cuts and restructuring in such industries as banking and the utilities are gradually diminishing. Employment in the latter two industries should stabilize by 1996. o The prospect of rising US exports, now strengthened even more by the lower dollar exchange rate, is an important plus for California' trade-oriented economy. There is concern the Mexico's problems will dampen the California outlook. Prior to the peso crisis, California might have expected to see exports to Mexico rise by about $1 billion this year. Now, a drop of about $2 billion seems likely - a $3 billion swing. But although Mexico is an important element in the state's export picture, Japan and Europe are far larger markets ($33 billion) for the state's goods and services. Already, the strong yen has prompted a record surge in tourism from Japan. These visitors are not just sightseeing, but are also buying a variety of consumer goods at less than half the price they could at home. In addition to tourism, traditional exports are also on the rise. Even though Japan's recovery is likely to slow as a result of the rising yen, American - including California - exports will increase. The dollar's depreciation is considerably less against European currencies, but there will still be an extra boost for exports. Thus, it is likely that most if not all of the weakness in exports to Mexico will be offset by better prospects in Europe and Asia. While the uncertainties surrounding the U.S.-Japanese trade negotiations will take some time to play out, the proposed sanctions on Japanese luxury vehicles are not expected to materially effect the level of California exports. Damage from the heavy winter rains will probably exceed $2 billion when the final totals are in. Late spring rains and cool weather have reduced projected yields for alfalfa and canning tomatoes. But without minimizing the impact of the losses on individual farmers and homeowners, there are also gains which will partially offset the weather-related damage on a statewide basis. In 1994, personal income growth was held down by special factors, including the Northridge earthquake and tax-related income shifting following the November Congressional elections. The earthquake subtracted over $6 billion from income last year, reflecting uninsured losses to residences and small businesses. It appears that about $2 billion was shifted from the fourth quarter, after the election dramatically increased the odds of a federal tax cut in 1995. In the previous two years, income had been accelerated to avoid federal tax increases, following the 1992 Presidential election. Without these distortions, income would have grown 4.7 percent last year, rather than the 3.5 percent estimate. The reversal of these special factors will add to growth in 1995. The forecast 6.7-percent increase would be a more moderate 5.2-percent rise without the earthquake-related and tax-motivated income shifting. The moderate improvement in underlying income growth reflects employment gains, partially offset by slower growth in interest income and government transfer payments. In 1996, this underlying improvement is projected to continue, with income up almost 6 percent. FOR CITIBANK NEW YORK RETAIL BANKING AND BUSINESS AND PROFESSIONAL CUSTOMERS: Citibank, N.A. 450 West 33rd Street, New York, NY 10001 (212) 564-3456 or (800) 846-5300 P.O. Box 5130, New York, NY 10126-5130 Call Your Citigold Executive or in NY or CT (800) 285-1701, or for all other states (800) 285-1707 FOR CITIBANK PRIVATE BANKING CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 Call Your Citibank Private Banking Account Officer, Registered Representative or (212) 559-5959 FOR CITIBANK GLOBAL ASSET MANAGEMENT CLIENTS: Citibank, N.A. 153 East 53rd Street, New York, NY 10043 FOR CITIBANK NORTH AMERICAN INVESTOR SERVICES CLIENTS: Citibank, N.A. 111 Wall Street, New York, NY 10043 Call Your Account Manager or (212) 657-9100 FOR CITICORP INVESTMENT SERVICES CUSTOMERS: One Court Square, Long Island City, NY 11120 Call Your Investment Consultant or (800) 846-5200 (212) 736-8170 in New York City LANDMARK CALIFORNIA TAX FREE RESERVES C. Oscar Morong, Jr., Chairman William S. Woods, Jr. *Affiliated Person of Administrator and Distributor 153 East 53rd Street, New York, NY 10043 The Landmark Funds Broker-Dealer Services, Inc. 6 St. James Avenue, Boston, MA 02116 TRANSFER AGENT AND CUSTODIAN State Street Bank and Trust Company 225 Franklin 125 Summer Street, Boston, MA 02110 150 Federal Street, Boston, MA 02110	497	497	1996-01-12T00:00:00	1996-01-12T10:10:21
0000950131-96-000066	0000950131-96-000066_0016.txt	<DESCRIPTION>MODEL RETIREMENT PLANS SUNAMERICA SARSEP [ART WORK LOGO APPEARS HERE] THE SUNAMERICA MUTUAL FUND SARSEP PLAN SARSEP - Salary Reduction SEP, is a low-cost, easily manageable, retirement plan that the small business owner can establish for employees. Employees contribute their own income into the plan, on a pretax basis, up to $9,240 (for 1995) in deferred compensation. To establish a SARSEP, the employer must have 25 or fewer employees and at least half of the company's eligible employees must elect to defer part of their compensation into the plan. OTHER ADVANTAGES OF A SARSEP PLAN INCLUDE: . MINIMAL ADMINISTRATIVE COSTS - Reporting and disclosure requirements are few as opposed to complicated and costly qualified retirement plans. . CONTRIBUTION FLEXIBILITY - Employee contributions may vary. Employers can terminate the plan at any time. . PARTICIPANT DIRECTED INVESTMENTS - Employees control the investment allocation of their account. Having a choice of mutual funds yields investment flexibility and increases the likelihood of realizing your individual investment goals. . LOWER TAXES - The SARSEP is a salary reduction plan which reduces the taxable wage base for the employee. Both income taxes and FICA taxes are reduced by contributions to the Plan. . TAX-DEFERRED ACCUMULATION - Earnings and return on earnings accumulate on a tax-deferred basis until withdrawn. . EMPLOYER CONTRIBUTIONS - A combination of employer contributions and the employee elective deferral cannot exceed the lesser of 15% or $22,500 (for 1995). Please read on for more details. QUESTIONS AND ANSWERS ABOUT SARSEPS Q. WHO MAY ESTABLISH A SARSEP? A. This SARSEP may be established by an incorporated or unincorporated business provided: A) THE BUSINESS IS NOT A STATE OR LOCAL GOVERNMENT OR A TAX-EXEMPT ORGANIZATION. B) THE BUSINESS HAS NO MORE THAN 25 EMPLOYEES ELIGIBLE TO PARTICIPATE IN THE SARSEP. C) THE BUSINESS HAS AT LEAST ONE EMPLOYEE WHO IS NOT HIGHLY COMPENSATED. Q. HOW DOES A SARSEP WORK? A. SARSEP contributions are deducted from the employees paycheck and are deposited by the employer into the employee's Individual Retirement Account. They are not included in the employee's income and therefore are not reported or deducted by the employee on his or her tax return. Salary reduction contributions are not subject to federal or state (except Pennsylvania) income tax withholding, however, they are subject to FICA withholding. Q. WHICH EMPLOYEES ARE ELIGIBLE TO PARTICIPATE IN THE SARSEP? A. The plan must include non-union employees who meet all of the following requirements: . ARE AT LEAST 21 YEARS OLD. . HAVE WORKED FOR THE EMPLOYER FOR ANY PART OF ANY THREE OF THE PRECEDING FIVE PLAN YEARS. . HAVE EARNED AT LEAST $396 FOR 1994 OR $400 FOR 1995 (INDEXED FOR INFLATION) DURING THE YEAR FOR WHICH THE CONTRIBUTION IS MADE. Less restrictive eligibility requirements may be imposed in lieu of the above requirements. At least 50% of the employees eligible to participate must elect to make salary reduction contributions in order for the SARSEP to be qualified. Q. HOW MUCH CAN AN EMPLOYEE ELECT TO CONTRIBUTE TO THE SARSEP? A. The maximum amount that an employee can elect to contribute to the SARSEP for a calendar year is 15% of his or her compensation, not to exceed $9,240 (indexed for 1995). Q. WHAT HAPPENS WHEN AN EMPLOYEE LEAVES BEFORE RETIREMENT? A. All SARSEP contributions made by an employee, or by the employer, belong to that employee as soon as they are made. Should an employee terminate employment before retirement, his or her entire account may then go directly to the employee. In most instances, the employee will maintain the account on an individual basis so that it would continue to accumulate on a tax- deferred basis until withdrawn at retirement, or some later date. Q. WHEN MAY WITHDRAWALS BE MADE? A. Contributions and earnings on contributions will ordinarily remain in the plan until age 59-1/2. After that, they may be withdrawn at any time without penalty and will be taxed as ordinary income. Distributions taken before age 59-1/2 are taxed as ordinary income and are subject to a 10% federal penalty tax. In the event of death or disability, payments may begin immediately without penalty. Payments from the SARSEP Plan must begin no later than April 1st of the year following the year in which the participant reaches age 70-1/2. Further contributions may be made to the participant's account after age 70-1/2 as long as the participant is still an employee. Q. WHAT ARE THE NONDISCRIMINATION REQUIREMENTS FOR A SARSEP? A. In no case may contributions, or the manner of making contributions, discriminate in favor of any highly compensated employee. Therefore, the SARSEP must meet the requirements for top-heavy defined contribution plans. A plan is considered "top-heavy" if 60% or more of the assets were in the accounts of key employees on the last day of the preceding plan year (the last day of the first plan year for new plans). Employers establishing a SARSEP may elect to have the top-heavy test based upon 60% of the aggregate plan contributions. This service is not provided by SunAmerica. Also, the Actual Deferral Percentage (ADP) of each highly compensated employee cannot be greater than 1.25 times the average deferral of all non- highly compensated employees. The ADP is calculated by dividing the employee's elective deferral for any year by his or her compensation for the year. Q. WHAT ARE "KEY EMPLOYEES" AND "HIGHLY COMPENSATED EMPLOYEES"? A. I. A "key employee" is defined as: a) an officer who earned $45,000 or more. b) a more than 5% owner of the business. c) a 1% or more owner in the business having annual compensation of more than $150,000. d) an employee who is one of the ten largest owners and makes more than $30,000 annual compensation. II. A "highly compensated employee" is defined as: a) a 5% owner of the business. b) received more than $75,000 in annual compensation. c) received more than $50,000 in compensation and was in the top-paid 20% of the employees, ranked by compensation. d) was an officer of the employer's business and received more than $45,000 in annual compensation. The chart below compares the features of SEP-IRA, Profit Sharing, SARSEP and 401(k) Plans. . Employer sponsored and funded . Employer contributions cannot exceed 15% of compensation or $22,500, . Contributions can be discretionary; employer does not need to fund in a year in which there are no profits Plan Establishment Requires IRS Form Requires adoption Vesting 100% immediate 5 year cliff/3-7 year graded Set up Tax Filing Deadline Calendar year or fiscal year end . Salary reduction contributions are made at the request of the employees . Employee elective deferrals are limited to 15% or $9,240 (for 1995), . Actual deferral percentage testing is required to comply with non- Plan Establishment Requires IRS Form Requires adoption agreement Vesting 100% immediate 5 year cliff/3-7 year graded Set up Tax Filing Deadline Calendar year or fiscal year end Eligibility Firms with 25 or fewer No limit on number of employees and at participants, but need least 50% participation 56% participation HOW TO ESTABLISH A SARSEP 1) The SunAmerica SARSEP Kit contains the following pieces: . ADOPTION AGREEMENT - the agreement completed by the employer specifying the terms of the SARSEP (page 9). . SALARY REDUCTION AGREEMENT - an extension of the adoption agreement allowing employees to make contributions to the SARSEP (page 11). . SALARY REDUCTION ELECTION - an election by each employee to participate in the SARSEP and indicating deferral percentages for contributions (page 13). . SARSEP DISCLOSURE STATEMENT - the definition of a SARSEP and how it works, including how an employer makes contributions and how the Code treats contributions for tax purposes (page 15). 2) To establish the plan, read the Plan Document and complete the Adoption Agreement. 3) A Salary Reduction Agreement and an Individual Retirement Account application (if not previously prepared) must be completed and signed by each employee to allow for the plan elective deferrals. 4) A Salary Reduction Election must be completed and signed by each employee to indicate allocation instructions for contributions. 5) Conduct the nondiscrimination test and monitor participation to determine if your plan is likely to unfairly benefit certain employees and to make sure that 50% of eligible employees will be participating. In performing this test, it is recommended that you project the numbers to the end of the year. This would give you a meaningful indication of whether or not you will pass the test. Your tax advisor should review this test with you. 6) The Actual Deferral Percentage (ADP) test must be completed annually, showing the contribution formula for the year and how contributions will be allocated. 7) Group investment lists can be provided to a plan administrator for allocation of employee deferrals (page 14). 8) Employer mails the following items to SunAmerica Fund Services Attn: Retirement Plans Department, 733 Third Avenue, 3rd floor, New York, NY 10017-3204: . Signed Adoption Agreement including Salary Reduction Agreement (employer must keep a file copy) . Check for the first contributions, made payable to the Trustee, Resources . Salary Reduction Election (allocation instructions for each employee) . Employee IRA application (if applicable) FOR COMPLETING THE SEP ADOPTION AGREEMENTS 1.01 PLAN. Fill in the name of the employer. 1.04 EMPLOYEE. The employer should complete this section of the adoption agreement by checking the appropriate exclusions, if any. If the definition of "employee" is to be all inclusive, the employer should check Option (a) indicating no exclusions. 1.06 COMPENSATION. Options (a) and (b) represent two alternative safe harbor definitions of compensation which satisfy Code Section 408(k)(7)(B). Both definitions are very similar and contain only minor differences. For example, both definitions include basic compensation items such as salary, overtime, bonuses and commissions. Since the definitions are very similar, the determining factor for the employer should be administrative convenience. Options (c) and (d) represent safe harbor modifications to compensation as permitted under Treas. Reg. Section 1.414(s)-1(c). By checking Option (c), the plan "grosses up" the compensation definition for certain elective amounts (e.g., SARSEP deferrals). The gross up will apply to whichever definition the employer elects (i.e., (a) or (b)). By checking Option (d), the plan excludes certain extraordinary forms of compensation (e.g., fringe benefits) from the definition of compensation elected under (a) or (b). 1.09 EFFECTIVE DATE. If the employer is adopting a new plan, it must specify the effective date in the first sentence. In general, the effective date would be the first day of the plan year for which the employer adopts the SEP Plan (e.g., January 1, 1993) unless the employer started its business during the calendar year. If the employer is amending an existing SEP Plan, the employer must specify the restated effective date in the first blank and the original plan execution date (e.g., "April 13, 1986") or effective date (e.g., "as of January 1, 1986") in the second blank. If the employer is restating the SEP for TRA, the restated effective date should be the later of (1) the first day of the first plan year beginning after December 31, 1988, or (2) the first day of the first plan year for which the SEP was effective. 1.11 PLAN YEAR. The plan year of the SEP may be the calendar year or the employer's taxable year. No other measuring period is acceptable. If the employer elects a calendar plan year and the employer's taxable year is not the calendar year, the employer must determine its deduction limitation on the basis of the calendar year ending within the employer's taxable year. The employee's gross income exclusion limitation also applies on a plan year basis. ELIGIBILITY TO PARTICIPATE IN EMPLOYER CONTRIBUTIONS (a) Insert the age desired. If the employer does not wish to condition eligibility upon age, do not check (a), or complete (a) with "N/A." (b) (1) Insert the number of prior years of service required as an eligibility condition. (2) Check Option (b)(2) if service in a prior year is not an eligibility condition; for example, in the case of a new business established during the plan year. 3.01 AMOUNT. The only contribution formula the plan provides is a discretionary contributions formula. Options (a) and (b) relate to the allocation of the employer's discretionary contribution to the participant's IRA. Option (a) is a "nonintegrated formula" which allocates employer contributions pro rata on the basis of compensation (as defined in Section 1.06). Option (b) is an "integrated" formula which incorporates the Code Section 401(l) safe harbor permitted disparity rules. If the employer elects an integrated formula, it also must define excess compensation by completing the blank spaces in Option (b). Excess compensation is simply the employee's compensation in excess of a specified integration level. The amount of the integration level also will affect the "applicable percentage" portion of the integrated formula. The "applicable percentage" in the integrated portion of the formula can be 5.7%, 5.4% or 4.3%, depending on the integration level. Option (b) provides for a "floating" integration level. This approach permits the employer to select a percentage of the taxable wage base for purposes of the "float." Please note the maximum floating integration level for a plan year is the taxable wage base in effect at the beginning of that plan year. If the employer wishes to "float" the integration level with the full taxable wage base, the employer should insert "100%" in the first space provided in Option (b) and insert an "N/A" in the second space. The taxable wage base for 1993 is $57,600. For many highly compensated employees, experience has shown an "applicable percentage" of 5.4% is the most advantageous. To use 5.4%, the integration level must exceed 80% of the taxable wage base. For example, the employer may specify 80% in the first space in Option (b) rounded to the next "$1,000." By rounding to the next $1,000, the plan ensures the integration level is greater than 80% of the taxable wage base (permitting use of the 5.4% applicable percentage) and at the same time provides a rounded number for simpler administration. The integrated contribution formula under Option (b) is a two-tiered formula. Under the first tier, the employer contributes a uniform percentage of compensation to each eligible participant. The second tier is the integrated contribution. However, to ensure the plan is in compliance with the top-heavy rules, the employer may not contribute under the second tier unless the first tier contribution percentage is at least 3%. Under the second tier, the employer contributes a uniform percentage of excess compensation which may not exceed the lesser of (1) the percentage contributed under the fast tier, or (2) the percentage determined in the maximum disparity table. 7.01 SALARY REDUCTION CONTRIBUTION. If the employer is not establishing a SEP with a salary reduction agreement, the employer should elect Option (a) and complete the "Execution" section. If the employer wishes to permit employees to make salary reduction contributions to the plan, the employer must elect Option (b) and complete Appendix A of the agreement. ACTUAL DEFERRAL PERCENTAGE TEST. Section 7.06 of the basic plan document describes the actual deferral percentage ("ADP") test each highly compensated employee must satisfy. Please note the ADP test is on a plan year basis, whereas the annual deferral limitation under Code Section 402(g) is on a calendar year basis. The maximum ADP each highly compensated employee may have depends on the average ADP of the non highly compensated employees. Section 7.06(C) of the basic plan document satisfies Code Section 408(k)(6), under which the plan may distribute excess contributions which cause the plan to fail to satisfy the ADP test. Under a SEP, the excess contributions are part of the highly compensated employee's IRA to which the employer makes the contributions. Accordingly, it is the sponsor of the highly compensated employee's IRA that will need to distribute the excess contributions adjusted for allocable income or loss. The plan directs the employer to notify the IRA sponsor of the amount of the excess contribution. However, the highly compensated employee should request the necessary withdrawal from his IRA. The highly compensated employee must receive the distribution of excess contributions, as adjusted for allocable income or loss, by the last day of the following plan year for the elective deferral arrangement to continue to qualify. However, the employer is liable for a 10% excise tax on the excess contributions not distributed by the 15th day of the third month of the following plan year. The highly compensated employee must include in his gross income the excess contribution (plus allocable income, if any) distributed from his IRA. However, the taxable year in which the highly compensated employee includes this amount in income depends on the timing of the distribution from the IRA. The disclosure statement explains the income tax consequences to the highly compensated employee. COORDINATION WITH DISCRETIONARY CONTRIBUTIONS. If the employees make elective deferrals for a plan year, the employer should not make its discretionary contribution until after the close of that plan year. The law requires a SEP to allocate discretionary contributions on the basis of a uniform percentage of compensation, subject to the integration option. Therefore, if the employer elects a nonintegrated allocation for the discretionary contribution, all eligible employees must receive the same percentage of compensation as an allocation of discretionary contributions. If the employer elects an integrated allocation for the discretionary contribution, all eligible employees must receive the same percentage of excess compensation, under the integrated portion of the allocation formula, plus the same percentage of compensation under the nonintegrated portion of the allocation formula. The employer cannot determine the maximum uniform percentage it can contribute for the eligible employees until it determines the highest elective deferral rate elected by an employee. In addition, the employer cannot determine the maximum percentage until after the employer has reduced the employee's compensation for his salary reduction contributions. An employer's SEP contribution will not be includible in the employee's gross income to the extent the contribution does not exceed the lesser of (1) 15% of the employer compensation for the year, or (2) a specified dollar amount (currently $30,000). In applying the 15% limit, the Code determines compensation after the reduction for the salary reduction contributions. For example, assume after the close of the plan year the employer determines eligible employee A had the highest deferral rate. A's compensation is $70,000, and he deferred $7,000 of that amount. Accordingly, A's compensation for 15% allocation limit is $63,000. A's maximum SEP contribution is 15% of $63,000, or $9,450. Therefore, A's allocation of employer discretionary contributions cannot exceed $2,450 [$9,450 - $7,000]. If the employer elected a nonintegrated allocation formula, the maximum discretionary contribution is 3.88%, which is the maximum percentage A may receive and, thus, all participants may receive. If the employer elected an integrated allocation formula, the computation becomes more complicated because the employer must factor in not only the uniform rate of contribution requirement and the contribution limits but also the permitted disparity rules. For example, assume the same facts as in the example above except the employer elected an integrated contribution formula. Assume further the employer elects an integration level of 80% of the taxable wage base rounded to the next $1,000 ($47,000 for 1993) to maximize the permitted disparity contribution. As with the nonintegrated contribution formula, A's contribution may not exceed $2,450. Therefore, the maximum integrated contribution A may receive and thus, the maximum all participants may receive is: 3.1% of total compensation [3.1% x $63,000 = $1,953] plus 3.1% of excess compensation [3.1% x 16,000 = $497]. APPENDIX A OF ADOPTION AGREEMENT Complete Appendix A only if the employer checked Section 7.01(b). Appendix A includes three Sections: 7.02, 8.01 and 8.04. 7.02 SALARY REDUCTION AGREEMENTS. Option (a) provides limitations on the employees' salary reduction contributions. It is not necessary to prescribe the Code 402(g) limitations (see Section 7.04 of the basic plan document) nor the Code Section 415 limitation (see Section 3.02 of the basic plan document). The employer should complete Option (a) to provide a lesser limitation (e.g., 10% of compensation for the plan year). A lesser limitation may minimize the chance of an employee's elective deferrals causing a Code Section 415 violation or a chance of exceeding the deduction limitation of Code Section 404. Options (b) and (c) set parameters on the frequency of changing the salary reduction agreement. Option (b) addresses the complete revocation of the salary reduction agreement and the execution of a new agreement following revocation. Option (c) addresses increases or decreases in the level of salary reduction contributions. 8.01 TOP-HEAVY REQUIREMENTS. If the plan permits salary reduction contributions to the plan, the employer must specify whether the plan will operate as a "deemed top-heavy plan" or as a "not deemed top-heavy plan". If the employer elects Option (a), the employer will not need to make a determination as to whether the plan is top-heavy. However, the plan will require the employer to make a top-heavy minimum contribution for each plan year, even if the plan is not top-heavy. If the employer elects Option (b), the employer will need to make a top-heavy minimum contribution only in plan years in which the plan is top- heavy. The top-heavy minimum contribution is the lesser of 3% of the participant's compensation for the plan year or the highest contribution rate for a key employee for the plan year. A key employee's contribution rate is the sum of the employer contributions and salary reduction contributions, divided by the key employee's compensation for the plan year. The following example demonstrates the effect of the top-heavy election. Assume for the 1993 plan year, employer X adopts a SEP with a salary reduction feature. Assume further the plan is not top-heavy for the 1993 plan year. For the 1993 plan year, X makes no contribution other than the participant's elective deferrals. The elective deferral contributions for the two key employees are 6% and 4% respectively, while the elective deferral contributions for the four nonkey employees are 4%, 3%, 2% and 0% respectively. If the employer elects Option (a) under Section 8.01, the employer will need to make a 3% top-heavy minimum contribution to each nonkey employee because the plan is operating as a deemed top-heavy plan. However, if the employer elects Option (b), the employer will not need to make a top-heavy minimum contribution for the 1993 plan year because the plan is not top-heavy. 8.04 TOP-HEAVY MINIMUM ALLOCATION. The employer may complete Section 8.04 to specify a different plan to satisfy the top-heavy minimum benefit requirement. For example, if the employer is adopting both a SEP and a profit sharing plan, the employer might specify the profit sharing plan as the plan which guarantees the top-heavy minimum allocation. If the employer maintains only one plan, it never would complete Section 8.04. On page 10, the Employer must complete the date of execution. The employer then must execute the adoption agreement and complete the employer informational items. There is no provision within the adoption agreement for the designation of a plan administrator. Therefore, the employer is the plan administrator. The employer's acting as plan administrator avoids the necessity of a separate EIN for an individual plan administrator. However, the employer must designate the person (by name or title) who will provide additional information to participants regarding the SEP. 3.01 AMOUNT. The Employer will make its discretionary contribution under the following formula: (Choose (a) or (b)). _______ (a) Uniform contribution allocation formula. _______ (b) Permitted disparity contribution formula. For purposes of this formula, "Excess Compensation" means Compensation in excess of the following Integration Level:______% (not exceeding 100%) of the taxable wage base, as determined under Section 230 of the Social Security Act, in effect on the first day of the Plan Year rounded to the next $________(but not exceeding the taxable wage base). 7.01 SALARY REDUCTION CONTRIBUTIONS. The Plan: (Choose (a) or (b)) _______ (a) Does not permit Participant Salary Reduction Contributions. _______ (b) Permits Participant Salary Reduction Contributions (If the Employer elects (b), the Employer must complete Appendix A.) IN WITNESS WHEREOF, the Employer has executed this Adoption Agreement, in duplicate, each constituting an original Adoption Agreement, on this ____ day of ______ , 199 . The name or title of the individual the Employer has designated to provide additional information to Participants concerning this SEP is _______________ _______________________________________________. Street Address City State ZIP Telephone Number Federal Employer Identification Number For inquiries regarding the SEP, please contact the Sponsor at the following address and telephone number: [Note: Complete this Appendix A only if the Employer elected Adoption Agreement Section 7.01(b). Leave this page blank if the Employer elected Adoption 7.02 SALARY REDUCTION AGREEMENTS. The following rules and restrictions apply to an Employee's salary reduction agreement: (Choose the applicable elections). _______ (a) LIMITATION ON AMOUNT. The Employee's salary reduction contributions are subject to the following limitations:__________________________ [Note: If the Employer does not elect Option (a), the salary reduction contributions are not subject to any limitations other than the 15% limitation described in Section 3.02 of the Plan and the 402(g) limitation described in Section 7.02 of the Plan.] _______ (b) REVOCATION. An Employee, on a prospective basis, may revoke a salary reduction agreement or may file a new agreement following a _______ (1) As of any Plan Entry Date. _______ (2) As of the first day of each Plan Year quarter. _______ (3) (Specify at least once per Plan Year)_______________ _______ (c) MODIFYING ELECTIONS. An Employee, on a prospective basis, may increase or may decrease his salary reduction percentage or dollar _______ (1) As of the beginning of each payroll period. _______ (2) As of the first day of each Plan Year quarter. _______ (3) As of any Plan Entry Date. _______ (4) (Specify at least once per Plan Year)________________ 8.01 TOP-HEAVY REQUIREMENTS. For purposes of the top-heavy requirements, the Employer will treat this Plan as a: _______ (a) Deemed Top-Heavy Plan. _______ (b) Not Deemed Top-Heavy Plan. 8.04 TOP-HEAVY MINIMUM ALLOCATION. The Employer will satisfy the top heavy minimum allocation under the following plan it maintains:______________________ (This page left intentionally blank.) SUNAMERICA SIMPLIFIED EMPLOYEE PENSION [LOGO] Complete this form to indicate the amount of money to be deferred from your salary and contributed to your account each pay period. Both you and your Employer must sign where indicated. This form should be retained by the Employer; you should keep a copy for your records and send a copy to SunAmerica Fund Services. [_] New Enrollment [_] Change ELECTION TO PARTICIPATE IN A SALARY REDUCTION SEP [_] I DO WISH to participate in the Company's SARSEP. Subject to the requirements of the Company's SARSEP, I authorize the following amount or percentage of my Compensation to be withheld from each paycheck and contributed to my SEP-IRA: [_] __________% of my Compensation (not in excess of 15% ); or [_] $__________________ (not in excess of $9,240 (as adjusted)) Subject to the requirements of the Company's SARSEP, I authorize the following amount to be contributed to my SEP-IRA, rather than paid to me in cash: [_] Cash Bonus Deferral: $________________ (not in excess of $9,240 (as adjusted)). I understand that the total amount I defer in any calendar year to this SEP may not exceed the lesser of 15% of my Compensation (determined without including any SEP IRA contributions) or $9,240 (adjusted annually for inflation). This deferral election shall remain in effect until, in writing, I either terminate or change it. I may make future contribution changes and may stop my pay deductions at any time. I further understand that I should not withdraw or transfer any amounts from my SEP that are attributable to elective deferrals and income on elective deferrals for a particular plan year (except for excess elective deferrals) until 2-1/2 months after the end of the plan year, or if sooner, when my employer notifies me that the deferral percentage limitation test for that plan year has been completed. Any such amounts that I withdraw or transfer before this time will be included in income for purposes of sections 72(t) and 408(d)91 of the Code. [_] I DO NOT WISH to participate in the Company's SARSEP, subject to the provisions of the plan regarding such election. I release and hold harmless the Company from and against any and all claims the undersigned may have or hereafter claim to have against said Company with respect to my election to not participate in the SARSEP. I understand that the Company shall not be responsible or liable for any loss or expense which may arise or result from compliance with this election. This designation shall remain in effect until such time as I specifically revoke it by delivering such revocation, in writing, to the Company. [_] CHECK HERE TO RECEIVE A MONTHLY GROUP INVESTMENT LIST SEND monthly transmittal forms for employee contributions to: Instructions for the above Salary Reduction Election . Employer should keep original copy on file . Send in copy to SunAmerica Resources Trust Company hereby provides a prototype simplified employee pension which an employer may adopt by completing and executing the complementary adoption agreement. 1.01 "PLAN" means the simplified employee pension established by the Employer in the form of this document, including the Employer's Adoption Agreement. The Employer will designate the name of the Plan in its Adoption Agreement. The Employer must use this Plan only in conjunction with an individual retirement account or individual retirement annuity for which the Internal Revenue Service has issued a favorable opinion or ruling letter or in conjunction with model individual retirement accounts issued by the Internal Revenue Service. 1.02 "EMPLOYER" means each employer who adopts this Plan by executing an Adoption Agreement, and any other employer which is a member with the Employer of the same controlled group of corporations as defined in Code Section 414(b), which is a trade or business (whether or not incorporated) under the same common control as defined in Code Section 414(c) or which is a member of an affiliated service group within the meaning of Code Section 414(m) or Code Section 414(o). 1.03 "CUSTODIAN" means Resources Trust Company. 1.04 "EMPLOYEE" means any employee of the Employer, including a self-employed individual who is an employee of the Employer by reason of Code Section 401(c)(1), except as otherwise provided in the Employer's Adoption Agreement. Employee also means any individual (who otherwise is not an Employee of the Employer) who is the Employer's leased employee under Code Section 414(n). 1.05 "PARTICIPANT" means an eligible Employee for whose benefit the Employer makes a contribution to an Account. 1.06 "COMPENSATION" means Compensation as defined in the Employer's Adoption Agreement. For a Self-Employed Individual, Compensation means Earned Income. Any reference in this Plan to Compensation is a reference to the definition in this Section 1.06, unless the Plan reference specifies a modification to this definition. The Plan will take into account only Compensation actually paid, or Compensation which the Employee had the right to receive, for the relevant period. A Compensation payment includes Compensation paid by the Employer through another person under the common paymaster provisions in Code Sections 3121 and 3306. (A) DEFINITIONS. For purposes of the Compensation definition elections in the Adoption Agreement, the following definitions apply: (1) "FEDERAL INCOME TAX WAGES" definition of Compensation. All wages for federal income tax withholding purposes, as defined under Code Section 3401(a) (for purposes of income tax withholding at the source), disregarding any rules limiting the remuneration included as wages based on the nature or location of the employment or the services performed. (2) "W-2 WAGES" definition of Compensation. All wages as described in the "federal income tax wages" definition, and all other payments to an Employee in the course of the Employer's trade or business, for which the Employer must furnish the Employee a written statement under Code Sections 6041(d) and 6051(a)(3). As long as the instructions to Form W-2, Box 10, remain consistent with the instructions for the 1990 or 1991 Form W-2, the Employer may treat the amount reported in Box 10 as satisfying this definition. (3) "ELECTIVE CONTRIBUTIONS." Elective contributions are amounts excludible from the Employee's gross income under Code Sections 125, 402(a)(8), 402(h) or 403(b), and contributed by the Employer, at the Employee's election, to a Code Section 401(k) arrangement, a Simplified Employee Pension, cafeteria plan or tax-sheltered annuity. Elective contributions also include Compensation deferred under a Code Section 457 plan maintained by the Employer and Employee contributions "picked up" by a governmental entity and, pursuant to Code Section 414(h)(2), treated as Employer contributions. The definitions of Compensation in paragraphs (1) and (2) do not include elective contributions, unless otherwise specified in the Plan or in the Adoption Agreement. (B) COMPENSATION DOLLAR LIMITATION. The Plan must take into account only the first $200,000 (or such larger amount as the Commissioner of Internal Revenue may prescribe) of any Participant's Compensation. This dollar limitation applies on a prorated basis to any measuring period less than 12 months. 1.07 "HIGHLY COMPENSATED EMPLOYEE" means an Employee who, during the Plan Year or during the preceding 12-month period: (a) is more than 5% owner of the Employer (applying the constructive ownership rules of Code Section 318, and applying the principles of Code Section 318, for an unincorporated entity); (b) has Compensation in excess of $75,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year); (c) has Compensation in excess of $50,000 (as adjusted by the Commissioner of Internal Revenue for the relevant year) and is part of the top-paid 20% group of employees (based on Compensation for the relevant year); or (d) has Compensation in excess of 50% of the dollar amount prescribed in Code Section 415(b)(1)(A) (relating to defined benefit plans) and is an officer of the Employer. If the Employee satisfies the definition in clause (b), (c) or (d) in the Plan Year but does not satisfy clause (b), (c) or (d) during the preceding 12-month period and does not satisfy clause (a) in either period, the Employee is a Highly Compensated Employee only if he is one of the 100 most highly compensated Employees for the Plan Year. The number of officers taken into account under clause (d) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than 50 officers. If no Employee satisfies the Compensation requirement in clause (d) for the relevant year, the Employer will treat the highest paid officer as satisfying clause (d) for that year. For purposes of applying this definition, compensation must include elective contributions and the Employer will disregard any exclusions elected in Adoption Agreement Section 1.06. The Employer must make the determination of who is a Highly Compensated Employee, including the determinations of the number of identity of the top paid 20% group, the top 100 paid Employees, the number of officers includible in clause (d) and the relevant Compensation, consistent with Code Section 414(q) and regulations issued under that Code section. The Employer may make a calendar year election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations. A calendar year election must apply to all plans and arrangements of the Employer. For purposes of applying any nondiscrimination test, the Employer will treat a Highly Compensated Employee and all family members (a spouse, a lineal ascendant or descendant, or a spouse of a lineal ascendant or descendant) as a single Highly Compensated Employee, but only if the Highly Compensated Employee is more than 5% owner or is one of the 10 Highly Compensated Employees with the greatest Compensation for the Plan Year. This aggregation rule applies to a family member even if that family member is a Highly Compensated Employee without family aggregation. This family aggregation rule will apply only for Plan Years in which Code Section 414(q) requires its application. 1.08 "ACCOUNT" means the IRA account or annuity contract established and maintained by a Participant to which the Employer makes contributions pursuant to the Plan. 1.09 "NONFORFEITABLE" means a Participant's or Beneficiary's unconditional claim, legally enforceable against the Plan, to the Participant's Account. 1.10 "EFFECTIVE DATE" of this Plan is the date specified by the Employer in its Adoption Agreement. 1.11 "CODE" means the Internal Revenue Code of 1986, as amended. 1.12 "PLAN YEAR" means the fiscal year of the Plan, as specified in the Employer's Adoption Agreement. ELIGIBILITY TO PARTICIPATE IN EMPLOYER CONTRIBUTIONS 2.01 PARTICIPATION. The Employer will specify in its Adoption Agreement the conditions for eligibility to participate in the Plan. 2.02 PARTICIPANTS' RIGHT TO EMPLOYMENT. Nothing contained in this Plan, or in the establishment of a Participant's Account, or any modification or amendment to the Plan or a Participant's Account, or in the creation of any Account, or the payment of any benefit, shall give any Employee, even if he is a Participant, or any Beneficiary, any right to continue employment, any legal or equitable right against the Employer or any officer, or employee of the Employer, except as expressly provided by the Plan. 3.01 AMOUNT. In the Adoption Agreement, the Employer will elect to contribute under a uniform contribution formula or under a permitted disparity contribution formula. For each Plan Year, the Employer will contribute to each Participant's Account, the lesser of the amount determined under this Section 3.01 or the maximum amount permitted under Section 3.02. (A) UNIFORM CONTRIBUTION FORMULA. For each Plan Year, the Employer will contribute to each Participant's Account a uniform percentage of Compensation, as determined in the Employer's sole discretion. (B) PERMITTED DISPARITY CONTRIBUTION FORMULA. For each Plan Year the Employer will contribute the following amount to each Participant's Account: (1) A uniform percentage of Compensation, as determined in the Employer's (2) A uniform percentage of Excess Compensation, as determined in the Employer's sole discretion. The percentage described in (2) may not exceed the lesser of the percentage determined in (1) or the percentage determined in the Maximum Disparity Table in the next paragraph. Furthermore, the Employer may not contribute an amount described in (2) unless the contribution percentage under ( 1 ) is at least 3%. If at any time during the Plan Year, the Employer maintains a qualified plan or another SEP that also uses a permitted disparity formula (or imputes permitted disparity to satisfy the nondiscrimination requirements), the Employer may not contribute an amount described in (2). Integration Level (as percentage Applicable of taxable wage base). Percentages More than 80% but less than 100% 5.4% More than 20% (but at least more than $10,000) and no more than 80% 4.3% 20% (or $10,000, if greater) or less 5.7% (C) OTHER REQUIREMENTS. Employment by a Participant on the last day of the Plan Year is not a condition to an allocation of an Employer contribution under the Plan for that Plan Year. However, the Employer will not make a contribution for the Plan Year for any Participant whose Compensation is less than $300 (or the adjusted dollar amount determined by the Internal Revenue Service). For this purpose, a Participant's compensation must include elective contributions and the Employer will disregard any exclusions elected in Adoption Agreement Section 1.06. (D) DEDUCTION. Contributions to the SEP are deductible by the Employer for the taxable year with or within which the Plan Year of the SEP ends. The Code treats contributions made for a particular taxable year and contributed by the due date of the Employer's income tax return, including extensions, as made during that taxable year. 3.02 CONTRIBUTION LIMITATION. The total of the Employer contributions (as determined under Sections 3.01 and 7.01) allocated to a Participant's Account for any Plan Year may not exceed the lesser of 15% of the Participant's Compensation or $30,000 (or, if greater, one fourth of the defined benefit dollar limitation under Code Section 415(b)(1)(A)). 3.03 EMPLOYER CONTRIBUTIONS NOT CONDITIONAL. The Employer does not condition any contribution made under the Plan on behalf of a Participant upon the retention by the Participant of the contribution within the Participant's Account. Furthermore, the Employer does not impose any restriction on a Participant's withdrawal of any amount from the Participant's Account. 4.01 ESTABLISHMENT OF ACCOUNT. Each Participant must establish in his own name an individual retirement account with the Custodian or with any bank or other institution maintaining individual retirement accounts or individual retirement annuities. The Employer may establish an Account with the Custodian for the benefit of an eligible Employee if the Employee is unable or unwilling to execute the necessary documents to establish an Account or if the Employer is unable to locate the Employee. 4.02 NONFORFEITABLE ACCOUNT. The interest of any Participant in the balance of his Account is at all times 100% Nonforfeitable. 4.03 EXCLUSIVE BENEFIT. The Employer will have no beneficial interest in any asset of a Participant's Account and no part of any asset in a Participant's Account will revert to or be repaid to the Employer, either directly or indirectly; nor will any part of the corpus or income of a Participant's Account, or any asset of a Participant's Account, be (at any time) used for, or diverted to, purposes other than the exclusive benefit of the Participant or his Beneficiaries. 4.04 ADMINISTRATION OF ACCOUNT. The provisions of the document under which a Participant maintains his Account will determine the administration, distribution and investment of the Employer's and the Employee's, if any, contribution(s) to a Participant's Account. The Employer does not in any way guarantee a Participant's Account from loss or depreciation. 4.05 PARTICIPANT CONTRIBUTIONS. Nothing in the Plan prohibits a Participant from making IRA contributions (deductible or nondeductible) to his Account, as permitted by Code Sections 219 and 408. 5.01 SUCCESSORS. The Plan is binding upon all persons entitled to benefits under the Plan and their respective heirs and legal representatives. 5.02 WORD USAGE AND TITLES. Words used in the masculine will apply to the feminine where applicable, and wherever the context of the Plan dictates, the plural includes as the singular and the singular includes the plural. Article and Section titles are for reference only. 5.03 STATE LAW. Except to the extent superseded by Federal statute, the law of the state of the Employer's principal place of business will determine all questions arising with respect to the provisions of this Plan. 5.04 PARTICIPATION IN PROTOTYPE. If the Employer ever maintained a defined benefit plan which is now terminated or, subsequent to the adoption of this Plan, terminates a defined benefit plan, the Employer can no longer be a participating Employer in this Prototype. If the Employer currently maintains a defined benefit plan, the Employer may not elect under Adoption Agreement Section 7.01 to permit Employees to make salary reduction contributions. An Employer which is not a participating Employer in this Prototype cannot rely on the Sponsor's opinion letter issued by the Revenue Service and must treat this Plan as an individually designed plan. 6.01 AMENDMENT. The Employer has the right at any time and from time to time: (a) To amend this Plan and its Adoption Agreement, without any Participant's consent, in any manner it deems necessary or advisable in order to qualify (or maintain qualification of) this Plan under the provisions of (b) To amend this Plan and its Adoption Agreement in any other manner. However, no amendment may authorize or permit any portion of an Account to be used for or diverted to purposes other than for the exclusive benefit of the Participant, his Beneficiaries or their estates. If the Employer amends this Plan and its Adoption Agreement, other than by changing its elections in the Adoption Agreement, the Employer no longer can participate in this Prototype. See Section 5.04. 6.02 NOTICE OF AMENDMENT. The Sponsor will inform the Employer of any amendments to the prototype SEP or if the Sponsor has discontinued sponsorship of this prototype SEP. 6.03 DISCONTINUANCE. The Employer has the right to suspend or discontinue its contributions under the Plan, and to terminate this Plan, at any time. 7.01 APPLICATION. This Article VII applies to an Employer's Plan only if the Employer elects in Section 7.01 of the Adoption Agreement to permit Employees to make salary reduction contributions to the Plan. The Sponsor intends for this arrangement to qualify as a salary reduction simplified employee pension ("SARSEP") under Code Section 408(k)(6) and the applicable regulations. 7.02 ELECTIVE DEFERRALS. The Employer will contribute to each Participant's Account the elective deferrals the Participant has elected the Employer to withhold from his Compensation under his salary reduction agreement on file with the Employer. The salary reduction agreement will not apply to Compensation actually paid before its effective date. The effective date of the salary reduction agreement may not be earlier than its execution date. The salary reduction agreement will apply to subsequent increases in the Participant's Compensation unless the Participant revokes or modifies the salary reduction agreement. The Employer only may contribute elective deferrals for a Plan Year to any Participant's Account if: (a) At least 50% of Employer's eligible Employees have salary reduction agreements in effect for at least part of that Plan Year; and (b) The Employer has no more than 25 Employees eligible to participate in the Plan at any time during the prior Plan Year. (A) DISALLOWED DEFERRALS. If the Plan does not satisfy the 50% requirement at any time during the Plan Year, the Plan will consider all elective deferrals made by Employees for than Plan Year as "disallowed deferrals." Disallowed deferrals are IRA contributions which are not SEP-IRA contributions. If the Employer determines the Plan has made contributions to Participants' IRAs which are disallowed deferrals, the Plan must notify each affected Employee the Code Section no longer considers the deferrals as SEP-IRA contributions. The Employer must provide the notification within 21/2 months following the end of the Plan Year to which the disallowed deferrals relate. (B) NOTIFICATION PROCEDURE. The notification must specify (1) the amount of the disallowed deferrals (2) that the disallowed deferrals are includible in the Employee's gross income for the calendar year or years in which the amounts deferred would have been received by the Employee in cash had he not made an election to defer and that the income allocable to the disallowed deferrals is includible in the year withdrawn from the IRA; and (3) that the Employee must withdraw the disallowed deferrals (and allocable income) from the SEP-IRA by April 15 following the calendar year of notification by the Employer. The Code will subject disallowed deferrals not withdrawn by April 15 following the year of notification to the IRA contribution limitations of Code Sections 219 and 408. The Code will consider disallowed deferrals in excess of the limitations as excess IRA contributions and subject to the 6% excise tax on excess contributions under Code Section 4973. If income allocable to a disallowed deferral is not withdrawn by April 15 following the year of notification by the Employer, the income may be subject to the 10% tax on early distributions under Code Section 72(t) when withdrawn. The Employer will report disallowed deferrals in the same manner as excess SEP contributions. 7.03 PARTICIPATION. To the extent prohibited by law, an Employer which is a state or local government or a tax-exempt organization may not permit Participant salary reduction contributions. In addition, an Employer with leased employees as defined under Code Section 414(n)(2) may not permit Participant salary reduction contributions. 7.04 ANNUAL ELECTIVE DEFERRAL LIMITATIONS. A Participant's elective deferrals may not exceed the lesser of 15% of the Participant's Compensation, or 402(g) limitation. The 402(g) limitation is the greater of $7,000 or the adjusted amount determined by the Secretary of the Treasury. If, pursuant to a salary reduction agreement, the Employer determines the Participant's elective deferrals to the Plan for a calendar year would exceed the 402(g) limitation, the Employer will suspend the employee's salary reduction agreement, if any, until the following January 1 and refund any elective deferrals in excess of the 402(g) limitation which the Employer has not contributed to the Participant's Account. The Employer will make all refunds no later than April 15 of the following calendar year. 7.05 DEFINITIONS. For purposes of this Article VII: (a) "Highly Compensated Employee" means an Eligible Employee who satisfies the definition in Section 1.07 of the Plan. Family members aggregated as a single Employee under Section 1.07 constitute a single Highly Compensated Employee, whether a particular family member is a Highly Compensated Employee or a Nonhighly Compensated Employee without the application of family aggregation. (b) "Nonhighly Compensated Employee" means an Eligible Employee who is not a Highly Compensated Employee and who is not a family member treated as a Highly Compensated Employee. (c) "Eligible Employee" means an Employee who is eligible to enter into a salary reduction agreement for the Plan Year, regardless of whether he actually enters into such an agreement. (d) "Nonhighly Compensated Group" means the group of Eligible Employees who are Nonhighly Compensated Employees for the Plan Year. (e) "Compensation" means any definition of Compensation which is permissible under Adoption Agreement Section 1.06, regardless of the actual elections made by the Employer in the Adoption Agreement. The definition used by the Employer for a Plan Year must apply uniformly to all Eligible Employees. 7.06 ACTUAL DEFERRAL PERCENTAGE TEST. For each Plan Year, the Employer must determine whether the elective deferrals for each Highly Compensated Employee satisfy the actual deferral percentage ("ADP") test. A Highly Compensated Employee satisfies the ADP test if his ADP does not exceed 1.25 times the average ADP of the Nonhighly Compensated Group. (A) CALCULATION OF ADP. The average ADP for the Nonhighly Compensated group is the average of the separate ADPs calculated for each Eligible Employee who is a member of that group. An Eligible employee's ADP for a Plan Year is the ratio of the Eligible Employee's deferral contributions for the Plan Year to the Employee's Compensation for the Plan Year. In calculating the average ADP, the percentage for an eligible Nonhighly Compensated Employee who does not make deferral contributions for the Plan Year is 0%. For aggregated family members treated as a single Highly Compensated Employee, the ADP of the family unit is the ADP determined by combining the deferral contributions and Compensation of all aggregated family members. A Nonhighly Compensated Employee's ADP does not include elective deferrals made to this Plan or to any other Plan maintained by the Employer, to the extent such elective deferrals exceed the 402(g) limitation described in this Section. (B) EXCESS SEP CONTRIBUTIONS. If the Employer determines a Highly Compensated Employee fails to satisfy the ADP test for a Plan Year, the Employer must notify the affected employee of the excess contribution and tax consequences of the excess contribution during the next Plan Year. However, the Employer will incur an excise tax equal to 10% of the amount of the excess SEP contribution if the Employer does not notify the Employee during the first 21/2 months of that next Plan Year. The excess SEP contributions are that amount if deferral contributions made by a Highly Compensated Employee which exceeds 1.25 times the average ADP of the Nonhighly Compensated Group. An Excess SEP contribution is includible in an Employee's gross income on the earliest date any elective deferral made by an Employee during the Plan Year would have been received by the Employee had he originally elected to receive the amounts in cash. However, if the excess SEP contribution (not including allocable income) totals less than $100, then the excess contribution is includible in the Employee's gross income in the year of notification. Income allocable to the excess SEP contribution is includible in the year of withdrawal from the IRA. (C) NOTIFICATION PROCEDURE. The Employer's notification to each affected Highly Compensated Employee of the excess SEP contributions must state specifically, in a manner calculated to be understood by the average Participant: (1) the amount of the excess contribution attributable to that Employee's elective deferrals; (2) the calendar year for which the excess SEP contribution is includible in the employee's gross income; (3) that the employee must withdraw the excess SEP contribution (and allocable income) from the SEP-IRA by April 15 following the year of notification by the Employer. Excess SEP contributions not withdrawn by April 15 following the year of notification will be subject to the IRA contribution limitations of Code Sections 219 and 408 for the preceding calendar year. The Code will consider contributions in excess of the limitations as excess IRA contributions and subject to the 6% excise tax on excess contributions under Code Section 4973. If income allocable to an excess SEP contribution is not withdrawn by April 15 following the year of notification by the Employer, the income when withdrawn may be subject to the 10% tax on early distributions under Code Section 72(t). If the Employer fails to notify Employees by the end of the Plan year following the Plan Year in which the Employees made the excess SEP contribution, the Revenue Service will no longer consider the SEP to meet the requirements of Code Sections 408(k)(6). If the SEP no longer meets the requirements of Code Section 408(k)(6), any contribution to an Employee's IRA will be subject to the contribution limitations of Code Section 219 and 408. The Code will consider contributions in excess of the limitations as excess IRA contributions. (D) WITHDRAWAL RESTRICTIONS. For each Eligible Employee who makes an elective deferral to a SEP-IRA, the Employer will provide a notice explaining the IRA distribution rules of Code Section 408(d)(1) and the penalty tax provisions of Code Section 72(t) will apply to the transfer or distribution from a SEP-IRA of any elective deferrals prior to the earlier of (1) 21/2 months after the close of the Plan Year or (2) the determination of whether the SEP satisfies the ADP test. 8.01 DEEMED TOP HEAVY PLAN ELECTION. If the Employer does not permit Participant salary reduction contributions, the Plan must operate the SEP as a Deemed Top Heavy Plan. If the Employer permits salary reduction contributions, the Employer must specify in its Adoption Agreement whether the Plan will operate as a Deemed Top Heavy Plan or as a Not Deemed Top Heavy Plan. (A) DEEMED TOP HEAVY PLAN. If the Employer elects in the Adoption Agreement to treat the Plan as a Deemed Top Heavy Plan, the top heavy minimum allocation requirement applies in all Plan Years even if the Plan is not top heavy. (B) NOT DEEMED TOP HEAVY PLAN. The top heavy minimum allocation requirement applies to a Not Deemed Top Heavy Plan only in Plan Years for which the Plan is top heavy. 8.02 DETERMINATION OF TOP HEAVY STATUS. The Plan is top heavy for a Plan Year if the top heavy ratio as of the Determination Date exceeds 60%. The top heavy ratio is a fraction, the numerator of which is the sum of the Employer contributions (including election deferrals, if any) made to the Accounts of all Key Employees as of the Determination Date and the denominator of which is a similar sum determined for all Employees. The Plan must calculate the top heavy ratio by disregarding the Employer Contributions of any Non-Key Employee who was formerly a Key Employee, and by disregarding the Employer Contributions of an individual who has not received credit for at least one Hour of Service with the Employer during the Determination Period. The Plan must calculate the top heavy ratio in accordance with Code Section 416 and the regulations under that Code section. Under a Deemed Top Heavy Plan, the Plan need not determine whether the Plan actually is top heavy. If the Employer maintains (or maintained within the prior 5 years) any other SEP or qualified plan in which a key employee participates or participated, the Employer must aggregate contributions, accrued benefits or account balances (whichever is applicable), with contributions made to this SEP to determine top heavy status. 8.03 DEFINITIONS. For purposes of applying the top heavy provisions: (1) "Key Employee" means, as of any Determination Date, any Employee or former Employee (or Beneficiary of such Employee) who, for any Plan Year in the Determination Period: (i) has Compensation in excess of 50% of the dollar amount prescribed in Code Section 415(b)(1)(A) and is an officer of the Employer; (ii) has Compensation in excess of the dollar amount prescribed in Code Section 415(c)(1)(A) and is one of the Employees owning the ten largest interests in the Employer; (iii) is a more than 5% owner of the Employer; or (iv) is a more than 1% owner of the Employer and has Compensation of more than $150,000. The constructive ownership rules of Code Section 318 (or the principles of that section, in the case of an unincorporated Employer,) will apply to determine ownership in the Employer. The number of officers taken into account under clause (i) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q) exclusions) of Employees, but no more than 50 officers. The Plan will make the determination of who is a Key Employee in accordance with Code Section 416(i)(1) and the regulations under that Code Section. (2) "Non-Key Employee" means an Employee who does not meet the definition of Key Employee. (3) The Plan defines "Hour of Service" in accordance with the rules of Labor Reg. Section 2530.200b-2, which the Plan, by this reference, specifically incorporates in full. (4) "Determination Date" for any Plan Year is the last day of the preceding Plan Year or, in the case of the first Plan Year of the Plan, the last day of that Plan Year. The "Determination Period" is the 5 year period ending on the Determination Date. (5) "Participant" includes any Employee otherwise eligible to participate in the Plan but who is not a Participant because of his failure to make elective deferrals under the salary reduction arrangement. (6) "Compensation" The Employer will determine Compensation by excluding elective contributions (even if included under Adoption Agreement Section 1.06) and by disregarding any exclusion from compensation elected in Adoption Agreement Section 1.06. 8.04 TOP HEAVY MINIMUM ALLOCATION. Unless the Employer designates in the Adoption Agreement another plan to satisfy the top heavy minimum requirements, the Employer will make a minimum contribution each year to the Account of each Non-Key Employee eligible to participate in this Plan. The top heavy minimum contribution is the lesser of 3% of the Participant's Compensation for the Plan Year or the highest Key Employee contribution rate for the Plan Year. A Key Employee's contribution is the sum of the Employer contributions made to the Key Employee's Account under Sections 3.01 and 7.01, divided by the Key Employee's Compensation. A Non-Key Employee's contribution rate is the Employer's contributions made to the Non-Key Employee's Account, exclusive of the elective deferrals, divided by the Non-Key Employee's Compensation. A Simplified Employee Pension, or SEP, is a written arrangement through which an employer can make a contribution toward its employees' retirement income without becoming involved in more complex retirement plans. Under a SEP, an employer makes contributions directly to each employee's Individual Retirement Account or Annuity ("IRA"). The IRA to which the employer contributes is referred to as a SEP-IRA. An employer who signs a SEP agreement is not statutorily required to make any contribution to the SEP-IRAs of eligible employees. However, if the employer makes any contribution, the SEP must allocate the contribution in accordance with a written formula which does not discriminate in favor of highly compensated employees. The employer does not report SEP contributions made on behalf of participants as gross income on Form W-2, unless the contribution exceeds certain limits. For more specific instructions regarding the income tax exclusion for SEP contributions, see Question 4. If an eligible employee makes less than $300 in the year for which the employer makes a contribution, the employer need not make a SEP contribution for that employee. The Revenue Service will increase the $300 amount, on an annual basis, by a cost of living adjustment factor ($400 for 1995). The employer may impose participation requirements which may not be more restrictive than the Internal Revenue Code ("Code") permits, but they may be less restrictive. Under the Code, all employees who have attained age 21 and have worked for the employer for some period of time (however short) in any three of the immediately preceding five plan years, are eligible to receive the employer's SEP contribution (if any). The plan year of the SEP must be either the calendar year or the employer's taxable year. The SEP document defines the plan year. The employer also may exclude from participation certain nonresident aliens and certain union employees who already have negotiated with respect to retirement benefits. This information and the following "Questions and Answers" should provide a basic understanding of what a SEP is, how an employer makes its contribution, and how the Code treats the contribution for tax purposes. An employee who has unresolved questions concerning SEPs should call the Federal tax information number, or the toll free number, shown in the white pages of the local telephone directory. (1) WHAT IS A SIMPLIFIED EMPLOYEE PENSION, OR SEP? A SEP is a retirement income arrangement under which your employer may contribute any amount each year up to the lesser of $22,500 or 15% of your compensation into your own IRA. Your employer will provide you with a copy of the agreement containing participation requirements and a description of the method under which the SEP allocates its employer contribution to your IRA. All amounts contributed to your IRA by your employer belong to you, even after you separate from service with the employer. (2) MUST MY EMPLOYER CONTRIBUTE TO MY IRA UNDER THE SEP? Whether or not your employer makes a contribution to the SEP is entirely within the employer's discretion. If a contribution is made under the SEP, an employer makes a contribution under the SEP, the SEP agreement, must provide a method for allocating the contribution to all eligible employees. (3) HOW MUCH MAY MY EMPLOYER CONTRIBUTE TO MY SEP-IRA IN ANY YEAR? Under a SEP, your employer will determine each year the amount of contribution it wishes to make to your IRA. However, the contribution for any year may not exceed the lesser of $22,500 or 15% of your compensation for that year. The compensation used to determine this limit does not include any amount which the employer contributed to your IRA under the SEP. The agreement does not require an employer to maintain a particular level of contributions. It is possible the employer may not make a contribution for a particular year. Also see Question 5. (4) HOW DO I TREAT MY EMPLOYER'S SEP CONTRIBUTIONS FOR MY TAXES? The amount your employer contributes is excludible from your gross income subject to certain limitations (see Question 1) and is not includible as taxable wages on your Form W-2. (5) MAY I ALSO CONTRIBUTE TO AN IRA IF I AM A PARTICIPANT IN A SEP? Yes. You may still contribute the lesser of $2,000 or 100% of your compensation to an IRA. However, the amount which is deductible is subject to various limitations. Also see Question 11. (6) ARE THERE ANY RESTRICTIONS ON THE IRA I SELECT TO DEPOSIT MY SEP CONTRIBUTIONS IN? Under the SEP which is approved by the IRS, contributions must be made to either a Model IRA which is executed on an IRS form or a master or prototype IRA for which the IRS has issued a favorable opinion letter. (7) WHAT IF I DON'T WANT A SEP-IRA? Your employer may require you become a participant in such an arrangement as a condition of employment. If the employer does not require all eligible employees to become participants and an eligible employee elects not to participate, the Code would prohibit the employer from contributing to the SEP-IRAs of all other employees of the same employer. If one or more eligible employees do not participate and the employer attempts to establish a SEP-IRA agreement with the remaining employees, the resulting arrangement may result in adverse tax consequences to the participating employees. (8) CAN I MOVE FUNDS FROM MY SEP-IRA TO ANOTHER TAX-SHELTERED IRA? Yes, it is permissible for you to withdraw, or receive, funds from your SEP-IRA, and no more than 60 days later, place such funds in another IRA, or SEP-IRA. The Code refers to this as a "rollover" and you may not make more than one rollover per IRA during a one-year interval. However, there are no restrictions on the number of times you may make "transfers" if you arrange to have your IRA funds transferred between the trustees, so you never have possession of the funds. (9) WHAT HAPPENS IF I WITHDRAW MY EMPLOYER'S CONTRIBUTION FROM MY IRA? If you do not want to leave the employer's contribution in your IRA, you may withdraw it at any time, but any amount withdrawn is includible in your income. Also, if withdrawals occur before attainment of age 59 1/2, and not on account of death or disability, you may be subject to a penalty tax. (10) MAY I PARTICIPATE IN A SEP EVEN THOUGH I'M COVERED BY ANOTHER PLAN? Yes. You can participate in a SEP (other than the IRS Model SEP) even though you participate in another plan of the same employer. However, the Code imposes combined contribution limits. Also, if you work for several employers, one employer may cover you under a SEP and the other employer may cover you under a pension or profit sharing plan. (11) WHAT HAPPENS IF AN EMPLOYER CONTRIBUTES TOO MUCH TO MY SEP-IRA IN ONE YEAR? You may withdraw any contribution which exceeds the yearly limitations without penalty by the due date (plus extensions) for filing your tax return (normally April 15th). The withdrawn contribution is includible in your gross income. Excess contributions left in your SEP-IRA account after the prescribed time for withdrawal may have adverse tax consequences. Withdrawals of the excess contributions may be subject to the premature distribution penalty tax withdrawals. (12) DO I NEED TO FILE ANY ADDITIONAL FORMS WITH THE IRS BECAUSE I PARTICIPATE IN A SEP? (13) IS MY EMPLOYER REQUIRED TO PROVIDE ME WITH INFORMATION ABOUT SEP-IRAS AND THE SEP AGREEMENT? Yes. In addition to the SEP Disclosure Information contained in this document, your employer must provide you with the following information: (a) At the time you become eligible to participate in the SEP your employer must inform you in writing it has adopted a SEP agreement and state which employees may participate, how the SEP allocates employer contributions, and who can provide you with additional information. (b) Your employer must inform you in writing of all employer contributions to your SEP-IRA (the employer must supply this information by January 31st of the year following the year for which the employer makes the contribution, or 30 days after the employer makes the contribution, whichever is later). (c) If your employer amends the SEP, or replaces it with another SEP, the employer must furnish a copy of the amendment or new SEP (with a clear written explanation of its terms and effects) to each participant within 30 days of the date the SEP or amendment becomes effective. (d) If your employer selects or recommends the IRAs into which it will deposit the SEP contribution (or substantially influences you or other employees to choose them), your employer must ensure a clear written explanation of the terms of those IRAs is provided at the time each employee becomes eligible to participate. The explanation must include information about the terms of those IRAs, such as rates of return and any restrictions on a Participant's ability to "rollover," transfer, or withdraw funds from the IRAs (including restrictions which allow rollovers or withdrawals but reduce earnings of the IRAs or impose other penalties). (e) If your employer selects, recommends, or substantially influences you to choose a specific IRA and the IRA prohibits the withdrawal of funds, the Department of Labor may require your employer to provide you additional information. (14) IS THE FINANCIAL INSTITUTION WHERE I ESTABLISH MY IRA ALSO REQUIRED TO PROVIDE ME WITH INFORMATION? Yes, it must provide you with a disclosure statement which contains the following items of information in plain, nontechnical language: (1) the statutory requirements which relate to your IRA; (2) the tax consequences which follow the exercise of various options and (3) participation eligibility rules, and rules on the deductibility and (4) the circumstances and procedures under which you may revoke your IRA, including the name, address and telephone number of the person designated to receive notice of revocation (this explanation must be prominently displayed at the beginning of the disclosure statement); (5) explanations of when penalties may be assessed against you because of specified prohibited or penalized activities concerning your IRA; and (6) financial disclosure information which: (a) either projects value growth rates of your IRA under various contribution and retirement schedules, or describes the method of computing and allocating the annual earnings and charges which the financial institution may assess; (b) describes whether, and for what period, the financial institution guarantees growth projections for the plan, or a statement describing the basis of earnings rate projections; (c) states the sales commission the financial institution will charge in each year expressed as a percentage of $1,000; and (d) states the proportional amount of any nondeductible life insurance which may be a feature of your IRA. (15) CAN SEP CONTRIBUTIONS BE REDUCED BY EMPLOYER CONTRIBUTIONS TO SOCIAL SECURITY? Although employer contributions under the SEP agreement must bear a uniform relationship to employees' compensation, your employer may take into consideration certain amounts it already has paid on your account as Social Security taxes. This is called "integration" and is permissible only if the employer satisfies certain statutory requirements. If your employer chooses an integration formula, the SEP allocation information your employer provides you must clearly show the integration formula. See Publication 590 available at most IRS offices, for a more complete explanation of disclosure requirements. In addition to this disclosure statement, the financial institution must provide you with a financial statement each year. It may be necessary to retain and refer to statements for more than one year to evaluate the investment performance of the IRA and in order that you will know how to report IRA distributions for tax purposes. The SEP your employer has adopted includes an elective deferral arrangement. Under a SEP elective deferral arrangement, you may elect to reduce your compensation (usually by a payroll deduction agreement) by an amount you wish the employer to contribute to your SEP-IRA. The SEP refers to these amounts you elect to have the Employer contribute from your compensation as "elective deferrals." (16) WHAT IS A SEP ELECTIVE DEFERRAL ARRANGEMENT? A SEP elective deferral arrangement is a SEP which permits you to defer compensation to your own IRA. You may elect to defer from your regular salary or on a bonus. This type of elective SEP is available only to an employer with 25 or fewer eligible employees. Your Employer will provide you with a copy of the agreement containing eligibility requirements and a description of the method for making elective deferral contributions to your IRA. All amounts contributed to your IRA belong to you, even after you separate from service with the employer. (17) MUST I MAKE ELECTIVE DEFERRALS TO AN IRA? No. However, if more than half of the eligible employees choose not to make elective deferrals in a particular year, then no employee may participate in an elective SEP of that employer for the year. (18) HOW MUCH MAY I ELECT TO DEFER TO MY SEP-IRA IN A PARTICULAR YEAR? For any year, the amount which you may defer to this SEP may not exceed the lesser of: (1) 15% of compensation; or (2) $7,000 (as adjusted for increases in the cost of living.) If your employer also makes non-elective contributions to the SEP, the total contributions on your behalf to the SEP (non-elective contributions and elective contributions) may not exceed the lesser of $22,500 or 15% of your compensation. The $7,000 is an overall cap on the maximum amount you may defer in each calendar year to all elective SEPs and cash-or-deferred arrangements under Code 401(k), even if maintained by unrelated employers. If you participate in two arrangements which permit elective deferrals, you are responsible for determining whether you exceed this limit for any calendar year. If you are a highly compensated employee, the Code imposes a further limit on the amount you may contribute to a SEP-IRA for a particular year. The employer calculates this limit on the basis of a mathematical formula which limits the percentage of pay that highly compensated employees may elect to defer to a SEP- IRA. As discussed below, your employer will notify you if you have exceeded the ADP limits. (19) HOW DO I TREAT ELECTIVE DEFERRALS FOR TAX PURPOSES? The amount you elect to defer to your SEP-IRA is excludable from your gross income, subject to the limitations discussed above, and is not includible as taxable wages on your Form W-2. However, elective deferrals are subject to FICA taxes. (20) HOW WILL I KNOW IF THE EMPLOYER CONTRIBUTES TOO MUCH TO MY SEP-IRA IN ONE YEAR? There are two different ways in which you may contribute too much to your SEP- IRA. One way is to make elective deferrals in excess of the $7,000 limitation described above ("excess elective deferrals"). The second way is to make elective deferrals which violate the ADP test ("excess SEP contributions"). You are responsible for calculating whether or not you have exceeded the $7,000 limitation. Your employer is responsible for determining whether you have made any excess SEP contributions. The Code requires your employer to notify you by March 15 if you have made any excess SEP contributions for the preceding calendar year. Your employer will notify you of an excess SEP contribution by providing you with any required form for the preceding calendar year. (21) WHAT MUST I DO ABOUT EXCESS DEFERRALS TO AVOID ADVERSE TAX CONSEQUENCES? Excess deferrals are includible in your gross income in the year of the deferral. You should withdraw excess deferrals under this SEP and any income allocable to the excess deferrals from your SEP-IRA by April 15. You may not transfer or rollover excess deferrals to another SEP-IRA. If you fail to withdraw your excess deferrals and any income allocable to the excess deferrals by April 15 of the following year, your excess deferrals will be subject to a 6% excise tax for each year they remain in the SEP-IRA. If you have both excess deferrals and excess SEP contributions (as described in 21a below), the amount of excess deferrals you withdraw by April 15 will reduce your excess SEP contributions. (21A) WHAT MUST I DO ABOUT EXCESS SEP CONTRIBUTIONS TO AVOID ADVERSE TAX CONSEQUENCES? Excess SEP contributions are includible in your gross income in the year of the deferral. You should withdraw excess SEP contributions for a calendar year and any income allocable to the excess SEP contributions by the due date (including extensions) for filing your income tax return for the year. You may not transfer or rollover excess SEP contributions to another SEP-IRA. If you fail to withdraw your excess SEP contributions and income allocable to the excess SEP contributions by the due date (including extensions) for filing your income tax return, your excess SEP contributions will be subject to a 6% excise tax for each year they remain in the SEP-IRA. (22) CAN I REDUCE EXCESS ELECTIVE DEFERRALS OR EXCESS SEP CONTRIBUTIONS BY ROLLING OVER OR TRANSFERRING AMOUNTS FROM MY SEP-IRA TO ANOTHER IRA ? No. You may reduce excess elective deferrals or excess SEP contributions only by a distribution to you. Excess amounts rolled over or transferred to another IRA will be includible in income and subject to the penalties discussed above. (23) HOW DO I KNOW HOW MUCH INCOME IS ALLOCABLE TO MY EXCESS ELECTIVE DEFERRALS OR ANY EXCESS SEP CONTRIBUTIONS? The rules for determining and allocating income to excess elective deferrals or SEP contributions are the same as those governing regular IRA contributions. The trustee or custodian of your SEP-IRA may be able to inform you of the amount of income allocable to your excess amounts. (24) WHAT HAPPENS IF I WITHDRAW MY ELECTIVE DEFERRALS TO MY SEP-IRA? If you don't want to leave the money in the IRA, you may withdraw it at any time, but any amount withdrawn is includible in your income. Also, if withdrawals occur before you are 591/2, and not on account of death or disability, you may be subject to a 10% penalty tax. (As discussed above, different rules apply to the removal of excess amounts contributed to your SEP- (25) WHAT HAPPENS IF I TRANSFER OR DISTRIBUTE CONTRIBUTIONS FROM MY SEP BEFORE THE ADP TEST DESCRIBED IN QUESTION 3 HAS BEEN SATISFIED ? If you make a transfer or a distribution from your SEP before the Employer satisfies the nondiscrimination test, the distribution will be subject to regular income tax and the additional 10% tax on early distributions. To order additional brochures or prospectuses relating to the shares of SunAmerica's funds call: 800/858-8850, extension 5134. Please read the prospectuses carefully before investing.	485BPOS	EX-99.B14	1996-01-12T00:00:00	1996-01-12T16:13:13
0000950115-96-000012	0000950115-96-000012_0001.txt	MESIROV GELMAN JAFFE CRAMER & JAMIESON REGISTRATION STATEMENT ON FORM S-2 (NO. 33-80223) This firm is counsel to ICC Technologies, Inc. (the 'Company'). As such, we are familiar with the corporate proceedings relating to the Registration Statement on Form S-2, File No. 33-80223 (the 'Registration Statement'), filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, covering 2,875,000 shares of the $.01 par value Common Stock to be offered and sold to the Underwriters named in the Registration Statement, of which (i) 2,500,000 shares (the 'Primary Shares') will be sold by the Company, and (ii) a total of 375,000 shares (the 'Option Shares') will be sold upon exercise by the Underwriters of an option granted to them by the Company, solely for the purpose of covering over-allotments. We have examined the original or copies, certified or otherwise identified to our satisfaction, of the Company's Certificate of Incorporation, as amended, its By-laws, as amended, resolutions of its Board of Directors, the proposed Underwriting Agreement between the Company and Janney Montgomery Scott Inc. and Gerard Klauer Mattison & Co., LLC, and such other documents and corporate records relating to the Company and the issuance and sale of the Primary Shares and the Option Shares as we deemed appropriate for purposes of rendering this opinion. Based upon the foregoing, it is our opinion that when the Primary Shares and the Option Shares being registered for sale by the Company are sold in the manner and for the consideration described in the Registration Statement, such securities will be legally issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as Exhibit 5 to the Registration Statement and to the reference made to this firm under the heading 'Legal Matters' in the Prospectus comprising a part of the Registration Statement. /s/ Mesirov Gelman Jaffe Cramer & Jamieson 1735 MARKET STREET o PHILADELPHIA, PA 19103-7598 o 215 994 1000 FAX 215 994 1111	S-2/A	EX-5	1996-01-12T00:00:00	1996-01-11T17:48:48
0000950168-96-000039	0000950168-96-000039_0003.txt	This Agreement, dated as of the 10th day of August, 1992 made by and among FIRST INVESTORS SERIES FUND II, INC., a corporation duly organized and existing under the laws of the State of Maryland (the "Fund"), on behalf of its separate, designated series presently existing or hereafter established (hereinafter the "Series"); and ADMINISTRATIVE DATA MANAGEMENT CORP., a corporation duly organized and existing under the laws of the State of New York ("ADM"). WHEREAS, ADM has agreed to act as transfer agent to the Series, as their dividend disbursing agent, and as administrator of the Dividend Reinvestment, Share Accumulation and Systematic Withdrawal Accounts of the Series ("Plans" as defined in Section 21 hereof), and ADM has also agreed to act for the Series in other respects as hereinafter stated; and WHEREAS, the parties hereto desire to set forth certain terms relating to the activities of ADM under this Agreement. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein, the parties hereto, intending to be legally bound, do hereby agree as follows: Section 1. The Fund hereby appoints ADM as the Series' transfer agent and ADM accepts such appointment and agrees to act in such capacity upon the terms set forth in this Agreement. Section 2. ADM will maintain stock registry records in the usual form in which it will note the issuance and redemption of shares and the issuance and transfer of share certificates and is also authorized to maintain an account entitled Unissued Share Certificate Account in which it will record the shares and fractions thereof issued and outstanding from time to time for which issuance of share certificates is deferred. ADM is also authorized to keep records, which will be part of the stock transfer records, as well as its records of the Plans, in which it will note the names and registered addresses of Planholders (as defined in Section 21 hereof), and the number of shares and fractions thereof from time to time owned by them for which no share certificates are outstanding. Each shareholder whether he or she holds one or more share certificates will be assigned a single account number. Section 3. Whenever shares are purchased for Planholders, the Fund authorizes ADM to dispense with the issuance and countersignature of share certificates. In such case ADM, as transfer agent, shall merely note on its stock registry records the issuance of the shares and fractions thereof (if any), shall credit the proper Unissued Share Certificate Account with the shares and fractions thereof to the respective Planholders. Likewise, whenever ADM has occasion to surrender for redemption shares and fractions thereof owned by Planholders, it shall be unnecessary to issue share certificates for redemption purposes. The Fund authorizes ADM in such cases to process the transactions by appropriate entries in its stock transfer accounts and debiting of the Unissued Share Certificate Account and the record of shares outstanding. Whenever Planholders are entitled to the issuance of share certificates for shares held under Plans, the Fund authorizes ADM as transfer agent, to countersign share certificates for issuance and delivery and to debit the Unissued Certificate Account. Section 4. ADM in its capacity as transfer agent will, in addition to the duties and functions above-mentioned, perform the usual duties and functions of a stock transfer agent for the Series. ADM may rely conclusively and act without further investigation upon any list, instruction, certification, authorization, share certificate or other instrument or paper reasonably believed by it to be genuine and unaltered and to have been signed, counter-signed or executed by a duly authorized person or persons or upon the instructions of any officer of the Fund, or upon the advice of counsel for the Fund or for ADM. ADM shall be protected in any action it takes or does not take in reliance upon directions, advice or written instructions it receives from the Fund or from counsel in accordance with this Agreement and which ADM believes, in good faith, to be consistent with those directions, advice or written instructions. Nothing in this section shall be construed to impose an obligation upon ADM (1) to seek such directions, advice or written instructions or (2) to act in accordance with such directions, advice or written instructions unless, under the terms of other provisions of this Agreement, the same is a condition of ADM's properly taking or not taking such action. Nothing in this subsection shall excuse ADM when an action or omission on the part of ADM constitutes willful misfeasance, bad faith, negligence or reckless disregard by ADM of any duties, obligations or responsibilities provided for in this Agreement. Section 5. Upon declaration of each dividend and each securities profit distribution by the Board of Directors of the Fund on behalf of any Series, the Fund shall notify ADM of the date of such declaration, the amount payable per share, the record date for determining the shareholders entitled to payment, the payment date, the date for issuance of shares as dividends, and the price which is to be used to issue such shares. In the case of dividends and securities profit distributions issued in shares, ADM will advise the applicable Series of the number of shares to be issued, or upon shareholder election, pay such dividends and distributions in cash, if provided for in the Series' prospectus. In all cases, such issuance of shares or payments of cash, as well as payments upon redemption, shall be made after ADM deducts and pays the required amount of funds to be withheld in accordance with any applicable tax law or other laws, rules or regulations. ADM shall mail to each Series' shareholders such tax forms and other information, or permissible substitute notice, relating to any dividends and distributions paid by the Series as are required to be filed and mailed by applicable law, rule or regulation. Dividends and securities profit distributions directed to be reinvested under Plans will be applied as provided in Section 11 below. ADM shall prepare, maintain and file with the IRS and other appropriate taxing authorities reports relating to all dividends paid by any Series to its shareholders as required by tax or other law, rule or regulation. Section 6. On or about each payment date for cash payments, the Fund will transfer, or cause the Custodian to transfer, to ADM in its capacity as dividend disbursing agent, the total amount of the dividend and/or distribution currently payable in cash, and ADM in such capacity will, on the designated payment date, mail distribution checks to the shareholders for the proper amounts payable to them. THE ADMINISTRATION OF THE PLANS Section 7. The Fund hereby appoints ADM as administrator of the Plans and ADM accepts such appointment and agrees to act in such capacity upon the terms set forth in this Agreement. As provided in Section 2, ADM will maintain records, which will be part of the stock registry records as well as its records of the administration of the Plans, in which it will note the transactions effected for the respective Planholders and the number of shares and fractions thereof from time to time owned by them for which no share certificates are outstanding. Section 8. The Fund will from time to time keep ADM fully informed of the respective prices which are applicable to Planholders who are entitled to purchase shares at reduced offering prices. ADM may conclusively rely on such information in placing orders for shares on behalf of such Planholders. Section 9. It will be the practice of ADM to process payments by Planholders received by it in acceptable form between and until the time of the closing of the New York Stock Exchange on each day on which said Exchange is open, and the same time on the prior business day in which said Exchange was open, and to obtain from the Series a quotation of the public offering price per Series share (on which it may conclusively rely) as of the close of business on said Exchange. ADM will proceed to calculate the amount available for investment in shares at the public offering price so quoted and, if applicable, the amounts to be allocated as between commissions of dealers, share of the Series' principal underwriter and net asset value to be deposited with the Custodian. While the public offering price so quoted is still in effect, ADM, as agent for the Planholders, will place an order with the Series' principal underwriter for the proper number of shares and fractions thereof, will advise the underwriter of the breakdown of the total purchase price as between commissions of dealers, share of the underwriter and net asset value, and will confirm said figures in writing. Section 10. ADM will thereupon set aside the commissions of dealers, and the share of the Series' principal underwriter, and will pay over the balance available (i.e., the net asset value) to the Custodian and will furnish said Custodian with the statements required by the Custodian Agreement. Said Custodian will deposit the net asset value in the Principal Account under the Custodian Agreement. ADM will credit the bank account of the underwriter for its share. The proper number of shares and fractions thereof will then be issued and credited to the Unissued Certificate Account and the shares and fractions thereof purchased for each Planholder will be credited to his or her separate account. ADM will thereupon mail to each Planholder a confirmation of the purchase, with copies to the Series and the proper dealers, if a Series so requests. Such confirmation will show the prior and new share balance, the shares held under the Plans and shares (if any) for which share certificates are outstanding, the amount invested, the price paid and other data. ADM will remit commissions to the proper dealers weekly or at other convenient intervals, as agreed upon between the Series and ADM. Section 11. As and when a Series declares dividends and/or securities profit distributions, it will promptly quote to ADM the net asset value per share at the close of business on the payment date for reinvestments. Thereafter, ADM promptly will advise the Series of the amounts which will be issued in full and fractional shares on such payment date. Upon determination of the amount of the dividends or distributions to be issued in shares under Plans, the shares and fractions thereof purchased for the Plans will be issued pursuant to a Statement of ADM and will be credited to the Unissued Certificate Account. ADM will credit the shares and fractions thereof so issued to the separate accounts maintained for the respective Planholders, and will promptly mail to each Planholder a confirmation of the purchase, with a copy to the Series, showing the prior and new share balance. Section 12. Whenever a shareholder shall deposit shares represented by share certificates in a Systematic Withdrawal Plan or other Plan permitting deposit of shares thereunder, ADM as transfer agent is authorized upon receipt of share certificates registered in the name of the shareholder, or if not so registered in due form for transfer, to cancel such share certificates, to debit the individual share accounts and to credit the shares to the Unissued Certificate Account. ADM as Plan administrator will credit the shares to be deposited to the proper Plan accounts. In the event that a Planholder shall desire to deposit under a Systematic Withdrawal Plan shares held in an investment plan or other like plan, ADM will accomplish such deposit by proper debiting and crediting of Plan accounts. Section 13. ADM will administer the Systematic Withdrawal Plans for the Planholders. ADM will note in such accounts the share balances from time to time, the additional shares issued from the payment of dividends and distributions in shares and the share redeemed to provide the withdrawal payments. Confirmations will be mailed to the Planholders reflecting each transaction, with copies to the Series. Section 14. Whenever ADM shall have received requests from Planholders to redeem shares and remit proceeds, or whenever ADM is required to redeem shares to make withdrawal payments under Systematic Withdrawal Plans or the like, ADM will advise the Series that it has shares for redemption, stating the number of shares and fractions thereof to be redeemed. The Series will then quote to ADM the applicable net asset value or redemption price, whereupon ADM will furnish the Series with an appropriate confirmation of the redemption and will process the redemption by filing with the Custodian an appropriate Statement of ADM as may be required by the Custodian Agreement. The Custodian shall be authorized to pay over to ADM as administrator, the total redemption price stated in the Statement of ADM for proper distribution and application. The stock registry books recording outstanding shares, the Unissued Certificate Account and the individual accounts of the shareholders shall be properly debited. Section 15. The practices and procedures of ADM and the Series above outlined in Sections 7 to 14, inclusive, may be altered or modified from time to time as may be mutually agreed by the parties to this Agreement, so long as the intent and purposes of the Plans, as stated from time to time in the prospectuses of the Series, are complied with. For special cases, the parties hereto may adopt such procedures as may be appropriate or practical under the circumstances and ADM may conclusively assume that any special procedure which has been approved by the Fund does not conflict with or violate any requirements of the Fund's Articles of Incorporation or By-Laws or the applicable Series' current prospectus, or any applicable rule, regulation or requirement of a regulatory body. Section 16. ADM in acting for Planholders or in any other capacity set forth in this Agreement, shall not be personally liable for any taxes, assessments or governmental charges which may be levied or assessed on any basis whatsoever in connection with the administration of the Plans, excepting only for taxes assessed against it in its corporate capacity out of its compensation hereunder. ADM shall be under no duty to take any action on behalf of a Series, except as specifically set forth herein or as may be specifically agreed to by ADM in writing. ADM shall be obligated to exercise due care and diligence in the performance of its duties hereunder, to act in good faith, and to use its best efforts in performing services provided for under this Agreement. ADM shall be liable for any damages arising out of or in connection with ADM's performance of or omission or failure to perform its duties under this Agreement to the extent such damages arise out of ADM's negligence, reckless disregard of its duties, bad faith or willful misfeasance. Without limiting the generality of the foregoing or of any other provision of this Agreement, ADM, in connection with its duties under this Agreement, shall not be under any duty or obligation to inquire into and shall not be liable for (a) the validity or invalidity or authority or lack thereof of any written instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which ADM reasonably believes to be genuine; or (b) subject to the provisions of Section 27, delays or errors or loss of data occurring by reason of circumstances beyond ADM's control, including acts of civil or military authority, national emergencies, labor difficulties, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply. Section 17. In addition to the services as transfer agent, dividend disbursing agent and administrator as set forth above, ADM will perform other services for the Fund as agreed to from time to time, including but not limited to preparation of Federal 1099 and other required tax information forms, mailing of annual and semi-annual reports of the Series, preparation of one annual list of shareholders and mailing of notices of shareholders meeting, proxies and proxy statements. Section 18. The Fund, on behalf of the Series, agrees to pay ADM compensation for its services and to reimburse it for expenses as set forth in Schedule A attached hereto, or as shall be set forth in amendments to such schedule approved by the parties to this Agreement. Section 19. ADM may from time to time in its sole discretion delegate some or all of its duties hereunder to any affiliate(s) or other entity, which shall perform such functions as the agent of ADM. To the extent of such delegation, the term "ADM" in this Agreement shall be deemed to refer to both ADM and such affiliate(s) or other entity or any of them, as the context may indicate; provided that the assignment and delegation of any of ADM's duties under this section shall not relieve ADM of any of its responsibilities or liabilities under this Agreement. Section 20. Nothing contained in this Agreement is intended to or shall require ADM in any capacity hereunder to perform any functions or duties on any holiday or other day of special observances on which the Fund and ADM are closed. Functions or duties normally scheduled to be performed on such days shall be performed on, and as of, the next business day on which both the Series and ADM are open. Section 21. All terms herein which are defined in the Custodian Agreement shall have the same meanings as set forth therein. In addition, the following terms as used in this Agreement shall have the meaning set forth below unless the context otherwise requires: Plan: The term "Plan" shall include such Dividend Reinvestment Accounts, Share Accumulation Accounts, Systematic Withdrawal Plans and other types of plans or accounts in a form acceptable to ADM, which the Fund, on behalf of the Series, may from time to time adopt and make available to shareholders of the Series, including plans or accounts adopted for pension and profit-sharing plans established by self-employed individuals, partnerships, individuals, corporations and not-for-profit organizations. Planholder: The term "Planholder" shall mean a shareholder who at the time of reference is participating in a Plan. Section 22. This Agreement may be terminated by any party to this Agreement by giving at least sixty (60) days' advance written notice stating when thereafter such termination shall be effective. In case of such notice of termination, the Board of Directors of the Fund shall, by resolution duly adopted, promptly appoint a successor to ADM to serve upon the terms set forth in this Agreement as then amended and supplemented. Unless and until a successor to ADM has been appointed as above, provided ADM shall continue to perform according to the terms of this Agreement, ADM shall be entitled to receive all the payments and reimbursement to which it is entitled under this Agreement. Section 23. This Agreement may be executed in one or more counterparts, each of which when so executed shall be deemed to be original, but such counterparts shall together constitute but one and the same instrument. Section 24. This Agreement shall extend to, and shall be binding upon, the parties hereto and their respective successors and assigns; provided however that this Agreement shall not be assignable by the Fund without the written consent of the Fund, authorized or approved by a resolution of its Board of Directors. Section 25. This Agreement shall be construed in accordance with the laws of the State of New York. Section 26. Notwithstanding any provision of law to the contrary, ADM hereby waives any right to enforce this Agreement against the individual and separate assets of any shareholder of the Series. With respect to any obligations of the Fund on behalf of the Series arising out of this Agreement, ADM shall look for payment or satisfaction of any obligation solely to the assets and property of the Series to which such obligation relates as though the Series had separately contracted with ADM by separate written instrument with respect to each Series. Section 27. No Director, officer, employee, or agent of the Fund shall be subject to any personal liability whatsoever under this Agreement, except for that arising from his or her bad faith, willful misconduct, gross negligence, or reckless disregard of his or her duties or for his or her failure to act in good faith and in the reasonable belief that his or her action was in the best interest of the Fund, and ADM shall look solely to the Fund property for satisfaction of claims of any nature arising in connection with the affairs of the Fund. Section 28. ADM shall maintain insurance of the types and in the amounts deemed by it to be appropriate. To the extent that policies of insurance may provide for coverage of claims for liability or indemnity by the parties set forth in this Agreement, the contracts of insurance shall take precedence, and no provision of the Agreement shall be construed to relieve an insurer of any obligation to pay claims to the Series, ADM or any other insured party which could otherwise be a covered claim in the absence of any provision of this Agreement. Section 29. ADM shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provision for periodic backup of computer files and data with respect to the Series and emergency use of electronic data processing equipment. In the event of equipment failures, ADM shall, at no additional expense to the Fund, take all reasonable steps to minimize service interruptions. ADM shall have no liability with respect to the loss of data or service interruptions caused by equipment failures, provided such loss or interruption is not caused by the negligence of ADM and provided further that ADM has complied with the provisions of this Section 29. Section 30. ADM represents that it is currently registered with the appropriate federal agency for the registration of transfer agents, or is otherwise permitted to lawfully conduct its activities without such registration and that it will remain so registered for the duration of this Agreement. ADM agrees that it will promptly notify the Fund in the event of any material change in its status as a registered transfer agent. Should ADM fail to be registered with the SEC as a transfer agent at any time during this Agreement, and such failure to register does not permit ADM to lawfully conduct its activities, the Series may, on written notice to ADM, terminate this Agreement upon five days written notice to ADM. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized officers and their seals hereunto duly affixed and attested as of the day and the year first above written. ATTEST: FIRST INVESTORS SERIES FUND II, INC /s/ C. Durso By: /s/ David D. Grayson C. Durso, Vice President David D. Grayson, President /s/ C. Durso By: /s/ David D. Grayson C. Durso, Vice President David D. Grayson, President Compensation and charges of Administrative Data Management Corp. for services as Transfer Agent, Dividend Disbursing Agent and Plan Administration, and for other services under the Administration Agreement. Opening New Account $5.00 for each account Processing Payments $0.75 for each payment* Processing Share Certificates $3.00 per certificate issued General Account Maintenance $0.65 per account per month Legal Transfers of Shares $10.00 per transfer Dividend Processing $0.45 per account per dividend Complete Liquidations $5.00 per transaction Governmental Authorities $1.00 for each account Exchange Fee $5.00 for each exchange of shares Systematic Withdrawal Plans $1.00 for each SWP check* OUT-OF-POCKET EXPENSES: In addition to the above charges, the Fund, First Investors Management Company, Inc. or First Investors Corporation shall reimburse Administrative Data Management Corp. for all out-of-pocket costs including but not limited to postage, insurance, forms relating to shareholders of the Fund, envelopes and other similar items, and will also reimburse Administrative Data Management Corp. for counsel fees, including fees for the preparation of the Administration Agreement and review of prospectus and application forms. THE ABOVE FEES AND OUT-OF-POCKET EXPENSES APPLY TO THE FOLLOWING FUNDS: FIRST INVESTORS FUND FOR INCOME, INC., FIRST INVESTORS GLOBAL FUND, INC., FIRST INVESTORS GOVERNMENT FUND, INC., FIRST INVESTORS HIGH YIELD FUND, INC., FIRST INVESTORS INSURED TAX EXEMPT FUND, INC., FIRST INVESTORS MULTI- STATE INSURED TAX FREE FUND, FIRST INVESTORS NEW YORK INSURED TAX FREE FUND, INC., FIRST INVESTORS SERIES FUND, FIRST INVESTORS SERIES FUND II, INC., FIRST INVESTORS U.S. GOVERNMENT PLUS FUND - 1st, 2nd & 3rd SERIES, EXECUTIVE INVESTORS TRUST * Administrative Data Management Corp. (ADM) bills the Fund. ADM is then paid by the Fund, after which FIMCO reimburses the Fund.	485BPOS	EX-99.B9	1996-01-12T00:00:00	1996-01-12T09:22:27
0000950115-96-000012	0000950115-96-000012_0002.txt	AB AIR TECHNOLOGIES, LTD. (AB AIR) Engelhard/ICC (E/ICC), a partnership of Engelhard Corporation and ICC Technologies, Inc., and AB Air Technologies (AB Air), Ltd., a company established in the State of Israel, desire to enter into a program for the development of a residential desiccant-based air conditioning system, and E/ICC and AB Air both wish to accomplish Phase I of the development program with a clear definition of the obligations and benefits associated with the parties to the agreement, according to the project details in Attachment A, NOW, THEREFORE, THE FOLLOWING ARE AGREED TO BY THE PARTIES TO THE AGREEMENT: 1. The income resulting from the successful completion of the development program, or any part thereof, which is expected to consist of licenses and royalties, will be shared in the following way: 1.1 In Stage 1, income will be used to repay, on an equally shared basis, the accumulated cost of the Joint Development Program plus any subsequent accumulation of overhead expenses. 1.2 In Stage 2, net profit (after deduction of any continuing overhead expenses) will be shared in the following way: 50% will be shared by the parties to this agreement equally and 50% will be paid to the partner in the Joint Development Program that licenses the technology in its territory of operation. Stage 2 will continue until the accumulated net profit will reach ten (10) times the accumulated cost of the Joint Development Program. 1.3 Thereafter, net profit (after deduction of any continuing overhead expenses) will be shared in the following way: 20% will be shared by the parties to this agreement equally and 80% will be paid to the partner in the Joint Development Program that licenses the technology in its territory of operation. 1.4 For the purpose of this Agreement, the territory of AB Air will be as defined in the Agreements regarding marketing and manufacturing, and the territory of Engelhard/ICC will be all other world-wide territory. 2. The partners in the joint development programs will share equally in the cost of the program. The budget of the program is proposed at $206,850 and should not exceed $250,000. The partners will pay for equal shares of the budget. Should the budget be revised, the same proportions will be applied. The partners will transfer all the money to a joint development bank account established on behalf of the partners in Israel according to the program projected cash flow in order to prevent any setbacks. Money will be withdrawn as needed to satisfy the needs of the program. Amounts withdrawn greater than $2,000 for external expenses, whether at one time or in cumulative payments to the same vendor, such as consultants, subcontracts, and purchased materials will require the prior written approval of both parties to this agreement. Such approval will be conveyed within two business days or assumed to be approved. 3. Engelhard/ICC and AB Air agree that the attached document, Attachment A -- Project Layout and Budget state the objectives of the joint development program at present. 4.1 A staff will be created at AB Air that will exist solely for the purposes of the joint development program. Any work accomplished by such employees for, or on behalf of, outside entities, including the parties to this Agreement, beyond the scope of the joint development program, will be compensated for by the recipient of the services. 4.2 AB Air will perform accounting for the program and will be compensated for this service in an agreed-upon way, beyond the O/H stated in Attachment A. 4.3 Any additional expenses will be borne equally by the parties to the Agreement. This includes, but is not limited to, expenses prior to the period of performance of the program, capital expenses beyond the scope of the program and business-related expenses (such as licensee development costs) that occur after the conclusion of the program. Such expenses will be limited at this point to $50,000, of which about $30,000 has been spent already as expenses prior to the program. Any expansion of this budget will be agreed to in advance in writing by the parties to this agreement, and in no way is either party bound, without such authorization, to any amount beyond the approved amounts. 5.1 The partners will allow the usage of their know-how, intellectual assets, relevant patents, software, etc. free of charge and declare that these assets are their sole property. All such intellectual property, as necessary to the program, and as Engelhard/ICC is free to transfer in consideration of other obligations, will be used only for the purposes of the program, and will be returned at the end of the program. 5.2 The acquired property of the program will be owned equally by the parties to the Agreement during the program. This includes, but is not limited to, general purpose hardware and software, specific designs, calculations, computer files, drawings, and the like, specialty tooling, and prototype units and test instrumentation. Acquired property will be disposed of in an equitable fashion at the end of the program. Those properties owned by a partner outside of the program and loaned to the program, as described in 5.1 as well any tangible properties, will be returned to the owner separately from the distribution of the jointly owned assets. 6. Licensing costs that are specific to marketing in a specific territory will be borne by the party that deals in that territory. Costs for general services to support all licensing efforts that are relevant to all territories, such as technical support, and materials will be borne equally by the partners, up to reasonable limits, and excluding foreign travel-time, flights, expenses and subject to prior consent between the two parties. 7. Each of the parties to this Agreement will submit account summaries to the other party on a monthly basis. AB Air will compose a monthly consolidated project summary. Any purchases beyond the scope of the program will be authorized by both parties. 8. All intellectual property rights (patents, etc.) that emerge as a result of the joint development program will be owned jointly by the parties to the Agreement. Ownership of these rights cannot be transferred by one party without written authorization by the other party, except as it occurs through purchase of ownership of one of the parties to the Agreement. 9. The purpose of the joint development program is the development of a residential (low tonnage) desiccant-based, all-electric air conditioning system as defined in Attachment A. 10. The parties to the agreement and their employees are bound to hold confidential the material developed in the course of the program. This confidentiality will extend for a period of three years after the completion of the program or after termination of employment by a particular employee. All subcontractors and consultants will be required to operate under a confidentiality agreement with terms that will be agreed upon by the parties to this agreement. 11. The joint development program may be terminated at any time by either party only if milestones as described in the attachment are not met and cannot be met within a reasonable period of time and within the allocated budget. Upon termination or completion of the program all confidential materials will be returned to their respective owner. 12. The management of the R&D program will be shared by AB Air and Engelhard/ICC. Each will manage the day-to-day activities of activities in its own territories and together will manage the overall flow and direction of the program. The AB Air manager will be Yehoshua Elizov, and the Engelhard/ICC manager will be Barry M. Cohen. Any substitution of the management must be agreed to by both parties. This document includes Attachment A.	S-2/A	EX-10.23	1996-01-12T00:00:00	1996-01-11T17:48:48
0000939028-96-000001	0000939028-96-000001_0000.txt	PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (Date of earliest event reported) January 12, 1996 FORD CREDIT AUTO LEASE TRUST 1995-1 (Exact name of registrant as specified in its charter) (State of other juris- (Commission File Number) (IRS Employer c/o The Chase Manhattan Bank (USA) 801 Delaware Avenue, Wilmington, Delaware 19801 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 302-575-5000 Servicing Report relating to the Ford Credit Auto Lease Trust 1995-1 for the collection period ending December 31, 1995 is attached hereto as Exhibit 19 and is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION DESIGNATION DESCRIPTION METHOD OF FILING Exhibit 19 Servicing Report for the Filed with this collection period ending Report. December 31, 1995 relating to the Ford Credit Auto Lease Trust 1995-1. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the date indicated. Date: January 12, 1996 FORD CREDIT AUTO LEASE TRUST 1995-1 (RCL TRUST 1995-1 - ORIGINATOR) By: FORD MOTOR CREDIT COMPANY of Ford Motor Credit Company By: FORD CREDIT LEASING COMPANY, INC. Exhibit 19 Servicing Report for the December 31, 1995 relating to the Ford Credit Auto Lease Trust 1995-1.	8-K	8-K	1996-01-12T00:00:00	1996-01-12T08:48:54
0000869393-96-000001	0000869393-96-000001_0000.txt	U.S. SECURITIES AND EXCHANGE COMMISSION ANNUAL NOTICE OF SECURITIES SOLD Read instructions at end of Form before preparing Form. Please print or type. 1. Name and address of issuer: 2. Name of each series or class of funds for which this notice is filed: 3. Investment Company Act File Number: 4. Last day of fiscal year for which this notice is filed: 5. Check box if this notice is being filed more than 180 days after the close of the issuer's fiscal year for purposes of reporting securities sold after the close of the fiscal year but before termination of the issuer's 24f-2 declaration: 6. Date of termination of issuer's declaration under rule 24f-2(a)(1), if applicable (see instruction A.6): 7. Number and amount of securities of the same class or series which had been registered under the Securities Act of 1933 other than pursuant to rule 24f-2 in a prior fiscal year, but which remained unsold at the beginning of the fiscal year: 8. Number and amount of securities registered during the fiscal year other than pursuant to rule 24f-2: 9. Number and aggregate sale price of securities sold during the fiscal year: 10. Number and aggregate sale price of securities sold during the fiscal year in reliance upon registration pursuant to rule 24f-2: 11. Number and aggregate sale price of securities issued during the fiscal year in connection with dividend reinvestment plans, if applicable (see instruction B.7): 12. Calculation of registration fees: (i) Aggregate sale price of securities sold during the year in reliance on rule 24f-2 (from Item 10):$ (ii) Aggregate price of shares issued in connection (from Item 11, if applicable) + price of shares redeemed or repurchased during the fiscal year (if applicable)- (iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing pursuant to rule 24e-2 (if applicable)+ (v) Net aggregate price of securities sold and issued the fiscal year in reliance on rule 24f-2 [line line (ii), less line (iii), plus line (iv)] (if (vi) Multiplier prescribed by Section 6(b) of the Act of 1933 or other applicable law or regulation (see Instruction C.6): x 1/2900 (i) or line (v) multiplied by line (vi)]: should complete lines (ii), (iii), (iv), and (v) only if the form in being filed within 60 days after the close of the issuer's fiscal year. See Instruction C.3. 13. Check box if fees are being remitted to the Commission's lockbox depository as described in section 3a of the Commission's Rules of Informal and Other (17 CFR 202.3a). Date of mailing or wire transfer of filing fees to the Commission's lockbox depository: This report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated. C. Todd Gibson - Assistant Secretary * Please print the name and title of the signing officer below the signature.	24F-2NT	24F-2NT	1996-01-12T00:00:00	1996-01-12T12:03:12
0000950109-96-000200	0000950109-96-000200_0022.txt	PFPC, ATTENTION WEISS FUNDS, P.O. BOX 8969, WILMINGTON, DE 19899-8969 OWNER ___ UGMA ___ (STATE) CO-OWNER, MINOR, TRUST ___ OTHER _______ TELEPHONE #: DAYTIME ( ) EVENING ( ) CITIZENSHIP: USA _____ OTHER (PLEASE SPECIFY) _______________________________ (OWNER'S SOCIAL SECURITY NUMBER) (TAX IDENTIFICATION NUMBER) For joint registration, both must sign the application. The registration will be as joint tenants with the right of survivorship, and not as tenants in common, unless otherwise indicated. Enclosed is my check for $______ (minimum $1,000) made payable to "The Fund." ___ Weiss Treasury Only Money Market Fund ___ Weiss Intermediate Treasury Fund Unless you elect otherwise, all dividends and capital gain distributions will be automatically reinvested in additional shares. Dividends may be automatically invested in shares of any other Fund in the Weiss family of funds. You must have at least the minimum investment amount (currently $1,000) in the alternate Fund to select this privilege. ___ All dividend and capital gains in cash ___ Capital Gains in cash, and income and short-term gains reinvested ___ Income and Short-term gains in cash and Capital Gains reinvested ___ Income and Capital Gains directed to another, eligible, Weiss Fund: Fund Name _____________________________ Account Number ______________ PLEASE CROSS OUT THIS SECTION IF THIS PRIVILEGE IS NOT WANTED. The Trust or its agents are authorized to honor telephone or other instructions from any person for the redemption of shares in Funds in the Weiss family of funds. Proceeds are to be wire-transferred to the bank account referenced below (minimum $10,000, maximum $50,000). (Wire charges will be (as shown on bank records) Name of Bank __________________ Account Number ___________ ABA Number ____ (a savings and loan or credit union may not be able to receive wire redemptions) Street ______________________ City _______________ ST _____ Zip ________ If you want someone else to receive a copy of your statement, please complete this section. Name ___________ This person (is / is not) a broker/dealer or financial advisor. Street ______________________ City _______________ ST _____ Zip ________ ___ Check here if you wish to authorize this person to have access to your account by phone. ___ Check here if you wish to authorize this person to transact on your account, and we will send you a limited power of attorney. The Systematic Withdrawal plan requires a minimum account of $10,000 in shares at the current offering price. Minimum withdrawal is $100. Each withdrawal redemption will be processed on or about the 25th of the month and mailed as soon as possible thereafter. Start (month) _______ $(amount) _______ ___ Monthly ___ Quarterly ___ Semi-Annually ___ Annually Provide the following information only if distributions or withdrawal checks are to be payable to a person or organization different than account is registered. Name of Bank or Individual ____________________________________ Account # (if applicable) _____________________________________ Street ________________________ City _______________ ST _____ Zip _________ IF YOU DO NOT WISH THIS PRIVILEGE, PLEASE CHECK HERE _____ . Your account will automatically provide for the telephone exchange of other investment portfolios offered in the Weiss family of funds. When you wish to exchange shares, all you need to do is call 800-430-9617. The same registration and address will be used as is listed on this form under "Registration." It is understood that neither PFPC nor the Fund will be liable for any loss, liability, cost or expense for acting upon telephone exchange requests reasonably believed to be genuine. (maximum exchange $50,000) You may elect to redeem shares in the Weiss Treasury Only Money Market Fund by writing checks against your account. The minimum amount for each check is $250. To elect this service, please fill out and return the enclosed Weiss Treasury Only Money Market Fund signature card. AUTOMATIC INVESTING: This program provides for investments to be made automatically by authorizing PFPC to withdraw funds from your bank account each month on the date you choose. An initial minimum investment of $1,000 per Portfolio, and subsequent investments of at least $50, are required. This may not be used with a systematic withdrawal plan. The investment will be made on or about the 15th of the month. If this date falls on a weekend or holiday, investment will be made the next business day. Please allow 20 days for processing Fund Name and account number (if known) ___________________ TAPE A VOIDED CHECK TO THIS APPLICATION. CHECK MUST BE PREPRINTED WITH YOUR BANK ACCOUNT NUMBER. YOUR VOIDED CHECK CANNOT BE RETURNED. SIGN BELOW EXACTLY AS PRINTED IN REGISTRATION SECTION. Under penalty of perjury, I certify with my signature below that: 1: The number shown in this section of the application is my correct 2: that I am NOT subject to backup withholding because: (a) I am exempt from backup withholding, or, (b) I have not been notified by the Internal Revenue Service that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the Internal Revenue Service has notified me that I am no longer subject to IMPORTANT: IF YOU ARE SUBJECT TO BACKUP WITHHOLDING, STRIKE OUT ITEM 2 IN THE ABOVE SENTENCE. CORPORATIONS AND CERTAIN OTHER ENTITIES ARE EXEMPT FROM BACKUP WITHHOLDING FOR CERTAIN PAYMENTS. IF YOU ARE EXEMPT, YOU MUST STILL PROVIDE A CERTIFIED TAXPAYER IDENTIFICATION NUMBER, AND WRITE THE WORD "EXEMPT" IN THE FOLLOWING SPACE:____. NONRESIDENT ALIENS AND FOREIGN COUNTRIES THAT ARE NOT SUBJECT TO BACKUP WITHHOLDING MUST PROVIDE A COMPLETED IRS FORM W-8, CERTIFICATE OF FOREIGN STATUS. I (we) am (are) of legal age and have read the Prospectus for the Weiss Funds. I (we) hereby certify that each of the persons listed below has been duly elected, and is now legally holding the office set below his name and has the authority to make this authorization. (President, Trustee, General (Co-owner, Sec. of Corp., Co- Partner, Agent) Trustee, etc.	N-1/A	EX-99.20	1996-01-12T00:00:00	1996-01-11T17:32:37
0000950124-96-000224	0000950124-96-000224_0000.txt	<DESCRIPTION>AMENDMENT NO. 1 TO FORM 8-K Form 8-K Filed on November 22, 1995 Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): November 10, 1995 (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation) (Commission File Number) (IRS Employer Identification No.) 101 West 11th Street, Kansas City, Missouri 64105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (816) 474-7000 (Former name or former address, if changed since last report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On November 10, 1995, Unitog Rental Services, Inc., a California corporation ("Purchaser") and a wholly-owned subsidiary of Unitog Company, a Delaware corporation, purchased all of the issued and outstanding stock of Ace-Tex Corporation, a Michigan corporation ("Ace-Tex"). The stock of Ace-Tex was acquired by the Purchaser pursuant to a Stock Purchase Agreement, dated October 19, 1995, among the Purchaser, Ace-Tex and the following sellers: Irving Laker, Martin Laker, Irving Laker, as trustee of the Ace-Tex Corporation Savings and Profit Sharing Plan and Trust, Irving Laker, as trustee of the Irving Laker Charitable Remainder Unitrust and Martin Laker, as trustee of the Martin Laker Charitable Remainder Unitrust. Simultaneously with the purchase of the stock, a subsidiary of Ace-Tex purchased three improved parcels of real estate from certain affiliates of Ace-Tex (the "Affiliated Real Estate"). Ace-Tex is engaged in the rental, supply, service and sale of industrial uniforms and garments, linens, dust control products and related products and services in certain portions of Michigan, Ohio, Indiana and Maryland (the "Uniform Rental Business"). Ace-Tex was also engaged in the manufacture and sale of wiping and polishing cloths, tack cloths, disposable paper products and rags (the "Wiper Business"). In conjunction with the purchase of the stock of Ace-Tex, the Wiper Business and the assets of Ace-Tex used in the Wiper Business were sold to the former principals of Ace-Tex. As a result, from and after the completion of the purchase, Ace-Tex will only be engaged in the Uniform Rental Business (Mechanic's). The principal assets used in the Uniform Rental Business include seven improved parcels of real estate (including the Affiliated Real Estate), motor vehicles, machinery and equipment, accounts receivable, customer lists and customer contracts, inventories, supplies, miscellaneous contract rights and other assets. Such assets will continue to be used in the Uniform Rental Business after the acquisition. The principal assets used in the Wiper Business, all of which have been sold by Ace-Tex, include two improved parcels of real estate, motor vehicles, machinery and equipment, accounts receivable, customer lists, inventories, supplies, miscellaneous contract rights and other assets. The purchase price for the stock of Ace-Tex is based on the stockholder's equity of Ace-Tex and on the book value of the assets used in the Wiper Business as of the closing date, as determined from audited financial statements of Ace-Tex to be issued after the closing. The final purchase price for the stock of Ace-Tex and the affiliated real estate is estimated herein at $43,000,000. The purchase price received from the sale of the Wiper Business and the Wiper Business assets was $8 million, plus the assumption by the buyer of accounts payable and accrued expenses of the Wiper Business. The purchase price for the stock of Ace-Tex was financed by the issuance to Irving Laker and Martin Laker of promissory notes, which notes are due on January 15, 1996 (the "Laker Notes"), and from a portion of the proceeds of a recently completed private debt placement with Metropolitan Life Insurance Company. Repayment of the Laker Notes will be financed from a portion of the proceeds from the private debt placement and from borrowings from UMB Bank, n.a., Harris Trust and Savings Bank and NBD Bank. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. 2. Stock Purchase Agreement, dated October 19, 1995, among Unitog Rental Services, Inc., Ace-Tex Corporation, Irving Laker, Martin Laker, Irving Laker, as Trustee of the Ace-Tex Corporation Savings and Profit Sharing Plan and Trust, Irving Laker, as Trustee of the Irving Laker Charitable Remainder Unitrust and Martin Laker, as Trustee of the Martin Laker Charitable Remainder Unitrust and First Amendment to Stock Purchase Agreement, dated November 10, 1995. At September 30, 1995 and 1994 For the six months ended September 30, 1995 and 1994 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended September 30, 1995 and 1994 MARCH 31, 1995 AND 1994 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS YEARS ENDED MARCH 31, 1995 AND 1994 See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1995 AND 1994 See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of Ace-Tex Corporation (the "Corporation") and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. Inventories -- All inventories, except rental garments, are stated at the lower of cost (first-in, first-out method) or market. Rental garments in service are stated at amortized value. The cost of such inventory is charged gainst income over its estimated useful life of 22 to 104 weeks. Depreciation is computed using the straight-line method over estimated useful lives. Fully depreciated assets other than real properties are retired. Customer Lists and Other Assets (principally covenants not-to-compete and customer lists acquired through the acquisition of the assets of various businesses) are carried at cost net of accumulated amortization of $33,000 and $11,000 at March 31, 1995 and 1994, respectively. Deferred Bond Issuance Costs are carried at cost, net of accumulated amortization of $348,506 and $324,788 at March 31, 1995 and 1994, respectively, and are being amortized using the straight-line method over the life of the related bonds. Accounts receivable includes $79,826 and $34,819 due from related parties at March 31, 1995 and 1994, respectively. Inventories consisted of the following at March 31: 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at March 31: The Corporation has entered into agreements with the trusts of two of its officers whereby the Corporation will pay a portion of premiums for life insurance policies on these two officers in which the trusts are beneficiaries. The policies are collaterally assigned to the Corporation for the sole purpose of providing security for the repayment of its share of the premiums paid. As of March 31, 1995, the policies have a cash surrender value of approximately $720,000. The Corporation has a line of credit agreement with a bank which provides for borrowings up to $4,800,000 (increased to $5,300,000 effective April 12, 1995) payable on demand at the bank's prime interest rate (9.00% at March 31, 1995). The line of credit, which expires in August 1995, is secured by substantially all of the Corporation's assets, subordinated only to other security interests in the pollution control assets and certain operating assets. The Corporation's borrowing capacity under the line of credit is reduced by any outstanding letters of credit issued by the bank, which amounted to $350,000 at March 31, 1995, and expire in February 1996. The letters of credit require a semiannual fee equal to .75% of the aggregate stated amount of the letters. The Corporation obtained a second line of credit October 27, 1993, which provided for borrowing up to $1,500,000 payable on demand through April 1, 1994, at the bank's prime interest rate. All borrowings outstanding under this line of credit on April 1, 1994 were converted to a term note payable in 60 monthly payments with interest at .25% over the bank's prime rate and are included in long-term debt (Note 7). The line is secured by substantially all of the Corporation's assets, subordinated only to other security interests in the pollution control assets and certain operating assets. Long-term debt consisted of the following at March 31: The aggregate annual maturities of long-term debt for the next five years are as follows: In connection with the notes payable to the bank, equipment note payable, note payable referred to above, and line of credit (Note 6), the Corporation must meet certain loan covenants, the more significant of which are restrictions with respect to accounts receivable, tangible net worth, net current assets, and debt service coverage. The Corporation was in compliance with these covenants at March 31, 1995. Effective April 1, 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income tax purposes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable/deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The cumulative impact of adopting SFAS No. 109 was immaterial. The 1995 and 1994 effective tax rate is greater than the statutory rate due to the nondeductibility of entertainment expenses. Deferred tax assets (liabilities) at March 31, 1995 and 1994 consisted of the following: 9. NOTES PAYABLE TO RELATED PARTIES The Corporation has unsecured notes payable to related parties of $425,000 as of March 31, 1995 and 1994, which bear interest at 9%. At March 31, 1995, the entire balance of these notes payable is long-term based on when management intends to repay the borrowed amounts. The Corporation has established a self-insured employee health benefit plan to provide health care benefits to its employees and their families. The Corporation has obtained reinsurance which limits any liability to $35,000 per individual per year, with an aggregate annual maximum of up to approximately 500,000. Management does not expect to reach the maximum liability for the plan year ending August 31, 1995. The Corporation is obligated under noncancelable operating leases expiring at various times through 1998 for four of its facilities. The Corporation also rents other facilities on a month-to-month basis. Rental expense charged to operations approximated $324,000 and $360,000 during 1995 and 1994, respectively. The Corporation's facilities in Bay City, Flint and Grand Rapids, Michigan, and Hamilton, Ohio, are owned by an entity related through common ownership. The lease expense paid by the Corporation to the related parties amounted to $192,600 in both 1995 and 1994. Approximate total future minimum rentals for the years subsequent to March 31, 1995 are as follows: The Corporation has entered into a consulting agreement with an individual resulting in a yearly commitment of $75,000 through 1999. The Corporation has been notified by the City of Detroit that they may be liable for certain usage taxes on natural gas purchased in prior years from independent suppliers. The final liability for such taxes, if any, has not been determined. At March 31, 1995, $200,000 was accrued as the Corporation's best estimate of the final liability. 12. PROFIT-SHARING AND SAVINGS AND INVESTMENT PLANS The Corporation maintains a profit-sharing plan for those eligible employees who have completed one full year of employment. Contributions to the plan are made at the discretion of the Board of Directors, but are limited to 25% of the annual compensation of eligible employees. Contributions to the plan were $198,000 and $173,000 in 1995 and 1994, respectively. In addition, the Corporation maintains a savings and investment plan for substantially all employees who have completed one year of service, attained the age of 21, and do not belong to a union. The plan requires the Corporation to contribute, from profits, an amount equal to 50% of the employee's contribution limited to 6% of their annual compensation. The Corporation contributed approximately $67,000 and $64,000 to the plan in 1995 and 1994, respectively. The Corporation and certain subsidiaries are required to make contributions to either a multi-employer pension plan or to a company sponsored 401(k) plan for employees covered by various collective bargaining agreements in amounts based upon stipulated weekly rates for each participant. The cost of the plans amounted to $126,083 and $118,857 in 1995 and 1994, respectively. During September 1993, the Corporation acquired the fixed assets, inventory and customer lists of a competitor for $580,000. The acquisition was accounted for under the purchase method. These assets were recorded at an allocated portion of the total purchase price, which reflected the respective fair market values. The customer lists are being amortized over 15 years. The Corporation operates in two industry segments, the "Wiper Industry" and the "Uniform Rental Industry." The Wiper Industry includes the manufacture and sale of wiping and polishing cloths, disposable paper products and rags. The Uniform Rental Industry includes the rental, supply, service and sale of industrial uniforms and garments, linens, and dust control products. Operations and indentifiable assets by industry segments as of and for the years ended March 31 consisted of the following: [DELOITTE & TOUCHE LLP LETTERHEAD] Board of Directors and Stockholders We have audited the accompanying consolidated balance sheets of Ace-Tex Corporation as of March 31, 1995 and 1994, and the related consolidated statements of income and retained earnings and of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Ace-Tex Corporation as of March 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 8 to the consolidated financial statements, effective April 1, 1993 the Corporation changed its method of accounting for income taxes. [Deloitte & Touche LLP sig] We consent to the use in this Registration Statement of Unitog Company on Form 8-K/A of our report, dated June 7, 1995, on the consolidated financial statements of Ace-Tex Corporation as of March 31, 1995 and 1994 and for the years then ended, appearing in this Registration Statement. [Deloitte & Touche LLP sig] PRO FORMA FINANCIAL INFORMATION - GENERAL The stock of Ace-Tex was acquired by Unitog Company pursuant to a Stock Purchase Agreement, dated October 19, 1995. Ace-Tex is engaged in the rental, supply, service and sale of industrial uniforms and garments, liens, dust control products and related products and services in certain portions of Michigan, Ohio, Indiana and Maryland (the "Uniform Rental Business"). Ace-Tex was also engaged in the manufacture and sale of wiping and polishing cloths, tack cloths, disposable paper products and rags (the "Wiper Business"). In conjunction with the purchase of the stock of Ace-Tex, the Wiper Business and the assets of Ace-Tex used in the Wiper Business were sold. As a result, from and after the completion of the purchase, Ace-Tex will only be engaged in the Uniform Rental Business (Mechanics). The accompanying pro forma balance sheet as of October 29, 1995 and pro forma statement of earnings for the nine months ended October 29, 1995, and pro forma statement of earnings for the year ended January 29, 1995 are presented to illustrate the estimated effects of the acquisition of the Uniform Rental Business (Mechanics). The pro forma balance sheet as of October 29, 1995 was prepared as if the purchase and related financing had occurred on October 29, 1995. The pro forma statement of earnings for the nine months ended October 29, 1995 was prepared as if the purchase and related financing had occurred on January 30, 1995. The pro forma statement of earnings for the year ended January 29, 1995 was prepared as if the purchase and related financing had occurred January 31, 1994. The pro forma statements of earnings are not necessarily indicative of what the results of operations would actually have been if such transactions had occurred on January 30, 1995 and January 31, 1994, respectively. Moreover, it is not intended to be indicative of future results of operations. Audited consolidated financial statements of Ace-Tex Corporation are presented elsewhere. See "Index to Financial Statements." See accompanying notes to pro forma financial data. PRO FORMA STATEMENT OF EARNINGS Nine months ended October 29, 1995 See accompanying notes to financial data. PRO FORMA STATEMENT OF EARNINGS Year ended January 29, 1995 See accompanying notes to financial data. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS In the opinion of the Company, the accompanying unaudited Unitog Company Historical condensed financial information reflects all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company as of October 29, 1995 and the results of its operations for the nine months ended October 29, 1995. The results of operations for the nine months ended October 29, 1995 are not necessarily indicative of the results to be expected for the full year. The Unitog Company Historical condensed statement of earnings information for the year ended January 29, 1995 was derived from audited financial statements. The Mechanics condensed statement of earnings information for the nine months ended October 29, 1995 was derived from unaudited interim financial data for the six month period ended September 30, 1995, audited financial statements for the year ended March 31, 1995, and unaudited interim financial data for the nine months ended December 31, 1994. The Mechanics condensed statement of earnings information for the year ended January 29, 1995 was derived from audited financial statements as of the year ended March 31, 1995. The results of operations for the nine months ended September 30, 1995 are not necessarily indicative of the results to be expected for the full year. The pro forma acquisition amounts included for Mechanics are subject to change. The purchase price for Ace-Tex (estimated to be $43 million) and the sale price for the assets of the wiping business (estimated to be $10 million) may be adjusted to reflect audited changes in net book values. As a result the final purchase price for the stock and sales price of the wiping business assets will not be known until completion of an audit, which is not expected to occur before February 10, 1996. Other noncurrent assets includes unexpended proceeds from a bond offering, debt origination and placement fees and acquisition related expenditures associated with noncompetition agreements, customer contracts and other acquired intangible assets. Amortization of intangible assets is provided using the straight-line method over the term of the underlying agreements and estimated useful lives, generally three to twelve years. The Company's acquisitions of rental operations were accounted for by using the purchase method. The purchase method allocates the amounts paid to the net assets acquired based upon their respective fair values. The amounts paid in excess of the fair value of the acquired net assets is amortized on a straight-line basis over twenty to thirty-five years. STATEMENT OF EARNINGS, NINE MONTHS ENDED OCTOBER 29, 1995 a. record the accrual of and avoidance of certain costs (principally owners' salaries, benefits and expenses, lease rental payments and contributions and consulting costs) resulting from immediate implementation of a business b. record the amortization of intangible assets and depreciation c. record computed interest expense on indebtedness of Unitog Company in connection with the acquisition, d. record the income tax effects of the above pro forma adjustments. STATEMENT OF EARNINGS, YEAR ENDED JANUARY 29, 1995 a. record the accrual of and avoidance of certain costs (principally owners' salaries, benefits and expenses, lease rental payments and contributions and consulting costs) resulting from immediate implementation of a business b. record the amortization of intangible assets and depreciation c. record computed interest expense on indebtedness of Unitog Company in connection with the acquisition, d. record the income tax effects of the above pro forma adjustments. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: January 12, 1996 By: /s/ J. Craig Peterson Senior Vice President Finance and	8-K/A	8-K	1996-01-12T00:00:00	1996-01-12T16:44:31
0000950152-96-000082	0000950152-96-000082_0000.txt	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE X SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1995 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ (Exact name of registrant as specified in its charter) (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One American Road, Cleveland, Ohio 44144 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. As of November 30, 1995, the date of this report, the number of shares outstanding of each of the issuer's classes of common stock was: PART I - FINANCIAL INFORMATION (Thousands of dollars except per share amounts) See notes to consolidated financial statements. (Thousands of dollars except per share amounts) See notes to consolidated financial statements. CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended November 30, 1995 and 1994 Note A - Basis of Presentation The accompanying financial statements have been prepared in accordance with the instructions to Form 10-Q. Although they are unaudited, the Corporation believes that all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations have been made. Note B - Seasonal Nature of Business The Corporation's business is seasonal in nature. Therefore, the results of operations for interim periods are not necessarily indicative of the results for the fiscal year taken as a whole. Note C - Asset Impairment Loss In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Corporation recorded an impairment loss on the long-lived assets of its CreataCard business. The trends in the CreataCard business indicated that the undiscounted future cash flows from this business would be less than the carrying value of the long-lived assets related to that business. Therefore, on November 1, 1995 the Corporation recognized an asset impairment loss of $52,061 ($35,094 net of tax, or $.47 per share). This loss is the difference between the carrying value of the CreataCard machines and related goodwill and other intangibles, and the fair value of these assets based on discounted estimated future cash flows. Note D - Deferred Costs The major components of both the Other Assets and Prepaid Expenses and Other classifications are deferred costs relating to agreements with certain customers. Deferred costs are charged to operations on a straight-line basis over the effective period of each agreement, generally three to six years. Deferred costs estimated to be charged to operations during the next twelve months are classified with Prepaid Expenses and Other. Deferred costs included in the Prepaid Expenses and Other classification are $128,013, $110,890 and $100,866 at November 30, 1995, February 28, 1995 and November 30, 1994, respectively. Deferred costs included in the Other Assets classification at the same dates are $347,079, $311,503 and $164,680, respectively. Future payment commitments relating to these agreements are classified as Other Current Liabilities or Other Liabilities. Part I., Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Net sales of $587.6 million for the third quarter and $1,457.3 million for the nine months ended November 30, 1995 were up 6.6% and 6.5%, respectively, over the same periods in the prior year. These increases were due primarily to higher sales of greeting cards. The unit volume of cards was flat for both the quarter and nine months compared to the prior year. Material, labor and other production costs were 42.1% of net sales for the quarter compared to 38.4% for the third quarter last year and 38.6% for the nine months, up from 36.7% for the same period last year. These increases were due primarily to higher production costs of greeting cards as a result of transitional costs associated with the Corporation's North American Plan. For the quarter, selling, distribution and marketing expenses were 33.9% of net sales compared to 34.0% last year. Through nine months, selling, distribution and marketing expenses were 38.4% of net sales, down from 38.7% last year, due primarily to the CreataCard national advertising program which has not been repeated at the same level this year. For the quarter, administrative and general expenses were $56.1 million, down from $58.4 million for the same period in the prior year. Through nine months these expenses were $163.9 million, down from $167.2 million in the prior year. These decreases are a result of overall cost containment and lower profit sharing expense. Interest expense increased $2.2 million for the quarter and $4.6 million for the nine months due to both higher rates and higher levels of borrowing to support operating cash requirements. The effective tax rate was 34.8% for the quarter and 34.2% for nine months, lower than the rates of 34.9% and 35.0% for the same periods of the prior year. This rate decrease is due to the increased benefit from the corporate owned life insurance program and the reduction in foreign losses with no tax benefit. During the third quarter, the Corporation recorded a one-time charge of $52.1 million resulting from the early adoption of Statement of Financial Accounting Standards No. 121, reflecting the write down of long-lived assets and other intangible costs related to CreataCard. See Note C to the Consolidated Financial Statements for a further discussion of this charge. Excluding this charge, net income for the quarter would have been $52.6 million or $.71 per share compared to $58.9 million or $.79 per share last year. For the nine months, net income excluding this charge would have been $104.9 million or $1.41 per share compared to $105.5 million or $1.42 per share last year. The seasonality of the Corporation's business precludes a useful comparison of the current period and the year-end financial statements; therefore, a Statement of Financial Position for November 30, 1994 has been included. Operations for the first nine months required $95.3 million more cash than the same period last year due primarily to increases in accounts receivable, deferred costs related to agreements with customers and inventories. Accounts receivable growth required $24.6 million more in cash this year compared to last year, reflecting increased sales levels. Net accounts receivable were 28.4% of the prior twelve months' net sales at November 30, 1995, an improvement from 29.0% last year. Also, deferred costs related to agreements with customers required $23.2 million more in cash for the nine months compared to the prior year. Inventory growth required $18.3 million more in cash this year than last year due primarily to higher levels of non-card product to support new product offerings. Inventories as a percent of the prior twelve months' material, labor and other production costs were 43.8% at November 30, 1995 and 40.4% at November 30, 1994. Investing activities used $11.5 million more cash for the nine months than in the same period in the prior year, due primarily to investments related to expanded product offerings. Financing activities provided $136.4 million more cash during the first nine months of this year than in the prior year, due to higher borrowing levels to support operating requirements. Debt as a percentage of debt plus equity was 27.3% at November 30, 1995, an increase from 20.8% in the prior year. On a per share basis, shareholders' equity increased from $15.26 at November 30, 1994 to $16.08 at November 30, 1995. There were no material changes in the financial condition, liquidity or capital resources of the Corporation from February 28, 1995, the end of its preceding fiscal year, to November 30, 1995, the end of its last fiscal quarter and the date of the most recent balance sheet included in this report, nor from November 30, 1994, the end of the corresponding fiscal quarter last year, to November 30, 1995, except the changes discussed above and aside from normal seasonal fluctuations. On December 3, 1995, the Corporation announced that it had signed an agreement in principle to acquire the assets of John Sands Group, the largest greeting card company in Australia and New Zealand. The Corporation is continuing its due diligence procedures and the cash transaction is expected to close during January, 1996. The Corporation's results for the year will not be materially impacted. Management is not aware of any current trends, events, demands, commitments or uncertainties which reasonably can be expected to have a material effect on the liquidity, capital resources, financial position or results of operations of the Corporation, other than those set forth herein. PART II - OTHER INFORMATION J.E. and Z.B. Butler Foundation, Inc. v American Greetings Corp., Morry Weiss, Edward Fruchtenbaum, John M. Klipfell, Irving I. Stone and Dale A. Cable, Case No. 1:95CV 2411, United States District Court, Northern District of Ohio. On November 14, 1995, the above class action lawsuit was filed against the Corporation and certain of its officers, alleging violations of (i) Section 10 (b) of the Securities Exchange Act of 1934 (the "Act") and Rule 10b-5 promulgated thereunder and (ii) Section 20(a) of the Act. The Complaint is based on the alleged failure to disclose, as well as misleading disclosure, of material information regarding the Corporation's CreataCard unit prior to the Corporation's November 10, 1995 announcement that it had elected to write down certain of CreataCard's assets pursuant to Statement of Financial Accounting Standards No. 121. The Complaint also alleges that certain of the Corporation's officers improperly benefitted from this activity. The Complaint in this action seeks unspecified compensatory and punitive damages (as well as attorney fees) on behalf of all purchasers of the Corporation's publicly traded shares who were allegedly injured during the period of the alleged wrongdoing, March 30-November 10, 1995. The Corporation and the individual defendants have filed an Answer denying liability and asserting numerous defenses. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (exhibit reference numbers refer to Item 601 of 11(a) Calculation of Primary Earnings Per Share 11(b) Calculation of Fully-Diluted Earnings Per Share (b) Reports on Form 8-K Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. By: /s/ William S. Meyer	10-Q	10-Q	1996-01-12T00:00:00	1996-01-12T13:19:24
0000950109-96-000198	0000950109-96-000198_0010.txt	EXHIBIT I A. (3) (b) John Hancock Mutual Life Insurance Company ("JHMLICO"), as the distributor and principal underwriter, and ("the Broker/Dealer"), enter into this agreement effective with its execution by the Broker/Dealer for the purpose of authorizing the Broker/Dealer to solicit applications for variable life insurance and annuity contracts ("Contracts") distributed by JHMLICO on its own behalf and on behalf of John Hancock Variable Life Insurance Company ("JHVLICO"), a subsidiary of JHMLICO. The parties represent as follows: 1. JHMLICO is engaged in the issuance of variable annuity contracts and JHVLICO is engaged in the issuance of variable life insurance contracts, both in accordance with Federal securities laws and the applicable laws of those states in which the Contracts have been qualified for sale. The Contracts are considered securities under the Securities Act of 1933; therefore, distribution of the Contracts is made through JHMLICO as a registered broker/dealer under the Securities Act of 1934 and as a member of the National Association of Securities Dealers, Inc. ("NASD"). 2. The Broker/Dealer certifies that it is a registered Broker/Dealer under the Securities Exchange Act of 1934 and a member of the NASD. The Broker/Dealer agrees to abide by all rules and regulations of the NASD, including its Rules of Fair Practice, and to comply with all applicable state and Federal laws and the rules and regulations of authorized regulatory agencies affecting the sale of the Contracts. 3. The Broker/Dealer will select persons to be registered and supervised by it who will be trained and qualified to solicit applications for the Contracts in conformance with applicable state and Federal laws and regulations. Persons so trained and qualified will be registered representatives of the Broker/Dealer in accordance with the rules of the NASD and they will be properly licensed to represent JHMLICO or JHVLICO or both in accordance with the state insurance laws of those jurisdictions in which the Contracts may lawfully be distributed and in which they solicit applications for such Contracts. 4. The Broker/Dealer will take reasonable steps to ensure that its registered representatives shall not make recommendations to applicants to purchase Contracts in the absence of reasonable grounds to believe the purchase of each Contract is suitable for the applicant. The procedure will include review of all proposals and applications for Contracts for suitability and completeness and correctness as to form as well as review and endorsement on an internal record of the Broker/Dealer of the transactions. The Broker/Dealer will promptly forward to JHMLICO all applications found suitable, together with any payments received with the applications, without deduction or reduction. JHMLICO reserves the right to reject any Contract application and return any payment made in connection with an application which is rejected. Contracts issued on applications accepted by JHMLICO or JHVLICO will be forwarded to the registered representative of the Broker/Dealer for delivery to the Contract owner. 5. The Broker/Dealer will perform the selling functions required by this agreement only in accordance with the terms and conditions of the then current prospectus applicable to the Contracts and will make no representations not included in the prospectus or in any authorized supplemental material. Any material prepared or used by the Broker/Dealer or its registered representatives, which describes or must describe the Contracts, or uses the name of JHVLICO, JHMLICO or the logos or Service Marks of either must be approved by JHMLICO in writing prior to any such use. 6. JHMLICO will provide Broker/Dealer with prospectuses, and any supplements or amendments thereto, describing the Contracts subject to this Agreement. JHMLICO is responsible for maintaining in effect in accordance with the requirements of the Securities and Exchange Commission each Registration Statement of which the prospectus is part. JHMLICO will immediately notify Broker/Dealer of the issuance of any stop order or any Federal or state regulatory proceeding which would prevent the sale of Contracts in any state or jurisdiction. 7. Compensation payable on sales of the Contracts solicited by the Broker/Dealer will be paid to the Broker/Dealer by JHMLICO in accordance with the compensation schedules defined under the John Hancock Mutual Life Insurance Company Producer Agreements related thereto, as in effect at the time the contract premiums or considerations are received by JHMLICO or JHVLICO. Compensation to the registered representative for contracts solicited by the registered representative will be governed by an agreement between the Broker/Dealer and its registered representative. To the extent requested by Broker/Dealer, registered representative compensation may be paid directly to such registered representative by JHMLICO or JHVLICO 8. In the event of any surrender of a Contract within the 10 day "free look" period or, in the case of a variable life insurance policy, within 10 days after the mailing of the Notice of Withdrawal Right, any compensation payable to Broker/Dealer or its registered representatives will not be payable or will be refunded if priorly paid, in accordance with the terms of the Producer's Contract. 9. This agreement may not be assigned except by mutual consent and will continue for an indefinite term, subject to the termination by either party by ten days advance written notice to the other party, except that in the event JHMLICO or the Broker/Dealer ceases to be a registered broker/dealer or a member of the NASD, this agreement will immediately terminate. Upon its termination, all authorizations, rights and obligations shall cease, except the agreement in Section 11, the indemnifications in Section 12 and the payment of any accrued but unpaid compensation to the Broker/Dealer. 10. For the purpose of compliance with any applicable Federal or state securities laws or regulations, the Broker/Dealer acknowledges and agrees that in performing the services covered by this agreement, it is acting in the capacity of an independent "broker" or "dealer" as defined by the By- Laws of the NASD and not as an agent or employee of either JHMLICO or JHVLICO or any registered investment company. In furtherance of its responsibilities as a broker or dealer, the Broker/Dealer acknowledges that it is responsible for statutory and regulatory compliance in securities transactions involving any business produced by its registered representatives concerning the Contracts. For the purpose of compliance with any applicable state insurance laws or regulations, the Broker/Dealer acknowledges and agrees that only while performing the insurance selling functions reflected by this agreement are the Broker/Dealer's registered representatives acting as the licensed insurance agents of JHMLICO or JHVLICO or both and in that capacity are authorized only to solicit applications for the Contracts which will not become effective until acceptance by JHMLICO or JHVLICO. 11. The Broker/Dealer and JHMLICO jointly agree to cooperate fully in any insurance or securities regulatory investigation or proceeding or judicial proceeding arising in connection with any Contract. Without limiting the foregoing: a. Broker/Dealer will be notified promptly of any customer complaint or notice of any regulatory authority investigation or proceeding or judicial proceeding received by JHMLICO with respect to any Contract. b. Broker/Dealer will promptly notify JHMLICO of any customer complaint or notice of any regulatory authority investigation or proceeding or judicial proceeding received by Broker/Dealer with respect to any Contract. 12. (1) JHMLICO agrees to indemnify and hold harmless Broker/Dealer and each person who controls or is associated with Broker/Dealer against any losses, claims, damages or liabilities, joint or several, to which Broker/Dealer or such controlling or associated person may become subject under the 1933 Act or otherwise insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact required to be stated therein or necessary to make the statements therein not misleading contained (i) in any Registration Statement, any Prospectus or any document executed by JHMLICO or JHVLICO specifically for the purpose of qualifying a Contract for sale under the laws of any jurisdiction or (ii) in any written information or sales material authorized for and supplied or furnished to Broker/Dealer and its agents or representatives by JHMLICO, its employees or agents, in connection with the sale of the Contract and JHMLICO will reimburse Broker/Dealer and each such controlling person for legal or other expenses reasonably incurred by Broker/Dealer or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. (2) Broker/Dealer agrees to indemnify and hold harmless JHMLICO and each of its directors and officers against any losses, claims, damages or liabilities to which JHMLICO and any such director or officer may become subject under the 1933 Act and state insurance laws or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (a) any unauthorized use of sales materials or any verbal or written misrepresentations or any unlawful sales practices concerning a (b) claims by agents or representatives or employees of Broker/Dealer for commissions or other compensation or remuneration of any type or (c) failure by agents, representatives or employees of Broker/Dealer to comply with all applicable state insurance laws and regulations including but not limited to state licensing requirements, rebate statutes and replacement regulations, and the provisions of this Agreement; and Broker will reimburse JHMLICO and any director or officer for any legal or other expenses reasonably incurred by JHMLICO or such director or officer in connection with investigating or defending any such loss, claim, damage, liability or action. (3) After receipt by a party entitled to indemnification of notice of the commencement of any action, if a claim in respect thereof is to be made against any person obligated to provide indemnification, such indemnified party will notify the indemnifying party in writing of the commencement thereof as soon as practicable thereafter, and the omission so to notify the indemnifying party will not relieve it from any liability except to the extent that the omission results in a failure of actual notice to the indemnifying party, and such indemnifying party is damaged solely as a result of the failure to give such notice. 13. All notices to JHMLICO should be mailed to: John Hancock Mutual Life Insurance Company All notices to the Broker/Dealer will be duly given if mailed to the address shown below. 14. This agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. In reliance on the representations set forth and in consideration of the undertakings described, the parties represented below do hereby contract and agree. Date of Execution Date of Execution	485BPOS	EX-99.A.3.B	1996-01-12T00:00:00	1996-01-11T17:42:34
0000950130-96-000108	0000950130-96-000108_0003.txt	TENDER OF SHARES OF COMMON STOCK This form, or a form substantially equivalent to this form, must be used to accept the Offer (as defined below) if the certificates representing shares of common stock, par value $0.25 per share, of Loral Corporation and the associated preferred stock purchase rights (collectively, the "Shares") are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or if time will not permit all required documents to reach the Depositary at or prior to the expiration of the Offer. Such form may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary. See Section 3 of the Offer to Purchase. The Depositary for the Offer is: FIRST CHICAGO TRUST COMPANY OF NEW YORK By Mail: By Facsimile By Hand or By Overnight Transmission: Courier: P.O. Box 2559--Suite 4660-- (201) 222-4720 Tenders & Exchanges LORAL or 14 Wall Street, Suite Jersey City, New Jersey (201) 222-4721 4680--LORAL New York, New York 10005 Confirm Receipt of Notice of Guaranteed Delivery by Telephone: DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS LISTED ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. The undersigned hereby tenders to LAC Acquisition Corporation (the "Purchaser"), a New York corporation and a wholly owned subsidiary of Lockheed Martin Corporation, a Maryland corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated January 12, 1996 (the "Offer to Purchase"), and the related Letter of Transmittal (which together constitute the "Offer"), receipt of which is hereby acknowledged, the number of Shares indicated below pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Number of Shares: _________________ Name(s) of Record Holder(s): Share Certificate Numbers (if ----------------------------------- available): Please Type or Print If Shares will be delivered by Area Code and Telephone Number: transfer, check one box: ----------------------------------- [_] The Depository Trust Company ----------------------------------- (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States (each, an "Eligible Institution"), hereby guarantees that either the certificates representing the Shares tendered hereby in proper form for transfer, or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company, the Midwest Securities Trust Company or the Philadelphia Depository Trust Company (pursuant to guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase), together with a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signature guarantee and any other required documents, will be received by the Depositary at one of its addresses set forth above within five (5) New York Stock Exchange, Inc. trading days after the date of execution hereof. The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Letter of Transmittal and certificates for Shares to the Depositary within the time period shown herein. Failure to do so could result in a financial loss to such Eligible Institution. Name of Firm: _______________________ ------------------------------------- Zip Code Please Type or Print Area Code and Title: ______________________________ Telephone Number: ___________________ Dated: _______________________ , 1996 NOTE: DO NOT SEND CERTIFICATES FOR SHARES WITH THIS NOTICE OF GUARANTEED DELIVERY. CERTIFICATES FOR SHARES ARE TO BE DELIVERED WITH THE LETTER OF TRANSMITTAL.	SC 14D1	EX-99.(A)(3)	1996-01-12T00:00:00	1996-01-12T17:26:30
0000950115-96-000013	0000950115-96-000013_0002.txt	<DESCRIPTION>AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER a Delaware corporation (the "Company") Background: The Company is in the business of providing project management, architectural planning and design, interior design and development services. Owner owns all of the issued and outstanding capital stock of the Company (the "Company's Stock"). Parentco owns all of the issued and outstanding capital stock of Newco. The parties desire that Newco be merged with and into the Company (the "Merger") on the terms and conditions set forth in this Agreement and Plan of Merger ("Agreement"). The respective boards of directors of Owner and the Company have determined that the Merger and the other transactions contemplated by this Agreement are in the best interests of Owner and the Company and their respective shareholders. The board of directors of Newco has determined that the Merger and the other transactions contemplated by this Agreement are in the best interests of Newco and its shareholder. Intending to be legally bound, and in consideration of the mutual agreements contained herein, the parties agree as follows: Certain defined terms used in this Agreement and not specifically defined in context are defined in this Section 1, as follows: 1.1. "Accounts Receivable" means (a) any right to payment for goods sold, leased or licensed or for services rendered, whether or not it has been earned by performance, whether billed or unbilled, and whether or not it is evidenced by any Contract, (b) any note receivable, or (c) any other receivable or right to payment of any nature. 1.2. "Ancillary Agreements" means the Real Estate Agreement and the Management Agreement. 1.3. "Asset" means any real, personal, mixed, tangible or intangible property of any nature, including, but not limited to, (a) Cash Assets, (b) Accounts Receivable, (c) other current assets of any nature including, but not limited to, prepayments, deposits and escrows, (d) Tangible Property, (e) Real Property, (f) Intangibles, (g) Contract Rights, (h) claims, causes of action and other legal rights and remedies of any nature, and (i) goodwill and miscellaneous assets of any nature including, but not limited to, rights with respect to telephone numbers, rights with respect to telephone and other directory listings, marketing materials and advertisements, books and records, correspondence files, data bases, customer lists, prospect lists, supplier lists, and other files and records of any nature, whether stored in written form or on any type of computer, electronic or other media. 1.4. "Cash Asset" means any cash on hand, cash in bank or other accounts, readily marketable securities, and other cash-equivalent liquid assets of any nature. 1.5. "Consent" means any consent, approval, order or authorization of, or any declaration, filing or registration with, or any application or report to, or any waiver by, or any other action (whether similar or dissimilar to any of the foregoing) of, by or with, any Person, which is legally necessary in order to take a specified action or actions in a specified manner and/or to achieve a specified result. 1.6. "Contract" means any written or oral contract, agreement, instrument, order, arrangement, commitment or understanding of a legally binding nature, including, but not limited to, sales orders, purchase orders, leases, subleases, data processing agreements, maintenance agreements, license agreements, sublicense agreements, loan agreements, promissory notes, security agreements, pledge agreements, deeds, mortgages, guaranties, indemnities, warranties, employment agreements, consulting agreements, sales representative agreements, joint venture agreements, buy-sell agreements, subscriptions, options or warrants. 1.7. "Contract Right" means any right, power or remedy of any nature under any Contract including, but not limited to, rights to receive property or services or otherwise derive benefits from the payment, satisfaction or performance of another party's Obligations, rights to demand that another party accept property or services or take any other actions, and rights to pursue or exercise remedies or options. 1.8. "Employee Benefit Plan" means any employee benefit plan as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any other plan, program, policy or arrangement for or regarding bonuses, commissions, incentive compensation, severance, vacation, deferred compensation, pensions, profit sharing, retirement, payroll savings, stock options, stock purchases, stock awards, stock ownership, phantom stock, stock appreciation rights, medical/dental expense payment or reimbursement, disability income or protection, sick pay, group insurance, self insurance, death benefits, employee welfare or fringe benefits of any nature; but not including employment Contracts with individual employees or Contracts with independent contractors. 1.9. "Encumbrance" means any lien, security interest, pledge, mortgage, easement, covenant, restriction, reservation, conditional sale, prior assignment, or other encumbrance, claim, burden or charge of any nature. 1.10. "GAAP" means generally accepted accounting principles under United States accounting rules and regulations, as in effect from time to time, consistently applied throughout the applicable periods. 1.11. "Insurance Policy" means any public liability, product liability, general liability, comprehensive, property damage, vehicle, life, hospital, medical, dental, disability, workers' compensation, key man, fidelity bond, theft, forgery, errors and omissions, directors' and officers' liability, or other insurance policy of any nature. 1.12. "Intangible" means any name, corporate name, fictitious name, trademark, trademark application, service mark, service mark application, trade name, brand name, product name, slogan, trade secret, know-how, patent, patent application, copyright, copyright application, design, logo, formula, invention, product right, computer program, operating system, applications system, firmware, software, or other intangible asset of any nature, whether in use, under development or design, or inactive, but not including any software. 1.13. "Judgment" means any order, writ, injunction, citation, award, decree or other judgment of any nature of any foreign, federal, state or local court, governmental body, administrative agency, regulatory authority or arbitration tribunal. 1.14. "Law" means any provision of any foreign, federal, state or local law, statute, ordinance, charter, constitution, treaty, rule or regulation. 1.15. "Material Adverse Effect" means, with respect to any Person, any adverse effect on the financial condition, financial performance, financial prospects, business prospects or operations of such Person and its Subsidiaries, which is or will be material, under either GAAP or applicable legal principles, to such Person and its Subsidiaries. 1.16. "Obligation" means any debt, liability or obligation of any nature, whether secured, unsecured, recourse, nonrecourse, liquidated, unliquidated, accrued, absolute, fixed, contingent, ascertained, unascertained, known, unknown or otherwise. 1.17. "Permit" means any license, permit, approval, waiver, order, authorization, right or privilege of any nature, granted, issued, approved or allowed by any foreign, federal, state or local governmental body, administrative agency or regulatory authority. 1.18. "Person" means any individual, sole proprietorship, joint venture, partnership, corporation, association, cooperative, trust, estate, governmental body, administrative agency, regulatory authority or other entity of any nature. 1.19. "Proceeding" means any demand, claim, suit, action, litigation, governmental investigation, arbitration, administrative hearing or other legal proceeding of any nature. 1.20. "Real Property" means any real estate, land, building, condominium, town house, structure or other real property of any nature, all shares of stock or other ownership interests in cooperative or condominium associations or other forms of ownership interest through which interests in real estate may be held, and all appurtenant and ancillary rights thereto, including, but not limited to, easements, covenants, water rights, sewer rights and utility rights. 1.21. "Subsidiary" means, with respect to any Person, any other Person as to which such Person directly or indirectly owns or has the power to vote, or to exercise a controlling influence with respect to, 50% or more of the securities or interests of any class of such other Person which are entitled to vote for the election of directors or others performing similar functions. OMD, Inc. ("OMD") shall be deemed a Subsidiary of the Company within the meaning of Section 4.2 below. 1.22. "Tangible Property" means any furniture, fixtures, leasehold improvements, vehicles, office equipment, computer equipment, other equipment, machinery, tools, forms, supplies or other tangible personal property of any nature, whether constituting fixed assets, inventory or otherwise. 1.23. "Tax" means (a) any foreign, federal, state or local income, earnings, profits, gross receipts, franchise, capital stock, net worth, sales, use, occupancy, severance, general property, real property, personal property, intangible property, license, stamp, transfer, fuel, excise, payroll, employment withholding, unemployment compensation, social security or other tax of any nature, (b) any foreign, federal, state or local organization fee, qualification fee, annual report fee, filing fee, occupation fee, assessment, sewer rent or other fee or charge of any nature, or (c) any deficiency, interest or penalty or addition thereto, whether disputed or not, imposed with respect to any of the foregoing. 2.1. Merger. On the Effective Date (as defined in Section 10.1), Newco shall be merged with and into the Company in accordance with this Agreement and in compliance with the Delaware General Corporation Law ("DGCL"), and the Merger shall have the effect provided for in the DGCL. The Company (sometimes referred to below as the "Surviving Corporation") shall be the surviving corporation of the Merger and shall continue to exist and to be governed by the Laws of the State of Delaware. The corporate existence and identity of the Company shall continue unaffected and unimpaired by the Merger. On the Effective Date, the Company shall succeed to and be fully vested with the corporate existence and identity of Newco, and the separate corporate existence and identity of Newco shall cease. 2.2. Name of Surviving Corporation. The name of the Surviving Corporation shall be "Medifac, Inc." 2.3. Certificate of Incorporation. The Certificate of Incorporation of the Company immediately before the Merger shall be the Certificate of Incorporation of the Surviving Corporation immediately after the Merger, unless and until otherwise subsequently amended or modified. 2.4. Bylaws. The Bylaws of the Company immediately before the Merger shall be the Bylaws of the Surviving Corporation immediately after the Merger, unless and until otherwise subsequently amended or modified. 2.5. Directors. Immediately after Merger, the directors of the Surviving Corporation shall consist of the persons listed below, who shall serve in accordance with the Bylaws of the Surviving Corporation and until their successors are elected and have qualified: 2.6. Officers. On the Effective Date, the officers of the Surviving Corporation shall consist of the persons listed below who shall hold the office(s) in the Surviving Corporation set forth opposite their name and shall serve in accordance with the Bylaws of the Surviving Corporation: James W. Eastwood Chairman and President 2.7. Conversion of Newco Stock. On the Effective Date, each share of the total of 100 shares of common stock, par value $10.00 per share, of Newco issued and outstanding immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically converted into and become one share of common stock, $10.00 par value per share, of the Surviving Corporation. It is the intention of the parties that, immediately after the Merger, Parentco shall own all of the issued and outstanding capital stock of the Surviving Corporation. 2.8. Conversion of the Company's Stock. On the Effective Date, each share of the total of 100 shares of common stock, $10.00 par value per share, of the Company issued and outstanding immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the holder thereof, be automatically converted into the right to receive (i) $15,000.00 in cash, and (ii) a subordinated note of the Surviving Corporation in the principal amount of $15,000.00 (the "Subordinated Note"). The Subordinated Note shall have a term of six years, and shall be repayable as follows: (a) interest only on the outstanding principal amount shall be payable monthly during the first two years of the term, at an annual rate of .5% above the National Commercial Rate of Meridian Bank, as the same may vary from time to time; (b) for the remaining four years of the term, interest on the outstanding principal amount shall be payable monthly at an annual rate of 9.5%, and principal shall be payable at such periodic intervals and upon such an amortization schedule as set forth in the Subordinated Note; and (c) all unpaid principal and interest shall be payable at the expiration of the six year term. The Subordinated Note, together with the fees due pursuant to the Management Agreement described in Section 10.2.10, shall be secured by (i) a guaranty of Granary Partners, L.P., which shall be secured by subordinated mortgage on the Granary, and (ii) a life insurance policy on the life of James W. Eastwood, which policy shall be purchased by the Surviving Corporation, shall have Owner as the beneficiary and shall be in such amount as mutually agreed upon by Owner and Parentco. The terms and conditions of the Subordinated Note, the guaranty and mortgage from Granary Partners, L.P. and the other documents relating thereto shall be mutually agreed upon by Owner and Parentco. The Subordinated Note shall be subject and subordinate in every respect to the Financing, as hereinafter defined, upon such terms and conditions as are reasonably acceptable to Owner and Parentco. 2.9. Treasury Stock. On the Effective Date, each share of the Company's Stock which is held by the Company (as a treasury share), immediately before the Effective Date shall, by virtue of the Merger and without any action on the part of the Company, be automatically canceled. 2.10. Exchange Procedures. At Closing (as defined in Section 6.1), Owner shall surrender certificates evidencing all of the Company's Stock in exchange for the following consideration (the "Merger Consideration"): 2.10.1 Cash Payment. An aggregate of $1,500,000, payable by wire transfer of federal funds to the account of Owner designated by Owner, or by bank cashier's or certified check; and 2.10.2 Subordinated Note. A Subordinated Note in the aggregate principal amount of $1,500,000. 2.11. No Dissenter's Rights. Owner, as the only stockholder of the Company, has approved and voted for the Merger and, therefore, shall not be entitled to exercise any dissenter's rights. 2.12. Cash at Closing. As of the Effective Date, the Company shall have cash (the "Closing Cash Amount") in an amount equal to the sum of (i) $389,500, (ii) the accrued bonuses as of the Effective Date for 1995 for all employees of the Company, and (iii) the amount of accounts payable of the Company as of the Effective Date (the "Closing Payables"). 2.13. Closing Balance Sheet. Within 45 days of the Closing, the Company shall prepare a balance sheet of the Company as of the Effective Date (the "Closing Balance Sheet"). The Closing Balance Sheet shall be prepared in accordance with generally accepted accounting principles, consistently applied. The Company and Owner shall fully cooperate in connection with the preparation of the Closing Balance Sheet. Owner shall have ten (10) business days after receipt of the Closing Balance Sheet to notify the Company in writing of any objections to the Closing Balance Sheet. If Owner notifies the Company of any objections within such period, then the Closing Balance Sheet shall be reviewed as soon as possible, at the joint shared expense of Owner and the Surviving Corporation, by the Company's independent certified public accounting firm (the "Company's Accountants"). The parties shall instruct the Company's Accountants to resolve any disagreements and deliver a final report to the parties as soon as possible. 2.14. Adjustment. If the amount of cash reflected on the Closing Balance Sheet is less than the Closing Cash Amount, Owner shall pay to the Surviving Corporation, within five business days after the Closing Balance Sheet is finalized, the amount of such deficiency. If the amount of cash reflected on the Closing Balance Sheet is more than the Closing Cash Amount, the Surviving Corporation shall pay to Owner, within five business days after the Closing Balance Sheet is finalized, the amount of such excess. Knowing that Parentco and Newco rely thereon, Owner represents and warrants to Parentco and Newco as follows: 4.1. Organization. The Company is a corporation that is duly organized, validly existing and in good standing under the Law of the State of Delaware, its jurisdiction of incorporation. The Company is duly qualified or registered to do business as a foreign corporation in the States of Pennsylvania, New Jersey and New York. Accurate and complete copies of the charter and bylaws of the Company, including all amendments to date, are attached to Schedule 4.1. The Company has the full corporate power and authority to own its Assets, conduct its business as and where such business is presently conducted, and enter into and perform this Agreement. 4.2. Subsidiaries. Schedule 4.2 sets forth a list of each direct or indirect Subsidiary of the Company (such Subsidiaries and the Company being hereinafter referred to as the "Companies"), setting forth as to each such Subsidiary its name, jurisdiction of incorporation, and the percentage of voting securities or other interest owned by the Company or any of its Subsidiaries. Except as set forth on Schedule 4.2, each of the Company's Subsidiaries (a) is a corporation duly organized, validly existing, and in good standing under the laws of its respective jurisdiction of incorporation, (b) is duly qualified or registered to do business as a foreign corporation or entity in each jurisdiction set forth on Schedule 4.2, and (c) has the full corporate power and authority to own its respective Assets and conduct its respective business as and where such business is presently conducted. All of the issued and outstanding capital stock of each of the Company's Subsidiaries is duly authorized, validly issued, fully paid and non-assessable, with no liability attaching to the ownership thereof. Except for (i) Medifac Architect, P.C., the shares of which are owned by Michael R. Arnold, (ii) Medifac Architects, Inc., the shares of which are owned by Norman H. Martin and Michael R. Arnold, and (iii) Medifac Architects, P.A., the shares of which are owned by Michael R. Arnold, the shares of each of the Company's Subsidiaries are owned by the Company, free and clear of all Encumbrances. Except as set forth on Schedule 4.2, there are no outstanding stock appreciation rights, phantom stock or other contracts or Contract rights relating to the issuance, sale, redemption, disposition or voting of any shares of capital stock or other securities of any of the Company's Subsidiaries. Except for the Company's interest in its Subsidiaries, to the knowledge of Owner, the Company does not own directly or indirectly any interest in any other Person. 4.3. Effect of Agreement. The execution, delivery and performance of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, by Owner and the Company have been (or as of the Closing Date shall have been) duly authorized by all necessary corporate actions by their respective boards of directors and stockholders and do not constitute a violation of or default under their respective charters, bylaws and/or other organizational documents. The execution, delivery and performance of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, by Owner and the Company (a) do not constitute a default or breach (immediately or after the giving of notice, passage of time or both) under any Contract to which Owner is a party or by which it is bound, (b) do not constitute a violation of any Law or Judgment that is applicable to Owner (c) do not result in the creation of any Encumbrance upon, or give to any third party any interest in, any of the business or Assets of the Companies, or any of the capital stock of the Companies except as contemplated by this Agreement and the Ancillary Agreements, and (d) except as stated on Schedule 4.3 (the "Required Consents") and except for the filing of the Certificate of Merger with the proper officials of the State of Delaware, do not require the Consent of any Person. This Agreement constitutes and the Ancillary Agreements, when executed and delivered, will constitute the valid and legally binding agreements of Owner and the Company, enforceable against them in accordance with their respective terms. 4.4. Corporate Records. Accurate and complete copies of the contents of the minute books and stock books of the Companies have been delivered to Parentco. Such minute books and stock books include (a) minutes of all meetings of the stockholders, boards of directors and any committees of the boards of directors at which any material action was taken, which minutes accurately record all actions taken at such meetings, (b) accurate and complete written statements of all actions taken by the stockholders, boards of directors and any committees of the boards of directors without a meeting at which any material action was taken, and (c) accurate and complete records of the issuance, transfer and cancellation of all shares of capital stock and other securities since the date of incorporation. Neither the stockholders, boards of directors or any committee of the boards has taken any material action other than those actions reflected in the records referenced in clauses (a) and (b) of the preceding sentence. 4.5. Capital Stock and Ownership. The authorized capital stock of the Company consists of 100 shares of Common Stock, $10.00 par value, all of which are issued, outstanding and owned by Owners, and no shares are held in treasury. Except for Owner, there are no other record or beneficial owners of any shares of capital stock of the Company. Except for the 100 shares of the Company's Stock owned by Owner, there are no other issued or outstanding shares of capital stock of the Company. All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued, and are fully paid and nonassessable, with no liability attaching to the ownership thereof. All offerings, sales and issuances by the Company of any shares of capital stock were conducted in compliance with all applicable federal and state securities Laws and all applicable state corporation Laws. Except for this Agreement, there are no outstanding stock appreciation rights, phantom stock, or other Contracts or Contract Rights relating to the offering, sale, issuance, redemption, disposition or voting of any shares of capital stock, or other securities of the Company. 4.6. Assets. Except as set forth on Schedule 4.6, Owner has taken no action that would result in any Encumbrance on any Assets of any of the Companies. 4.7. Obligations. Except as set forth on Schedule 4.7, Owner has incurred no Obligations on behalf of any of the Companies. 4.8. Employee Benefit Plans. Except as listed on Schedule 4.8, none of the Companies sponsors, maintains or contributes to, nor do the Companies have any ongoing Obligation with respect to, any Employee Benefit Plan. Except as described on Schedule 4.8, none of the Companies has agreed or committed, or has any understanding whether legally binding or not, to create any additional Employee Benefit Plan or to continue, modify, change or terminate any Employee Benefit Plan. Any Employee Benefit Plan that is a "Pension Plan" (as defined in Section 3(2) of ERISA) that the Companies have established, maintained, sponsored or contributed to, and with respect to which the Companies have any ongoing Obligation, is intended to qualify under Sections 401 and 501 of the Code. Except as otherwise described on Schedule 4.8, with respect to each Employee Benefit Plan listed on Schedule 4.8, (a) the Companies have made all payments required to be made and have accrued in accordance with GAAP all payments due but not yet payable; (b) the Companies have operated and currently operate such plans in compliance with the plan documents and in all material respects with all applicable Laws including, but not limited to, ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), (including, but not limited to, Section 4980B thereof) and the regulations thereunder; (c) there has not been any violation of the reporting and disclosure provisions of the Code and ERISA; (d) there has not been any Prohibited Transaction (as defined in ERISA or the Code); and (e) there has not been any violation of Sections 404, 406 or 407 of ERISA. None of the Companies has any direct or indirect Obligation under any Employee Benefit Plan other than the Employee Benefit Plans listed on Schedule 4.8. Except as described on Schedule 4.8, there are no circumstances arising out of the sponsorship of or contribution to any Employee Benefit Plan by the Companies that will result in the Companies having any direct or indirect liability other than liability for contributions, benefit payments, administrative costs and liabilities incurred in the ordinary course of business. There would be no direct or indirect liability of any of the Companies under Title IV of ERISA if any Employee Benefit Plan listed on Schedule 4.8 were terminated as of the Closing Date. No event has occurred and no circumstances currently exist that do or will result in any civil penalty being assessed pursuant to Section 502 of ERISA, any tax being imposed under Section 4975 of the Code, any liability for a breach of fiduciary or other responsibility under ERISA or the Code in connection with any Employee Benefit Plan or any other Obligation under applicable Law (including, but not limited to, those relating to Section 4980B of the Code or Sections 601 through 609 of ERISA) with respect to any Employee Benefit Plan that has been established, maintained or contributed to by any of the Companies or any other entity or entities that, together with any of the Companies, constitute elements of either a controlled group of corporations (within the meaning of Section 414(b) of the Code), a group of trades or businesses under common control (within the meaning of Section 414(c) of the Code or Section 4001 of ERISA), an affiliated service group (within the meaning of Section 414(m) of the Code), or another arrangement covered by Section 414(o) of the Code. 4.9.1 General. Schedule 4.9.1 is an accurate and complete list of all federal, state, local and other Tax returns and reports (including, but not limited to, information returns) (collectively "Returns") filed by the Companies with respect to their last five fiscal years. Accurate and complete copies of all Returns filed by the Companies with respect to their last five fiscal years have been delivered or made available to Newco. Except as explained on Schedule 4.9.1, (a) each of the Companies has properly and timely filed all Tax Returns required to be filed by it, all of which were accurately prepared and completed; (b) each of the Companies has properly withheld from payments to its employees, agents, representatives, contractors and suppliers all amounts required by Law to be withheld for Taxes; (c) each of the Companies has paid all amounts for Taxes required to be paid by it except for current Taxes which are not yet due or Taxes which are being contested in good faith as disclosed on Schedule 4.9.1 by appropriate proceedings diligently prosecuted, provided that, in either case, adequate reserves therefor have been established in accordance with GAAP; (d) no audit of any of the Companies by any governmental taxing authority has ever been conducted, is currently pending or, to Owner's knowledge, threatened; (e) no notice of any proposed Tax audit, or of any Tax deficiency or adjustment, has been received by any of the Companies, and there is no reasonable basis for any Tax deficiency or adjustment to be assessed against any of the Companies; and (f) there are no agreements or waivers currently in effect that provide for an extension of time for the assessment of any tax against any of the Companies. 4.9.2 Affiliated Group. None of the Companies has been a member of an affiliated group filing a consolidated federal income Tax Return other than a group the common parent of which is the Owner (the "Affiliated Group"). The Affiliated Group has filed all income Tax Returns that it was required to file for each taxable period during which any of the Companies was a member of the group. No director or officer (or employee responsible for Tax matters) of any of the Companies expects any authority to assess any additional Taxes against the Affiliated Group for any taxable period during which any of the Companies was a member of the group. There is no dispute or claim concerning any Tax liability of the Affiliated Group for any taxable period during which any of the Companies was a member of the group either (A) claimed or raised by any authority in writing or (B) as to which any of the directors and officers (and employees responsible for Tax matters) of any of the Companies has knowledge based upon personal contact with any agent of such authority. Except as disclosed on Schedule 4.9.2, the Affiliated Group has not waived any statute of limitations in respect of any Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency for any taxable period during which any of the Companies was a member of the group. None of the Companies has any liability for the Taxes of any person other than the Companies (A) under Treasury Reg. Section 1.1.1502-6 (or any similar provision of state, local or foreign law), (B) as a transferee or successor, (C) by contract, or (D) otherwise. 4.10. Proceedings and Judgments. Except as described on Schedule 4.10, to Owner's knowledge, (a) no Proceeding is currently pending or threatened against or relating to any of the Companies, any of the Companies' Businesses or any of the Companies' Assets, or the transactions contemplated by this Agreement; and (b) no Judgment is currently outstanding against or relating to the Company or the Companies' Businesses or any of the Companies' Assets. 4.11. Insurance. Schedule 4.11 is an accurate and complete list and description of (a) each Insurance Policy currently owned or maintained by or for the benefit of any of the Companies (excluding Insurance Policies for Employee Benefit Plans that are listed on Schedule 4.11), and (b) each Insurance Policy owned or maintained by or for the benefit of any of the Companies at any time since January 1, 1990. Each such Insurance Policy is or was in full force and effect during the period of coverage set forth on Schedule 4.11. Neither Owner nor, to Owner's knowledge, any of the Companies has received any notice of cancellation with respect to any such current Insurance Policy. Except as explained on Schedule 4.11, no claim is pending under any Insurance Policy listed on Schedule 4.11, nor has any claim occurred thereunder since January 1, 1990. 4.12. Related Party Transactions. Except as explained on Schedule 4.12 and for intercompany transactions between Owner and the Companies consistent with past practices, there are no Contracts, arrangements, transactions or understandings of any nature between any of the Companies and Owner or any director or officer of Owner or between any of the Companies and any Person that is an affiliate (as such term is defined for purposes of the Exchange Act) or immediate family member of any director or officer of Owner. 4.13. Brokerage Fees. No Person acting on behalf of any of the Companies or Owner is entitled to any brokerage, finder's or investment banking fee in connection with the transactions contemplated by this Agreement. 4.14. Full Disclosure. No representation or warranty made by Owner in this Agreement or the Ancillary Agreements or pursuant hereto or thereto contains or will contain any untrue statement of any material fact, or omits or will omit any material fact necessary to make the statements made, in the context in which made, not false or misleading. The copies of documents comprising or attached to the Schedules to this Agreement and the Ancillary Agreements, or otherwise delivered or provided to Parentco and Newco in connection with the transactions contemplated by this Agreement, are accurate and complete and are not missing any amendments, modifications, correspondence or other related papers that would be pertinent to Parentco's and Newco's understanding thereof. 5. REPRESENTATIONS OF PARENTCO AND NEWCO Knowing that the Owner relies thereon, Parentco and Newco jointly and severally, represent and warrant to Owner as follows: 5.1. Organization. Parentco and Newco each is a corporation that is duly organized, validly existing and in good standing under the Law of the State of Delaware. Parentco and Newco each has the full corporate power and authority to own its Assets, and enter into and perform this Agreement and the Ancillary Agreements. 5.2. Agreement. Parentco's and Newco's execution, delivery and performance of this Agreement and the Ancillary Agreements, and the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements, (a) have been duly authorized by all necessary corporate actions by Parentco's and Newco's board of directors and stockholders; (b) do not constitute a violation of or default under Parentco's and Newco's charter or bylaws; (c) do not constitute a default or breach (immediately or after the giving of notice, passage of time or both) under any Contract to which Parentco or Newco is a party or by which Parentco or Newco is bound; (d) do not constitute a violation of any Law or Judgment that is applicable to Parentco or Newco, to the business or Assets of Parentco or Newco, or to the transactions contemplated by this Agreement; and (e) except as stated on Schedule 5.2 and except for the filing of the Certificate of Merger with the proper officials of the State of Delaware, do not require the Consent of any Person. This Agreement constitutes and the Ancillary Agreements, when executed and delivered, will constitute the valid and legally binding agreements of Parentco and Newco, enforceable against them in accordance with their respective terms. 5.3. Proceedings. There is no Proceeding currently pending or, to the knowledge of Parentco or Newco, threatened against Parentco or Newco which has, or so far as Newco can now reasonably foresee will have, a Material Adverse Effect on Newco, or on Parentco's or Newco's ability to perform this Agreement. 5.4. Brokerage Fees. No Person acting on behalf of Parentco or Newco is entitled to any brokerage, finder's or investment banking fee in connection with the transactions contemplated by this Agreement. 5.5. Full Disclosure. None of the representations and warranties made by Parentco or Newco in this Agreement or the Ancillary Agreements or pursuant hereto or thereto contains any untrue statement of any material fact, or omits any material fact necessary to make the statements made, in the context in which made, not false or misleading. 6. CERTAIN OBLIGATIONS OF THE COMPANY AND OWNER PENDING CLOSING 6.1. Investigation. During the period from the date of this Agreement to the Closing Date, Owner shall provide, and shall cause the Companies to provide, to Parentco and Newco and their authorized representatives all information concerning the Companies and their businesses, Assets and that financial conditions that is reasonably requested by Parentco and Newco. 6.2. Conduct Pending Closing. During the period from the date of this Agreement to the Closing Date, except with the express prior written consent of Parentco. 6.2.1 Outside the Ordinary Course. Owner shall not take any action that would cause the Companies to do anything outside the ordinary course of business consistent with past practices. 6.2.2 Corporate Action. Owner shall cause each of the Companies not to (i) declare, pay or set aside for payment any dividend or other distribution, or make any direct or indirect redemption, retirement or acquisition of any shares of its capital stock, (ii) make any change in its accounting policies or practices, (iii) issue, or authorize the issuance, of any shares of capital stock or other securities or grant any rights with respect to its shares of capital stock or other securities, (iv) amend its certificate of incorporation or bylaws (or other organizational documents), or merge with or into, consolidate with, completely or partially liquidate or dissolve, or be involved in any other business combination with any other Person, (v) change, or authorize a change in, the rights of its outstanding capital stock or the character of its business, (vi) adopt or amend any Employee Benefit Plan. 6.2.3 Compliance. Owner shall (i) maintain all Insurance Policies relating to the Companies and their businesses and Assets in full force and effect, (ii) duly and timely file all Tax Returns required to be filed by the Companies, (iii) fully pay due all Taxes payable by the Companies or assessed against them or any of their respective Assets, (iv) continue to maintain the Employee Benefit Plans of the Companies in accordance with their respective terms. 6.2.4 Other Matters. Owner shall not, and shall cause the Companies not to, sell, transfer, give or otherwise dispose of, or create any Encumbrance upon, any of the Company's Stock. 6.3. Acquisition Proposals. During the period from the date of this Agreement until June 30, 1995, Owner shall not, and shall cause the Companies and the respective directors, officers, employees, affiliates, associates, advisors, representatives and agents of Owner and the Companies not to, directly or indirectly, solicit, initiate or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries, or proposals from, any Person (other than Parentco and Newco and their respective officers, employees, representatives and agents) relating to any transaction involving the sale of the business or Assets of any of the Companies, or any of the capital stock of any of the Companies or any merger, consolidation, business combination, or similar transaction involving any of the Companies. 6.4. Consents. Between the date of this Agreement and the Closing Date, Owner shall, and shall cause the Companies to, in good faith, use all reasonable efforts to obtain as promptly as practicable, and shall cooperate with Parentco and Newco in obtaining, the Required Consents. 6.5. Advice of Changes. Between the date of this Agreement and the Closing Date, Owner shall promptly advise Parentco in writing of any fact of which it obtains knowledge from a source other than an officer or employee of the Company and which, if existing or known as of the date of this Agreement, would have been required to be set forth or disclosed in or pursuant to this Agreement (it being understood that any such advice shall not be deemed to modify the representations, warranties or covenants of Owner contained in this Agreement). 6.6. Accounting Adjustment and Contribution of OMD. On the Closing Date immediately prior to the Effective Date, Owner shall take all actions necessary or appropriate to (i) properly contribute to the capital of the Company the Mediq Advance account and the current Federal Taxes Payable (Receivable) account; and (ii) contribute all of the issued and outstanding shares of OMD to the Company. 6.7. Reasonable Efforts. Owner shall, and shall cause the Company to, use all reasonable efforts to consummate the transactions contemplated by this Agreement as promptly as practicable, and neither Owner nor the Company shall take, or cause to be taken, or to the best of its ability permit to be taken, any action that would impair the prospect of completing the transactions contemplated by this Agreement. 7. CERTAIN OBLIGATIONS OF PARENTCO AND NEWCO PENDING CLOSING 7.1. Consents. Between the date of this Agreement and the Closing Date, Parentco and Newco shall, in good faith, use all reasonable efforts to obtain as promptly as practicable, and shall cooperate with Owner and the Company in obtaining, the Required Consents. 7.2. Advice of Changes. Between the date of this Agreement and the Closing Date, Parentco shall promptly advise Owner in writing of any fact of which it obtains knowledge and which, if existing or known as of the date of this Agreement, would have been required to be set forth or disclosed in or pursuant to this Agreement (it being understood that any such advice shall not be deemed to modify the representations, warranties and covenants of Parentco or Newco contained in this Agreement). 7.3. Financing. Parentco and Newco shall use all reasonable efforts to obtain financing, subject to reasonable and customary conditions, from reputable lenders in an aggregate amount which will be adequate to pay the $1,500,000 cash payment portion of the Merger Consideration, and provide a line of credit, in the amount of $1,000,000, to be used as working capital (said loan and line of credit being jointly referred to herein as the "Financing"). 7.4. Reasonable Efforts. Parentco and Newco shall use all reasonable efforts to consummate the transactions contemplated by this Agreement as promptly as practicable, and neither Parentco nor Newco shall take, cause to be taken, or to the best of its ability permit to be taken, any action that would impair the prospect of completing the transactions contemplated by this Agreement. 8. CONDITIONS PRECEDENT TO CLOSING BY OWNER Each obligation of Owner to be performed on the Closing Date shall be subject to the satisfaction of each of the following conditions, except to the extent that such satisfaction is waived by Owner in writing: 8.1. Representations of Parentco and Newco. All representations, warranties and certifications of Parentco and Newco contained in this Agreement and the Ancillary Agreements and in any written statement or document delivered to Owner by Parentco or Newco under or in connection with this Agreement or the Ancillary Agreements, taken individually and together, shall be true on and as of the Closing Date, with the same force and effect as though made on and as of the Closing Date, except that any such representation, warranty or certification made as of a specified date shall be true on and as of such date. 8.2. Performance by Parentco and Newco. All of the covenants, terms and conditions of this Agreement to be satisfied or performed by Parentco or Newco on or before the Closing Date shall have been substantially satisfied or performed. 8.3. Absence of Proceedings. No Proceeding shall have been instituted or threatened on or before the Closing Date by any Person (other than Owner or any of the Companies), no Judgment shall have been issued, and no new Law shall have been enacted, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the transactions contemplated by this Agreement. 8.4. Consents. All Required Consents shall have been obtained. 8.5. Owner's Board Approval. This Agreement and the transactions contemplated hereby shall have been approved by Owner's board of directors. 9. CONDITIONS PRECEDENT TO CLOSING BY PARENTCO, NEWCO AND THE SHAREHOLDER Each obligation of Parentco and Newco to be performed on the Closing Date shall be subject to the satisfaction of each of the following conditions, except to the extent that such satisfaction is waived by Parentco in writing: 9.1. Representations of Owner. All of the representations, warranties and certifications of Owner contained in this Agreement and the Ancillary Agreements and in any written statement or document delivered by Owner under or in connection with this Agreement, taken individually and together, ("Owner's Representations and Warranties") shall be true on and as of the Closing Date, with the same force and effect as though made on and as of the Closing Date, except that any such representation, warranty or certification made as of a specified date shall be true on and as of such date. 9.2. Performance by Owner. All of the covenants, terms and conditions of this Agreement to be satisfied or performed by Owner on or before the Closing Date shall have been satisfied or performed. 9.3. Absence of Adverse Changes. There shall not have been any change or casualty loss between the date of this Agreement and the Closing Date that has or would have a Material Adverse Effect on the Company. 9.4. Absence of Proceedings. No Proceeding shall have been instituted or threatened on or before the Closing Date by any Person (other than Parentco or Newco) no Judgment shall have been issued, and no new Law shall have been enacted, that seeks to or does prohibit or restrain, or that seeks damages as a result of, the consummation of the transactions contemplated by this Agreement. 9.5. Consents. All Required Consents shall have been obtained. 9.6. Financing. Newco shall have received the proceeds of the Financing. 9.7. OMD. Prior to the Closing Date, Owner shall have contributed all of the issued and outstanding shares of OMD to the Company. 9.8. Owner's Board Approval. This Agreement and the transactions contemplated hereby shall have been approved by Owner's board of directors. 10.1. Closing. Unless this Agreement is terminated in accordance with Section 13, the closing of the Merger and the other transactions contemplated by this Agreement ("Closing") shall be held at 10:00 A.M. local time on the fifth business day after the conditions to closing set forth in Sections 8.4, 8.5, 9.5 and 9.6 are satisfied, or such other time and date as is agreed upon by Owner and Parentco, at the offices of Blank, Rome, Comisky & McCauley, Four Penn Center Plaza, Philadelphia, Pennsylvania 19103, or such other location as is agreed upon by Owner and Parentco. The parties shall cause Certificate of Merger to be filed with the Secretary of State of the State of Delaware on the Closing Date or as soon as thereafter as is possible, and the Merger shall be effective on the date and time specified in the Certificate of Merger (the "Effective Date"). The parties shall take such further actions as may be required by the DGCL in connection with such filing and the consummation of the Merger. 10.2. Obligations of Owner at Closing. At the Closing, Owner shall deliver the following to Parentco and Newco: 10.2.1 The Company Stock. Stock certificates representing all of the Company's Stock, together with assignments separate from certificate in blank, dated the Effective Date and duly executed by Owner, and stamps or other proper evidence of the payment of any stock transfer or similar Taxes due as a result of the transfer of the Company's Stock. 10.2.2 Instruments of Transfer. All instruments or documents necessary to change the names of the individuals who have access to or are authorized to make withdrawals from or dispositions of all bank accounts, other accounts, certificates of deposits, marketable securities, other investments, safe deposit boxes, lock boxes and safes of the Companies and all keys and combinations to all safe deposit boxes, lock boxes and safes of the Companies. 10.2.3 Certificate of Merger. A Certificate of Merger, in form and substance, acceptable to the parties ("Certificate of Merger"), dated the Closing Date and duly executed by the Company and Owner. 10.2.4 Consents. The original signed copies of all Consents listed on Schedule 4.3. 10.2.5 Corporate Records and Resignations. All of the original minute books and stock books of the Companies and duly executed resignations, dated the Effective Date, of all directors and officers of the Companies other than as specified by Parentco. 10.2.6 Good Standing. Good standing certificates for the Companies, dated no earlier than ten (10) days before the Closing Date, from their respective jurisdictions of incorporation and from each other jurisdiction in which they are qualified or registered to do business as a foreign corporation. 10.2.7 Certified Resolutions. Copies of the resolutions duly adopted by the respective boards of directors of the Company and Owner, authorizing the Company and Owner to execute, deliver and perform this Agreement and to consummate the transactions contemplated by this Agreement, certified by an officer of the Company and Owner, as the case may be, as in full force and effect, without modification or rescission, on and as of the Closing Date. 10.2.8 Closing Certificate. A certificate dated the Closing Date and duly executed by proper officers of Owner in which Owner represents and warrants to Parentco and Newco that the conditions set forth in Sections 9.1, 9.2, 9.3, 9.4 and 9.7 have been satisfied. 10.2.9 General Release. A General Release of the Companies, in form acceptable to Owner and Parentco dated the Closing Date and duly executed by Owner. 10.2.10 Management Agreement. A Management Agreement, in form and substance acceptable to Owner and Parentco (the "Management Agreement"), dated the Closing Date, and duly executed by Owner, providing for the payment by the Surviving Corporation to Owner of a fee (the "Annual Service Fee"), in an amount per year for seven years calculated as set forth below, in exchange for the provision by Owner to Newco of certain management services over such seven year period. The Annual Service Fee shall equal the result of: (i) the quotient of (A) the amount of the Company's net accounts receivable as reflected on the Closing Balance Sheet, less all billings made by the Company in excess of costs and income recognized on uncompleted projects as reflected on the Closing Balance Sheet, divided by (B) seven, less (ii) $375,000. 10.2.11 Lease Agreement. A lease agreement (the "Granary Lease"), in form and substance acceptable to Owner and Parentco, dated the Closing Date, and duly executed by Owner, providing that the Surviving Corporation shall lease the property located at 411 North Twentieth Street, Philadelphia, Pennsylvania (the "Granary") from Owner at the same rent the Company currently pays Owner for the use of such property. 10.2.12 Other Documents. All other agreements, certificates, instruments, opinions and documents reasonably requested by Parentco in order to fully consummate the transactions contemplated by this Agreement. 10.3. Obligations of Parentco and Newco at Closing. At the Closing, Parentco and Newco shall deliver the following to Owner: 10.3.1 Payment. The Merger Consideration shall be paid in accordance with Section 2.10. 10.3.2 Certificate of Merger. The Certificate of Merger, dated the Closing Date and duly executed by Newco and Parentco. 10.3.3 Good Standing. Good standing certificates for Parentco, Newco, dated no earlier than ten (10) days before the Closing Date, from the State of Delaware. 10.3.4 Certified Resolutions. Copies of the resolutions duly adopted by the board of directors of Parentco, Newco, authorizing Parentco and Newco to execute, deliver and perform this Agreement and to consummate the transactions contemplated by this Agreement, certified by an officer of Parentco and Newco as in full force and effect, without modification or rescission, on and as of the Closing Date. 10.3.5 Closing Certificate. A certificate dated the Closing Date and duly executed by proper officers of Parentco and Newco, in which Parentco and Newco jointly and severally, represent and warrant to Owner that the conditions set forth in Sections 8.1, 8.2 and 8.3 have been satisfied. 10.3.6 Management Agreement. The Management Agreement, dated the Closing Date and duly executed by the Surviving Corporation. 10.3.7 Lease Agreement. The Granary Lease, dated the Closing Date and duly executed by the Surviving Corporation. 10.3.8 Guaranty and Life Insurance Policy. The Guaranty of Granary Partners, L.P. referred to in Section 2.8, dated the Closing Date and duly executed by Granary Partners, L.P., and the life insurance policy on the life of James W. Eastwood referred to in Section 2.8. 10.3.9 Other Documents. All other agreements, certificates, instruments, opinions and documents reasonably requested by Owner in order to fully consummate the transactions contemplated by this Agreement. 11.1. Transition and Cooperation. From and after the Closing Date, (a) Owner shall fully cooperate to transfer to Parentco the control and enjoyment of the Company in accordance with this Agreement; and (b) Owner shall promptly deliver to the Company all correspondence, papers, documents and other items and materials received by Owner or found to be in the possession of Owner which pertain to the Company. At any time and from time to time after the Closing Date, at the Company's request and without further consideration, Owner shall promptly execute and deliver all such further agreements, certificates, instruments and documents and perform such further actions as the Company may reasonably request, in order to fully consummate the transactions contemplated hereby and carry out the purposes and intent of this Agreement. 11.2.1 Tax Sharing Agreements. Any Tax sharing agreement between Owner and any of the Companies shall be terminated as of the Closing Date and shall have no further effect for any taxable year (whether the current year, a future year, or a past year). 11.2.2 Returns for Periods Through the Closing Date. Owner shall include the income of the Companies (including any deferred income triggered into income by Treasury Reg. Section 1.1502-13 and Treasury Reg. Section 1.1502-14 and any excess loss accounts taken into income under Treasury Reg. Section 1.1502-19) on Owner's consolidated federal income Tax Returns for all periods through the Closing Date and pay all federal income Taxes attributable to such income. The Companies will furnish Tax information to Owner for inclusion in Owner's federal consolidated income Tax Return and separate company state Tax Returns for the period which includes the Closing Date in accordance with Companies' past custom and practice. Owner shall take no position on such Tax Returns relating to the Companies that is inconsistent with past practices. The income of the Companies shall be apportioned to the period up to and including the Closing Date and the period after the Closing Date by closing the books of the Companies as of the end of the Closing Date. 11.2.3 Audits. Owner shall permit the Companies and their counsel to participate in any audits of Owner's consolidated federal income Tax Returns to the extent that such returns relate to the Companies. Owner shall not settle any such audit in a manner which would adversely affect the Companies after the Closing Date without the prior written consent of Parentco, which consent shall not unreasonably be withheld. 11.2.4 Election Out of Consolidated Group. The Companies shall not elect to be excluded from Owner's consolidated group under Treasury Reg. Section 1.1502-76(b)(5)(ii) for the Owner group taxable year that includes the Closing Date. 11.2.5 No Carrybacks. Surviving Corporation shall not carryback any post-acquisition Tax attribute of any of the Companies into the Owner's consolidated Tax Return. 11.2.6 Section 338(h)(10) Election. Owner shall join with Parentco and Newco in making an election under Sections 338(g) and 338(h)(10) of the Code (and any corresponding elections under state, local, or foreign tax law)(collectively a "Section 338(h)(10) Election") with respect to the Merger. Owner shall pay any Tax attributable to the making of the Section 338(h)(10) Election and will indemnify Parentco, Newco and the Companies, against any adverse consequences arising out of any failure to pay such Tax. Owner shall also pay any state, local, or foreign Tax and indemnify Parentco, Newco and the Companies against any adverse consequences arising out of any failure to pay such Tax attributable to an election under state, local, or foreign law similar to the election available under Section 338(g) of the Code (or which results from the making of an election under Section 338(g) of the Code) with respect to the Merger where the state, local, or foreign Tax jurisdiction (i) does not provide or recognize a Section 338(h)(10) election or (ii) does not apply its provisions corresponding to Section 338(h)(10) of the Code to the purchase and sale of the stock of the Companies (for example, because the Companies file a separate company Tax return in such jurisdiction). 11.2.7 Certain Limitations. Parentco and Newco covenant and agree that they will take no action, including, but not limited to, any merger or liquidation that would adversely affect the categorization of the Merger as a qualified stock purchase for the purpose of Section 338 of the Code. 11.3. The Company's Employee Benefit Plans. As soon as practicable, following the Effective Date, Surviving Corporation shall establish a retirement plan which shall include a cash or deferred arrangement described in Section 401(k) of the Code. It is intended that such plan will satisfy the applicable requirements of the Code and ERISA. After establishing such 401(k) retirement plan, those same assets attributable to the entire accounts, whether or not vested, of the participants in the Mediq Incorporated Employees' Savings Plan who become employees of Surviving Corporation on the Effective Date shall be transferred to Surviving Corporation's 401(k) retirement plan as soon as practicable. Such accounts shall be adjusted for all investment experience through the date of the actual transfer. Such accounts shall include the actual assets allocated to each participant's account, including stock of Owner, and all employer matching contributions with respect to deferrals made by participants for all periods through the Effective Date. The vesting provisions of Mediq Incorporated Pension Plan ("Pension Plan") shall be amended to provide that employees of the Companies on the Effective Date who are participants in the Pension Plan shall continue to receive vesting credit for employment with the Surviving Corporation. The Surviving Corporation shall periodically notify Owner upon the termination of employment of an employee of the Surviving Corporation who was a participant in the Pension Plan. 11.4. Nondisclosure. At all times after the Closing Date, except with the Company's prior written consent or as legally required in the reasonable written opinion of counsel to Owner, Owner shall not, directly or indirectly, in any capacity communicate, publish or otherwise disclose to any Person, or use for the benefit of any Person, any confidential or proprietary property, knowledge or information of any of the Companies or concerning any of their businesses, assets or financial conditions, no matter when or how such knowledge or information was obtained. 11.5. Noncompetition. During the period beginning on the Closing Date and ending on the third anniversary of the Closing Date, except with the Company's prior written consent, Owner shall not, directly or indirectly, in any capacity, at any location where the Companies have conducted or are conducting business as of the Closing: 11.5.1 Non-Solicitation. Communicate with or solicit any Person who is, or during such period becomes, a customer, prospect, supplier, employee, salesman, agent or representative of, or a consultant to, any of the Companies, in any manner which interferes or might interfere with such Person's relationship with any of the Companies, or in an effort to obtain any such Person as a customer, employee, salesman, agent or representative of, or a consultant to, any other Person that conducts a business competitive with or similar to the project management, interior design or architectural planning and design businesses (the "Business") of any of the Companies. 11.5.2 Competing Business. Establish, own, manage, operate, finance or control, or participate in the establishment, ownership, management, operation, financing or control of, or be a director, officer, employee, salesman, agent or representative of, or be a consultant to, any Person that conducts a business competitive with or similar to the Business of any of the Companies. 11.6. Enforcement of Covenants. Owner expressly acknowledges that it would be extremely difficult to measure the damages that might result from any breach of the Covenants, and that any breach of the Covenants will result in irreparable injury to the Company for which money damages could not adequately compensate. If a breach of the Covenants occurs, then the Company shall be entitled, in addition to all other rights and remedies that it may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining the Owner and all other Persons involved therein from continuing such breach. The existence of any claim or cause of action that the Owner or any such other Person may have against any of the Companies shall not constitute a defense or bar to the enforcement of any of the Covenants. If the Company must resort to litigation to enforce any of the Covenants that has a fixed term, then such term shall be extended for a period of time equal to the period during which a breach of such Covenant was occurring, beginning on the date of a final court order (without further right of appeal) holding that such a breach occurred or, if later, the last day of the original fixed term of such Covenant. 11.7. Scope of Covenants. If any Covenant, or any part thereof, or the application thereof, is construed to be invalid, illegal or unenforceable, then the other Covenants, or the other portions of such Covenant, or the application thereof, shall not be affected thereby and shall be enforceable without regard thereto. If any of the Covenants is determined to be unenforceable because of its scope, duration, geographical area or other factor, then the court making such determination shall have the power to reduce or limit such scope, duration, area or other factor, and such Covenant shall then be enforceable in its reduced or limited form. 12.1. Indemnification Obligations of Owner. From and after the Closing Date, Owner shall indemnify and hold harmless Parentco, Newco, the Companies and all existing and future, direct or indirect, subsidiaries of the Companies (collectively, the "Company Group"), and their respective successors and assigns, and their respective shareholders, directors, officers, employees, agents and representatives ("Indemnified Persons"), from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including, but not limited to, reasonable attorney's fees and court costs, arising out of or caused by, directly or indirectly, any of all of the following: breach or failure of any warranty or representation made by the Owner in or pursuant to this Agreement. 12.1.2 Nonperformance. Any failure or refusal by Owner to satisfy or perform any covenant, term or condition of this Agreement required to be satisfied or performed by it. 12.1.3 Employee Benefit Plans. Any Proceeding arising out of, directly or indirectly, the Savings Plan or the Pension Plan and any act or omission of Owner, or any act or omission of any of the Companies prior to the Effective Date, relating to the Savings Plan or the Pension Plan. 12.1.4 Taxes. Any deficiency or adjustment for Taxes and related interest, penalties and expenses, assessed against or imposed upon any of the Companies (or their successors) with respect to any period ending on or before the Closing Date, including any liability of any of the Companies for Taxes of Owner or any of its Subsidiaries or affiliates other than any of the Companies (i) under Treasury Reg. Section 1.1502-6 (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract, or (iv) otherwise. 12.2. Indemnification Obligations of Parentco and the Surviving Corporation. From and after the Closing Date, Parentco and the Surviving Corporation, jointly and severally, shall indemnify and hold harmless Owner and its Indemnified Persons from and against any and all actions, suits, claims, demands, debts, liabilities, obligations, losses, damages, costs and expenses, including, but not limited to, reasonable attorney's fees and court costs, arising out of or caused by, directly or indirectly, any of all of the following: breach or failure of any warranty or representation made by Parentco or Newco in or pursuant to this Agreement. 12.2.2 Nonperformance. Any failure or refusal by Parentco or Newco to satisfy or perform any covenant, term or condition of this Agreement required to be satisfied or performed by it. 12.2.3 Proceedings Against Owner. Any Proceeding against Owner by any Person (other than Parentco or the Surviving Corporation) solely as a result of Owner having been a shareholder of the Company and not as a result of any act or omission of Owner. 12.3. Indemnification Procedures. With respect to each event, occurrence or matter ("Indemnification Matter") as to which the members of the Company Group or Owner (in either case, referred to as the "Indemnitee") are entitled to indemnification from another party (referred to as the "Indemnitor") under this Section 12: 12.3.1 Notice. Within ten (10) days after the Indemnitee receives written documents underlying the Indemnification Matter or, if the Indemnification Matter does not involve a third party action, suit, claim or demand, promptly after the Indemnitee first has actual knowledge of the Indemnification Matter, the Indemnitee shall give notice to the Indemnitor of the nature of the Indemnification Matter and the amount demanded or claimed in connection therewith ("Indemnification Notice"), together with copies of any such written documents. 12.3.2 Defense. If a third party action, suit, claim or demand is involved, then, upon receipt of the Indemnification Notice, the Indemnitor shall, at its expense and through counsel of its choice, promptly assume and have sole control over the litigation, defense or settlement (the "Defense") of the Indemnification Matter, except that (a) the Indemnitee may, at its option and expense and through counsel of its choice, participate in (but not control) the Defense; (b) if the Indemnitee reasonably believes that the handling of the Defense by the Indemnitor may have a material adverse effect on the Indemnitee, its business or financial condition, or its relationship with any customer, prospect, supplier, employee, salesman, consultant, agent or representative, then the Indemnitee may, at its option and expense and through counsel of its choice, assume control of the Defense, provided that the Indemnitor shall be entitled to participate in the Defense at its expense and through counsel of its choice, and provided further that the Indemnitee shall not consent to any judgment or agree to any settlement without the Indemnitor's prior written consent, which consent shall not be unreasonably withheld or delayed; (c) the Indemnitor shall not consent to any Judgment, or agree to any settlement, without the Indemnitee's prior written consent provided that, if the Indemnitee withholds its consent to any monetary Judgment or monetary settlement which is acceptable to the Indemnitor and which does not exceed the limitation set forth in Section 12.4.2, then the Indemnitor's liability with respect to such Indemnification Matter shall be limited to such monetary amount; (d) if the Indemnitor does not promptly assume control over the Defense or, after doing so, does not continue to prosecute the Defense in good faith, the Indemnitee may, at its option and through counsel of its choice, but at the Indemnitor's expense, assume control over the Defense provided that the Indemnitor shall continue to be obligated to indemnify the Indemnitee with respect thereto. In any event, the Indemnitor and the Indemnitee shall fully cooperate with each other in connection with the Defense, including, but not limited to, by furnishing all available documentary or other evidence as is reasonably requested by the other. 12.3.3 Payments. All amounts owed by the Indemnitor to the Indemnitee (if any) shall be paid in cash in full within five (5) business days after a final Judgment (without further right of appeal) determining the amount owed is rendered, or after a final settlement or agreement as to the amount owed is executed. 12.4. Limits on Indemnification. The Indemnitor's liability under this Section 12 shall be limited as follows: 12.4.1 Threshold. No amount shall be payable by the Indemnitor under this Section 12 unless and until the aggregate amount otherwise payable by the Indemnitor under this Section 12 exceeds Ten Thousand Dollars ($10,000), in which event the Indemnitor shall pay such aggregate amount and all future amounts payable by the Indemnitor under this Section 12. 12.4.2 Ceiling. The Indemnitor's total liability under this Section 12 shall not exceed the sum of Three Million Dollars ($3,000,000). 12.4.3 Time Periods. With respect to any Indemnification Matter that does not involve a third party or governmental claim, demand or Proceeding, the Indemnitor shall have no liability unless the Indemnitee gives an Indemnification Notice with respect thereto within three (3) years after the Closing Date. With respect to an Indemnification Matter that involves a third party or governmental claim, demand or proceeding, the liability of Indemnitor shall not be affected if the Indemnitee gives an Indemnification Notice with respect thereto after the expiration of the three year period after the Closing Date. 12.4.4 Exceptions. None of the foregoing limitations shall apply in the case of any Indemnification Matter involving recklessness, intentional misrepresentation, fraud or criminal liability or Taxes. 12.5. Setoff and Holdback. In addition to all other rights and remedies that the Indemnitee may have, the Indemnitee shall have the right to setoff, against any amounts due to the Indemnitor, whether due under this Agreement, any of the other Contracts contemplated by this Agreement or otherwise, any sums for which the Indemnitee is entitled to indemnification under this Section 12; provided that the Indemnitee's rights to indemnification under this Section 12 shall not be in any manner limited by or to this right of setoff. If any Indemnification Matters are pending at a time when the Indemnitee is required to pay any amount due to the Indemnitor, then the Indemnitee shall have the right, upon notice to the Indemnitor, to withhold from such payment, until final determination of such pending Indemnification Matters, the total amount for which the Indemnitor may become liable as a result thereof, as determined by the Indemnitee reasonably and in good faith. 13.1. Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time before Closing, whether before or after approval by Acquiror's shareholders in accordance with any of the following methods: 13.1.1 Mutual Consent. By the mutual written consent of Parentco and Owner. 13.1.2 Termination Date. By written notice from Parentco to Owner or from to Owner to Parentco, if the Closing does not occur on or before June 30, 1995 for any reason other than a breach of this Agreement by the party giving such notice. 13.1.3 Failure of Parentco's and Newco's Conditions. By written notice from Parentco to Owner, if it becomes certain, for all practical purposes, that any of the conditions to the closing obligations of Parentco and Newco set forth in Section 9 cannot be satisfied for a reason other than Parentco's or Newco's breach of this Agreement, and Parentco is not willing to waive the satisfaction of such condition. 13.1.4 Failure of Owner's Conditions. By written notice from Owner to Parentco, if it becomes certain, for all practical purposes, that any of the conditions to the closing obligations of Owner set forth in Section 8 cannot be satisfied for a reason other than Owner's breach of this Agreement, and Owner is not willing to waive the satisfaction of such condition. 13.2. Effect of Termination. Upon termination of this Agreement pursuant to Section 13.1, this Agreement shall be of no further force and effect, and there shall be no liability on the part of any party hereto, except for the obligations of the parties under Sections 14.1, 14.2 and 14.3 and except that no such termination shall relieve any party from liability for any breach of this Agreement prior to such termination. Each party's rights under this Section 13 is in addition to all other rights it may have under this Agreement or otherwise, and the exercise of its rights under this Section 13 shall not be deemed an election of remedies. 14.1. Confidentiality. During the period from the date of this Agreement to the Closing Date, each of the parties shall maintain the confidentiality of all confidential information which is disclosed to them in connection with this Agreement. If this Agreement is terminated in accordance with Section 13, then each party shall promptly return all confidential information and materials of the other parties, and the provisions of the foregoing sentence shall survive such termination indefinitely. The parties acknowledge that any breach of this Section 14.1 may cause irreparable injury to the others for which money damages could not adequately compensate. If there is such a breach, the aggrieved parties shall be entitled, in addition to all other rights and remedies they may have at law or in equity, to have an injunction issued by any competent court enjoining and restraining the breaching parties from continuing such breach. The existence of any claim or cause of action which any of the breaching parties may have against any of the aggrieved parties shall not constitute a defense or bar to the enforcement of this Section 14.1. 14.2. Fees and Expenses. Parentco and Newco shall pay all of the fees and expenses incurred by them, and Owner shall pay all fees and expenses incurred by the Company and it, in negotiating and preparing this Agreement (and all other Contracts executed in connection herewith or therewith) and in consummating the transactions contemplated by this Agreement; provided, that Newco and Owner shall each be responsible for and shall each pay one-half of the counsel fees of any lender which are payable by Parentco and/or Newco in connection with a Financing. The parties acknowledge that Blank, Rome, Comisky & McCauley is not representing the Company in this transaction. 14.3. Publicity. All voluntary public announcements concerning the transactions contemplated by this Agreement shall be mutually acceptable to both Parentco and Owner. Unless required by Law, no party shall make any public announcement or issue any press release concerning the transactions contemplated by this Agreement without the prior written consent of Parentco and Owner. With respect to any announcement that any of the parties is required by Law or stock exchange or NASDAQ regulation to issue, such party shall, to the extent possible under the circumstances, review the necessity for the contents of the announcement with the other party before issuing the announcement. 14.4. Notices. All notices, consents or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or one business day after being sent by a nationally recognized overnight delivery service, charges prepaid, to the parties at their respective addresses stated on the first page of this Agreement. Notices may also be given by facsimile and shall be effective on the date transmitted if confirmed within forty-eight (48) hours thereafter by a signed original sent in the manner provided in the preceding sentence. Any notice to Owner shall be sent to the attention of Alan Einhorn, Corporate Counsel. A copy of each notice to Parentco, Newco or the Surviving Corporation shall be simultaneously sent to Arthur H. Miller at Blank, Rome, Comisky & McCauley, 1200 Four Penn Center Plaza, Philadelphia, PA 19103. Any party may change its address for notice and the address to which copies must be sent by giving notice of the new addresses to the other parties in accordance with this Section 14.4, provided that any such change of address notice shall not be effective unless and until received. 14.5. Survival of Representations. All representations and warranties made in this Agreement or pursuant hereto shall survive the date of this Agreement, the Effective Date, the Closing Date and the consummation of the transactions contemplated by this Agreement. 14.6. Interpretation of Representations. Each representation and warranty made in this Agreement or pursuant hereto is independent of all other representations and warranties made by the same parties, whether or not covering related or similar matters, and must be independently and separately satisfied. Exceptions or qualifications to any such representation or warranty shall not be construed as exceptions or qualifications to any other representation or warranty. 14.7. Reliance by Parentco, Newco and the Shareholder. Notwithstanding the right of Parentco, Newco and the Shareholder to investigate the business, Assets and financial condition of the Companies, and notwithstanding any knowledge determined or determinable by Parentco, Newco and the Shareholder as a result of such investigation, Parentco, Newco and the Shareholder have the unqualified right to rely upon, and has relied upon, each of the representations and warranties made by the Owner in this Agreement or pursuant hereto. 14.8. Entire Understanding. This Agreement, together with the Exhibits and Schedules hereto which are hereby incorporated herein as a part of this Agreement, states the entire understanding among the parties with respect to the subject matter hereof, and supersedes all prior oral and written communications and agreements, and all contemporaneous oral communications and agreements, with respect to the subject matter hereof. 14.9. Parties in Interest. This Agreement shall bind, benefit, and be enforceable by and against the parties to this Agreement and their respective successors, permitted assigns, heirs, estates and personal representatives. Nothing in this Agreement is intended to confer, or shall be deemed to confer, any rights or remedies upon any Persons other than the parties hereto and their respective heirs, estates, personal representatives, successors and permitted assigns. 14.10. Amendment. This Agreement may be amended, modified or supplemented by the parties hereto, whether before or after approval by a party's shareholders, provided that any such amendment, modification or supplement shall be in writing and signed by the parties hereto. 14.11. Waivers. No waiver with respect to this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought. Except as otherwise expressly provided herein, no failure to exercise, delay in exercising, or single or partial exercise of any right, power or remedy by any party, and no course of dealing between or among any of the parties, shall constitute a waiver of, or shall preclude any other or further exercise of, any right, power or remedy. 14.12. Severability. If any provision of this Agreement is construed to be invalid, illegal or unenforceable, then the remaining provisions hereof shall not be affected thereby and shall be enforceable without regard thereto. 14.13. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original hereof, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart hereof. 14.14. Section Headings. The section and subsection headings in this Agreement are used solely for convenience of reference, do not constitute a part of this Agreement, and shall not affect its interpretation. 14.15. References. All words used in this Agreement shall be construed to be of such number and gender as the context requires or permits. Unless a particular context clearly requires otherwise, the words "hereof" and "hereunder" and similar references refer to this Agreement in its entirety and not to any specific section or subsection of this Agreement. 14.16. Controlling Law. THIS AGREEMENT IS MADE UNDER, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. 14.17. Schedules. The parties agree that within ten (10) business days of the date of this Agreement, Owner shall furnish to Parentco and Newco and Parentco and Newco shall furnish to Owner, all Schedules called for by this Agreement which were not delivered upon execution of this Agreement. If any party receiving a Schedule from another party pursuant to this Section 14.17 objects, for any reason, to anything disclosed on such Schedule, the objecting party shall have the right to terminate this Agreement by written notice to the other party. Witness the due execution and delivery hereof as of the date first stated above. By: /s/ Michael S. Sandler Title: By: /s/ James W. Eastwood Title: By: /s/ Michael S. Sandler Title: By: /s/ James W. Eastwood Title:	10-K405	EX-2.3	1996-01-12T00:00:00	1996-01-12T11:57:13
0000950134-96-000108	0000950134-96-000108_0002.txt	<DESCRIPTION>STOCK PURCHASE AGREE BETWEEN SEARCH AND L.DORFMAN This agreement ("Agreement) dated as of May 5, 1995 is entered into by and between Search Capital Group, Inc. ("Search"), and Louis Dorfman, Trustee ("Trustee") of The SBM Trust ("Trust") not in his individual capacity but as Trustee of The SBM Trust. WHEREAS, the Trust is the owner of 1,312,127 shares of Search's common stock, $0.01 par value per share (the "Shares"); and WHEREAS, Search determined that it is in its best interest to purchase 500,000 of the Shares, and to obtain a proxy and a right of first refusal on the remainder of the Shares; and WHEREAS, following such determination, Search made corresponding requests of the Trust; and WHEREAS, the Trust is willing to sell 500,000 of the Shares and to grant a proxy and right of first refusal to Search on the remainder of the Shares provided that Search agrees to give to the Trust the right to put such NOW, THEREFORE, for the mutual promises recited herein and Ten Dollars ($10.00) and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the parties hereto, and with the intent to be legally bound hereby, the parties hereto agree as follows: 1. PURCHASE OF COMMON STOCK. Contemporaneously with the execution of this Agreement, Search shall purchase from the Trust Five Hundred Thousand (500,000) of the Shares. The purchase price shall be Two Dollars and Twenty-Five Cents ($2.25) per Share, or a total of One Million, One Hundred Twenty Five Thousand Dollars ($1,125,000.00). Such purchase price shall be paid in U.S. dollars in good funds and may be made either by Federal wire transfer or certified check. 2. RIGHT OF FIRST REFUSAL. The Trust hereby grants to Search the priority right to purchase all or any portion of the remaining Shares owned by the Trust which may be from time to time offered for sale by the Trust upon the following terms: a. The right of first refusal shall continue for two years. b. The right of first refusal shall not apply in the case of an open market sale of the Shares. c. Upon receipt of an arms-length offer from an unrelated party to purchase any or all of the Shares, the Trustee shall promptly give Search notice of such offer (the "Notice"). d. The Notice shall specify the name of the offeror, the number of Shares to be purchased, the purchase price, and any other relevant terms or conditions applicable to the proposed sale to the offeror identified in the Notice. e. If Search does not notify the Trustee by 6:00 p.m. the following business day that Search will purchase the Shares then being offered for sale on the terms and conditions stated in the Notice, the Trust shall be free to sell the Shares to the third-party. f. If Search elects to purchase the Shares offered, Search shall tender a certified check in the appropriate amount at a closing to be held in Search's offices at 5:00 p.m. the business day following its election to purchase. At closing the Trustee shall tender, free or any liens or encumbrances, duly endorsed stock certificates evidencing the number of Shares specified in the Notice. g. Should Search fail to timely tender the purchase price, Search shall be deemed to have waived its right of first refusal. h. The right of first refusal shall cease as to any portion of the Shares sold by the Trust to a third party in conformity with this Section 2. 3. IRREVOCABLE PROXY. The Trust shall, upon closing of this Agreement, execute an irrevocable proxy in form and substance similar to that contained on Exhibit A hereof (the "Irrevocable Proxy"). Such irrevocable proxy shall be a proxy coupled with an interest binding all remaining Shares owned by the Trust. The Irrevocable Proxy shall terminate as to Shares retained by the Trust two years from the date of this Agreement. The Irrevocable Proxy shall terminate: a. as to Shares sold on the open market, upon transfer to a b. as to Shares not sold on the open market, upon compliance by the Trustee with the first refusal rights of Search under Section 2. 4. PUT OPTION. Search grants Trustee the right (the "Put Option") to cause Search to purchase from the Trustee all, but not less than all, of the Shares unsold (the "Remaining Shares") upon the following terms: a. PURCHASE PRICE. The purchase price of the Remaining Shares shall be Two Dollars and Twenty-Five Cents ($2.25) per share. b. CLOSING. At closing the Remaining Shares shall be tendered free and clear of any liens or encumbrances. Upon such tender, the purchase price shall be paid in U.S. dollars in good funds by means of cashier's check or Federal wire transfer. c. TIME FOR EXERCISE. The Trustee shall notify Search at least thirty (30) days prior to the expiration of twenty four months following the execution of this Agreement that Trustee intends to exercise the Put Option. If so exercised, closing shall take place within five (5) business days following the expiration of such twenty four month period. d. ANTI-DILUTION PROVISIONS. In the event that Search issues additional shares of its common stock as a stock dividend or as part of a stock split, or if Search reduces the number of its issued and outstanding shares of common stock as a result of a reverse stock split, the number of the remaining Shares subject to the right of first refusal and the Put Option, and the purchase prices herein specified shall all be appropriately adjusted. 5. CONTINUING OWNERSHIP INTEREST. Subject to the terms of this Agreement, the Trust shall be entitled to all rights of ownership of the Shares, including, without limitation, the right to receive cash or stock dividends. a. PIGGY-BACK REGISTRATION. Should Search register its common stock under the Securities Act of 1933, as amended, upon request and without cost to the Trust, Search shall at the same time register all Shares owned by the Trust. b. PROFESSIONAL FEES. Search shall be responsible and pay for the reasonable attorney's fees and accountant's fees incurred by each party hereto in relation to the negotiation and consummation of this Agreement. Each party hereto shall be responsible for its own professional fees in relation to the interpretation, enforcement or adjudication, if any, of this Agreement. c. REPRESENTATIONS AND WARRANTIES OF SEARCH. Search represents and warrants that the execution, delivery and performance of this Agreement has been duly authorized by all necessary corporate action and that this Agreement is a valid and binding obligation of Search enforceable according to its terms. d. REPRESENTATIONS AND WARRANTIES OF TRUSTEE. The Trustee represents and warrants that he is currently serving as the sole Trustee of The SBM Trust, that he has authority under the Trust Agreement of The SBM Trust to enter into this Agreement, and that this Agreement is a valid and binding obligation of the Trust enforceable according to its terms. e. INDEMNITY OF SEARCH. Search agrees to indemnify, save and hold Trustee and the Trust harmless from and against costs, expenses or disbursements (including attorneys' fees) liabilities, obligations, losses, damages, penalties, actions, judgments, or suits of any kind or nature whatsoever (collectively, the "Losses") INSOFAR ONLY as the Losses relate to a breach or alleged breach of a representation or warranty of Search under Section 6.c. On any action for which indemnity is provided under the foregoing sentence, Search agrees, if requested, to advance from time to time attorneys fees and costs incurred by the Trustee or Trust. f. INDEMNITY OF TRUST. The Trust agrees to indemnify, save and hold Search harmless from and against costs, expenses or disbursements (including attorneys' fees) liabilities, obligations, losses, damages, penalties, actions, judgments, or suits of any kind or nature whatsoever (collectively, the "Losses) INSOFAR ONLY as the Losses relate to a breach or alleged breach of a representation or warranty of Trustee under Section 6.d. On any action for which indemnity is provided under the foregoing sentence, the Trust agrees to advance from time to time attorneys fees and costs incurred by Search. g. AMENDMENTS, ETC. This Agreement may be amended, terminated or superseded only by an instrument signed by the party against whom such amendment, termination or supersession is sought to be enforced. h. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties and their respective heirs, legal representatives, successors, and assigns. i. ENTIRE AGREEMENT. This Agreement evidences the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any prior agreements or undertakings with respect thereto. j. FURTHER ASSURANCES. The parties hereto agree to cooperate with each other and execute any and all documents and to do any and all things necessary to effectuate this Agreement. k. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED UNDER THE LAWS OF THE STATE OF TEXAS AND VENUE FOR ANY MATTER BROUGHT BY ONE PARTY AGAINST THE OTHER CONCERNING THIS AGREEMENT SHALL BE ANY COURT OF COMPETENT JURISDICTION IN DALLAS COUNTY, TEXAS. l. SEVERABILITY. If any part of this Agreement is found invalid or unenforceable, that part will be amended to achieve as nearly as possible the same economic effect as the original provision and the remainder of this Agreement will remain in full force. m. NOTICES. All notices, requests, demands, and other communications provided for or permitted hereunder shall be in writing and shall be sent by mail, telex, telecopier or hand delivery as follows: Search Capital Group, Inc. With a copy to (not constituting 700 N. Pearl Street notice): Dallas, Texas 75201-2809 Search Capital Group, Inc. Attn: President 700 N. Pearl Street 214 965 6000 Suite 400, L.B. 401 214 965 6098 (fax) Dallas, Texas 75201-2809 IN WITNESS WHEREOF, the parties have signed this Agreement as of the date first written above. Louis Dorfman, not individually, but as Trustee of The SBM Trust The undersigned, in his capacity as Trustee of The SBM Trust and not in his individual capacity (the "Trustee), hereby appoints A. Brean Murray (or such other individual as may be designated the Board of Directors of Search Capital Group, Inc. from time to time) as his proxy and appoints him to represent and vote as he sees fit all, of the shares of common stock ("Shares") of Search Capital Group, Inc. ("Search"), as from time to time held in The SBM Trust. This irrevocable proxy, pursuant to the provisions of that certain agreement between Trustee and Search of even date herewith, is coupled with an interest in the Shares and shall continue until terminated pursuant to such agreement. Louis Dorfman, not individually, but as Trustee of Subscribed and Sworn to before me on _______________________, 199__. Notary Public in and for (SEAL) The State of Texas I, Joe B. Dorman, Secretary of Search Capital Group, Inc. ("Search") do hereby certify that the following resolution was adopted and approved by the Board of Directors of Search on the 5th day of May 1995. WHEREAS, Search has determined that it is in the best interest of Search to purchase Five Hundred Thousand (500,000) shares of Search's $.0l par value common stock from the SBM Trust, and WHEREAS, the agreement between the SBM Trust and Search requires approval of Search's Board of Directors prior to the execution of such agreement. NOW, THEREFORE, BE IT RESOLVED, that the Agreement between Search and The SBM Trust is hereby approved, and once executed by George C. Evans, will constitute a valid and binding agreement upon Search. FURTHER RESOLVED, that George C. Evans is authorized and empowered to execute the aforementioned agreement in a form that is substantially similar to the Agreement considered this day by the Board of Directors and hereby placed in the Minutes of Search. WHEREAS, Search has requested that Sam Myers resign from the Board of Directors, and resign as an officer of Search and its subsidiaries, and Search and Myers have entered into an agreement WITH respect to his resignation, and WHEREAS, the agreement between Sam B. Myers, Jr. and Search requires approval of Search's Board of Directors prior to the execution of such agreement. NOW, THEREFORE, BE IT RESOLVED, that the Agreement between Search and Sam B. Myers, Jr. is hereby approved, and once executed by George C. Evans, will constitute a valid and binding agreement upon Search. FURTHER RESOLVED, that George C. Evans is authorized and empowered to execute the aforementioned agreement in a form that is substantially similar to the Agreement considered this day by the Board of Directors and hereby placed in the Minutes of Search. The undersigned, in his capacity as Trustee of The SBM Trust and not in his individual capacity (the "Trustee), hereby appoints A. Brean Murray (or such other individual as may be designated the Board of Directors of Search Capital Group, Inc. from time to time) as his proxy and appoints him to represent and vote as he sees fit all, of the shares of common stock ("Shares") of Search Capital Group, Inc. ("Search"), as from time to time held in The SBM Trust. This irrevocable proxy, pursuant to the provisions of that certain agreement between Trustee and Search of even date herewith, is coupled with an interest in the Shares and shall continue until terminated pursuant to such agreement. Louis Dorfman, not individually, but as Trustee of Subscribed and Sworn to before me on May 5th, 1995. Notary Public in and for (SEAL) The State of Texas I, Joe B. Dorman, Secretary of Search Capital Group, Inc. ("Search") do hereby certify that the following resolution was adopted and approved by the Board of Directors of Search on the 5th day of May 1995. WHEREAS, Search has determined that it is in the best interest of Search to purchase Five Hundred Thousand (500,000) shares of Search's $.0l par value common stock from the SBM Trust, and WHEREAS, the agreement between the SBM Trust and Search requires approval of Search's Board of Directors prior to the execution of such agreement. NOW, THEREFORE, BE IT RESOLVED, that the Agreement between Search and The SBM Trust is hereby approved, and once executed by George C. Evans, will constitute a valid and binding agreement upon Search. FURTHER RESOLVED, that George C. Evans is authorized and empowered to execute the aforementioned agreement in a form that is substantially similar to the Agreement considered this day by the Board of Directors and hereby placed in the Minutes of Search. WHEREAS, Search has requested that Sam Myers resign from the Board of Directors, and resign as an officer of Search and its subsidiaries, and Search and Myers have entered into an agreement with respect to his resignation, and WHEREAS, the agreement between Sam B. Myers, Jr. and Search requires approval of Search's Board of Directors prior to the execution of such agreement. NOW, THEREFORE, BE IT RESOLVED, that the Agreement between Search and Sam B. Myers, Jr. is hereby approved, and once executed by George C. Evans, will constitute a valid and binding agreement upon Search. FURTHER RESOLVED, that George C. Evans is authorized and empowered to execute the aforementioned agreement in a form that is substantially similar to the Agreement considered this day by the Board of Directors and hereby placed in the Minutes of Search.	10-K	EX-10.9	1996-01-12T00:00:00	1996-01-12T17:20:19
0000950130-96-000094	0000950130-96-000094_0004.txt	<DESCRIPTION>APPRAISAL OF THE SPECIFIED PARCELS [LOGO OF APPRAISAL GROUP APPEARS HERE] CFO - Trump Taj Mahal Casino Resorts Atlantic City, New Jersey 08401 Re: Trump Taj Mahal Realty Corp. Pursuant to your authorization, an appraisal has been made of the above-captioned premises in order to estimate the Market Value, as of December 20, 1995. Market Value is defined within the report, which contains the collective data and analyses upon which our value estimate is concluded. Trump Taj Mahal Realty Co. consists of various parcels of land (see enclosed) used in conjunction and operation of the Trump Taj Mahal Casino Resorts in Atlantic City, New Jersey. The property consists of a total 15.31+ Acres, which include various parcel situated under the Taj Mahal main structure, the Steel Pier and the Virginia Avenue warehouse (lots 119 & 120). Based upon the findings, it is our opinion that the Market Value, subject to the assumptions and limiting conditions as set forth herein, as the value date, December 20, 1995, is in the range of $80,180,000 (R) to $95,590,000 (R). This letter and the collective data and analyses upon which our value estimate is concluded are integral parts of our findings and conclusions. /s/ Avi M. Vardi, Mai N.J. State Certified Real Estate TRUMP TAJ MAHAL REALTY CORP.	SC 13E3	EX-99.17.(B)(6)	1996-01-12T00:00:00	1996-01-11T17:58:48
0000912057-96-000425	0000912057-96-000425_0000.txt	/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 1995 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to (EXACT NAME OF REGISTRANT AS SPECIFIED) (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 280 Park Avenue, Suite 2700 West, New York, New York 10017 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 557-6200 (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report 12,942,666. YORK RESEARCH CORPORATION AND SUBSIDIARIES * Derived from audited financial statements as of February 28, 1995 The accompanying notes are an integral part of these financial statements. YORK RESEARCH CORPORATION AND SUBSIDIARIES The accompanying notes are an integral part of these financial statements. YORK RESEARCH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED NOVEMBER 30, The accompanying notes are an integral part of these financial statements. YORK RESEARCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the accompanying consolidated, unaudited financial statements contain all adjustments necessary to present fairly York Research Corporation and Subsidiaries' ("York" or the "Company") consolidated financial position as at November 30, 1995 and results of operations for the nine and three months ended November 30, 1995 and 1994, and cash flows for the nine months ended November 30, 1995 and 1994. Certain financial information which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying financial statements need to be read in conjunction with the financial statements and notes thereto included in the Registrant's Form 10-K. Any adjustments that have been made to the financial statements are of a normal recurring nature. Per share data for the nine and three months ended November 30, 1995 and 1994 is based upon the weighted average number of common shares outstanding. Unreleased Employee Stock Ownership Plan shares are not considered outstanding for earnings per share calculations. The per share data for the nine and three months ended November 30, 1995 also includes common equivalent shares, which are warrants and stock options; per share data for these periods are calculated using the modified treasury stock method. There is no significant difference between primary and fully diluted earnings per share. The Company, while denying any liability, and in the opinion of management, in order to avoid a protracted and costly litigation, settled in May 1993 a class action lawsuit which shareholders brought against the Company and certain directors and officers of York. Pursuant to the terms of the settlement, the Company issued to the members of the class warrants to purchase 600,000 shares of its common stock at $8.00 ("Class A Warrants") per share and warrants to purchase 180,000 shares of its common stock at $6.15 ("Class B Warrants") per share (collectively the "Warrants"). Through November 30, 1995, 7,511 Class B Warrants have been exercised. Under the terms of the settlement other principal provisions of the unexercised Class B Warrants include the following: (i) The Company has the right to redeem the Class B Warrants in whole or in part for $11.50 per warrant. YORK RESEARCH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ii) The Company has the right to reduce the Class B Warrant exercise price, in its discretion (the "adjusted exercise price"). (iii) The Class A Warrants expired on November 1, 1995 (the "Expiration Date"). The Expiration Date of the Class B Warrants has been extended. (iv) Unless the Class B Warrants have previously been redeemed or accelerated the warrants may be exchanged by the holders thereof on the Expiration Date for $11.50 in cash per warrant (the "Surrender Price"). (v) All unexpired Class B Warrants may no longer be exchanged for the Surrender Price if the closing price of the Company's stock on NASDAQ shall have equaled or exceeded the exercise price or adjusted exercise price of the warrants plus $11.50 on at least seventy-five of ninety consecutive trading days at any time prior to the Expiration Date. (vi) The Surrender Price of the Class B Warrants is collateralized by a 35% limited partnership interest in Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP") held by B-41 Associates, L.P. This limited partnership interest will be released when it is replaced by a letter of credit or if the event described in (v) above occurs. On November 1, 1995, when the Class A Warrants expired, the holders of such warrants became entitled to and did surrender them for $6.9 million drawn under a letter of credit which had been posted on February 16, 1995 by Mission Energy Company. York Research Corporation has no liability for the money drawn under this letter of credit. YORK RESEARCH CORPORATION AND SUBSIDIARIES OF FINANCIAL CONDITION & RESULTS OF OPERATIONS Brooklyn Navy Yard Cogeneration Partners, L.P. ("BNYLP"), a joint venture, was formed on October 19, 1992. BNYLP is owned and controlled equally by a subsidiary of Mission Energy Company ("Mission"), which is a wholly owned subsidiary of SCE Corp., and a limited partnership, B-41 Associates, L.P.("B-41LP"), in which the Company is a majority partner. The Company estimates the total capital costs of the Brooklyn Navy Yard ("BNY") Facility, when completed, to be approximately $410,000,000. On December 22, 1995, the New York City Industrial Development Agency (the "IDA") issued $253,925,700 of Industrial Development Revenue Bonds for the purpose of financing certain costs incurred to date in constructing and developing the BNY Facility. These bonds are non-recourse to BNYLP's assets or revenues and have recourse only to a letter of credit ("LOC") in like amounts arranged by Mission, which LOC is in turn supported by a Mission guarantee. The proceeds of this bond sale are being used to reimburse Mission for a portion of its construction loans made to date and to reimburse the Company for engineering and other costs that had been expensed in prior periods and for services that have been and will be performed by the Company. Substantial construction is still in progress and it is likely that the portion of construction not funded by the IDA Bonds will be complete prior to the receipt of additional third party financing. As a result, Mission is likely to be required to fund all remaining construction costs, or provide additional guarantees to secure project financing. The Company has no obligation to fund the project or provide guarantees and all obligations incurred by BNYLP to date are non-recourse to the Company. Pursuant to the provisions of the partnership agreement, Mission retains the right, because it has spent in excess of $13,258,043 in development costs, to take all the votes on the Management Committee that controls the day to day operations of BNYLP. Mission has informed B-41LP that they have incurred costs in excess of $310,000,000 through November 30, 1995 for this project. If Mission decides to exercise its right to cast all votes on the BNYLP Management Committee, B-41LP still remains a 50% general and limited partner in the Navy Yard project and retains all its other rights, and Mission retains all its funding and other obligations to the Project and B-41LP. Like other large projects of this nature, the BNY cogeneration facility is subject to various risks. There can be no assurance that the facility will be successfully constructed or, if it is successfully constructed that it will operate at sufficient levels to cover all YORK RESEARCH CORPORATION AND SUBSIDIARIES OF FINANCIAL CONDITION & RESULTS OF OPERATIONS operation and maintenance expenses and debt service. The Company has no liability for any such shortfalls. In September 1994, the Company resumed full operations of the Warbasse facility, and since that date has supplied all the electric and thermal needs of the host, Amalgamated Warbasse Houses, Inc., and is supplying up to the full capacity requirements of its electric power contract with Consolidated Edison Company of New York, Inc. The Company is in the final stages of completing construction of the Warbasse project. The Company expects that the Warbasse Project requires approximately $500,000 to complete construction which includes installed capacity beyond the requirements of the current power purchase agreements which would be available for an additional potential pending utility contract, and certain enhancements for increased efficiency. Cash used in operating activities during the nine months ended November 30, 1995 was approximately $3,828,000, as compared to approximately $2,028,000 used during the nine months ended November 30, 1994. During the nine months ended November 30, 1995, a significant portion of cash used in operating activities, approximately $2,846,000, was spent on construction in progress related to the Warbasse project as compared to $877,000 spent during the prior corresponding period. During the current nine month period, approximately $2,996,000 was generated by net income, however that was offset by an increase in service receivables of approximately $3,269,000. During the nine months ended November 30, 1994, the remaining balances due to bank and an equipment vendor of $572,000 were satisfied, accounting for most of the cash used. During the nine months ended November 30, 1995, cash generated by financing activities was approximately $4,028,000, as compared to approximately $1,387,000 during the nine months ended November 30, 1994. During the nine months ended November 30, 1995, $2,949,000 was received from the ESOP, and approximately $1,401,000 was received during the nine months ended November 30, 1994. In addition, during the nine months ended November 30, 1995, approximately $1,092,000 was received as a result of the exercise of stock options and warrants. The Company expects to continue to finance its selling, general and administrative expenses and other obligations. Although there can be no assurance, the Company believes it will be able to meet these obligations from sources that have been and will be available to the Company over the next year and on a long-term basis. YORK RESEARCH CORPORATION AND SUBSIDIARIES OF FINANCIAL CONDITION & RESULTS OF OPERATIONS In the nine and three months ended November 30, 1995, the Company's Canadian subsidiary, York Research Canada Inc., incurred approximately $584,000 and $116,000, respectively, of selling, general and administrative expenses. The Company has signed an agreement with NAEC which provides for the Company to be reimbursed for all costs associated with its activities related to NAEC, a company owned by the Company's Chairman, and the Company will receive power brokerage fees to be mutually agreed upon based on level of activity. The Company recognized $900,000 and $300,000, respectively, as a reimbursement of costs and $675,000 and $0, respectively, in brokerage fees related to the nine and three months ended November 30, 1995. The Company has no significant capital commitments, other than the completion of construction of the Warbasse facility. Total revenues increased approximately $5,047,000 and $1,351,000, respectively, when comparing the nine and three months ended November 30, 1995 to the corresponding periods in 1994. Resumption of operations of the Warbasse project in September, 1994, caused Services-WCTP revenues to increase approximately $1,559,000 for the nine months ended November 30, 1995 and were approximately the same when comparing the three month periods. Engineering and other services-BNYLP increased approximately $2,647,000 and $2,564,000, respectively, for the nine and three month periods. This was principally due to a reimbursement by BNYLP of $2,500,000 for certain engineering and other costs that had been expensed in prior periods. Such reimbursement was recognized in the quarter ended November 30, 1995, and was collected on December 22, 1995. Development fees-BNYLP revenues increased $417,000 and decreased $950,000, respectively, as a result of an additional $3,000,000 development fee paid in the nine months ended November 30, 1995, by Mission to B-41LP to, among other things, compensate B-41LP for certain services rendered, offset by a decrease of $2,250,000 and $750,000, respectively, due to the conclusion of certain monthly development fees in December, 1994. Additionally, power brokerage fees from NAEC of $675,000 and $0 were recognized in the current periods, compared to $250,000 in both of the prior periods. Cost of services to WCTP, which include fuel and other operations and maintenance costs, during the nine months ended November 30, 1995, increased approximately $1,553,000, compared to the nine months ended November 30, 1994, commensurate with Services - WCTP revenues. Selling, general and administrative expenses increased approximately $464,000 and $5,000, respectively, when comparing the nine and three months YORK RESEARCH CORPORATION AND SUBSIDIARIES OF FINANCIAL CONDITION & RESULTS OF OPERATIONS ended November 30, 1995 to the corresponding periods in 1994. Expenses for the current periods increased approximately $151,000 and $35,000, respectively, as a result of increases in public company costs. Expenses for the current periods increased approximately $303,000 and $116,000, respectively, due to expenditures for development of new projects. Due to a restructuring of the Corporate Headquarters lease, which will result ultimately in reduced rent expense, a prior deferred credit of approximately $72,000 was recognized, causing a decrease in rent expense for the nine months ended November 30, 1995. Payroll and related expenses increased approximately $250,000 and $98,000 during the nine and three months ended November 30, 1995, as a result of salary increases, additional personnel, and increased health insurance costs over the same periods in the prior year. Selling, general and administrative expenses decreased approximately $300,000 and $70,000, respectively, for the nine and three months ended November 30, 1995, as a result of an increase in expenses allocated to Cost of Services - WCTP. Interest and other income increased approximately $823,000 and decreased approximately $119,000, respectively, for the nine and three months ended November 30, 1995, as compared to the corresponding periods in 1994. During the current periods, an increase of $1,080,000 and a decrease of $122,000, respectively, were due to interest received from WCTP related to the long-term note receivable acquired by B-41LP in September, 1994. The realization of a deferred gain of approximately $244,000 which occurred during the quarter ended August 31, 1994 resulted in a decrease when comparing the nine months ended November 30 of the current year to the prior year. Income allocated to minority interest increased $500,000 for the nine months ended November 30, 1995 compared to the corresponding periods in the prior year. This was the minority portion of the development fees recognized in the quarter ended August 31, 1995. YORK RESEARCH CORPORATION AND SUBSIDIARIES ITEM 6. Exhibits and Reports on Form 8-K (b) There were no reports on Form 8-K filed during the three months ended November 30, 1995. YORK RESEARCH CORPORATION AND SUBSIDIARIES Pursuant to the requirements of The Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: January 11, 1996 /s/Robert M. Beningson Chairman of the Board and Dated: January 11, 1996 /s/ Michael Trachtenberg	10-Q	10-Q	1996-01-12T00:00:00	1996-01-12T09:45:18
0000948630-96-000002	0000948630-96-000002_0004.txt	With respect to our purchase from you of shares of beneficial interest (the "Initial Shares") of each of the following series (each a "Fund") of BT Advisor Funds (the "Trust"): EAFE(R) Equity Index Fund Institutional Class Shares U.S. Bond Index Fund Institutional Class Shares Equity 500 Equal Weighted Index Fund Institutional Class Shares Small Cap Index Fund Institutional Class Shares we hereby advise you that we are purchasing the Initial Shares of each Fund with no intention to dispose of them either through resale to others or redemption by the Trust. The Trust will invest all of the investable assets of each Fund in the corresponding series of BT Investment Portfolios (the "Corresponding Portfolio"), an investment company registered under the Investment Company Act of 1940, as amended. The amount paid by a Fund on any redemption by us, or any other then-current holder of that Fund's Initial Shares, will be reduced by a portion of any unamortized organization expenses of the Fund and the Corresponding Portfolio, such portion to be determined by the proportion of the number of Initial Shares of the Fund redeemed to the number of the Initial Shares of the Fund then outstanding after taking into account any prior redemptions of the Initial Shares of the Fund. The amount of such reduction in excess of the unamortized organization expenses of the Fund shall be contributed by the Fund to the Corresponding Portfolio.	N-1A EL/A	EX-99.B13	1996-01-12T00:00:00	1996-01-12T16:13:30
0000899243-96-000019	0000899243-96-000019_0005.txt	This Employment Agreement entered into this 29th day of December, 1995, is between GAIA TECHNOLOGIES, INC., a Texas corporation ("Company"), and HENRY W. SULLIVAN, a resident of Harris County, Texas ("Employee"). WHEREAS, the Company wishes to assure itself of the services of Employee for the period provided in this Agreement, and Employee is willing to serve in the employ of the Company on a full-time basis for said period, and upon the other terms and conditions hereinafter provided; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Employment. The Company hereby employs Employee and the Employee hereby accepts employment by the Company upon the terms and conditions of this Agreement. 2. Position and Responsibilities. During the period of his employment hereunder, Employee agrees to serve the Company and the Company shall employ Employee as the Company's President. During the term of this Agreement, Employee agrees to devote his full time and attention during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Employee hereunder, to use the Employee's best efforts to perform faithfully and efficiently such responsibilities. The foregoing shall not be construed as preventing the Employee from making passive investments in other businesses or enterprises; provided, however, that (a) such investments would not require services on the part of the Employee which would in any way impair the performance of his duties under this Agreement and (b) are not in violation of any provision of Section 6 or 7 of this Agreement. 3. Term. The period of Employee's employment under this Agreement shall commence on the date hereof and shall continue for a period of sixty (60) full calendar months thereafter; provided, however, that on the first day of each April and October during the term of this Agreement beginning on April 1, 1997, either the Company or the Employee may, at such party's sole option, terminate this Agreement, with or without cause, by providing not less than six (6) months' prior notice to the other party (or the Company may also elect to provide three (3) months's prior notice so long as it also provides three (3) additional months of severance pay). Upon any termination of this Agreement, at the written request of the sole shareholder of the Company, Employee shall promptly resign in writing from any other positions as a director, officer, employee or other position that he may then hold with respect to the Company or any corporation, partnership or other entity controlling, controlled by or under common control with the Company. a. Base Salary. For all services rendered by Employee in any capacity during his employment under this Agreement, including, without limitation, services as an executive, officer, director, or member of any committee of the Company or of any subsidiary, affiliate, or division thereof, the Company shall pay Employee as compensation a monthly salary at the rate of not less than $7,500.00. Such salary shall be payable in accordance with the customary payroll practices of the Company, but in no event less than semi-monthly. During the period of this Agreement, Employee's salary shall be reviewed at least annually, but there shall be no obligation to increase such salary. b. Bonus. From time to time, the Board of Directors of the Company, or a committee designated by the Board of Directors, may (but is not obligated to) elect to pay a bonus to Employee. c. Stock Option Agreement. Contemporaneously with the execution and delivery of this Agreement, the parties hereto shall cause to be executed and delivered to each other that certain Stock Option Agreement, substantially in the form of Exhibit A, attached hereto and made a part hereof. d. Benefits. Until the termination of the Employee's employment pursuant to this Agreement, the Employee and the Employee's family, as the case may be, shall be eligible for participation in and to receive all benefits under welfare benefit plans, practices, policies and programs of the Company or any other subsidiaries of North American Technologies Group, Inc., a Delaware corporation ("NATK"), that are offered to officers similarly situated (including, without limitation, medical, disability, employee life, group life, accidental death and travel accident insurance plans and programs), so long as, with respect to any such insurance plan or program, Employee qualifies in, and his enrollment is accepted by the insurer providing, such insurance plan or program, without any material additional cost or expense by the Company; provided, however, that the Company shall not be obligated to provide Employee with any benefit offered by any other subsidiary of NATK that varies from a benefit offered by the Company if such benefit is based primarily on the unique nature of the business activities conducted by such other subsidiary. e. Reimbursement of Expenses. The Company shall reimburse the Employee for all reasonable and proper travel and out-of-pocket expenses incurred by Employee in connection with the performance of his duties, all in accordance with the Company's policies as to the allowable amount of such expenses and the provision of itemized reports. a. By Company for Cause. The Company may terminate the Employee's employment of "Cause" at any time. Termination for "Cause" shall mean termination of Employee's employment with the Company because of (i) any act or omission that constitutes a material breach by Employee of his obligations or agreements under this Agreement (other than any such act or omission resulting from Employee's death or disability due to physical or mental illness or accident), after written notice by the Board of such breach which sets forth the nature of the material breach, and failure of Employee to correct such breach within 30 business days of such notice; (ii) Employee's being convicted of the commission of a felony; (iii) Employee's engaging in willful misconduct, gross negligence or an act of dishonesty that has or can reasonably be expected to have an adverse effect on the Company; or (iv) a material failure by Employee to comply with the procedures or policies of general application with respect to the operation of the Company, as established by the Board, after written notice by the Board of such failure which sets forth the nature of the material failure, and failure of Employee to correct such failure within 30 business days of such notice. b. Death or Disability. The Employee's employment shall be terminated on account of the Employee's death or disability. Employee shall be deemed to be disabled if, as a result of incapacity due to physical or mental illness or accident, the Employee shall have failed to perform in any material respect Employee's duties with the Company for two months within a twelve-month period and, within ten (10) days after written notice of termination is given to the Employee, the Employee shall not have returned to the full-time performance of the Employee's duties. c. By Employee for Good Reason. The Employee's employment may be terminated by the Employee at any time for "Good Reason." For purposes of this Agreement, "Good Reason" shall mean, without the Employee's written consent, the occurrence of any of the following circumstances unless such circumstances are fully remedied by the Company within 30 days after the Company's receipt of written notice thereof given by the Employee: (i) Any act or omission that constitutes a material breach by the Company of its obligations or agreements under this Agreement (and if such omission is the failure to make any salary payment to Employee when due, the Company shall only be entitled to receive ten (10) days' (rather than 30 days') written notice and opportunity to remedy such (ii) The assignment to the Employee of any duties materially inconsistent with, or the withdrawal from the Employee of any duties material to, the position in the Company that the Employee holds pursuant to this Agreement; or (iii) The relocation of the Employee's office to a location other than in Harris County, Texas or a county adjacent thereto, except for required travel on the Company's business. d. Notice of Termination. Any termination by the Company for Cause or by the Employee for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon and (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. (i) If Employee's employment is terminated by the Company or the Employee in accordance with the provisions of this Section or in accordance with the provisions of Section 3, then the Company's obligations to the Employee and the Employee's obligations to the Company shall terminate except that the Company shall be obligated to pay to the Employee the base salary earned by him and not previously paid to him through the date of termination, and the Employee's obligations under Sections 6 and 7 shall continue as provided therein. (ii) If Employee's employment is terminated by the Company without Cause (other than as a result of death, disability or as provided in Section 3), or by Employee with Good Reason, Company's obligations to the Employee and the Employee's obligations to the Company shall terminate except that (A) the Company shall be obligated to pay to the Employee the base salary earned by him and not previously paid to him through the date of termination, (B) Company shall continue to pay Employee (on a semi-monthly basis) his then current base salary for the remainder of the then-current six (6) month period at the end of which the Employee's employment could have been terminated by the Company pursuant to Section 3 hereof, and (C) Employee's obligations under Sections 6 and 7 shall continue as provided therein. 6. Confidential Information. The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge, data and customer lists relating to the Company or any of its affiliates and which shall not be or become public knowledge (other than by acts by the Employee or his representatives in violation of this Agreement). After termination of the Employee's employment with the Company, the Employee shall not, without the prior written consent of the Company communicate or divulge any such information, knowledge, data or customer list to any party other than the Company and those designated by it. a. Discoveries and Inventions. If Employee, while employed by the Company or during a period of one year after termination of such employment, makes, either solely or jointly with others, any discovery, improvement, or invention which would pertain or relate in any way to the Business (as defined in Section 7(e)(i)) as conducted by the Company, its subsidiaries, or affiliates at the time of termination of his employment, such discovery, improvement, or invention (whether or not of patentable nature) shall be the exclusive property of the Company. Employee shall execute and deliver to the Company, without further compensation, any and all documents which the Company deems necessary or appropriate to prepare or prosecute applications for patents upon such discovery, improvement, or invention, to assign and transfer to the Company his entire right, title, and interest in and to such discovery, improvement, or invention, and patents therefor, and otherwise more fully and perfectly to evidence the Company's ownership thereof. b. Assistance in Litigation. Employee shall, upon reasonable notice and at the Company's sole expense, furnish such information and assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party that relates to any matter or event occurring during Employee's tenure with the Company. c. Return of Confidential Information. Upon termination of Employee's employment by Company, Employee shall promptly return to Company all property, papers, records and software of every kind relating to the Company or its business, whether in hard copy form or electronically or magnetically stored; provided, however, that in the event of a dispute between the Company and Employee relating to the subject matter of this Agreement, Employee may retain a copy of any of the foregoing that may relate to such dispute until such dispute has been resolved, and Employee shall continue to be subject to the provisions of Section 6 with respect to such copy or copies. d. Noncompetition. The parties recognize that the employment of Employee with the Company will be special, unique and of an extraordinary character and in connection with such employment Employee has special skill and training and may acquire during the term hereof additional special skill and training. Employee accordingly agrees that while Employee is employed by Company and continuing from the date of the termination of Employee's employment with the Company for any reason for three (3) years thereafter, Employee shall not: (i) directly or indirectly, either as principal, agent, independent contractor, consultant, director, officer, employee, employer, advisor, stockholder, partner or in any other individual or representative capacity whatsoever, either for his own benefit or for the benefit of any other person or entity either (a) hire, attempt to hire, contact or solicit with respect to hiring any employee of the Company or any of its affiliates, or (b) induce or otherwise counsel, advise or encourage any employee of the Company or any of its affiliates to leave the employment of the Company or such affiliate, in each case under this clause (i), unless Employee has received the express prior written consent of NATK thereto, which consent shall not (ii) act or serve as a director, officer, employee, consultant, independent contractor or in any other position or capacity with or for, or acquire a direct or indirect ownership interest in or otherwise conduct (whether as stockholder, partner, investor, joint venturer, or as owner of any other type of interest), any Competing Business as such term is defined herein; provided, however, that this clause (ii) shall not prohibit Employee from being the owner of up to 5% of any class of outstanding securities of any company or entity if such class of securities is publicly traded; or (iii) directly or indirectly, either as principal, agent, independent contractor, consultant, director, officer, employee, employer, advisor, stockholder, partner or in any other individual or representative capacity whatsoever, either for his own benefit or for the benefit of any other person or entity, (A) divert or take away any customers or clients of the Business or (B) contact, call upon or solicit any such customer or client if the intent, effect or a reasonably expected consequence of the same is to divert or take away such customer or client. Notwithstanding the provisions of this paragraph (d), in the event NATK or one of its subsidiaries or affiliates does not elect to exercise the Crosstie Purchase Option, as defined in that certain Crosstie Purchase Option and Loan Agreement (the "Crosstie Agreement"), dated as of December 29, 1995, by and among TIETEK, INC., a Texas corporation, NATK, William T. Aldrich, J. Denny Bartell and Henry W. Sullivan, in accordance with the terms of such Crosstie Agreement, as the same may be amended from time to time, then the provisions of clause (d)(ii) above shall not apply to Employee's carrying on the activities described therein as they relate to the Crosstie Business (as defined in the Crosstie Agreement), and shall not be deemed to be violating the provisions of clause (d)(ii) with respect thereto; provided, however, that Employee shall continue to be subject to the other provisions of this paragraph (d). e. In exchange for Employee's agreements contained in the provisions of clause (d) of this Section 7, the Company agrees to pay to Employee on or before March 28, 1996, the sum of $25,000. f. For the purposes of this Section 7 the following terms shall have the meaning set forth below: (iv) "Business" shall mean the design, development, engineering, manufacture, marketing, service and supply of Products (as that term is defined in that certain TieTek Royalty Agreement, a copy of which is attached to the Crosstie Agreement, dated as of the date hereof) that the Company is permitted to manufacture, other than Applicable Hardgoods (as that term is defined in that certain Gaia-TieTek License Agreement, dated as of the date hereof, by and between the Company and TieTek, Inc., a Texas corporation); provided further that Products shall also include such Applicable Hardgoods in the event NATK exercises the Crosstie Purchase Option (as that term defined in the Crosstie Agreement). (v) "Competing Business" shall mean any individual, business, firm, undertaking, company, partnership, corporation, joint venture, limited liability company, organization or other entity that engages in any aspect of the Business. g. Should any portion of this Section 7 be deemed unenforceable because of the scope, duration or territory encompassed by the undertakings of the Employee hereunder, and only in such event, then the parties consent and agree to such limitation on scope, duration or territory as may be finally adjudicated as enforceable by a court of competent jurisdiction after the exhaustion of all appeals. 8. Remedies. With respect to each and every breach or violation or threatened breach or violation by Employee of Section 6 or 7, the Company, in addition to all other remedies available at law or in equity including specific performance of the provisions hereof, shall be entitled to enjoin the commencement or continuance thereof and may, without notice to Employee, apply to any court of competent jurisdiction for entry of an immediate restraining order or injunction. The Company may pursue any of the remedies described in this Section 8 concurrently or consecutively in any order as to any such breach or violation, and the pursuit of one of such remedies at any time will not be deemed an election of remedies or waiver of the right to pursue any of the other of such remedies. a. This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Employee's legal representatives. b. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. a. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without reference to principles of captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. b. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid addressed as follows: If to the Employee: Henry W. Sullivan 4710 Bellaire Blvd., Suite 301 If to the Company: 4710 Bellaire Boulevard, Suite 301 or to such other address as any party shall have furnished to the others in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. c. Except as specifically set forth in Section 7 hereof, any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms or provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable or invalid, such provision shall be interpreted to be only so broad as is enforceable and valid. d. This Agreement contains the entire understanding of the Company and the Employee with respect to the subject matter hereof. e. Any material decision or determination relating to the enforcement of the Company's rights against Employee hereunder by the Company shall only be made with the written concurrence or consent of the chief executive officer or other executive officer of NATK. 11. Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12. Employment. Notwithstanding anything to the contrary in this Agreement, the Employee and the Company acknowledge that the employment of the Employee by the Company after expiration of the term of this Agreement as set out in Section 3 hereof is "at will," unless the parties agree otherwise in writing, and may be terminated at any time thereafter by either the Employee or the Company at any time. IN WITNESS WHEREOF, the Employee has hereunto set his hand and the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written.	8-K	EX-10.4	1996-01-12T00:00:00	1996-01-12T16:52:02
0000909230-96-000001	0000909230-96-000001_0003.txt	PROTOTYPE MONEY PURCHASE PLAN AND TRUST The Employer named in Section I.A. below hereby establishes or restates a Money Purchase Plan ("Plan") and Trust, consisting of such sums as shall be paid to the Trustee(s) under the Plan, the investments thereof and earnings thereon. The terms of the Plan and Trust are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Trust Agreement, both as amended from time to time, which are hereby adopted and incorporated herein by reference. B. Employer is a ( ) corporation; ( ) S corporation; ( ) partnership; ( ) sole proprietor; ( ) other. C. Employer's Tax ID Number: D. Employer's fiscal year: [....] F. If this is a new Plan, the Effective Date of the Plan: If this is an amendment and restatement of an existing Plan, enter the date originally adopted [....]. The effective date of this amended Plan is [....]. G. The Trustee shall be: ( ) The Dreyfus Trust Company ( ) Other: (Name) [....] I. Plan Year shall mean the 12-consecutive-month period commencing on [....] and ending on [....]. J. Service with the following predecessor employer(s) shall be credited for purposes of vesting and eligibility: [Note: Such Service must be provided if the adopting Employer maintains the plan of the predecessor employer]. K. The following employer(s) associated with the Employer under Section 414(b), (c), (m) or (o) of the Internal Revenue Code ("Code") shall be Participating Employers in the Plan: L. Are all employers associated with the Employer under Section 414(b), (c), (m) or (o) of the Code participating in the Plan? ( ) Yes ( ) No Hours of Service under the Plan will be determined for all Employees on the basis of the method selected below: ( ) On the basis of actual hours for which an Employee is paid or entitled to payment. ( ) On the basis of days worked. An Employee will be credited with ten (10) Hours of Service for any day such Employee would be credited with at least one (1) Hour of Service during the day under the Plan. ( ) On the basis of weeks worked. An Employee will be credited with forty-five (45) Hours of Service for any week such Employee would be credited with at least one (1) Hour of Service during the week under the Plan. ( ) On the basis of semi-monthly payroll periods. An Employee will be credited with ninety-five (95) Hours of Service for any semi-monthly payroll period such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of months worked. An Employee will be credited with one hundred ninety (190) Hours of Service for any month such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of elapsed time. All Employees shall be Eligible Employees, except: ( ) Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. ( ) Employees who are nonresident aliens and who receive no earned income from the Employer which constitutes income from sources within the United States. Note: The term Employee includes all employees of the Employer and any employer required to be aggregated with the Employer under Section 414(b), (c), (m) or (o) of the Code, and individuals considered employees of any such employer under Section 414(n) or (o) of the Code. If the Employer adopts Sponsor's paired defined contribution plan number 01003, 01004 or 01006 or paired defined benefit plan number 02001 in addition to this Plan, the definition of "Eligible Employee" in all paired plans of the Employer must be identical in order for the Employer to be able to designate in Section XV one of the paired plans to provide the required minimum allocation to each Non-Key Employee in the event the Plan becomes Top-Heavy. If the definition of "Eligible Employee" in all paired plans of the Employer is not identical, Section 13.1 through 13.4 shall apply in the event the Plan becomes Top-Heavy. IV. AGE AND SERVICE REQUIREMENTS Each Eligible Employee shall become a Participant on the Entry Date coincident with or following completion of the following age and service requirements: ( ) No age or service requirement. ( ) The attainment of age [....] (not to exceed age 21). ( ) The completion of [....] (not to exceed 1, unless 100% immediate vesting is elected, in which case may not exceed 2) Eligibility Years of Service. Note: If the Eligibility Years of Service is or includes a fractional year, an Employee may not be required to complete any specified number of Hours of Service to receive credit for such fractional year. The Entry Date shall mean: ( ) Annual Entry. The first day of the Plan Year. [Note: If Annual Entry is selected, the age and service requirements cannot exceed 20 1/2 and 1/2 Eligibility Year of Service. (1 1/2 Eligibility Years of Service for Employer Discretionary Contributions if 100% ( ) Dual Entry. The first day of the Plan Year and the first day of the seventh month of the Plan Year. ( ) Quarterly Entry. The first day of the Plan Year and the first day of the fourth, seventh and tenth months of the Plan Year. ( ) Monthly Entry. The first day of the Plan Year and the first day of each following month of the Plan Year. A. Except for purposes of "annual additions" testing under Section 415 of the Code, Compensation shall mean all of each Participant's: ( ) Information required to be reported under Sections 6041, 6051, and 6052 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in Section 3401(a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of Section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a non- accountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in Section 408(k), or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid to the Participant during the following applicable period: ( ) the portion of the Plan Year in which the Employee is a Participant in the Plan. ( ) the Plan Year. ( ) the calendar year ending with or within the Plan Year. ( ) Compensation shall be reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits. Compensation ( ) shall; ( ) shall not include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not includible in the gross income of the Employee by reason of Sections 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. B. For purposes of "annual additions" testing under Section 415 of the Code, Compensation for any Limitation Year shall mean all of each Participant's: ( ) Information required to be reported under Sections 6041, 6051, and 6052 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in Section 3401(a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of Section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a non -accountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in Section 408(k), or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid or includible in gross income during such Limitation Year. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. Limitation Year shall mean the 12-consecutive-month period: ( ) Identical to the Plan Year. ( ) Identical to the Employer's fiscal year ending with or within the Plan Year of reference. ( ) As fixed by a resolution of the Board of Directors of the Employer, or the Employer if no Board of Directors exists. Normal Retirement Age shall mean: ( ) Age [....] (not to exceed 65). ( ) Age [....] (not to exceed 65), or the [....] (not to exceed the 5th) anniversary of the date the Participant commenced participation in the Plan, if later. Early Retirement Age shall mean: ( ) There shall be no early retirement provision in this Plan. ( ) Age [....] and [....] Years of Service. [....]% of the aggregate Compensation of Active Participants for the Plan Year (not to exceed 25%). Employer Contributions ( ) shall; ( ) shall not be integrated with Social Security. The Permitted Disparity Percentage shall be [....]%. The Integration Level shall be: ( ) the Taxable Wage Base. ( ) $[....] (a dollar amount less than the Taxable Wage Base). ( ) [....]% (not to exceed 100% of the Taxable Wage Base). Note: The Permitted Disparity Contribution Percentage cannot exceed the lesser of: (i) the base contribution or (ii) the greater of 5.7% or the tax rate under Section 3111 (a) of the Code attributable to the old age insurance portion of the Social Security Act (as in effect on the first day of the Plan Year). If the Integration Level selected above is other than the Taxable Wage Base ("TWB"), the 5.7% factor in the preceding sentence must be replaced by the applicable percentage determined from the following table. If the Integration Level is: The more than but not more than Factor is X* 80% of TWB 4.3% 80% of TWB Y** 5.4% X = the greater of $10,000 or 20% of TWB Y = any amount more than 80% of TWB, but less than 100% of TWB B. Forfeitures (Do not complete if 100% immediate vesting is elected). Forfeitures of Employer Contributions shall be: ( ) Used to reduce future Employer contributions. ( ) Allocated to the Regular Accounts of Participants eligible to receive Employer Contributions in accordance with Section 3.3 of the Plan. XI. VESTING SERVICE - EXCLUSIONS All of an Employee's years of Service with the Employer shall be counted to determine the vested interest of such Employee except: ( ) Years of Service before age 18. ( ) Years of Service before the Employer maintained this Plan or a predecessor plan. ( ) Years of Service before the effective date of ERISA if such Service would have been disregarded under the Service Break rules of the prior plan in effect from time to time before such date. For this purpose, Service Break rules are rules which result in the loss of prior vesting or benefit accruals, or deny an Employee's eligibility to participate by reason of separation or failure to complete a required period of Service within a specified period of time. The vested interest of each Employee (who has an Hour of Service on or after January 1, 1989) in his Employer-derived account balance shall be determined on the basis of the following schedule: ( ) 100% immediately vested. [Note: Mandatory if more than 1 Eligibility Year of Service is required.] ( ) 100% immediately vested after [....] (not to exceed 5) years of Service. ( ) [....]% (not less than 20%) vested for each year of Service, beginning with the [....] (not more than the 3rd) year of Service until 100% vested. ( ) The Top Heavy Minimum Vesting Schedule selected in B., below. ( ) Other: [....] (Must be at least as favorable as any one of the above 4 options). B. Top Heavy Minimum Vesting Schedules. One of the following schedules will be used for years when the Plan is or is deemed to be Top-Heavy. ( ) 100% immediately vested after [....] (not to exceed 3) years of Service. ( ) 20% vested after 2 years of Service, plus [....]% vested (not less than 20%) for each additional year of Service until 100% vested. If the vesting schedule under the Plan shifts in or out of the Minimum Schedule above for any Plan Year because of the Plan's Top-Heavy status, such shift is an amendment to the vesting schedule and the election in Section 7.3 of the Plan applies. Life insurance ( ) shall; ( ) shall not be a permissible investment. Loans ( ) shall; ( ) shall not be permitted. ( ) The provisions of Article XIII of the Plan shall always apply. ( ) The provisions of Article XIII of the Plan shall only apply in Plan Years after 1983, during which the Plan is or becomes Top-Heavy. If the Employer has adopted Sponsor's paired defined contribution plan number 01003, 01004 or 01006 in addition to this Plan and the definition of "Eligible Employee" on all paired plans is identical, then the minimum allocation required by Section 13.3 will be provided ( ) under this Plan; ( ) under such other paired defined contribution plan. If the Employer has adopted Sponsor's paired defined benefit plan number 02001, then Participants in this Plan (or another paired defined contribution plan) who are covered under the paired defined benefit plan shall receive the minimum Top Heavy benefit under the paired defined benefit plan and shall receive no minimum allocation. If a Participant in this Plan who is a Non-Key Employee is covered under another qualified plan maintained by the Employer, other than a paired plan of the Sponsor, the minimum Top Heavy allocation or benefit required under Section 416 of the Code shall be provided to such Non-Key Employee under: ( ) the Employer's other qualified defined contribution plan. ( ) the Employer's qualified defined benefit plan. C. Determination of Present Value If the Employer maintains a defined benefit plan in addition to this Plan, and such plan fails to specify the interest rate and mortality table to be used for purposes of establishing present value to compute the Top-Heavy Ratio, then the following assumptions shall be used: Interest Rate [....]% Mortality Table [....] If the Employer maintains or has ever maintained another qualified plan (other than the Sponsor's paired defined contribution plan number 01003, 01004, or 01006 or the Sponsor's paired defined benefit plan number 02001), in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant, the adopting Employer must complete this Section. The Employer must also complete this Section if it maintains a welfare benefit fund, as defined in Section 419(e) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code, under which amounts are treated as Annual Additions with respect to any Participant in the Plan. (If the Employer maintains only paired plans of the Sponsor this Section should not be completed.) (a) If the Participant is covered under another qualified defined contribution plan maintained by the Employer, other than a Master or Prototype Plan, Annual Additions for any Limitation Year shall be limited to comply with Section 415(c) of the Code: ( ) in accordance with Sections 6.4(e) - (j) as though the other plan were a Master or Prototype Plan. ( ) by freezing or reducing Annual Additions in the other qualified defined contribution plan. (b) If a Participant is or has ever been participant in a qualified defined benefit plan maintained by the Employer, the "1.0" aggregate limitation of Section 415(e) of the Code shall be satisfied by: ( ) freezing or reducing the rate of benefit accrual under the qualified defined benefit plan. ( ) freezing or reducing the Annual Additions under this Plan (or, if the Employer maintains more than one qualified defined contribution plan, as indicated in (a) above. Participants ( ) shall; ( ) shall not be permitted to direct the investment of their Accounts in the investment options selected by the Employer or the Committee. The Employer hereby represents that: a. It is aware of, and agrees to be bound by, the terms of the Plan. b. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the Plan and has consulted legal and tax counsel to the extent necessary. c. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. XIX. RELIANCE ON PLAN QUALIFICATION An Employer who has ever maintained or who later adopts any plan (including, after December 31, 1985, a welfare benefit fund, as defined in Section 419(e) of the Internal Revenue Code, which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as defined in Section 419A(d)(3) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code) in addition to this Plan (other than the Sponsor's paired defined contribution plan number 01003, 01004, 01005, or 01006 or the Sponsor's paired defined benefit plan number 02001) may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Code. If an Employer who adopts or maintains multiple plans wishes to obtain reliance that his or her plans are qualified, application for a determination letter should be made to the appropriate key district office of the Internal Revenue Service. The Employer may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Code unless the terms of the Plan, as herein adopted or amended, that pertain to the requirements of Sections 401(a)(4), 401(a)(17), 401(l), 401(a)(5), 410(b) and 414(s) of the Code, as amended by the Tax Reform Act of 1986, or later laws, (a) are made effective with respect to this Plan); or (b) are made effective no later than the first day on which the Employer is no longer entitled, under regulations, to rely on a reasonable, good faith interpretation of these requirements, and the prior provisions of the Plan constitute such a interpretation. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Trust Agreement both as amended from time to time. In the event the Sponsor amends the Basic Plan Document or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, The Dreyfus Corporation, is available to answer questions regarding the intended meaning of any Plan provisions, adoption of he Plan and the effect of an Opinion Letter, at 144 Glenn Curtiss Boulevard, Uniondale, New York 11556-0144 [(516) 338-3418]. IN WITNESS WHEREOF, the Employer and the Trustee have executed this instrument the ________ day of __________, 19__. If applicable, the appropriate corporate seal has been affixed and attested to. Name and Title (Corporate Trustee only) PROTOTYPE PROFIT SHARING PLAN AND TRUST The Employer named in Section I.A. below hereby establishes or restates a Profit Sharing Plan ("Plan") and Trust, consisting of such sums as shall be paid to the Trustee(s) under the Plan, the investments thereof and earnings thereon. The terms of the Plan and Trust are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Trust Agreement, both as amended from time to time, which are hereby adopted and incorporated herein by reference. B. Employer is a ( ) corporation; ( ) S Corporation; ( ) partnership; ( ) sole proprietor; C. Employer's Tax ID Number: F. If this is a new Plan, the Effective Date of the Plan is: If this is an amendment and restatement of an existing Plan, enter the original Effective Date [....]. The effective date of this amended Plan is [....]. G. The Trustee shall be: ( ) The Dreyfus Trust Company ( ) Other: (Name) [....] H. The first Plan Year shall be [....] through [....]. Thereafter, the Plan Year shall mean the 12-consecutive-month period commencing on [....] and ending on [....]. I. Service with the following predecessor employer(s): shall be credited for purposes of: [ ] eligibility; [ ] vesting. Note: Such Service must be credited if the adopting Employer maintains the plan of the predecessor employer. J. The following employer(s) aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Internal Revenue Code ("Code") shall be Participating Employers in the Plan: [....] K. Are all employers aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Code participating in this Plan? ( ) Yes ( ) No Hours of Service under the Plan will be determined for all Employees on the basis of the method selected below: ( ) On the basis of actual hours for which an Employee is paid or entitled to payment. ( ) On the basis of days worked. An Employee will be credited with ten (10) Hours of Service for any day such Employee would be credited with at least one (1) Hour of Service during the day under the Plan. ( ) On the basis of weeks worked. An Employee will be credited with forty-five (45) Hours of Service for any week such Employee would be credited with at least one (1) Hour of Service during the week under the Plan. ( ) On the basis of semi-monthly payroll periods. An Employee will be credited with ninety-five (95) Hours of Service for any semi-monthly payroll period such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of months worked. An Employee will be credited with one hundred ninety (190) Hours of Service for any month such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of elapsed time. Hours of Service under the Plan will be determined for all Employees on the basis of the method selected below: ( ) On the basis of actual hours for which an Employee is paid or entitled to payment. ( ) On the basis of days worked. An Employee will be credited with ten (10) Hours of Service for any day such Employee would be credited with at least one (1) Hour of Service during the day under the Plan. ( ) On the basis of weeks worked. An Employee will be credited with forty-five (45) Hours of Service for any week such Employee would be credited with at least one (1) Hour of Service during the week under the Plan. ( ) On the basis of semi-monthly payroll periods. An Employee will be credited with ninety-five (95) Hours of Service for any semi-monthly payroll period such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of months worked. An Employee will be credited with one hundred ninety (190) Hours of Service for any month such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of elapsed time. All Employees shall be Eligible Employees, except: ( ) Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. ( ) Employees who are nonresident aliens and who receive no earned income from the Employer which constitutes income from sources within the United States. ( ) Employees included in the following classification(s): ( ) Employees of the following employers aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Code: ( ) Individuals required to be considered Employees under Section 414(n) of the Code. ( ) Employees who, subject to determination by the Committee that such election will not affect the plan's qualification, make a one-time irrevocable election not to participate in the Plan for purposes of the following: [ ] Employer Discretionary Contributions. [ ] Elective Deferrals/Thrift Contributions/Combined Contributions. Note: The term Employee includes all employees of the Employer and any employer required to be aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Code, and individuals considered employees of any such employer under Section 414(n) or (o) of the Code. IV. AGE AND SERVICE REQUIREMENTS Each Eligible Employee shall become a Participant on the Entry Date coincident with or following completion of the following requirements: Age: ( ) No age requirement. ( ) The attainment of age [....] (not to exceed age 21). Service: ( ) No service requirement. ( ) For Employer Discretionary Contributions only -- The completion of [....] (not to exceed 1 unless 100% immediate vesting is elected, in which case, may not exceed 2) Eligibility Years of Service. If the Eligibility Years of Service is or includes a fractional year, an Employee shall not be required to complete any specific number of Hours of Service to receive credit for such fractional year. If more than 1 Eligibility Year of Service is required, Participants must be 100% immediately vested. ( ) For all other contributions -- The completion of [....] (not to exceed 1) Eligibility Year of Service. Date: ( ) Each Eligible Employee who is employed on the Effective Date shall become a Participant on the Effective Date. Each Eligible Employee employed after the Effective Date shall become a Participant on the Entry Date coincident with or following completion of the age and service requirements specified above. ( ) Each Eligible Employee who is employed on the effective date of this amended plan shall become a Participant as of such date. Each Eligible Employee employed after the effective date shall become a Participant on the entry date coincident with or following completion of the age and service requirements specified above. V. ELIGIBILITY YEARS OF SERVICE A. For Employer Discretionary Contributions, in order to be credited with an Eligibility Year of Service, an Employee shall complete [....] (not to exceed 1,000) Hours of Service. Note: Not applicable if elapsed time method of crediting service for eligibility purposes is elected. B. For all other contributions, in order to be credited with an Eligibility Year of Service, an Employee shall complete [....] (not to exceed 1,000) Hours of Service. Note: Not applicable if elapsed time method of crediting service for eligibility purposes is elected. Note: In the case of an Employee in the Maritime Industry, for purposes of Eligibility Years of Service, refer to Section 1.24 of the Plan. The Entry Date shall mean: ( ) For the first Plan Year only, the initial Entry Date shall be_____ ( ) Annual Entry. The first day of the Plan Year. [Note: If Annual Entry is selected, the age and service requirements cannot exceed 20 1/2 and 1/2 Eligibility Year of Service.] ( ) Dual Entry. The first day of the Plan Year and the first day of the seventh month of the Plan Year. ( ) Quarterly Entry. The first day of the Plan Year and the first day of the fourth, seventh and tenth months of the Plan Year. ( ) Monthly Entry. The first day of the Plan Year and the first day of each following month of the Plan Year. ___________(Note: Eligible Employees must commence participation no later than the earlier of: a) the beginning of the Plan Year after meeting the age and service requirements, or b) 6 months after the date the Employee meets the age and service requirements). A. Except for purposes of "annual additions" testing under Section 415 of the Code, Compensation shall mean all of each Participant's: ( ) Information required to be reported under Sections 6041, 6051, and 6052 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in Section 3401(a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of Section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in Section 408(k), or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid to the Participant during the following applicable period: ( ) the portion of the Plan Year in which the Employee is a Participant in the Plan. ( ) the Plan Year. ( ) the calendar year ending with or within the Plan Year. ( ) Compensation shall be reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits. Compensation ( ) shall; ( ) shall not include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not includible in the gross income of the Employee by reason of Sections 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. If the Employer's contributions to the Plan are not allocated on an integrated basis, the following may be excluded from the definition of Compensation selected above for any year in which the Plan is not Top Heavy: ( ) amounts in excess of $ [....] For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. B. For purposes of "annual additions" testing under Section 415 of the Code, Compensation for any Limitation Year shall mean all of each Participant's: ( ) Information required to be reported under Sections 6041, 6051 and 6052 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in Section 3401(a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of Section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in Section 408(k), or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid or includible in gross income during such Limitation Year. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. Limitation Year shall mean the twelve (12) consecutive-month period: ( ) Identical to the Plan Year. ( ) Identical to the Employer's fiscal year ending with or within the Plan Year of reference. ( ) As fixed by a resolution of the Board of Directors of the Employer, or the Employer if no Board of Directors exists. Normal Retirement Age shall mean: ( ) Age [....] (not to exceed 65). ( ) Age [....] (not to exceed 65), or the [....] (not to exceed the 5th) anniversary of the date the Participant commenced participation in the Plan, if later. Early Retirement Age shall mean: ( ) There shall be no early retirement provision in this Plan. ( ) Age [....] and [....] Years of Service. XI. EMPLOYER AND EMPLOYEE CONTRIBUTIONS A. Types and allocation of Contributions ( ) An amount fixed by appropriate action of the Employer. ( ) [....]% of Compensation of Participants for the Plan Year (not to exceed 15%). ( ) [....]% of Compensation of Participants for the Plan Year, plus an additional amount fixed by appropriate action of the Employer (in total not to exceed 15%). Employer Discretionary Contributions ( ) shall; ( ) shall not be integrated with Social Security. If integrated with Social Security: a. ( ) The Permitted Disparity Percentage shall be [....]%. b. ( ) The Permitted Disparity Percentage shall be determined annually by appropriate action of the Employer. c. ( ) The Integration Level shall be: ( ) the Taxable Wage Base. ( ) $____________(a dollar amount less than the Taxable Wage Base). ( ) ___% (not to exceed 100% of the Taxable Wage Base). Note: The Permitted Disparity Percentage cannot exceed the lesser of: (i) the base contribution, or (ii) the greater of 5.7% or the tax rate under Section 3111(a) of the Code attributable to the old age insurance portion of the Old Age, Survivors and Disability Income provisions of the Social Security Act (as in effect on the first day of the Plan Year). If the Integration Level selected above is other than the Taxable Wage Base ("TWB"), the 5.7% factor in the preceding sentence must be replaced by the applicable percentage determined from the following table. If the Integration Level is: more than but not more than Factor is X 80% of TWB 4.3% 80% of TWB Y** 5.4% X = the greater of $10,000 or 20% of TWB Y = any amount more than 80% of TWB, but less Allocation of Employer Discretionary Contributions. In order to share in the allocation of Employer Discretionary Contributions (and forfeitures, if forfeitures are reallocated to Participants) an Active Participant: ( ) Need not be employed on the last day of the Plan Year. ( ) Must be employed on the last day of the Plan Year, unless the Participant terminates employment on account of: ( ) Attainment of Early Retirement Age. ( ) Attainment of Normal Retirement Age. ( ) Employer approved leave of absence. ( ) Must have ( ) 501 Hours of Service; ( ) [....] Hours of Service (cannot exceed 1,000). (Note: Not applicable if elapsed time method of crediting service is elected. A Participant may elect to have his or her Compensation reduced by: ( ) An amount not in excess of [....]% of Compensation [cannot exceed the dollar limitation of Section 402(g) of the Code for the calendar year]. ( ) An amount not in excess of $[....] of Compensation [cannot exceed the dollar limitation of Section 402(g) of the Code for the calendar year]. ( ) An amount not to exceed the dollar limitation of Section 402(g) of the Code for the calendar year. ( ) An amount not in excess of (Note: The percent for the Highly Compensated Employee cannot exceed the percent for the Non-Highly Compensated Employee): _______% of Compensation [cannot exceed the dollar limitation of Section 402(g) of the Code for the calendar year] for each Highly Compensated ________% of Compensation [cannot exceed the dollar limitation of Section 402(g) of the Code for the calendar year] for each Non-Highly Compensated Employee. A Participant may elect to commence Elective Deferrals the next pay period following: [....] (enter date or period -- at least once each calendar year). A Participant may modify the amount of Elective Deferrals as of [....] (enter date or period -- at least once each calendar year). A Participant ( ) may; ( ) may not base Elective Deferrals on cash bonuses that, at the Participant's election, may be contributed to the CODA or received by the Participant in cash. Such election shall be effective as of the next pay period following [....] or as soon as administratively feasible thereafter. Participants who claim Excess Elective Deferrals for the preceding calendar year must submit their claims in writing to the plan administrator by [....] (enter date between March 1 and April 15). A Participant ( ) may; ( ) may not elect to recharacterize Excess Contributions as Thrift Contributions. (Note: Available only if Thrift Contributions are permitted.) Participants who elect to recharacterize Excess Contributions for the preceding Plan Year as Thrift Contributions must submit their elections in writing to the Committee by [....] (enter date no later than 2 1/2 months after close of Plan Year). Participants shall be permitted to make Thrift Contributions from [....]% (not less than 1) to [....]% (not more than 10) of their total aggregate Compensation. A Participant may elect to commence Thrift Contributions the next pay period following [....] (enter date or period--at least once each calendar year). The Change Date for a Participant to modify the amount of Thrift Contributions shall be as of [....] (enter date or period -- at least once each calendar year). 4. Elective Deferrals and Thrift Contributions, combined A Participant may elect to make Combined Contributions which do not exceed [....]% of Compensation. (Note: Elective Deferrals can not exceed the dollar limitation of Section 402(g) of the Code for the calendar year). A Participant may elect to commence contributions the next pay period following: (enter date or period -- at least once each calendar year). A Participant may modify his amount of Combined Contributions as of [....] (enter date or period -- at least once each calendar year). A Participant ( ) may; ( ) may not base Elective Deferrals on cash bonuses that, at the Participant's election, may be contributed to the CODA or received by the Participant in cash. Such election shall be effective as of the next pay period following [....] or as soon as administratively feasible thereafter. Participants who claim Excess Elective Deferrals for the preceding calendar year must submit their claims in writing to the plan administrator by [....] (enter date between March 1 and April 15). A Participant ( ) may; ( ) may not elect to recharacterize Excess Contributions as Thrift Contributions. Participants who elect to recharacterize Excess Contributions for the preceding Plan Year as Thrift Contributions must submit their elections in writing to the Committee by [....] (enter date no later than 2 1/2 months after close of the Plan Year). ( ) The Employer shall or may (in the event that the Matching Contribution amount is within the discretion of the Employer) make Matching Contributions to the Plan with respect to (any one or a combination of the following may be selected): Such Matching Contributions will be made on behalf of: ( ) All Participants who make such contribution(s). ( ) All Participants who are Non-Highly Compensated Employees who make such contribution(s). The amount of such Matching Contributions made on behalf of each such Participant shall be: (i) Elective Deferrals (any one or a combination of the following may be selected) - ( ) An amount or percentage fixed by appropriate action of the Employer. ( ) [....]% of the Elective Deferrals. ( ) [....]% of the first [....]% of Compensation contributed as an Elective Deferral, plus [....]% of the next [....]% of Compensation contributed as an Elective Deferral, plus [....]% of the next [....]% of Compensation contributed as an Elective Deferral. The Employer shall not match Elective Deferrals as provided above in excess of $[....] or in excess of [....]% of the Participant's Compensation. The Employer shall not match Elective Deferrals made by the following class(es) of Employees: (ii) Thrift Contributions (any one or a combination of the ( ) An amount or percentage fixed by appropriate action of the Employer. ( ) $[....] for each dollar of Thrift Contributions. ( ) [....]% of the Thrift Contributions. ( ) [....]% of the first [....]% of Compensation contributed, plus [....]% of the next [....]% of Compensation contributed, plus [....]% of the remaining Compensation contributed. The Employer shall not match Thrift Contributions as provided above in excess of $[....] or in excess of [....]% of the Participant's Compensation. The Employer shall not match Thrift Contributions made by the following class(es) of Employees: [...] (iii) Combined Contributions (any one or a combination of the following may be selected). ( ) An amount fixed by appropriate action of the Employer. ( ) [....]% of Combined Contributions. ( ) [....]% of Elective Deferrals, plus [....]% of Thrift contributions. ( ) [....]% of the first [....]% of Compensation contributed, plus [....]% of the next [....]% of Compensation contributed, plus [....]% of the remaining Compensation contributed. The Employer shall not match Combined Contributions as provided above in excess of $[....] or in excess of [....]% of the Participant's Compensation. The Employer shall not match Combined Contributions made by the following class(es) of Employees: [....] Matching Contributions shall be made each: Allocation of Matching Contributions -- In order to share in the allocation of Matching Contributions (and forfeitures, if forfeitures are reallocated to participants) a Participant: ( ) Must be employed on the last day of the payroll period. ( ) Must be employed on the last day of the Month. ( ) Must be employed on the last day of the Quarter. ( ) Must be employed on the last day of the Plan Year. unless the Participant terminates employment on account of: ( ) Attainment of Early Retirement Age. ( ) Attainment of Normal Retirement Age. ( ) Employer approved leave of absence. ( ) Must have ( ) 501 Hours of Service; ( ) [....] Hours of Service (cannot exceed 1,000). Note: Not applicable if elapsed time method of crediting service is elected. ( ) The Employer shall or may (in the event that the Qualified Matching Contribution amount is within the discretion of the Employer) make Qualified Matching Contributions. Qualified Matching Contributions will be made on behalf of: ( ) All Participants who make Elective Deferrals. ( ) All Participants who are Non-Highly Compensated Employees and who make Elective Deferrals. The amount of such Qualified Matching Contributions made on behalf of each Participant shall be (any one or a combination of the following may be selected): ( ) An amount or percentage fixed by appropriate action by the Employer. ( ) [....]% of the Elective Deferrals. The Employer shall not match Elective Deferrals as provided above in excess of $[....] or in excess of [....]% of the Participant's Compensation. ( ) The Employer shall have the discretion to contribute Qualified Nonelective Contributions for any Plan Year in an amount to be determined each year by the Employer. Qualified Nonelective Contributions will be made on behalf of (select as appropriate): ( ) All Eligible Employees. ( ) All Participants who make Elective Deferrals. ( ) All Participants who are Non-Highly Compensated Employees and who make Elective Deferrals. ( ) All Participants who are Non-Highly Compensated Employees. ( ) All Non-Key Employees. B. Forfeitures (Do not complete if 100% immediate vesting is elected). Forfeitures of Employer Discretionary Contributions, Matching Contributions or Excess Aggregate Contributions shall be: ( ) Allocated to participants in the manner provided in Sections 4.2 and 4.7(d)(2) of the Plan. ( ) Used to reduce: ( ) any future Employer contributions. C. Contributions Not Limited by Net Profits Indicate for each type of Employer contribution allowed under the Plan whether such contributions are to be limited to Net Profits of the Employer for the taxable year of the Employer ending with or within the Plan Year: ( ) Yes ( ) No Employer Discretionary Contributions ( ) Yes ( ) No Elective Deferrals ( ) Yes ( ) No Qualified Nonelective Contributions ( ) Yes ( ) No Matching Contributions ( ) Yes ( ) No Qualified Matching Contributions. XII. DISTRIBUTIONS AND IN-SERVICE WITHDRAWALS A. Accounts shall be distributable upon a Participant's separation from service, death, or Total and Permanent Disability, and, in addition: ( ) Termination of the Plan without establishment or maintenance of a successor plan. ( ) The disposition to an entity that is not an Affiliated Employer of substantially all of the assets used by the Employer in a trade or business, but only if the Employer continues to maintain the Plan and only with respect to participants who continue employment with the acquiring corporation. ( ) Upon attainment of the Plan's Normal Retirement Age. ( ) The disposition to an entity that is not an Affiliated Employer of the Employer's interest in a subsidiary, but only if the Employer continues to maintain the Plan and only with respect to Participants who continue employment with such subsidiary. ( ) Vested portion of Employer Discretionary Contributions on account of a Participant's financial hardship to the extent permitted by Section 4.9 of the Plan. ( ) Vested portion of Employer Matching Contributions on account of a Participant's financial hardship to the extent permitted by Section 4.9 of the Plan. B. In addition to A above, Elective Deferrals, Qualified Nonelective Contributions and Qualified Matching Contributions (as applicable) and income allocable to such amounts shall be distributable: ( ) Upon the Participant's attainment of age 59 1/2. ( ) On account of a Participant's financial hardship, to the extent permitted by Section 4.9 of the Plan (Elective Deferrals Only). C. In-service withdrawals from a Participant's: ( ) Employer Discretionary Contribution Account; ( ) Matching Contribution Account; ( ) Transfer Account, if any ( ) shall; ( ) shall not be permitted upon the attainment of age 59 1/2. (Permitted only if the Plan is not integrated with Social Security and a Participant's Employer Discretionary Contribution Account and Matching Contribution Accounts are 100% vested at time of distribution.) D. Distribution of benefits upon separation of service, retirement or death of a Participant ( ) shall; ( ) shall not be subject to the Automatic Annuity rules of Section 8.2 of the Plan. E. (Complete only if the Plan is not subject to the Automatic Annuity rules of Section 8.2.) Check the appropriate optional forms of benefit that shall be available under the Plan (if left blank, the provisions of Section 8.6(a) of this Plan shall apply): [ ] Single lump sum payment. [ ] Installment payments pursuant to Section 8.6(a) of the Plan. F. The following optional forms of benefit shall be available in addition to the optional forms of benefit available under Section 8.6 of the Plan (Note: If the Plan is not subject to the Automatic Annuity rules of Section 8.2 and the Participant is permitted to select an annuity as an optional form of benefit, then the Automatic Annuity rules of Section 8.2 shall apply to such participant): [Note: If the Plan is an amendment and restatement of an existing Plan, optional forms of benefit protected under Section 411(d)(6) of the Code may not be eliminated, unless permitted by IRS Regulations Sections 1.401(a)-(4) and 1.411(d)-4]. In order to be credited with a year of Service for vesting purposes, a Participant shall complete [....] (not to exceed 1,000) Hours of Service. (Not applicable if elapsed time method of crediting service for vesting purposes is elected). Note: In the case of Employees in the Maritime Industry, for purposes of a year of Service, refer to Section 1.56 of the Plan. XIV. VESTING SERVICE - EXCLUSIONS All of an Employee's years of Service with the Employer shall be counted to determine the vested interest of such Employee except: ( ) Years of Service before age 18. ( ) Years of Service before the Employer maintained this Plan or a predecessor plan. ( ) Years of Service before the effective date of ERISA if such Service would have been disregarded under the Service Break rules of the prior plan in effect from time to time before such date. For this purpose, Service Break rules are rules which result in the loss of prior vesting or benefit accruals, or deny an Employee's eligibility to participate by reason of separation or failure to complete a required period of Service within a specified period of time. The vested interest of each Employee (who has an Hour of Service on or after January 1, 1989) in his Employer-derived account balance shall be determined on the basis of the following schedules: ( ) 100% immediately vested. [Note: Mandatory if more than 1 Eligibility Year of Service is required.] ( ) 100% immediately vested after [....] (not to exceed 5) years of Service. ( ) [....]% (not less than 20%) vested for each year of Service, beginning with the [....] (not more than the 3rd) year of Service until 100% vested. ( ) Other: [....] (Must be at least as favorable as any one of the above 3 options). ( ) Effective Date Vesting. Each Employee who is a Participant on the Effective Date shall be 100% immediately vested. ( ) 100% immediately vested. [Note: Mandatory if more than 1 Eligibility Year of Service is required.] ( ) 100% immediately vested after [....] (not to exceed 5) years of Service. ( ) [....]% (not less than 20%) vested for each year of Service, beginning with the [....] (not more than the 3rd) year of Service until 100% vested. ( ) Other: [....] (Must be at least as favorable as any one of the above 3 options). ( ) Effective Date Vesting. Each Employee who is a Participant on the Effective Date shall be 100% immediately vested. C. Top Heavy Minimum Vesting Schedules. One of the following schedules will be used for years when the Plan is or is deemed to be Top-Heavy. ( ) 100% immediately vested after [....] (not to exceed 3) years of Service. ( ) 20% vested after 2 years of Service, plus [....]% vested (not less than 20%) for each additional year of Service until 100% vested. ( ) Other: [....] (Note: must be at least as favorable as either of the two schedules in this Section C). If the vesting schedule under the Plan shifts in or out of the Minimum Schedule above for any Plan Year because of the Plan's Top-Heavy status, such shift is an amendment to the vesting schedule and the election in Section 7.3 of the Plan applies. Life insurance ( ) shall; ( ) shall not be a permissible investment. Loans ( ) shall; ( ) shall not be permitted. ( ) The provisions of Article XIII of the Plan shall always apply. ( ) The provisions of Article XIII of the Plan shall only apply in Plan Years after 1983, during which the Plan is or becomes Top-Heavy. If a Participant in this Plan who is a Non-Key Employee is covered under another qualified plan maintained by the Employer, the minimum Top Heavy allocation or benefit required under Section 416 of the Code shall be provided to such Non-key Employee under: ( ) the Employer's other qualified defined contribution plan. ( ) the Employer's qualified defined benefit plan. C. Determination of Present Value If the Employer maintains a defined benefit plan in addition to this Plan, and such plan fails to specify the interest rate an mortality table to be used for purposes of establishing present value to compute the Top-Heavy Ratio, then the following assumptions shall be used: If the adopting Employer maintains or has ever maintained another qualified plan in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant, the adopting Employer must complete this Section. The Employer must also complete this Section if it maintains a welfare benefit fund, as defined in Section 419(e) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code, under which amounts are treated as Annual Additions with respect to any Participant in the Plan. (a) If the Participant is covered under another qualified defined contribution plan maintained by the Employer, other than a Master or Prototype Plan, Annual Additions for any Limitation Year shall be limited to comply with Section 415(c) of the Code: ( ) in accordance with Sections 6.4(e) - (j) as though the other plan were a Master or Prototype Plan. ( ) by freezing or reducing Annual Additions in the other qualified defined contribution plan. (b) If a Participant is or has ever been a Participant in a qualified defined benefit plan maintained by the Employer, the "1.0" aggregate limitation of Section 415(e) of the Code shall be satisfied by: ( ) freezing or reducing the rate of benefit accrual under the qualified defined benefit plan. ( ) freezing or reducing the Annual Additions under this Plan (or, if the Employer maintains more than one qualified defined contribution plan, as indicated in (a) above). ( ) Participants ( ) shall; ( ) shall not be permitted to direct the investment of their Accounts in the investment options selected by the Employer or the Committee. ( ) Investment of participant Accounts shall be directed consistent with rules and procedures established by the Committee. Such rules shall be applied to all Participants in a uniform and nondiscriminatory basis. Transfers pursuant to Section 10.3 of the Plan ( ) shall; ( ) shall not be permitted. If permitted, indicate additional prior plan provisions, if applicable: [....]. Rollovers pursuant to Section 10.3 of the Plan ( ) shall; ( ) shall not be permitted. The Employer hereby represents that: a. It is aware of, and agrees to be bound by, the terms of the Plan. b. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the Plan and has consulted legal and tax counsel to the extent necessary. c. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. XXIV. RELIANCE ON PLAN QUALIFICATION The adopting Employer may not rely on an opinion letter issued by the National Office of the Internal Revenue Service as evidence that the Plan is qualified under Section 401 of the Code. In order to obtain reliance with respect to plan qualification, the Employer must apply to the appropriate key district office of the Internal Revenue Service for a determination letter. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Trust Agreement both as amended from time to time. In the event the Sponsor amends the Basic Plan Document or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, The Dreyfus Corporation, is available to answer questions regarding the intended meaning of any Plan provisions, adoption of the Plan and the effect of an Opinion Letter at 144 Glenn Curtiss Boulevard, Uniondale, New York 11556-0144 [(516) 338-3418]. IN WITNESS WHEREOF, the Employer and the Trustee have executed this instrument the _______________________day of __________________ , 19__. If applicable, the appropriate corporate seal has been affixed and attested to. Name and Title (Corporations or Partnerships) Name and Title (Corporate Trustee only) PROTOTYPE PROFIT SHARING PLAN AND TRUST The Employer named in Section I.A. below hereby establishes or restates a Profit Sharing Plan ("Plan") and Trust, consisting of such sums as shall be paid to the Trustee(s) under the Plan, the investments thereof and earnings thereon. The terms of the Plan and Trust are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Trust Agreement, both as amended from time to time, which are hereby adopted and incorporated herein by reference. B. The Employer is a ( ) corporation; ( ) S Corporation; ( ) ( ) sole proprietor; ( ) other: [.....] C. Employer's Tax ID Number: F. If this is a new Plan, the Effective Date of the Plan is: If this is an amendment and restatement of an existing Plan, enter the original Effective Date [....]. The effective date of this amended Plan is [....]. G. The Trustee shall be: ( ) The Dreyfus Trust Company. ( ) Other: (Name) [....] H. The first Plan Year shall be [....] through [....]. Thereafter, the Plan Year shall mean the 12-consecutive-month period commencing on [....] and ending on [....]. I. Service with the following predecessor employer(s) shall be credited for purposes of vesting and eligibility: [Note: Such Service must be provided if the adopting Employer maintains the plan of the predecessor employer]. J. The following employer(s) aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Internal Revenue Code ("Code") shall be Participating Employers in the Plan: [....] K. Are all employers aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Code participating in the Plan? ( ) Yes ( ) No Hours of Service under the Plan will be determined for all Employees on the basis of the method selected below: ( ) On the basis of actual hours for which an Employee is paid or entitled to payment. ( ) On the basis of days worked. An Employee will be credited with ten (10) Hours of Service for any day such Employee would be credited with at least one (1) Hour of Service during the day under the Plan. ( ) On the basis of weeks worked. An Employee will be credited with forty-five (45) Hours of Service for any week such Employee would be credited with at least one (1) Hour of Service during the week under the Plan. ( ) On the basis of semi-monthly payroll periods. An Employee will be credited with ninety-five (95) Hours of Service for any semi- monthly payroll period such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of months worked. An Employee will be credited with one hundred ninety (190) Hours of Service for any month such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of elapsed time. All Employees shall be Eligible Employees, except: ( ) Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. ( ) Employees who are nonresident aliens and who receive no earned income from the Employer which constitutes income from sources within the United States. Note: The term Employee includes all Employees of the Employer and any employer required to be aggregated with the Employer under Sections 414(b), (c), (m) or (o) of the Code, and individuals considered employees of any such employer under Section 414(n) or (o) of the Code. If the Employer adopts Sponsor's paired defined contribution plan number 01001, 01004, 01005 or 01006 or paired defined benefit plan number 02001 in addition to this Plan, the definition of "Eligible Employee" in all paired plans of the Employer must be identical in order for the Employer to be able to designate in Section XV one of the paired plans to provide the required minimum allocation to each Non-Key Employee in the event the Plan becomes Top-Heavy. If the definition of "Eligible Employee" in all paired plans of the Employer is not identical, Section 13.1 through 13.4 shall apply in the event the Plan becomes Top-Heavy. IV. AGE AND SERVICE REQUIREMENTS Each Eligible Employee shall become a Participant on the Entry Date coincident with or following completion of the following requirements: Age: ( ) No age requirement. ( ) The attainment of age [....] (not to exceed age 21). Service: ( ) No service requirement. ( ) For Employer Discretionary Contributions only -- the completion of [....] (not to exceed 1 unless 100% immediate vesting is elected, in which case, may not exceed 2) Eligibility Years of Service. [Note: If more than 1 Eligibility Year of Service is required, Participants must be 100% immediately vested. If the Eligibility Years of Service is or includes a fractional year, an Employee may not be required to complete any specified number of Hours of Service to receive credit ( ) For all other contributions -- the completion of [....] (not to exceed 1) Eligibility Year of Service. The Entry Date shall mean: ( ) For the first Plan Year only, the initial Entry Date shall be ( ) Annual Entry. The first day of the Plan Year. [Note: If Annual Entry is selected, the age and service requirements cannot exceed 20 1/2 and 1/2 Eligibility Year of Service.] ( ) Dual Entry. The first day of the Plan Year and the first day of the seventh month of the Plan Year. ( ) Quarterly Entry. The first day of the Plan Year and the first day of the fourth, seventh and tenth months of the Plan Year. ( ) Monthly Entry. The first day of the Plan Year and the first day of each following month of the Plan Year. A. Except for purposes of "annual additions" testing under Section 415 of the Code, Compensation shall mean all of each Participant's: ( ) Information required to be reported under Sections 6041, 6051 and 6052 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in Section 3401(a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of Section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in Section 408(k), or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid to the Participant during the following applicable period: ( ) the portion of the Plan Year in which the Employee is a Participant in the Plan. ( ) the Plan Year. ( ) the calendar year ending with or within the Plan Year. ( ) Compensation shall be reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits. Compensation ( ) shall; ( ) shall not include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not includible in the gross income of the Employee by reason of Sections 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. B. For purposes of "annual additions" testing under Section 415 of the Code, Compensation for any Limitation Year shall mean all of each Participant's: ( ) Information required to be reported under Sections 6041, 6051, and 6052 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in Section 3401(a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of Section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in Section 408(k), or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid or includible in gross income during such Limitation Year. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. Limitation Year shall mean the twelve (12) consecutive-month period: ( ) Identical to the Plan Year. ( ) Identical to the Employer's fiscal year ending with or within the Plan Year of reference. ( ) As fixed by a resolution of the Board of Directors of the Employer, or the Employer if no Board of Directors exists. Normal Retirement Age shall mean: ( ) Age [....] (not to exceed 65). ( ) Age [....] (not to exceed 65), or the [....] (not to exceed the 5th) anniversary of the date the Participant commenced participation in the Plan, if later. Early Retirement Age shall mean: ( ) There shall be no early retirement provision in this Plan. ( ) Age [....] and [....] Years of Service. X. EMPLOYER AND EMPLOYEE CONTRIBUTIONS A. Types and allocation of Contributions ( ) An amount fixed by appropriate action of the Employer. ( ) [....]% of Compensation of Participants for the Plan Year (not to exceed 15%). Employer Discretionary Contributions ( ) shall; ( ) shall not be integrated with Social Security. If integrated with Social Security: a. ( ) The Permitted Disparity Percentage shall be [....]%. b. ( ) the Permitted Disparity Percentage shall be determined annually by appropriate action of the Employer. c. ( ) The Integration Level shall be: ( ) the Taxable Wage Base. ( ) $____(a dollar amount less than the Taxable Wage Base). ( ) _____(not to exceed 100% of the Taxable Wage Base). Note: The Permitted Disparity Percentage cannot exceed the lesser of: (i) the base contribution, or (ii) the greater of 5.7% or the tax rate under Section 3111(a) of the Code attributable to the old age insurance portion of the Old Age, provisions of the Social Security Act (as in effect on the first day of the Plan Year). If the Integration Level selected above is other than the Taxable Wage Base ("TWB"), the 5.7% factor in the preceding sentence must be replaced by the applicable percentage determined from the following table. more than but not more than Factor is X 80% of TWB 4.3% 80% of TWB Y* 5.4% * X = the greater of $10,000 or 20% of TWB ** Y = any amount more than 80% of TWB, but less than A Participant may elect to have his or her Compensation reduced by: ( ) An amount not in excess of [....]% of Compensation [cannot exceed the dollar limitation of Section 402(g) of the Code for the calendar year]. ( ) An amount not in excess of $[....] of Compensation [cannot exceed the dollar limitation of Section 402(g) of the Code for the calendar year]. A Participant may elect to commence Elective Deferrals the next pay period following: [....] (enter date or period -- at least once each calendar year). A Participant may modify the amount of Elective Deferrals as of: [....] (enter date or period -- at least once each calendar year). A Participant ( ) may; ( ) may not base Elective Deferrals on cash bonuses that, at the Participant's election, may be contributed to the CODA or received by the Participant in cash. Such election shall be effective as of the next pay period following [....] or as soon as administratively feasible thereafter. Participants who claim Excess Elective Deferrals for the preceding calendar year must submit their claims in writing to the plan administrator by [....] (enter date between March 1 and April 15). ( ) The Employer shall or may (in the event that the Matching Contribution amount is within the discretion of the Employer) make Matching Contributions to the Plan on behalf of: ( ) All Participants who make Elective Deferrals. ( ) All Participants who are Non-Highly Compensated Employees and who make Elective Deferrals. The amount of such Matching Contributions made on behalf of each such Participant shall be (any one or a combination of the following may be selected): ( ) An amount or percentage of Elective Deferrals fixed by appropriate action of the Employer. ( ) [....]% of the Elective Deferrals. The Employer shall not match Elective Deferrals as provided above in excess of $[....] or in excess of [....]% of the Participant's Compensation. Matching Contributions shall be made during each: ( ) The Employer shall have the discretion to contribute Qualified Nonelective Contributions for any Plan Year in an amount to be determined each year by the Employer. ( ) Shall be made in an amount equal to [....]% of each Participant eligible to receive Qualified Nonelective Contributions. Qualified Nonelective Contributions will be made on behalf of: ( ) All Participants who make Elective Deferrals. ( ) All Participants who are Non-Highly Compensated Employees and who make Elective Deferrals. B. Forfeitures (Do not complete if 100% immediate vesting is elected). Forfeitures of Employer Discretionary Contributions, Matching Contributions or Excess Aggregate Contributions shall be: ( ) Allocated to Participants in the manner provided in Sections 4.2 and 4.7(d) of the Plan. ( ) Used to reduce future Employer contributions. C. Contributions Not Limited by Net Profits Indicate for each type of Employer contribution allowed under the Plan whether such contributions are to be limited to Net Profits of the Employer for the taxable year of the Employer ending with or within the Plan Year. ( ) Yes ( ) No Employer Discretionary Contributions ( ) Yes ( ) No Elective Deferrals ( ) Yes ( ) No Qualified Nonelective Contributions ( ) Yes ( ) No Matching Contributions XI. DISTRIBUTIONS AND IN-SERVICE WITHDRAWALS A. Accounts shall be distributable upon a Participant's separation from service, death, or Total and Permanent Disability, as defined in the Plan, and, in addition: ( ) Termination of the Plan without establishment or maintenance of a successor plan. ( ) The disposition to an entity that is not an Affiliated Employer of substantially all of the assets used by the Employer in a trade or business, but only if the Employer continues to maintain the Plan and only with respect to Participants who continue employment with the acquiring corporation. ( ) The disposition to an entity that is not an Affiliated Employer of the Employer's interest in a subsidiary, but only if the Employer continues to maintain the Plan and only with respect to Participants who continue employment with such subsidiary. ( ) Upon attainment of the Plan's Normal Retirement Age. B. In Addition to A above, Elective Deferrals and Qualified Nonelective Contributions (as applicable) and income allocable to such amounts shall be distributable: ( ) Upon the Participant's attainment of age 59 1/2. ( ) On account of a Participant's financial hardship, to the extent permitted by Section 4.9 of the Plan (Elective Deferrals Only). C. In-service withdrawals from a Participant's: ( ) Employer Discretionary Contribution Account; ( ) Matching Contribution Account; ( ) Transfer Account, if any ( ) shall; ( ) shall not be permitted upon the attainment of age 59 1/2. (Permitted only if Plan is not integrated with Social Security and a Participant's Employer Discretionary Contribution Account and Matching Contribution Accounts are 100% vested at time of distribution.) D. Distribution of benefits upon retirement or death of a Participant ( ) shall; ( ) shall not be subject to the Automatic Annuity rules of Sections 8.2 of the Plan. XII. VESTING SERVICE - EXCLUSIONS All of an Employee's years of Service with the Employer shall be counted to determine the vested interest of such Employee except: ( ) Years of Service before age 18. ( ) Years of Service before the Employer maintained this Plan or a predecessor plan. ( ) Years of Service before the effective date of ERISA if such Service would have been disregarded under the Service Break rules of the prior plan in effect from time to time before such date. For this purpose, Service Break rules are rules which result in the loss of prior vesting or benefit accruals, or deny and Employee's eligibility to participate by reason of separation or failure to complete a required period of Service within a specified period of time. The vested interest of each Employee (who has an Hour of Service on or after January 1, 1989) in his Employer-derived account balance shall be determined on the basis of the following schedules: ( ) 100% immediately vested. [Note: Mandatory if more than 1 Eligibility Year of Service is required.] ( ) 100% immediately vested after [....] (not to exceed 5) years of Service. ( ) [....]% (not less than 20%) vested for each year of Service, beginning with the [....] (not more than the 3rd) year of Service until 100% vested. ( ) Other: [....] (Must be at least as favorable as any one of the above 3 options). ( ) 100% immediately vested. [Note: Mandatory if more than 1 Eligibility Year of Service is required.] ( ) 100% immediately vested after [....] (not to exceed 5) years of Service. ( ) [....]% (not less than 20%) vested for each year of Service, beginning with the [....] (not more than the 3rd) year of Service until 100% vested. ( ) Other: [....] (Must be at least as favorable as any one of the above 3 options). C. Top Heavy Minimum Vesting Schedules. One of the following schedules will be used for years when the Plan is or is deemed to be Top-Heavy. ( ) 100% immediately vested after [....] (not to exceed 3) years of Service. ( ) 20% vested after 2 years of Service, plus [....]% vested (not less than 20%) for each additional year of Service until 100% vested. ( ) Other: [....] (Note: Must be at least as favorable as either of the two schedules in this Section C). If the vesting schedule under the Plan shifts in or out of the Minimum Schedule above for any Plan Year because of the Plan's Top-Heavy status, such shift is an amendment to the vesting schedule and the election in Section 7.3 of the Plan applies. Life insurance ( ) shall; ( ) shall not be a permissible investment. Loans ( ) shall; ( ) shall not be permitted. ( ) The provisions of Article XIII of the Plan shall always apply. ( ) The provisions of Article XIII of the Plan shall only apply in Plan Years after 1983, during which the Plan is or becomes Top-Heavy. If the Employer has adopted Sponsor's paired defined contribution plan number 01001, 01004 or 01005 in addition to this Plan, then the minimum allocation required by Section 13.3 will be provided ( ) under this Plan; ( ) under such other paired defined contribution plan. If the Employer has adopted Sponsor's paired defined benefit plan number 02001, then Participants in this Plan (or another paired defined contribution plan) who are covered under the paired defined benefit plan shall receive the top-heavy minimum benefit under the paired defined benefit plan and shall receive no minimum allocation. If a Participant in this Plan who is a Non-Key Employee is covered under another qualified plan maintained by the Employer, other than a paired plan of the Sponsor, the minimum Top Heavy allocation or benefit required under Section 416 of the Code shall be provided to such Non-Key Employee under: ( ) the Employer's other qualified defined contribution plan. ( ) the Employer's qualified defined benefit plan. C. Determination of Present Value If the Employer maintains a defined benefit plan in addition to this Plan, and such plan fails to specify the interest rate and mortality table to be used for purposes of establishing present value to compute the Top-Heavy Ratio, then the following assumptions shall be used: Interest Rate [....]% Mortality Table [....] If the Employer maintains or has ever maintained another qualified plan (other than the Sponsor's paired defined contribution plan number 01001, 01004, 01005, or 01006 or the Sponsor's paired defined benefit plan number 02001), in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant, the adopting Employer must complete this Section. The Employer must also complete this Section if it maintains a welfare benefit fund, as defined in Section 419(e) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code, under which amounts are treated as Annual Additions with respect to any Participant in the Plan. (If the Employer maintains only paired plans of the Sponsor this Section should not be completed.) (a) If a Participant is covered under another qualified defined contribution plan maintained by the Employer, other than a Master or Prototype Plan, Annual Additions for any Limitation Year shall be limited to comply with Section 415(c) of the Code: ( ) in accordance with Section 6.4 (e) - (j) as though the other plan were a Master or Prototype Plan. ( ) by freezing or reducing Annual Additions in the other qualified defined contribution plan. (b) If a Participant is or has ever been a participant in a qualified defined benefit plan maintained by the Employer, the "1.0" aggregate limitation of Section 415(e) of the Code shall be satisfied by: ( ) freezing or reducing the rate of benefit accrual under the qualified defined benefit plan. ( ) freezing or reducing the Annual Additions under this Plan (or, if the Employer maintains more than one qualified defined contribution plan, as indicated in (a) above). Participants ( ) shall; ( ) shall not be permitted to direct the investment of their Accounts in the investment options selected by the Employer or the Committee. The Employer hereby represents that: a. It is aware of, and agrees to be bound by, the terms of the Plan. b. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the Plan and has consulted legal and tax counsel to the extent necessary. c. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. XX. RELIANCE ON PLAN QUALIFICATION An Employer who has ever maintained or who later adopts any plan (including, after December 31, 1985, a welfare benefit fund, as defined in Section 419(e) of the Code which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as defined in Section 419A(d)(3) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code) in addition to this Plan (other than the Sponsor's paired defined contribution plan number 01001, 01004, or 01005, or the Sponsor's paired defined benefit plan number 02001), may not rely on the opinion letter issued by the National Office of the Service as evidence that this Plan is qualified under Section 401 of the Code. If an Employer who adopts or maintains multiple plans wishes to obtain reliance that his or her plans are qualified, application for a determination letter should be made to the appropriate key district office of the Internal Revenue Service. The Employer may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Code unless the terms of the Plan, as herein adopted or amended, that pertain to the requirements of Sections 401(a)(4), 401(a)(17), 401(l), 401(a)(5), 410(b) and 414(s) of the Code, as amended by the Tax Reform Act of 1986, or later laws, (a) are made effective retroactively to the first day of the first Plan Year beginning after December 31, 1988 (or such later date on which these requirements first become effective with respect to this Plan); or (b) are made effective no later than the first day on which the Employer is no longer entitled, under regulations, to rely on a reasonable, good faith interpretation of these requirements, and the prior provisions of the Plan constitute such an interpretation. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Trust Agreement both as amended from time to time. In the event the Sponsor amends the Basic Plan Document or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, The Dreyfus Corporation is available to answer questions regarding the intended meaning of any Plan provisions, adoption of the Plan and the effect of an Opinion Letter, at 144 Glenn Curtiss Boulevard, Uniondale, New York 11556-0144 [(516) 338-3418]. IN WITNESS WHEREOF, the Employer and the Trustee executed this instrument the ____day of __________, 19__. If applicable, the appropriate corporate seal has been affixed and attested to. Name and Title (Corporations or Partnerships) Name and Title (Corporate Trustee only) PROTOTYPE TARGET BENEFIT PLAN AND TRUST The Employer named in Section I.A. below hereby establishes or restates a Target Benefit Plan ("Plan") and Trust, consisting of such sums as shall be paid to the Trustee(s) under the Plan, the investments thereof and earnings thereon. The terms of the Plan and Trust are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Trust Agreement, both as amended from time to time, which are hereby adopted and incorporated herein by reference. B. The Employer is a ( ) corporation; ( ) S Corporation; ( ) partnership; ( ) Sole Proprietor; ( ) Other: [....] C. Employer's Tax ID Number: [....] D. Employer's fiscal year: [....] F. If this is a new Plan, the Effective Date of the Plan is: If this is an amendment and restatement of an existing Plan, enter the original Effective Date [....]. The effective date of this amended Plan is [....]. G. The Trustee shall be: ( ) The Dreyfus Trust Company ( ) Other: (Name) [....] I. Plan Year shall mean the 12-consecutive-month period commencing on ______ /________and ending on ______/_______. J.Service with the following predecessor employer(s) shall be credited for purposes of vesting and eligibility: [....] Note: Such Service must be provided if the adopting Employer maintains the plan of the predecessor employer. K. The following employer(s) aggregated with the Employer under Section 414(b), (c), (m) or (o) of the Internal Revenue Code ("Code") shall be Participating Employers in the Plan: [....] L. Are all employers associated with the Employer under Section 414(b), (c), (m) or (o) of the Code participating in the Plan? ( ) Yes ( ) No Hours of Service under the Plan will be determined for all Employees on the basis of the method selected below: ( ) On the basis of actual hours for which an Employee is paid or entitled to payment. ( ) On the basis of days worked. An Employee will be credited with ten (10) Hours of Service for any day such Employee would be credited with at least one (1) Hour of Service during the day under the Plan. ( ) On the basis of weeks worked. An Employee will be credited with forty-five (45) Hours of Service for any week such Employee would be credited with at least one (1) Hour of Service during the week under the Plan. ( ) On the basis of semi-monthly payroll periods. An Employee will be credited with ninety-five (95) Hours of Service for any semi-monthly payroll period such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of months worked. An Employee will be credited with one hundred ninety (190) Hours of Service for any month such Employee would be credited with at least one (1) Hour of Service under the Plan. ( ) On the basis of elapsed time. All Employees shall be Eligible Employees, except: ( ) Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining and if two percent or less of the Employees of the Employer who are covered pursuant to that agreement are professionals as defined in Section 1.410(b)-9 of the Income Tax Regulations. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. ( ) Employees who are nonresident aliens and who receive no earned income from the Employer which constitutes income from sources within the United States. Note: The term Employee includes all Employees of the Employer and any employer required to be aggregated with the Employer under Section 414(b), (c), (m) or (o) of the Code, and individuals considered employees of any such employer under Section 414(n) or (o) of the Code. If the Employer adopts Sponsor's paired defined contribution plan number 01001, 01003, 01005 or 01006 or paired defined benefit plan number 02001 in addition to this Plan, the definition of "Eligible Employee" in all paired plans of the Employer must be identical in order for the Employer to be able to designate in Section XV one of the paired plans to provide the required minimum allocation to each Non-Key Employee in the event the Plan becomes Top-Heavy. If the definition of "Eligible Employee" in all paired plans of the Employer is not identical, Section 13.1 through 13.4 shall apply in the event the Plan becomes Top-Heavy. IV. AGE AND SERVICE REQUIREMENTS Each Eligible Employee shall become a Participant on the Entry Date coincident with or following completion of the following age and service requirements: ( ) No age or service requirement. ( ) The attainment of age [....] (not to exceed age 21). ( ) The completion of [....] (not to exceed 1, unless 100% immediate vesting is elected, in which case, may not exceed 2) Eligibility Years of Service. [Note: If more than 1 Eligibility Year of Service is required, Participants must be 100% immediately vested. If the Eligibility Years of Service is or includes a fractional year, an Employee may not be required to complete any specified number of Hours of Service to receive credit for such fractional year. The Entry Date shall mean: ( ) Annual Entry. The first day of the Plan Year. Note: If Annual Entry is selected, the age and service requirements cannot exceed 20 1/2 and 1/2 Eligibility Year of Service. (1 1/2 Eligibility Years of Service for Employer Discretionary Contributions if 100% immediate ( ) Dual Entry. The first day of the Plan Year and the first day of the seventh month of the Plan Year. ( ) Quarterly Entry. The first day of the Plan Year and the first day of the fourth, seventh and tenth months of the Plan Year. ( ) Monthly Entry. The first day of the Plan Year and the first day of each following month of the Plan Year. Compensation shall mean all of each Participant's: ( ) Information required to be reported under Sections 6041, 6051,and 6052 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in Section 3401(a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under Section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of Section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in Section 408(k), or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid to the Participant during ( ) the Plan Year. ( ) the calendar year ending with or within the Plan Year. ( ) Compensation shall be reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits. Compensation ( ) shall; ( ) shall not include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not includible in the gross income of the Employee by reason of Sections 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. Limitation Year shall mean the 12-consecutive-month period: ( ) Identical to the Plan Year. ( ) Identical to the Employer's fiscal year ending with or within the Plan Year of reference. ( ) As fixed by a resolution of the Board of Directors of the Employer, or the Employer if no Board of Directors exists. Normal Retirement Age shall mean: ( ) Age [....] (not to exceed 65). ( ) The later of: ( ) (i) age [....] (not to exceed 65), or ( ) (ii)the [....] (not to exceed 5th) anniversary of the participation commencement date. If, for Plan Years beginning before January 1, 1988, normal retirement age was determined with reference to the anniversary of the participation commencement date (more than 5 but not to exceed 10 years), the anniversary date for Participants who first commenced participation under the Plan before the first Plan Year beginning on or after January 1, 1988, shall be the earlier of (A) the tenth anniversary of the date the Participant commenced participation in the plan (or such anniversary as had been elected by the Employer, if less than 10) or (B) the fifth anniversary of the first Plan Year beginning on or after January 1, 1988. The participation commencement date is the first day of the first Plan Year in which the Participant commenced participation in the Plan. Early Retirement Age shall mean: ( ) There shall be no early retirement provision in this Plan. ( ) Age [....] and [....] Years of Service. For each Plan Year the Employer will contribute for each Participant who either completes more than 500 Hours of Service (if the Plan utilizes the elapsed time method in lieu of counting Hours of Service, the completion of either 91 consecutive calendar days or 3 consecutive calendar months may be substituted for 500 Hours of Service) during the Plan Year or is employed on the last day of the Plan Year the annual Employer contribution calculated below. The annual Employer contribution necessary to fund the Stated Benefit with respect to a Participant will be determined each year as follows: Step 1: If the Participant has not yet reached Normal Retirement Age, calculate the present value of the Stated Benefit by multiplying the Stated Benefit by the factor that is the product of: i) the applicable factor in Table I (if attained (current) age is less than 65) or Table IA (if attained age is greater than or equal to 65), multiplied by (ii) the applicable factor in Table III. If the Participant is at or beyond Normal Retirement Age, calculate the present value of the Stated Benefit by multiplying the Stated Benefit by the factor in Table IV corresponding to that Normal Retirement Age. Step 2: Calculate the excess, if any, of the amount determined in Step 1 over the Theoretical Reserve (see below). Step 3: Amortize the result in Step 2 by multiplying it by the applicable factor from Table II. For the Plan Year in which the Participant attains Normal Retirement Age and for any subsequent Plan Year, the applicable fact is 1.0. For purposes of this Section, the Theoretical Reserve is determined according to (i) and (ii) below: (i) Initial Theoretical Reserve. A Participant's Theoretical Reserve as of the last day of the Participant's first year of projected participation (year 1) is zero. However, if this Plan is a prior safe harbor plan with a stated benefit formula that takes into account Plan Years prior to the first Plan Year this Plan satisfies the safe harbor in Regulations Section 1.401(a)(4)-8(b)(3)(C), the initial Theoretical Reserve is determined as follows: (A) Calculate as of the last day of the Plan Year immediately preceding year 1 the present value of the Stated Benefit, using the actuarial assumptions, the provisions of the Plan, and the Participant's Compensation as of such date. For a Participant who is beyond Normal Retirement Age during year 1, the Stated Benefit will be determined using the actuarial assumptions, the provisions of the Plan, and the Participant's Compensation as of such date, except that the straight life annuity factor used in that determination will be the factor applicable for the Participant's Normal Retirement Age. (B) Calculate as of the last day of the Plan Year immediately preceding year 1 the present value of future Employer contributions, i.e., the contributions due each Plan Year using the actuarial assumptions, the provisions of the Plan (disregarding those provisions of the Plan providing for the limitations of Section 415 of the Code or the minimum contributions under Section 416 of the Code), and the Participant's Compensation as of such date, beginning with year 1 through the end of the Plan Year in which the Participant attains Normal Retirement Age. (C) Subtract the amount determined in (B) from the amount determined in (A). (ii)Accumulate the initial Theoretical Reserve determined in (i) and the Employer contribution (as limited by Section 415 of the Code, but without regard to any required minimum contributions under Section 416 for each Plan Year beginning in year 1 up through the last day of the current Plan Year (excluding contributions(s) (if any) for the current Plan Year) using the Plan's interest assumption in effect for each such year. In any Plan Year following the Plan Year in which the Participant attains Normal Retirement Age, the accumulation is calculated assuming an interest rate of 0%. For purposes of determining the level of annual Employer contribution necessary to fund the Stated Benefit, the calculations in (i) and (ii) above will be made as of the last day of each Plan Year, on the basis of the Participant's age on the Participant's last birthday, using the interest rate in effect on the last day of the prior Plan Year. For purposes of determining the annual Employer contribution necessary to fund the Stated Benefit, the interest rate will be: TABLE I: Present value factors (See * below) Number of years Interest Rate to age 65* 7.50% 8.00% 8.50% * If a Participant's attained age is at or above 65 but still below the Participant's Normal Retirement Age, use Table IA. Note: These factors are based on the UP-1984 Mortality Table. TABLE IA: Present value factors for Participants below Normal Retirement Age (to be used only when attained age is greater than, Number of years Interest Rate from age 65 to ______________ attained age 7.50% 8.00% 8.50% Note: These factors are based on the UP-1984 Mortality Table. from attained age Interest Rate Retirement Age 7.50% 8.00% 8.50% TABLE III: Factors to be multiplied by those in Table I. Note: These factors are based on the UP-1984 Mortality Table. TABLE IV: Factors for Participants who are at or beyond Normal Retirement Age. Note: These factors are based on the UP-1984 Mortality Table. Each Participant's Stated Benefit is equal to _____% of Average Annual Compensation (reduced pro rate for the Participant's years of projected participation less that 25) payable annually as a straight life annuity beginning at Normal Retirement Age. Each Participant's Stated Benefit is equal to _____% of Average Annual Compensation multiplied by the Participant's years of projected participating up to a maximum of ______ (no less than 25), payable annually as a straight life annuity beginning at Normal Retirement Age. The first day of the first Plan Year taken into account under this Stated Benefit formula will be ________. Each Participant's Stated Benefit will be payable annually as a straight life annuity beginning at Normal Retirement Age, in an amount equal to _____percent of Average Annual Compensation (R1) per year for the first _____years of the Participant's years of projected participation (y) and ____percent (R2) of Average Annual Compensation per year for the next _____years of the Participant's years of projected participation (such that the total years of projected participation taken into account under R1 and R2 is not less than 33). If y is less that 33, R2 will be not less than: (R1) - (25 - y) (but in no case less than 0), and not greater than: (R1) (44 - y). For purposes of determining a Participant's Stated Benefit, a Participant's years of projected participation under the Plan is the sum of (1) and (2), where (1) is the number of years during which the Participant benefited under this Plan beginning with the latest of: (a) the first Plan Year in which the Participant benefited under the Plan, (b) the first Plan Year taken into account in the Stated Benefit formula, and (c) any Plan Year immediately following a Plan Year in which the Plan did not satisfy the safe harbor for target benefit plans in Regulations Section 1.401(a)(4)-8(b)(3), and ending with the last day of the current Plan Year, and (2) is the number of years, if any, subsequent to the current Plan Year through the end of the Plan Year in which the Participant attains Normal Retirement Age. For purposes of this definition of Years of Projected Participation, if this Plan is a prior safe harbor plan, the Plan is deemed to satisfy the safe harbor for target benefit plans in Regulations Section 1.401(a)(4)-8(b)(3) and a Participant is treated as benefiting under the Plan in any Plan Year beginning prior to January 1, 1994. A prior safe harbor plan is a plan that (1) was adopted and in effect on September 19, 1991, (2) which on that date contained a stated benefit formula that took into account service prior to that date, and (3) satisfied the applicable nondiscrimination requirements for target benefit plans for those prior years. For purposes of determining whether a plan satisfies the applicable nondiscrimination requirements for target benefit plans for Plan Years beginning before January 1, 1994, no amendments after September 19, 1991, other than amendments necessary to satisfy Section 401(l) of the Code, will be taken into account. For purposes of this Section, Average Annual Compensation means the average of a Participant's annual Compensation, as defined in Article VI of the Plan, over the three (3) consecutive plan year period ending in the current year or in any prior year that produces the highest average. If the Participant has less than three (3) years of participation in this Plan, Compensation is averaged over the Participant's total period of participation. Subject to the overall permitted disparity limit below, each Participant's Stated Benefit under the Plan is a straight life annuity commencing at Normal Retirement Age in an amount: Equal to the sum of (a) and (b) below: (a) ______% (base benefit percentage) times Average Annual Compensation up to the Integration Level for the Plan Year times the Participant's years of projected participation plus a benefit equal to ____% (excess benefit percentage, not to exceed the base benefit percentage by more than the Maximum Excess Allowance) times Average Annual Compensation in excess of the Integration Level for the Plan Year times the Participant's years of projected participation. The maximum number of years of projected participation taken into account under this paragraph (a) will be __________(may not be less than 25 and may not exceed 35). However, the number of years of projected participation taken into account in the preceding sentence for any Participant may not exceed the Participant's Cumulative Permitted Disparity Limit. The Participant's Cumulative Permitted Disparity Limit is equal to 35 minus: (1) the number of years the Participant benefited under this Plan prior to the Participant's first year of projected participation, and (2) the number of years credited to the Participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the Employer) other than years counted in (1) above or counted toward a Participant's years of projected participation). For purposes of determining the Participant's Cumulative Permitted Disparity Limit, all Plan Years ending in the same calendar year are treated as the same year. (b) ____% (not to exceed the excess benefit percentage) times Average Annual Compensation for each year of projected participation after the period taken into account under paragraph (a). (If the number of years of projected participation taken into account under paragraph (a) is less than 35 (as modified by the Participant's Cumulative Permitted Disparity Limit), then for each year of projected participation after the period taken into account under paragraph (a) up to and including the 35th year of participation (as modified by the Participant's Cumulative Permitted Disparity Limit), this percentage will be equal to the excess benefit percentage.) The maximum number of years of projected participation taken into account under this paragraph will be The Maximum Excess Allowance is equal to the lesser of: (1) the base benefit percentage, or (2) the applicable factor determined from Tables I or II in Section B below. Overall permitted disparity limit: Notwithstanding paragraphs (a) and (b) above, for any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the Stated Benefit for all Participants under this Plan will be equal to the excess benefit percentage above times the Participant's total Average Annual Compensation times the Participant's years of projected participation under the Plan up to the maximum years of projected participation taken into account in paragraphs (a) and (b). Equal to ___% times Average Annual Compensation up to the Integration Level for the Plan Year (base benefit percentage) plus a benefit equal to ____% (excess benefit percentage) (not to exceed the base benefit percentage by more than the Maximum Excess Allowance) times Average Annual Compensation in excess of the Integration Level for the Plan Year. The Maximum Excess Allowance is equal to the lesser of: (1) the base benefit percentage, or (2) 35 times the applicable factor determined from Tables I or II in Section B below. For a Participant with less than 35 years of projected participation, the base benefit percentage and the excess benefit percentage will be reduced by being multiplied by a fraction, the numerator of which is the Participant's years of projected participation, and the denominator of which is 35. Cumulative permitted disparity reduction: If the number of the Participant's cumulative permitted disparity years exceeds 35, the excess benefit percentage will be reduced as provided below. A Participant's cumulative permitted disparity years consists of the sum of: (1) the Participant's years of projected Participation (up to 35), (2) the number of years the Participant benefited or is treated as having benefited under this Plan prior to the Participant's first year of projected participation, to the Participant's first year of projected participation, and (3) the number of years credited to the Participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the employer (other than years counted in (1) or (2) above.) For purposes of determining the Participant's Cumulative Permitted Disparity Limit, all Plan Years ending in the same calendar year are treated as the same year. If the cumulative permitted disparity reduction is applicable, the excess benefit percentage will be reduced as follows: (A) Subtract the Participant's base benefit percentage from the participant's excess benefit percentage, (after modification in accordance with the paragraph preceding this cumulative permitted disparity reduction). (B) Multiply the result determined in (A) by a fraction (not less than 0), the numerator of which is 35 minus the sum of the years in (2) and (3) above, and the denominator of which is 35. (C) The Participant's excess benefit percentage is equal to the sum of the result in (B) and the Participant's base benefit percentage, as otherwise modified. Overall permitted disparity limit: Notwithstanding the above, for any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension plan maintained by the Employer that provides for permitted disparity, (or imputes permitted disparity), the Stated Benefit for all Participants under this Plan will be equal to the excess benefit percentage entered into the benefit formula above multiplied by the Participant's total Average Annual Compensation under the Plan (prorated for years of projected participation less than 35). Equal to the sum of (a) and (b) below: (a) ____% (gross benefit percentage) times Average Annual Compensation for the Plan Year times the Participant's years of projected participation offset by ______% (not to exceed the Maximum Offset Allowance) times Final Average Compensation up to the Offset Level times the Participant's total years of projected participation. The maximum number of years of projected participation taken into account under this paragraph will be ______(may not be less than 25 and may not exceed 35). However, the number of years of projected participation taken into account in the preceding sentence for any Participant may not exceed the Participant's Cumulative Permitted Disparity Limit. The Participant's Cumulative Permitted Disparity Limit is equal to 35 minus: (1) the number of years the Participant benefited under this Plan prior to the Participant's first year of projected participation, and (2) the number of years credited to the Participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the Employer (other than years counted in (1) above or counted toward a Participant's years of projected participation). For purposes of determining the Participant's Cumulative Permitted Disparity Limit, all Plan Years ending in the same calendar year are treated as the same year. (b) ___% (not to exceed the gross benefit percentage) times Average Annual Compensation for each year of projected participation after the period set forth in paragraph (a). (If the number of years of projected participation set forth in paragraph (a) is less than 35 (as modified by the Participant's Cumulative Permitted Disparity Limit), then for each year of projected participation after the period set forth under paragraph (a) up to and including the 35th year of projected participation (as modified by the Participant's Cumulative Permitted Disparity Limit), this percentage will be equal to the gross benefit percentage.) The maximum number of years of projected participation taken into account under this paragraph will be ______. The maximum offset allowance will not exceed the lesser of: (1) the applicable factor from Tables I or II below, and (2) one-half of the gross benefit percentage, multiplied by a fraction (not to exceed one), the numerator of which is the Participant's Average Annual Compensation, and the denominator of which is the Participant's Final Average Compensation up to the Offset Level. Overall permitted disparity limit: Notwithstanding the preceding paragraphs (a) and (b), for any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension plan maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the Stated Benefit for all Participants under this Plan will be equal to the gross benefit percentage above (without regard to the offset) times the Participant's total Average Annual Compensation times the Participant's years of projected participation under the Plan up to the maximum of years of projected participation taken into account in paragraphs (a) and (b). Equal to ____% times Average Annual Compensation offset by _____% (not to exceed the Maximum Offset Allowance) times Final Average Compensation up to the Offset Level. The Maximum Offset Allowance will not exceed the lesser of: (1) the applicable factor from Tables I or II, multiplied by 35, and (2) one- half of the gross benefit percentage, multiplied by a fraction (not to exceed one), the numerator of which is the Participant's Average Annual Compensation, and the denominator of which is the Participant's Final Average Compensation up to the Offset Level. For a Participant with less that 35 years of projected participation, both the gross benefit percentage and the offset percentage will be reduced by being multiplied by a fraction, the numerator of which is the number of the Participant's years of projected participation, and the denominator of which is 35. Cumulative permitted disparity reduction: If the number of the Participant's cumulative permitted disparity years exceeds 35, the gross benefit percentage and the offset will be further reduced as provided below. A Participant's cumulative permitted disparity years consist of the sum of: (1) the Participant's years of projected participation (up to 35), (2) the number of years the Participant benefited or is treated as having benefited under this Plan prior to the Participant's first year of projected participation, to the Participant's first year of projected participation, and (3) the number of years credited to the Participant for allocation or accrual purposes under one or more qualified plans or simplified employee pension plans (whether or not terminated) ever maintained by the Employer (other than years counted in (1) or (2) above. For purposes of determining the Participant's Cumulative Permitted Disparity Limit, all Plan Years ending in the same calendar year are treated as the same year. If the cumulative permitted disparity reduction is applicable, the gross benefit percentage and the offset will be reduced as follows: (A) The offset will be reduced by multiplying it by a fraction (not less than 0), the numerator of which is 35 minus the sum of the years in (2) and (3) above, and the denominator of which is 35. (B) The gross benefit percentage will be reduced by the number of percentage points by which the offset was reduced in (A) above. Overall permitted disparity limit: Notwithstanding the above, for any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension plan maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the Stated Benefit for all Participants under this Plan will be equal to the gross benefit percentage entered in the benefit formula above (without regard to the offset) multiplied by the Participant's total Average Annual Compensation under the Plan (prorated for years of projected participation less than 35). The applicable factor is the factor derived from the applicable table(s) below based on the Normal Retirement Age under the Plan. If the Employer elects as an Integration Level (or Offset Level) option 4 or option 5 below, Table II will apply. Otherwise, Table I will apply. Normal Retirement Age TABLE I TABLE II The Integration Level (or Offset Level) for each Plan Year for each Participant will be an amount equal to: (1) ( ) such Participant's Covered Compensation for the Plan Year. (2) ( ) the greater of $10,000 or one-half of the Covered Compensation of any individual who attains social security retirement age during the calendar year in which the Plan Year begins. (3) ( ) $_____(a single dollar amount not to exceed the greater of $10,000 or one-half of Covered Compensation of any individual who attains social security retirement age during the calendar year in which the Plan Year begins). (4) ( ) $ _____(a single dollar amount that exceeds the greater of $10,000 or one-half of Covered Compensation of any individual who attains social security retirement age during the calendar year in which the Plan Year begins, but not to exceed the greater of $25,450 or 150% of the Covered Compensation of an individual attaining social security retirement age in the current Plan Year). (5) ( ) a uniform percentage equal to ____% (greater than 100 percent but not greater than 150 percent of each Participant's Covered Compensation for the current year, and in no event in excess of the Taxable Wage Base). 1. A Participant's years of projected participation under the Plan is the sum of (1) and (2), where (1) is the number of years during which the Participant benefited under this Plan beginning with the latest of: (a) the first Plan Year in which the Participant benefited under the Plan, (b) the first Plan Year taken into account in the stated benefit formula, and (c) any Plan Year immediately following a Plan Year in which the Plan did not satisfy the safe harbor for target benefit plans in Regulations Section 1.401(a)(4)-8(b)(3), and ending with the last day of the current Plan Year and (2) is the number of years if, any, subsequent to the current Plan Year through the end of the Plan Year in which the Participant attains Normal Retirement Age. For purposes of this definition of years of projected participation, if this Plan is a prior safe harbor plan the Plan is deemed to satisfy the safe harbor for target benefit plans in Regulation Section 1.401(a)(4)-8(b)(3) and a Participant is treated as benefiting under the Plan in any Plan Year beginning prior to January 1, 1994. A prior safe harbor plan is a plan that (1) was adopted and in effect on September 19, 1991, (2) which on that date contained a stated benefit formula that took into account service prior to that date and (3) satisfied the applicable nondiscrimination requirements for target benefit plans for those prior years. For purposes of determining whether a plan satisfies the applicable nondiscrimination requirements for target benefit plans for Plan Years beginning before January 1, 1994, no amendments after September 19,1991, other than amendments necessary to satisfy Section 401(l) of the Code, will be taken into account. 2. Average Annual Compensation. Average Annual Compensation is the average of a Participant's annual Compensation as defined in Section VI of the Plan, over the three-consecutive Plan Year period ending in either the current year or any prior year that produces the highest average. If the Participant has less than three years of participation in this Plan, Compensation is averaged over the Participant's total period of participation. 3. Covered Compensation. A Participant's Covered Compensation for a Plan Year is the average (without indexing) of the Taxable Wage Bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the Participant attains (or will attain) social security retirement age. In determining a Participant's Covered Compensation for a Plan Year, the Taxable Wage Base in effect for the current Plan Year and any subsequent Plan Year will be assumed to be the same as the Taxable Wage Base in effect as of the beginning of the Plan Year for which the determination is being made. Covered Compensation will be determined based on the year designated by the Employer in the last paragraph of X.C.5. of the Adoption Agreement below. A Participant's Covered Compensation for a Plan Year before the 35-year period ending with the last day of the calendar year in which the Participant attains social security retirement age is the Taxable Wage Base in effect as of the beginning of the Plan Year. A Participant's Covered Compensation for a Plan Year after such 35-year period is the Participant's Covered Compensation for the Plan Year during which the 35-year period ends. 4. Taxable Wage Base. Taxable Wage Base is the contribution and benefit base in effect under Section 230 of the Social Security Act at the beginning of the Plan Year. 5. Final Average Compensation. (Offset plans only) A Participant's Final Average Compensation is the average of the Participant's annual Compensation, as defined in Section VI above, from the Employer for the three-consecutive year period ending with or within the Plan Year. If a Participant's entire period of employment with the Employer is less than three consecutive years, Compensation is averaged on an annual basis over the Participant's entire period of employment. Compensation for any year in excess of the Taxable Wage Base in effect at the beginning of such year will not be taken into account. Covered compensation will be determined based on the following year: ( ) _________year (may be the Covered Compensation for a Plan Year earlier than the current Plan Year, provided the earlier Plan Year is the same for all Participants and is not earlier that the later of (A) the Plan Year that begins 5 years before the current Plan Year, and (B) the Plan Year beginning in 1989. If the Plan Year entered is more than five years prior to the current Plan Year, the Participant's Covered Compensation will be that determined under the Covered Compensation table for the Plan Year five years prior to the current Plan Year). Forfeitures of Employer Contributions, if any, shall be used to reduce future Employer Contributions. XI. VESTING SERVICE - EXCLUSIONS All of an Employee's years of Service with the Employer shall be counted to determine the vested interest of such Employee except: ( ) Years of Service before age 18. ( ) Years of Service before the Employer maintained this Plan or a predecessor plan. ( ) Years of Service before the effective date of ERISA if such Service would have been disregarded under the Service Break rules of the prior plan in effect from time to time before such date. For this purpose, Service Break rules are rules which result in the loss of prior vesting or benefit accruals, or deny an Employee's eligibility to participate by reason of separation or failure to complete a required period of Service within a specified period of time. The vested interest of each Employee (who has an Hour of Service on or after January 1, 1989) in his Employer-derived account balance shall be determined on the basis of the following schedule: ( ) 100% immediately vested. [Note: Mandatory if more than 1 Eligibility Year of Service is required.] ( ) 100% immediately vested after [....] (not to exceed 5) years of Service. ( ) [....]% (not less than 20%) vested for each year of Service, beginning with the [....] (not more than the 3rd) year of Service until 100% vested. ( ) The Top Heavy Minimum Vesting Schedule selected in B., below. ( ) Other: [....] (Note: Must be at least as favorable as any one of the above 4 options). B. Top Heavy Minimum Vesting Schedules. One of the following schedules will be used for years when the Plan is or is deemed to be Top-Heavy. ( ) 100% immediately vested after [....] (not to exceed 3) years of Service. ( ) 20% vested after 2 years of Service, plus [....]% vested (not less than 20%) for each additional year of Service until 100% vested. ( ) Other: [....] (Note: Must be at least as favorable as any one of the above two options. If the vesting schedule under the Plan shifts in or out of the Minimum Schedule above for any Plan Year because of the Plan's Top-Heavy status, such shift is an amendment to the vesting schedule and the election in Section 7.3 of the Plan applies. Life insurance ( ) shall; ( ) shall not be permitted. Loans ( ) shall; ( ) shall not be permitted. ( ) The provisions of Article XIII of the Plan shall always apply. ( ) The provisions of Article XIII of the Plan shall only apply in Plan Years after 1983, during which the Plan is or becomes Top-Heavy. If the Employer has adopted Sponsor's paired defined contribution plan number 01001, 01003, 01005 or 01006 in addition to this Plan and the definition of "Eligible Employee" in all paired plans is identical, then the minimum allocation required by Section 13.3 will be provided ( ) under this Plan; ( ) under such other paired defined contribution plan. If the Employer has adopted Sponsor's paired defined benefit plan number 02001, then Participants in this Plan (and another paired defined contribution plan, if any) shall receive the Top Heavy minimum benefit contribution under the paired defined benefit plan and shall receive no minimum allocation. If a Participant in this Plan who is a Non-Key Employee is covered under another qualified plan maintained by the Employer, other than a paired plan of the Sponsor, the minimum Top Heavy allocation or benefit required under Section 416 of the Code shall be provided to such Non-Key Employee under: ( ) the Employer's other qualified defined contribution plan. ( ) the Employer's qualified defined benefit plan. C. Determination of Present Value If the Employer maintains a defined benefit plan in addition to this Plan, and such plan fails to specify the interest rate and mortality table to be used for purposes of establishing present value to compute the Top-Heavy Ratio, then the following assumptions shall be used: Interest Rate [....]% Mortality Table [....]% If the Employer maintains or has ever maintained another qualified plan (other than the Sponsor's paired defined contribution plan number 01001, 01003, 01005, 01006 or the Sponsor's paired defined benefit plan number 02001), in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant, the Employer must complete this Section. The Employer must also complete this Section if it maintains a welfare benefit fund, as defined in Section 419(e) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code, under which amounts are treated as Annual Additions with respect to any Participant in the Plan. (If the Employer maintains only paired plans of the Sponsor this Section should not be completed.) (A) If a Participant is covered under another qualified defined contribution plan maintained by the Employer, other than a Master or Prototype Plan, Annual Additions for any Limitation Year shall be limited to comply with Section 415(c) of the Code: ( ) in accordance with Sections 6.4(e) - (j) as though the other plan were a Master or Prototype Plan. ( ) by freezing or reducing Annual Additions in the other qualified defined contribution plan. (B) If a Participant is or has ever been a participant in a qualified defined benefit plan maintained by the Employer, the "1.0" aggregate limitation of Section 415(e) of the Code shall be satisfied by: ( ) freezing or reducing the rate of benefit accrual under the qualified defined benefit plan. ( ) freezing or reducing the Annual Additions under this Plan (or, if the Employer maintains more than one qualified defined contribution plan, as indicated in (A) above). Participants ( ) shall; ( ) shall not be permitted to direct the investment of their Accounts in the investment options selected by the Employer or the Committee. The Employer hereby represents that: A. It is aware of, and agrees to be bound by, the terms of the Plan. B. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the Plan and has consulted legal and tax counsel to the extent necessary. C. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. XIX. RELIANCE ON PLAN QUALIFICATION An Employer who has ever maintained or who later adopts any plan (including, after December 31, 1985, a welfare benefit fund, as defined in Section 419(e) of the Code, which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as defined in Section 419A(d)(3) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code) in addition to this Plan (other than the Sponsor's paired defined contribution plan number 01001, 01003, 01005, 01006 or the Sponsor's paired defined benefit plan number 02001), may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Internal Revenue Code. If an Employer who adopts or maintains multiple plans wishes to obtain reliance that his or her plans are qualified, application for a determination letter should be made to the appropriate key district office of the Internal Revenue Service. The Employer may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Code unless the terms of the Plan, as herein adopted or amended, that pertain to the requirements of Sections 401(a)(4), 401(a)(17), 401(l), 401(a)(5), 410(b) and 414(s) of the Code, as amended by the Tax Reform Act of 1986, or later laws, (a) are made effective retroactively to the first day of the first Plan Year beginning after December 31, 1988 (or such later date on which these requirements first become effective with respect to this Plan); or (b) are made effective no later than the first day on which the Employer is no longer entitled, under regulations, to rely on a reasonable, good faith interpretation of these requirements, and the prior provisions of the Plan constitute such an interpretation. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Trust Agreement both as amended from time to time. In the event the Sponsor amends the Basic Plan Document or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, The Dreyfus Corporation is available to answer questions regarding the intended meaning of any Plan provisions, adoption of the Plan and the effect of an Opinion Letter, at 666 Old Country Road, Garden City, New York 11530 [(516) 296-3418]. IN WITNESS WHEREOF, the Employer and the Trustee have executed this instrument the ______day of ______, 19__. If applicable, the appropriate corporate seal has been affixed and attested to. Name and Title (Corporations or Partnerships) Name and Title (Corporate Trustee only) The Employer named in section I.A. below hereby establishes or restates a Money Purchase Plan ("Plan") and Custodial Account appointing The Dreyfus Trust Company as the custodian ("Custodian") under the related custodial agreement ("Custodial Agreement"). The Custodial Account shall consist of such sums as shall be paid to the Custodian, the investments thereof and earnings thereon. The terms of the Plan are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Custodial Agreement, both as amended from time to time, which are hereby adopted and incorporated herein by reference. B. The Employer is a ( ) partnership; ( ) sole proprietor. C. If this is a new Plan, the Effective Date of the Plan is: [....] D. If this is an amendment and restatement of an existing Plan, enter name of Plan [....] and date adopted [....]. The effective date of the amended Plan is: [....] Each Eligible Employee will be eligible to participate in this Plan, except the following: ( ) Employees who have not attained the age of [....] (not to exceed age 21). ( ) Employees who have not completed [....] Eligibility Years of Service. (May not exceed 2 years). NOTE: The term Employee includes all employees of the Employer and any employer required to be aggregated with the Employer under Section 414(b), (c), (m) or (o) of the Internal Revenue Code ("Code"), and individuals considered employees of any such employer under Section 414(n) or (o) of the Code. If the Employer adopts Sponsor's paired defined contribution plan number 01003, 01004 or 01006 or paired defined benefit plan number 02001 in addition to this Plan, the definition of "Eligible Employee" in all paired plans of the Employer must be identical in order for the Employer to be able to designate in Section VI one of the paired plans to provide the required minimum allocation to each Non-Key Employee in the event the Plan becomes Top-Heavy. If the definition of "Eligible Employee" in all paired plans of the Employer is not identical, Section 13.1 through 13.4 shall apply in the event the Plan becomes Top-Heavy. Normal Retirement Age shall mean age 59 1/2. The Plan shall not be integrated with Social Security and the Employer's contribution will be [....]% (not to exceed 25% of the aggregate Compensation of Active Participants for the Plan Year). Vesting shall be full and immediate. The Top-Heavy provisions of Article XIII shall always apply. If the Employer has adopted Sponsor's paired defined contribution plan number 01003, 01004, or 01006 in addition to this Plan and the definition of "Eligible Employee" in all paired plans is identical, then the minimum allocation required by Section 13.3 will be provided ( ) under this Plan; ( ) under such other paired defined contribution plan. If the Employer has adopted Sponsor's paired defined benefit plan number 02001, then Participants in this Plan (or another paired defined contribution plan) who are covered under the paired defined benefit plan shall receive the minimum top heavy benefit under the paired defined benefit plan and shall receive no minimum allocation. If a Participant in this Plan who is a Non-key Employee is covered under another qualified plan maintained by the Employer, other than a paired plan of the Sponsor, the minimum top heavy allocation or benefit required under Section 416 of the Code shall be provided to such Non-Key Employee under: ( ) the Employer's other qualified defined contribution plan. ( ) the Employer's qualified defined benefit plan. C. Determination of Present Value If the Employer maintains a defined benefit plan in addition to this Plan and such plan fails to specify the interest rate and mortality table to be used for purposes of establishing present value to compute the Top-Heavy Ratio, then the following assumptions shall be used: Interest Rate [....]% Mortality Table [....]% If the Employer maintains or has ever maintained another qualified plan (other than the Sponsor's paired defined contribution plan numbers 01003, 01004, 01006, or the Sponsor's paired defined benefit plan number 02001), in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant, the following provision(s) must apply. The Employer must also complete this Section if it maintains a welfare benefit fund, as defined in Section 419(e) of the Code, or an individual medical account, as defined in Section 415(l)(2) of the Code, under which amounts are treated as Annual Additions with respect to any Participant in the Plan. (a) If the Participant is covered under another qualified defined contribution plan maintained by the Employer other than a Master or Prototype Plan, Annual Additions for any Limitation Year shall be limited to comply with Section 415(c) of the Code: ( ) in accordance with Sections 6.4(e) - (j) as though the other plan were a Master or Prototype Plan. ( ) by freezing or reducing Annual Additions in the other qualified defined contribution plan. (b) If a Participant is or has ever been a participant in a qualified defined benefit plan maintained by the Employer, the "1.0" aggregate limitation of Section 415(e) of the Code shall be satisfied by: ( ) freezing or reducing the rate of benefit accrual under the qualified defined benefit plan. ( ) freezing or reducing the Annual Additions under this Plan (or, if the Employer maintains more than one qualified defined contribution plan, as indicated in (a) above). In accordance with the provisions of the Custodial Agreement, the Employer hereby directs the Custodian to invest the assets of the Fund as indicated per the attached Participant's Plans Detail form. The Employer hereby represents that: a. It is aware of, and agrees to be bound by, the terms of the Plan. b. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the Plan and has consulted legal and tax counsel to the extent necessary. c. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. X. RELIANCE ON PLAN QUALIFICATION An Employer who has ever maintained or who later adopts any plan (including, after December 31, 1985, a welfare benefit fund, as defined in Section 419 (e) of the Code, which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as defined in Section 419A(d)(3), or an individual medical account, as defined in Section 415(l)(2) of the Code) in addition to this Plan (other than the Sponsor's paired defined contribution plan number 01003, 01004, or 01006 or the Sponsor's paired defined benefit plan number 02001), may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Internal Revenue Code. If the Employer who adopts or maintains multiple plans wishes to obtain reliance that his or her plan(s) are qualified, application for a determination letter should be made to the appropriate Key District Director of Internal Revenue. The Employer may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Code unless the terms of the Plan, as herein adopted or amended, that pertain to the requirements of Sections 401(a)(4), 401(a)(17), 401(l), 401(a)(5), 410(b) and 414(s) of the Code, as amended by the Tax Reform Act of 1986, or later laws, (a) are made effective retroactively to the first day of the first Plan Year beginning after December 31, 1988 (or such later date on which these requirements first become effective with respect to this Plan); or (b) are made effective no later than the first day on which the Employer is no longer entitled, under regulations, to rely on a reasonable, good faith interpretation of these requirements, and the prior provisions of the Plan constitute such an interpretation. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Custodial Agreement both as amended from time to time. In the event the Sponsor amends the Basic Plan Document or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, The Dreyfus Corporation is available to answer questions regarding the intended meaning of any Plan provisions, adoption of the Plan and the effect of an Opinion Letter, at 144 Glenn urtiss Boulevard, Uniondale, New York 11556 [(516) 338-3418]. By signing the Application you acknowledge that you have received and read the Fund(s) current prospectus(es), the Dreyfus Easy Standardized/Paired Retirement Plan and the attached Custodial Agreement. You accept the terms of the Plan and Custodial Agreement and you appoint The Dreyfus Trust Company to be Custodian. By signing here, The Dreyfus Trust Company accepts this Adoption Agreement and its appointment as Custodian of your Dreyfus Easy Standardized/Paired Retirement Plan. The Adoption Agreement will be maintained by The Dreyfus Trust Company. The Dreyfus Trust Company Date The Employer named in section I,A. below hereby establishes or restates a Defined Benefit Pension Plan ("Plan") and Trust, consisting of such sums as shall be paid to the Trustee(s) under the Plan, the investments thereof and earnings thereon. The terms of the Plan and Trust are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Defined Benefit Plan, Basic Plan Document No. 02, and the Dreyfus Trust Agreement, both as amended from time to time, which are hereby adopted and incorporated herein by reference. A. Employer's Name: [. . . .] Address: [. . . .] B. Employer is a ( ) corporation; ( ) S corporation; ( ) partnership; ( ) sole proprietor; ( ) other. C. Employer's Tax ID Number: [. . . .] D. Employer's Fiscal Year: [. . . .] E. Plan name: [. . . . ] F. Effective date of Plan: [. . . .] If this is an amendment and restatement of an existing Plan, enter the date originally adopted [. . . .]. The effective date of this amended Plan is [. . . .]. G. The Trustee shall be: ( ) The Dreyfus Trust Co. ( ) Other: (Name) [. . . .] (Address) [. . . .] (Phone #) [. . . .] H. Anniversary Date: [. . . .] I. Plan Year shall mean the 12 consecutive month period commencing on _____________ / ______________ and ending on _____ /___________. J. Service with the following predecessor employer(s) shall be credited for purposes of vesting and eligibility: [. . . .] [Note: Such Service must be provided if the adopting Employer maintains the plan of the predecessor employer]. K. The following employer(s) associated with the Employer under section 414(b), (c), (m) or (o) of the Internal Revenue Code ("Code") shall be Participating Employers in the Plan: [. . . .] L. Are all employers associated with the Employer under section 414(b), (c), (m) or (o) of the Code participating in the Plan?: ( ) Yes ( ) No Hours of Service under the Plan will be determined for all Employees on the basis of the method selected below: ( ) On the basis of actual hours for which an Employee is paid or entitled to payment. ( ) On the basis of days worked. An Employee will be credited with 10 Hours of Service for any day such Employee would be credited with at least one Hour of Service during the day under the Plan. ( ) On the basis of weeks worked. An Employee will be credited with 45 Hours of Service for any week such Employee would be credited with at least one Hour of Service during the week under the Plan. ( ) On the basis of semi-monthly payroll periods. An Employee will be credited with 95 Hours of Service for any semi-monthly payroll period such Employee would be credited with at least one Hour of Service under the Plan. ( ) On the basis of months worked. An Employee will be credited with 190 Hours of Service for any month such Employee would be credited with at least one Hour of Service under the Plan. ( ) On the basis of elapsed time. All Employees shall be Eligible Employees, except: ( ) Employees included in an unit of Employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining and if two percent or less of the Employees of the Employer covered by that Agreement are professionals as defined in section 1.410(b)-9 of the Income Tax Regulations. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. ( ) Employees who are nonresident aliens (within the meaning of section 7701(b)(1)(B) of the Code) and who receive no earned income (within the meaning of section 911(d)(2) of the Code) from the Employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3) of the Code). Note: The term Employee includes all Employees of the Employer and any employer required to be aggregated with the Employer under section 414(b), (c), (m) or (o) of the Code, and individuals considered employees of any such employer under section 414(n) or (o) of the Code. Note: If the Employer adopts Sponsor's paired defined contribution plan number 01001, 01003, 01004, 01005 or 01006 in addition to this Plan, the definition of "Eligible Employee" in all paired plans of the Employer must be identical in order for the Employer to be able to provide the minimum benefit to each Non-key Employee in the event the Plan becomes Top-Heavy under this Plan and no minimum allocation under the paired defined contribution plan or plans is provided in Section XVIII. IV. AGE AND SERVICE REQUIREMENTS Each Eligible Employee shall become a Participant on the Entry Date coincident with or following completion of the following age and service requirements: ( ) No age or service requirement. ( ) The attainment of age [. . . .] (not to exceed age 21). ( ) The completion of [. . . .] (not to exceed 2) Eligibility Years of Service. [Note: If more than 1 Eligibility Year of Service is required, Participants must be 100% immediately vested. If the Eligibility Years of Service is or includes a fractional year, an Employee may not be required to complete any specified number of Hours of Service to receive credit for The Entry Date shall mean: ( ) Annual Entry. The first day of the Plan Year. [Note: If Annual Entry is selected, the age and service requirements cannot exceed 20-1/2 and 1/2 Eligibility Year of Service (or 1-1/2 Eligibility Years of Service if 100% immediate vesting ( ) Dual Entry. The first day of the Plan Year and the first day of the seventh month of the Plan year. ( ) Quarterly Entry. The first day of the Plan Year and the first day of the fourth, seventh and tenth months of the Plan Year. ( ) Monthly Entry. The first day of the Plan year and the first day of each following month of the Plan Year. A. Except for purposes of "annual additions" testing under section 415 of the Code, Compensation shall mean all of each Participant's ( ) Information required to be reported under sections 6041 and 6051 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in section 3401(a) of the Code and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a non-accountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in section 408(k) of the Code, or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross (b) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid or made available to the Participant during ( ) the Plan Year ( ) the calendar year ending with or within the Plan Year ( ) ____________________ (must be determined on the basis of any consecutive period ending within the Plan Year which is at least 12 months in duration and applied uniformly to all Employees in the Plan). For employees whose date of hire is less than 12 months before the end of the 12-month period designated, Compensation will be determined over the Plan Year. ( ) Compensation shall be reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits. Compensation ( ) shall; ( ) shall not include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not includible in the gross income of the Employee by reason of sections 125, 402(e)(3), 402(h) or 403(b) of the Code. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. Average Compensation shall mean the average of a Participant's Compensation for the highest [. . . .] (not less than 3 nor more than 5) consecutive Plan Years. If a Participant's entire period of Service for the Employer is less than three consecutive years, Compensation is averaged on an annual basis over the Participant's entire period of Service. B. For purposes of "annual additions" testing under section 415 of the Code, Compensation for any Limitation Year shall mean all of each Participant's: ( ) Information required to be reported under sections 6041 and 6051 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in section 3401(a) of the Code and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d) and 6051(a)(3) of the Code, determined without regard to any rules under section 3401(a) of the Code that limit the renumeration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a non-accountable plan (as described in section 1.62-2(c) of the regulations), and excluding the following: (a) Employer contributions to a plan of deferred compensation to the extent that, before the application of the section 415 limitations to that plan, the contributions are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in section 408(k) of the Code, or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the (b) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Code (whether or not the contributions are actually excludable from the gross which is actually paid or includible in gross income during such Limitation Year. Note: Section 415 safe-harbor compensation is determined without regard to the exclusions from gross income in sections 931 and 933 of the Code. A similar rule is to be applied in determining the compensation of Self- Employed individuals. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. Limitation Year shall mean the 12-consecutive-month period: ( ) Identical to the Plan Year. ( ) Identical to the Employer's fiscal year ending with or within the Plan Year of reference. ( ) As fixed by a resolution of the Board of Directors of the Employer, or the Employer if no Board of Directors exists. Normal Retirement Age shall mean: ( ) Age [. . . .] (not to exceed 65) ( ) The later of: (i) age __________ (not to exceed 65) or (ii) the _________ (not to exceed 5th) anniversary of the participation commencement date. If, for Plan Years beginning before January 1, 1988, Normal Retirement Age was determined with reference to the anniversary of the participation commencement date (more than 5 but not to exceed 10 years), the anniversary date for Participants who first commenced participation under the Plan before the first Plan Year beginning on or after January 1,1988, shall be the earlier of (A) the tenth anniversary of the date the Participant commenced participation in the Plan (or such anniversary as had been elected by the Employer, if less than 10) or (B) the fifth anniversary of the first day of the first Plan Year beginning on or after January 1, 1988. The participation commencement date is the first day of the first Plan Year in which the Participant commenced participation in the Plan. The suspension of benefit rules in section 5.7 of the plan will apply to: ( ) all Participants in the Plan. ( ) only those Participants described in section 5.7 of the Plan whose benefits, if actuarially increased, would exceed the limitations of section 415 of the Code. Early Retirement Date shall mean the first day of any month following: ( ) There shall be no early retirement provision in this Plan. ( ) Age [. . . .]. ( ) Age [. . . .] and [. . . .] years of Service. [Note: Early Retirement Age cannot be more than 10 years before Normal The suspension of benefit rules in section 5.7 of the Plan will apply to: ( ) all Participants in the Plan. ( ) only those Participants described in section 5.7 of the Plan whose benefits, if actuarially increased, would exceed the limitations of section 415 of the Code. A Participant who terminates employment with a vested interest may elect to commence payment of his vested benefits as of the first day of any month following: ( ) termination of employment (no age requirement). ( ) attainment of age [. . . .]. (Should not be less than the age required for Early Retirement, if any). A. Annual Retirement Benefit Formula. Subject to the overall permitted disparity limit below, the current benefit formula under the Plan will be an amount payable at Normal Retirement Age equal to: ( ) Fixed Benefit - [. . . .]% of Average Compensation up to the Integration Level for the Plan Year ("Base Benefit Percentage"), plus [. . . .]% of Average Compensation in excess of the Integration Level for the Plan Year ("Excess Benefit Percentage"). Note: The Excess Benefit Percentage may not exceed the Base Benefit Percentage by more than the lesser of (i) the Base Benefit Percentage or (ii) the product of 35 times the applicable factor determined from Table I or II in Section XI, B. below. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the Participant's benefit will be determined in accordance with section 5.3 of the Plan. For Participants who are projected to have earned less than 35 years of Service under this Plan as of the end of the Plan Year in which they attain Normal Retirement Age (or current age, if later), the Base Benefit Percentage and the Excess Benefit Percentage will be reduced by multiplying them by a fraction, the numerator of which is the number of years of Service the Participant is projected to have earned under this Plan as of the end of the Plan Year in which the Participant attains Normal Retirement Age (or current age, if later), and the denominator of which is 35. Cumulative permitted disparity adjustment: If the number of the Participant's cumulative permitted disparity years exceeds 35, the Participant's benefit will be further adjusted as provided below. A Participant's cumulative disparity years consist of the sum of: (1) the total years of Service a Participant is projected to have earned under this Plan by the end of the Plan Year containing the Participant's Normal Retirement Age, and subsequent years of Service, if any, (the total not to exceed 35), and (2) the number of years credited to the Participant for purposes of the benefit formula or the accrual method under the Plan under one or more other qualified plans or simplified employee pensions (whether or not terminated) ever maintained by the Employer (other than years counted in (1)), and not including any years credited to the Participant under such other qualified plans or simplified employee pensions after the Participant has earned 35 years of Service under this Plan). For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If this cumulative disparity adjustment is applicable, the Participant's benefit will be increased as follows: (A) Subtract the Participant's Base Benefit Percentage from the Participant's Excess Benefit Percentage (after modification in accordance with the paragraphs preceding this cumulative disparity adjustment). (B) Divide the result in (A) by the Participant's years of Service under the Plan projected to the later of Normal Retirement Age or current age, not to exceed 35 years of Service. (C) Multiply the result in (B) by the number of years by which the Participant's Cumulative Disparity Years exceed 35. (D) Add the result in (C) to the Participant's Base Benefit Percentage determined prior to this cumulative disparity adjustment. Overall permitted disparity limit: For any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the benefit for each Participant under this Plan will be equal to the Base Benefit Percentage times the Participant's Average Compensation. For Participants who are projected to have earned less than 35 years of Service under this Plan as of the end of the Plan Year in which they attain Normal Retirement Age, (or current age, if later), the percentage in the preceding sentence will be multiplied by a fraction (not more than one), the numerator of which is the number of the Participant's years of Service the Participant is projected to have earned under this Plan as of the end of the Plan Year in which the Participant attains Normal Retirement Age (or current age, if later), and the denominator of which is 35. If this paragraph is applicable, this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is first applicable. In addition, if in any subsequent Plan Year this Plan no longer benefits any Participant who also benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. For purposes of determining the Participant's overall permitted disparity limit, all years ending in the same calendar year are treated as the same year. ( ) Unit Benefit - the sum of (a) and (b) below: (a) [. . . .]% of Average Compensation up to the Integration Level for the Plan Year ("Base Benefit Percentage"), times years of Service plus [. . . .]% of Average Compensation in excess of the Integration Level for the Plan Year ("Excess Benefit Percentage") times years of Service. The maximum number of years of Service which may be taken into account for this purpose shall be [. . . .] (not to exceed 35). If the Participant's benefit after the latest Fresh-Start Date is determined under the fraction accrual rule, or the Plan satisfies section 411(b)(1)(F) of the Code, the maximum number of years of Service during which permitted disparity is taken into account under this formula may not be less than 25. The number of years of Service taken into account under paragraph (a) for any Participant will not exceed the Participant's cumulative permitted disparity limit. The Participant's cumulative permitted disparity limit is equal to 35 minus the number of years credited to the Participant for purposes of the benefit formula or the accrual method under the plan under one or more qualified plans or simplified employee pensions (whether or not terminated) ever maintained by the Employer, other than years for which a Participant earned a year of Service under the benefit formula in paragraph (a). For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the Participant's cumulative permitted disparity limit is less than the period of years specified in paragraph (a), then for years after the Participant reaches the cumulative permitted disparity limit and through the end of the period specified in paragraph (a), the Participant's benefit will be equal to the Excess Benefit Percentage, or, if the Participant's benefit after the latest Fresh-Start Date is not accrued under the fractional accrual rule and the plan does not satisfy section 411(b)(1)(f) of the code, 133 1/3 percent of the Base Benefit Percentage, if lesser, times Average Compensation. (b) [....] (not to exceed the lesser of: (1) the Excess Benefit Percentage, and (2) 133 1/3 percent of the Base Benefit Percentage, times Average Compensation for each year of Service after the number of years of Service taken into account in paragraph (a). If, however, benefits after the latest Fresh Start Date are accrued under the fractional accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, then for each year of Service after the years of Service taken into account in paragraph (a), this percentage will be equal to the Excess Benefit Percentage. The maximum number of years of Service taken into account under this paragraph (b) will be [....] (if benefits after the latest Fresh-Start Date are accrued under the fractional accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, the number of years entered must be no less than 35 minus the number of years of Service taken into account in paragraph (a)). For purposes of the preceding paragraph(s), the Maximum Excess Allowance is, with respect to benefits under the Plan for any year of Service, the lesser of (1) the Base Benefit Percentage or (2) the applicable factor determined from Table I or II in section B below. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the Participant's benefit will be determined in accordance with section 5.3 of the Plan. Overall permitted disparity limit: For any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the benefit for each Participant under this Plan will be equal to the Base Benefit Percentage times the Participant's Average Compensation. If this paragraph is applicable, this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is first applicable. In addition, if in any subsequent Plan Year this Plan no longer benefits any Participant who also benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. For purposes of determining the Participant's overall permitted disparity limit, all years ending in the same calendar year are treated as the same year. ( ) Fixed Benefit - [.....]% (Gross Benefit Percentage) times Average Compensation offset by [....]% (Offset Percentage -- not to exceed the Maximum Offset Allowance) times Final Average Compensation up to the offset level. The Offset Percentage for any Participant shall not exceed one-half of the Gross Benefit Percentage, multiplied by a fraction (not to exceed one), the numerator of which is the Participant's Average Compensation, and the denominator of which is the Participant's Final Average Compensation up to the offset level. The Maximum Offset Allowance will not exceed the lesser of (1) the applicable factor from Table I or II in section B. below, multiplied by 35, and (2) one-half of the Gross Benefit Percentage. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the Participant's benefit will be determined in accordance with section 5.3 of the Plan. For Participants who are projected to have earned less than 35 years of Service under this Plan as of the end of the Plan Year in which they attain Normal Retirement Age (or the current age, if later), both the Gross Benefit Percentage and the Offset Percentage will be reduced by multiplying them by a fraction, the numerator of which is the number of years of Service the Participant is projected to have earned under this Plan as of the end of the Plan Year in which the Participant attains Normal Retirement Age (or the current age, if later), and the denominator of which is 35. Cumulative permitted disparity adjustment: If the number of the Participant's cumulative permitted disparity years exceeds 35, the Offset Percentage will be further adjusted as provided below. A Participant's cumulative permitted disparity years consist of the sum of: (1) the total years of Service a Participant is projected to have earned under this Plan by the end of the Plan Year containing the Participant's Normal etirement Age and subsequent years of Service, if any, (the total not to exceed 35), and (2) the number of years credited to the Participant for purposes of the benefit formula or the accrual method under the plan under one or more other qualified plans or simplified employee pensions maintained by the Employer (other than years counted in (1), and not including any years credited to the Participant under such other qualified plans or simplified employee pensions after the Participant has earned 35 years of Service under this Plan). For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If this cumulative permitted disparity adjustment is applicable, the Offset Percentage will be further adjusted as follows: (A) Divide the Offset Percentage (after modification in accordance with the paragraphs preceding this cumulative permitted disparity adjustment) by the Participant's years of Service under this Plan projected to the later of Normal Retirement Age or current age, not to exceed 35 years of Service. (B) Multiply the result in (A) by the number of years by which the Participant's cumulative permitted disparity years exceed 35. (C) Subtract the result in (B) from the Offset Percentage determined prior to this cumulative permitted disparity adjustment. Overall permitted disparity limit: For any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the benefit for all Participants under this Plan will be equal to a percentage that is equal to the Gross Benefit Percentage minus the Offset Percentage, times the Participant's Average Compensation. For Participants who are projected to have earned less than 35 years of Service under this Plan as of the end of the Plan Year in which they attain Normal Retirement Age, (or current age, if later), the percentage in the preceding sentence will be multiplied by a fraction (not more than one), the numerator of which is the Service the Participant is projected to have earned under this Plan as of the end of the Plan Year in which the Participant attains Normal Retirement Age (or current age, if later), and the denominator of which is 35. If this paragraph is applicable, this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is first applicable. In addition, if in any subsequent Plan Year this Plan no longer benefits any Participant who also benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes disparity), this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. For purposes of determining the Participant's overall permitted disparity limit, all years ending in the same calendar year are treated as the same year ( ) Unit Benefit - The sum of (a) and (b): (a) [....]% (Gross Benefit Percentage) of Average Compensation times years of Service offset by [. . . .]% (Offset Percentage -- not to exceed the Maximum Offset Allowance) times Final Average Compensation up to the offset level times each year of Service. The Offset Percentage for any Participant shall not exceed one- half of the Gross Benefit Percentage, multiplied by a fraction (not to exceed one), the numerator of which is the Participant's Average Compensation, and the denominator of which is the Participant's Final Average Compensation up to the offset level. The maximum number of years of Service taken into account under this paragraph will be [....] (may not exceed 35.) If the Participant's benefit after the latest Fresh-Start Date is determined under the fractional accrual rule in section 1.0 of the Plan, the maximum number of years of Service during which permitted disparity is taken into account under this formula may not be less than 25. The number of years of Service taken into account under paragraph (a) for any Participant may not exceed the Participant's cumulative permitted disparity limit. The Participant's cumulative permitted disparity limit is equal to 35 minus the number of years credited to the Participant for purposes of the benefit formula or the accrual method under the plan under one or more qualified plans or simplified employee pensions (whether or not terminated) ever maintained by the Employer, other than years for which a Participant earned a year of Service under the benefit formula in paragraph (a). For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the Participant's cumulative disparity limit is less than the period of years specified in paragraph (a), then for years after the Participant reaches the cumulative permitted disparity limit and through the end of the period specified in paragraph (a), the Participant's benefit will be equal to the Gross Benefit Percentage, or, if the Participant's benefit after the latest Fresh-Start Date is not accrued under the fractional accrual rule and the Plan does not satisfy section 411(b)(1)(f) of the Code, 133 1/3 percent of the Gross Benefit Percentage reduced by the Offset Percentage if lesser, times Average Compensation. (b) [....]% (not to exceed the lesser of: (l) the Gross Benefit Percentage, and (2) 133 1/3 percent of the Gross Benefit Percentage reduced by the Offset Percentage, times Average Compensation for each year of Service after the number of years of Service taken into account in paragraph (a). If however, benefits after the latest Fresh-Start Date are accrued under the fractional accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, then for each year of Service after the years of Service taken into account in paragraph (a), this percentage will be equal to the Gross Benefit Percentage. The maximum number of years of Service taken into account under this paragraph (b) will be [....] (if benefits after the latest Fresh-Start Date are accrued under the fractional accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, the number of years entered must be no less than 35 minus the number of years of Service taken into account in paragraph (a)). For purposes of the preceding paragraph(s), the Maximum Offset Allowance will not exceed the lesser of (1) the applicable factor from Table I or II in section B below, or (2) one-half of the Gross Benefit Percentage. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the Participant's benefit will be determined in accordance with section 5.3 of the Plan. Overall permitted disparity limit: For any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the benefit for all Participants under this Plan will be equal to the Gross Benefit Percentage minus the Offset Percentage, times the Participant's total Average Compensation. If this paragraph is applicable, this Plan will have a Fresh- Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is first applicable. In addition, if in any subsequent Plan Year this Plan no longer benefits any Participant who also benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputed permitted disparity) this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. For purposes of determining the Participant's overall permitted disparity limit, all years ending in the same calendar year are treated as the same year ( ) Fixed Benefit - [. . . .]% of Average Compensation. such benefit shall be reduced pro-rata for years of Participation less than [. . . .] years. ( ) Unit Benefit - [. . . .]% of Average Compensation times years of Participation. ( ) Unit Benefit (past/future) - [. . . .]% of Average Compensation times years of Participation before the Effective Date, plus [. . ..]% of Average Compensation times years of Participation after the Effective Date. Notwithstanding the benefit formula specified above: ( ) The minimum annual retirement benefit, if any, shall be at least $ [. . . ] ( ) The maximum annual retirement benefit shall be $ [. . . .] The Applicable Factor is determined from the appropriate table below based on the Normal Retirement Age under the Plan, as specified above (without regard to any years of Participation requirement.) If the Plan's Standard Form of Retirement Income, as specified below is other than a life annuity, the factor determined from the appropriate table below must be multiplied by the following adjustment factor: life annuity, 10 years guaranteed -- .90; life annuity and 50% survivor benefit -- .80; life annuity and 100% survivor benefit -- .666. If the Integration Level under the Plan is either option 4 or 5 in Section XI, C. below, the appropriate table is Table II. Otherwise, the appropriate table shall be Table I. Retirement Age Participant's Social Security Retirement Age Retirement Age Participant's Social Security Retirement Age If a Participant begins receiving benefits before Normal Retirement Age or, in the case of a fixed benefit plan (whether excess or offset), before the Participant has completed 35 years of Participation, the Participant's benefit will be determined in accordance with Section 5.7 of the Plan. C. Integration Level - the Integration Level (or offset level) for each Plan Year for each Participant shall be: ( ) 1. The Participant's Covered Compensation for the Plan Year. ( ) 2. The greater of $10,000 or one-half of the Covered Compensation of any person who attains Social Security Retirement Age during the calendar year in which the Plan Year begins. ( ) 3. $________ (a single dollar amount not to exceed the greater of $10,000 or one-half of Covered Compensation of any person who attains Social Security Retirement Age during the calendar year in which the Plan Year begins.) ( ) 4. $________ (a single dollar amount that exceeds the greater of $10,000 or one-half of Covered Compensation of any person who attains Social Security Retirement Age during the calendar year in which the Plan Year begins, but not to exceed the greater of $25,450 or 150% of the Covered Compensation of an individual attaining Social Security Retirement Age in the current Plan ( ) 5. A uniform percentage equal to ________% (greater than 100 percent but not greater than 150 percent of each Participant's Covered Compensation for the current year, and in no event in excess of the Taxable Wage Base (for excess plans), or Final Average Compensation (for offset plans).) Covered Compensation will be determined based on the following year: [ ] current Plan Year [ ] __________ Plan Year (may be Covered Compensation for a Plan Year earlier than the current Plan Year, provided the earlier Plan Year is the same for all Employees and is not earlier than the later of (A) the Plan Year that begins 5 years before the current Plan Year, and (B) the Plan Year beginning in 1989. If the Plan Year entered is more than five years prior to the current Plan Year, the Participant's Covered Compensation will be that determined under the Covered Compensation table for the Plan Year five years prior to the current Plan Year. For benefit accrual purposes, Participation shall not include: ( ) employment prior to the original effective date of the Plan. ( ) employment prior to the date the Participant gained membership in the Plan. ( ) employment other than as an Eligible Employee. ( ) with respect to Participants who were not Eligible Employees under the Plan prior to the first Plan Year beginning on or after January 1, 1988 because their employment began within 5 years of their Normal Retirement Date, employment prior to becoming a Participant. E. Standard Form of Retirement Income: ( ) Life annuity, 10 years guaranteed ( ) Life annuity and 50% survivor benefit ( ) Life annuity and 100% survivor benefit For purposes of determining the Actuarial Equivalent, of any benefit, the following mortality and interest rate assumptions shall be used: Interest rate - Pre-retirement: [. . . .]% Post-retirement: [. . . .]% (must be between 7 1/2% and 8 1/2% if the Plan provides for permitted disparity under section 401(l) of the Code. Mortality table: [. . . .] (must be standard mortality table as described in section 1.401(a)(4)-12 of the Income Tax regulations if the Plan provides for permitted disparity under section 401(l) of the Code. The formula with wear-away and formula with extended wear-away Fresh-Start rules below take into account an Employee's past service in determining the Employee's benefit accruals under the Plan: either of these Fresh-Start rules may cause the Plan to fail to satisfy the safe harbor for past service in section 1.401(a)(4)-5(a)(3) of the Income Tax Regulations. The Accrued Benefit of each Participant in the Fresh-Start Group under the Plan will be equal to: ( ) 1. Formula with wear-away -- the greater of: (a) the Participant's Frozen Accrued Benefit, if any, and (b) the Participant's Accrued Benefit determined with respect to the current benefit formula as applied to the Participant's total years of Service under the Plan. ( ) 2. Formula without wear-away -- the sum of: (a) the Participant's Frozen Accrued Benefit, if any, and (b) the Participant's Accrued Benefit determined with respect to the current benefit formula as applied to the Participant's years of Service beginning after the Fresh-Start Date. If, however, the Participant's benefit under the Plan is accrued under the fractional accrual rule or the 3 percent accrual rule or if this Plan satisfies the safe harbor for insurance contract plans in Income Tax Regulations section 1.401(a)(4)-3(b)(7), this formula without wear-away will not apply, and the Participant's accrued benefit will be determined in accordance with the formula with wear-away above. ( ) 3. Formula with extended wear-away -- the greater of the accrued benefit determined for the Participant under the formula with wear-away or the formula without wear-away above. If, however, the Participant's benefit under the Plan is accrued under the 3 percent accrual rule the formula with extended wear-away will not apply, and the Participant's Accrued Benefit will be determined in accordance with the formula with wear-away above. Definition of Fresh-Start Group. The Fresh-Start Group consists of all Participants who have Accrued Benefits as of the Fresh-Start Date and have at least one Hour of Service with the Employer after that date. However, if designated below, the Fresh-Start Group shall be limited to: ( ) Section 401(a)(17) Participants (may be elected only with respect to a Tax Reform Act of 1986 (TRA '86) Fresh-Start Date and with respect to an Omnibus Budget Reconciliation Act of 1993 (OBRA '93) Fresh-Start Date). A TRA '86 Fresh-Start Date means a Fresh-Start Date that is not earlier than the last day of the last Plan Year beginning before the first Plan Year beginning on or after January 1, 1989 (the statutory effective date), and not later than the last day of the last Plan Year beginning before the first Plan Year beginning on or after January 1, 1994 (the regulatory effective date). An OBRA '93 Fresh-Start Date means the last day of the last Plan Year beginning before the first Plan Year beginning on or after January 1, 1994. ( ) Members of an acquired group of employees An acquired group of employees means employees of a prior employer who become employed by the Employer in a transaction between the Employer and the prior employer that is a stock or asset acquisition, merger, or other similar transaction involving a change in the employer of the employees of the trade or business on or before [ / / ] (enter a date no later than the end of the transition period defined in section 410(b)(6)(c)(ii) of the Code, if the date selected is after February 10, 1993). The date in the preceding sentence will be the Fresh-Start Date with respect to members of the acquired group described below. The acquired group consists of: ___________________________________ ( ) Employees with a Frozen Accrued Benefit that is attributable to assets and liabilities transferred to the Plan as of a Fresh Start Date in connection with the transfer and for whom the current formula is different from the formula used to determine the Frozen Accrued Benefit. The Fresh Start Date in connection with the transfer is: [ / /] (must be the date as of which the Employees begin accruing benefits under the Plan). The group of employees with a Frozen Accrued Benefit that is attributable to assets and liabilities transferred to the Plan is: If elected by the Employer below, each Participant's Frozen Accrued Benefit will be adjusted in accordance with the following fraction: [ ] Old Compensation fraction [ ] New Compensation fraction [ ] Reconstructed Compensation fraction (may be selected only if the latest Fresh-Start Date is before the first day of the first Plan Year beginning on or after January 1, 1994.) For purposes of calculating a Participant's "Reconstructed Compensation", the selected year will be the Plan Year beginning in (the selected year must begin after the latest Fresh-Start Date): ( ) Special adjustment for section 401(a)(17) Participants XII. QUALIFIED JOINT AND SURVIVOR ANNUITY The survivor annuity of the Qualified Joint and Survivor Annuity shall ( ) 50% ( ) 66-2/3% ( ) 100% of the annuity payable during the joint lives of the Participant and the Participant's spouse. Life insurance ( ) shall; ( ) shall not be a permissible investment. If the Plan is not funded with life insurance, the pre-retirement death benefit shall be: ( ) the Qualified Pre-retirement Survivor Annuity (the required spousal benefit) only. ( ) The Actuarial Value of the Participant's Accrued Benefit. If the Participant's Spouse is the Beneficiary, such benefit shall be offset by the Actuarial Value of the Qualified Pre-retirement Survivor Annuity. If the Plan is funded with life insurance, the face amount of the policies purchased will be [. . . .] (not to exceed 100) times the Participant's anticipated monthly retirement benefit. All of an Employee's years of Service with the Employer shall be counted to determine the vested interest of such Employee except: ( ) Years of Service before age 18. ( ) Years of Service before the Employer maintained this Plan or a predecessor plan. ( ) Years of Service before the effective date of ERISA if such Service would have been disregarded under the Service Break rules of the prior plan in effect from time to time before such date. For this purpose, Service Break rules are rules which result in the loss of prior vesting or benefit accruals, or deny an Employee's eligibility to participate by reason of separation or failure to complete a required period of Service within a specified period of time. The vested interest of each Employee in his Employer-derived Accrued Benefit shall be determined on the basis of the following schedule: ( ) 100% immediately vested. [Note: Mandatory if more than 1 eligibility Year of Service is required.] ( ) 100% immediately vested after [. . . .] (not to exceed 3) years of Service. ( ) 20% vested after 2 years of Service, plus [. . . .]% vested (not less than 20%) for each additional year of Service until 100% vested. Following a complete termination of the Plan by the Employer, any assets which remain after provisions have been made to satisfy all liabilities of the Plan to Participants and Beneficiaries ( ) shall revert to the Employer in cash. ( ) shall be allocated among Participants on a uniform and non-discriminatory basis, subject to the limitation on benefits of Section 8.1 of the Plan. Note: If this is an amendment and restatement of an existing Plan which did not previously provide for a reversion, an election that excess assets revert to the Employer shall not be effective before the end of the 5th calendar year following the date of this Adoption Agreement. ( ) The provisions of Article XV of the Plan shall always apply. ( ) The provisions of Article XV of the Plan shall only apply in Plan Years after 1983, during which the Plan is or becomes Top-Heavy. If the Employer has adopted Sponsor's paired defined contribution plan number 01001, 01003, 01004, 01005 and/or 01006 in addition to this Plan and the definition of "Eligible Employee" in all paired plans is identical, then Non-Key Employees who are Participants in this Plan shall receive the minimum Top Heavy benefit accrued under this Plan and shall receive no minimum allocation under the paired defined contribution plan or plans. If a Participant in this Plan who is a Non-Key Employee is covered under another qualified plan maintained by the Employer, other than a paired plan of the Sponsor, the minimum top heavy allocation or benefit required under section 416 of the Code shall be provided to such Non-Key Employee under: ( ) the Employer's qualified defined contribution plan. C. Determination of Present Value For purposes of establishing present value to compute the Top-Heavy Ratio, any benefit shall be discounted only for mortality and interest based on the following: ( ) Interest Rate [....]% (must be between 7 1/2% and 8 1/2% if the plan provides for permitted disparity under section 401(l) of the Code. Mortality table: [....] (must be standard mortality table as described in section 1.401(a)(4)-12 of the Income Tax regulations if the Plan provides for permitted disparity under section 401(l) of the Code. ( ) The Interest Rate(s) and Mortality Table specified under Section 1.2 of the Plan For purposes of computing the Top-Heavy Ratio, the Valuation Date shall be one of the following: ( ) the first day of the Plan Year ( ) the last day of the Plan Year [Note: The date selected must be the same date used for computing Plan costs for minimum funding, regardless of whether a valuation If the Employer maintains or has ever maintained another qualified plan (other than the Sponsor's paired defined contribution plan number 01001, 01003, 01004, 01005 and/or 01006) in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant, the adopting Employer must complete this Section. The Employer must also complete this Section if it maintains a welfare benefit fund, as defined in section 419(e) of the Code, or an individual medical account, as defined in section 415(1)(2) of the Code, under which amounts are treated as Annual Additions with respect to any Participant in the Plan. (If the Employer maintains only paired plans of the Sponsor this Section should (a) If a Participant is, or ever has been, covered under another qualified defined benefit plan maintained by the Employer, annual benefits shall be limited to comply with section 415(b) of the Code: ( ) by freezing or reducing Annual Benefits under this Plan. ( ) by freezing or reducing Annual Benefits in the other qualified defined benefit plan. (b) If a Participant is, or has ever been, a participant in one or more qualified defined contributions plans maintained by the Employer, the "1.0" aggregate limitation of section 415(e) of the Code shall be satisfied by: ( ) freezing or reducing Annual Benefits under this Plan. ( ) freezing or reducing the Annual Additions under the defined contribution plan or plans. The pre-termination restrictions in Section 8.3 of the Plan will be effective [ / / ] (no later than the first day of the 1994 Plan Year). The Employer hereby represents that: a. It is aware of, and agrees to be bound by, the terms of the Plan. b. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the Plan and has consulted legal and tax counsel to the extent necessary. c. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. XXII. RELIANCE ON PLAN QUALIFICATION An Employer who has ever maintained or who later adopts any plan (including, after December 31, 1985, a welfare benefit fund, as defined in section 419(e) of the Code, which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as defined in section 419(d)(3) of the Code, or an individual medical account, as defined in section 415(1)(2) of the Code) in addition to this Plan (other than the Sponsor's paired defined contribution plan number 01001, 01003, 01004, 01005 or 01006 may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under section 401 of the Code. If an Employer who adopts or maintains multiple plans wishes to obtain reliance that his or her plans are qualified, application for a determination letter should be made to the appropriate key district office of the Internal Revenue Service. In addition, the Employer may rely upon the opinion letter issued by the national Office of the Internal Revenue Service only if the plan adopted by the Employer satisfies one of the safe-harbors provided in regulations under section 401(a)(26) of the Code with respect to its prior benefit structure or is deemed to satisfy section 401(a)(26) under such regulations. If the Employer wishes to obtain reliance that its plan is qualified, the Employer may request a determination from the appropriate Key District Director with regard to its prior benefit structure. The Employer may not be entitled to rely on the opinion letter issued by the National Office in certain other circumstances, which are specified in the opinion letter issued with respect to the Plan or in section 6 of Revenue Procedure 89-9, as amended. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Defined Benefit Plan, Basic Plan Document No. 02, and the Dreyfus Trust Agreement all as amended from time to time. In the event the Sponsor amends the Basic Plan Document or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, Dreyfus Corporation, is available to answer questions regarding the intended meaning of any Plan provisions, adoption of the Plan and the effect of an opinion letter, _____________________________________________________________________. IN WITNESS WHEREOF, the Employer and the Trustee have executed this instrument the _____ day of _____ , 19__. If applicable, the appropriate corporate seal has been affixed and attested to. Name and Title (Corporate Trustee only) The Employer named in section I,A. below hereby establishes or restates a Defined Benefit Pension Plan ("Plan") and Trust, consisting of such sums as shall be paid to the Trustee(s) under the Plan, the investments thereof and earnings thereon. The terms of the Plan and Trust are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Defined Benefit Plan, Basic Plan Document No. 02, and the Dreyfus Trust Agreement, both as amended from time to time, which are hereby adopted and incorporated herein by reference. A. Employer's Name: [. . . .] Address: [. . . .] B. Employer is a ( ) corporation; ( ) S corporation; ( ) partnership; ( ) sole proprietor; ( ) other. C. Employer's Tax ID Number: [. . . .] D. Employer's Fiscal Year: [. . . .] E. Plan name: [. . . . ] F. Effective Date of Plan: [. . . .] If this is an amendment and restatement of an existing Plan, enter the date originally adopted [. . . .]. The effective date of this amended Plan is [. . . .]. G. The Trustee shall be: ( ) The Dreyfus Trust Co. ( ) Other: (Name) [. . . .] (Address) [. . . .] (Phone #) [. . . .] H. Anniversary Date: [. . . .] I. Plan Year shall mean the 12 consecutive month period commencing on ___________ /___________ and ending on _________ /_________. J. Service with the following predecessor employer(s) shall be credited for purposes of vesting and eligibility: [. . . .] [Note: Such Service must be provided if the adopting Employer maintains the plan of the predecessor employer]. K. The following employer(s) associated with the Employer under section 414(b), (c), (m) or (o) of the Internal Revenue Code ("Code") shall be Participating Affiliates in the Plan: [. . ..] L. Are all employers associated with the Employer under section 414(b), (c), (m) or (o) of the Code participating in the Plan?: ( ) Yes ( ) No Hours of Service under the Plan will be determined for all Employees on the basis of the method selected below: ( ) On the basis of actual hours for which an Employee is paid or entitled to payment. ( ) On the basis of days worked. An Employee will be credited with 10 Hours of Service for any day such Employee would be credited with at least one Hour of Service during the day under the Plan. ( ) On the basis of weeks worked. An Employee will be credited with 45 Hours of Service for any week such Employee would be credited with at least one Hour of Service during the week under the Plan. ( ) On the basis of semi-monthly payroll periods. An Employee will be credited with 95 Hours of Service for any semi-monthly payroll period such Employee would be credited with at least one Hour of Service under the Plan. ( ) On the basis of months worked. An Employee will be credited with 190 Hours of Service for any month such Employee would be credited with at least one Hour of Service under the Plan. ( ) On the basis of elapsed time. All Employees shall be Eligible Employees, except: ( ) Employees included in an unit of Employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining and if two percent or less of the Employees of the Employer covered by the Agreement are professionals as defined in section 1.410(b)-9 of the Income Tax Regulations. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. ( ) Employees who are nonresident aliens (within the meaning of section 7701(b)(1)(B) of the Code and who receive no earned income (within the meaning of section 911(d)(2) of the Code) from the Employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3) of the Code). ( ) Employees included in the following job classifications ( ) Employees of the following employers aggregated under section 414(b), (c), (m) or (o) of the Code [. . . .] ( ) Individuals required to be considered Employees under section 414(n) of the Code. Note: The term Employee includes all Employees of the Employer and any employer required to be aggregated with the Employer under section 414(b), (c), (m) or (o) of the Code, and individuals considered employees of any such employer under section 414(n) or (o) of the Code. IV. AGE AND SERVICE REQUIREMENTS Each Eligible Employee shall become a Participant on the Entry Date coincident with or following completion of the following age and service requirements: ( ) No age or service requirement. ( ) The attainment of age [. . . .] (not to exceed age 21). ( ) The completion of [. . . .] (not to exceed 2) Eligibility Years of Service. [Note: If more than 1 Eligibility Year of Service is required, Participants must be 100% immediately vested. If the Eligibility Years of Service is or includes a fractional year, an Employee may not be required to complete any specified number of Hours of Service to receive credit for ( ) Effective Date entry. Each Eligible Employee who is employed on the Effective Date shall become a Participant on the effective date. Each Eligible Employee employed after the Effective Date shall become a Participant on the Entry Date coincident with or following completion of the age and service requirements specified above. V. ELIGIBILITY YEARS OF SERVICE In order to be credited with an Eligibility Year of Service, an Employee shall complete [. . . .] (not to exceed 1,000) Hours of Service. (Not applicable if elapsed time method of crediting service The Entry Date shall mean: ( ) Annual Entry. The fist day of the Plan Year. [Note: If Annual Entry is selected, the age and service requirements cannot exceed 20-1/2 and 1/2 Eligibility Year of Service (or 1-1/2 Eligibility Years of Service if 100% immediate vesting ( ) Dual Entry. The first day of the Plan Year and the first day of the seventh month of the Plan year. ( ) Quarterly Entry. The first day of the Plan Year and the first day of the fourth, seventh and tenth months of the Plan Year. ( ) Monthly Entry. The first day of the Plan year and the first day of each following month of the Plan Year. A. Except for purposes of "annual additions" testing under Section 415 of the Code, Compensation shall mean all of each ( ) Information required to be reported under sections 6041 and 6051 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in section 3401(a) of the Code and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a non-accountable plan (as described in Section 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in section 408(k) of the Code, or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid or made available to the Participant ( ) the Plan Year ( ) the calendar year ending with or within the Plan Year ( ) __________________ (must be determined on the basis of any consecutive period ending within the Plan Year which is at least 12 months in duration and applied uniformly to all Employees in the Plan). For Employees whose date of hire is less than 12 months before the end of the 12-month period designated, Compensation will be determined over the Plan Year. ( ) Compensation shall be reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), money expenses, deferred compensation and welfare benefits. Compensation ( ) shall; ( ) shall not include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not includible in the gross income of the Employee by reason of sections 125, 402(e)(3), 402(h) or 403(b) of the Code. If benefits under the Plan are not determined on a integrated basis, the following may be excluded from the definition of Compensation selected above (provided the Employer determines that the resulting definition of Compensation does not violate the nondiscrimination provisions of the Income Tax Regulations) for any year in which the Plan is not Top Heavy: ( ) amounts in excess of $[....] For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. Average Compensation shall mean the average of a Participant's Compensation for the highest [. . . .] (not less than 3 nor more than 5) consecutive Plan Years. If a Participant's entire period of Service for the Employer is less than three consecutive years, Compensation is averaged on an annual basis over the Participant's entire period of Service. B. For purposes of "annual additions" testing under section 415 of the Code, Compensation for any Limitation Year shall mean all of each Participant's: ( ) Information required to be reported under sections 6041 and 6051 of the Code. (Wages, tips and other compensation box on Form W-2) Compensation is defined as wages as defined in section 3401(a) of the Code and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). This definition of Compensation shall exclude amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are deductible by the Employee under section 217 of the Code. ( ) Section 3401(a) wages. Compensation is defined as wages within the meaning of section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). ( ) Section 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a non accountable plan (as described in section 1.62-2(c) of the regulations), and excluding the following: (a) Employer contributions to a plan of deferred compensation to the extent that, before the application of the section 415 limitations to that plan, the contributions are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in section 408(k) of the Code, or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the (b) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). which is actually paid or includible in gross income during such Limitation Year. Note: Section 415 safe-harbor compensation is determined without regard to the exclusions from gross income in sections 931 and 933 of the Code. A similar rule is to be applied in determining the compensation of Self- Employed individuals. For any Self-Employed Individual covered under the Plan, Compensation means Earned Income. Limitation Year shall mean the 12-consecutive-month period: ( ) Identical to the Plan Year. ( ) Identical to the Employer's fiscal year ending with or within the Plan Year of reference. ( ) As fixed by a resolution of the Board of Directors of the Employer, or the Employer if no Board of Directors exists. Normal Retirement Age shall mean: ( ) Age [. . . .] (not to exceed 65) ( ) The later of: (i) age __________ (not to exceed 65) or (ii) the __________(not to exceed 5th) anniversary of the participation commencement date. If, for Plan Years beginning before January 1, 1988, Normal Retirement Age was determined with reference to the anniversary of the participation commencement date (more than 5 but not to exceed 10 years), the anniversary date for Participants who first commenced participation under the Plan before the first Plan Year beginning on or after January 1,1988, shall be the earlier of (A) the tenth anniversary of the date the Participant commenced participation in the Plan (or such anniversary as had been elected by the Employer, if less than 10) or (B) the fifth anniversary of the first day of the first Plan Year beginning on or after January 1, 1988. The participation commencement date is the first day of the first Plan Year in which the Participant commenced participation in the Plan. The suspension of benefit rules in section 5.7 of the Plan will apply to: ( ) all Participants in the Plan. ( ) only those Participants described in section 5.7 of the Plan whose benefits, if actuarially increased, would exceed the limitations of section 415 of the Code. Early Retirement Date shall mean the first day of any month following: ( ) There shall be no early retirement provision in this Plan. ( ) Age [. . . .]. ( ) Age [. . . .] and [. . . .] years of Service. [Note: Early Retirement Age cannot be more than 10 years before The suspension of benefit rules in section 5.7 of the Plan will apply to: ( ) all Participants in the plan. ( ) only those Participants described in section 5.7 of the Plan whose benefits, if actuarially increased, would exceed the limitations of section 415 of the Code. A Participant who terminates employment with a vested interest may elect to commence payment of his vested benefits as of the first day of any month following: ( ) termination of employment (no age requirement). ( ) attainment of age [. . . .]. (Should not be less than the age required for Early Retirement, if any). A. Annual Retirement Benefit Formula. Subject to the overall permitted disparity limit below, the current benefit formula under the Plan will be an amount payable at normal retirement age equal to: ( ) Fixed Benefit - [. . . .]% of Average Compensation up to the Integration Level for the Plan Year ("Base Benefit Percentage"), plus [. . . .]% of Average Compensation in excess of the Integration level for the Plan Year ("Excess Benefit Percentage"). Note: The Excess Benefit Percentage may not exceed the Base Benefit Percentage by more than the lesser of (i) the Base Benefit Percentage or (ii) the product of 35 times the applicable factor determined from Table I or II in Section XII, B. below. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the Participant's benefit will be determined in accordance with section 5.3 of the Plan. For Participants who are projected to have earned less than 35 years of Service under this Plan as of the end of the Plan Year in which they attain Normal Retirement Age (or current age, if later), the Base Benefit Percentage and the Excess Benefit Percentage will be reduced by multiplying them by a fraction, the numerator of which is the number of years of Service the Participant is projected to have earned under this Plan as of the end of the Plan Year in which the Participant attains Normal Retirement Age (or current age, if later), and the denominator of which is 35. Cumulative permitted disparity adjustment: If the number of the Participant's Cumulative permitted disparity years exceeds 35, the Participant's benefit will be further adjusted as provided below. A Participant's cumulative disparity years consist of the sum of: (1) the total years of Service a Participant is projected to have earned under this Plan by the end of the Plan Year containing the Participant's Normal Retirement Age, and subsequent years of Service, if any, (the total not to exceed 35), and (2) the number of years credited to the Participant for purposes of the benefit formula or the accrual method under the Plan, under one or more other qualified plans or simplified employee pensions (whether or not terminated) ever maintained by the Employer (other than years counted in (1), and not including any years credited to the Participant under such other qualified plans or simplified employee pensions after the Participant has earned 35 years of Service under this Plan). For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If this cumulative disparity adjustment is applicable, the Participant's benefit will be increased as follows: (A) Subtract the Participant's Base Benefit Percentage from the Participant's Excess Benefit Percentage (after modification in accordance with the paragraphs preceding this cumulative disparity adjustment). (B) Divide the result in (A) by the Participant's years of Service under the Plan projected to the later of Normal Retirement Age or current age, not to exceed 35 years of Service. (C) Multiply the result in (B) by the number of years by which the Participant's Cumulative Disparity Years exceed 35. (D) Add the result in (C) to the Participant's Base Benefit Percentage determined prior to this cumulative disparity adjustment. Overall permitted disparity limit: For any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes disparity), the benefit for each Participant under this Plan will be equal to the Base Benefit Percentage times the Participant's Average Compensation. For Participants who are projected to have earned less than 35 years of Service under this Plan as of the end of the Plan Year in which they attain Normal Retirement Age, (or current age, if later), the percentage in the preceding sentence will be multiplied by a fraction (not more than one), the numerator of which is the number of the Participant's years of Service the Participant is projected to have earned under this Plan as of the end of the Plan Year in which the Participant attains Normal Retirement Age (or current age, if later), and the denominator of which is 35. If this paragraph is applicable, this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is first applicable. In addition, if in any subsequent Plan Year this Plan no longer benefits any Participant who also benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. For purposes of determining the Participant's overall permitted disparity limit, all years ending in the same calendar year are treated as the same year. ( ) Unit Benefit - the sum of (a) and (b) below: (a) [. . . .]% of Average Compensation up to the Integration Level for the Plan Year ("Base Benefit Percentage"), times years of Service plus [. . . .]% of Average Compensation in excess of the Integration Level for the Plan Year ("Excess Benefit Percentage") times years of Service. The maximum number of years of Service which may be taken into account for this purpose shall be [. .] (not to exceed 35). If the Participant's benefit after the latest Fresh-Start Date is determined under the fraction accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, the maximum number of years of Service during which permitted disparity is taken into account under this formula may not be less than 25. The number of years of Service taken into account under paragraph (a) for any Participant will not exceed the Participant's cumulative permitted disparity limit. The Participant's cumulative permitted disparity limit is equal to 35 minus the number of years credited to the Participant for purposes of the benefit formula or the accrual method under the Plan, under one or more qualified plans or simplified employee pensions (whether or not terminated) ever maintained by the Employer other than years for which a Participant earned a year of Service under the benefit formula in paragraph (a). For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the Participant's cumulative permitted disparity limit is less than the period of years specified in paragraph (a), then for years after the Participant reaches the cumulative permitted disparity limit and through the end of the period specified in paragraph (a), the Participant's benefit will be equal to the Excess Benefit Percentage or, if the Participant's benefit after the latest Fresh-Start Date is not accrued under the Fractional accrual rule and the Plan does not satisfy section 411(b)(1)(f) of the Code, 133 1/3 percent of the Base Benefit Percentage, if lesser, times Average Compensation. (b)[...]% (not to exceed the lesser of: (1) the Excess Benefit Percentage, and (2) 133 1/3 percent of the Base Benefit Percentage, times Average Compensation for each year of Service after the number of years of Service taken into account in the first paragraph of (a). If, however, benefits after the latest Fresh-Start Date are accrued under he fractional accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, then for each year of Service after the years of Service taken into account in paragraph (a), this percentage will be equal to the Excess Benefit Percentage. The maximum number of years of Service taken into account under this paragraph will be [...] (if benefits after the latest Fresh-Start Date are accrued under the fractional accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, the number of years entered must be no less than 35 minus the number of years of Service taken into account in paragraph (a)). For purposes of the preceding paragraph(s), the Maximum Excess Allowance is, with respect to benefits under the Plan for any year of Service, the lesser of (1) the Base Benefit Percentage or (2) the applicable factor determined from Table I or II in section B below. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the Participant's benefit will be determined in accordance with section 5.3 of the Plan. Overall permitted disparity limit: For any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the benefit for each Participant under this Plan will be equal to the Base Benefit Percentage times the Participant's Average Compensation. If this paragraph is applicable, this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is first applicable. In addition, if in any subsequent Plan Year this Plan no longer benefits any Participant who also benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. For purposes of determining the Participant's overall permitted disparity limit, all years ending in the same calendar year are treated as the same year. ( ) Fixed Benefit - [.....]% (Gross Benefit Percentage) times Average Compensation offset by [.....]% (Offset Percentage -- not to exceed the Maximum Offset Allowance) times Final Average Compensation up to the offset level. The Offset Percentage for any Participant shall not exceed one-half of the Gross Benefit Percentage, multiplied by a fraction (not to exceed one), the numerator of which is the Participant's Average Compensation, and the denominator of which is the Participant's Final Average Compensation up to the offset level. The Maximum Offset Allowance will not exceed the lesser of (1) the applicable factor from Table I or II in section B. below, multiplied by 35, and (2) one-half of the Gross Benefit Percentage. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the Participant's benefit will be determined in accordance with section 5.3 of the Plan. For Participants who are projected to have earned less than 35 years of Service under this Plan as of the end of the Plan Year in which they attain Normal Retirement Age (or the current age, if later), both the Gross Benefit Percentage and the Offset Percentage will be reduced by multiplying them by a fraction, the numerator of which is the number of years of Service the Participant is projected to have earned under this Plan as of the end of the Plan Year in which the Participant attains Normal Retirement Age (or the current age, if later), and the denominator of which is 35. Cumulative permitted disparity adjustment: If the number of the Participant's cumulative permitted disparity years exceeds 35, the Offset Percentage will be further adjusted as provided below. A Participants cumulative disparity years consist of the sum of: (l) the total years of Service a Participant is projected to have earned under this Plan by the end of the Plan Year containing the Participant's Normal Retirement Age and subsequent years of Service, if any, (the total not to exceed 35), and (2) the number of years credited to the Participant for purposes of the benefit formula or the accrual method under the plan under one or more other qualified plans or simplified employee pensions maintained by the Employer (other than years counted in (1), and not including any years credited to the Participant under such other qualified plans or simplified employee pension after the Participant has earned 35 years of Service under this Plan). For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If this cumulative permitted disparity adjustment is applicable, the Offset Percentage will be further adjusted as follows: (A) Divide the Offset Percentage (after modification in accordance with the paragraphs preceding this cumulative disparity adjustment) by the Participant's years of Service under this Plan projected to the later of Normal Retirement Age or current age, not to exceed 35 years of Service. (B) Multiply the result in (A) by the number of years by which the Participant's cumulative permitted disparity years exceed 35. (C) Subtract the result in (B) from the Offset Percentage determined prior to this cumulative permitted disparity adjustment. Overall permitted disparity limit: For any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the benefit for all Participants under this Plan will be equal to a percentage that is equal to the Gross Benefit Percentage minus the Offset Percentage, times the Participant's Average Compensation. For Participants who are projected to have earned less than 35 years of Service under this Plan as of the end of the Plan Year in which they attain Normal Retirement Age, (or current age, if later), the percentage in the preceding sentence will be multiplied by a fraction (not more than one), the numerator of which is the Service the Participant is projected to have earned under this Plan as of the end of the Plan Year in which the Participant attains Normal Retirement Age (or current age, if later), and the denominator of which is 35. If this paragraph is applicable, this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is first applicable. In addition, if in any subsequent Plan Year this Plan no longer benefits any Participant who also benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. ( ) Unit Benefit - The sum of (a) and (b): (a) [. .]% (Gross Benefit Percentage) of Average Compensation times years of Service offset by [. .]% (Offset Percentage not to exceed the Maximum Offset Allowance) times Final Average Annual Compensation up to the offset level times each year of Service. The Offset Percentage for any Participant shall not exceed one-half of the Gross Benefit Percentage, multiplied by a fraction (not to exceed one), the numerator of which is the Participant's Average Compensation, and the denominator of which is the Participant's Final Average Compensation up to the offset level. The maximum number of years of Service taken into account under this paragraph will be [...](may not exceed 35.) If the Participant's benefit after the latest Fresh-Start Date is determined under the fractional accrual rule in section 1.0 of the Plan, the maximum number of years of Service during which permitted disparity is taken into account under this formula may not be less than 25. The number of years of Service taken into account under paragraph (a) for any Participant may not exceed the Participant's cumulative permitted disparity limit. The participant's cumulative permitted disparity limit is equal to 35 minus the number of years credited to the participant for purposes of the benefit formula or the accrual method under the plan under one or more qualified plans or simplified employee pensions (whether or not terminated) ever maintained by the Employer, other than years for which a Participant earned a year of Service under the benefit formula in paragraph (a). For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the Participant's cumulative disparity limit is less than the period of years specified in paragraph (a), then for years after the Participant reaches the cumulative permitted disparity limit and through the end of the period specified in paragraph (a), the Participant's benefit will be equal to the Gross Benefit Percentage, or, if the Participant's benefit after the latest Fresh-Start Date is not accrued under the fractional accrual rule and the Plan does not satisfy section 411(b)(1)(f) of the Code, 133 1/3 percent of the Gross Benefit Percentage reduced by the offset percentage if lesser, times Average Compensation. (b)[...]% (not to exceed the lesser of: (l) the Gross Benefit Percentage, and (2) 133 1/3 percent of the Gross Benefit Percentage reduced by the Offset Percentage, times Average Compensation for each year of Service after the number of years of Service taken into account in paragraph (a). If however, benefits after the latest Fresh-Start Date are accrued under the fractional accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, then for each year of Service after the years of Service taken into account in paragraph (a), this percentage will be equal to the Gross Benefit Percentage. The maximum number of years of Service taken into account under this paragraph (b) will be [...] (if benefits after the latest Fresh-Start Date are accrued under the fractional accrual rule or the Plan satisfies section 411(b)(1)(f) of the Code, the number of years entered must be no less than 35 minus the number of years of Service taken into account in paragraph (a)). For purposes of the preceding paragraph(s), the Maximum Offset Allowance will not exceed the lesser of (1) the applicable factor from Table I or II in section B, below, or (2) one-half of the Gross Benefit Percentage. If a Participant begins receiving benefits at an age other than Normal Retirement Age, the participant's benefit will be determined in accordance with section 5.3 of the Plan. Overall permitted disparity limit: For any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), the benefit for all Participants under this Plan will be equal to the Gross Benefit Percentage minus the Offset Percentage, times the Participant's total Average Compensation. If this paragraph is applicable, this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is first applicable. In addition, if in any subsequent Plan Year this Plan no longer benefits any Participant who also benefits under another qualified plan or simplified employee pension maintained by the Employer that provides for permitted disparity (or imputes permitted disparity), this Plan will have a Fresh-Start Date on the last day of the Plan Year preceding the Plan Year in which this paragraph is no longer applicable. For purposes of determining the Participant's overall permitted disparity limit, all years ending in the same calendar year are treated as the same year. ( ) Fixed Benefit - [. . . .]% of Average Compensation. Such benefit shall be reduced pro-rata for years of Participation less than [. . . .] years. ( ) Unit Benefit - [. . . .]% of Average Compensation times years of Participation. ( ) Unit Benefit (past/future) - [. . . .]% of Average Compensation times years of Participation before the Effective Date, plus [. . ..]% of Average Compensation times years of Participation after the Effective Date. Notwithstanding the benefit formula specified above: ( ) The minimum annual retirement benefit, if any, shall be at ( ) The maximum annual retirement benefit shall be $[...]. The Applicable Factor is determined from the appropriate table below based on the Normal Retirement Age under the Plan, as specified above (determined without regard to any years of Participation requirement). If the Plan's Standard Form of Retirement Income, as specified below, is other than a life annuity, the factor determined from the appropriate table below must be multiplied by the following adjustment factor: life annuity, 10 years guaranteed -- .90; life annuity and 50% survivor benefit -- .80; life annuity and 100% survivor benefit -- .666. If the Integration Level under the Plan is either option 4 or 5 in Section XII, C. below, the appropriate table is Table II. Otherwise, the appropriate table shall be Table I. Retirement Age Participant's Social Security Retirement Age Retirement Age Participant's Social Security Retirement Age If a Participant begins receiving benefits before Normal Retirement Age or, in the case of a fixed benefit plan (whether excess or offset), the Participant has completed less than 35 years of Participation, the Participant's benefit will be determined in accordance with Section 5.7 of the Plan. C. Integration Level - the Integration Level for each Plan Year for each Participant shall be: ( ) 1. The Participant's Covered Compensation for the Plan Year. ( ) 2. The greater of $10,000 or one-half of the Covered Compensation of any person who attains Social Security Retirement Age during the calendar year in which the Plan Year begins. ( ) 3. $________ (a single dollar amount not to exceed the greater of $10,000 or one-half of Covered Compensation of any person who attains Social Security Retirement Age during the calendar year in which the Plan Year begins.) ( ) 4. $________ (a single dollar amount that exceeds the greater of $10,000 or one-half of Covered Compensation of any person who attains Social Security Retirement Age during the calendar year in which the Plan Year begins, but not to exceed the greater of $25,450 or 150% of the Covered Compensation of an individual attaining Social Security Retirement Age in the current Plan Year.) ( ) 5. A uniform percentage equal to ________% (greater than 100 percent but not greater than 150 percent of each Participant's Covered Compensation for the current year, and in no event in excess of the Taxable Wage Base (for excess plans), or Final Average Compensation (for offset plans)) Covered Compensation will be determined based on the following year: [ ] current Plan Year [ ] __________ Plan Year (may be Covered Compensation for a Plan Year earlier than the current Plan Year, provided the earlier Plan Year is the same for all Employees and is not earlier than the later of (A) the Plan Year that begins 5 years before the current Plan Year, and (B) the Plan Year beginning in 1989. If the Plan Year entered is more than five years prior to the current Plan Year, the Participant's Covered Compensation will be that determined under the Covered Compensation table for the Plan Year five years prior to the current Plan Year. For benefit accrual purposes, Participation shall not include: ( ) employment prior to the original effective date of the Plan. ( ) employment prior to the date the Participant gained membership in the Plan. ( ) employment other than as an Eligible Employee. ( ) with respect to Participants who were not Eligible Employees under the Plan prior to the first Plan Year beginning on or after January 1, 1988 because their employment began within 5 years of their Normal Retirement Date, employment prior to becoming a Participant. In order to be credited with a year of Participation, an Active Participant must have: (Not applicable if elapsed time method of ( ) 501 Hours of Service: ( ) [. . . .] Hours of Service (cannot exceed 1,000); ( ) 1,000 Hours of Service E. Standard Form of Retirement Income: ( ) Life annuity, 10 years guaranteed ( ) Life annuity and 50% survivor benefit ( ) Life annuity and 100% survivor benefit For purposes of determining the Actuarial Equivalent, of any benefit, the following mortality and interest rate assumptions shall be used: Interest rate - Pre-retirement: [. . . .]% Post-retirement: [. . . .]% (must be between 7 1/2% and 8 1/2% if the plan provides for permitted disparity under section 401(l) of the Code. Mortality table: [. . . .] (must be standard mortality table as described in section 1.401(a)(4)-12 of the Income Tax regulations if the plan provides for permitted disparity under section 401(l) of the Code. The formula with wear-away and formula with extended wear-away Fresh-Start rules below take into account an Employee's past service in determining the Employee's benefit accruals under the Plan: either of these Fresh-Start rules may cause the Plan to fail to satisfy the safe harbor for past service in section 1.401(a)(4)-5(a)(3) of the Income Tax Regulations. The Accrued Benefit of each Participant in the Fresh-Start Group under the Plan will be equal to: ( ) 1. Formula with wear-away -- the greater of: (a) the Participant's Frozen Accrued Benefit, if any, and (b) the Participant's Accrued Benefit determined with respect to the current benefit formula as applied to the Participant's total years of Service under the Plan. ( ) 2. Formula without wear-away -- the sum of: (a) the Participant's Frozen Accrued Benefit, if any, and (b) the Participant's Accrued Benefit determined with respect to the current benefit formula as applied to the Participant's years of Service beginning after the Fresh-Start Date. If, however, the Participant's benefit under the Plan is accrued under the fractional accrual rule or the 3 percent accrual rule, or if this Plan satisfies the safe harbor for insurance contract plans in Income Tax Regulations section 1.401(a)(4)-3(b)(7), this formula without wear-away will not apply, and the Participant's Accrued Benefit will be determined in accordance with the formula with wear-away above. ( ) 3. Formula with extended wear-away -- the greater of the Accrued Benefit determined for the Participant under the formula with wear-away or the formula without wear-away above. If, however, the Participant's benefit under the Plan is accrued under the 3 percent accrual rule, the formula with extended wear-away will not apply, and the Participant's Accrued Benefit will be determined in accordance with the formula with wear-away above. Definition of Fresh-Start Group. The Fresh-Start Group consists of all Participants who have Accrued Benefits as of the Fresh- Start Date and have at least one Hour of Service with the Employer after that date. However, if designated below, the Fresh-Start Group shall be limited to: ( ) section 401(a)(17) Participants (may be elected only with respect to a Tax Reform Act of 1986 (TRA '86) Fresh-Start Date and with respect to an Omnibus Budget Reconciliation Act of 1993 (OBRA '93) Fresh-Start Date). A TRA '86 Fresh-Start Date means a Fresh Start Date that is not earlier than the last day of the last Plan Year beginning before the First Plan Year beginning on or after January 1, 1989 (the statutory effective date), and not later than the last day of the last Plan Year beginning before the first Plan Year beginning on or after January 1, 1994 (the regulatory effective date). An OBRA '93 Fresh-Start Date means the last day of the last Plan Year beginning before the first Plan Year beginning on or after January 1, 1994. ( ) Members of an acquired group of employees An acquired group of employees means employees of a prior employer who become employed by the Employer in a transaction between the Employer and the prior employer that is a stock or asset acquisition, merger, or other similar transaction involving a change in the employer of the employees of the trade or business on or before [ / / ] (enter a date no later than the end of the transition period defined in section 410(b)(6)(c)(ii) of the Code, if the date selected is after February 10, 1993). The date in the preceding sentence will be the Fresh-Start Date with respect to members of the acquired group described below. The acquired group consists of: ___________________________________ ( ) Employees with a Frozen Accrued Benefit that is attributable to assets and liabilities transferred to the Plan as of a Fresh- Start Date in connection with the transfer and for whom the current formula is different from the formula used to determine the Frozen Accrued Benefit. ( ) The Fresh Start Date in connection with the transfer is: [ / / ] (must be the date as of which the Employees begin accruing benefits under the Plan). ( ) The group of employees with a Frozen Accrued Benefit that is attributable to assets and liabilities transferred to the Plan If elected by the Employer below, each Participant's Frozen Accrued Benefit will be adjusted in accordance with the following fraction: [ ] Old Compensation fraction [ ] New Compensation fraction [ ] Reconstructed Compensation Fraction (may be selected only if the latest Fresh-Start Date is before the first day of the first Plan Year beginning after January 1, 1994). For purposes of calculating a Participant's "Reconstructed Compensation", the selected year will be the Plan Year beginning in (the selected year must begin after the latest Fresh-Start Date): ( ) Special adjustment for section 401(a)(17) Participants. XIII. QUALIFIED JOINT AND SURVIVOR ANNUITY The survivor annuity of the Qualified Joint and Survivor Annuity shall ( ) 50% ( ) 66-2/3% ( ) 100% of the annuity payable during the joint lives of the Participant and the Participant's spouse. XIV. OPTIONAL FORMS OF BENEFIT The following optional forms of benefit shall be available in addition to the optional forms of benefit available under Section 9.4 of the Plan: [Note: If the Plan is an amendment and restatement of an Existing Plan, optional forms of benefit protected under section 411(d)(6) of the Code may not be eliminated, unless permitted by IRS regulations Life insurance ( ) shall; ( ) shall not be a permissible investment. If the Plan is not funded with life insurance, the pre-retirement death benefit shall be: ( ) the Qualified Pre-retirement Survivor Annuity (the required spousal benefit) only. ( ) The Actuarial Value of the Participant's Accrued Benefit. If the Participant's Spouse is the Beneficiary, such benefit shall be offset by the Actuarial Value of the Qualified Pre-retirement Survivor Annuity. If the Plan is funded with life insurance, the face amount of the policies purchased will be [. . . .] (not to exceed 100) times the Participant's anticipated monthly retirement benefit. In order to be credited with a year of Service for vesting purposes, a Participant shall complete [. . . .] (not to exceed 1,000) Hours of Service. (Not applicable if elapsed time method of crediting service All of an Employee's years of Service with the Employer shall be counted to determine the vested interest of such Employee except: ( ) Years of Service before age 18. ( ) Years of Service before the Employer maintained this Plan or a predecessor plan. ( ) Years of Service before the effective date of ERISA if such Service would have been disregarded under the Service Break rules of the prior plan in effect from time to time before such date. For this purpose, Service Break rules are rules which result in the loss of prior vesting or benefit accruals, or deny an Employee's eligibility to participate by reason of separation or failure to complete a required period of Service within a specified period of time. The vested interest of each Employee (who has an Hour of Service on or after January 1, 1989) in his Employer-derived Accrued Benefit shall be determined on the basis of the following schedule: ( ) 100% immediately vested. [Note: Mandatory if more than 1 Eligibility Year of Service is required.] ( ) 100% immediately vested after [. . . .] (not to exceed 5) years of Service. ( ) [. . . .]% (not less than 20%) vested for each year of Service, beginning with the [. . . .] (not more than the 3rd) year of Service until 100% vested. ( ) the Top Heavy Minimum Vesting Schedule selected in B., below. ( ) Other: [. . . .] (must be at least as favorable as any one of the above 4 options). ( ) Effective Date Vesting. Each Employee who is a Participant on the Effective Date shall be 100% immediately vested. B. Top Heavy Minimum Vesting Schedule. One of the following schedules will be used for years when the Plan is or is deemed to be Top-Heavy. ( ) 100% immediately vested after [. . . .] (not to exceed 3) years of Service. ( ) 20% vested after 2 years of Service, plus [. . . .]% vested (not less than 20%) for each additional year of Service until 100% vested. If the vesting schedule under the Plan shifts in or out of the Minimum Schedule above for any Plan Year because of the Plan's Top-Heavy status, such shift is an amendment to the vesting schedule and the election in Section 6.5 of the Plan applies. Loans ( ) shall; ( ) shall not be permitted. Following a complete termination of the Plan by the Employer, any assets which remain after provisions have been made to satisfy all liabilities of the Plan to Participants and Beneficiaries ( ) shall revert to the Employer in cash. ( ) shall be allocated among Participants on a uniform and non-discriminatory basis, subject to the limitation on benefits of Section 8.1 of the Plan. Note: If this is an amendment and restatement of an existing Plan which did not previously provide for a reversion, an election that excess assets revert to the Employer shall not be effective before the end of the 5th calendar year following the date of this Adoption Agreement. ( ) The provisions of Article XV of the Plan shall always apply. ( ) The provisions of Article XV of the Plan shall only apply in Plan Years after 1983, during which the Plan is or becomes Top-Heavy. If the Employer has adopted Sponsor's paired defined contribution plan number 01001, 01003, 01004, 01005 and/or 01006 in addition to this Plan and the definition of "Eligible Employee" in all paired plans is identical, then Non-Key Employees who are Participants in this Plan shall receive the minimum Top Heavy benefit accrued under this Plan and shall receive no minimum allocation under the paired defined contribution plan or plans. If a Participant in this Plan who is a Non-Key Employee is covered under another qualified plan maintained by the Employer, other than a paired plan of the Sponsor, the minimum Top Heavy allocation or benefit required under section 416 of the Code shall be provided to such Non-Key Employee under: ( ) the Employer's qualified defined contribution plan. C. Determination of Present Value For purposes of establishing present value to compute the Top-Heavy Ratio, any benefit shall be discounted only for mortality and interest based on the following: ( ) Interest Rate [....]% (must be between 7 1/2% and 8 1/2% if the plan provides for permitted disparity under section 401(l) of the Code). Mortality table: [....] (must be standard mortality table as described in section 1/401(a)(4)-12 of the Income Tax regulations if the plan provides for permitted disparity under section 401(l) of the Code). ( ) The Interest Rate(s) and Mortality Table specified under Section 1.2 of the Plan For purposes of computing the Top-Heavy Ratio, the Valuation Date shall be one of the following: ( ) the first day of the Plan Year ( ) the last day of the Plan Year [Note: The date selected must be the same date used for computing Plan costs for minimum funding, regardless of whether a valuation is performed that year.] If the Employer maintains or has ever maintained another qualified plan (other than the Sponsor's paired defined contribution plan number 01001, 01003, 01004, 01005 and/or 01006) in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant, the adopting Employer must complete this Section. The Employer must also complete this Section if it maintains a welfare benefit fund, as defined in section 419(e) of the Code, or an individual medical account, as defined in section 415(1)(2) of the Code, under which amounts are treated as Annual Additions with respect to any Participant in the Plan. (If the Employer maintains only paired plans of the Sponsor this Section should not be completed.) (a) If a Participant is, or ever has been, covered under another qualified defined benefit plan maintained by the Employer, annual benefits shall be limited to comply with section 415(b) of the Code: ( ) by freezing or reducing Annual Benefits under this Plan. ( ) by freezing or reducing Annual Benefits in the other qualified defined benefit plan. (b) If a Participant is, or has ever been, a participant in one or more qualified defined contributions plans maintained by the Employer, the "1.0" aggregate limitation of section 415(e) of the Code shall be satisfied by: ( ) freezing or reducing Annual Benefits under this Plan. ( ) freezing or reducing the Annual Additions under the defined contribution plan or plans. The pre-termination restrictions in Section 8.3 of the Plan will be effective [ / / ] (no later than the first day of the 1994 plan year). The Employer hereby represents that: a. It is aware of, and agrees to be bound by, the terms of the Plan. b. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the Plan and has consulted legal and tax counsel to the extent necessary. c. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. XXII. RELIANCE ON PLAN QUALIFICATION An Employer who has ever maintained or who later adopts any plan (including, after December 31, 1985, a welfare benefit fund, as defined in section 419(e) of the Code, which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as defined in section 419(d)(3) of the Code, or an individual medical account, as defined in section 415(1)(2) of the Code) in addition to this Plan (other than the Sponsor's paired defined contribution plan number 01001, 01003, 01004, 01005 or 01006 may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under section 401 of the Code. If an Employer who adopts or maintains multiple plans wishes to obtain reliance that his or her plans are qualified, application for a determination letter should be made to the appropriate key district office of the Internal Revenue Service. In addition, the Employer may rely upon the opinion letter issued by the national Office of the Internal Revenue Service only if the plan adopted by the Employer satisfies one of the safe-harbors provided in regulations under section 401(a)(26) of the Code with respect to its prior benefit structure or is deemed to satisfy section 401(a)(26) under such regulations. If the employer wishes to obtain reliance that its plan is qualified, the employer may request a determination from the appropriate Key District Director with regard to its prior benefit structure. The Employer may not be entitled to rely on the opinion letter issued by the National Office in certain other circumstances, which are specified in the opinion letter issued with respect to the plan or in section 6 of Revenue Procedure 89-9, as amended. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Defined Benefit Plan, Basic Plan Document No. 02, and the Dreyfus Trust Agreement all as amended from time to time. In the event the Sponsor amends the Basic Plan Document or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, Dreyfus Corporation, is available to answer questions regarding the intended meaning of any Plan provisions, adoption of the Plan and the effect of an opinion letter at: _________________________________________________________________________. IN WITNESS WHEREOF, the Employer and the Trustee have executed this instrument the ______ day of _____ , 19__. If applicable, the appropriate corporate seal has been affixed and attested to. Name and Title (Corporate Trustee only) The Employer named in section I.A. below hereby establishes or restates a Profit Sharing Plan ("Plan") and Custodial Account appointing The Dreyfus Trust Company as the custodian ("Custodian") under the related custodial agreement ("Custodial Agreement"). The Custodial Account shall consist of such sums as shall be paid to the Custodian, the investments thereof and earnings thereon. The terms of the Plan are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Custodial Agreement, both as amended from time to time, which are hereby adopted and incorporated herein by reference. B. The Employer is a ( ) partnership; ( ) sole proprietor. C. IF this is a new Plan, the Effective Date of the Plan is: [....]. D. If this is an amendment and restatement of an existing Plan, enter name of Plan [....] and date adopted [....]. The effective date of the amended Plan is: [....] Each Eligible Employee will be eligible to participate in this Plan, except the following: ( ) Employees who have not attained the age of [....] (not to exceed age 21). ( ) Employees who have not completed [....] Eligibility Years of service. (May not exceed 2 years). Note: The term Employee includes all employees of the Employer and any employer required to be aggregated with the Employer under Section 414(b), (c), (m) or (o) of the Internal Revenue Code ("Code"), and individuals considered employees of any such employer under section 414(n) or (o) of the Code. Normal Retirement Age shall mean age 59 1/2. The Employer's contributions ( ) shall; ( ) shall not be made from its current or accumulated Net Profits. (If left blank, contributions may only be made from Net Profits). The contribution will be an amount fixed by appropriate action of the Employer and shall not be integrated with Social Security. Distribution of benefits upon retirement or death of a Participant shall be subject to the Automatic Annuity rules of Section 8.2 of the Plan. Vesting shall be full and immediate. The Top-Heavy provisions of Article XIII shall always apply. If the Employer has adopted Sponsor's paired defined contribution plan number 01001, 01004 or 01005 in addition to this Plan, then the minimum allocation required by Section 13.3 will be provided ( ) under this Plan; ( ) under such other paired defined contribution plan. If the Employer has adopted Sponsor's paired defined benefit plan number 02001, then Participants in this Plan (or another paired defined contribution plan) who are covered under the paired defined benefit plan shall receive the minimum top heavy benefit under the paired defined benefit plan and shall receive no minimum allocation. If a Participant in this Plan who is a Non-Key Employee is covered under another qualified plan maintained by the Employer, other than a paired plan of the Sponsor, the minimum top heavy allocation or benefit required under section 416 of the Code shall be provided to such Non-Key Employee under: ( ) the Employer's other qualified defined contribution plan. ( ) the Employer's qualified defined benefit plan. C. Determination of Present Value If the Employer maintains a defined benefit plan in addition to this Plan, and such plan fails to specify the interest rate and mortality table to be used for purposes of establishing present value to compute the Top-Heavy Ratio, then the following assumptions shall be used: Interest Rate [....]% Mortality Table [....]% If the Employer maintains or has ever maintained another qualified plan (other than the Sponsor's paired defined contribution plan numbers 01001, 01004 or 01005 or the Sponsor's paired defined benefit plan number 02001), in which any Participant in this Plan is (or was) a Participant or could possibly become a Participant, the following provision(s) must apply. The Employer must also complete this Section if it maintains a welfare benefit fund, as defined in section 419(e) of the Code, or an individual medical account, as defined in section 415(l)(2) of the Code, under which amounts are treated as Annual Additions with respect to any Participant in the Plan. (If the Employer maintains only paired plans of the Sponsor this Section should (a) If the Participant is covered under another qualified defined contribution plan maintained by the Employer other than a Master or Prototype Plan, Annual Additions for any Limitation Year shall be limited to comply with section 415(c) of the Code: ( ) in accordance with Sections 6.4(e) - (j) as though the other plan were a Master or Prototype Plan. ( ) by freezing or reducing Annual Additions in the other qualified defined contribution plan. (b) If a Participant is or has ever been a participant in a qualified defined benefit plan maintained by the Employer, the "1.0" aggregate limitation of section 415(e) of the Code shall be satisfied by: ( ) freezing or reducing the rate of benefit accrual under the qualified defined benefit plan. ( ) freezing or reducing the Annual Additions under this Plan (or, if the Employer maintains more than one qualified defined contribution plan, as indicated in (a) above): In accordance with the provisions of the Custodial Agreement, the Employer hereby directs the Custodian to invest the assets of the Fund as indicated per the attached Participant's Plans Detail form. The Employer hereby represents that: a. It is aware of, and agrees to be bound by, the terms of the Plan. b. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the Plan and has consulted legal and tax counsel to the extent necessary. c. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. XI. RELIANCE ON PLAN QUALIFICATION An Employer who has ever maintained or who later adopts any plan (including, after December 31, 1985, a welfare benefit fund, as defined in section 419(e) of the Code, which provides post-retirement medical benefits allocated to separate accounts for Key Employees, as defined in section 419A(d)(3) of the Code, or an individual medical account, as defined in section 415(l)(2) of the Code) in addition of this Plan (other than the Sponsor's defined contribution paired plan number 01001, 01004, or 01005 or the Sponsor's defined benefit paired plan number 02001) may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under section 401 of the Code. If the Employer who adopts or maintains multiple plans wishes to obtain reliance that his or her plan(s) are qualified, application for a determination letter should be made to the appropriate Key District Director of Internal Revenue. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Defined Contribution Plan, Basic Plan Document No. 01, and the Dreyfus Custodial Agreement both as amended from time to time. In the event the Sponsor amends Basic Plan Document No. 01 or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, The Dreyfus Corporation is available to answer questions regarding the intended meaning of any Plan provisions adoption of the Plan and the effect of an Opinion Letter at 144 Glenn Curtiss Boulevard, Uniondale, New York 11556-0144 [(516) 338-3418]. By signing the Application you acknowledge that you have received and read the Fund(s) current prospectus(es), the Dreyfus Easy Standardized/Paired Retirement Plan and the attached Custodial Agreement. You accept the terms of the Plan and Custodial Agreement and you appoint The Dreyfus Trust Company to be Custodian. By signing here, The Dreyfus Trust Company accepts this Adoption Agreement and its appointment as Custodian of your Dreyfus Easy Standardized/Paired Retirement Plan. The Adoption Agreement will be maintained by The Dreyfus Trust Company. The Dreyfus Trust Company Date Basic Plan Document No. 01 This Custodial Agreement is for use in connection with Dreyfus Easy Standardized/Paired Prototype Money Purchase Plan (No. 01005) or Dreyfus Easy Standardized/Paired Prototype Profit Sharing Plan (No. 01006). The Employer named on the Adoption Agreement, by signing the Adoption Agreement, hereby establishes a Custodial Agreement, and The Dreyfus Trust Company (herein referred to as the "Custodian"), by countersigning the Adoption Agreement, accepts the custodianship thereof upon the following conditions: 1. The Employer represents that the Employer is either a sole proprietorship or a partnership. 2. The Custodial Agreement is established solely for the purpose of holding such cash or monetary contributions made by or on behalf of participants in the Plan (the "Participants") as the Custodian may receive from time to time from the Employer, rollover contributions and transfers from other qualified retirement plans (to the extent permitted under the Plan), and investments purchased therewith pursuant to paragraph 5 hereof (the "Custodial Account"). Contributions under the Plan shall be accepted by the Custodian only when made through the Employer, and shall be accompanied by written instructions from the Employer specifying the Participant's account to which they are to be credited (including the type of contribution being made) and the investments to be acquired therewith. The Custodian shall hold and treat the contributions made by or on behalf of each Participant as a separate account under the Agreement. The Custodian shall have no obligation to verify the allowability or amount of contributions and may rely solely on the representations of the Employer with respect thereto. 3. The Custodian shall make such distributions (including transfers to a qualified retirement plan or an individual retirement account) as the Employer shall direct in writing. Such directions shall specify whether the distribution is a normal distribution (i.e., a distribution on or after age 59 1/2), a premature distribution (i.e., a distribution before age 59 1/2), on account of the death or disability of the Participant, a return of an excess contribution and such other information as the Custodian may require in order to accurately report the nature of the distribution to the appropriate governmental authorities. At no time shall it be possible for any part of the assets of the Custodial Account to be used for or diverted to purposes other than for the exclusive purpose of providing benefits to Participants and their beneficiaries and defraying the reasonable expenses of administering the Plan. In connection with the making of any distributions, the Custodian may rely solely on the accuracy of all facts supplied at any time by the Employer, including any written designation of beneficiary. If distributions are to be made in the form of a joint and survivor or pre-retirement survivor annuity, such instructions, shall specify the amount to be applied to the purchase of such an annuity contract from an insurance company. In the case of a direction to distribute in a form other than an annuity or to a beneficiary other than the Participant's spouse, the Employer shall be deemed to certify that the directed distribution complies with the distribution rules applicable thereto and that where applicable, it has received a validly executed spousal consent to the distributions in the form or to the person to whom distribution is directed. Prior to making any distribution, the Employer shall supply the Custodian with such documentation as it may reasonably require including documentation with respect to any estate or other inheritance taxes which may be due on the Participant's death. In making such distributions upon death, the Custodian may retain a reserve for taxes and expenses in accordance with the rules of paragraphs 9 and 10 hereof. 4. The Employer shall file all beneficiary designations and changes thereof with the Custodian. To be effective, any designation or change of designation must be received by the Custodian prior to the death of the Participant. In the event that there is no such beneficiary designation on file with the Custodian or if all beneficiaries have predeceased the Participant, the Custodian shall make distributions to such persons and in such amounts as may be specified in writing by the Employer. 5. The amount of each contribution credited to a Participant's account shall be applied to the following in accordance with the Employer's written instructions: (a) Fund Shares: Shares of ownership in an investment company registered under the Investment Company Act of 1940, as amended, the shares of which are sponsored, managed, advised, subadvised or administered by The Dreyfus Corporation (the "Sponsor") or any of its affiliates, or shares in any other investment company as may from time to time be offered by the Sponsor (the "Fund"), in accordance with the respective Fund's current prospectus and which the Custodian has agreed to hold in the Custodial Account. (Such shares are referred to herein as "Fund Shares"). (b) Other Investments: Other investments allowed by law, offered by the Sponsor and which the Custodian has agreed in writing with the Sponsor to hold in the Custodial Account. (Fund Shares and such other investments are referred to collectively as "Investments"). A receipt for each contribution received and showing the investment thereof and current status of the Custodial Account with respect to each Participant shall be prepared by the Custodian and delivered to the Employer. All dividends and capital gain distributions received on the Fund Shares held by the Custodian in Custodial Account shall be reinvested in accordance with the respective Fund's current prospectus in such shares and credited to such Account. The Custodian shall furnish the Employer with a statement of the Custodial Account with respect to each Participant (including a statement as to each Participant's account) no less frequently than once a calendar year which shall be deemed to be the sole accounting by the Custodian necessary under this Agreement. If the Custodian does not receive a written objection to such accounting from the Employer within one hundred eighty (180) days after the date the accounting is sent by the Custodian, the Custodian shall be relieved from all liabilities and responsibilities that may arise in connection with any matters covered by the accounting. 6. Where the Employer allows, Participants may authorize and direct the Custodian in writing to exchange any or all Fund Shares held by the Custodian on behalf of such Participant, for any other Fund Shares, subject to and in accordance with the terms and conditions of any exchange privilege, including the telephone privilege, offered with respect to Fund Shares. The Employer may authorize an investment advisor to make such exchanges for all accounts maintained under the Plan, if allowed by the Sponsor, subject to and in accordance with such terms and conditions as may be agreed upon in writing from time to time by the Sponsor and the Custodian. If the Employer elects the telephone exchange privilege or if the Employer in writing authorizes an investment advisor to make exchanges as described above, the Custodian shall be entitled to rely and act on telephone instructions reasonably believed by it to be genuine, received from any person directing the exchange of any or all Fund Shares held by the Custodian on behalf of the Participant for any other Fund Shares as specified in such telephonic instructions, provided that such Fund is available for sale in the state of residence of the Participant. The Custodian will employ reasonable procedures, such as requesting a form of personal identification, to confirm that telephonic instructions are genuine and, if it does not follow such procedures, it may be liable for any losses due to unauthorized or fraudulent instructions. It is understood and agreed that the telephone exchange privilege is subject to the limitation specified above. The Employer understands and agrees that the Custodian, any Dreyfus Fund, the Sponsor or any subsidiary of the Sponsor, or their respective officers and employees, will not be held liable and will be fully protected by the Employer against any loss, expense or cost (including attorney's fees) arising out of any telephone exchange request reasonably believed to be genuine. The Employer certifies and agrees that the certifications, authorizations, directions and restrictions contained herein will continue until the Custodian receives written notice of any change or revocation. The Employer agrees and understands that the Funds and the Custodian reserve the right to refuse any telephonic instructions. 7. The Custodian shall be compensated for its services under this Agreement in accordance with the fee schedule in effect from time to time and shall be reimbursed for its expenses. 8. Any income tax or other taxes of any kind whatsoever that may be levied or assessed upon or in respect to the Custodial Account shall, unless allocable to a particular Participant's Account, be charged proportionately to the accounts of all Participants held under this Agreement. Any transfer taxes incurred in connection with the investment and reinvestment of the assets of the Custodial Account, all other administrative expenses incurred by the Custodian in the performance of its duties, including fees for legal services rendered to the Custodial Account and such compensation to the Custodian as may be set forth in the fee schedule attached to the Application as revised from time to time by the Custodian shall, to the extent that they are not allocable to a particular Participant's account under this Agreement, be allocated proportionately to the accounts of all Participants held under this Agreement. 9. The Employer shall at any time have the right to remove the Custodian by delivering to it a notice in writing to that effect which notice shall also designate a successor custodian. Upon receipt by the Custodian of written acceptance by the successor custodian of its appointment, the removal of the Custodian shall be effective and the Custodian shall forthwith transfer and pay over to such successor custodian the assets of the Custodial Account and such records pertaining thereto as the successor custodian may reasonably request in writing. The Custodian may, however, reserve such Fund Shares as may be required for the payment of all its fees, compensation, costs and expenses and for the payment of all liabilities of or against the assets of the Custodial Account or Custodian and where necessary may liquidate such reserved Fund Shares. Any balances of such reserve remaining after the payment of all such items shall be paid over to the successor custodian. Any successor custodian must meet the applicable requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal Revenue Code of 1986, as amended (the "Code"). 10. The Custodian shall at any time have the right to resign as custodian under this Agreement by written notice to the Employer, which shall be effective 90 days after it is sent. Upon receipt by the Custodian of written acceptance by a successor custodian of such appointment, the Custodian is authorized to act in the same manner as provided in paragraph 9 hereof. In the event the Employer fails to appoint a successor custodian, the Custodian will terminate the account in a manner consistent with the Code. 11. The Custodian shall keep accurate and detailed accounts of all contributions, receipts, investments, distributions, disbursements and all other transactions. The Custodian shall prepare and file such reports and returns as required of a custodian under ERISA or the Code. 12. The Custodian shall mail to the Employer all notices, prospectus(es), financial statements, proxies and proxy soliciting material relating to the Investments held hereunder except in accordance with the written instructions of the Employer. 13. At no time shall it be possible for the Custodian to knowingly engage in any transaction which is prohibited by section 4975 of the Code, or section 406 of ERISA. 14. Upon written request of the Employer, the Custodian shall return any contribution made by the Employer because of a mistake of fact; because it is conditioned upon the Plan's initial qualification under the Code and the Plan is determined to be disqualified; or because it is conditioned upon deductibility under section 404 of the Code and a deduction is disallowed for such contribution, within one year of the mistaken contribution, the date the initial qualification of the Plan is denied or the date the deduction is disallowed, respectively. The Custodian shall be under no obligation to inquire as to the facts surrounding any requested return and may rely on the Employer's written representations with respect thereto. 15. The Custodian shall be under no duties whatsoever except such duties as are specifically set forth as such in this Custodial Agreement, and no implied covenant or obligation shall be read into this Custodial Agreement against the Custodian. The Employer shall have the sole authority and responsibility for the enforcement or defense of the terms and conditions of the Custodial Agreement against or on behalf of any person or persons claiming any interest in the Custodial Account. 16. If the Employer is a partnership, upon the death of the last surviving partner, the legal representative of such partner's estate shall be deemed to be the Employer under this Agreement. Upon the death of the Employer if the Employer is a sole proprietorship, the legal representative of such Employer's estate shall be deemed to be the Employer under this Agreement. 17. The Custodian reserves the right to amend all or part of the terms of this Custodial Agreement upon written notice to the Employer in any manner which would not disqualify the Custodial Agreement from complying with sections 401 and 501 of the Code. 18. The Custodian may employ such agents, experts and counsel as it may, from time to time, deem necessary or appropriate and may delegate discretionary responsibilities thereto. The reasonable fees and expenses of such agents, experts and counsel shall be charged to the Custodial Account in accordance with paragraph 8 of this Agreement. 19. The Custodian shall be liable only for its negligence or willful misconduct in performing or failing to perform the terms of the Custodial Agreement, and the Custodian shall not be liable for any action, or failure to act, it shall take when such action or failure to act is in accordance with the instructions of the Employer or the Sponsor, or is in accordance with the terms and conditions of the exchange privilege, including the telephone exchange privilege, offered with respect to Fund Shares. The Custodian shall not be required to give bond or security for the performance of its duties. The Employer shall fully indemnify and hold harmless the Custodian from any liability, cost or expense (including attorney's fees), incurred in connection with the Custodial Agreement, except that which may arise from the negligence or willful misconduct of the Custodian. 20. The Employer understands that neither the Sponsor nor the Custodian will render legal or tax advice and states that it has consulted legal and tax counsel to the extent necessary. 21. This Custodial Agreement shall be construed, administered and enforced according to the law of the State of New York, except to the extent preempted by ERISA. In the event of any conflict between the terms of the Plan and the terms of the Custodial Agreement, the terms of the Custodial Agreement shall control. BASIC PLAN DOCUMENT NO. 02 DREYFUS PROTOTYPE DEFINED BENEFIT PLAN BASIC PLAN DOCUMENT NO. 02 1.0 "Accrued Benefit" at any time shall mean the product of the Standard Form of Retirement Income which would be payable at the Participant's Normal Retirement Date multiplied by a fraction the numerator of which is his years of Participation at such date and the denominator of which is the years of Participation he could have completed at Normal Retirement Date. Such fraction shall not exceed one (1.0). When determining the Accrued Benefit, the Standard Form of Retirement Income is the annual benefit to which the Participant would be entitled if he continued to earn annually until Normal Retirement Date the same rate of Compensation upon which his Standard Form of Retirement income would be computed. This rate of Compensation is computed on the basis of Compensation taken into account under the Plan for determining the Standard Form of Retirement Income. For Plan Years beginning before section 411 of the Code is applicable hereto, the Participant's Accrued Benefit shall be the greater of that provided by the Plan, or one-half (1/2) of the benefit which would have accrued had the provisions of this Section 1.0 been in effect. In the event that the Accrued Benefit as of the effective date of section 411 of the Code is less than that provided by this Section 1.0, such difference shall be accrued in accordance with the provisions of this Section 1.0. 1.1 "Act" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.2 "Actuarial Equivalent" shall mean, with respect to any benefit under the terms of this Plan, the actuarial present value of a stated benefit. Except to the extent a Participant's benefits are suspended in accordance with the suspension of benefits rules in section 5.7 of the Plan, the amount of any form of benefits under the terms of this Plan will be the Actuarial Equivalent of the Participant's Accrued Benefit in the Standard Form of Retirement Income commencing at Normal Retirement Age. The Actuarial Equivalent shall be determined on the basis of the interest rate and mortality table specified in the Adoption Agreement. In the case of a Plan that provides for the disparity permitted under section 401(l), if benefits commence to a Participant at an age other than Normal Retirement Age, the Participant's benefit will be adjusted in accordance with section 5.3 of the Plan. In the event that the adopting Employer does not specify the interest rates and mortality table, actuarial equivalence shall be determined by discounting all future payments for interest and mortality on the basis of the 1971 Group Annuity Mortality Table (Unisex) without projection and six percent (6%) interest. Notwithstanding the preceding paragraph, for purposes of determining the amount of distribution in a form other than a non-decreasing annuity payable for a period of not less than the life of the Participant (or, in the case of a Qualified Pre Retirement Survivor Annuity, the life of the surviving spouse), actuarial equivalence will be determined on the basis of the mortality table specified in the Adoption Agreement, and the section 417 interest rate(s), if it produces a benefit greater than that determined under the preceding paragraph. The section 417 interest rate(s) are as follows: (i) the "applicable PBGC interest rate" if the actuarial present value of the benefit (using such rate(s)) is not in excess of twenty five thousand dollars ($25,000); or (ii) one hundred twenty percent (120% of the "applicable PBGC interest rate" if the actuarial present value of the benefit exceeds twenty five thousand dollars ($25,000) (as determined under clause (i) above). In no event shall the actuarial present value determined under this clause (ii) be less than twenty five thousand dollars ($25,000). The "applicable PBGC interest rate" is the interest rate(s) which would be used (as of the first day of the Plan Year which contains the Annuity Starting Date) by the PBGC for a trusteed single-employer plan to value such benefit upon termination of an insufficient trusteed single-employer plan. The applicable PBGC interest rate limitations shall apply to distributions in Plan years beginning after December 31, 1984. Notwithstanding the preceding sentence, the applicable PBGC interest rate limitations shall not apply to any distributions commencing in Plan Years beginning before January 1, 1987, if such distributions were determined in accordance with the interest rate(s) as required by regulations section 1.417(e)-IT(e) including the PBGC immediate interest rate). The applicable PBGC interest rate limitations shall not apply to annuity contracts distributed to or owned by a Participant prior to September 17, 1985, unless additional contributions are made under the Plan by the Employer with respect to such contracts. In addition, the applicable PBGC interest rate limitations shall not apply to annuity contracts owned by the Employer or distributed to or owned by Participant prior to the first Plan Year beginning after December 31, 1988, if the annuity contracts satisfied the requirements in section 1.401(a)-11T and 1.417(e)-IT of the regulations. The preceding sentence shall not apply if additional contributions are made under the Plan by the Employer with respect to such contracts on or after the beginning of the first Plan Year beginning after December 31, 1988. If as a result of actuarial increases to the benefit of a Participant who delays commencement of benefits beyond Normal Retirement Age, the Accrued Benefit of such Participant would exceed the Code section 415 limitations under section 8.1(e) of the Plan for such year, immediately before the actuarial increase to the Participant's benefit that would cause such Participant's benefit to exceed the limitations of section 415 of the Code, payment of benefits to such Participant will be suspended in accordance with section 5.7 of the Plan, if applicable; otherwise, distribution of the Participant's benefit will commence. 1.3 "Actuarial Value" shall mean the value of a benefit, when computed on the date of such determination, on the basis of the actuarial assumptions used to determine Actuarial Equivalence. 1.4 "Adoption Agreement" shall mean the document executed by the adopting Employer which contains all the options which may be selected and which incorporated this Prototype Plan by reference. 1.5 "Affiliated Employer" shall mean any corporation which is a member of a controlled group of corporations (as defined in section 414(b) of the Code) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in section 414(c) of the Code) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in section 414(m) of the Code) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to regulations under section 414(o) of the Code. 1.6 "Anniversary Date" shall mean each anniversary of the Effective Date, unless otherwise stated in the Adoption Agreement. 1.7 "Annuity Starting Date" shall mean the first day of the first period for which an amount is paid as an annuity or any other form. If benefit payments in any form are suspended pursuant to section 5.7 of the Plan for an Employee who continues in service without a separation and who does not receive a benefit payment the recommencement of benefit payments shall be treated as a new Annuity Starting Date. 1.8 "Beneficiary" shall mean the person, persons, or trust designated by the Participant to receive benefits in the event of death under the terms of the Plan. 1.9 "Board of Directors" shall mean the Board of Directors of the Employer if the Employer is an incorporated business entity. 1.10 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.11 "Committee" shall mean the person or persons appointed by the Employer to administer the Plan in accordance with Article X. If no such Committee is appointed, the Employer shall act as the Committee. 1.12 "Compensation", unless otherwise specified in the Adoption Agreement, shall mean, in the case of an Employee other than a Self-Employed Individual, his section 3401(a) wages, which are actually paid during the determination period. In the case of a Self-Employed Individual, Compensation shall mean his Earned Income. Unless otherwise specified in the Adoption Agreement, the determination period shall be the Plan Year. If elected by the Employer in the Adoption Agreement, Compensation shall also include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not currently includable in the gross income of the Employee by reason of the application of sections 125, 402(e)(3), 402(h) or 403(b) of the Code. The Compensation of a Participant who was on a military leave of absence or on any other authorized leave of absence without pay for the whole or part of a Plan Year shall be his compensation for the last full year worked prior to such Plan Year. "Average Compensation" shall, unless otherwise defined in the Adoption Agreement, mean the average of a Participant's Compensation for the three (3) consecutive Plan Years of Service ending in the current year or in any prior year that produce the highest average. Compensation is averaged on an annual basis over the participant's entire period of service. "Covered Compensation" shall mean the average (without indexing) of the Taxable Wage Bases in effect for each calendar year during the thirty-five (35) year period ending with the calendar year in which the Participant attains (or will attain) Social Security Retirement Age. No increase in Covered Compensation shall decrease a Participant's Accrued Benefit. In determining a Participant's Covered Compensation for a Plan Year, the Taxable Wage Base for all calendar years beginning after the first day of the Plan Year is assumed to be the same as the Taxable Wage Base in effect as of the beginning of the Plan Year for which the determination is being made. Covered Compensation will be determined based on the year designated by the Employer in the Adoption Agreement. A Participant's Covered Compensation for a Plan Year before the thirty-five (35) year period ending with the last day of the calendar year in which the Participant attains Social Security Retirement Age is the Taxable Wage Base in effect as of the beginning of the Plan Year. A Participant's Covered Compensation for a Plan Year after such thirty-five (35) year period is the Participant's Covered Compensation for the Plan Year during which the 35 year period ends. "Final Average Compensation" shall mean the average of a Participant's Compensation as defined in this Section 1.12 for the three (3) consecutive years ending with or within the Plan Year. For this purpose, Compensation in excess of the Taxable Wage Base of any year may not be considered. If a Participant's entire period of service is less than three (3) consecutive years, Compensation is averaged on a annual basis over the Participant's entire period of service. Compensation for any year in excess of the Taxable Wage Base in effect at the beginning of such year shall not be taken into account. No increase in Final Average Compensation will decrease a Participant's Accrued Benefit under the Plan. For years beginning on or after January 1, 1989, and before January 1, 1994, the annual Compensation of each participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $ 200,000. This limitation shall be adjusted by the Secretary at the same time and in the same manner as under section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $ 200,000 limitation is effective on January 1, 1990. For years beginning on or after January 1, 1994, the annual compensation limit of each Participant taken into account for determining all benefits provided under the Plan for any determination period shall not exceed $ 150,000, as adjusted for the cost-of-living in accordance with section 401(a)(17)(b) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such calendar year. If a determination period consists of fewer than 12 months, the annual compensation limit is an amount equal to the otherwise applicable annual compensation limit multiplied by a fraction, the numerator of which is the number of months in the short determination period, and the denominator of which is 12. In determining the Compensation of a Participant for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply, except in applying such rules, the term family shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year. If, as a result of the application of such rules the adjusted annual compensation limitation is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level if this plan provides for permitted disparity), the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this section prior to the application of this limitation. If Compensation for any prior determination period is taken into account in determining a Participant's benefits for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual compensation limit in effect for that prior period. For this purpose, in determining benefits in Plan Years beginning on or after January 1, 1989, the annual compensation limit in effect for determination periods beginning before that date is $200,000. In addition, in determining benefits in Plan Years beginning on or after January 1, 1994, the annual compensation limit in effect for determination periods beginning before that date is $150,000. 1.13 "Contract" shall mean a whole, universal or term life type insurance policy or an annuity contract made available and issued under this Plan or a predecessor Plan. 1.14 "Deferred Retirement Date" shall mean, in the case of any Participant who continues in employment after his Normal Retirement Date, the first day of any month following his actual retirement. 1.15 "Disability Retirement Date" shall mean the first day of any month following the occurrence of Participant's Permanent Disability. 1.16 "Early Retirement Date" shall mean the first day of any month following the date a Participant satisfies the age and service requirements, if any, for early retirement specified in the Adoption Agreement. Upon reaching Early Retirement Date, a Participant's right to his Accrued Benefit shall be fully vested and nonforfeitable, notwithstanding the Plan's vesting schedule. 1.17 "Earned Income" shall mean the net earning from self-employment in the trade or business with respect to which the Plan is established, provided that personal services of the individual are a material income-producing factor Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions by the Employer to a qualified plan to the extent deductible under section 404 of the Code. Net earnings shall be determined with regard to the deduction allowed to the taxpayer by section 164(f) of the Code for taxable years beginning after December 31, 1989. 1.18 "Effective Date" shall mean the date specified in the Adoption Agreement. 1.19 "Eligible Employee" shall mean each Employee who is not excluded from eligibility to participate in the Plan under the Adoption Agreement. 1.20 "Eligibility Year(s) of Service" shall mean the twelve (12) consecutive month period commencing on an Employee's Employment Commencement Date and anniversaries thereof, during which the Employee completed at least one thousand (1,000) Hours of Service (or such lesser number of Hours of Service specified in the Adoption Agreement). In the case of a Participant who does not have any nonforfeitable right to the Accrued Benefit derived from Employer contributions, Eligibility Years of Service before a period of consecutive one (1) year Service Breaks will not be taken into account in computing Eligibility Years of Service if the number of consecutive one (1) year Service Breaks in such period equals or exceed the greater of five (5) or the aggregate number of eligibility Years of Service. Such aggregate number or Eligibility Years of Service will not include any Eligibility Year of Service disregarded under the preceding sentence by reason of prior Service Breaks. Notwithstanding the above, if the Adoption Agreement provides for full and immediate vesting upon completion of the eligibility requirements and an Employee has incurred a one (1) year Service Break before satisfying the Plan's eligibility requirements, all Eligibility Year(s) of Service before such Service Break will not be taken into account. If the elapsed time method of crediting service is specified in the Adoption Agreement, an Employee shall receive credit for service, except for credit which may be disregarded under this Section or Section 2.3, for the aggregate of all time periods commencing on his Employment Commencement Date or Re-Employment Commencement Date and ending on his Severance from Service Date. An Employee shall also receive credit for any Period of Severance of less than twelve (12) months. Fractional periods of a year shall be expressed in terms of days. 1.21 "Employee" shall mean an Owner-Employee, a Self-Employed Individual, a Shareholder-Employee or any other person employed by the Employer or any Affiliated Employer. A "leased employee" shall also be treated as an Employee. The term "leased employee" means any person (other than an employee of the recipient employer) who pursuant to an agreement between the recipient employer and any other person ("leasing organization") has performed services for the recipient employer (or for the recipient employer and related persons determined in accordance with section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. Notwithstanding the preceding paragraph, a leased employee shall not be considered an employee of the recipient employer if: (i) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in section 415(c)(3) of the code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under section 125, section 402(e)(3), section 402(h) or section 403(b) of the Code, (2) immediate participation, and (3) full and immediate vesting; and (ii) leased employees do not constitute more than twenty percent (20%) of the recipient employers nonhighly compensated workforce. 1.22 "Employer" shall mean the corporation, partnership, proprietorship or other business entity which shall adopt the Plan or any successor thereof and any participating Employer designated in the Adoption Agreement. 1.23 "Employment Commencement Date" shall mean the first date with respect to which an Employee performs an Hour of Service. 1.24 "Entry Date", unless otherwise specified in the Adoption Agreement, shall mean the first day of the Plan Year and the first day of the seventh month of the Plan Year. The initial Entry Date shall not precede the original effective date of the Plan. 1.25 "Fresh Start Date" mean the date as defined in Section 5.8 of the Plan. 1.26 "Frozen Accrued Benefit" shall mean the benefit as defined in Section 5.8 of the Plan. 1.27 "Highly Compensated Employee" shall mean an Employee of the Employer described in section 414(q) of the Code and the regulations thereunder. The term Highly Compensated Employee includes Highly Compensated Active Employees and Highly Compensated Former Employees. A Highly Compensated Active Employee includes any Employee who performs service for the Employer during the Determination Year and who, during the Look-Back Year: (i) received Compensation from the Employer in excess of $75,000 (as adjusted pursuant to section 415(d) of the Code); (ii) received Compensation from the Employer in excess of $50,000 (as adjusted pursuant to section 415(d) of the Code) and was a member of the top-paid group for such year; or (iii) was an officer of the Employer and received Compensation during such year that is greater than 50 percent of the dollar limitation in effect under section 415(b)(1)(A) of the Code. The term Highly Compensated Employee also includes: (i) Employees who are both described in the preceding sentence if the term "Determination Year" is substituted for the term "Look-Back Year" and the Employee is one of the 100 Employees who received the most Compensation from the Employer during the Determination Year; and (ii) Employees who are 5 percent owners at any time during the Look-Back Year or Determination Year. If no officer has satisfied the Compensation requirement of (iii) above during either a Determination Year or Look-Back Year, the highest paid officer for such year shall be treated as a Highly Compensated Employee. For this purpose, the Determination Year shall be the Plan Year. The Look-Back Year shall be the twelve-month period immediately preceding the Determination Year. A Highly Compensated Former Employee includes any Employee who separated from Service (or was deemed to have separated) prior to the Determination Year, performs no Service for the Employer during the Determination Year, and was a Highly Compensated Active Employee for either the separation year or any Determination Year ending on or after the Employee's 55th birthday. If an Employee is, during a Determination Year or Look-Back Year, a family member or either a 5 percent owner who is an active or former Employee or a Highly Compensated Employee who is one of the 10 most Highly Compensated Employee ranked on the basis of Compensation paid by the Employer during such year, then the family member and the 5 percent owner or top-ten Highly Compensated Employee shall be aggregated. In such case, the family member and 5 percent owner or top-ten Highly Compensated Employee shall be treated as a single Employee receiving Compensation and plan contributions or benefits equal to the sum of such Compensation and contributions or benefits of the family member and 5 percent owner or top-ten Highly Compensated Employee. For purposes of this section, family member includes the spouse, lineal ascendants and descendants of the Employee or former Employee and the spouse of such lineal ascendants and descendants. The determination of who is a Highly Compensated Employee, including the determination of the number and identity of Employees in the top-paid group, the top 100 Employees, the number of Employees treated as officers and the Compensation that is considered, will be made in accordance with section 414(g) of the Code and the regulations thereunder. (a) Each Hour of Service shall mean and include each hour for which an Employee is compensated by the Employer, or is entitled to be so compensated, for services rendered by him to the Employer. These hours will be credited to the Employee for the computation period in which the duties are (b) Each Hour of Service shall also mean and include each hour for which an Employee is compensated by the Employer, or is entitled to be so compensated, on account of a period of time during which no services are rendered by him to the Employer (regardless of whether the Employee shall have ceased to be an Employee) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than five hundred and one (501) Hours of Service will be credited under this paragraph for a single computation period (whether or not the period occurs in a single computation period). Hours under this paragraph will be calculated and credited pursuant to section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this (c) Each Hour of Service shall also mean and include each hour for which back pay, without regard to mitigation of damages, has been awarded or agreed to by the Employer. The same Hours of Service will not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. Hours of Service will be credited for employment with an Affiliated Employer. Hours of Service will also be credited for employment with a predecessor employer if the Employer maintains the plan of such predecessor or the Employer so elects in the Adoption agreement. Hours of Service will also be credited for any individual considered an Employee under sections 414(n) or 414(o) of the Code and the regulations thereunder. Solely for purposes of determining whether a Service Break, as defined in section 1.44, for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight (8) Hours of Service per day of such absence. For purposes of this paragraph, an absence form work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of the birth of a child of the individual, (3) by reason of the placement of chid with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a Service Break in that period, or (2) in all other cases, in the following computation period. Hours of Service shall be credited on the basis of actual hours worked unless another method has been specified in the Adoption Agreement, except to determine an Employee's Employment Commencement Date or Re-Employment Commencement Date. 1.29 "Normal Retirement Date" shall mean the first day of the month following the Participant's attainment of the Normal Retirement Age specified in the Adoption Agreement. Upon reaching his Normal Retirement Age, the Participant's right to his retirement benefit shall be nonforfeitable, notwithstanding the Plan's vesting schedule. 1.30 "Owner-Employee" shall mean a sole proprietor or a partner who owns more than ten percent (10%) of either the capital interest or profits interest of a partnership. 1.31 "Participant" shall mean any Employee who gains membership in this Plan and shall include the following classifications: (a) "Active Participant" shall mean an Employee participating in the Plan. (b) "Deceased Participant" shall mean a Participant who has died and on whose behalf benefits are payable in accordance with Article VII. (c) "Retired Participant" shall mean a Participant who is no longer an Employee, but who is entitled to benefits in accordance with Article V. (d) "Vested Participant" shall mean a Participant who is no longer an Employee, but who is entitled to benefits in accordance with Article VI. 1.32 "Participating Employer" shall mean any Affiliated Employer which has adopted the Plan in accordance with Section 16.2. 1.33 "Participation" shall mean any Plan Year during which a Participant competes at least one thousand (1,000) Hours of Service (or such lesser number of Hours of Service specified in the Adoption Agreement) or, if the Plan is a standardized plan, any Plan Year beginning on or after January 1, 1990 during which a Participant was employed other than a Plan Year in which the participant is not employed on the last day and is credited with less than five hundred and one (501) Hours of Service. Periods of employment to be excluded, if any, shall be as specified in the Adoption Agreement. All Participants who complete the required number of Hours of Service during a Plan Year must accrue a benefit under the Plan for the year, even if they terminate employment before the end of such year. If an Employee becomes an Active Participant on a date other than the first day of the Plan Year, a year or partial year of Participation shall be credited for the year of entry into the Plan equal to a fraction, the numerator of which shall be the number of Hours of Service credited to the Employee from the date of membership to the end of that Plan Year (or termination of employment, if earlier) and the denominator of which is the required number of Hours of Service under the Plan for a full year of Participation. Such fraction shall not exceed one (1.0). A Participant shall be credited with years of Participation prior to a Service Break unless such years may be disregarded under the rules of Section 6.4 or 6.6. If the elapsed time method of crediting Service is specified in the Adoption Agreement, an Active Participant shall be credited with Participation for all periods of employment, except as specified in the Adoption Agreement and for Participation which may be disregarded under Section 6.4 or 6.6, for the aggregate for all time periods commencing on his Employment Commencement Date and ending on the date he retires or otherwise terminated employment. Fractional periods of a year shall be expressed in terms of days. 1.34 "PBGC" shall mean the Pension Benefit Guaranty Corporation. 1.35 "Period of Severance" shall mean a continuous period of time during which the Employee is not employed by the Employer. Such period begins on the Employee's Severance from Service Date and ends on the Employee's Re-Employment Commencement Date. 1.36 "Permanent Disability" shall mean any physical or mental condition that may reasonably be expected to be permanent and which renders the Participant incapable of continuing as an Employee. In determining the nature, extent, and continuation of a Participant's disability, the Committee may select a physician to examine such Participant and render a medical opinion. The final determination shall be made by the Committee on the basis of all of the evidence. 1.37 "Plan" shall mean this Prototype Plan, the Trust Agreement and Adoption Agreement of the adopting Employer, as from time to time amended. 1.38 "Plan Year" shall mean the calendar year, unless another twelve (12) consecutive month period is specified in the Adoption Agreement. 1.39 "Prototype Plan" shall mean the basic plan document described herein. 1.40 "Qualified Joint and Survivor Annuity" shall mean an immediate annuity, payable monthly, for the life of the Participant with a survivor annuity for the life of the Participant's spouse which is not less than fifty percent (50%) and not more than one hundred percent (100%) of the amount of the annuity payable during the joint lives of the Participant and the Participant's spouse and which is the Actuarial Equivalent of the Standard Form of Retirement Income. The percentage of the spouse's survivor annuity shall be fifty percent (50%), unless a different percentage is specified in the Adoption Agreement. In the case of a Participant without a spouse, Qualified Joint and Survivor Annuity shall mean an annuity, payable monthly, for the life of the Participant, with no survivor benefit. 1.41 "Qualified Pre-retirement Survivor Annuity" shall mean an annuity payable to the Participant's spouse in accordance with Section 9.2. 1.42 "Re-Employment Commencement Date" shall mean the first day on which the Employee is credited with an Hour of Service for the performance of duties after the first eligibility computation period in which the employee incurs a one (1) year Service Break. In the case of any Participant who has incurred a one (1) year Service Break, Eligibility Year(s) of Service before such break shall not be taken into account until the Participant has completed an Eligibility Year of Service after returning to employment. Such Eligibility Year of Service will be measured by the twelve (12) consecutive month period beginning on the Employee's Re-Employment Commencement Date and, if necessary, subsequent twelve (12) consecutive month periods beginning on anniversaries of the Re-Employment Commencement Date. 1.43 "S Corporation" shall mean an Employer who has made an election for its taxable year of reference under section 1362(a) of the Code, or any other applicable section pertaining thereto. 1.44 "Self-Employed Individual" shall mean an individual who has Earned Income for the taxable year from the unincorporated trade or business or partnership with respect to which the Plan is established; also, an individual who would have had Earned Income but for the fact such trade, business or partnership had no net profits for the taxable year. 1.45 "Service" shall mean any Plan Year during which the Employee completes at least one thousand (1,000) or more Hours of Service (or such lesser number of Hours of Service specified in the Adoption Agreement). Periods of time to be excluded, if any, shall be specified in the Adoption Agreement. Service will be credited in accordance with the rules set forth above for any employment, for any period of time, for any Affiliated Employer. Service will also be credited for any individual required to be considered an Employee, for purposes of this Plan under section 414(n) or (o) of the Code, of the Employer or any Affiliated Employer. If the elapsed time method of crediting Service is specified in the Adoption Agreement, an Employee shall receive credit for Service, except for Service which may be disregarded under Section 6.4 or 6.6, for the aggregate of all time periods commencing on his Employment Commencement Date or Re-Employment Commencement Date and ending on his Severance from Service Date. An Employee shall also receive credit for any Period of Severance of less the twelve (12) consecutive months. An Employee shall receive a year of Service for vesting purposes for each twelve (12) months of Service. Fractional periods of a year shall be expressed in terms of days. 1.46 "Service Break" shall mean: (a) For purposes of calculating Eligibility Years of Service, any twelve (12) consecutive month period commencing on an Employee's Employment Commencement Date or anniversaries thereof during which the Employee is credited with five hundred (500) Hours of Service or less. (b) For purposes of calculating years of Service, any Plan Year during which the Employee is credited with five hundred (500) Hours of Service or less, where such Service Break shall be measured from the first day of such Plan Year. (c) If the elapsed time method of crediting Service is specified in the Adoption Agreement, a Service Break shall mean a Period of Severance of at least twelve (12) consecutive months; provided, however, that in the case of an Employee absent for maternity or paternity reasons (as defined in Section 1.26), the Period of Severance shall not commence for this purpose until the twenty-four (24) month anniversary of the first date of such absence. (d) However, a Service Break shall not be deemed to have occurred as a result of an authorized leave of absence granted in accordance with a uniform and non-discriminatory policy of the Employer, provided the Employee returns to employment with the Employer immediately following the end of such leave. A Service Break shall also not be deemed to have occurred as a result of an absence due to service in the armed forces of the United States, provided the Member makes application for resumption of work with the Employer, following discharge, within the time specified by then applicable laws. 1.47 "Severance from Service Date" shall mean the earlier of (a) the date on which an Employee quits, retires, is discharged (b) the twelve (12) month anniversary of the date an Employee is first absent (with or without pay) for any reason other than quit, retirement, discharge or death (such as vacation, holiday, sickness, disability, leave of absence or layoff). 1.48 "Shareholder-Employee" shall mean a Participant who owns (or is considered as owning) more than five percent (5%) of the outstanding stock of an S Corporation on any day during the taxable year of reference of such S Corporation. In determining the percent of a Participant's ownership of the outstanding stock, the family attribution rules of section 318(a)(1) of the Code, or nay other applicable section of the Code pertaining thereto shall apply. 1.49 "Social Security Retirement Age" shall mean age sixty-five (65) in the case of a Participant attaining age sixty-two (62) before January 1, 2000 (i.e., born before January 1, 1938), age sixty-six (66) for a Participant attaining age sixty-two (62) after December 31, 1999, and before January 1, 2017 (i.e., born after December 31, 1937, but before January 1, 1955), and age sixty-seven (67) for a Participant attaining age sixty-two (62) after December 31, 2016 (i.e., born after December 31, 1954). 1.50 "Sponsor" shall mean the Dreyfus Corporation. 1.51 "Standard Form of Retirement Income" shall mean a benefit payable in accordance with the terms of the Adoption Agreement, beginning as of the Participant's actual retirement date. The Standard Form of Retirement Income of each Participant shall not be less than the largest periodic benefit that would have been payable to the Participant upon separation from Service at or prior to the Normal Retirement Date under the Plan exclusive of social security supplements, premiums on disability or term insurance, and the value of disability benefits not in excess of the Standard Form of Retirement Income. For purposes of comparing periodic benefits in the same form, commencing prior to and at the Normal Retirement Date, the greater benefit is determined by converting the benefit payable at the Normal Retirement Date and comparing the amount of such annuity payments. 1.52 "Straight Life Annuity" means an annuity payable in equal installments for the life of the Participant that terminates upon the Participant's death. 1.53 "Taxable Wage Base" means the contribution and benefit base in effect under section 230 of the Social Security Act at the beginning of the Plan Year. 1.54 "Trustee" shall mean an individual or individuals or institution appointed by the Employer to act in accordance with the provisions of the Trust Agreement. 1.55 "Trust Agreement" shall mean the agreement between the Employer and the Trustee. 1.56 "Trust Fund" shall mean all property received by the Trustee for purposes of the Plan, investments thereof and earnings thereon, less payments made by the Trustee to carry out the Plan. ARTICLE II. Each eligible Employee shall become a Participant on the Effective Date or the Entry Date coincident with or next following the completion of the age and Service requirements set forth in the Adoption Agreement. The Adoption Agreement may exclude Employees from Participation in the Plan based upon minimum age and Service requirements or the inclusion of such Employees in certain ineligible job classifications. In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee will participate immediately if such Employee has satisfied the minimum age and Service requirements and would have otherwise previously become a Participant. In the event a Participant is no longer a member of an eligible class of Employees and becomes ineligible to participate, but has not incurred a Service Break, such Employee will participate immediately upon returning to an eligible class of Employees. If such Participant incurs a Service Break, eligibility to participate will be determined under the rules of Section 1.20 of the Plan. (a) A former Participant will become a Participant immediately upon returning to the employ of the Employer if such former Participant has a nonforfeitable right to all or a portion of the Accrued Benefit derived from Employer contributions at the time of termination from Service. (b) A former Participant who did not have a nonforfeitable right to any portion of the Accrued Benefit derived from Employer contributions at the time of termination from Service will be considered a new Employee, for eligibility purposes, if the number of consecutive one (1) year Service Breaks equal or exceed the greater of five (5) or the aggregate number of years of Service before such Service Breaks. If such former Participant's years of Service before termination from Service may not be disregarded pursuant to the preceding sentence, such former Participant shall participate immediately upon re-employment. (c) Any former Employee who was never a Participant and is re-employed as an Employee will be eligible to participate subject to the provisions of Section 2.1. 2.4 Change in Employment Status In the event that a Participant who was credited with a year of Service for the preceding Plan Year, at the request of the Employer, enters directly into the employ of any other business entity, such Participant shall be deemed to be an Active Participant. If such Participant returns to the employ of the Employer or becomes eligible for benefits pursuant to Articles V, VI or VII, without interruption of employment with the Employer or other business entity, he shall be deemed not to have had a Service Break for such period. However, if such Participant does not immediately return to the employ of the Employer upon his termination of employment with such other business entity or upon recall by the Employer, he shall be deemed to have terminated his employment for all purposes of the Plan as of the Anniversary Date following the date of transfer. 2.5 Limitation on Participation of Owner-Employees (a) If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and the plan established for other trades or businesses must, when looked at as a single plan, satisfy sections 401(a) and (d) of the Code, for the Employees of this and all other trades or businesses. (b) If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the Employees of the other trades or businesses must be included in a plan which satisfies sections 401(a) and (d) of the Code and which provides contributions and benefits not less favorable than provided for Owner-Employees under this Plan. (c) If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which are not controlled and the individual controls a trade or business, then the contributions or benefits of the Employees under the plan of the trade or business which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. For purposes of the preceding paragraphs, an Owner-Employee, or two or more Owner-Employees, will be considered to control a trade or business if the Owner-Employee, or two or more Owner-Employees together: (1) own the entire interest in an unincorporated trade or (2) in the case of a partnership, own more than fifty percent (50%) of either the capital interest or the profits interest in the partnership. For purposes of the preceding paragraphs, an Owner-Employee, or two or more Owner-Employees, shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such Owner-Employee, or such two or more Owner-Employees, are considered to control within the meaning of the preceding sentence. The Employer intends to make contributions to the Trust Fund in such amounts as are actuarially determined to be required to provide the benefits accruing under the Plan to Participants. Contributions by Participants shall be neither required nor permitted. The annual valuation for actuarially determining the contributions required shall reflect an adjustment for experience realized form the investment of the Trust Fund, mortality, turnover, forfeitures and any dividends resulting from any insurance company contracts, if applicable. Any forfeitures shall be used to reduce contributions, and shall not be applied to increase benefits payable under the Plan. Subject to the termination provisions of Section 16.5, the Employer reserves the right to reduce, suspend or discontinue its contributions under the Plan for any reason at any time. The amount of the Employer's contribution to the Plan for each Plan Year shall be paid to the Trustee either in a single payment or in installments. [Note: Failure to make quarterly contributions required under section 412(m) of the Code will result in he imposition of interest on the Employer]. In order to ensure a deduction for each Plan Year, the total amount of its contributions shall be made no later than the time prescribed by law for filing its federal income tax return for the fiscal year of the Employer ending with or within such Plan Year, including extensions thereof. All contributions made by an Employer shall be conditional upon their deductibility by the Employer for income tax purposes; provided, however, that no contributions shall be returned to the Employer except as otherwise provided in this Plan. In addition to its contribution, the Employer shall pay all the administrative expenses of the Plan and all fees and retainers of the Plan's Trustee, actuary, consultant, administrator, auditors and counsel, except that any expenses directly relating to the investments of the Trust fund, such as taxes, brokerage commissions, registration charges, etc., shall always be paid from the Trust Fund. In the event of the failure of the Employer to pay all or part of such expenses, the Trustee shall pay these expenses and charge the payment thereof against the Trust Fund. 3.4 Return of Employer Contributions Notwithstanding any other provisions of this Plan, contributions made by an Employer may be returned to such Employer if: (a) the contribution was made by reason of a mistake of fact and is returned to the Employer within one year of the (b) the contributions was conditioned upon its deductibility by the Employer for income tax purposes, the deduction was disallowed and the contribution is returned to the Employer within one year of the disallowance of the deduction, or (c) the contribution was conditioned upon the initial qualification of the Plan: the Plan was submitted to the Internal Revenue Service for a determination as to its initial qualification within the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted or such later date as the Secretary of the Treasury may prescribe; the Plan received an adverse determination, and the contribution is returned to the Employer within one year of the date of the adverse determination. The amount which may be returned to the Employer in the excess of the amount contributed over the amount that would have been contributed had there not occurred the circumstance causing the excess. Earnings attributable to the excess contributions may not be returned to the Employer, but losses thereto shall reduce the amount to be so returned. ARTICLE IV. Whenever reference is made in the Plan to retirement or a retirement date, it shall mean the Normal, Early, Deferred or Disability Retirement Date, whichever applies to the Participant involved. Upon reaching his Normal Retirement Age, an Active Participant's right to his retirement benefit shall be nonforfeitable. Such an Active Participant shall, subject to the provisions of Section 4.6, have the right to retire as of his Normal Retirement Date. If the Employer enforces a mandatory retirement date, the Normal Retirement Date is the earlier of that mandatory date or the date specified in the Adoption Agreement. An Active Participant may continue his employment after his Normal Retirement Date, in which event he shall continue as an Active Participant and, subject to the provisions of Section 4.6, retire as of his Deferred Retirement Date. However, the Employer may, subject to the provisions of Section 4.7, retire a Participant on the first day of any month following his Normal Retirement Date. A Participant shall, subject to the provisions of section 4.6, have the right to retire as of his Early Retirement Date. A Participant who has satisfied the service requirements for early retirement shall be entitled to elect early retirement upon completion of the age requirement. An Active Participant, who has suffered a Permanent Disability, may retire on his Disability Retirement Date. As a condition of his continuing to receive any disability retirement income, the Committee shall have the right to require any Participant who is in receipt of a monthly disability retirement income to be re-examined by a physician of its choice not more often than once in each calendar year to determine if he continues to be disabled. As a prerequisite to the commencement of a retirement benefit hereunder, a Participant otherwise entitled thereto shall file with the Committee an application for such benefit at least thirty-one (31) days prior to the Participant's retirement date. 4.7 Age Discrimination in Employment Act Notwithstanding any other provision of this Plan, the Employer, in accordance with the provisions of the Age Discrimination in Employment Act, shall have no right to compel a Participant to retire, except as otherwise provided in this Section, if in the calendar year or the preceding calendar year, the Employer may retire a Participant who for the two (2) year period prior to retirement is employed in a bona fide executive or high policy making position if (1) he has attained age sixty-five (65); (2) he has attained Normal Retirement Date and (3) his annual retirement benefit from the pension, profit-sharing, savings or deferred compensation plans maintained by the Employer equals, in the aggregate, at least $44,000. This Section shall be deemed to be automatically amended to reflect any subsequent Federal legislation or regulations. ARTICLE V. Except as otherwise provided in the Adoption Agreement and this Prototype Plan the provisions of this Article V shall apply with respect to the Plan Years, and benefits attributable to Plan Years, beginning after December 31, 1988. A Participant shall be entitled to receive as of his Normal Retirement Date a monthly Standard Form of Retirement Income equal to one-twelfth (1/12th) of the annual retirement benefit determined in accordance with the benefit formula elected by the Employer in the Adoption agreement. Effective with the first day of the Plan Year beginning on or after January 1, 1988, a Participant shall be entitled to receive as of his Deferred Retirement Date a monthly Standard Form of Retirement Income equal to one-twelfth (1/12th) of the greater of (i) the amount of his annual retirement benefit determined as of his Deferred Retirement Date in accordance with the Benefit formula elected by the Employer in the Adoption Agreement, or (ii) the Actuarial Equivalent of his Normal Retirement Benefit determined under section 5.1 above. The monthly retirement benefit so determined for a Participant who remains in employment after Normal Retirement Age shall be offset by the Actuarial Equivalent of the total of any distributions required by Section 9.5 which are made by the close of the Plan Year. An Active Participant who has satisfied the age and service requirements for early retirement shall be entitled to receive as of his Normal Retirement Date a monthly Standard Form of Retirement income equal to one-twelfth (1/12th) of his Accrued Benefit. Alternatively, such Participant may elect that the Early Retirement Benefit commence on the Participant's Early Retirement Date or on the first day of any following month prior to his Normal Retirement Date. If the Participant so elects to have benefits commence prior to his Normal Retirement Date, his annual retirement benefit shall be an amount equal to his Accrued Benefit payable at Normal Retirement Date reduced by one-fifteenth (1/15th) for each of the first five (5) years, one-thirtieth (1/30th) for each of the next five (5) years, and actuarially reduced for each additional year by which the Participant's Annuity Starting Date precedes his Normal Retirement Date. If benefits commence to a Participant at a time other than Normal Retirement Age, the Participant's Accrued Benefit will be multiplied by a fraction, the numerator of which is the annual factor that corresponds to the age at which benefits commence to the Participant in the Standard Form of Retirement Income, and the denominator of which is the annual factor that corresponds to the Normal Retirement Age under the Plan in the Standard Form of Retirement Income. If benefits commence to the Participant in a form other than the Standard Form of Retirement Income, the product in the preceding paragraph will be actuarially adjusted in accordance with the provisions of section 1.2 of the Plan. If this Plan has had a Fresh-Start, the limitations in the preceding paragraphs will be applied only to the Participant's accruals for years for which the Plan provides for the disparity permitted under section 401(1) of the Code. All benefit accruals for years for which the Plan does not provide for the disparity permitted under section 401(1) of the Code will be actuarially adjusted in accordance with the provisions of section 1.2 of the Plan. The annual factor is the factor derived from the applicable in table(s) below based on the Normal Retirement Age under the Plan, as specified in the Adoption Agreement (determined without regard to any years of Participation requirement), and the Standard Form of Retirement Income, as specified in the Adoption Agreement. If the Employer elects as an integration level in the Adoption Agreement option 4 or 5, the following Table II shall apply. Otherwise, the following Table I shall apply. Retirement Age Participant's Social Security Retirement Age Retirement Age Participant's Social Security Retirement Age An Active Participant who has suffered a Permanent Disability shall be entitled to receive during the period of his disability, with the first payment to be made on his Disability Retirement Date, a monthly Standard Form of Retirement Income which shall be equal to his Accrued Benefit payable at his Normal Retirement Date, reduced by one-fifteenth (1/15th) for each of the first five (5) years, one-thirtieth (1/30th) for each of the next five (5) years, and actuarially reduced for each additional year by which his Disability Retirement Date precedes his Normal Retirement Date. If it is subsequently determined that such Participant is no longer disabled, he shall not be entitled to further benefits as a result of such disability, and he shall only be entitled to such other benefits as may be provided under the terms of the Plan for which he was eligible as of his Disability Retirement Date, reduced by the disability retirement benefits paid. If such Participant returns to the employ of the Employer immediately following the termination of his Permanent Disability, he shall resume the classification of an Active Participant, and his employment with the Employer shall not be deemed interrupted. A Participant, who has severed employment prior to his Permanent Disability, will not be entitled to any benefits under this Section 5.4. 5.5 Distribution of Retirement Benefits Distribution of any benefits payable under this Section shall be paid in accordance with the provisions of Article IX. If a Participant dies prior to his Annuity Starting Date, the provisions of Article VII shall apply. (1) As elected by the Employer in the Adoption Agreement, normal or early retirement benefits will be suspended for each calendar month during which the Employee completes at least 40 Hours of Service with the Employer as defined in section 203(a)(3)(B) of the Employee Retirement Income Security Act of 1974, as amended ("Section 203(a)(3)B Service"). Consequently, the amount of benefits which are paid later than Normal Retirement Age will be computed as if the Employee had been receiving benefits since Normal Retirement Age. (2) Resumption of payment. If benefit payments have been suspended, payments shall resume not later than the first day of the third calendar month after the calendar month in which the Employee ceases to be employed in section 203(a)(3)(B) service. The initial payment upon resumption shall include the payment scheduled to occur in the calendar month when payments resume and any amounts withheld during the period between the cessation of section 203(a)(3)(B) service and the resumption of payments. (3) Notification. No payment shall be withheld by the Plan pursuant to this section unless the Plan notifies the Employee by personal delivery or first class mail during the first calendar month or payroll period in which the Plan withholds payment that his or her benefits are suspended. Such notification shall contain a description of the specific reasons why benefit payments are being suspended, a description of the plan provision relating to the suspension of payments, a copy of such provisions, and a statement to the effect that applicable Department of Labor regulations may be found in section 2530.203-3 of the Code of Federal Regulations. In addition, the notice shall inform the Employee of the Plan's procedures for affording a review of the suspension of benefits. Requests for such reviews may be considered in accordance with the claims procedure adopted by the plan pursuant to the section 503 of the Employment Retirement Income Security Act of 1974, as amended, and applicable regulations. (a) Life annuity. In the case of benefits payable periodically on a monthly basis for as long as a life (or lives) continues, such as a straight life annuity or a Qualified Joint and Survivor Annuity, an amount equal to the portion of a monthly benefit payment derived from Employer contributions. (b) Other benefit forms. In the case of a benefit payable in a form other than the form described in subsection (a) above, an amount of the Employer-provided portion of benefit payments for a calendar month in which the Employee is employed in section 203(a)(3)(B) service, equal to the lesser of: (i) The amount of benefits which would have been payable to the Employee if he had been receiving monthly benefits under the Plan since actual retirement based on a straight life annuity commencing at actual retirement (ii) The actual amount paid or scheduled to be paid to the Employee for such month. Payments which are scheduled to be paid less frequently than monthly may be converted to monthly payments for purposes of the above sentence. (5) This section does not apply to the minimum benefit to which the Participant is entitled under the top-heavy rules of Article XV. A Participant's Frozen Accrued Benefit is the amount of the Participant's Accrued Benefit determined in accordance with the provisions of the Plan applicable in the year containing the latest Fresh-Start Date, determined as if the Participant terminated employment with the Employer as of the latest Fresh-Start Date, (or the date the Participant actually terminated employment with the Employer, if earlier), without regard to any amendment made to the Plan after that date other than amendments recognized as effective as of or before the date under section 401(b) of the Code or section 1.401(a)(4)-11(g) of the regulations. If the Participant has not had a Fresh-Start Date, the Participant's Frozen Accrued Benefit will be zero. If, as of the Participant's latest Fresh-Start Date, the amount of a Participant's Frozen Accrued Benefit was limited by the application of section 415 of the Code, the Participant's Frozen Accrued Benefit will be increased for years after the latest Fresh-Start Date to the extent permitted under section 415(d)(l) of the Code. In addition, the Frozen Accrued Benefit of a Participant whose Frozen Accrued Benefit includes the Top-Heavy minimum benefits provided in section 15.3 of the Plan, will be increased to the extent necessary to comply with the average compensation requirement of section 416(c)(l)(D)(i) of the Code. If: (l) the Plan's Standard Form of Retirement Income in effect on the Participant's latest Fresh-Start Date is not the same as the Standard Form of Retirement Income under the Plan after the Participant's latest Fresh-Start Date and/or (2) the Normal Retirement Age for any Participant on that date was greater than the Normal Retirement Age for that Participant under the Plan after such latest Fresh-Start Date, the Frozen Accrued Stated Benefit will be expressed as an actuarially equivalent benefit in the Standard Form of Retirement Income under the Plan after the latest Fresh-Start Date, commencing at the Participant's Normal Retirement Age under the Plan in effect after the latest Fresh-Start Date. If the Plan provides a new optional form of benefit with respect to a Participant's Frozen Accrued Benefit, such new optional form of benefit will be provided with respect to each Participant's entire Accrued Benefit (i.e., Accrued both before and after the Fresh-Start Date). In addition, if this Plan is a unit credit plan, with respect to plan years beginning after the latest Fresh-Start Date, the current benefit formula will provide each Participant in the Fresh-Start group a benefit of not less than .5% of the Participant's average annual Compensation times the participant's years of Service after the latest Fresh-Start Date. If this is a flat benefit plan, then, with respect to Plan Years beginning after the Plan's latest Fresh-Start Date, the current benefit formula will provide each Participant a benefit of not less than 25% of the Participant's average annual Compensation. If a participant will have less than 50 years of Service after the latest Fresh-Start Date through the year the Participant attains Normal Retirement Age (or current age, if later), then such minimum percentage will be reduced by multiplying it by the following ratio: Service after the latest Fresh-Start Date Definition of Fresh-Start Date. Fresh-Start Date generally means the last day of a Plan Year preceding a Plan Year for which any amendment of the Plan that directly or indirectly affects the amount of a Participant's benefit determined under the current benefit formula (such as an amendment to the definition of Compensation used in the current benefit formula or a change in the Normal Retirement Age of the Plan) is made effective. However, if under the Adoption Agreement the Fresh-Start group is limited to an acquired group of employees, or a group of employees with a Frozen Accrued Benefit attributable to assets and liabilities transferred to the Plan, the Fresh Start Date will be the date designated in the Adoption Agreement. If this Plan has had a Fresh-Start for all Participants, and in a subsequent Plan Year is aggregated for purposes of section 401(a)(4) of the Code with another Plan that did not make the same Fresh-Start, this Plan will have a Fresh-Start on the last day of the Plan Year preceding the Plan Year during which the plans are first aggregated. 5.9 Adjustments to Frozen Accrued Benefit (a) If elected by the Employer in the Adoption Agreement, the provisions of sections 5.9(b) through (i) below will apply to adjust each Participant's Frozen Accrued Benefit determined as of the latest Fresh-Start Date under the Plan, if, as of that date, the Plan contained a benefit formula under which the Participant's Accrued Benefit could be determined with reference to Compensation earned by the Participant in years beginning after the latest Fresh-Start Date occurring before the first Plan Year beginning on or after January 1, 1994. (b) If a Fresh-Start group fails to satisfy the minimum coverage requirements of section 410(b) of the Code for any Plan Year, the provisions of this section 5.9 will not apply for that year or any subsequent year. A Fresh-Start group is deemed to satisfy the minimum coverage requirements of section 410(b) of the Code for any Plan Year if any one of the following requirements is satisfied: 1. the Fresh-Start group satisfied the minimum coverage requirements of section 410(b) of the Code for the first five Plan Years beginning after the Fresh-Start Date; 2. the Fresh-Start group satisfied the ratio percentage test of section 1.410(b)-2(b)(2) of the Regulations as of the Fresh 3. the Fresh-Start group consists of an acquired group of employees that satisfied the minimum coverage requirements of section 410(b) of the Code (determined without regard to any of the special rules pertaining to certain dispositions or acquisitions provided in section 410(b)(6)(c)) of the Code as of the Fresh-Start Date; or 4. the Fresh-Start Date with respect to the Fresh-Start group occurs before the first day of the first Plan Year beginning on or after January 1, 1994. (c) Unit Credit Plans -- with respect to Plan Years beginning after the latest Fresh-Start Date, the current benefit formula will provide each Participant in the Fresh-Start group a benefit of not less than .5% of the Participant's Average Compensation times the Participant's years of Service after the latest Fresh-Start Date. (d) Flat Benefit Plans -- with respect to Plan Years beginning after the Plan's latest Fresh-Start Date, the current benefit formula will provide each Participant a benefit of not less than 25% of the Participant's Average Compensation. If a Participant will have less than 50 years of Service under the Plan after the latest Fresh-Start Date through the year the Participant attains Normal Retirement Age (or current age, if later), then such minimum percentage will be reduced by multiplying it by the following ratio: Service after the latest Fresh-Start Date (e) The minimum benefit in sections 5.9 (h) through (j) below take into account an Employee's past Service in determining the Employee's Accrued Benefit under the Plan and may cause the Plan to fail to satisfy the safe harbor for past service in section 1.401(a)(4)-5(a)(3) of the regulations. (f) If this Plan was a defined benefit excess plan as of the latest Fresh-Start Date, each Participant's Frozen Accrued Benefit will be increased, to the extent necessary, if any, so that the Base Benefit Percentage, as defined in the Adoption Agreement, determined with reference to all years of Service as of the latest Fresh-Start Date, is not less than 50 percent of the Excess Benefit Percentage, as defined in the Adoption Agreement, as of the latest Fresh-Start Date, determined with reference to all years of Service as of the latest Fresh-Start Date. For this purpose, a defined benefit excess plan is a defined benefit plan under which the rate at which Employer-provided benefits are determined with respect to Average Compensation above the Integration Level under the Plan is greater than the rate at which employer-provided benefits are determined with respect to Average Compensation at or below the Integration Level. (g) If this Plan was a PIA offset plan as of the latest Fresh-Start Date, the offset applied to determine the Frozen Accrued Benefit of each Participant in the Fresh-Start group will be decreased, to the extent necessary, if any, so that it does not exceed 50 percent of the benefit determined without applying the offset, taking into account all years of Service as of the latest Fresh-Start Date. For this purpose, a PIA offset plan is a Plan that applies the Plan's benefit rates uniformly regardless of an Employee's Compensation, but that reduces an Employee's benefit by a stated percentage of the Employee's primary insurance amount under the Social Security Act. (h) In the case of a Plan other than a Plan described in Sections 5.9(h) and 5.9(i) above, the Frozen Accrued Benefit of each Participant in the Fresh-Start Date will be increased, to the extent necessary, if any, in a manner that is economically equivalent to the adjustment required under Sections 5.9 (h) and (i). (i) If elected by the Employer in the Adoption Agreement, the Frozen Accrued Benefit (as adjusted under Sections 5.9 (h) through (j) above, as applicable) of each Participant other than section 401(a)(17) Participants in the Fresh-Start group will be adjusted in accordance with one of the methods set forth in Section 5.9(l) below. The Frozen Accrued Benefit of all section 401(a)(17) Participants will be determined in accordance with the special adjustment applicable to section 401(a)(17) Participants in Section 5.9(m). A section 401(a)(17) Participant includes a Tax Reform Act of 1986 (TRA '86) section 401(a)(17) Participant as well as an Omnibus Budget Reconciliation Act of 1993 (OBRA '93) section 401(a)(17) Participant. A TRA '86 section 401(a)(17) Participant means a Participant whose Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1989, is based on Compensation for a year beginning prior to the TRA '86 statutory effective date that exceeded $ 200,000. An OBRA '93 section 401(a)(17) Participant means a Participant whose Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994, is based on Compensation for a year beginning prior to the first day of the first Plan Year beginning on or after January 1, 1994, that exceeded $ 150,000. (j) The Frozen Accrued Benefit of each Participant in the Fresh-Start group other than section 401(a)(17) Participants will be adjusted in accordance with one of the following methods, as elected by the Employer in the Adoption Agreement: Old Compensation fraction: The Frozen Accrued Benefit of each Participant in the Fresh-Start group, as adjusted in Sections 5.9 (e) through (g) above, as fraction (not less than 1), the numerator of which is the Participant's Compensation for the current Plan Year, using the same definition and Compensation formula used in determining the Participant's Frozen Accrued Benefit, and the denominator of which is the Participant's Compensation as of the latest Fresh-Start Date, determined in the same manner as the numerator. New Compensation fraction: The Frozen Accrued Benefit of each Participant in the Fresh-Start group, as adjusted in Sections 5.9 (e) through (g) above, as applicable, will be multiplied by a fraction (not less than 1), the numerator of which is the Participant's Average Compensation, as defined in section 1.12 of the Plan, for the current Plan Year, and the denominator is the participant's Average Compensation as of the latest Fresh-Start Date, determined in the same manner as the numerator. Reconstructed Compensation fraction: The Frozen Accrued Benefit of each Participant in the Fresh-Start group, as adjusted in Sections 5.9 (e) through (g) above, as applicable, will be multiplied by a fraction (not less than 1), the numerator of which is the Participant's Average Compensation, as defined in Section 1.12 of the Plan, for the current Plan Year, and the denominator of which is the Participant's reconstructed compensation as of the Fresh- Start Date. A Participant's "reconstructed compensation" will be equal to the Participant's Average Compensation, as defined in section 1.12 of the Plan, for the Plan Year elected by the Employer in the Adoption Agreement multiplied by a fraction, the numerator of which is the Participant's Compensation for the Plan Year ending on the latest Fresh-Start Date determined using the same Compensation definition and Compensation formula used to determine the Participant's Frozen Accrued Benefit, and the denominator of which is the Participant's Compensation for the selected year, determined in the same manner as the numerator. For purposes of calculating a Participant's "reconstructed compensation", the selected year will be the Plan Year elected by the Employer in the Adoption Agreement. (k) Alternative Adjustment: In lieu of applying the old compensation fraction or new compensation fraction described in section 5.9(l), if the Employer elects, a Participant's adjusted Accrued Benefit will be determined by substituting the Participant's Compensation (as defined in section of the Plan) for the current Plan Year determined under the same Compensation formula and underlying definition of Compensation used to determine the Frozen Accrued Benefit of each Participant in the Fresh-Start group. If elected by the Employer in the Adoption Agreement, the Frozen Accrued Benefit of each section 401(a)(17) Participant in the Fresh-Start group will be adjusted in accordance with the following method: Section 401(A)(17) Participants Who Are OBRA '93 Section 401(A)(17) Participants Only: (1) Determine the Frozen Accrued Benefit of each OBRA '93 section 401(a)(17) Participant as of the last day of the Plan Year beginning before January 1, 1994. (2) Adjust the amount in step 1 by multiplying it by the following fraction (not less than 1). The numerator of the fraction is the average compensation of the OBRA '93 section 401(a)(17) employee determined for the current year (as limited by section 401(a)(17)), using the same definition and Compensation formula in effect as of the last day of the last Plan Year beginning before January 1, 1994. The denominator of the fraction is the Participant's Average Compensation for the last day of the last Plan Year beginning before January 1, 1994. Using the definition and Compensation formula in effect as of the last day of the last Plan Year beginning before January 1, 1994. Section 401(A)(17) Participants Who Are Both TRA '86 Section 401(A)(17) Participants and OBRA '93 Section 401(A)(17) Participants: (1) Determine each TRA '86 section 401(a)(17) Participant's Frozen Accrued Benefit as of the last day of the last Plan Year beginning before January 1, 1989. (2) Adjust the amount in step 1 up through the last day of the last Plan Year beginning before the first Plan Year beginning on or after January 1, 1994, by multiplying it by the following fraction (not less than 1). The numerator of the fraction is the TRA '86 section determined for the current year (as limited by section 401(a)(17)), using the same definition and Compensation formula in effect as of the last day of the last Plan Year beginning before January 1, 1989. The denominator of the fraction is the Participant's Average Compensation for the last day of the Plan Year beginning before January 1, 1989, using the definition and Compensation formula in effect as of the last day of the last Plan Year beginning before January 1, 1989. (3) Determine the TRA '86 section 401(a)(17) Participant's Frozen Accrued Benefit as of the last day of the last Plan Year beginning before January 1, 1994. (4) Subtract the amount determined in step 2 from the amount determined in step 1. (5) Adjust the amount in step 4 by multiplying it by the following fraction (not less than 1). The numerator of the fraction is the TRA '86 section 401(a)(17) Participant's Average Compensation determined for the current year (as limited by section 401(a)(17)), using the same definition and Compensation formula in effect as of the last day of the last Plan Year beginning before January 1, 1994. The denominator of the fraction is the Participant's Average Compensation for the last day of the Plan Year beginning before January 1, 1994, using the definition and Compensation formula in effect as of the last day of the last Plan Year beginning before January 1, 1994. (6) Adjust the amount in step 1 by multiplying it by the following fraction (not less than 1). The numerator of the fraction is the TRA '86 section 401(a)(17) Participant's Average Compensation for the current year (as limited by section 401(a)(17)), using the same definition of Compensation and Compensation formula in effect as of the last day of the last Plan Year beginning before January 1, 1989. The denominator of the fraction is the Participant's Average Compensation for the last day of the last Plan Year beginning before January 1, 1989, using the definition and Compensation formula in effect as of the last day of the last Plan Year beginning before January 1, 1989. (7) Add the amounts determined in step 5, and the greater of steps 6 or 2. If an Active Participant terminates his employment with the Employer, or with any other business entity pursuant to Section 2.4, prior to qualifying for any other benefits pursuant to the provisions of the Plan, and prior to the satisfaction of the vesting requirement set forth in the Adoption Agreement, his Participation hereunder shall cease and no benefits shall be payable from the Plan. If however, an Active Participant terminates his employment after the satisfaction of the vesting requirements set forth in the Adoption Agreement, he shall become a Vested Participant. Such Vested Participant shall be entitled to receive a Standard Form of Retirement Income, beginning as of his Normal Retirement Date, equal to the vested percentage, as determined in accordance with the schedule set forth in the Adoption Agreement, of the Participant's Accrued Benefit. A Vested Participant who terminates employment after meeting the Service requirement but before meeting the age requirement for Early Retirement may also elect to retire on the first day of any month following Early Retirement Age. Any other Vested Participant may elect to commence payment of his benefits on the first day of any month preceding his Normal Retirement Date and after his vested Termination Date as specified in the Adoption Agreement. Such benefit shall be equal to his Accrued Benefit payable at Normal Retirement Date reduced by one-fifteenth (1/15th) for each of the next five (5) years, one thirtieth (1/30th) for each of the next five (5) years and actuarially reduced for each additional year by which the commencement date of the Vested Benefit precedes his Normal Retirement Date. 6.2 Distribution of Vested Interest As a prerequisite to the commencement of a Vested Termination Benefit hereunder, a Participant otherwise entitled thereto shall file with the Committee an application for such benefit at least thirty-one (31) days prior to the Participant's Vested Termination Date. Distribution of any benefit payable under this Section shall be paid pursuant to the provisions of Article IX. 6.3 Death of a Vested Member If a Vested Participant dies prior to his Annuity Starting Date, the provisions of Article VII shall apply. 6.4 Vesting of a Participant In order to determine the Vested Percentage of a Participant who has incurred a Service Break, the following rules will apply: (a) A former Participant who had a nonforfeitable right to all or a portion of the Accrued Benefit derived from Employer contributions at the time of the Participant's termination of employment will receive credit for all years of Service prior to a Service Break upon completing a year of Service after returning to the employ of the Employer. (b) In the case of a Participant who has five (5) or more consecutive one (1) year Service Breaks, the Participant's pre-break Service will count in vesting of the Employer-derived Accrued Benefit only if (i) such Participant has any nonforfeitable interest in the Accrued Benefit attributable to Employer contributions at the time of separation from service, or (ii) upon returning to Service the number of consecutive one (1) year Service Breaks is less than the number of years of Service. 6.5 Amendment of Vesting Provisions If the Plan's vesting schedule set forth in the Adoption Agreement is amended or the Plan is amended in any way that directly or indirectly affects the computation of a Participant's nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each Participant with at least three (3) years of Service with the Employer may elect within a reasonable period after the adoption of the amendment or change, to have his nonforfeitable percentage computed under the Plan without regard to such amendment or change. For Participants who do not have at least one Hour of Service in any Plan Year beginning on or after January 1, 1989, the preceding sentence shall be applied by substituting "five (5) years of Service "for "three (3) years of Service." The period during which the election may be made shall commence with the date the amendment is adopted and shall end on the latest of: (1) sixty (60) days after the amendment is adopted; (2) sixty (60) days after the amendment becomes effective; or (3) sixty (60) days after the Participant is issued written notice of the amendment by the Employer or the Committee. (a) If a Participant terminates employment with the Employer and the Actuarial Value of the Participant's vested Accrued Benefit derived form Employer and Employee contributions is not greater than $3,500, the Employee shall receive a distribution of the Actuarial Value of the entire vested portion of such Accrued Benefit, and the nonvested portion will be treated as a forfeiture. For purposes of this Section 6.6, if the Actuarial Value of a Participant's vested Accrued Benefit is zero, the Participant shall be deemed to have received a distribution of such vested Accrued Benefit. (b) If a Participant terminates employment with the Employer, (and the present value of the Employee's vested Accrued Benefit exceeds $3,500), and elects (with his or her spouse's consent) in accordance with Section 9.2 to receive the Actuarial Value of his or her vested Accrued Benefit, the nonvested portion will be treated as a forfeiture. If the Participant elects to have distributed an amount that is less than the entire vested portion of the Accrued Benefit derived from Employer contributions, the part of the nonvested portion that will be treated as a forfeiture is the total nonvested portion multiplied by a fraction, the numerator of which is the amount of the distribution attributable to Employer contributions and the denominator of which is the total Actuarial Value of the vested Employer derived Accrued Benefit. (c) If a Participant receives a distribution pursuant to the Section 6.6 and resumes employment covered under the Plan, the Participant shall have the right to restore his or her Employer-provided Accrued Benefit (including all optional forms of benefit and subsidies relating to such benefits), to the extent forfeited, upon the repayment to the Plan of the full amount of the distribution plus interest compounded annually at the rate of (i) five percent (5%) from the date of distribution to the date of repayment or to the last day of the Plan Year beginning on or after January 1, 1987, if earlier, (ii) and one hundred twenty percent (120%) of the federal mid-term rate (as in effect under section 1274 of the Code for the first month of a Plan Year) from the first day of the Plan Year beginning on or after January 1, 1987 or the date of distribution, if later. Such repayment must be made before the earlier of (i) five (5) years after the Participant's Re-Employment Commencement Date or (ii) the date the Participant incurs five (5) consecutive one year Service Breaks following the day of distribution. If an Employee is deemed to receive a distribution pursuant to this Section, and the Employee resumes employment covered under this Plan before the date he incurs five (5) consecutive one year Service Breaks, upon the reemployment of such Employee, the Employer-provided Accrued Benefit will be restored to the amount on the date of such deemed distribution. (d) Any forfeitures under this Plan shall be used to reduce Employer contributions, and shall not be applied to increase benefits payable under the Plan. 7.1 Pre-Retirement Without Life Insurance: (a) Plan funded without life insurance: The death benefit payable under this Plan upon the death of a Participant prior to his Annuity Starting Date shall be the Qualified Pre-retirement Survivor Annuity plus, if applicable, any other incidental death benefit provided in the Adoption Agreement. Upon the death of an Active or Retired Participant prior to his Annuity Starting Date, the death benefit shall be determined on the basis of the Participant's entire Accrued Benefit. Upon the death of a Vested Participant prior to his Annuity Starting Date, the death benefit shall be determined on the basis of the Participant's vested Accrued Benefit. (b) Plan funded with life insurance: If a Participant dies prior to his Annuity Starting Date, the Participant's surviving spouse shall be entitled to a Qualified Pre-retirement Survivor Annuity plus the proceeds of insurance policies purchased on he Participant's life; provided that any death benefit in addition to the Qualified Pre-retirement Survivor Annuity shall be reduced to the extent necessary so that the sum of such additional benefit and the Actuarial Value of the Qualified Pre-retirement Survivor Annuity does not exceed one hundred (100) times the Participant's anticipated monthly benefit or such lesser multiple specified in the Adoption Agreement. If the Participant dies prior to his Annuity Starting Date and has no surviving spouse or his surviving spouse is not his Beneficiary, his Beneficiary shall be entitled only to the proceeds of insurance policies purchased on the Participant's life. If a Participant should die before the issuance of a contract in accordance with the terms of this Plan, the death benefit payable shall be equal to the amount of premiums that would have been paid to purchase the contract, plus the Actuarial Value of his Accrued Benefit, if any. Upon the death of an Active or Retired Participant prior to his Annuity Starting Date, the death benefit shall be determined on the basis of the Participant's entire Accrued Benefit. Upon the death of a Vested Participant prior to his Annuity Starting Date, the death benefit shall be determined on the basis of the Participant's vested Accrued Benefit. Each Participant shall have the right, by written notice to the Committee, to designate or to change his Beneficiary. However, any designation (or change of designation) of a Beneficiary must be consented to by the Participant's Spouse pursuant to a Qualified election under 9.2, if such Beneficiary is not the Participant's Spouse. 7.3 Distribution of Death Benefit Notwithstanding any other provision of the Plan, after receipt by the Committee of due notice of the death of the Participant, any benefit payable under this Article shall be paid in accordance with Article IX. 7.4 Payment on Beneficiary's Death If the Beneficiary should die while in receipt of benefits hereunder, benefits payable following the Beneficiary's death, if any, shall be paid to the legal representative of such Beneficiary's estate. Upon the death of a Participant after his Annuity Starting Date, any payment of benefits to the Beneficiary after the Participant's death shall be governed by the terms of the form of benefit under which payments were being made. (a) The Annual Benefit otherwise payable to a Participant at any time will not exceed the Maximum Permissible Amount. If the benefit the Participant would otherwise accrue in a Limitation Year would produce an Annual Benefit in excess of the Maximum Permissible Amount, the rate of accrual will be reduced so that the Annual Benefit will equal the Maximum Permissible Amount. This limitation is deemed satisfied if the Annual Benefit payable to a Participant is not more than one thousand dollars ($1,000) multiplied by the Participant's number of years of Service or parts thereof (not to exceed then (10)) with the Employer and the Employer has not at any time maintained a defined contribution plan, a welfare benefit plan as defined in section 419(e) of the Code, or an individual medical account as defined in section 415(1)(2) of the Code maintained by the Employer, or a simplified Employee pension, as defined in section 408(k) of the Code, maintained by the Employer, in which such Participant participated. (b) If a Participant has made nondeductible Employee contributions under the terms of this Plan, the amount of such contributions is treated as an Annual Addition to a qualified defined contribution plan. (c) If a Participant is, or has ever been, covered under more than one defined benefit plan maintained by the Employer, the sum of the Participant's Annual Benefits from all such plans may not exceed the Maximum Permissible Amount. The Employer will elect in the Adoption Agreement the method by which the plans will meet this limitation. (d) If the Employer maintains, or at any time maintained, one or more qualified defined contribution plans covering any Participant in this Plan, a welfare benefit fund, as defined in section 419(e) of the Code, or an individual medical account as defined in section 415(1)(2) of the Code maintained by the Employer, or a simplified Employee pension, as defined in section 408(k) of the Code, maintained by the Employer, that the sum of the Participant's Defined Contribution Fraction and Defined Benefit Fraction will not exceed one (1.0) in any Limitation Year. The Employer will choose in the Adoption Agreements the method by which the plans will meet this limitation. (e) In the case of an individual who was a Participant in one or more defined benefit plans of the Employer as of the first day of the first Limitation Year beginning after December 31, 1986, the application of the limitations of this Section 8.1 shall not cause the maximum Permissible Amount for such individual under all such defined benefit plans to be less than the individual's Current Accrued Benefit. The preceding sentence applies only if such defined benefit plans met the requirements of section 415 of the Code, for all limitation years beginning before January 1, 1987. (f) For purposes of this Section 8.1 and Article XVII, the following definitions shall apply. (1) "Annual Additions" shall mean the sum of the following amounts credited to the Participant's account for the Limitation Year: Amounts allocated, after March 31, 1984, to an individual medical account, as defined in section 415(1)(2) of the Code, which is part of a pension or annuity plan maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in section 419(e) of the Code, maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, allocations under a simplified Employee pension are treated as Annual Additions to a defined contribution plan. (2) "Annual Benefit" shall mean a retirement benefit payable under the Plan which is payable annually in the form of a straight life annuity. Except as provided below, a benefit payable in a form other than a straight life annuity must be adjusted to an actuarially equivalent straight life annuity before applying the limitations of this Section. The interest rate assumption used to determine actuarial equivalence will be the greater of the interest rate specified in Section 1.2 of this Plan or five percent (5%). The Annual Benefit does not include any benefits attributable to Employee contributions or rollover contributions, or the assets transferred from a qualified plan that was not maintained by the Employer. No actuarial adjustment to the benefit is required for (a) the value of a Qualified Joint and Survivor Annuity, (b) the value of benefits that are not directly related to retirement benefits (such as the qualified disability benefit, pre-retirement death benefits and post-retirement medical benefits) and (c) the value of post-retirement cost-of-living increases made in accordance with Section 415(d) of the Code and section 1.415-3(c)(2)(iii) of the Federal Income Tax Regulations. (3) "Compensation", unless otherwise specified in the Adoption Agreement, shall mean, in the case of an Employee other than a Self-Employed Individual, his section 3401(a) wages, which are actually paid or includable in gross income during the Limitation Year. In the case of a Self-Employed Individual, Compensation shall mean his Earned Income. (4) "Current Accrued Benefit" shall mean a Participant's Accrued Benefit under the Plan, determined as if the Participant had separated form service as of the close of the last Limitation Year beginning before January 1, 1987, when expressed as an Annual Benefit within the meaning of section 415(b)(2) of the Code. In determining the amount of a Participant's Current Accrued Benefit, the following shall be disregarded: (i) any change in the terms and conditions of the Plan after May 5, 1986; and (ii) any cost-of-living adjustments occurring after May 5, 1986. (5) "Defined Benefit Dollar Limitation" shall mean ninety thousand dollars ($90,000). Effective on January 1, 1988, and each January thereafter, the ninety thousand dollar ($90,000) limitation above will be automatically adjusted by multiplying such limit by the cost-of-living adjustment factor prescribed by the Secretary of the Treasury under section 415(d) of the Code in such manner as the Secretary shall prescribe. The new limitation will apply to Limitation Years ending within the calendar year of the date of the adjustment. (6) "Defined Benefit Fraction" shall mean a fraction, the numerator of which is the sum of the Participant's Projected Annual Benefit under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of one hundred twenty-five percent (125%) of the dollar limitation determined for the Limitation Year under sections 415(b) and (d) of the Code and in accordance with Section 8.1(f)(11) below or one hundred forty percent (140%) of the Highest Average Compensation, including adjustments under section 415(b) of the Code. Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than one hundred twenty-five percent (125%) of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plans after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of section 415 of the Code for all Limitation Years beginning before January 1, 1987. (7) "Defined Contribution Fraction" shall mean a fraction the numerator of which is the sum of the Annual Additions to the Participant's account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation years (including the Annual Additions attributable to the Participant's nondeductible voluntary contributions to this and all the defined benefit plans (whether or not terminated) maintained by the Employer and the Annual Additions attributable to all welfare benefit funds, as defined in section 419(e) of the Code or individual medical accounts, as defined in section 415(1)(2) of the Code, or a simplified employee pension, as defined in section 408(k) of the Code, maintained by the Employer), and the denominator of which is the sum of the Maximum Aggregate Amounts for the current and all prior Limitation Years of Service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The Maximum Aggregate Amount in any Limitation Year is the lesser of one hundred twenty-five percent (125%) of the dollar limitation determined under Sections 415(b) and (d) of the Code in effect under section 415(c)(1)(A) of the Code or thirty-five percent (35%) of the Participant's Compensation for such year. If the Employee was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed one (1.0) times under the terms of this Plan. Under the adjustment, an amount equal to the product of (a) the excess of the sum of the fractions over 1.0 times (b) the denominator of this fraction will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and condition of the Plans made after May 5, 1986, but using the limitation of section 415 of the Code applicable to the first Limitation Year beginning on or after January 1, 1987. The Annual Additions for any Limitation Year beginning before January 1, 1987 shall not be recomputed to treat all Employee contributions as Annual Additions. (8) "Employer" shall mean the Employer that adopts this Plan, and all members of a controlled group of corporations (as defined in section 414(b) of the Code, as modified by section 415(h)), commonly controlled trades or businesses (as defined ins section 414(c) as modified by section 415(h)), affiliated service groups (as defined in section 414(m)) of which the adopting Employer is a part, or any other entity required to be aggregated with the adopting Employer pursuant to regulations under section 414(o). (9) "Highest Average Compensation" shall mean the average Compensation for the three (3) consecutive years of Service with the Employer that produces the highest average. A Year of Service with the Employer is the twelve (12) consecutive month period identical to the Plan Year. (10) "Limitation Year" shall mean the calendar year, unless another twelve (12) consecutive month period is elected in the Adoption Agreement. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation year is changed by amendment, the new Limitation year must begin on a date within the Limitation Year in which the amendment is made. (A) Effective as of the first day of the first Plan Year beginning on or after January 1, 1987, the lesser of the Defined Benefit Dollar limitation or one hundred percent (100%) of the Participant's Highest Average Compensation. (B) If the Participant has less than ten (10) Years of Participation (as defined in Section 8.1(f)(13) of the Plan) with the Employer, the Defined Benefit Dollar Limitation is reduced by one-tenth (1/10th) for each Year of Participation (or part thereof) less then ten (10). If the Participant has less than ten (10) years of Service with the Employer, the Compensation limitation is reduced by one-tenth (1/10th) for each year of Service (or part thereof) less than ten (10). The adjustments of this paragraph (b) shall be applied in the denominator of the Defined Benefit Fraction based upon years of Service. Years of Service shall include future years occurring before the Participant's Normal Retirement Age. Such future years shall include the year which contains the date the Participant reaches Normal Retirement Age, only if it can be reasonably anticipated that the Participant will receive a year of Service for such year. (C) If the annual benefit of the Participant commences before the Participant's Social Security Retirement Age, but on or after age sixty-two (62), the Defined Benefit Dollar Limitation as reduced above, if necessary, shall be determined as follows: (i) If a Participant's Social Security Retirement Age is sixty-five (65), the dollar limitation for benefits commencing on or after age sixty-two (62) is determined by reducing the Defined Benefit Dollar Limitation by five-ninths of one percent (.556%) for each month by which benefits commence before the month in which the Participant attains age sixty-five (65). (ii) If a Participant's Social Security Retirement Age is greater than sixty-five (65), the dollar limitation for benefits commencing on or after age sixty-two (62) is determined by reducing the defined benefit dollar limitation by five-ninths of one percent (.556%) for each of the first thirty-six (36) months and five-twelfths of one percent (.556%) for each of the additional months (up to twenty-four (24) months) by which benefits commence before the month of the Participant's Social Security Retirement Age. (D) If the annual benefit of a Participant commences prior to age sixty-two (62), the Defined Benefit Dollar Limitation shall be the Actuarial Equivalent of an annual benefit beginning at age sixty-two (62), as determined above, reduced for each month by which benefits commence before the month in which the Participant attains age sixty-two (62). To determine actuarial equivalence, the interest rate assumption is the greater of the rate specified in Section 1.12 or five percent (5%). Any decrease in the Defined Benefit Dollar Limitation determined in accordance with this paragraph (d) shall not reflect any mortality decrement to the extent that benefits will not be forfeited upon the death of the Participant. (E) If the annual benefit of a Participant commences after the Participant's Social Security Retirement Age, the Defined Benefit Dollar Limitation as reduced in paragraph (b) above, if necessary, shall be adjusted so that it is the Actuarial Equivalent of an annual benefit of such dollar limitation beginning at the Participant's Social Security Retirement Age. To determine actuarial equivalence, the interest rate assumption used is the lesser of the rate specified in Section 1.2 or five percent (5%). (12) "Projected Annual Benefit" shall mean the Annual Benefit as defined in subsection (2) above, to which the Participant would be entitled under the terms of the Plan assuming: (A) the Participant will continue employment until the Normal Retirement Date under the Plan (or current (B) the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. (13) "Year of Participation" shall mean a year of Participation (as defined in Article I) (computed to fractional parts of a year). A Participant who is permanently and totally disabled within the meaning of section 415(c)(3)(C)(i) of the Code for an accrual computation period shall receive a Year of Participation with respect to that period. In addition, for a Participant to receive a Year of Participation (or part thereof) for a Plan Year, the Plan must be established no later than the last day of such accrual computation period. In no event will more than one Year of Participation be credited for any twelve (12) month period. 8.2 Limitations Applicable to Twenty-Five (25) Highest Paid Employees (a) Prior to the date the pre-termination restrictions in section 8.3 of the Plan are effective, Employer contributions on behalf of any of the twenty-five (25) highest paid Employees at the time the Plan is established and whose anticipated annual benefit exceeds fifteen hundred dollars ($1,500) will be restricted as provided in paragraph (b) upon the occurrence of the following conditions: (1) The Plan is terminated within ten (10) years after its (2) The benefits of such highest paid Employee become payable within ten (10) years after the establishment of the Plan. If (2) above is applicable, the restrictions shall remain in effect until the expiration of the ten (10) year period or, if later, the date on which the Full Current Costs have been funded for the first time. (b) Employer contributions (or funds attributable thereto) which may be used for the benefit of an Employee described in paragraph (a) shall not exceed the greater of twenty thousand dollars ($20,000), or twenty percent (20%) of the first fifty thousand dollars ($50,000) of the Employee's Annual Compensation multiplied by the number of years between the date of establishment of the Plan and: (1) If (a)(1) applies, the date of termination of the Plan, or (2) If (a)(2) applies, the date the benefits become payable. (c) If the Plan is amended so as to increase the benefit actually payable in the event of the subsequent termination of the Plan, or the subsequent discontinuance of contributions thereunder, then the provisions of the above paragraphs shall be applied to the Plan as so changed as if it were a new plan established on the date of the change. The original group of twenty-five (25) Employees (as described in (a) above will continue to have the limitation in (b) apply as if the Plan had not been changed. The restrictions relating to the change of Plan should apply to benefits or funds for each of the twenty-five (25) highest paid Employees on the effective date of the change except that such restrictions need not apply with respect to any Employee in this group from whom the normal annual pension or annuity provided by Employer contributions prior to that date or during the ensuing ten (10) years, based on his rate of Annual Compensation on that date, could not exceed fifteen hundred dollars ($1,500). The Employer contributions which may be used for the benefit of the new group of twenty-five (25) Employees will be limited to the greater of: (1) The Employer contributions (or funds attributable thereto) which would have been applied to provide the benefits for the Employee if the previous plan had been continued without (2) Twenty thousand dollars ($20,000); or (3) The sum of (A) the Employer contributions (or funds attributable thereto) which would have been applied to provide benefits for the Employee under the previous plan if it had been terminated the day before the effective date of the change and (B) an amount computed by multiplying the number of years for which the current costs of the Plan after that date are met by (i) twenty percent (20%) or his Annual Compensation, or (ii) ten thousand dollars ($10,000), whichever is smaller. (d) Notwithstanding the above limitations, the following limitation will apply if they would result in a greater amount of Employer contributions to be used for the benefit of the restricted Employee: (1) In the case of a substantial owner (as defined in section 4022(b)(5) of the Act), a dollar amount which equals the present value of the benefit guaranteed for such Employee under section 4022 of the Act, or if the Plan has not terminated, the present value of the benefit that would be guaranteed if the Plan terminated on the date the benefit commences, determined in accordance with regulation of the (2) In the case of other restricted Employees, a dollar amount which equals the present value of the maximum benefit described in section 4022(b)(3)(B) of the Act (determined on the earlier of the date the Plan terminates or the date benefits commence and determined in accordance with regulations of the PBGC) without regard to any other limitations in section 4022 of the Act. (e) The provisions of this Section 8.2 shall not restrict the full payment of the Standard Form of Retirement Income payable under the Plan or the full payment of an optional form of retirement benefit in an amount not in excess of the Standard Form of Retirement Income while the Plan is in effect and (1) its Full Current Costs are met or (2) the aggregate of all payments in excess of the restricted amounts payable to all Participants who are among the affected twenty-five (25) highest paid Employees does not exceed the aggregate of all Employer contributions already made to the Plan in the current Plan Year. (f) The provisions of this Section 8.2 shall not restrict the payment of a lump sum distribution if the Participant enters into an agreement to repay any amount which may be required to be repaid under this Section 8.2 upon a plan termination or failure to meet Full Current Costs within ten (10) years of its establishment or amendment increasing benefits, as applicable, and the Participant deposits with an acceptable depository property having a fair market value equal to one hundred twenty-five percent (125%) of the amount which would be repayable had the Plan terminated on the date of the lump sum distribution. If the market value of the property held by the depository falls below one hundred ten percent (110%) of the amount which would be repayable if the Plan were then to terminate, additional property necessary to bring the value of the property held by the depository up to one hundred twenty-five percent (125%) of such amount will be deposited. (g) If this Plan terminates at a time when the value of Plan assets is not less than the present value of all Accrued Benefits (whether or not nonforfeitable) distributions of assets to each Participant equal to the present value of the Participant's Accrued Benefit will not be discriminatory if the formula for computing benefits as of the date of termination is not discriminatory. All present values and the value of Plan assets will be computed using assumptions satisfying section 4044 of the Act. (h) For purposes of this Section 8.2: (1) "Full current costs" of the Plan means the normal cost of the Plan, as defined in IRS Regulations Section 1.404(a)-6 for all years since the effective date of the Plan, plus interest on any unfunded liability during such period. (2) "Annual Compensation" means an Employee's average regular annual Compensation, or such average Compensation over the last five (5) years, or such Employee's last annual Compensation if such Compensation is reasonably similar to his average regular annual Compensation for the five (5) preceding years. For Plan Years beginning on or after the date set forth in the Adoption Agreement, benefits distributed to any of the 25 most highly compensated active and highly compensated former Employees with the greatest Compensation in the current or any prior year are restricted such that the annual payments are no greater than an amount equal to the payment that would be made on behalf of the Employee under a straight life annuity that is the Actuarial Equivalent of the sum of the Employee's Accrued Benefit, the Employee's other benefits under the Plan (other than a social security supplement, within the meaning of section 1.411(a)-7(c)(4)(ii) of the Income Tax Regulations), and the amount the Employee is entitled to receive under a social security supplement. The preceding paragraph shall not apply if: (1) after payment of the benefit to an Employee described in the preceding paragraph, the value of Plan assets equals or exceeds 110% of the value of current liabilities, as defined in section 412(1)(7) of the Code, (2) the value of the benefits for an Employee described above is less than 1% of the value of current liabilities before distribution, or (3) the value of the benefits payable under the Plan to an Employee described above does not exceed $3,500. For purposes of this section, "benefit" includes loans in excess of the amount set forth in section 72(p)(2)(A) of the Code, any periodic income, any withdrawal values payable to a living Employee, and any death benefits not provided for by insurance on the Employee's life. The pre-termination restrictions in section 8.3 of the Plan will be effective as elected in the Adoption Agreement (no later than the first day of the 1994 Plan Year). An Employee's otherwise restricted benefit may be distributed in full to the affected Employee if prior to receipt of the restricted amount, the Employee enters into a written agreement with the Plan Administrator to secure repayment to the Plan of the restricted amount. The restricted amount is the excess of the amounts distributed to the Employee (accumulated with reasonable interest) over the amounts that could have been distributed to the Employee as a straight life annuity (accumulated with reasonable interest). The Employee may secure repayment of the restricted amount upon distribution by: (1) entering into an agreement for promptly depositing in escrow with an acceptance depository property having a fair market value equal to at least 125 percent of the restricted amount, (2) providing a bank letter of credit in amount equal to at least 100 percent of the restricted amount, or (3) posting a bond equal to at least 100 percent of the restricted amount. If the Employee elects to post bond, the bond will be furnished by an insurance company, bonding company or other surety for federal bonds. The escrow arrangement may provide that an Employee may withdraw amounts in excess of 125 percent of the restricted amount. If the market value of the property in an escrow account falls below 110 percent of the remaining restricted amount, the Employee must deposit additional property to bring the value of the property held by the depository up to 125 percent of the restricted amount. The escrow arrangement may provide that an Employee may have the right to receive any income from the property placed in escrow subject to the Employee's obligation to deposit additional property, as set forth in the preceding sentence. A surety or bank may release any liability on a bond or letter of credit in excess of 100 percent of the restricted amount. If the Plan Administrator certifies to the depository, surety or bank that the Employee (or the Employee's estate) is no longer obligated to repay any restricted amount, a depository may redeliver to the Employee any property held under an escrow agreement, and a surety or bank may release any liability on an Employee's bond or letter of credit. The following provisions shall be applicable for determining when the distribution of benefits shall be made: (a) If the Actuarial Value of a Participant's vested Accrued Benefit exceeds (or at the time of any prior distribution exceeded) $3,500, the Participant must consent to any distribution of such Accrued Benefit prior to the date the Participant has attained the later of Normal Retirement Age or age sixty-two (62). The consent of the Participant's spouse shall also be required if such distribution is made in any form other than a Qualified Joint and Survivor Annuity. The consent of the Participant and, if applicable, the Participant's spouse to any such distribution shall be obtained in writing within the ninety (90) day period ending on the Annuity Starting Date. The Committee shall provide the Participant with a written explanation of the material features and relative values of he optional forms of benefit available under the Plan. Such notice shall also notify the Participant of the right to defer distribution until Normal Retirement Age (or age sixty-two (62), if later), and shall be provided during the period beginning ninety (90) days before and ending thirty (30) days before the Annuity Starting Date. Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the Accrued Benefit is immediately distributable. Neither the consent of the Participant nor the Participant's spouse shall be required to the extent that a distribution is required to satisfy section 401(a)(9) or section 415 of the Code. An Accrued Benefit is immediately distributable if any part of the Accrued Benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or age 62. For purposes of determining the applicability of the foregoing consent requirements to distributions made before the first day of the first Plan Year beginning after December 31, 1988, the Participant's vested Accrued Benefit shall not include amounts attributable to accumulated deductible Employee contributions within the meaning of section 72(o)(5)(B) of the Code. (b) Unless the Participant elects otherwise, in the event of the retirement or termination of employment of a Participant, the Committee shall determine the exact date on which payment of benefits shall commence, but such date shall be no later than the sixtieth (60th) day after the close of the Plan Year in which the latest of the following events occurs: (1) the Participant reaches his Normal Retirement Age (or age sixty-five (65), if earlier), (2) the tenth (10th) anniversary of the year in which the Participant commenced participation in the Plan, or (3) the Participant terminates employment with the Employer. The failure of a Participant or surviving spouse to consent to a distribution shall be deemed to be an election to defer commencement of benefit distributions sufficient to satisfy this Section. Neither the consent of the Participant nor the Participant's spouse shall be required to the extent a distribution is necessary to satisfy section 401(a)(9) or section 415 of the Code. If, however, such Participant's termination occurred after he had satisfied the Service requirements, if any, for an Early Retirement Benefit, he may elect to have such benefit commence on a date prior to his Normal Retirement Date, provided an application is filed with the Committee at least sixty (60) days prior to the earlier commencement date. Employer-derived benefits shall be paid only in the event of death, disability, termination of employment or retirement. (a) Applicability of Automatic Annuity Requirements. The provisions of this Section shall take precedence over any conflicting provision in this Plan and shall apply to any Participant who is credited with at least one (1) Hour of Service with the Employer on or after August 23, 1984, and such other Participants as provided in Section 9.3. Qualified Joint and Survivor Annuity. Unless an optional form of benefit is selected pursuant to a Qualified Election within the ninety (90) day period ending on the Annuity Starting Date, a married Participant's Vested Accrued Benefit shall be paid in the form of a Qualified Joint and Survivor Annuity and an unmarried Participant's Vested Accrued Benefit shall be paid in the form of a single life annuity. The Participant may elect to have such annuity distributed upon attainment of the Earliest Retirement Age. Qualified Pre-retirement Survivor Annuity. Unless an optional form of benefit is selected within the election Period pursuant to a Qualified Election, if a Participant dies after the Earliest Retirement Age, the Participant's Surviving Spouse (if any) shall receive the same benefit that would be payable if the Participant had retired with an immediate Qualified Joint and Survivor Annuity on the day before the Participant's date of death. Unless an optional form of benefit is selected within the Election Period pursuant to a Qualified Election, if a Participant dies on or before the Earliest Retirement Age, the Participant's Surviving Spouse (if any) shall receive the same benefit that would be payable if the Participant had: (i) separated form service on the date of death (or date of separation from service, if earlier), (ii) survived to the Earliest Retirement Age, (iii)retired with an immediate Qualified Joint and Survivor Annuity at the Earliest Retirement Age, and (iv) died on the day after the Earliest Retirement Age. Notwithstanding the above, a Surviving Spouse shall begin to receive payments at the Earliest Retirement Age, unless such Surviving Spouse elects a later date. The Actuarial Value of benefits which commence later than the date on which payments would have been made to the surviving spouse under a Qualified Joint and Survivor Annuity in accordance with this provision shall be adjusted to reflect the delayed payment. Subject to the provisions of Section 9.1(a), a surviving spouse will begin to receive payments at the Earliest Retirement Age. Benefits commencing after the Earliest Retirement Age will be the Actuarial Equivalent of the Benefit to which the surviving spouse would have been entitled if benefits had commenced at the Earliest Retirement Age under an immediate Qualified Joint and Survivor Annuity. The benefit payable to the Surviving Spouse shall be attributable to Employee contributions in the same proportion as the Accrued Benefit derived from Employee contributions is to the total Accrued Benefit of the Participant. Definitions. For purposes of this Section 9.2, the following words shall have the following meanings: (i) "Earliest Retirement Age" shall mean the earliest date on which, under the Plan, the Participant could elect to receive retirement benefits. (ii) "Election Period" shall mean the period which begins on the first day of the Plan Year in which the Participant attains age thirty-five (35) and ends on the date of the Participant's death. If a Participant separates from service prior to the first day of the Plan Year in which age thirty-five (35) is attained, with respect to benefits accrued prior to separation, the Election Period shall begin on the date of separation. A Participant who will not yet attain age thirty-five (35) as of the end of any current Plan Year may make a special Qualified Election to waive the Qualified Pre-retirement Survivor Annuity for the period beginning on the date of such election and ending on the first day of the Plan Year in which the Participant will attain age thirty-five (35). Such election shall not be valid unless the Participant receives a written explanation of the Qualified Pre-retirement Survivor Annuity in such terms as are comparable to the explanation required under Section 9.2(b). Qualified Pre-retirement Survivor Annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age thirty-five (35). Any new waiver on or after such date shall be subject to the full requirements of this Section 9.2. (iii)"Qualified Election" shall mean a Participant's waiver of a Qualified Joint and Survivor annuity or a Qualified Pre-retirement Survivor Annuity. Any such waiver must be consented to in writing by the Participant's Spouse. The Spouse's consent must: designate a specific alternate Beneficiary (including any class of Beneficiaries or any contingent Beneficiaries, which may not be changed without spousal consent) or expressly permit designations by the Participant without any further spousal consent; acknowledge the effect of the election; and be witnessed by a member of the Committee or a Notary Public. Additionally, a Participant's waiver of the Qualified Joint and Survivor Annuity shall not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent (or the Spouse expressly permits designations by the Participant without any further spousal consent). Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of a member of the Committee that there is no Spouse or the Spouse cannot be located, a waiver will be deemed a Qualified Election. Any spousal consent (of deemed spousal consent) obtained under this provision will be valid only with respect to such Spouse. A consent that permits designations by the Participant without further consent by such Spouse must acknowledge that the Spouse has the right to limit consent to a specific Beneficiary and, where applicable, a specific form of benefit, and that the Spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior consent may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in paragraph (b) below. (iv) "Spouse (Surviving Spouse)" shall mean the Spouse or Surviving Spouse of the Participant, provided that a former spouse will be treated as the Spouse or Surviving Spouse to the extent provided under a qualified domestic relations order as described in section 414(p) of the Code. (v) "Vested Accrued Benefit" shall mean the value of the Participant's vested Accrued Benefit derived from Employer and Employee contributions (including rollovers). The provisions of this Section shall apply to a Participant who is vested in amounts attributable to Employer contributions, Employee contributions (or both) at the time of death or distribution. Qualified Joint and Survivor Annuity. In the case of a Qualified Joint and Survivor Annuity as described above the Committee shall provide each Participant a written explanation of: (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of a Participant's Spouse; (iv) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity; and (v) the relative values of the various optional forms of benefit under the Plan. Qualified Pre-retirement Survivor Annuity. In the case of a Qualified Pre-retirement Survivor Annuity as described above, the Committee shall provide each Participant with a written explanation of the Qualified Pre-retirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirement applicable to explaining a Qualified Joint and Survivor Annuity within whichever of the following periods ends last: (i) The period beginning on the first day of the Plan Year in which the Participant attains age thirty-two (32) and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age thirty-five (35). (ii) A reasonable period ending after a Participant enters the Plan. (iii)A reasonable period after this Section 9.2 first applies to a Participant. (iv) A reasonable period ending after the Plan ceases to "fully subsidize" the cost of the Qualified Pre-retirement Survivor Annuity. For purposes of applying the preceding paragraph, a reasonable period ending after the enumerated events described in (ii), (iii) and (iv) is the end of the two (2) year period beginning one year prior to the date the applicable event occurs, and ending one year after that date. Notwithstanding the foregoing, notice must be provided within a reasonable period ending after termination of employment in the case of a Participant who terminates employment before attaining age 35. Such notice shall be provided within the two (2) year period beginning one year prior to termination and ending one year after termination. If such a Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined. Notwithstanding the above, the respective notices prescribed herein need not be given to a Participant if this Plan "fully subsidizes" the costs of a Qualified Joint and Survivor Annuity or Qualified Pre-retirement Survivor Annuity and the Participant cannot elect another form of benefit or designate a non-spouse Beneficiary. For purposes of the foregoing, a Plan fully subsidizes the costs of a benefit if under the Plan no increase in cost or decrease in benefits to the Participant may result from the Participant's failure to elect another benefit. Prior to the time the Plan allows the Participant to waive the Qualified Pre-retirement Survivor Annuity, the Plan may not charge the Participant for the cost of such benefit by reducing the Participant's benefits under the Plan or by any other method. 9.3 Transitional Rules Applicable to Joint and Survivor Annuities (a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by Section 9.2 must be given the opportunity to elect to have section 9.2 apply if such Participant is credited with at least one (1) Hour of Service under this Plan or a predecessor Plan in a Plan Year beginning on or after January 1, 1976, and such Participant had at least ten (10) years of Service when he or she terminated employment. (b) Any living Participant not receiving benefits on August 23, 1984 who was credited with at least one (1) Hour of Service under this Plan or a predecessor Plan on or after September 2, 1974, and who is not otherwise credited with any Service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his or her benefits paid in the manner set forth in paragraph (d) below. (c) The respective opportunities to elect (as described in paragraphs (a) and (b) above) must be afforded to the appropriate Participants during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to said Participants. (d) Any Participant who has elected pursuant to paragraph (b) above and any Participant who does not elect under paragraph (a) above or who meets the requirements of paragraph (a) except that such Participant does not have at least ten (10) years of Service when he or she terminates employment shall have his or her benefits distributed in accordance with all of the following requirements if benefits would have been payable in the form of a life annuity. (1) Qualified Joint and Survivor Annuity. If benefits in the form of a life annuity become payable to a married Participant who: (i) Begins to receive payments under the Plan on or after Normal Retirement Age; or (ii) Dies on or after Normal Retirement Age while still working for the Employer; or (iii)Begins to receive payments on or after the Qualified Early Retirement Age; or (iv) Separates from service on or after attaining Normal Retirement Age (or the Qualified Early Retirement Age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits; then such benefits will be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant has elected otherwise during the election period which shall begin at least six (6) months before the Participant attains Qualified Early Retirement Age and end not more than ninety (90) days before the commencement of benefits. Any election hereunder will be in writing and may be changed by the Participant, with the consent of his or her spouse, at any item during the election period. (2) Election of Early Survivor Annuity. A Participant who is employed after attaining the Qualified Early Retirement Age will be given the opportunity to elect, during the election period, to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the spouse under Qualified Joint and Survivor Annuity if the Participant had retired on the day before his or her death. Any election under this provision will be in writing and may be changed by the Participant, with the consent of his or her spouse, at any time. The election period begins on the later of (1) the ninetieth (90th) day before the Participant attains the Qualified Early Retirement Age, or (2) the date on which Participation begins, and ends on the date the Participant terminates employment. (3) Definitions. For purposes of this Section 9.3(d): (i) "Qualified Joint and Survivor Annuity" shall mean an annuity for the life of the Participant with a survivor annuity for the life of his Spouse as described in Section 9.2. (ii) Qualified Early Retirement Age shall mean the latest of: (A) the earliest date, under the Plan, on which the Participant may elect to receive (B) the first day of the one hundred twentieth (120th) month beginning before the Participant reaches Normal Retirement Age, or (C) the date the Participant begins participation. 9.4 Other Forms and Methods of Payment of Benefits The Standard Form of Retirement Income shall be the applicable form of Automatic Annuity under Section 9.2. In lieu of the Automatic Annuity, a Participant or Beneficiary may elect any one of the optional forms of distribution set forth below or specified in the Adoption Agreement, subject to the provisions of Section 9.5. Each optional form of distribution shall be the Actuarial Equivalent of the Participant's Standard Form of Retirement income. Any such election by a Participant must be accompanied by the written consent of his spouse (consistent with the requirements for a Qualified Election under Section 9.2). The available form of distribution shall be: (i) a lump sum distribution. (ii) a joint and 100% survivor annuity. (iv) a single life annuity contract, with 10 years guaranteed. (v) installments payable monthly, quarterly, semi-annually or annually. At the Committee's discretion, any benefits payable under the Plan may be paid directly from the Trust Fund in cash, or through the purchase of an annuity contract from an insurance company selected by the Committee. 9.5 Required Payment of Benefits (a) Subject to Section 9.2, Automatic Annuity Requirements, the requirements of this Section shall apply to any distribution of a Participant's interest and will take precedence over any inconsistent provisions of this Plan. Unless otherwise specified, the provisions of this Section apply to calendar years beginning after December 31, 1984. All distributions required under this Section shall be determined and made in accordance with the Proposed Income Tax Regulations under section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of section 1.401(a)(9)-2 of the Proposed Income Tax Regulations. (b) Required Beginning Date. The entire interest of a Participant must be distributed or begin to be distributed no later than the Participant's required beginning date. (c) Limits on Distribution Periods. As of the first distribution calendar year, distributions, if not made in a single-sum, may only be made over one of the following periods (or a combination thereof): (i) the life of the Participant, (ii) the life of the Participant and a designated Beneficiary, (iii)a period certain not extending beyond the life expectancy of (iv) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. Any annuity contract purchased and distributed to a Participant or his Beneficiary shall comply with the requirements of this Plan, and shall be made and endorsed as nontransferable. (d) Determination of amount to be distributed each year. (i) If the Participant's interest is to be paid in the form of annuity distributions under the Plan, payments under the annuity shall satisfy the following requirements: (A) the annuity distributions must be paid in periodic payments made at intervals not longer than one year; (B) the distribution period must be over a life (or lives) or over a period certain not longer than a life expectancy (or joint life and survivor expectancy) described in section 401(a)(9)(A)(ii) or section 401(a)(9)(B)(iii) of the Code, whichever is applicable; (C) the life expectancy (or joint life and last survivor expectancy) for purposes of determining the period certain shall be determined without recalculation of (D) once payments have begun over a period certain, the period certain may not be lengthened even if the period certain is shorter than the maximum permitted; (E) payments must either be nonincreasing or increase only as follows: (1) with any percentage increase in a specified and (2) to the extent of the reduction to the amount of the Participant's payments to provide for survivor benefit upon death, but only if the Beneficiary whose life was being used to determine the distribution period described in subparagraph (C) above dies and the payments continue otherwise in accordance with that subparagraph over the life of (3) to provide cash refunds of Employee contributions upon the Participant's death; or (4) because of an increase in benefits under the Plan. (F) If the annuity is a life annuity (or a life annuity with a period certain not exceeding 20 years), the amount which must be distributed on or before the Participant's required beginning date (or, in the case of distributions after the death of the Participant, the date distributions are required to begin pursuant to paragraph (e) below) shall be the payment which is required for one payment interval. The second payment need not be made until the end of the next payment interval even if that payment interval ends in the next calendar year. Payment intervals are the periods for which payments are received, e.g., bimonthly, monthly, semi-annually, or annually. If the annuity is a period certain annuity without a life contingency (or is a life annuity with a period certain exceeding 20 years) periodic payments for each distribution calendar year shall be combined and treated as an annual amount. The amount which must be distributed by the Participant's required beginning date (or, in the case of distributions after the death of the Participant, the date distributions are required to begin pursuant to paragraph (e) below) is the annual amount for the first distribution calendar year. The annual amount for other distribution calendar years, including the annual amount for the calendar year in which the Participant's required beginning date (or the date distributions are required to begin pursuant to paragraph (e) below) occurs, must be distributed on or before December 31 of the calendar year for which the distribution is required. (ii) Annuities purchased after December 31, 1988, are subject to the following additional conditions: (A) Unless the Participant's spouse is the designatedBeneficiary, if the Participant's interest is being distributed in the form of a period certain annuity without a life contingency, the period certain as of the beginning of the first distribution calendar year may not exceed the applicable period determined using the table set forth in Q&A A-5 of section 1.401(a)(9)-2 of the Proposed Income Tax Regulations. (B) If the Participant's interest is being distributed in the form of a joint and survivor annuity for the joint lives of the Participant and a nonspouse Beneficiary, annuity payments to be made on or after the Participant's required beginning date to the designated Beneficiary after the Participant's death must not at any time exceed the applicable percentage of the annuity payment for such period that would have been payable to the Participant using the table set forth in Q&A A-6 of section 1.401(a)(9)-2 of the Proposed Income Tax Regulations. (iii)Transitional rule. If payments under an annuity which complies with paragraph (d)(i) above begin prior to January 1, 1989, the minimum distribution requirements in effect as of July 27, 1987, shall apply to distributions from this Plan, regardless of whether the annuity form of payment is irrevocable. This transitional rule also applies to deferred annuity contracts distributed to or owned by the Employee prior to January 1, 1989, unless additional contributions are made under the Plan by the Employer with respect to such contract. (iv) If the form of distribution is an annuity made in accordance with this paragraph (d), any additional benefits accruing to the Participant after his or her required beginning date shall be distributed as a separate and identifiable component of the annuity beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues. (v) Any part of the Participant's interest which is in the form of an individual account shall be distributed in a manner satisfying the requirements of section 401(a)(9) of the Code and regulations thereunder. (i) Distribution beginning before death. If the Participant dies after distribution of his or her interest has begun, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. (ii) Distribution beginning after death. If the Participant dies before distribution of his or her interest begins, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death except to the extent that an election is made to receive distributions in accordance with (A) or (B) below: (A) if any portion of the Participant's interest is payable to a designated Beneficiary, distributions may be made over the life of over a period certain not greater than the life expectancy of the designated Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which (B) if the designated Beneficiary is the Participant's surviving spouse, the date distributions are required to begin in accordance with (A) above shall not be earlier than the later of (1) December 31 of the calendar year immediately following the calendar year in which the Participant died and (2) December 31 of the calendar year in which the Participant would have attained age seventy and one-half (70-1/2). If the Participant has not made an election pursuant to this paragraph (e)(ii) by the time of his or her death, the Participant's designated Beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this section, or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no designated Beneficiary, or if the designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (iii)For purposes of paragraph (e)(ii) above, if the surviving spouse dies after the Participant, but before payments to such spouse begin, the provisions of paragraph (e)(ii), with the exception of paragraph (B) therein, shall be applied as if the surviving spouse were the Participant. (iv) For purposes of this paragraph (e), any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. (v) For the purposes of this paragraph (e), distribution of a Participant's interest is considered to begin on the Participant's required beginning date (or, if paragraph (e)(iii) above is applicable, the date distribution is required to begin to the surviving spouse pursuant to paragraph (e)(ii) above). If distribution in the form of an annuity described in paragraph (d) above irrevocably commences to the Participant before the required beginning date, the date distribution is considered to begin is the date distribution actually commences. (i) Designated Beneficiary. The individual who is designated as the beneficiary under the Plan in accordance with section 401(a)(9) of the Code and the regulations thereunder. (ii) Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year which contains the Participant's required beginning date. For distribution beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to paragraph (e) above. (iii)Life expectancy. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or designated Beneficiary) as of the Participant's (or designated Beneficiary's) birthday in the applicable calendar year. The applicable calendar year shall be the first distribution calendar year. If annuity payments commence before the required beginning date, the applicable calendar year is the year such payments commence. Life expectancy and joint and last survivor expectancy are computed by use of the expected return multiples in Tables V and VI of section 1.72-9 of the Income Tax Regulations. (i) General rule. The required beginning date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age seventy and one-half (70-1/2). (ii) Transitional rule. The required beginning date of a Participant who attains age seventy and one-half (70-1/2) before January 1, 1988, shall be determined in accordance with (A) or (B) below: (B) Five Percent Owners. The required beginning date of a Participant who is a five percent (5%) owner during any year beginning after December 31, 1979, is the first day of April following the later of: (1) the calendar year in which the Participant attains age seventy and one-half (70-1/2), or (2) the earlier of the calendar year with or within which ends the Plan Year in which the Participant becomes a five percent (5%) owner, or the calendar year in which the Participant retires. The required beginning date of a Participant who is not a five percent (5%) owner who attains age seventy and one-half (70-1/2) during 1988 and who has not retired as of January 1, 1989, is April 1, 1990. (iii)Five percent (5%) owner. A Participant is treated as a five percent (5%) owner for purposes of this Section if such Participant is a five percent (5%) owner as defined in section 416(i) of the Code (determined in accordance with section 416 but without regard to whether the Plan is Top-Heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age sixty-six and one-half (66-1/2) or any subsequent Plan Year. (iv) Once distributions have begun to a five percent (5%) owner under this Section, they must continue to be distributed, even if the Participant ceases to be a five percent (5%) owner in a subsequent year. Transitional Rule. Notwithstanding the above requirements and subject to the requirement of Section 9.2, distribution on behalf of any Employee, including a five percent (5%) owner, may be made in accordance with all of the following requirements (regardless of when such distribution commences): (a) The distribution by the Plan is one which would not have disqualified such Plan under section 401(a)(9) of the Code as in effect prior to amendment by the Deficit Reduction Act of 1984. (b) The distribution is in accordance with a method of distribution designated by the Employee whose interest in the trust is being distributed or, if the Employee is deceased, by a Beneficiary of such Employee; (c) Such designation was in writing, was signed by the Employee or Beneficiary, and was made before January 1, 1984; (d) The Employee had accrued a benefit under the Plan as of (e) The method of distribution designated by the Employee or the Beneficiary specifies the form of the distribution, the time at which distribution will commence, the period over which distributions will be made and in the case of any distribution upon the Employee's death, the Beneficiaries of the Employee listed in order of priority. Unless paid to a Surviving Spouse under a Qualified Joint and Survivor Annuity, the method of distribution selected must assure that at least fifty percent (50%) of the present value of the amount available for distribution is paid within the life expectancy of the Participant. A distribution upon death will not be covered by this transition rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Employee. For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Employee, or the Beneficiary, to whom such distribution is being made, will be presumed to have designated the method under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirement in subparagraphs (a) through (e) above. If a designation is revoked, the subsequent distribution must satisfy the requirements of section 401(a)(9) of the Code and the regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the trust must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy section 401(a)(9) of the Code and the regulation thereunder, but for the section 242(b)(2) election. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in section 1.401(a)(9)-2 of the Proposed Income Tax Regulations. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another Beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation so long as such substitution or addition does not alter the designation, directly or indirectly (for example, by altering the relevant measuring life). The rules of Q&A J-2 and J-3 of Proposed Income Tax Regulations section 1.401(a)(9)-1 shall apply to rollovers and transfers form one plan to another. In the event a distribution made to or on behalf of a Participant prior to the attainment of age fifty-nine and one-half (59-1/2), would be subject to the ten percent (10%) penalty tax set forth in section 72(t) or 72(m)(5) of the Code, the Participant may, within sixty (60) days of the distribution date, request that the distribution be transferred to another qualified retirement plan or an Individual Retirement Account as a rollover contribution, if the distribution satisfies the requirements of section 402(c)(5) of the Code. 9.7 No Duplication of Benefits In the determination of the amount of any benefit to which a Participant is entitled in accordance with the provisions of this Plan, adjustments shall be made to reflect any amounts previously paid under the provisions of this Plan. (a) This section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this part, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution, that is equal to at least $500, paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includable in net unrealized appreciation with respect to Employer securities; and any other distribution(s) that is reasonably expected to total less than $200 during a year. (c) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, and annuity plan described in section 403(a) of the Code, or a qualified plan described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the Surviving Spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (d) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are distributee's with regard to the interest of the spouse or former spouse. (e) Direct rollover: A direct rollover is a payment of the Plan to the eligible retirement plan specified by the distributee. 10.1 Creation of a Committee The Employer may appoint a person or persons to act as the Committee and serve at its pleasure. If no such Committee is appointed, the Employer shall act as the Committee. The Employer shall notify the Trustee of the appointment of the original members of the Committee and of each change in the membership of the Committee. Vacancies in the Committee shall be filled by the Employer. In the event that the Employer appoints such person or persons to act as the Committee, such Committee shall act by a majority of its members at a meeting or in writing without a meeting. A member of the Committee who is also a Participant of the Plan shall not vote or act as a member of the Committee upon any matter relating solely to his rights or benefits under the Plan. Except as otherwise provided in section 10.10, the Committee may designate a person or persons who shall be authorized to sign any document in the name of the Committee. The Trustee shall be fully protected in relying upon any notice, instruction or certification from the Committee or executed pursuant to the provisions of this Section. The Committee shall have such powers and duties as are necessary for the proper administration of the Plan, including but not limited to the power to make decisions with respect to the application and interpretation of the Plan. The Committee shall be empowered to establish rules and regulations for the transactions of its business and for the administration of the Plan. The determinations of the Committee with respect to the interpretation, application, or administration of the Plan shall be final, binding, and conclusive upon each person or party interested or concerned. Where provisions of this Plan are at the discretion of the Committee, all Participants shall be treated in an uniform and non-discriminatory manner. The Committee shall maintain such records as may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service and Department of Labor as required by law. Employees may examine those records pertaining directing to them. 10.7 Reliance on Professional Advice The Committee shall be entitled to rely conclusively on the advice or opinion of any consultant, accountant, or attorney and such persons may also act in their respective professional capacities as advisors to the Employer. All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the duties of the Committee, including, but not limited to, fees of consultants, accountants, and attorneys, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. However, the Employer may reimburse the Trust Fund for any administration expense incurred. Any administration expense paid to the Trust Fund as a reimbursement shall not be considered an Employer contribution. The Committee must discharge its duties solely in the interest of the Participants and their Beneficiaries. The Committee must carry out its duties with the care, skill, prudence and diligence under circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. The Committee, however, shall not be liable for any acts or decisions based on the advice or opinion of any consultant, accountant or attorney employed by the Committee in their respective professional capacities as advisors to the Employer, provided, however, that the Committee did not violate its general fiduciary duty in selecting or retaining such advisor. 10.10 Payment Certification to Trustee The Committee shall provide written instruction to the Trustee with respect to all payment which become due under the terms of the Plan and shall direct the Trustee to make such payments from the Trust Fund. All orders, requests and instructions by the Committee to the Trustee shall be in writing and signed by an authorized member of the Committee. The Trustee shall act and shall be fully protected in acting in accordance with such orders, requests and instructions. A Participant or Beneficiary ("Claimant") may file a written claim for benefits with the Committee. If the Committee decides that a Claimant is not entitled to all or any part of the benefits claimed, it shall, within ninety (90) days of receipt of such claim, inform the claimant in writing of its determination; the reasons for its determination, including specific references to the pertinent Plan provisions; and the Plan's review representative shall be permitted to review pertinent documents and within sixty (60) days after receipt of the notice of denial of claim to request to appear personally before it or to submit such further information or comments to the Committee as will, in the Claimant's opinion establish his right to such benefits. The Committee will render its final decision with the specific reason therefor in writing and will transmit it to the claimant by certified mail within sixty (60) days (or one hundred twenty (120) days, if special circumstances require an extension of time and the claimant is given written notice within the initial sixty (60) day period) of any such appearance. If the final decision is not made within such period, it will be considered denied. If, upon review of a request for benefits hereunder, the Committee finds the Participant ineligible for such benefits, it shall inform the Participant in writing the reason or reasons for such denial. In the event any Participant or Beneficiary disagrees with the conclusions of the Committee, the Committee must reconsider their decision based on the facts and evidence presented to them by the Participant or Beneficiary. Further, the Committee must substantiate in writing to any Participant or Beneficiary who disagrees with the amount of his benefit the method under which the benefit computations were made. Effective for Plan Years beginning after the Plan Year in which this Plan is adopted by the Employer, Employee contributions shall not be permitted under this Plan. Employee contributions for Plan Years beginning after December 31, 1986 shall be limited so as to meet the nondiscrimination test of section 401(m) of the Code. The Committee shall maintain a separate Participant Voluntary Contribution Account for Employee contributions made prior to such time. Such Account shall be fully vested and nonforfeitable at all times. On the basis of each annual valuation of the Trust Fund, as provided for in the Trust Agreement, the Participant Voluntary Contribution Accounts of all Participants shall be adjusted to reflect the effects of income, realized and unrealized gains and losses on securities and expenses. Such adjustment shall be based upon the proportion that the total of all Participant Voluntary Contribution Accounts as of the last preceding Anniversary Date bears to the total market value of the Trust Fund. Each Participant shall then have his Participant Voluntary Contribution Account adjusted in proportion to all such Participant Voluntary Contribution Accounts. (a) A Participant may make withdrawals from the Participant Voluntary Contribution Account which results from his own contributions at such time as the Committee shall designate, but not more than quarterly during a Plan Year provided that no single withdrawal shall be less than the total amount in such Account or five hundred dollars ($500), whichever is less, and the aggregate withdrawals by a Participant prior to his separation from service may never exceed the smaller of the actual amount he has contributed or the adjusted value of the Participant Voluntary Contribution Account resulting from his own contributions. (b) Distribution or withdrawals form a Participant's Voluntary Contribution Account shall be paid in accordance with the provisions of Article IX, including the requirement of the written consent of the Participant's spouse to any withdrawal. (c) No portion of a Participant's Accrued Benefit derived form Employer contributions shall be forfeitable solely as a result of a Participant's withdrawal of voluntary contributions. 11.4 Transfers From Other Trusts The Committee may, in its discretion, direct the Trustee to accept a rollover contribution described in sections 402(a)(5), 403(a)(4) or 408(a)(3)(A)(ii) of the Code or a direct transfer of funds from a qualified retirement plan, provided that, in the opinion of counsel for the Employer, the transfer will not jeopardize the tax exempt status of the Plan or create adverse tax consequences to the Employer. The committee shall exercise such discretion in a uniform and non-discriminatory manner. A transfer or rollover contribution may be made on behalf of an Employee eligible to participate in the Plan who has not met the age and service requirements, if any, for participation. Such an Employee shall become a Participant on the date the Trustee accepts the rollover contribution or transfer for all purposes, except that no Employer or Employee contributions shall be made by or on behalf of such Employee and such Employee shall not share in Plan forfeitures until he has completed the age and service requirements for participation. A rollover contribution or transfer shall be maintained in a Participant's Rollover Account, provided that the Committee shall maintain a separate accounting for the amount transferred and its share of the income. The Employer may elect in the Adoption Agreement to have the provisions of this Article XII apply. 12.1 Trustee To Procure Contracts If this Plan is to be funded partially with life insurance contracts, the Trustee, upon his applications, shall procure a contract on the whole, universal or term life plan on the life of a Participant who is insurable as a standard risk, or who is not insurable as a standard risk but with respect to whom the Committee shall have elected to pay substandard rates in accordance with Section 12.2 hereof. The contract shall provide a life insurance benefit, payable on the death of the Participant prior to his Normal Retirement Date, equal to a multiple limited to one hundred (100) times the amount of anticipated monthly normal retirement benefit to which such Participant is entitled as calculated pursuant to Section 5.1. The multiple shall be set forth in the Adoption Agreement. If a Participant is not insurable as a standard risk but may nevertheless be eligible for insurance coverage at an extra rating because of excess mortality hazards, the Committee, in its discretion, may agree to pay the substandard rate required to obtain the full amount of the death benefits herein above set forth. In determining whether or not to pay such substandard rates, the Committee shall not discriminate and shall accord uniform treatment to all of its Participants in a similar situation. The Committee shall notify the Trustee of its decision in each such case. The Trustee, upon his application, shall either procure an annuity on the life of each Participant who is not insurable or who is insurable only at substandard rates and with respect to whom the Committee shall not have elected to pay substandard rates in accordance with this Section; or shall purchase no annuity on the life of such Participant, whichever course of action shall be dictated by the Committee. If the choice shall be the purchase of an annuity, the annual premium therefore shall not exceed the annual premium that would have been paid for a whole life policy covering such Participant had he been insurable as a standard risk. Such annuity shall provide a benefit in the event of death prior to his Normal Retirement Date at least equal to the cash value of such annuity or the sum of the premiums paid, whichever is greater. If the choice shall be the purchase of no annuity, then the annual contributions on behalf of such Participant, determined pursuant to Section 3.1, shall be those required to provide the benefits to which he shall be entitled, form time to time, without reference to any annuity on his life, and the entire amount of such contributions shall be deposited to his account in the Trust Fund. 12.3 Rules Applicable To Contracts The following rules shall be applicable to the acquisition, handling or disposition of any contract: (a) Each such whole or universal life insurance contract shall contain a provision permitting the purchase at retirement of any additional income to which the Participant shall be entitled pursuant to Article V. (b) Each application for a contract and the contracts themselves, shall nominate and designate the Trustee as sole owner, with the right reserved to said Trustee to exercise any right or option contained therein, subject to the terms and provisions of this Plan. All such contracts shall be held by the Trustee. (c) The Trustee shall be designated in the contracts to receive the proceeds maturing by reason of the death of the Participant to pay death benefits pursuant to Article VII to the Deceased Participant's Beneficiary or Beneficiaries. (d) The Trustee shall arrange, where possible, that all contracts issued under this Plan shall bear the same premium due date. (e) All whole or universal life insurance contracts acquired for the purpose of this Plan shall contain guaranteed cash values and as uniform basic options as it is possible to obtain. (f) Each whole or universal life insurance contract shall provide in the event of lapse for non-payment of premiums that its value will be applied in accordance with contract provisions to provide reduced paid-up benefits. (g) Each contract, if and only if issued by a company selling policies on a participating basis, shall provide that the dividend plan shall be premium reduction. Any dividend payable upon maturity of the contract shall be payable in cash to the Trustee. (h) Any payments by the insurer on account of credits such as dividends, experience rating credits, or surrender or cancellation credits shall be applied, within the taxable year of the Employer in which received or within the next succeeding taxable year, toward the next premiums due before any further Employer contributions are so applied. 12.4 Increases or Decreases in Benefits If the anticipated normal retirement benefit of a Participant is increased, the Trustee shall take the necessary action to increase the Participant's benefits to become effective on the Anniversary Date next following or coinciding with such increase, to the extent required by increase or accumulation of prior increases; provided, however, that no increase in the benefit of a Participant shall be recognized by the purchase of additional contracts unless and until the increase or an accumulation of increases shall be sufficient in amount to require provision for a minimum of ten dollars ($10) per month of additional retirement benefit. If the anticipated normal retirement benefit of a Participant is decreased, the Trustee shall take the necessary action, to become effective on the next succeeding Anniversary Date, to decrease the benefits provided by contract for such Participant to the extent required by such decrease or accumulation of decreases, provided, however, that reduction in the amount of contracts unless and until the decrease or accumulation of decreases shall be sufficient in amount to cause a reduction of a minimum of ten dollars ($10) per month in retirement benefits. If any portion of the value of the contracts shall be released, the Trustee shall retain such released amount toward the payment of premiums due in the current or succeeding years. In no event, however, shall increases in benefits occurring within five (5) years of the Normal Retirement Date of any Participant be reflected by the purchase of additional contracts, nor shall decreases in anticipated benefits be reflected by the reduction in the amount of contracts. If a Participant should continue in the employ of the Employer beyond his Normal Retirement Date in accordance with Section 4.3, the Trustee shall convert the contracts on the life of such Participant to reduced paid-up contracts under the provision of such contracts relating to default in premium payment so that, subject to the terms and conditions of the provision for the purchase of additional retirement benefits, a deferral of such Participant's retirement benefits can be accomplished until his actual retirement. Upon actual retirement, the Trustee shall make application to the insurance company to obtain for such Participant the retirement benefits to which he may be then entitled. In lieu of such action, the Trustee may direct the insurance company to pay the cash value of the contracts on the life of such Participant to the Trustee for distribution pursuant to Article IX. If term life insurance has been purchased and if the Participant should continue in the employ of the Employer beyond his Normal Retirement Date in accordance with Section 4.3, the Committee shall have the right to direct that the Trustee continue the term life contracts on the life of such Participant The Trustee shall pay any premiums which become due on contracts purchased on the life of a Participant who has left the employ of the Employer for reasons other than retirement, death or disability until it can be determined that such Participant has incurred a Service Break or it has been decided to distribute to the terminated Participant his benefit. 12.7 Conflicts With Plan Terms In the event of any conflict between the terms of this Plan and the terms of any insurance contract issued hereunder, the Plan provisions shall control. 13.1 No Right of Continued Employment Neither the establishment of the Plan nor the making of contributions by the Employer, nor any action of the Employer or the Committee shall be held or construed to confer upon any person any legal right to be continued as an Employee. The Employer expressly reserves the right to discharge any Employee whenever the interest of the Employer may so require. No benefit or interest available hereunder will be subject to assignment or alienation, either voluntarily or involuntarily. The preceding sentence shall not apply to loans made to the Participant under the Plan, or domestic relations orders which are determined by the Committee to be a qualified domestic relations orders, as defined in section 414(p) of the Code, or were entered before January 1, 1985. 13.3 Incompetence of Participants and Beneficiaries If the Committee deems any person incapable of receiving benefits to which he is entitled by reason of minority, illness, infirmity, or other incapacity, it may direct the Trustee to make payment directly for the benefit of such person to a legal representative of such person. Such payment shall, to the extent thereof, discharge all liability of the Employer, the Committee, the Trustee and the Fund. 13.4 Separate Employer Trusts Maintained Except as provided in section 16.2, the Plan of each Employer which adopts this Prototype Plan and corresponding Trust Agreement as part of its Plan shall be administered separately from those of any other Employer. The Plan shall be administered, construed and enforced to the state wherein the Trustee maintains its principal place of business, except to the extent preempted by the Act. Should any provision of the Plan or rules and regulations adopted thereunder be deemed or held to be unlawful or invalid for any reason, such fact shall not adversely affect the other provisions unless such invalidity shall render impossible or impractical the functioning of the Plan. In such case, the appropriate parties shall immediately adopt a new provision to take the place of the illegal or invalid provision. The masculine pronoun wherever used shall include the feminine pronoun and the singular shall include the plural and the plural shall include the singular, wherever appropriate to the context. The titles and headings of the respective Articles and Sections in this instrument are inserted merely for convenience and shall be given no legal effect. The Plan has been prepared in counterparts each of which so prepared shall be construed an original and such counterparts shall together constitute one and the same instrument. 13.10 Failure of Employer's Plan to Qualify The use of this Prototype Plan and corresponding Trust Agreement shall be available only to the Plans of Employers which meet the requirements of section 401(a) of the Code. If the Employer's Plan fails to attain or retain qualification, such Plan shall no longer participate in the Prototype Plan and will be considered an individually designed Plan. Except as otherwise provided in this Plan, at no time shall any part of the corpus or income of the Fund be used for or diverted to purposes other than for the exclusive benefit of the Participants and their Beneficiaries and defraying reasonable expenses of the Plan. The records of the Committee at the time of death of any person entitled to any benefits hereunder shall be conclusive as to the identity of the proper payee and of the amounts payable. Payment made in accordance with such facts shall constitute a complete discharge of any and all obligations hereof. In the event any amount shall become payable to any person or estate, the Committee shall mail written notice to such person's last known address as shown in the Employer's records. If such person or his personal representative does not present himself to the Committee within one year after the mailing of such notice, then the Committee may distribute any amounts due to one or more of the spouse, blood relatives and adopted children of such person. Any action of the Committee under this Section shall be final and conclusive upon all persons. Any person who receives any distribution under this Section shall be the absolute owner thereof, regardless of whether such person had been a Participant, a Beneficiary or the personal representative of any Participant hereunder. If a benefit is forfeited because the Participant or Beneficiary cannot be found, such benefit will be reinstated if a claim is made by the Participant or Beneficiary. If permitted under the Adoption Agreement, the Committee, in its discretion, may authorize and direct the Trustee to grant loans to Participants and Beneficiaries in accordance with written rules established by the Committee. Such loans: (a) Shall not exceed the lesser of: (1) fifty thousand dollars ($50,000) reduced by the excess, if any, of (i) the highest outstanding balance of loans form the Plan during the one (1) years period ending on the day before the date on which such loan was made, over (ii) the outstanding balance of loans from the Plan on the date such (2) the greater of (i) ten thousand dollars ($10,000), or (ii) one-half (1/2) of the Actuarial Value of the Participant's or Beneficiary's vested interest under the Plan. However, if the Participant is an affected Employee under the pre-termination restriction in section 8.3 of the plan, the total of all the affected Employee's outstanding loans will not exceed the amount that such affected Employee would be entitled to under the pre-termination restrictions. For this purpose, all plans of the Employer and Affiliated Employers shall be treated as a single plan; (b) Shall be evidenced by a promissory note, secured by an assignment of a portion of the Actuarial Value of the Participant's or Beneficiary's vested interest in the Plan. Effective for loans granted or renewed after October 18, 1989, the portion of a Participant's or Beneficiary's vested interest which may be used as security for a loan hereunder shall not exceed fifty percent (c) Shall bear a reasonable rate of interest, as determined by the Committee to be a rate of interest commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances; and (d) Shall require substantially level repayments of principal and interest (with repayments made no less frequently than quarterly) over a period not to exceed five (5) years. Any such loan shall be nonrenewable except that if the loan was originally granted for a period of less than five (5) years, then the same may be renewed, in the discretion of the Committee, for a period of time equal to the difference between five (5) years and the duration of the original loan. The five (5) year repayment period shall not apply to any loan used to acquire any dwelling unit which within a reasonable period of time is to be used (to be determined at the time the loan is made) as the principal residence of the Participant. The written consent of the Participant's spouse (consistent with the requirements for a Qualified Election under Section 9.2) must be obtained within the 90-day period ending on the date the Participant's vested interest is used as security for the loan. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse. However, a new consent shall be required if the Participant's vested interest is used for renegotiation, extension, renewal or other revision of the loan. 14.2 Transactions Treated as Loans The following transactions shall be treated as loans hereunder: (a) If a Participant or Beneficiary assigns or pledges (or agrees to assign or pledge) any portion of his interest in the Plan, such portion shall be treated as a loan from the Plan to the Participant or Beneficiary. (b) Any amount received as a loan from an insurance contract purchased under the provisions of this Plan, if applicable (or any assignment or pledge with respect to such contract), shall be treated as a loan under the Plan. 14.3 Provisions to be Applied in a Uniform and Nondiscriminatory Manner In deciding whether or not to grant any request for a loan hereunder, the Committee shall be guided by procedure and criteria designed to assure that uniformity is applied to all Participants and Beneficiaries under similar circumstances and that the granting of such approval does not result in discrimination prohibited by the Code. In the event of default, foreclosure on the note and attachment of the security will not occur until a distributable event occurs under the terms of the Plan. If spousal consent (consistent with the requirements for a Qualified Election under Section 9.2) has been obtained, then, notwithstanding any other provision of the Plan, the portion of the Participant's vested interest in the Plan used as security for a loan shall be taken into account for purposes of determining the amount of the benefits payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. 14.5 Loans to Owner-Employees or Shareholder-Employees No loan shall be granted to an Owner-Employee or Shareholder-Employee unless an exemption has been obtained for such loan from the Secretary of Labor under section 408 of the Act (and such loan is exempt from the excise tax imposed under section 4975 of the Code). As specified in the Adoption Agreement, the provisions of this Article XV will either (1) always supersede any conflicting provisions in the Plan or (2) only supersede such conflicting provisions in any Plan Year beginning after 1983, during which the Plan is or becomes Top-Heavy. For purposes of this Article and Article XVII, the following words shall have the following meanings: (a) "Compensation" shall mean Compensation as defined in Article I. For any Plan Year beginning before January 1, 1989, only the first two hundred thousand dollars ($200,000) of a Participant's Compensation shall be taken into account for purposes of determining the Top-Heavy minimum accrued benefit. (b) "Determination Date" shall mean (1) the last day of the preceding Plan Year, or (2) in the case of the first Plan Year, the last day of such Plan Year. (c) "Employer" shall mean the Employer and all Affiliated Employers. (d) "Key Employee" shall mean any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the Plan Year containing the Determination Date and the four (4) preceding Plan Years was: (1) An officer of the Employer if such individual's annual Compensation exceeds fifty percent (50%) of the dollar limitation under section 415(b)(1)(A) of the Code (provided that the number of employees treated as officers shall be no more than fifty (50) or, if fewer, the greater of three (3) employees of ten percent (10%) of all employees); (2) An owner (or considered an owner under section 318 of the Code) of at least a one-half of one percent (.5%) interest and one of the ten (10) largest interests in the Employer if such individual's Compensation exceeds one hundred percent (100%) of such dollar limitation under section 415(c)(1)(A) (3) A five percent (5%) owner of the Employer; or (4) A one percent (1%) owner of the Employer who has an annual Compensation of more than one hundred fifty thousand dollars ($150,000). For this purpose, annual Compensation means Compensation as defined in section 415(c)(3) of the Code, but including amounts excludable from the Employee's gross income by reason of sections 125, 402(e)(3), 402(h)(1)(B), or 403(b) of the Code. The determination of who is a Key Employee will be made in accordance with section 416(i)(1) of the Code and the regulations thereunder. (e) "Non-Key Employee" shall mean any Employee who is not a Key Employee. (f) "Permissive Aggregation Group" shall mean the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of sections 401(a)(4) and 410 of the Code. (g) "Present Value" shall be based upon the interest rates and mortality table used under Section 1.2, unless otherwise specified in the Adoption Agreement. (h) "Required Aggregation Group" shall mean (1) each qualified plan of the Employer in which at least one (1) Key Employee participates or participated in any time during the determination period (regardless of whether the Plan terminated), and (2) any other qualified plan of the Employer which enables a plan described in (1) to meet the requirements of sections 401(a)(4) and 410 of the Code. (i) "Super Top-Heavy": For any Plan Year after 1983, this Plan is Super Top-Heavy if the Top-Heavy Ratio for the Plan, under the Required Aggregation Group or the Permissive Aggregation Group, as applicable, exceeds ninety percent (90%). (j) "Top-Heavy Plan": For any Plan Year beginning after 1983, this Plan is Top-Heavy if any of the following conditions exist: (1) If the Top-Heavy Ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (2) If this Plan is a part of a Required Aggregation Group of plans, but not part of a Permissive Aggregation Group, and the Top-Heavy Ratio for the group of plans exceeds sixty (3) If this Plan is a part of a Required Aggregation Group of plans and part of a Permissive Aggregation Group, and the Top-heavy Ratio for the group of plans exceeds sixty percent (60%). (1) If the Employer maintains one or more defined benefit plans and the Employer has not maintained any defined contribution plans (including any simplified employee pension plan) which during the five (5) year period ending on the Determination Date has or has had account balances, the Top-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the present values of accrued benefits of all Key Employees as of the Determination Date (including any part of any accrued benefit distributed in the five (5) year period ending on the Determination Date), and the denominator of which is the sum of the present value of Accrued Benefits (including any part of any Accrued Benefit distributed in the five (5) year period ending on the Determination Date), determined in accordance with section 416 of the Code and the regulations thereunder. Both the numerator and the denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under section 416 of the Code and the regulations thereunder. (2) If the Employer maintains one or more defined benefit plans and the Employer maintains or has maintained one or more defined contribution plans (including any simplified employee pension plan) which during the five (5) year period ending on the Determination Date has or has had any account balances, the Top-Heavy Ratio for any Required or Permissive Aggregation group as appropriate is a fraction, the numerator of which is the sum of the present value of Accrued Benefits under the aggregate defined benefit plan or plans for all Key Employees, determined in accordance with (a) above and the sum of account balances under the aggregated defined contribution plan or plans, for all Key Employees as of the Determination Date and the denominator of which is the sum of the present values of accrued benefits under the aggregated defined benefit plan or plans, determined in accordance with (a) above, for all Participants and the sum of the account balances under the aggregated defined contribution plan or plans for all Participants as of the Determination Date, all determined in accordance with section 416 of the Code and the regulations thereunder. The account balances under a defined contribution plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an account balance made in the five (5) year period ending on the Determination Date. (3) For purposes of (1) and (2) above, the value of account balances and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve (12) month period ending on the Determination Date, except as provided in section 416 of the Code and the regulations thereunder for the first and second Plan Years of a defined benefit plan. The account balances and accrued benefits of a Participant (1) who is not a key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service for any Employer maintaining the Plan at any time during the five (5) year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with section 416 of the Code and the regulations thereunder. Deductible Employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of account balances and accrued benefits will be calculated with references to the Determination Dates that fall within the same calendar year. (4) Solely for the purpose of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is Top-Heavy (within the meaning of section 416(g) of the Code) the accrued benefit of a Non-Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of section 411(b)(1)(C) of the Code. (1) "Valuation Date" shall mean the last day of the Plan Year, unless a different date is elected by the Employer in the Adoption Agreement and is the day on which account balances and Accrued Benefits are valued for purposes of calculating the Top-Heavy Ratio. For any Plan Year in which this Plan is Top-Heavy, one of the Top Heavy minimum vesting schedules as elected by the Employer in the Adoption Agreement will automatically apply to the Plan. The Top Heavy minimum vesting schedule applies to all benefits within the meaning of section 411(a)(7) of the Code except those attributable to Employee contributions, including benefits accrued before the effective date of section 416 and benefits accrued before the Plan became Top-Heavy. Further, no reduction in vested benefits may occur in the event the Plan's status as Top-Heavy changes for any Plan Year. However, this Section does not apply to the Accrued Benefits of any Employee who does not have an Hour of Service after the Plan has initially become Top-Heavy and such Employee's Accrued Benefits attributable to Employer contributions will be determined without regard to this Section. (a) Notwithstanding any other provision in this Plan, except paragraphs (b), (c) and (d) below, for any Plan Year beginning after December 31, 1983 in which this Plan is Top-Heavy ("Top Heavy Plan Years"), each Participant who is a Non-Key Employee and has completed one thousand (1,000) Hours of Service will accrue a benefit (to be provided solely by Employer contributions and expressed as a life annuity (without regard to ancillary benefits) commencing at his Normal Retirement Date) of not less than two percent (2%) of his average Compensation for five (5) consecutive years for which the Participant had the highest average Compensation. The aggregate Compensation for the years during such five-year period in which the Participant was credited with a year of Service will be divided by the number of such years in order to determine Average Annual Compensation. If the Plan credits Participation on the elapsed time basis, all Participation in Top-Heavy Plan Years shall be used to determine the Top-Heavy minimum accrual. The minimum accrual is determined without regard to any Social Security contribution. The minimum accrual applies even though under other Plan provisions the Non-Key Employee would not otherwise be entitled to receive an accrual, or would have received a lesser accrual for the year because (1) the Non-Key Employee fails to make mandatory contributions to the Plan (2) the Non-Key Employee's Compensation is less than a stated amount, (3) the Non-Key Employee is not employed on the last day of the accrual computation period, or (4) the Plan is integrated with Social Security. (b) No additional benefit accruals shall be provided pursuant to (a) above to the extent that the total accruals on behalf of the Participant attributable to Employer contributions will provide a benefit expressed as a life annuity commencing at the Normal Retirement Date that equals or exceeds twenty percent (20%) of the Participant's average Compensation for the five (5) consecutive years for which the Participant had the highest average Compensation. (c) If the Plan is Top Heavy, but is not Super Top-Heavy, each Participant who is a Non-Key Employee shall receive the minimum accrual under (a) above, except that "three percent (3%)" shall be substituted for "two percent (2%)" and "thirty percent (30%)" shall be substituted for "twenty percent (20%)" in (b) above. (d) The provisions in (a) above shall not apply to any Participant to the extent that the Participant is covered under any other qualified plan or plans of the Employer other than a paired plan of the Sponsor Adoption Agreement that the minimum Top Heavy allocation or benefit will be met in the other plan or plans. (e) The Minimum Accrued Benefit required (to the extent required to be nonforfeitable under the provisions of Section 15.2) may not be forfeited under section 411(a)(3)(B) or 411(a)(3)(D) of the Code. (f) All accruals of Employer derived benefit, whether or not attributable to years for which the Plan is Top-Heavy, may be used in computing whether the minimum accrual requirements of paragraph (d) above are satisfied. 15.4 Adjustment For Benefit Other Than Life Annuity If the form of benefit is other than a single life annuity, the Employee must receive an amount that is the Actuarial Equivalent of the minimum single life annuity benefit. If the benefit commences at a date other than at the Normal Retirement Date, the Employee must receive at least an amount that is the Actuarial Equivalent of the minimum single life annuity benefit commencing at the Normal Retirement Date. 15.5 Adjustment to Defined Benefit Fraction and Defined Contribution If the Plan is Super Top-Heavy, then "one hundred percent (100%)" shall be substituted for "one hundred twenty-five percent (125%)" in the denominator of the Defined Benefit Fraction and the Defined Contribution Fraction under Section 8.1. (a) The Employer expressly recognizes the authority of the Sponsor to amend this Plan and Trust from time to time, and the Employer shall be deemed to consent to any such amendment. The Employer shall receive a written instrument indicating the amendment of the Plan and Trust and such amendment shall become effective as of the effective date of such instrument. (b) The Employer reserves the right to amend the Plan at any time. Except for (1) changes to the choice of options in the Adoption Agreement, (2) amendments stated in the Adoption Agreement which allow the Plan to satisfy section 415 of the Code or to avoid duplication of minimums under section 416 of the Code because of the required aggregation of multiple plans, or (3) amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as individually designed, an Employer will no longer participate in the Prototype Plan and will be considered to have an individually designed plan if it amends the Plan. (c) Notwithstanding anything in this Plan to the contrary, no amendment shall: (1) Increase the responsibility of the Trustee without the (2) Decrease a Participant's Accrued Benefit, except to the extent permitted by section 412(c)(8) of the Code; (3) In the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it become effective, decrease the nonforfeitable percentage (determined as of such date) of such Employee's right to his Employer-derived account balance below his non-forfeitable percentage computed under the Plan without regard to such (4) Violate the exclusive benefit rule of Section 13.11. For purposes of this paragraph, a Plan amendment which has the effect of (1) eliminating or reducing an Early Retirement Benefit or a retirement-type subsidy, or (2) eliminating an optional form of benefit, with respect to benefits attributable to Service before the amendment shall be treated as decreasing a Participant's Accrued Benefit. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a Participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy. In general, a retirement-type subsidy is a subsidy that continues after retirement, but does not include a qualified disability benefit, a medical benefit, a social security supplement, a death benefit (including life insurance), or a plant shutdown benefit (that does not continue after retirement age). Furthermore, if the vesting schedule of a Plan is amended, in the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's Employer-provided accrued benefit will not be less than the percentage computed under the Plan without regard to such amendment. (a) With the consent of the adopting Employer and Trustee, and by duly authorized action, any Affiliated Employer may adopt this Plan and become a Participating Employer. Unless the context clearly indicates otherwise the work "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan. (b) Each such Participating Employer shall be required to select the same Adoption Agreement provisions as those selected by the Employer, and to sue the same Trustee as the Employer. (c) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. (d) With respect to its relations with the Trustee and Committee for the purposes of this Plan, each Participating Employer shall be deemed to have irrevocably designated the Employer as its agent. Amendment of this Plan at any time when there shall be a Participating Employer shall only be by written action of the adopting Employer and such amendment shall be binding upon each Participating Employer. (e) Any Participating Employer may, at any time, by written notice to the Trustee in such form as is acceptable to the Trustee, discontinue its participation in the Plan and discontinue all contributions hereunder. The Trustee shall thereafter transfer, deliver and assign Fund assets to the Participants of such Participating Employer to such successor trustee as shall have been designated by such Participating Employer, in the event that it has established a separated plan for its Employees. If no successor trustee is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of this Plan. 16.3 Amended and Restated Plans If this Plan is an amendment and restatement of an existing plan ("Existing Plan") the following provisions shall apply: (a) Each Employee who was a Participant in the Existing Plan immediately prior to the Effective Date shall become a Participant in this Plan on the Effective Date. (b) All years of service credited for vesting service under the Existing Plan shall be credited as years of Service under this Plan. The amendment and restatement shall not reduce the vested interest of a Participant in the Existing Plan, and any change in the vesting schedule shall be subject to the provisions of Section 6.5. (c) The amendment and restatement shall not reduce a Participant's accrued benefit of the Existing Plan and shall not eliminate any optional form of benefit of the Existing Plan. (d) Any beneficiary designation in effect under the Existing Plan immediately before the amendment and restatement shall be deemed to be a valid Beneficiary designation under this Plan, to the extent consistent with Section 9.2. 16.4 Plan Merger and Consolidation or Transfer of Plan Assets In the event of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant of the Plan shall (if the Plan then terminated) be entitled to receive an amount immediately after such merger, consolidation or transfer which is equal to or greater than the amount he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). While the Plan and Trust Fund are intended to be permanent, they may be terminated at any time at the discretion of the Employer; provided, however, that, except as provided in Section 3.4, no action may be taken to render it possible, at any time prior to the satisfaction of all expenses and all liabilities with respect to Participants and their Beneficiaries, for any part of the corpus or income of the Trust Fund to be used for or diverted to purposes other than the Plan and for the payment of the expenses of the Trust Fund including any expenses incurred in effectuating the termination of the Plan and Trust Fund. In the event of the termination of the Plan and Trust Fund or upon partial termination, the rights of all affected Participants to benefits accrued, to the extent funded, as of the date of such termination or partial termination shall be one hundred percent (100%) vested and nonforfeitable. The Committee shall allocate the Trust Fund in accordance with section 4044 of the Act to the extent of the sufficiency of such funds. However, if necessary to prevent prohibited discrimination under section 401(a)(4) of the Code, then the allocation of assets under section 4044 of the Act shall be reallocated to the extent necessary to avoid such discrimination. Written notification of a complete termination shall be given to each affected Participant and Beneficiary and the Trustee setting forth the termination date. If the Plan is subject to Title IV of the Act, the Committee shall also comply with the plan termination requirements of Title IV. The Trustee, after reserving an amount from the Trust Fund sufficient to pay expenses and charges, including the payment of all expenses incurred in effectuating such termination, such as the fees and retainers of the Plan's Trustees, actuary, accountant, custodian, administrator, counsel, and other specialists, shall distribute the assets of the Trust Fund in accordance with the directions of the Committee which instructions shall be in accordance with Article IX. Unless otherwise elected in the Adoption Agreement, any assets of this Plan which remain after provisions have been made to satisfy all liabilities of this Plan to Participants shall be allocated among Participants on a uniform and nondiscriminatory basis, subject to the limitations of Section 8.1. However, to the extent such allocation would result in prohibited discrimination or violate any other provision of law, the excess assets shall revert to the Employer. Except as provided by law, an Employer shall have no liability in respect of payments or benefits under the Plan and each Participant or Beneficiary shall look solely to the Trust Fund for any payments or benefits under the Plan. The liability of the Trustee with respect thereto shall be limited to the amounts held by the Trustee in the Trust Fund. The provisions of this Article are applicable only if the Employer adopts a set of Dreyfus paired plans. Paired plans are a combination of standardized form plans, so designed that if any single plan or combination of plans is adopted by an Employer, each plan by itself, or the plans together, will meet the antidiscrimination rules set forth in section 401(a)(4) of the Code, the contribution and benefit limits set forth in section 415 of the Code and the Top-Heavy provisions set forth in section 416 of the Code. 17.1 Compliance with Section 415(e) of the Code If the Employer also maintains one or two of Sponsor's paired defined contribution plans, the "1.0" aggregate limitation of section 415(e) of the Code on contributions and benefits will be met by freezing or reducing the rate of benefit accruals under this Plan. 17.2 Adjustment of Combined Plan Fractions under Section 415 of the Code for Top-Heavy Ratio In Excess of Ninety Percent (90%). In any Plan Year in which the Plan becomes Super Top-Heavy, the denominators of the Defined Benefit Fraction and Defined Contribution fraction (both as defined in section 8.1 of the Plan) shall be computed using one hundred percent (100%) of the dollar limitation instead of one hundred twenty-five percent (125%). 17.3 Top Heavy Minimum Benefits and Contributions (a) When the paired plans are Top-Heavy, but are not Super Top-Heavy, the Top-Heavy requirements set forth in Article XV shall apply, except that "three percent (3%)" shall be substituted for "two percent (2%)" in determining the Top-Heavy minimum benefit under Section 15.3(a) and that the cumulative accrued benefit shall not exceed 30%. Each Non-Key Employee who is a Participant in both this Plan and a paired defined contribution pan shall be entitled only to this minimum top heavy benefit accrual and shall not be entitled to any Top-Heavy minimum allocation under the paired defined contribution plan or plans. (b) When the paired plans are Super Top-Heavy, the Top Heavy requirements of Article XV shall apply. Each Non-Key Employee who is a Participant in both this Plan and a paired defined contribution plan shall be entitled only to this minimum top heavy benefit accrual and shall not be entitled to any Top-Heavy minimum allocation under the paired defined contribution plan or plans. 17.4 Integration of Paired Plans If the Employer adopts paired plans, only one may allocate contributions or determine benefits on an integrated basis. DREYFUS PROTOTYPE DEFINED BENEFIT PLAN ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.0 "Accrued Benefit". . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 "Act". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 "Actuarial Equivalent" . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 "Actuarial Value". . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.4 "Adoption Agreement" . . . . . . . . . . . . . . . . . . . . . . . . 3 1.5 "Affiliated Employer". . . . . . . . . . . . . . . . . . . . . . . . 3 1.6 "Anniversary Date" . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.7 "Annuity Starting Date". . . . . . . . . . . . . . . . . . . . . . . 3 1.8 "Beneficiary". . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.9 "Board of Directors" . . . . . . . . . . . . . . . . . . . . . . . . 3 1.10 "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.11 "Committee". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.12 "Compensation" . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.13 "Contract" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.14 "Deferred Retirement Date" . . . . . . . . . . . . . . . . . . . . . 6 1.15 "Disability Retirement Date" . . . . . . . . . . . . . . . . . . . . 6 1.16 "Early Retirement Date". . . . . . . . . . . . . . . . . . . . . . . 6 1.17 "Earned Income". . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.18 "Effective Date" . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.19 "Eligible Employee". . . . . . . . . . . . . . . . . . . . . . . . . 6 1.20 "Eligibility Year(s) of Service" . . . . . . . . . . . . . . . . . . 6 1.21 "Employee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.22 "Employer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.23 "Employment Commencement Date" . . . . . . . . . . . . . . . . . . . 8 1.24 "Entry Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.25 "Fresh Start Date" . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.26 "Frozen Accrued Benefit" . . . . . . . . . . . . . . . . . . . . . . 8 1.27 "Highly Compensated Employee". . . . . . . . . . . . . . . . . . . . 8 1.28 "Hour of Service". . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.29 "Normal Retirement Date" . . . . . . . . . . . . . . . . . . . . . . 10 1.30 "Owner-Employee" . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.31 "Participant". . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.32 "Participating Employer" . . . . . . . . . . . . . . . . . . . . . . 11 1.33 "Participation". . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.34 "PBGC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.35 "Period of Severance". . . . . . . . . . . . . . . . . . . . . . . . 12 1.36 "Permanent Disability" . . . . . . . . . . . . . . . . . . . . . . . 12 1.37 "Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.38 "Plan Year". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.39 "Prototype Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.40 "Qualified Joint and Survivor Annuity" . . . . . . . . . . . . . . . 12 1.41 "Qualified Pre-retirement Survivor Annuity". . . . . . . . . . . . . 12 1.42 "Re-Employment Commencement Date". . . . . . . . . . . . . . . . . . 13 1.43 "S Corporation". . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.44 "Self-Employed Individual" . . . . . . . . . . . . . . . . . . . . . 13 1.45 "Service". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.46 "Service Break". . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.47 "Severance from Service Date". . . . . . . . . . . . . . . . . . . . 14 1.48 "Shareholder-Employee" . . . . . . . . . . . . . . . . . . . . . . . 14 1.49 "Social Security Retirement Age" . . . . . . . . . . . . . . . . . . 15 1.50 "Sponsor". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.51 "Standard Form of Retirement Income" . . . . . . . . . . . . . . . . 15 1.52 "Straight Life Annuity". . . . . . . . . . . . . . . . . . . . . . . 15 1.53 "Taxable Wage Base". . . . . . . . . . . . . . . . . . . . . . . . . 15 1.54 "Trustee". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.55 "Trust Agreement". . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.56 "Trust Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE II. PARTICIPATION. . . . . . . . . . . . . . . . . . . . . . . . 16 2.1 Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.2 Excluded Employees . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.3 Re-Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.4 Change in Employment Status. . . . . . . . . . . . . . . . . . . . . 17 2.5 Limitation on Participation of Owner-Employees . . . . . . . . . . . 17 ARTICLE III. CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . 19 3.1 Employer Contributions . . . . . . . . . . . . . . . . . . . . . . . 19 3.2 Payment of Contributions . . . . . . . . . . . . . . . . . . . . . . 19 3.3 Payment of Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 19 3.4 Return of Employer Contributions . . . . . . . . . . . . . . . . . . 19 ARTICLE IV. RETIREMENT DATES . . . . . . . . . . . . . . . . . . . . . . 21 4.1 Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.2 Normal Retirement Date . . . . . . . . . . . . . . . . . . . . . . . 21 4.3 Deferred Retirement Date . . . . . . . . . . . . . . . . . . . . . . 21 4.4 Early Retirement Date. . . . . . . . . . . . . . . . . . . . . . . . 21 4.5 Disability Retirement Date . . . . . . . . . . . . . . . . . . . . . 21 4.6 Application for Retirement . . . . . . . . . . . . . . . . . . . . . 22 4.7 Age Discrimination in Employment Act . . . . . . . . . . . . . . . . 22 ARTICLE V. RETIREMENT BENEFITS . . . . . . . . . . . . . . . . . . . . . 23 5.1 Normal Retirement Benefit. . . . . . . . . . . . . . . . . . . . . . 23 5.2 Deferred Retirement Benefit. . . . . . . . . . . . . . . . . . . . . 23 5.3 Early Retirement Benefit . . . . . . . . . . . . . . . . . . . . . . 23 5.4 Disability Retirement Benefit. . . . . . . . . . . . . . . . . . . . 26 5.5 Distribution of Retirement Benefits. . . . . . . . . . . . . . . . . 26 5.6 Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5.7 Suspension of Benefits . . . . . . . . . . . . . . . . . . . . . . . 26 5.8 Frozen Accrued Benefit . . . . . . . . . . . . . . . . . . . . . . . 28 5.9 Adjustments to Frozen Accrued Benefit. . . . . . . . . . . . . . . . 29 ARTICLE VI. TERMINATION OF EMPLOYMENT BENEFITS . . . . . . . . . . . . . 35 6.1 Vested Termination Benefit . . . . . . . . . . . . . . . . . . . . . 35 6.2 Distribution of Vested Interest. . . . . . . . . . . . . . . . . . . 35 6.3 Death of a Vested Member . . . . . . . . . . . . . . . . . . . . . . 35 6.4 Vesting of a Participant . . . . . . . . . . . . . . . . . . . . . . 36 6.5 Amendment of Vesting Provisions. . . . . . . . . . . . . . . . . . . 36 6.6 Forfeitures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE VII. DEATH BENEFITS. . . . . . . . . . . . . . . . . . . . . . . 38 7.1 Pre-Retirement Without Life Insurance. . . . . . . . . . . . . . . . 38 7.2 Designation of Beneficiary . . . . . . . . . . . . . . . . . . . . . 39 7.3 Distribution of Death Benefit. . . . . . . . . . . . . . . . . . . . 39 7.4 Payment on Beneficiary's Death . . . . . . . . . . . . . . . . . . . 39 7.5 Post-Retirement Death Benefit. . . . . . . . . . . . . . . . . . . . 39 ARTICLE VIII. LIMITATIONS ON BENEFITS. . . . . . . . . . . . . . . . . . 40 8.1 Maximum Retirement Benefit . . . . . . . . . . . . . . . . . . . . . 40 8.2 Limitations Applicable to Twenty-Five (25) Highest Paid Employees. . 46 8.3 Additional Restrictions. . . . . . . . . . . . . . . . . . . . . . . 49 ARTICLE IX. PAYMENT OF BENEFITS. . . . . . . . . . . . . . . . . . . . . 51 9.1 Commencement of Benefits . . . . . . . . . . . . . . . . . . . . . . 51 9.2 Automatic Annuity Requirements . . . . . . . . . . . . . . . . . . . 52 9.3 Transitional Rules Applicable to Joint and Survivor Annuities. . . . 56 9.4 Other Forms and Methods of Payment of Benefits . . . . . . . . . . . 58 9.5 Required Payment of Benefits . . . . . . . . . . . . . . . . . . . . 59 9.6 Certain Distributions. . . . . . . . . . . . . . . . . . . . . . . . 66 9.7 No Duplication of Benefits . . . . . . . . . . . . . . . . . . . . . 66 9.8 Direct Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ARTICLE X. THE COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . 68 10.1 Creation of a Committee. . . . . . . . . . . . . . . . . . . . . . . 68 10.2 Committee Action . . . . . . . . . . . . . . . . . . . . . . . . . . 68 10.3 Authorized Signatory . . . . . . . . . . . . . . . . . . . . . . . . 68 10.4 Powers and Duties. . . . . . . . . . . . . . . . . . . . . . . . . . 68 10.5 Non-Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . 68 10.6 Records and Reports. . . . . . . . . . . . . . . . . . . . . . . . . 69 10.7 Reliance on Professional Advice. . . . . . . . . . . . . . . . . . . 69 10.8 Payment of Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 69 10.9 Limitation of Liability. . . . . . . . . . . . . . . . . . . . . . . 69 10.1 Payment Certification to Trustee . . . . . . . . . . . . . . . . . . 69 10.1 Claims Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . 70 ARTICLE XI. PARTICIPANT VOLUNTARY CONTRIBUTIONS. . . . . . . . . . . . . 71 11.1 Voluntary Contributions. . . . . . . . . . . . . . . . . . . . . . . 71 11.2 Accounting Procedures. . . . . . . . . . . . . . . . . . . . . . . . 71 11.3 Withdrawals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 11.4 Transfers From Other Trusts. . . . . . . . . . . . . . . . . . . . . 72 ARTICLE XII. INSURANCE CONTRACTS . . . . . . . . . . . . . . . . . . . . 73 12.1 Trustee To Procure Contracts . . . . . . . . . . . . . . . . . . . . 73 12.2 Substandard Lives. . . . . . . . . . . . . . . . . . . . . . . . . . 73 12.3 Rules Applicable To Contracts. . . . . . . . . . . . . . . . . . . . 74 12.4 Increases or Decreases in Benefits . . . . . . . . . . . . . . . . . 75 12.5 Deferred Retirement. . . . . . . . . . . . . . . . . . . . . . . . . 75 12.6 Premium Continuation . . . . . . . . . . . . . . . . . . . . . . . . 76 12.7 Conflicts With Plan Terms. . . . . . . . . . . . . . . . . . . . . . 76 ARTICLE XIII. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . 77 13.1 No Right of Continued Employment . . . . . . . . . . . . . . . . . . 77 13.2 Non-Alienation of Interest . . . . . . . . . . . . . . . . . . . . . 77 13.3 Incompetence of Participants and Beneficiaries . . . . . . . . . . . 77 13.4 Separate Employer Trusts Maintained. . . . . . . . . . . . . . . . . 77 13.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 13.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 13.7 Gender and Number. . . . . . . . . . . . . . . . . . . . . . . . . . 78 13.8 Titles and Headings. . . . . . . . . . . . . . . . . . . . . . . . . 78 13.9 Counterparts as Original . . . . . . . . . . . . . . . . . . . . . . 78 13.1 Failure of Employer's Plan to Qualify. . . . . . . . . . . . . . . . 78 13.1 Exclusive Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . 78 13.1 Proper Payee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 ARTICLE XIV. LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 14.1 Loans to Participants. . . . . . . . . . . . . . . . . . . . . . . . 80 14.2 Transactions Treated as Loans. . . . . . . . . . . . . . . . . . . . 81 14.3 Provisions to be Applied in a Uniform and Nondiscriminatory Manner . 81 14.4 Satisfaction of Loan . . . . . . . . . . . . . . . . . . . . . . . . 81 14.5 Loans to Owner-Employees or Shareholder-Employees. . . . . . . . . . 81 ARTICLE XV. TOP-HEAVY PROVISIONS. . . . . . . . . . . . . . . . . . . . . 83 15.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 15.2 Vesting Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . 86 15.3 Minimum Accrued Benefit. . . . . . . . . . . . . . . . . . . . . . . 87 15.4 Adjustment For Benefit Other Than Life Annuity . . . . . . . . . . . 88 15.5 Adjustment to Defined Benefit Fraction and Defined Contribution Fraction under Section 8.1. . . . . . . . . . 88 ARTICLE XVI. AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . 89 16.1 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 16.2 Participating Employers. . . . . . . . . . . . . . . . . . . . . . . 90 16.3 Amended and Restated Plans . . . . . . . . . . . . . . . . . . . . . 91 16.4 Plan Merger and Consolidation or Transfer of Plan Assets . . . . . . 91 16.5 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 ARTICLE XVII. PAIRED PLAN PROVISIONS . . . . . . . . . . . . . . . . . . 93 17.1 Compliance with Section 415(e) of the Code . . . . . . . . . . . . . 93 17.2 Adjustment of Combined Plan Fractions under Section 415 of the Code for Top-Heavy Ratio In Excess of Ninety Percent (90%). . . . . . . . . . . . . . 93 17.3 Top Heavy Minimum Benefits and Contributions . . . . . . . . . . . . 93 17.4 Integration of Paired Plans. . . . . . . . . . . . . . . . . . . . . 94 BASIC PLAN DOCUMENT NO. 01 DREYFUS PROTOTYPE DEFINED CONTRIBUTION PLAN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 "Account" . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 "Act" . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 "Actual Deferral Percentage". . . . . . . . . . . . . . . 1 1.4 "Adoption Agreement". . . . . . . . . . . . . . . . . . . 1 1.5 "Affiliated Employer" . . . . . . . . . . . . . . . . . . 1 1.6 "Anniversary Date". . . . . . . . . . . . . . . . . . . . 1 1.7 "Annuity Starting Date" . . . . . . . . . . . . . . . . . 1 1.8 "Average Actual Deferral Percentage". . . . . . . . . . . 1 1.9 "Average Contribution Percentage" . . . . . . . . . . . . 2 1.10 "Beneficiary" or "Beneficiaries". . . . . . . . . . . . . 2 1.11 "Board of Directors" . . . . . . . . . . . . . . . . . . 2 1.12 "CODA". . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.13 "Code". . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.14 "Committee" . . . . . . . . . . . . . . . . . . . . . . . 2 1.15 "Compensation". . . . . . . . . . . . . . . . . . . . . . 2 1.16 "Contribution Percentage" . . . . . . . . . . . . . . . . 4 1.17 "Contribution Percentage Amounts" . . . . . . . . . . . . 4 1.18 "Early Retirement Age". . . . . . . . . . . . . . . . . . 4 1.19 "Earned Income" . . . . . . . . . . . . . . . . . . . . . 4 1.20 "Easy Retirement Plan". . . . . . . . . . . . . . . . . . 4 1.21 "Effective Date". . . . . . . . . . . . . . . . . . . . . 4 1.22 "Elective Deferrals". . . . . . . . . . . . . . . . . . . 5 1.23 "Eligible Employee" . . . . . . . . . . . . . . . . . . . 5 1.24 "Eligibility Year(s) of Service". . . . . . . . . . . . . 5 1.25 "Employee". . . . . . . . . . . . . . . . . . . . . . . . 6 1.26 "Employer". . . . . . . . . . . . . . . . . . . . . . . . 7 1.27 "Employment Commencement Date". . . . . . . . . . . . . . 7 1.28 "Entry Date". . . . . . . . . . . . . . . . . . . . . . . 7 1.29 "Excess Aggregate Contributions". . . . . . . . . . . . . 7 1.30 "Excess Contributions". . . . . . . . . . . . . . . . . . 7 1.31 "Excess Elective Deferrals" . . . . . . . . . . . . . . . 7 1.32 "Family Member" . . . . . . . . . . . . . . . . . . . . . 7 1.33 "Fund". . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.34 "Highly Compensated Employee" . . . . . . . . . . . . . . 7 1.35 "Hour of Service" . . . . . . . . . . . . . . . . . . . . 9 1.36 "Integration Level" . . . . . . . . . . . . . . . . . . . 10 1.37 "Matching Contribution" . . . . . . . . . . . . . . . . . 10 1.38 "Net Profits" . . . . . . . . . . . . . . . . . . . . . . 10 1.39 "Non-Highly Compensated Employee" . . . . . . . . . . . . 10 1.40 "Normal Retirement Age" . . . . . . . . . . . . . . . . . 10 1.41 "Owner-Employee". . . . . . . . . . . . . . . . . . . . . 11 1.42 "Participant" . . . . . . . . . . . . . . . . . . . . . . 11 1.43 "Participating Employer". . . . . . . . . . . . . . . . . 12 1.44 "Period of Severance" . . . . . . . . . . . . . . . . . . 12 1.45 "Plan". . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.46 "Plan Year" . . . . . . . . . . . . . . . . . . . . . . . 12 1.47 "Prototype Plan". . . . . . . . . . . . . . . . . . . . . 12 1.48 "Qualified Matching Contributions". . . . . . . . . . . . 12 1.49 "Qualified Nonelective Contributions" . . . . . . . . . . 12 1.50 "ReEmployment Commencement Date". . . . . . . . . . . . . 12 1.51 "Regular Account" . . . . . . . . . . . . . . . . . . . . 13 1.52 "S-Corporation" . . . . . . . . . . . . . . . . . . . . . 13 1.53 "Self-Employed Individual". . . . . . . . . . . . . . . . 13 1.54 "Service" . . . . . . . . . . . . . . . . . . . . . . . . 13 1.55 "Service Break" . . . . . . . . . . . . . . . . . . . . . 14 1.56 "Severance from Service Date" . . . . . . . . . . . . . . 14 1.57 "Shareholder-Employee". . . . . . . . . . . . . . . . . . 14 1.58 "Sponsor" . . . . . . . . . . . . . . . . . . . . . . . . 15 1.59 "Taxable Wage Base" . . . . . . . . . . . . . . . . . . . 15 1.60 "Thrift Contributions". . . . . . . . . . . . . . . . . . 15 1.61 "Total and Permanent Disability". . . . . . . . . . . . . 15 1.62 "Trustee" or "Custodian". . . . . . . . . . . . . . . . . 15 1.63 "Trust Agreement" or "Custodial Agreement". . . . . . . . 15 1.64 "Valuation Date". . . . . . . . . . . . . . . . . . . . . 15 1.65 "Voluntary Contributions" . . . . . . . . . . . . . . . . 16 PARTICIPATION. . . . . . . . . . . . . . . . . . . . . . . . . 16 2.1 Membership. . . . . . . . . . . . . . . . . . . . . . . . 16 2.2 Excluded Employees. . . . . . . . . . . . . . . . . . . . 16 2.3 Reemployment. . . . . . . . . . . . . . . . . . . . . . . 16 2.4 Change in Employment Status . . . . . . . . . . . . . . . 17 2.5 Limitations on Participation of Owner-Employees . . . . . 17 CONTRIBUTIONS AND CREDITS TO MONEY PURCHASE PLANS. . . . . . . . . . 18 3.1 Employer Contributions. . . . . . . . . . . . . . . . . . 18 3.2 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . 18 3.3 Credit to Participants. . . . . . . . . . . . . . . . . . 19 CONTRIBUTIONS AND CREDITS TO PROFIT SHARING PLANS. . . . . . . . . . 21 4.1 Limits on Employer Contributions. . . . . . . . . . . . . 21 4.2 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . 22 4.3 Employer Discretionary Contributions. . . . . . . . . . . 22 4.4 401(k) Cash or Deferred Arrangements ("CODA")/Thrift Contributions . . . . . . . . . . . . . . . . . . . . . . 25 4.5 Maximum Amount of Elective Deferrals. . . . . . . . . . . 28 4.6 Average Actual Deferral Percentage Tests. . . . . . . . . 29 4.7 Average Contribution Percentage Tests . . . . . . . . . . 34 4.8 Non-Hardship Withdrawals. . . . . . . . . . . . . . . . . 38 4.9 Distribution on Account of Financial Hardship . . . . . . 39 4.10 Special Distribution Rules. . . . . . . . . . . . . . . . 42 CONTRIBUTIONS AND CREDITS TO TARGET BENEFIT PLANS. . . . . . . . . . 42 CONTRIBUTION AND ALLOCATION LIMITS . . . . . . . . . . . . . . . . . 43 6.1 Timing of Contributions . . . . . . . . . . . . . . . . . 43 6.2 Deductibility of Contributions. . . . . . . . . . . . . . 43 6.3 Return of Employer Contributions. . . . . . . . . . . . . 43 6.4 Limitation on Allocations . . . . . . . . . . . . . . . . 44 6.5 Separate Accounts . . . . . . . . . . . . . . . . . . . . 53 6.6 Valuation . . . . . . . . . . . . . . . . . . . . . . . . 53 6.7 Segregation of Former Participant's Account . . . . . . . 54 VESTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 7.1 Vested Interest . . . . . . . . . . . . . . . . . . . . . 54 7.2 Vesting of a Participant. . . . . . . . . . . . . . . . . 55 7.3 Amendment of Vesting Provisions . . . . . . . . . . . . . 55 7.4 Forfeitures. . . . . . . . . . . . . . . . . . . . . . . . 56 BENEFITS ON RETIREMENT AND SEPARATION FROM SERVICE . . . . . . .57 8.1 Commencement of Benefits. . . . . . . . . . . . . . 57 8.2 Automatic Annuity Requirements. . . . . . . . . . . . . . 60 8.3 Profit Sharing Plans: Exception from Automatic Annuity Requirements. . . . . . . . . . . . . . . . . . . . . . . 64 8.4 Transitional Rules Applicable to Joint and Survivor Annuities 64 8.5 Required Payment of Benefits. . . . . . . . . . . . . . . 66 8.6 Available Forms of Distribution . . . . . . . . . . . . . 73 8.7 Certain Distributions . . . . . . . . . . . . . . . . . . 73 8.8 Forfeitures . . . . . . . . . . . . . . . . . . . . . . . 74 DEATH BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . 74 9.1 Payment to Beneficiary. . . . . . . . . . . . . . . . . . 74 9.2 Method of Payment . . . . . . . . . . . . . . . . . . . . 74 PARTICIPANT CONTRIBUTIONS; ROLLOVERS . . . . . . . . . . . . . 75 10.1 Voluntary Contributions . . . . . . . . . . . . . . . . . 75 10.2 Voluntary Tax-Deductible Contributions. . . . . . . . . . 75 10.3 Transfers From Other Trusts . . . . . . . . . . . . . . . 76 INSURANCE POLICIES . . . . . . . . . . . . . . . . . . . . . . 77 11.1 Policy Procurement. . . . . . . . . . . . . . . . . . . . 77 11.2 Rules and Regulations . . . . . . . . . . . . . . . . . . 77 11.3 Transfer of Policies. . . . . . . . . . . . . . . . . . . 78 11.4 Payment Upon Death. . . . . . . . . . . . . . . . . . . . 79 11.5 Plan Provisions Control . . . . . . . . . . . . . . . . . 79 LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 12.1 Loans to Participants . . . . . . . . . . . . . . . . . . 79 12.2 Provisions to be Applied in a Uniform and Nondiscriminatory Manner . . . . . . . . . . . . . . . . . . . . . . . . . 81 12.3 Satisfaction of Loan. . . . . . . . . . . . . . . . . . . 81 12.4 Loans to Owner-Employees or Shareholder-Employees . . . . 81 TOP-HEAVY PROVISIONS . . . . . . . . . . . . . . . . . . . . . 82 13.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . 82 13.2 Vesting Schedules . . . . . . . . . . . . . . . . . . . . 85 13.3 Minimum Allocation. . . . . . . . . . . . . . . . . . . . 86 13.4 Adjustment to Defined Benefit Fraction and Defined Contribution Fraction under section 6.4. . . . . . . . . . . . . . . . 87 THE COMMITTEE. . . . . . . . . . . . . . . . . . . . . . . . . 87 14.1 Creation of a Committee . . . . . . . . . . . . . . . . . 87 14.2 Committee Action. . . . . . . . . . . . . . . . . . . . . 87 14.3 Authorized Signatory. . . . . . . . . . . . . . . . . . . 88 14.4 Powers and Duties . . . . . . . . . . . . . . . . . . . . 88 14.5 Nondiscrimination . . . . . . . . . . . . . . . . . . . . 88 14.6 Records and Reports . . . . . . . . . . . . . . . . . . . 88 14.7 Reliance on Professional Advice . . . . . . . . . . . . . 88 14.8 Payment of Expenses . . . . . . . . . . . . . . . . . . . 88 14.9 Limitation of Liability . . . . . . . . . . . . . . . . . 89 14.10 Payment Certification to Trustee . . . . . . . . . . 89 14.11 Claims Procedure . . . . . . . . . . . . . . . . . . 89 GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 90 15.1 No Right of Continued Employment. . . . . . . . . . . . . 90 15.2 Nonalienation of Interest . . . . . . . . . . . . . . . . 90 15.3 Incompetence of Participants and Beneficiaries. . . . . . 90 15.4 Unclaimed Benefits. . . . . . . . . . . . . . . . . . . . 91 15.5 Separate Employer Trusts Maintained . . . . . . . . . . . 91 15.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . 91 15.7 Severability. . . . . . . . . . . . . . . . . . . . . . . 91 15.8 Gender and Number . . . . . . . . . . . . . . . . . . . . 91 15.9 Titles and Headings . . . . . . . . . . . . . . . . . . . 92 15.10 Failure of Employer's Plan to Qualify. . . . . . . . 92 15.11 Exclusive Benefit. . . . . . . . . . . . . . . . . . 92 15.12 Action by Employer . . . . . . . . . . . . . . . . . 92 AMENDMENT AND TERMINATION. . . . . . . . . . . . . . . . . . . 92 16.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . 92 16.2 Termination and Partial Termination . . . . . . . . . . . 93 16.3 Plan Merger and Consolidation or Transfer of Plan Assets. 94 16.4 Amended and Restated Plans. . . . . . . . . . . . . . . . 94 16.5 Participating Employers . . . . . . . . . . . . . . . . . 95 PAIRED PLAN PROVISIONS . . . . . . . . . . . . . . . . . . . . 96 17.1 Compliance With Section 415(e) of the Code. . . . . . . . 96 17.2 Adjustment of Combined Plan Fractions Under Section 415 of the Code for Top-Heavy Ratio in Excess of Ninety Percent (90%) 96 17.3 Top-Heavy Minimum Benefits and Contributions. . . . . . . 96 17.4 Integration of Paired Plans . . . . . . . . . . . . . . . 97 DREYFUS PROTOTYPE DEFINED CONTRIBUTION PLAN BASIC PLAN DOCUMENT NO. 01 1.1 "Account" shall mean any one of the accounts maintained by the Committee for each Participant in accordance with Section 6.5. 1.2 "Act" shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.3 "Actual Deferral Percentage" shall mean the ratio (expressed as a percentage) of Elective Deferrals (including Excess Elective Deferrals), Qualified Matching Contributions, and Qualified Nonelective Contributions paid over to the Fund on behalf of an Eligible Participant for the Plan Year to the Eligible Participant's Compensation for the Plan Year. The Actual Deferral Percentage of an Eligible Participant who does not make an Elective Deferral, and who does not receive an allocation of a Qualified Matching Contribution or a Qualified Nonelective Contribution, is zero. 1.4 "Adoption Agreement" shall mean the document executed by the adopting Employer which contains all the options which may be selected and which incorporates this Prototype Plan by reference. 1.5 "Affiliated Employer" shall mean any corporation which is a member of a controlled group of corporations (as defined in section 414(b) of the Code) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in section 414(c) of the Code) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in section 414(m) of the Code) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to regulations under section 414(o) of the Code. 1.6 "Anniversary Date" unless otherwise defined in the Adoption Agreement, shall mean the first day of the Plan Year. If the initial Plan Year is less than a 12 month period, the Anniversary Date shall mean the first day of the 12 consecutive month period designated as the Plan Year in the Adoption Agreement. 1.7 "Annuity Starting Date" shall mean the first day of the first period for which an amount is paid as an annuity or any other form. 1.8 "Average Actual Deferral Percentage" shall mean the average (expressed as a percentage) of the Actual Deferral Percentages of the Eligible Participants in a group. 1.9 "Average Contribution Percentage" shall mean the average (expressed as a percentage) of the Contribution Percentages of the Eligible Participants in a group. 1.10 "Beneficiary" or "Beneficiaries" shall mean one or more persons designated as such by a Participant to receive his interest in the Fund in the event of the death of the Participant. 1.11 "Board of Directors" shall mean the Board of Directors of the Employer if the Employer is an incorporated business entity. 1.12 "CODA" shall mean a cash or deferred arrangement qualified under section 401(k) of the Code. 1.13 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.14 "Committee" shall mean the person or persons appointed by the Employer to administer the Plan in accordance with Article XIV. If the Plan is an Easy Retirement Plan or if no such Committee is appointed by the Employer, the Employer shall act as the Committee. 1.15 "Compensation", unless otherwise specified in the Adoption Agreement, shall mean, in the case of an Employee other than a Self-Employed Individual, his wages as defined in section 3401(a) of the Code and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d) and 6051(a)(3) of the Code, determined without regard to any rules under section 3401(a) of the Code that limit the remuneration included in wages based on the nature or location of the employment or the services performed, which are actually paid during the applicable period. In the case of a Self-Employed Individual, Compensation shall mean his Earned Income. Unless otherwise specified in the Adoption Agreement, the applicable period shall be the Plan Year. If elected by the employer in the Adoption Agreement, Compensation shall also include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not currently includible in the gross income of the Employee by reason of the application of sections 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. Compensation shall include Excess Contributions which are recharacterized in accordance with Section 4.6(d) to the extent that Elective Deferrals are included in Compensation. Solely for purposes of determining Actual Deferral Percentages and Contribution Percentages, Compensation, if the Plan is a non-standardized plan, shall be determined without regard to any exclusions which may be elected in the Adoption Agreement. Solely for purposes of determining Actual Deferral Percentages and Contribution Percentages, the applicable period for determining the amount of an Employee's Compensation shall be limited to the period during which the Employee was an Eligible Participant. For Plan Years beginning on or after January 1, 1989, annual Compensation shall not include amounts in excess of $200,000, as adjusted by the Secretary of the Treasury at the same time and in the same manner as under section 415(d) of the Code except that the dollar increases in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effective on January 1, 1990. For Plan Years beginning on or after January 1, 1994, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $150,000, as adjusted for increases in the cost-of-living in accordance with section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to the applicable period beginning in such calendar year. If an applicable period consists of fewer than 12 months, the annual Compensation limit is an amount equal to the otherwise applicable annual Compensation limit multiplied by a fraction, the numerator of which is the number of months in the short applicable period, and the denominator of which is 12. In determining Compensation for purposes of the annual Compensation limit, the family member rules of Section 414(q)(6) of the Code shall apply except that in applying such rules, the term "family" shall include only the Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. If, as a result of the application of such family member rule the annual compensation limit is exceeded, then (except for purposes of determining the portion of Compensation up to the Integration Level if this Plan is integrated with Social Security), the annual compensation limit shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of such limitation. If Compensation for any prior applicable period is taken into account in determining a Participant's allocations for the current Plan Year, the Compensation for such prior applicable period is subject to the applicable annual Compensation limit in effect for that prior period. For this purpose, in determining allocations in Plan Years beginning on or after January 1, 1989, the annual Compensation limit in effect for applicable periods beginning before that date is $200,000. In addition, in determining allocations in Plan Years beginning on or after January 1, 1994, the annual Compensation limit in effect for applicable periods beginning before that date is $150,000. 1.16 "Contribution Percentage" shall mean the ratio (expressed as a percentage) of an Eligible Participant's Contribution Percentage Amounts to the Eligible Participant's Compensation for the Plan Year. 1.17 "Contribution Percentage Amounts" shall mean the sum of the Thrift Contributions (including amounts recharacterized in accordance with Section 4.6(d)), Voluntary Contributions and Matching Contributions under the Plan on behalf of an Eligible Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the contributions to which they relate are Excess Elective Deferrals, Excess Contributions, or Excess Aggregate Contributions. Such Contribution Percentage Amounts shall include forfeitures of Excess Aggregate Contributions or Matching Contributions allocated to the Eligible Participant's Employer Matching Contribution Account, which shall be taken into account in the year in which such forfeiture is allocated. 1.18 "Early Retirement Age" shall mean the date a Participant satisfies the age and service requirements for early retirement, if any, specified in the Adoption Agreement. Upon reaching his Early Retirement Age, a Participant's right to his account balance shall be nonforfeitable, notwithstanding the Plan's vesting schedule. If a Participant separates from service before satisfying the age requirement for early retirement, but has satisfied the service requirement, the Participant will be entitled to elect to receive an early retirement benefit upon satisfaction of such age requirement. 1.19 "Earned Income" shall mean the annual net earnings from self-employment in the trade or business with respect to which the Plan is established, provided that personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions by the Employer to a qualified plan to the extent deductible under section 404 of the Code. Net earnings shall be determined with regard to the deduction allowed to the Employer by section 164(f) of the Code for taxable years beginning after December 31, 1989. 1.20 "Easy Retirement Plan" shall mean a Plan established under Dreyfus Easy Standardized/Paired Prototype Money Purchase Retirement Plan No. 01005, Dreyfus Easy Standardized/Paired Prototype Profit Sharing Retirement Plan No. 01006, or Dreyfus Standardized/Paired Prototype Defined Benefit Plan No. 02001. 1.21 "Effective Date" shall mean the date specified in the Adoption Agreement. 1.22 "Elective Deferrals" shall mean any Employer contributions made to the Plan at the election of the Participant, in lieu of cash compensation, and shall include contributions made pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a Participant's Elective Deferrals are the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any CODA, any simplified employee pension cash or deferred arrangement as described in section 402(h)(1)(B), any eligible deferred compensation plan under section 457, any plan as described under section 501(c)(18), and any Employer contributions made on behalf of a Participant for the purchase of an annuity contract under section 403(b) pursuant to a salary reduction agreement. Elective Deferrals shall not include any deferrals properly distributed as an Excess Amount pursuant to Section 6.4(d). 1.23 "Eligible Employee" shall mean each Employee who is not excluded from eligibility to participate in the Plan under the Adoption Agreement. If the Plan is an Easy Retirement Plan, Eligible Employee shall mean each Employee who is not (i) included in a unit of Employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining, or (ii) a nonresident alien who received no income from the Employer which constitutes income from sources within the United States. For purposes of the preceding sentence, "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers, or executives of the Employer. 1.24 "Eligibility Year(s) of Service" shall mean the twelve (12) consecutive month period commencing on an Employee's Employment Commencement Date and anniversaries thereof, during which the Employee worked at least one thousand (1,000) Hours of Service (or such lesser number of Hours of Service specified in the Adoption Agreement). In the case of an Employee in the maritime industry whose compensation is determined based on days of service, 125 days of service shall be treated as 1,000 Hours of Service (or such lesser number of Hours of Service as specified in the Adoption Agreement). For purposes of the preceding sentence "maritime industry" shall mean that industry in which Employees perform duties on board commercial, exploratory, service or other vessels moving on the high seas, inland waterways, Great Lakes, coastal zones, harbors and noncontiguous areas, or on offshore ports, platforms or other similar sites. In the case of a Participant, who does not have any nonforfeitable right to the account balance derived from Employer contributions, Eligibility Year(s) of Service before a period of consecutive one (1) year Service Breaks will not be taken into account in computing Eligibility Years of Service, if the number of consecutive one (1) year Service Breaks in such period equals or exceeds the greater of five (5) or the aggregate number of Eligibility Years of Service before such break. Such aggregate number of Eligibility Years of Service will not include any Eligibility Year of Service disregarded under the preceding sentence by reason of prior Service Breaks. Notwithstanding the above, if the Adoption Agreement provides for full and immediate vesting upon completion of the eligibility requirements and an Employee has incurred a one (1) year Service Break before satisfying the Plan's eligibility requirements, all Eligibility Year(s) of Service before such Service Break will not be taken into account. If the elapsed time method of crediting service is specified in the Adoption Agreement, an Employee shall receive credit for Service, except for credit which may be disregarded under this Section or Section 2.3, for the aggregate of all time periods commencing on his Employment Commencement Date or Re-Employment Commencement Date and ending on his Severance from Service Date. An Employee shall also receive credit for any Period of Severance of less than twelve (12) months. Fractional periods of a year shall be expressed in terms of days. 1.25 "Employee" shall mean an Owner-Employee, a Self-Employed Individual, a Shareholder-Employee and any other person employed by the Employer or any Affiliated Employer. A "leased employee" shall also be treated as an Employee. The term "leased employee" means any person (other than an employee of the recipient employer) who pursuant to an agreement between the recipient employer and any other person ("leasing organization") has performed services for the recipient employer (or for the recipient employer and related persons determined in accordance with section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. Notwithstanding the preceding paragraph, a leased employee shall not be considered an employee of the recipient employer if: (i) such employee is covered by a money purchase pension plan providing (1) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under section 125, section 402(a)(8), section 402(h) or section 403(b) of the Code, (2) immediate participation, and (3) full and immediate vesting; and (ii) leased employees do not constitute more than twenty percent (20%) of the recipient employer's non-highly compensated workforce. 1.26 "Employer" shall mean the corporation, partnership, proprietorship or other business entity which shall adopt the Plan or any successor thereof. 1.27 "Employment Commencement Date" shall mean the first date with respect to which an Employee performs an Hour of Service. 1.28 "Entry Date", unless otherwise specified in the Adoption Agreement, shall mean the first day of the Plan Year and the first day of the seventh month of the Plan Year. The initial Entry Date shall not precede the original effective date of the Plan. 1.29 "Excess Aggregate Contributions" shall mean, with respect to any Plan Year, the excess of the aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage, actually made on behalf of Highly Compensated Employees for such Plan Year, over the maximum Contribution Percentage Amounts permitted by the Average Contribution Percentage tests of Section 4.7 (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages, beginning with the highest of such percentages). 1.30 "Excess Contributions" shall mean, with respect to any Plan Year, the excess of the aggregate amount of Elective Deferrals, Qualified Nonelective Contributions, and Qualified Matching Contributions actually taken into account in computing the Actual Deferral Percentage of Highly Compensated Employees for such Plan Year, over the maximum amount of such contributions permitted under the Average Actual Deferral Percentage tests of Section 4.6 (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Actual Deferral Percentages, beginning with the highest of such percentages). 1.31 "Excess Elective Deferrals" shall mean a Participant's Elective Deferrals for a taxable year in excess of the adjusted dollar limitation of section 402(g) of the Code. 1.32 "Family Member" shall, with respect to a five percent (5%) owner or top ten Highly Compensated Employee described in section 414(q)(6)(A) of the Code, include the spouse and lineal ascendants and descendants of an Employee or former Employee and the spouses of such lineal ascendants and descendants. The determination of who is a Family Member will be made in accordance with section 414(q) of the Code. 1.33 "Fund" shall mean all property received by the Trustee or Custodian for purposes of the Plan, investments thereof and earnings thereon, less payments made by the Trustee to carry out the Plan. 1.34 "Highly Compensated Employee" shall include highly compensated active employees and highly compensated former employees. A highly compensated active employee includes any Employee who performs services for the Employer or any Affiliated Employer during the determination year and who, during the look-back year: (i) received Compensation from the Employer or any Affiliated Employer in excess of $75,000 (as adjusted pursuant to section 415(d) of the Code); (ii) received Compensation from the Employer or any Affiliated Employer in excess of $50,000 (as adjusted pursuant to section 415(d) of the Code) and was a member of the top-paid group for such year; or (iii) was an officer of the Employer or any Affiliated Employer and received Compensation during such year that is greater than fifty percent (50%) of the dollar limitation in effect under section 415(b)(1)(A) of the Code. The term Highly Compensated Employee also includes: (i) an Employee who is described in the preceding sentence if the term "determination year" is substituted for the term "look-back year" and the Employee is one of the 100 most highly compensated Employees of the Employer or any Affiliated Employer during the Plan Year; and (ii) an Employee who is a five percent (5%) owner of the Employer or any Affiliated Employer at any time during the look-back year or determination year. If no officer has satisfied the compensation requirement of (iii) above during either a determination year or look-back year, the highest paid officer for such year shall be treated as a Highly Compensated Employee. For this purpose, the determination year shall be the Plan Year, and the look-back year shall be the twelve (12) month period immediately preceding the determination year unless the Employer has elected to use the calendar year ending with or within the determination year as the look-back year for purposes of its employee benefit plans. If the Employer has so elected to use such calendar year as the look-back year for its employee benefit plans, the determination year shall be the "lag period," if any, by which the applicable determination year extends beyond such calendar year. A highly compensated former employee includes any Employee who terminated employment (or was deemed to have terminated) prior to the determination year, performs no service for the Employer or any Affiliated Employer during the determination year, and was a highly compensated active employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. If an Employee is, during a determination year or look-back year, a Family Member of either a five percent (5%) owner who is an active or former Employee or a Highly Compensated Employee who is one of the 10 most Highly Compensated Employees of the Employer or any Affiliated Employer during such year, then the Family Member and the five percent (5%) owner or top-10 Highly Compensated Employee shall be aggregated. The Family Member and five percent (5%) owner or top-10 Highly Compensated Employee shall be treated as a single Employee receiving Compensation and Plan contributions equal to the sum of Compensation and contributions of the Family Member and five percent (5%) owner or top-10 Highly Compensated Employee. The determination of who is a Highly Compensated Employee, including the determinations of the number and identify of employees in top-paid group, the top 100 employees, the number of employees treated as officers and the compensation that is considered, will be made in accordance with section 414(q) of the Code and the regulations thereunder. 1.35 "Hour of Service" shall mean: (a) Each hour for which an Employee is compensated by the Employer, or is entitled to be so compensated, for services rendered by him to the Employer. These hours will be credited to the Employee for the computation period in which the duties are performed; and (b) Each hour for which an Employee is compensated by the Employer, or is entitled to be so compensated, on account of a period of time during which no services are rendered by him to the Employer (regardless of whether the Employee shall have ceased to be an Employee) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than five hundred and one (501) Hours of Service shall be credited pursuant to this subparagraph (b) on account of any single continuous period during which an Employee renders no services to the Employer (whether or not such period occurs in a single computation period). Hours under this paragraph will be calculated and credited pursuant to section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and (c) Each hour for which back pay, without regard to mitigation of damages, has been awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under subparagraph (a) or subparagraph (b), whichever shall be applicable, and also under this subparagraph (c). The hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made. Hours of Service will be credited for employment with an Affiliated Employer. Hours of Service will also be credited for employment with a predecessor employer if the Employer maintains the plan of such predecessor or the Employer so elects in the Adoption Agreement. Hours of Service will also be credited for any individual considered an Employee under sections 414(n) or 414(o) of the Code or the regulations thereunder. Solely for purposes of determining whether a Service Break, as defined in Section 1.54, for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight (8) Hours of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of a birth of a child of the individual, (3) by reason of the placement of the child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a Service Break in that period, (2) in all other cases, in the following computation period. Hours of Service shall be credited on the basis of actual hours worked unless another method has been specified in the Adoption Agreement. Hours of Service shall not be counted if the elapsed time method is specified in the Adoption Agreement, except to determine an Employee's Employment Commencement Date or Re-Employment Commencement Date. 1.36 "Integration Level" shall mean the Taxable Wage Base or such lesser amount elected by the Employer in the Adoption Agreement. 1.37 "Matching Contribution" shall mean Employer contributions made to this Plan or any other defined contribution plan by reason of Thrift Contributions or Elective Deferrals under this Plan. 1.38 "Net Profits" shall mean current and accumulated earnings of the Employer before Federal and State taxes and contributions to this and any other qualified plan. 1.39 "Non-Highly Compensated Employee" shall mean an Employee of the Employer who is neither a Highly Compensated Employee nor a Family Member. 1.40 "Normal Retirement Age" shall mean the age specified in the Adoption Agreement. Upon reaching his Normal Retirement Age, the Participant's right to his retirement benefit shall be nonforfeitable, notwithstanding the Plan's vesting schedule. In the event the Employer imposes a mandatory normal retirement age, the Normal Retirement Age may not exceed such mandatory normal retirement age. Notwithstanding any other provision of this Plan, the Employer, in accordance with the provisions of the Age Discrimination in Employment Act, shall have no right to compel a Participant to retire, except as otherwise provided herein, if in the calendar year or the preceding calendar year, the Employer has twenty (20) or more employees for each work day in each of twenty (20) or more calendar weeks. The Employer may retire a Participant who for the two (2) year period prior to retirement is employed in a bona fide executive or high policy-making position if (1) he has attained age sixty-five (65); (2) he has attained his Normal Retirement Date; and (3) his annual retirement benefit from the pension, profit sharing, savings or deferred compensation plans maintained by the Employer equals, in the aggregate, at least forty-four thousand dollars ($44,000). This Section shall be deemed to be automatically amended to reflect any subsequent Federal legislation or regulations. 1.41 "Owner-Employee" shall mean a sole proprietor or a partner who owns more than ten percent (10%) of either the capital interest or profits interest of a partnership. 1.42 "Participant" shall mean an Eligible Employee who enters the Plan pursuant to Section 2.1 of the Plan. (a) "Active Participant" shall mean a Participant who is credited with one thousand (1,000) or more Hours of Service (or such lesser number of Hours of Service specified in the Adoption Agreement) in the Plan Year. Unless otherwise specified in the Adoption Agreement, it is not necessary that the Participant be employed on the last day of the Plan Year in order to be deemed an Active Participant and share in the Employer contribution, if any. If the elapsed time method of crediting service is specified in the Adoption Agreement, Active Participant shall include all Participants, unless otherwise specified in the Adoption Agreement. Notwithstanding the foregoing paragraph, if the Plan is a standardized plan, "Active Participant" shall mean, for each Plan Year beginning on or after January 1, 1990, each Participant other than a Participant who is not employed on the last day of the Plan Year and is credited with more than 500 Hours of Service in the Plan Year. If the elapsed time method of crediting service is specified in the Adoption Agreement, "Active Participant" shall mean all Participants. If the elapsed time method of crediting Hours of Service is specified in the Adoption Agreement, Active Participant shall mean a Participant who is credited with three (3) consecutive calendar months of service. (b) "Eligible Participant" shall mean an Employee who is eligible under the terms of the Plan to make Thrift Contributions, Elective Deferrals or Elective Deferrals and Thrift Contributions, combined ("Combined Contributions") made on his behalf. 1.43 "Participating Employer" shall mean any Affiliated Employer which has adopted the Plan in accordance with Section 16.5. 1.44 "Period of Severance" shall mean a continuous period of time during which the Employee is not employed by the Employer. Such period begins on the Employee's Severance from Service Date and ends on the Employee's Re-Employment Commencement Date. 1.45 "Plan" shall mean this Prototype Plan, the Trust Agreement or Custodial Agreement and the Adoption Agreement of the adopting Employer, as from time to time amended. 1.46 "Plan Year" shall mean the calendar year, unless another twelve (12) consecutive month period is specified in the Adoption Agreement. 1.47 "Prototype Plan" shall mean the basic plan document described herein. 1.48 "Qualified Matching Contributions" shall mean Employer contributions to the Plan which are allocated to Participants' accounts by reason of Elective Deferrals, which are at all times subject to the distribution and nonforfeitability requirements of section 401(k) of the Code. 1.49 "Qualified Nonelective Contributions" shall mean Employer contributions (other than Matching Contributions or Qualified Matching Contributions) which are allocated to Eligible Participants' accounts, which such Participants may not elect to receive in cash until distributed from the Plan and, which are at all times subject to the distribution and nonforfeitability requirements of section 401(k) of the Code. 1.50 "ReEmployment Commencement Date" shall mean the first day on which the Employee is credited with an Hour of Service for the performance of duties after the first eligibility computation period in which the Employee incurs a one (1) year Service Break. In the case of any Participant who has a one (1) year Service Break, Eligibility Year(s) of Service before such break will not be taken into account until the Employee has completed one (1) Eligibility Year of Service after returning to employment. Such Eligibility Year of Service shall be measured by the twelve (12) consecutive month period beginning on the Employee's Reemployment Commencement Date and, if necessary, subsequent twelve (12) consecutive month periods beginning on anniversaries of the Re-Employment Commencement Date. If a former Participant completes an Eligibility Year of Service in accordance with this provision, such Participant's participation will be reinstated as of the Re-Employment Commencement Date. 1.51 "Regular Account" shall mean the account to which Employer contributions are credited with respect to the Dreyfus prototype money purchase and target benefit plans (Plan Numbers 01001, 01004, and 01005). 1.52 "S-Corporation" shall mean an Employer who has made an election for its taxable year of reference under section 1362(a) of the Code, or any other applicable section pertaining thereto. 1.53 "Self-Employed Individual" shall mean an individual who has Earned Income for the taxable year from the unincorporated trade, or business or partnership with respect to which the Plan is established; also, an individual who would have had Earned Income but for the fact such trade, business or partnership had no net profits for the taxable year. 1.54 "Service" shall mean any twelve (12) consecutive month period identical to the Plan Year during which the Employee completes at least one thousand (1,000) or more Hours of Service (or such lesser number of Hours of Service specified in the Adoption Agreement). Periods of time to be excluded, if any, shall be stipulated in the Adoption Agreement. In the case of Employees in the Maritime Industry, 125 days of service shall be treated as 1,000 Hours of Service (or such lesser number of hours of Service as specified in the Adoption Agreement). Service will be credited in accordance with the rules set forth above for any employment, for any period of time, for any Affiliated Employer. Service will also be credited for any individual required to be considered an Employee, for purposes of this Plan under section 414(n) or (o) of the Code, of the Employer or any Affiliated Employer. If the elapsed time method of crediting service is specified in the Adoption Agreement, an Employee shall receive credit for Service, except for Service which may be disregarded under Sections 7.2(b), for the aggregate of all time periods commencing on his Employment Commencement Date or Re-Employment Commencement Date and ending on his Severance from Service Date. An Employee shall also receive credit, for vesting purposes, for any Period of Severance of less than twelve (12) consecutive months. An Employee will receive a year of Service for vesting purposes for each twelve (12) months of Service. Fractional periods of a year shall be expressed in terms of days. 1.55 "Service Break" shall mean: (a)For purposes of calculating Eligibility Years of Service, any twelve (12) consecutive month period commencing on an Employee's Employment Commencement Date or anniversaries thereof during which the Employee is credited with five hundred (500) Hours of Service or less. In the case of Employees in the Maritime Industry, 62 days of service or less. (b) For purposes of calculating years of Service, any Plan Year during which the Employee is credited with five hundred (500) Hours of Service or less, where such Service Break shall be measured from the first day of such Plan Year. In the case of Employees in the Maritime Industry, 62 days of service or less. (c) If the elapsed time method of crediting service is specified in the Adoption Agreement, a Service Break shall mean a Period of Severance of at least twelve (12) consecutive months; provided, however, that in the case of an Employee absent for maternity or paternity reasons (as defined in Section 1.35), the Period of Severance shall not commence for this purpose until the twenty-four (24) month anniversary of the first date of such absence. (d) A Service Break shall not be deemed to have occurred as a result of absence due to service in the armed forces of the United States, provided the Employee makes application for resumption of work with the Employer following discharge, within the time specified by then applicable laws. 1.56 "Severance from Service Date" shall mean the earlier of (a) the date on which an Employee quits, retires, is discharged or dies; (b) the twelve (12) month anniversary of the date an Employee is first absent (with or without pay) for reason other than quit, retirement, discharge or death (such as vacation, holiday, sickness, disability, leave of absence or layoff). 1.57 Shareholder-Employee" shall mean a Participant who owns (or is considered as owning) more than five percent (5%) of the outstanding stock of an S-Corporation on any day during the taxable year of reference of such S-Corporation. In determining the percent of a Participant's ownership of the outstanding stock, the family attribution rules of section 318(a)(1) of the Code, or any other applicable section of the Code pertaining thereto shall apply. 1.58 "Sponsor" shall mean The Dreyfus Corporation. 1.59 "Taxable Wage Base" shall mean, except for purposes of Article V, the contribution and benefit base in effect under Section 230 of the Social Security Act at the beginning of the Plan Year. 1.60 "Thrift Contributions" shall mean contributions made by a Participant which are included in the Participant's gross income in the year in which made. 1.61 "Total and Permanent Disability" shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The permanence and degree of such impairment shall be supported by medical evidence satisfactory to the Committee. 1.62 "Trustee" or "Custodian" shall mean the individual or individuals, or institution appointed in the Adoption Agreement by the Employer to act in accordance with the provisions of the Trust Agreement or Custodial Agreement. If the contributions will be made to a Custodian, references herein to the "Trustee" shall be deemed to refer to the "Custodian" and the term "Trust Fund" shall be deemed to refer to the "Custodial Account." 1.63 "Trust Agreement" or "Custodial Agreement" shall mean: (a) for "Trust Agreement" shall mean the agreement between the Employer and the Trustee if the Plan is established under Dreyfus Standardized/Paired Prototype Money Purchase Plan No. 01001, Dreyfus Nonstandardized Prototype Profit Sharing Plan No. 01002, Dreyfus Standardized/Paired Prototype Profit Sharing Plan No. 01003, or Dreyfus Standardized/Paired Prototype Target Benefit Pension Plan No. 01004. (b) for "Custodial Agreement" shall mean the agreement between the Employer and the Custodian under which the Plan is funded if the Plan is established under Dreyfus Easy Standardized/Paired Prototype Money Purchase Retirement Plan No. 01005 or Dreyfus Easy Standardized/Paired Prototype Profit Sharing Retirement Plan No. 01006. Such Plans are hereinafter referred to as "Easy Retirement Plans." 1.64 "Valuation Date" shall mean the last day of the Plan Year and such other dates as may be determined by the Committee. 1.65 "Voluntary Contributions" shall mean contributions previously made by a Participant which were included in the Participant's gross income in the year in which made. Each Eligible Employee shall become a Participant on the Effective Date or the Entry Date coincident with or next following the completion of the age and service requirements set forth in the Adoption Agreement. The Adoption Agreement may exclude Employees from participation in the Plan based upon minimum age and service requirements or the inclusion of such Employees in certain ineligible classifications. In the event an Employee who is not a member of the eligible class of Employees becomes a member of the eligible class, such Employee will participate immediately if such Employee has satisfied the minimum age and service requirements and would otherwise have previously become a Participant. In the event a Participant is no longer a member of an eligible class of Employees and becomes ineligible to participate, but has not incurred a Service Break, such Employee will participate immediately upon returning to an eligible class of Employees. If such Participant incurs a Service Break, eligibility to participate will be determined under the rules of Section 1.24 of the Plan. (a) A former Participant will become a Participant immediately upon returning to the employ of the Employer if such former Participant had a nonforfeitable right to all or a portion of the account balance derived from Employer contributions at the time of termination from service. (b) A former Participant who did not have a nonforfeitable right to any portion of the account balance derived from Employer contributions at the time of termination from service will be considered a new Employee, for eligibility purposes, if the number of consecutive one (1) year Service Breaks equal or exceed the greater of five (5) or the aggregate number of years of Service before such Service Breaks. If such former Participant's years of Service before termination from service may not be disregarded pursuant to the preceding sentence, such former Participant shall participate immediately upon reemployment. (c) Any former Employee who was never a Participant and is reemployed as an Employee will be eligible to participate subject to the provisions of Section 2.1. 2.4 Change in Employment Status In the event that a Participant who was credited with a year of Service for the preceding Plan Year, at the request of the Employer, enters directly into the employ of any other business entity, such Participant shall be deemed to be an Active Participant. If such Participant returns to the employ of the Employer or becomes eligible for benefits pursuant to Articles VIII or IX, without interruption of employment with the Employer or other business entity, he shall be deemed not to have had a Service Break for such period. However, if such Participant does not immediately return to the employ of the Employer upon his termination of employment with such other business entity or upon recall by the Employer, he shall be deemed to have terminated his employment for all purposes of the Plan as of the Anniversary Date following the date of transfer. 2.5 Limitations on Participation of Owner-Employees Notwithstanding the above, Plans which allow Owner-Employees to participate must satisfy the following additional requirements: (a) If this Plan provides contributions or benefits for one or more Owner-Employees who control both the business for which this Plan is established and one or more other trades or businesses, this Plan and the plan established for other trades or businesses must, when looked at as a single plan, satisfy sections 401(a) and (d) of the Code for the Employees of this and all other trades or businesses. (b) If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses the employees of the other trades or businesses must be included in a plan which satisfies sections 401(a) and (d) of the Code and which provides contributions and benefits not less favorable than provided for Owner-Employees under this Plan. (c) If an individual is covered as an Owner-Employee under the plans of two or more trades or businesses which are not controlled and the individual controls a trade or business, then the contributions or benefits of the employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. For purposes of the preceding paragraphs, an Owner-Employee, or two or more Owner-Employees, will be considered to control a trade or business if the Owner-Employee, or two or more Owner-Employees together: (1) own the entire interest in an unincorporated trade or business, (2) in the case of a partnership, own more than fifty percent (50%) of either the capital interest or the profits interest in the partnership. For purposes of the preceding sentence, an Owner-Employee, or two or more Owner-Employees shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership which such Owner-Employee, or such two or more Owner-Employees, are considered to control within the meaning of the preceding sentence. CONTRIBUTIONS AND CREDITS TO MONEY PURCHASE PLANS (The provisions of this Article shall apply only with respect to Money Purchase Plans) For each Plan Year the Employer's contribution to the Fund shall be determined in accordance with the Adoption Agreement. Such contribution shall not exceed an amount equal to twenty-five percent (25%) of each Participant's Compensation. Unless otherwise specified in the Adoption Agreement, any forfeitures which occur will reduce Employer contributions for the next Plan Year. If the Adoption Agreement specifies that forfeitures are to be allocated to the Accounts of other Participants, the Plan shall continue to be designed to qualify as a money purchase pension plan for purposes of sections 401(a), 402, 412 and 417 of the Code. (a) If the Plan is not integrated with Social Security, the Employer's contribution (as specified in the Adoption Agreement) for any Plan Year (and any forfeitures, if forfeitures are allocated to Active Participants in accordance with Section 3.2) shall be allocated to the Regular Account of each Active Participant in the ratio in which each Active Participant's Compensation for the Plan Year bears to that of all Active Participants for such Plan Year. (b) If the Plan is integrated with Social Security: (i) Subject to the overall permitted disparity limits, if under Article XIII, the Plan is Top-Heavy for the Plan Year and the minimum Top-Heavy contribution is made under the Plan, then Employer Discretionary Contributions plus forfeitures shall be allocated to the Account of each Participant who either completes more than 500 Hours of Service during the Plan Year or is employed on the last day of the Plan Year as follows: Step One: Contributions and forfeitures will be allocated to each Participant's Account in the ratio that each Participant's total Compensation bears to all Participants' total Compensation, but not in excess of 3% of each Participant's Compensation. Step Two: Any contributions and forfeitures remaining after the allocation in Step One will be allocated to each Participant's Account in the ratio that each Participant's Compensation for the Plan Year in excess of the integration level bears to the excess compensation of all Participants, but not in excess of 3% of each Participant's Compensation. For purposes of this Step Two, in the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described below, such Participant's total Compensation for the Plan Year will be taken into account. Step Three: Any contributions and forfeitures remaining after the allocation in Step Two will be allocated to each Participant's Account in the ratio that the sum of each Participant's total Compensation and Compensation in excess of the Integration Level bears to the sum of all Participants' total Compensation and Compensation in excess of the Integration Level; however, the allocation cannot exceed the product of (a) the Permitted Disparity Percentage specified in the Adoption Agreement multiplied by (b) each Participant's total Compensation and Compensation in excess of the Integration Level. For purposes of this Step Three, in the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described below, two times such Participant's total Compensation for the Plan Year will be taken into account. Step Four: Any remaining Employer contributions or forfeitures will be allocated to each Participant's Account in the ratio that each Participants's total Compensation for the Plan Year bears to all Participants' total Compensation for that year. The Integration Level shall be equal to the Taxable Wage Base or such lesser amount elected by the Employer in the Adoption Agreement. (ii) Subject to the overall permitted disparity limits, if the Plan is not Top Heavy for the Plan Year, Employer Discretionary Contributions plus forfeitures shall be allocated to the Account of each Participant who either completes more than 500 Hours of Service during the Plan Year or is employed on the last day of the Plan Year as follows: Step One: Contributions and forfeitures will be allocated to each Participant's Account in the ratio that the sum of each Participant's total Compensation and Compensation in excess of the Integration Level bears to the sum of all Participants' total Compensation and Compensation in excess of the Integration Level; however, the allocation cannot exceed the product of (a) the Permitted Disparity Percentage specified in the Adoption Agreement multiplied by (b) each Participant's total Compensation and Compensation in excess of the Integration Level. For purposes of this Step One, in the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described below, two times such Participant's total Compensation for the Plan Year will be taken into account. Step Two: Any remaining Employer contributions or forfeitures will be allocated to each Participant's Account in the ratio that each Participants' total Compensation for the Plan Year bears to all Participants' total Compensation for that year. The Integration Level shall be equal to the Taxable Wage Base or such lesser amount elected by the Employer in the Adoption Agreement. Annual Overall Permitted Disparity Limit: Notwithstanding section 4.3(b)(i) and (ii) above, for any Play Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension, as defined in section 408(k) of the Code, maintained by the Employer that provides for permitted disparity (or imputes disparity), Employer contributions and forfeitures will be allocated to the Account of each Participant who either completes more than 500 Hours of Service during the Plan Year or is employed on the last day of the Plan Year in the ratio that such Participant's total Compensation bears to the total Compensation of all Participants. Cumulative Permitted Disparity Limit: Effective for Plan Years beginning on or after January 1, 1995, the Cumulative Permitted Disparity Limit for a Participant is 35 total cumulative permitted disparity years. Total cumulative permitted years means the number of years credited to the Participant for allocation or accrual purposes under this Plan, any other qualified plan or simplified employer pension plan (whether or not terminated) ever maintained by the Employer. For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the Participant has not benefited under a defined benefit or target benefit plan for any year beginning on or after January 1, 1994, the Participant has no cumulative disparity limit. CONTRIBUTIONS AND CREDITS TO PROFIT SHARING PLANS (The provisions of this Article shall apply only with respect to Profit Sharing Plans) 4.1 Limits on Employer Contributions Employer contributions for each Plan Year (including, if applicable, Elective Deferrals) shall be determined in accordance with the Adoption Agreement, but shall not exceed the maximum amount which shall constitute an allowable deduction under section 404(a) of the Code. Unless otherwise specified in the Adoption Agreement, Employer contributions may only be made out of Net Profits. If the Adoption Agreement provides that one or more Employer contributions may be made without regard to Net Profits, the Plan shall continue to be designed to qualify as a profit sharing plan for purposes of the Code. Unless otherwise specified in the Adoption Agreement, forfeitures, if any, will be allocated to Participants' Accounts in the following manner: Forfeitures of Employer Discretionary Contribution will be allocated in the same manner as are such contributions. Forfeitures of Matching Contributions will be allocated to the Matching Contribution Account in the ratio that the Matching Contribution for each Participant bears to the sum of all the Matching Contributions for all Participants. The following provisions shall apply if the Employer has elected in the Adoption Agreement to make Employer Discretionary Contributions. (a) If the Plan is not integrated with Social Security, the Employer Discretionary Contribution for any Plan Year (and any forfeitures, if forfeitures are reallocated to Active Participants in accordance with Section 4.2) shall be allocated to the Employer Discretionary Contribution Account established for each Active Participant in the ratio in which each Active Participant's Compensation for the Plan Year bears to that of all Active Participants for such Plan Year. (b) If the Plan is integrated with Social Security: (i) Subject to the overall permitted disparity limits,if under Article XIII, the Plan is Top-Heavy for the Plan Year and the minimum Top-Heavy contribution is made under the Plan, then Employer Discretionary Contributions plus forfeitures shall be allocated to the Account of each Participant who either completes more than 500 Hours of Service during the Plan Year or is employed on the last day of the Plan Year as follows: Step One: Contributions and forfeitures will be allocated to each Participant's Account in the ratio that each Participant's total Compensation bears to all Participants' total Compensation, but not in excess of 3% of each Participant's Compensation. Step Two: Any contributions and forfeitures remaining after the allocation in Step One will be allocated to each Participant's Account in the ratio that each Participant's Compensation for the Plan Year in excess of the integration level bears to the excess compensation of all Participants, but not in excess of 3% of each Participant's Compensation. For purposes of this Step Two, in the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described below, such Participant's total Compensation for the Plan Year will be taken into account. Step Three: Any contributions and forfeitures remaining after the allocation in Step Two will be allocated to each Participant's Account in the ratio that the sum of each Participant's total Compensation and Compensation in excess of the Integration Level bears to the sum of all Participants' total Compensation and Compensation in excess of the Integration Level; however, the allocation cannot exceed the product of (a) the Permitted Disparity Percentage specified in the Adoption Agreement multiplied by (b) each Participant's total Compensation and Compensation in excess of the Integration Level. For purposes of this Step Three, in the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described below, two times such Participant's total Compensation for the Plan Year will be taken into account. Step Four: Any remaining Employer contributions or forfeitures will be allocated to each Participant's Account in the ratio that each Participants's total Compensation for the Plan Year bears to all Participants' total Compensation for that year. The Integration Level shall be equal to the Taxable Wage Base or such lesser amount elected by the Employer in the Adoption Agreement. (ii) Subject to the overall permitted disparity limits,if the Plan is not Top- Heavy for the Plan Year, Employer Discretionary Contributions plus forfeitures shall be allocated to the Account of each Participant who either completes more than 500 Hours of Service during the Plan Year or is employed on the last day of the Plan Year as follows: Step One: Contributions and forfeitures will be allocated to each Participant's Account in the ratio that the sum of each Participant's total Compensation and Compensation in excess of the Integration Level bears to the sum of all Participants' total Compensation and Compensation in excess of the Integration Level; however, the allocation cannot exceed the product of (a) the Permitted Disparity Percentage specified in the Adoption Agreement multiplied by (b) each Participant's total Compensation and Compensation in excess of the Integration Level. For purposes of this Step One, in the case of any Participant who has exceeded the Cumulative Permitted Disparity Limit described below, two times such Participant's total Compensation for the Plan Year will be taken into account. Step Two: Any remaining Employer contributions or forfeitures will be allocated to each Participant's Account in the ratio that each Participant's total Compensation for the Plan Year bears to all Participants' total Compensation for that year. The Integration Level shall be equal to the Taxable Wage Base or such lesser amount elected by the Employer in the Adoption Agreement. Annual Overall Permitted Disparity Limit: Notwithstanding section 4.3(b)(i) and (ii) above, for any Plan Year this Plan benefits any Participant who benefits under another qualified plan or simplified employee pension, as defined in section 408(k) of the Code, maintained by the Employer that provides for permitted disparity (or imputes disparity), Employer contributions and forfeitures will be allocated to the Account of each Participant who either completes more than 500 Hours of Service during the Plan Year or who is employed on the last day of the Plan Year in the ratio that such Participant's total Compensation bears to the total Compensation of all Participants. Cumulative Permitted Disparity Limit: Effective for Plan Years beginning on or after January 1, 1995, the Cumulative Permitted Disparity Limit for a Participant is 35 total cumulative permitted disparity years. Total cumulative permitted years means the number of years credited to the Participant for allocation or accrual purposes under this Plan, any other qualified plan or simplified employer pension plan (whether or not terminated) ever maintained by the Employer. For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the Participant has not benefited under a defined benefit or target benefit plan for any year beginning on or after January 1, 1994, the Participant has no cumulative disparity limit. 4.4 401(k) Cash or Deferred Arrangements ("CODA")/Thrift Contributions If elected in the Adoption Agreement, the Employer may make contributions under a CODA. (a) Allocation of Deferrals. The Employer shall contribute and allocate to each Participant's Elective Deferral Account an amount equal to the amount of a Participant's Elective Deferrals. (1) Elective Deferrals Pursuant to a Salary Reduction Agreement. To the extent provided in the Adoption Agreement, a Participant may elect to have Elective Deferrals made under this Plan. Elective Deferrals shall include both single-sum and continuing contributions made pursuant to a salary reduction agreement. (i) Commencement of Elective Deferrals. A Participant shall be afforded a reasonable period at least once each calendar year, as specified in the Adoption Agreement, to elect to commence Elective Deferrals. Such election shall become effective as soon as administratively feasible, but not before the time specified in the Adoption Agreement. (ii) Modification and Termination of Elective Deferrals. A Participant's election to commence Elective Deferrals shall remain in effect until modified or terminated. A Participant shall be afforded a reasonable period at least once each calendar year, as specified in the Adoption Agreement, to modify the amount or frequency of his or her Elective Deferrals. A Participant may terminate his or her election to make Elective Deferrals at any time. (2) Cash bonuses. If permitted in the Adoption Agreement, a Participant may also base Elective Deferrals on cash bonuses that, at the Participant's election, may be contributed to the CODA or received by the Participant in cash. A Participant shall be afforded a reasonable period at least once a year to elect to defer such amounts to the CODA. Such election shall become effective as soon as administratively feasible, but not before the time specified in the Adoption Agreement. (3) Elective Deferrals shall be contributed and allocated to the Fund as soon as practicable (but in no event later than 90 days) following the close of the applicable pay period. Starting for Plan Year(s) beginning January 1, 1987, if permitted under the Adoption Agreement, Participants may make Thrift Contributions which shall be allocated to a Thrift Account for each such Participant. (a) A Participant shall always be one hundred percent (100%) vested in his Thrift Account. (b) Unless specified otherwise in the Adoption Agreement, Thrift Contributions shall take effect on the Anniversary Date coincident with or next following the Participant's election to make Thrift Contributions. Elections to change the amount of the Thrift Contribution shall take effect on the Change Date specified in the Adoption Agreement which is coincident with or next following the date the Participant's election is received by the Committee. Notwithstanding this provision, a Participant's revocation of an election to make Thrift Contributions shall take effect as soon as administratively feasible. (c) Thrift Contributions shall be made to the Fund as soon as practicable (but in no event later than 90 days) following the close of the applicable pay period. (d) Notwithstanding any other provisions of this Section 4.4(2), distributions or withdrawals from a Participant's Thrift Account shall be made in accordance with the rules applicable to Voluntary Contributions under Section 10.1 However, if the Employer has elected to make Matching Contributions with respect to Thrift Contributions, any Participant who withdraws any amount from his Thrift Account, shall be precluded from making Thrift Contributions until the next permitted Change Date specified in the Adoption Agreement which is at least six (6) months after the date of withdrawal. (e) Thrift Contributions shall be subject to the Contribution Percentage tests and the rules applicable to Excess Aggregate Contributions set forth in Section 4.7. (a) If elected by the Employer in the Adoption Agreement, the Employer will make Matching Contributions to the Plan. The amount of such Matching Contributions shall be calculated by reference to each eligible Participant's Elective Deferrals or Thrift Contributions or Combined Contributions as specified by the Employer in the Adoption Agreement. (b) Separate Account. Matching Contributions shall be allocated to each eligible Participant's Employer Matching Contribution Account. (c) Vesting. Matching Contributions will be vested in accordance with the Employer's election in the Adoption Agreement and the terms of this plan. Notwithstanding anything in the Plan to the contrary, Matching Contributions shall be forfeited to the extent they relate to Excess Elective Deferrals, Excess Contributions or Excess Aggregate Contributions, and shall not be taken into account for purposes of Section 4.7(a). (d) Forfeitures. Forfeitures of Matching Contributions other than Excess Aggregate Contributions shall be made in accordance with the forfeiture provisions pursuant to Section 4.2 of the Plan. (e) Matching Contributions shall be subject to the Contribution Percentage tests and the rules applicable to Excess Aggregate Contributions set forth in Section 4.7. (a) If elected by the Employer in the Adoption Agreement, the Employer will make Qualified Matching Contributions to the CODA. The amount of such Qualified Matching Contributions shall be calculated by reference to each eligible Participant's Elective Deferrals or the Elective Deferral portion of Combined Contributions, as specified in the Adoption Agreement. (b) Separate Account. Qualified Matching Contributions shall be allocated to each Participant's Qualified Nonelective Contribution Account. (c) Vesting. Qualified Matching Contributions shall be fully vested and nonforfeitable at all times. (d) Distributions. Qualified Matching Contributions and income allocable thereto shall be distributable only in accordance with Section 4.10. (a) The Employer may elect to make Qualified Nonelective Contributions under the Plan on behalf of Employees as provided in the Adoption Agreement. The Qualified Nonelective Contributions will be allocated to each eligible Participant's Qualified Nonelective Contribution Account in the ratio in which each eligible Participant's Compensation for the Plan Year bears to the total Compensation of all eligible Participants for such Plan Year. (b) Separate Account. Qualified Nonelective Contributions shall be allocated to each Eligible Participant's Qualified Nonelective Contribution Account. (c) Vesting. Qualified Nonelective Contributions shall be fully vested and nonforfeitable at all times. (d) Distributions. Qualified Nonelective Contributions and income allocable thereto shall be distributable only in accordance with Section 4.10. 4.5 Maximum Amount of Elective Deferrals (a) General Rule. A Participant's Elective Deferrals are subject to any limitations imposed in the Adoption Agreement and any further limitations under the Plan. No Participant shall be permitted to have Elective Deferrals made under this Plan or any other CODA maintained by the Employer or an Affiliated Employer, during any calendar year beginning after 1986, in excess of the adjusted dollar limitation of section 402(g) of the Code. Other dollar limitations may apply under section 402(g) of the Code to the extent that a Participant makes Elective Deferrals to arrangements other than CODAs (see also sections 402(h)(1)(B), 403(b), 457, and 501(c)(18) of the Code). (b) Distribution of Excess Elective Deferrals. A Participant may allocate to the Plan any Excess Deferrals made during a calendar year by notifying the Committee on or before the date specified in the Adoption Agreement of the amount of the Excess Elective Deferrals to be assigned to the Plan. A Participant shall be deemed to notify the Committee of any Excess Elective Deferrals that arise by taking into account only those Elective Deferrals made to this Plan and any other plans of the Employer. Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 to Participants to whose accounts Excess Elective Deferrals were allocated for the preceding year and who claim Excess Elective Deferrals for such taxable year no later than the date specified in the Adoption Agreement. (c) Determination of Income or Loss. Excess Elective Deferrals shall be adjusted for income or loss for the taxable year. Unless indicated otherwise by the Committee, the income or loss allocable to Excess Elective Deferrals is the income or loss allocable to the Participant's Elective Deferral Account for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Elective Deferrals for the year and the denominator is the Participant's account balance attributable to Elective Deferrals without regard to any income or loss occurring during such taxable year. If the Committee selects another method in order to compute the income or loss, the method selected must not violate the requirements of Code section 401(a)(4) and must be used consistently for all Plan participants and for all corrective distributions under the Plan for the taxable year. 4.6 Average Actual Deferral Percentage Tests (a) General Rule. The Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees for each Plan Year beginning on or after January 1, 1987 and the Average Actual Deferral Percentage for Eligible Participants who are Non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (1) The Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Eligible Participants who are Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; (2) The Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Actual Deferral Percentage for Eligible Participants who are Non-Highly Compensated Employees for the Plan Year multiplied by 2.0, provided that the Average Actual Deferral Percentage for Eligible Participants who are Highly Compensated Employees does not exceed the Average Actual Deferral Percentage for Eligible Participants who are Non-Highly Compensated Employees by more than two (2) percentage points. (1) The Actual Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferrals (and, if applicable, Qualified Nonelective Contributions or Qualified Matching Contributions, or both) allocated for his account under two or more CODAs, that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Nonelective Contributions and Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more CODAs that have different Plan Years, all CODAs ending with or within the same calendar year shall be treated as a single arrangement. (2) In the event that this Plan satisfies the requirements of sections 401(a)(4), 401(k) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Actual Deferral Percentage of Eligible Participants as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy section 401(k) of the Code only if they have the same Plan Year. (3) For purposes of the Average Actual Deferral Percentage of an Eligible Participant who is a 5 percent owner or one of the 10 most highly-paid Highly Compensated Employees, the Elective Deferrals (and, if applicable, Qualified Nonelective Contributions or Qualified Matching Contributions, or both) and Compensation of such Participant shall include the Elective Deferrals (and, if applicable, Qualified Nonelective Contributions and Qualified Matching Contributions or both), and Compensation for the Plan Year of Family Members. Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate employees in determining the Actual Deferral Percentage both for Eligible Participants who are Non-Highly Compensated Employees and for Eligible Participants who are Highly Compensated Employees. (4) Notwithstanding anything in this Plan to the contrary, Qualified Nonelective Contributions and Qualified Matching Contributions used to meet the Average Actual Deferral Percentage tests may be made at any time before the last day of the twelve (12) month period immediately following the Plan Year to which the contributions relate. (5) The determination and treatment of the Elective Qualified Matching Contributions and the Actual Deferral Percentage of any Eligible Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (6) The Employer shall maintain adequate records to demonstrate compliance with the Average Actual Deferral Percentage tests, including the extent to which Qualified Nonelective and Qualified Matching Contributions are taken into account. (c) Distribution of Excess Contributions. Notwithstanding any other provision of the Plan except Section 4.6(d) below, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to Participants to whose accounts Excess Contributions were allocated for the preceding Plan Year. The amount of Excess Contributions to be distributed shall be reduced by the amount of any Excess Contributions recharacterized in accordance with Section 4.6(d) below. Distributions of Excess Contributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each Highly Compensated Employee. Excess Contributions shall be allocated to Participants who are subject to the family member aggregation rules of section 414(q)(6) of the Code in the manner prescribed by the regulations. [If such excess amounts are not distributed or recharacterized (in accordance with Section 4.6(d) below) within 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, then section 4979 of the Code imposes a ten percent (10%) excise tax on the Employer maintaining the Plan with respect to such amounts.] Excess Contributions of Participants who are subject to the Family Member aggregation rules described in Section 4.6(b)(3) shall be allocated among the Family Members in proportion to the Elective Deferrals (and amounts treated as Elective Deferrals) of each Family Member that is combined to determine the combined Actual Deferral Percentage. (1) Determination of Income or Loss. Excess Contributions shall be adjusted for income or loss for the Plan Year. Unless indicated otherwise by the Committee, the income or loss allocable to Excess Contributions is the income or loss allocable to the Participant's Elective Deferrals (and, if applicable, Qualified Nonelective Contributions or Qualified Matching Contributions or both) for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Contributions for the year and the denominator is the Participant's account balance attributable to Elective Deferrals (and, if applicable, Qualified Nonelective Contributions or Qualified Matching Contributions or both) without regard to any income or loss occurring during such Plan Year. If the Committee selects another method in order to compute the income or loss, the method selected must not violate the requirements of Code section 401(a)(4) and must be used consistently for all Plan participants and for all corrective distributions under the Plan for the Plan Year. (2) Accounting for Excess Contributions. Excess Contributions shall be distributed first from the Participant's account balance attributable to Elective Deferrals and (to the extent used in the Average Actual Deferral Percentage tests) Qualified Matching Contributions in proportion to the Participant's Elective Deferrals and Qualified Matching Contributions for the Plan Year. Excess Contributions shall be distributed from the Participant's Qualified Nonelective Contribution Account only to the extent that such Excess Contributions exceed the Participant's account balance attributable to Elective Deferrals and Qualified Matching Contributions. (d) Recharacterization of Excess Contributions. If the Plan provides for Thrift Contributions by Participants and if permitted in the Adoption Agreement, each Participant to whom Excess Contributions are allocable may elect, in lieu of distribution under Section 4.6(c) above, that all or a portion of such Excess Contributions be recharacterized as Thrift Contributions no later than the later of (i) 2 1/2 months after the last day of the Plan Year in which such excess amounts arose or (ii) October 24, 1988. Recharacterization is deemed to occur no earlier than the date the last Highly Compensated Employee is informed in writing of the amount recharacterized and the consequences thereof. In no event may the amount of Excess Contributions recharacterized for any Plan Year exceed the amount of Elective Deferrals for such Plan Year. Excess Contributions may not be recharacterized as Thrift Contributions to the extent that, in combination with the Thrift Contributions actually made for the Plan Year, they exceed the maximum amount of Thrift Contributions permitted under the Plan (prior to the application of the Contribution Percentage tests of Section 4.7). Recharacterized Excess Contributions shall be treated as Thrift Contributions for purposes of the Contribution Percentage tests of Section 4.7. However, no matching Employer contribution shall be made with respect to Recharacterized Contributions. In addition, recharacterized Excess Contributions shall be reported to the Internal Revenue Service and the Participant as employee contributions in accordance with such rules as the Internal Revenue Service may prescribe and shall be accounted for as Voluntary Contributions for purposes of sections 72 and 6047 of the Code. Recharacterized Excess Contributions will be taxable to the Participant for the Participant's taxable year in which the Participant would have received them in cash. Recharacterized Excess Contributions will be taxable to the Participant for the Participant's taxable year in which the Participant would have received them in cash. Recharacterized Excess Contributions shall remain non-forfeitable and shall continue to be treated for all other purposes, including the limitations on distributions of section 401(k), the deduction limitations of section 404 of the Code, the contribution limitations of section 415 of the Code and the top heavy rules of section 416 of the Code, as Elective Deferrals, except that Recharacterized Excess Contributions which relate to Plan Years beginning before January 1, 1989 shall be treated as employee contributions for purposes of section 401(k)(2) of the Code. Recharacterized Excess Contributions shall be allocated to the Participant's Elective Deferral Account. 4.7 Average Contribution Percentage Tests (a) General Rule. The Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for each Plan Year beginning on or after January 1, 1987 and the Average Contribution Percentage for Eligible Participants who are Non-Highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (1) The Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Eligible Participants who are Non-highly Compensated Employees for the Plan Year multiplied by 1.25; or (2) The Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Eligible Participants who are Non-highly Compensated Employees for the Plan Year multiplied by two (2), provided that the Average Contribution Percentage for Eligible Participants who are Highly Compensated Employees does not exceed the Average Contribution Percentage for Eligible Participants who are Non-highly Compensated Employees by more than two (2) percentage points. (1) Effective for Plan Years beginning on or after January 1, 1989, if one or more Highly Compensated Employees participate in both a CODA and a plan subject to the Average Contribution Percentage tests maintained by the Employer and the sum of the Average Actual Deferral Percentage and Average Contribution Percentage of those Highly Compensated Employees subject to either or both tests exceeds the "Aggregate Limit" (as defined in (2) below), then the Average Contribution Percentage of those Highly Compensated Employees who also participate in a CODA will be reduced (beginning with such Highly Compensated Employee whose Contribution Percentage is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The Average Actual Deferral Percentage and Average Contribution Percentage of the Highly Compensated Employees are determined after any corrections required to meet the Average Actual Deferral Percentage and Average Contribution Percentage tests. Notwithstanding the foregoing, the Multiple Use limitations of Section 4.7 (b) do not apply if the Average Actual Deferral Percentage of Eligible Participants who are Highly Compensated Employees does not exceed 1.25 multiplied by the Average Actual Deferral Percentage of all other Eligible Participants and the Average Contribution Percentage of Eligible Participants who are Highly Compensated Employees does not exceed 1.25 multiplied by the Average Contribution Percentage of all other Eligible Participants. (2) For this purpose, "Aggregate Limit" shall mean the greater of the limit produced by (A) or (B) below: (A) the sum of (i) one hundred twenty-five percent (125%) of the greater of the Average Actual Deferral Percentage of the Non-Highly Compensated Employees eligible to participate in the CODA for the Plan Year or the Average Contribution Percentage of the Non-Highly Compensated Employees eligible to participate under the Plan subject to section 401(m) of the Code for the Plan Year beginning with or within the Plan Year of the CODA, and (ii) two (2) plus the lesser of such Average Actual Deferral Percentage or Average Contribution Percentage (however, this amount shall not exceed two hundred percent (200%) of the lesser such Average Actual Deferral Percentage or Average Contribution Percentage). (B) the sum of (i) one hundred twenty-five percent (125%) of the lesser of the Average Actual Deferral Percentage of the Non-Highly Compensated Employees eligible to participate in the CODA for the Plan Year or the Average Contribution Percentage of the Non-Highly Compensated Employees eligible to participate under the Plan subject section 401(m) of the Code for the Plan Year beginning with or within the Plan Year of the CODA, and (ii) two (2) plus the greater of such Average Actual Deferral Percentage or Average Contribution Percentage (however, this amount shall not exceed two hundred percent (200%) of the greater of such Average Actual Deferral Percentage or Average Contribution Percentage). (1) For purposes of this Section 4.7, the Contribution Percentage for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his account under two or more Plans described in section 401(a) of the Code, or CODAs, that are maintained by the Employer or an Affiliated Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each Plan. If a Highly Compensated Employee participates in two or more CODAs that have different Plan Years, all CODAs ending with or within the same calendar year shall be treated as a single arrangement. (2) In the event that this Plan satisfies the requirements of sections 401(a)(4), 401(m) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentages of Participants as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy section 401(m) of the Code only if they have the same Plan Year. (3) For purposes of determining the Contribution Percentage of an Eligible Participant who is a 5-percent owner or one of the 10 most highly-paid Highly Compensated Employees, the Contribution Percentage Amounts and Compensation of such Participant shall include the Contribution Percentage Amounts and Compensation for the Plan Year of Family Members. Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate employees in determining the Average Contribution Percentage both for Eligible Participants who are Non-Highly Compensated Employees and for Eligible Participants who are Highly Compensated Employees. (4) For purposes of the Contribution Percentage tests, Voluntary Contributions and Thrift Contributions are considered to have been made in the Plan Year in which contributed to the Fund. Notwithstanding anything in this Plan to the contrary, Matching Contributions will be considered made for a Plan Year if allocated to such year and made no later than the end of the twelve (12) month period beginning on the day after the close of the Plan Year. (5) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (6) The Employer shall maintain adequate records to demonstrate compliance with the Average Contribution Percentage tests. (d) Distribution of Excess Aggregate Contributions. Notwithstanding any other provision of this Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if forfeitable, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. [If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, then section 4979 of the Code imposes a ten percent (10%) excise tax on the Employer maintaining the Plan with respect to such amounts]. Excess Aggregate Contributions of Participants who are subject to the Family Member aggregation rules described in Section 4.7(c)(3) shall be allocated among the Family Members in proportion to the Thrift Contributions, Voluntary Contributions, and Matching Contributions (or amounts treated as Matching Contributions) of each Family Member that is combined to determine the combined Actual Contribution Percentage. (1) Determination of Income or Loss. The Excess Aggregate Contributions shall be adjusted for income or loss for the Plan Year. Unless indicated otherwise by the Committee, the income or loss allocable to Excess Aggregate Contributions is the income or loss allocable to the Participant's Voluntary Contribution Account, Thrift Account and Employer Matching Contribution Account for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Aggregate Contributions for the year and the denominator is the Participant's account balance(s) attributable to Contribution Percentage Amounts without regard to any income or loss occurring during such Plan Year. If the Committee selects another method in order to compute the income or loss, the method selected must not violate the requirements of Code section 401(a)(4) and must be used consistently for all Plan participants and for all corrective distributions under the Plan for the Plan Year. (2) Treatment of Forfeitures. Forfeitures of Excess Aggregate Contributions shall be allocated to Participants' Accounts or applied to reduce Employer contributions, as elected by the Employer in the Adoption Agreement, under Section 4.2. If forfeitures are reallocated to the accounts of Participants under Section 4.2, forfeitures of Excess Aggregate Contributions shall be allocated in the same manner as Matching Contributions, except that no such forfeitures shall be allocated to any Highly Compensated Employee. (3) The determination of the Excess Aggregate Contributions shall be made after first determining the Excess Elective Deferrals pursuant to Section 4.5, and then determining the Excess Contributions pursuant to Section 4.6. (a) If Employer Discretionary Contributions are not integrated with Social Security and a Participant's Employer Discretionary Contributions and Matching Contribution Accounts are 100% vested at the time of distribution, and if permitted by the Adoption Agreement, a Participant may make withdrawals from his Employer Discretionary Contributions and Matching Contribution Accounts, for any reason, after attainment of age fifty-nine and one-half (59 1/2). (b) If permitted by the Adoption Agreement, a Participant may make withdrawals from his Elective Deferral Account or Qualified Nonelective Contribution Account, for any reason, after attainment of age fifty-nine and one-half (59 1/2). (c) A withdrawal under (a) or (b) above may be made at such time as the Committee shall designate, but not more than quarterly during a Plan Year provided that no single withdrawal shall be less than five hundred dollars ($500) and a withdrawal by a Participant prior to his separation from service may never exceed the smaller of the actual amount contributed to the account or the adjusted value of the account. (d) If the Plan is subject to the Automatic Annuity Rules of Section 8.2, the written consent of the Participant's spouse (consistent with the requirements for a Qualified Election under Section 8.2) must be obtained with respect to any withdrawal. 4.9 Distribution on Account of Financial Hardship (a) If elected by the Employer in the Adoption Agreement, distributions may be made from a Participant's Elective Deferral, Qualified Nonelective Contribution Account, vested portion of the Participant's Employer Discretionary Contribution Account, or the vested portion of the Employer Matching Contribution Account on account of financial hardship if the distribution is necessary in light of the immediate and heavy financial needs of the Participant. Effective for Plan Years beginning on or after January 1, 1989, distributions on account of financial hardship with respect to Elective Deferrals shall be limited to the amount of the Participant's Elective Deferrals and income allocable to such contributions credited to the Participant's Elective Deferral Account as of the end of the last Plan Year ending before July 1, 1989; neither the income allocable to Elective Deferrals credited to a Participant's Elective Deferral Account after the end of the last Plan Year ending before July 1, 1989 nor a Participant's Qualified Non-elective Contribution Account shall be available for such distributions. (b) A distribution on account of financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship. With respect to the Elective Deferral Account, and the Qualified Nonelective Contribution Account, the determination of the existence of financial hardship, and the amount required to meet the immediate financial need created by the hardship shall be made by the Committee, in accordance with the criteria specified in (c) below. With respect to the Employer Discretionary Contribution Account and the Employer Matching Contribution Account, the determination of the existence of financial hardship, and the amount required to meet the immediate financial need created by the hardship shall be made by the Committee, in accordance with the criteria specified in (d) below. If the Plan is subject to the Automatic Annuity Rules of Section 8.2, the written consent of the Participant's spouse (consistent with the requirements for a Qualified Election under Section 8.2) must be obtained with respect to any withdrawal on account of financial hardship. The Committee shall establish written procedures specifying the requirements for distributions on account of hardship, including the forms to be submitted. Distributions of amounts under this Section shall be made as soon as administratively feasible. (c) (1) Immediate and Heavy Financial Need. Hardship distributions will be allowed only on account of: (i) Expenses for medical care (described in section 213(d) of the Code) incurred by the Employee, the Employee's spouse, or any dependents of the Employee (as defined in section 152 of the Code) or necessary for these persons to obtain such care; (ii) Purchase (excluding mortgage payments) of a principal residence (iii) Payment of tuition and related educational fees for the next 12 months of post-secondary education for the Employee, the Employee's spouse, children or (iv) The need to prevent the eviction of the Employee from his principal residence or foreclosure on the mortgage of the (v) Such other financial need which the Commissioner of Internal Revenue, through the publication of revenue rulings, notices and other documents of general applicability, deems to be immediate and heavy. (2) Distribution Necessary to Satisfy Financial Need. A distribution shall not be made on account of a financial need unless all of the following requirements are satisfied: (i) The distribution is not in excess of the amount of the immediate and heavy financial need (including amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the (ii) The Employee has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer; (iii) Elective contributions and employee contributions under this Plan and all other qualified and maintained by the Employer (other than mandatory contributions to a defined benefit plan) shall be suspended for at least twelve (12) months after receipt of the hardship distribution. For this purpose, the phrase "qualified and nonqualified deferred compensation plans" includes stock option, stock purchase and similar plans, and cash or deferred arrangements under a cafeteria plan, within the meaning of Section 125 of the Code. It does not include health or (iv) The Plan, and all other plans maintained by the Employer, provide that the Employee may not make elective contributions for the Employee's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under section 402(g) of the Code for such next taxable year less the amount of such Employee's elective contributions for the taxable year of the hardship distribution. An Employee shall not fail to be treated as an Eligible Participant for purposes of the Actual Deferral Percentage tests of Section 4.6 merely because his Elective Deferrals are suspended in accordance with this provision. (d) Immediate and Heavy Financial Need. The determination of whether an immediate and heavy financial need exists shall be made by the Committee in a uniform and nondiscriminatory manner. The criteria may include the events described in Section 4.9(c) of this plan. (e) If a distribution is made pursuant to this Section when the Participant has a nonforfeitable right to less than 100 percent of his Account balance derived from contributions made by the Employer and the Participant may increase the nonforfeitable percentage in the account: (1) A separate account will be established for the Participant's interest in the Plan as of the time of the distribution, and (2) At any relevant time the Participant's nonforfeitable portion of the separate account will be equal to an amount ("X") determined by the formula: X = P(AB + (R x D)) - (R x D) For purposes of applying the formula: P is the nonforfeitable percentage at the relevant time, D is the amount of the distribution and R is the ratio of the Account balance AB at the relevant time to the Account balance after distribution. Except as provided in the Adoption Agreement, Elective Deferrals, Qualified Nonelective Contributions, Qualified Matching Contributions and income allocable thereto are not distributable to the Participant, or the Participant's Beneficiary, in accordance with the Participant's or Beneficiary's election, earlier than upon separation from service, death, or Total and Permanent Disability. Distribution (if elected in the Adoption Agreement) upon termination of the Plan without the establishment or maintenance of a successor plan, the Employer's sale of substantially all of the assets of a trade or business or the sale of the Employer's interest in a subsidiary may only be made, after March 31, 1988, in a lump sum distribution within the meaning of section 401(k)(10)(B) of the Code. Unless the Plan is a Profit Sharing Plan exempt from the Automatic Annuity rules of Section 8.2 pursuant to Section 8.3, all distributions that may be made pursuant to one or more of the foregoing distributable events are subject to the spousal and Participant consent requirements contained in sections 401(a)(11) and 417 of the Code. CONTRIBUTIONS AND CREDITS TO TARGET BENEFIT PLANS [All provisions regarding target benefit plan contributions are in the Adoption Agreement for Dreyfus Standardized Prototype Target Benefit Plan No. 01004]. Contributions under Sections 3.1, 4.1, 4.4(3), 4.4(4), 4.4(5) and 5.1 shall be made no later than the time prescribed by law (including any extensions thereof) for filing the Employer's federal income tax return for the Plan Year for which they are made. All contributions made by an Employer shall be conditioned upon their deductibility by the Employer for income tax purposes; provided, however, that no contributions shall be returned to an Employer except as provided in Section 6.3. 6.3 Return of Employer Contributions Notwithstanding any other provision of this Plan, contributions made by an Employer may be returned to such Employer if: (a) the contribution was made by reason of a mistake of fact and is returned to the Employer within one year of the mistaken (b) the contribution was conditioned upon its deductibility by the Employer for income tax purposes, the deduction was disallowed and the contribution is returned to the Employer within one year after the disallowance of the deduction, or (c) the contribution was conditioned upon initial qualification of the Plan, the Plan was submitted to the Internal Revenue Service for a determination as to its initial qualification within the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted or such later date as the Secretary of the Treasury may prescribe, the Plan received an adverse determination, and the contribution is returned to the Employer within one year after the date of the adverse determination. Employer contributions may be returned even if such contributions have been allocated to a Participant's Account which is fully or partially nonforfeitable and it is necessary to adjust said Account to reflect the return of the Employer contributions. The amount which may be returned to the Employer is the excess of the amount contributed over the amount that would have been contributed had there not occurred the circumstances causing the excess. Earnings attributable to the excess contribution may not be returned to the Employer, but losses thereto shall reduce the amount to be so returned. Furthermore, if the withdrawal of the amount attributable to the excess contribution would cause the balance of the individual Account of any Participant to be reduced to less than the balance which would have been in the Account had the excess amount not been contributed, then the amount to be returned to the Employer shall be limited to avoid such reduction. (a) If the Participant does not participate in, and has never participated in another qualified plan or a welfare benefit fund, as defined in section 419(e) of the Code, maintained by the Employer, or an individual medical benefit account, as defined in section 415(l)(2) of the Code, maintained by the Employer, or a simplified employee pension, as defined in section 408(k) of the Code, maintained by the Employer which provides an Annual Addition, the amount of Annual Additions which may be credited to the Participant's Accounts for any Limitation Year will not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's Accounts would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. (b) Prior to the determination of the Participant's actual Compensation for a Limitation Year, the Maximum Permissible Amount may be determined on the basis of the Participant's estimated annual compensation for such Limitation Year. Such estimated annual compensation shall be determined on a reasonable basis and shall be uniformly determined for all Participants similarly situated. (c) As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for such Limitation Year shall be determined on the basis of the Participant's actual Compensation for such Limitation Year. (d) If, pursuant to Subsection (c) above or as a result of the allocation of forfeitures, there is an Excess Amount with respect to a Participant for a Limitation Year, such Excess Amount shall be disposed of as follows: (1) First, any deferrals made pursuant to a salary reduction agreement or other deferral mechanism and Thrift/Voluntary Employee contributions, to the extent that the return would reduce the Excess Amount, shall be returned to the Participant. (2) Unless otherwise specified in the Adoption Agreement, if after the application of paragraph (1) an Excess Amount still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the Excess Amount in the Participant's Accounts will be used to reduce Employer contributions (including any allocation of forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary. (3) If after the application of paragraph (1) an Excess Amount still exists, and the Participant is not covered by the Plan at the end of the Limitation Year, the Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year (4) If a suspense account is in existence at any time during the Limitation Year pursuant to this Section, it will not participate in the allocation of the Trust's investment gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts before any Employer or any employee contributions may be made to the Plan for that Limitation Year. Excess Amounts may not be distributed to Participants or former Participants. (e) Subsections (e), (f), (g), (h), (i) and (j) apply if, in addition to this Plan, the Participant is covered under another qualified master or prototype defined contribution plan maintained by the Employer or a welfare benefit fund, as defined in section 419(e) of the Code, maintained by the Employer or an individual medical benefit account, as defined in section 415(l)(2) of the Code, maintained by the Employer, or a simplified employee pension maintained by the Employer which provides an Annual Addition, during any Limitation Year. The Annual Additions which may be credited to a Participant's Accounts under this Plan for any such Limitation Year will not exceed the Maximum Permissible Amount reduced by the Annual Additions credited to a Participant's account under the other qualified master or prototype defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions for the same Limitation Year. If the Annual Additions with respect to the Participant under other qualified master or prototype defined contribution plans, welfare benefit funds, individual medical accounts, and simplified employee pensions maintained by the Employer are less than the Maximum Permissible Amount and the Employer contribution that would otherwise be contributed or allocated to the Participant's Accounts under this Plan would cause the Annual Additions for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the Annual Additions under such plans and welfare benefit funds for the Limitation Year will equal the Maximum Permissible Amount. If the Annual Additions with respect to the Participant under such other qualified master or prototype defined contribution plans, and welfare benefit funds, individual medical accounts, and simplified employee pensions in the aggregate are equal to or greater than the Maximum Permissible Amount, no amount will be contributed or allocated to the Participant's Accounts under this Plan for the Limitation Year. (f) Prior to determining the Participant's actual Compensation for the Limitation Year, the Employer may determine the Maximum Permissible Amount based on the Participant's estimated annual compensation in the manner described in Subsection (b). (g) As soon as administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for such Limitation Year shall be determined on the basis of the Participant's actual Compensation for such Limitation Year. (h) If pursuant to Subsection (g) above or as a result of the allocation of forfeitures, a Participant's Annual Additions under this Plan and all such other plans result in an Excess Amount for a Limitation Year, the Excess Amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a simplified employee pension will be deemed to have been allocated first, followed by Annual Additions to a welfare benefit fund or individual medical account, regardless of the actual allocation date. (i) If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of: (1) the total Excess Amount allocated as of such date, times, (2) the ratio of (A) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan, to (B) the total Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan and all other qualified Master and Prototype defined contribution plans. (j) Any Excess Amounts attributed to this Plan shall be disposed of as provided in Subsection (d). (k) If the Participant is covered under another qualified defined contribution plan maintained by the Employer which is not a Master or Prototype plan, Annual Additions which may be credited to the Participant's Accounts under this Plan for any Limitation Year will be limited in accordance with Subsections (e), (f), (g), (h), (i) and (j) as though the other plan were a Master or Prototype plan unless the Employer provides other limitations in the Adoption Agreement. (l) If the Employer maintains, or at any time maintained, a qualified defined benefit plan (other than the Sponsor's paired plan number 02001, covering any Participant in this Plan, the sum of the Participant's Defined Benefit Fraction and Defined Contribution Fraction will not exceed one (1.0) in any Limitation Year. Unless the Employer elects otherwise in the Adoption Agreement, this limitation will be met by freezing or reducing the rate of benefit accrual under the qualified defined benefit plan. (m) For purposes of this Section 6.4, the following definitions shall apply: (1) "Annual Additions" shall mean the sum of the following credited to a Participant's account for the Limitation Year: All excess deferrals as described in section 402(g) of the Code, all excess contributions as defined in section 401(k)(8)(B) of the Code, (including amounts recharacterized), and all excess aggregate contributions as defined in section 401(m)(6)(B) of the Code, regardless of whether such amounts are distributed or forfeited, shall continue to be treated as Annual Additions. For purposes of the above, amounts reapplied to reduce Employer contributions under Subsections (d) and (j) shall also be included as Annual Additions. Amounts allocated, after March 31, 1984, to an individual medical benefit account, as defined in section 415(l)(2) of the Code, which is part of a pension or annuity plan maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in section 419(e) of the Code, maintained by the Employer, are treated as Annual Additions to a defined contribution plan, and allocations under a simplified employee pension. (2) Unless specified otherwise in the Adoption Agreement, for purposes of this Section, Compensation shall have the same meaning as described in Section 1.15 of the Plan. One of the following definitions of Compensation may be elected by the employer in the Adoption Agreement. (1) Information required to be reported under section 6041, 6051, and 6052, (Wages, Tips and Other Compensation Box on Form W-2). Compensation defined as wages as defined in section 3401(a) and all other payments of compensation to an employee by the employer (in the course of the employer's trade or business) for which the employer is required to furnish the employee a written statement under section 6041(d) and 6051(a)(3) of the Code. Compensation must be determined without regard to any rules under section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2)). (2) Section 3401(a) wages. Compensation is defined as wages within the meaning of section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2). (3) 415 safe-harbor compensation. Compensation is defined as wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered int he course of employment with the employer maintaining the plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in 1.62-2(c)), and excluding the following: (a) Employer contributions to a plan of deferred compensation which are not includable in the employee's gross income for the taxable year in which contributed, or employer contributions under a simplified employee pension plan to the extent such contributions are deductible by the employee, or any distributions from a plan of deferred compensation; (b) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the employee either becomes freely transferable or is no longer subject to a substantial (c) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock (d) Other amounts which received special tax benefits, or contributions made by the employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the employee). For any self-employed individual compensation will mean earned income. For limitation years beginning after December 31, 1991, for purposes of applying the limitations of this article, compensation for a limitation year is the compensation actually paid or made available during such limitation year. Notwithstanding the preceding sentence, compensation for a participant in a defined contribution plan who is permanently and totally disabled (as defined in section 22(e)(3) of the Internal Revenue Code) is the compensation such participant would have received for the limitation year if the participant had been paid at the rate of compensation paid immediately before becoming permanently and totally disabled; such imputed compensation for the disabled participant may be taken into account only if the participant is not a highly compensated employee (as defined in section 414(q) of the Code) and contributions made on behalf of such participant are nonforfeitable when made. (3) "Defined Benefit Fraction" shall mean a fraction, the numerator of which is the sum of the Participant's Projected Annual Benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of one hundred twenty-five percent (125%) of the dollar limitation determined for the Limitation Year under sections 415(b) and (d) of the Code or one hundred forty percent (140%) of the Highest Average Compensation (which shall mean the average compensation for the three consecutive years of Service with the Employer that produces the highest average), including any adjustments under section 415(b) of the Code. A year of Service with the Employer is the twelve (12) consecutive month period defined in Section 1.54 of the Plan. Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than one hundred twenty five percent (125%) of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of section 415 of the Code for all Limitation Years beginning before January 1, 1987. (4) "Defined Contribution Fraction" shall mean a fraction, the numerator of which is the sum of the Annual Additions to the Participant's Account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Participant's nondeductible Voluntary Contributions to all defined benefit plans, whether or not terminated, maintained by the Employer and the Annual Additions attributable to all welfare benefit funds, as defined in section 419(e) of the Code, and individual medical benefit accounts as defined in section 415(l)(2) of the Code, and simplified employee pensions, maintained by the Employer) and the denominator of which is the sum of the Maximum Aggregate Amounts for the current and all prior Limitation Years of Service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The Maximum Aggregate Amount in any Limitation Year is the lesser of one hundred twenty-five percent (125%) of the dollar limitation in effect under section 415(c)(1)(A) of the Code or thirty-five percent (35%) of the Participant's Compensation for such year. If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed one (1.0) under the terms of this Plan. Under the adjustment, an amount equal to the product of (A) the excess of the sum of the fractions over one (1.0) times (B) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. The Annual Additions for any Limitation Year beginning before January 1, 1987 shall not be recomputed to treat all Employee contributions as Annual Additions. (5) "Employer" shall mean the Employer that adopts this Plan and all members of a controlled group of corporations (as defined in section 414(b) of the Code and as modified by section 415(h) of the Code) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in section 414(c) and as modified by section 415(h) of the Code) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in section 414(m)); and any other entity required to be aggregated with the Employer under Section 414(o) ofthe Code. (6) "Excess Amount" shall mean the excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (7) "Limitation Year" shall mean the calendar year, unless another twelve (12) consecutive month period is elected in the Adoption Agreement. All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is changed by amendment, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (8) "Master or Prototype Plan" shall mean a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (9) "Maximum Permissible Amount" shall mean the lesser of: (A) thirty-thousand dollars ($30,000) (or, if greater, one-fourth (1/4th) of the defined benefit dollar limitation set forth in section 415(b)(1) of the Code as in effect for (B) twenty-five percent (25%) of the Participant's Compensation for the Limitation Year. The compensation limitation referred to in paragraph (B) above shall not apply to any contribution for medical benefits (within the meaning of section 401(h) or section 419A(f)(2) of the Code) which is otherwise treated as an Annual Addition under section 415(l)(1) or 419A(d)(2) of the Code. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different twelve (12) consecutive month period, the Maximum Permissible Amount will not exceed the defined contribution dollar limitation set forth in paragraph (A) above multiplied by the following fraction: Number of Months in the Short Limitation Year (10) "Projected Annual Benefit" shall mean the annual retirement benefit (adjusted to an actuarial equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of the Plan assuming: (A) The Participant will continue employment until the Normal Retirement Date under the Plan (or current date, if later) (B) the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. The Committee shall maintain the following separate Accounts, as are applicable, with respect to each Participant: (a) a Regular Account (as described in Article III), (b) an Elective Deferral Account (as described in Article IV), (c) a Qualified Nonelective Contribution Account (as described in Article (d) a Thrift Account (as described in Article IV), (e) a Matching Contribution Account (as described in Article IV), (f) a Voluntary Account (as described in Article X), (g) a Voluntary Tax-Deductible Account (as described in Article X), (h) a Rollover Account (as described in Article X), (i) an Employer Discretionary Contribution Account (as described in (j) a Transfer Account (as described in Article X). Each such Account shall be credited with the applicable contributions, forfeitures, earnings losses, expenses, and distributions. The maintenance of separate Accounts is only for accounting purposes and a segregation of the Trust Fund to each Account shall not be required. (a) Except as otherwise provided in subsection (b) below, or as directed by the Committee subject to approval by the Trustee, the assets of the Trust Fund shall be valued at their current fair market value as of each Valuation Date, and the earnings and losses of the Trust Fund since the immediately preceding Valuation Date shall be allocated to the separate Accounts of all Participants and former Participants under the Plan in the ratio that the fair market value of each such Account as of the immediately preceding Valuation Date, reduced by any distributions or withdrawals therefrom since such preceding Valuation Date, bears to the total fair market value of all separate Accounts as of the immediately preceding Valuation Date, reduced by any distributions or withdrawals therefrom since such preceding Valuation Date; provided, however, that if Participant-directed investments have been elected in the Adoption Agreement, the earnings and losses of each separate Account shall be allocated solely to such Account. Notwithstanding any other provision of the Plan, the Committee may, in its sole discretion, on any date other than the last day of the Plan Year, determine the value of an Account. If such a determination is made, the date of such determination shall be considered to be a Valuation Date. (b) If the plan is an Easy Retirement Plan, the dividends, capital gain distributions, and other earnings or losses received on any share or unit of a regulated investment company or collective investment fund, or on any other investment, that is specifically credited to a Participant's separate Accounts under the Plan and/or held under the Custodial Agreement shall be allocated to such separate Accounts and, in the absence of investment directions to the contrary, immediately reinvested, to the extent practicable, in additional shares or units of such regulated investment company or collective investment fund, or in such other investments. 6.7 Segregation of Former Participant's Account The Committee may segregate any portion of a former Participant's account balance which is retained in the Fund after his death or separation from service in an interest-bearing account and debited or credited only with income and charges attributable directly. Each Participant shall at all times have a fully vested interest in his Elective Deferral Account, Qualified Nonelective Account, Voluntary Account, Voluntary Tax-Deductible Account and Thrift Account. Each Participant's Regular Account, Employer Discretionary Contribution Account, and Employer Matching Contribution Account shall vest in accordance with the vesting schedule elected in the Adoption Agreement. If a Participant is not already fully vested in his Regular Account, Employer Discretionary Contribution Account, and Employer Matching Contributions Account, he shall become so upon reaching Normal Retirement Age or Early Retirement Age, or upon his death or Total and Permanent Disability. 7.2 Vesting of a Participant Except in the case of Plans subject to full and immediate vesting, a Participant's vested amount shall be calculated by multiplying his Regular Account balance, Employer Discretionary Contribution Account balance, and Employer Matching Contribution Account balance, if any, as determined on the Valuation Date following his termination of employment by his vested interest as determined under Section 7.1. In order to determine the vested interest of a Participant after a Service Break, the following rules shall apply: (a) Subject to (b) below, a former Participant who had a nonforfeitable right to all or a portion of the account balance derived from Employer contributions at the time of the Participant's termination will receive credit for all years of Service prior to a Service Break if the Participant completes a year of Service after returning to the employ of the Employer. (b) In the case of a Participant who have five (5) or more consecutive one (1) year Service Breaks, all Service after such Service Breaks will be disregarded for the purpose of vesting the Employer-derived account balance that accrued before such Service Breaks. Such Participants' pre-Service Break Service will count in vesting the post-Service Break Employer-derived account balance only if (1) such Participant has any nonforfeitable interest in the account balance attributable to Employer contributions at the time of separation from service, or (2) upon returning to service the number of consecutive one (1) year Service Breaks is less than the number of years of Service. Separate accounts will be maintained for the Participant's pre-Service Break and post-Service Break Employer-derived account balance. Both accounts will share in the earnings and losses of the Fund. 7.3 Amendment of Vesting Provisions No amendment to the vesting provisions pursuant to Section 7.1 shall deprive a Participant of his nonforfeitable rights to benefits accrued to the date of the amendment. Further, if the vesting provisions of the Plan are amended, or the Plan is amended in any way that directly or indirectly affects computation of a Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each Participant with at least three (3) years of Service may elect, within a reasonable period after the adoption of the amendment, to have his nonforfeitable percentage computed under the Plan without regard to such amendment. For Participants who do not have at least one Hour of Service in any Plan Year beginning on or after January 1, 1989, the preceding sentence shall be applied by substituting "five (5) years of Service" for "three (3) years of Service." The period during which the election may be made shall commence with the date the amendment is adopted and shall end on the later of (1) sixty (60) days after the amendment is adopted; (2) sixty (60) days after the amendment becomes effective; or (3) sixty (60) days after the Participant is issued written notice of the amendment by the Employer or Committee. (a) If a Participant terminates employment with the Employer and the value of the Participant's vested account balance derived from Employer and Employee contributions (other than accumulated deductible employee contributions) is not greater than $3,500, the Employee shall receive a distribution of the value of the entire vested portion of such account balance, and the nonvested portion will be treated as a forfeiture. For purposes of this Section 7.4, if the value of a Participant's vested account balance is zero, the Participant shall be deemed to have received a distribution of such vested account balance. A Participant's vested account balance shall not include Voluntary Tax-Deductible Contributions for Plan Years beginning before January 1, 1989. (b) If a Participant terminates employment with the Employer, and elects (with his or her spouse's consent) in accordance with Article VIII to receive the value of his or her vested account balance, the nonvested portion will be treated as a forfeiture. If the Participant elects to have distributed less than the entire vested portion of the account balance derived from Employer contributions, the part of the nonvested portion that will be treated as a forfeiture is the total nonvested portion multiplied by a fraction, the numerator of which is the amount of the distribution attributable to Employer contributions and the denominator of which is the total value of the vested Employer derived account balance. (c) If a Participant terminates employment with the Employer but does not receive a distribution described in (a) or (b) above, the non-vested portion of his account balance will be treated as a forfeiture upon the occurrence of a Service Break of five (5) consecutive years. (d) If a Participant who receives a distribution pursuant to this Section 7.4 resumes employment, the Participant's Employer-derived account balance will be restored to the amount on the date of distribution if the Participant repays to the Plan the full amount of the distribution attributable to Employer contributions before the earlier of (i) five (5) years after the Participant's Re-Employment Commencement Date or (ii) the date the Participant incurs five (5) consecutive one (1) year Service Breaks following the date of distribution. If a Participant is deemed to receive a distribution pursuant to this Section, and the Participant resumes employment covered under this Plan before the date the Participant incurs five (5) consecutive one year Service Breaks, upon the reemployment of such Participant, the Employer-derived account balance of the Participant will be restored to the amount on the date of such deemed distribution. BENEFITS ON RETIREMENT AND SEPARATION FROM SERVICE (a) Any Participant who terminates employment with the Employer for any reason (including Total and Permanent Disability as defined in Section 1.61 of the Plan) shall be entitled to receive the value of the vested portion of his Accounts (determined as of the Valuation Date coincident with or immediately subsequent to his termination with employment) as soon as administratively feasible after the date of his termination of employment. If the value of the Employee's vested account balance derived from Employer and Employee contributions (excluding, for Plan Years beginning before January 1, 1989, accumulated Voluntary Tax-Deductible Contributions) is greater than (or at the time of any prior distribution was greater than) $3,500, then no such amount shall be distributed prior to Normal Retirement Age (or age sixty-two (62), if later) unless the Participant consents to the distribution. If the Plan is subject to the Automatic Annuity rules of Section 8.2, then the consent of the Participant's spouse shall also be required to a distribution in any form other than a Qualified Joint and Survivor Annuity (as defined in Section 8.2). In the case of the Dreyfus Easy Retirement Plans (Plan Numbers 01005, and 01006), Participants who attain the Plan's Normal Retirement Age shall be entitled to receive the value of the vested portion of their Accounts. With respect to the Dreyfus standardized and non- standardized prototype profit-sharing plans (Plan Numbers 01002 and 01003) if permitted under the Adoption Agreement, Participants who attain the Plan's Normal Retirement Age shall be entitled to receive the value of the vested portion of their Accounts. The Committee shall provide the Participant with a written explanation of the material features and relative values of the optional forms of benefit available under the Plan. Such notice shall also notify the Participant of the right to defer distribution until a future date specified by the Participant (not permitted in the case of the Dreyfus Easy Retirement Plans -- Plan Numbers 01005 and 01006) or until Normal Retirement Age (or age sixty-two (62), if later), and if the Plan is subject to the Automatic Annuity Rules of Section 8.2, shall be provided during the period beginning ninety (90) days before and ending thirty (30) days before the Annuity Starting Date. (b) If the value of the Participant's vested account balance derived from Employer and Employee contributions (excluding, for Plan Years beginning before January 1, 1989, accumulated Voluntary Tax-Deductible Contributions) is not greater than $3,500, the Employee shall receive a distribution of the value of the entire vested portion of such account balance. However, no such distribution shall be made after the Annuity Starting Date unless the Participant and his or her spouse (or the Participant's surviving spouse) consent in writing to such distribution. (c) Unless the Participant elects otherwise, distribution of benefits shall commence no later than the sixtieth (60th) day after the close of the Plan Year in which the latest of the following events occurs: (i) the Participant reaches his Normal Retirement Age (or age (ii) the tenth (10th) anniversary of the year in which the Participant commenced participation in the Plan, or (iii) the Participant terminates employment with the Employer. The failure of a Participant or surviving spouse to consent to a distribution shall be deemed to be an election to defer commencement of benefit distributions sufficient to satisfy this Section. (d) Neither the consent of the Participant nor the Participant's spouse shall be required to the extent a distribution is necessary to satisfy section 401(a)(9) or section 415 of the Code. (e) This Article applies to distribution made on or after January 1, 1993. Notwithstanding any provision of the plan to the contrary that would otherwise limit a distributee's election under this Article, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (i) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 402(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (iv) Direct rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. The provisions of Section 8.2 through 8.4 shall take precedence over any conflicting provisions in this Plan. (a) Applicability of Automatic Annuity Requirements. Except as provided in Section 8.3 with respect to certain Profit Sharing Plans, the provisions of this Section shall apply to any Participant who is credited with at least one (1) Hour of Service with the Employer on or after August 23, 1984, and such other Participants as provided in Section 8.4. Qualified Joint and Survivor Annuity. Unless an optional form of benefit is selected pursuant to a Qualified Election within the ninety (90) day period ending on the Annuity Starting Date, a married Participant's Vested Account Balance shall be paid in the form of a Qualified Joint and Survivor Annuity and an unmarried Participant's Vested Account Balance will be paid in the form of a life annuity. The Participant may elect to have such annuity distributed upon attainment of the Earliest Retirement Age. Qualified Pre-Retirement Survivor Annuity. Unless an optional form of benefit has been selected within the Election Period pursuant to a Qualified Election, if a Participant dies before the Annuity Starting Date then the Participant's Vested Account Balance shall be paid in the form of a Qualified Pre-Retirement Survivor Annuity. The Surviving Spouse may elect to elect to have such annuity distributed within a reasonable period after the Participant's death. Definitions. For purposes of this Section 8.2, the following words shall have the following meanings: (i) "Earliest Retirement Age" shall mean the earliest date on which, under the Plan, the Participant could elect to receive retirement benefits. (ii) "Election Period" shall mean the period which begins on the first day of the Plan Year in which the Participant attains age thirty-five (35) and ends on the date of the Participant's death. If a Participant separates from service prior to the first day of the Plan Year in which age thirty-five (35) is attained, with respect to benefits accrued prior to separation, the Election Period shall begin on the date of separation. A Participant who will not yet attain age thirty-five (35) as of the end of any current Plan Year may make a special Qualified Election to waive the Qualified Pre-Retirement Survivor Annuity for the period beginning on the date of such election and ending on the first day of the plan year in which the Participant will attain age thirty-five (35). Such election shall not be valid unless the Participant receives a written explanation of the Qualified Pre-Retirement Survivor Annuity in such terms as are comparable to the explanation required under Section 8.2(b). Qualified Pre-Retirement Survivor Annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age thirty-five (35). Any new waiver on or after such date shall be subject to the full requirements of this Section 8.2. (iii) "Qualified Election" shall mean a Participant's waiver of a Qualified Joint and Survivor Annuity or a Qualified Pre-Retirement Survivor Annuity. Any such waiver must be consented to in writing by the Participant's Spouse. The Spouse's consent must: designate a specific Beneficiary (including any class of Beneficiaries or any contingent Beneficiaries, which may not be changed without spousal consent) or expressly permits designations by the Participant without any further spousal consent; acknowledge the effect of the election; and be witnessed by a member of the Committee or a Notary Public. Additionally, a Participant's waiver of the Qualified Joint and Survivor Annuity shall not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent (or the Spouse expressly permits designations by the Participant without any further spousal consent). Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of a member of the Committee that there is no Spouse or the Spouse cannot be located, a waiver will be deemed a Qualified Election. Any spousal consent (or deemed spousal consent) obtained under this provision will be valid only with respect to such Spouse. A consent that permits designations by the Participant without further consent by such Spouse must acknowledge that the Spouse has the right to limit consent to a specific Beneficiary and, where applicable, a specific form of benefit, and that the Spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in paragraph (b) below. (iv) "Qualified Joint and Survivor Annuity" shall mean an immediate annuity for the life of the Participant with a survivor annuity for the life of the Spouse which is fifty percent (50%) of the amount of the annuity which is payable during the joint lives of the Participant and the Spouse and which is the amount of benefit which can be purchased with the Participant's Vested Account Balance. (v) "Qualified Pre-Retirement Survivor Annuity" shall mean an annuity for the life of the Participant's surviving spouse purchased with the Participant's Vested Account Balance. (vi) "Spouse (Surviving Spouse)" shall mean the Spouse or Surviving Spouse of the Participant, provided that former spouse will be treated as the Spouse or Surviving Spouse to the extent provided under a qualified domestic relations order as described in section 414(p) of the Code. (vii) "Vested Account Balance" shall mean the aggregate value of the Participant's vested account balance derived from employer and employee contributions (including rollovers), whether vested before or upon death, including the proceeds of insurance contracts, if any, on the Participant's life. The provisions of this Section 8.2 shall apply to a Participant who is vested in amounts attributable to employer contributions, employee contributions (or both) at the time of death or distribution. Qualified Joint and Survivor Annuity. In the case of a Qualified Joint and Survivor Annuity as described above, the Committee shall provide each Participant within the period beginning ninety (90) days before and ending thirty (30) days before the Annuity Starting Date a written explanation of: (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of a Participant's Spouse; (iv) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity; and (v) the right, if any, to defer the commencement of benefits. Qualified Pre-Retirement Survivor Annuity. In the case of a Qualified Pre-Retirement Survivor Annuity as described above, the Committee shall provide each Participant with a written explanation of the Qualified Pre-Retirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements applicable to explaining a Qualified Joint and Survivor Annuity within whichever of the following periods ends last: (i) The period beginning on the first day of the Plan Year in which the Participant attains age thirty-two (32) and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age thirty-five (35). (ii) A reasonable period ending after a Participant enters the Plan. (iii)A reasonable period ending after Section 8.3 ceases to apply to a Profit Sharing Plan. (iv) A reasonable period after Section 8.2 first applies to a Participant. Notwithstanding the foregoing, notice must be provided within a reasonable period ending after termination of employment in the case of a Participant who terminates employment before attaining age 35. For purposes of applying the preceding paragraph, a reasonable period ending after the enumerated events described in (ii), (iii), and (iv) is the end of the two-year period beginning one year prior to the date the applicable event occurs, and ending one year after that date. In the case of a Participant who terminates employment before the Plan Year in which age thirty-five (35) is attained, notice shall be provided within the two-year period beginning one year prior to termination and ending one year after termination. If such a Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined. If a distribution is one to which sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations in given, provided that: (1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the participant, after receiving the notice,affirmatively elects a distribution. 8.3 Profit Sharing Plans: Exception from Automatic Annuity Requirements Unless otherwise specified in the Adoption Agreement, the provisions of Sections 8.2 and 8.4 shall be inoperative in the case of a Profit Sharing Plan if the following two (2) conditions are met: (1) the Participant cannot or does not elect payments in the form of a life annuity, and (2) on the death of the Participant, the Participant's Vested Account Balance (as defined in Section 8.2) will be paid to the Participant's Surviving Spouse (as defined in Section 8.2), but if there is no Surviving Spouse, or, if the Surviving Spouse has already consented in a manner conforming to a Qualified Election to a waiver of a Qualified Pre-Retirement Survivor Annuity (under Section 8.2), then to the Participant's Beneficiary. However, the foregoing shall not be operative with respect to a Participant if it is determined that this Profit Sharing Plan is a direct or indirect transferee of a defined benefit plan, money purchase pension plan (including a target benefit plan), stock bonus, or profit-sharing plan which is subject to the survivor annuity requirements of sections 401(a)(11) and 417 of the Code. 8.4 Transitional Rules Applicable to Joint and Survivor Annuities (a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by Section 8.2 must be give the opportunity to elect to have Section 8.2 apply if such Participant is credited with at least one (1) Hour of Service under this Plan or a predecessor plan in a Plan Year beginning on or after January 1, 1976, and such Participant had at least ten (10) years of Service when he or she terminated employment. (b) Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one (1) Hour of Service under this Plan or a predecessor Plan on or after September 2, 1974, and who is not otherwise credited with any Service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have his or her benefits paid in the manner set forth in paragraph (d) below. (c) The respective opportunities to elect (as described in paragraphs (a) and (b) above) must be afforded to the appropriate Participants during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to said Participants. (d) Any Participant who has elected pursuant to paragraph (b) above and any Participant who does not elect under paragraph (a) above or who meets the requirements of paragraph (a) except that such Participant does not have at least ten (10) Years of Service when he or she terminates employment, shall have his or her benefits distributed in accordance with all of the following requirements if benefits would have been payable in the form of a life annuity: (1) Qualified Joint and Survivor Annuity. If benefits in the form of a life annuity become payable to a married Participant who: (i) Begins to receive payments under the Plan on or after his (ii) Dies on or after his Normal Retirement Age while still working for the Employer; or (iii)Begins to receive payments on or after the Qualified Early (iv) Separates from service on or after attaining his Normal Retirement Age (or the Qualified Early Retirement Age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits; then such benefits shall be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant, with the consent of his or her Spouse, has elected otherwise during the election period which shall begin at least six (6) months before the Participant attains the Qualified Early Retirement Age (or the date the Participant begins participation in the Plan, if later) and end not more than ninety (90) days before the commencement of benefits. Any election hereunder shall be in writing and may be changed by the Participant, with the consent of his or her Spouse, at any time during the election period. (2) Election of Early Survivor Annuity. A Participant who is employed after attaining the Qualified Early Retirement Age will be given the opportunity to elect, during the election period, to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the Spouse under the Qualified Joint and Survivor Annuity if the Participant had retired on the day before his or her death. Any election under this provision will be in writing and may be changed by the Participant with the consent of his or her Spouse at any time. The election period begins on the later of (1) the ninetieth (90) day before the Participant attains the Qualified Early Retirement Age, or (2) the date on which participation begins, and ends on the date the Participant terminates employment. Notwithstanding the availability of the elections set forth above, in the event a Participant dies after attaining the Qualified Early Retirement Age while still employed by the Employer, but before reaching the Normal Retirement Date, the Participant's account balance as of the date of death shall be paid to the Participant's Spouse. If the Participant is not married, such benefit shall be paid to the Participant's designated Beneficiary or, if none, to the Participant's estate. (3) Definitions. For purpose of this Section 8.4, the following words shall have the following meanings: (i) "Qualified Joint and Survivor Annuity" shall mean an annuity for the life of the Participant with a survivor annuity for the life of his Spouse as described in Section 8.2. (ii) "Qualified Early Retirement Age" shall mean the latest of: (A) the earliest date, under the Plan, on which the Participant may elect to receive retirement benefits; (B) the first day of the one hundred twentieth (120th) month beginning before the Participant reaches his (C) the date on which the Participant begins participation. 8.5 Required Payment of Benefits (a) General Rule. Except as otherwise provided in Section 8.2, the requirements of this Section shall apply to any distribution of a Participant's account balance and will take precedence over any inconsistent provisions of the Plan. Unless otherwise specified, the provisions of this Section shall apply to calendar years beginning after December 31, 1984. All distributions required under this Section 8.5 shall be determined and made in accordance with the Income Tax Regulations under section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of section 1.401(a)(9)-2 of the regulations. (b) Limits on Distribution Periods. Distributions, if not made in a single-sum, may only be made over one of the following periods (or a combination thereof): (1) the life of the Participant; (2) the life of the Participant and a Designated Beneficiary; (3) a period certain not extending beyond the life expectancy of the Participant; or (4) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a Designated Beneficiary. Any annuity contract purchased and distributed to a Participant or his Beneficiary shall comply with the requirements of this Plan, and shall be made and endorsed as nontransferable. (c) Minimum Amounts to be Distributed. If the Participant's entire interest is to be distributed in other than a single sum, the following minimum distribution rules shall apply on or after the Required Beginning Date: (i) If a Participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's Designated Beneficiary or (2) a period not extending beyond the life expectancy of the Designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first distribution calendar year, must at least equal the quotient obtained by dividing the Participant's benefit by the applicable life expectancy. (ii) For calendar years beginning before January 1, 1989, if the Participant's spouse is not the designated Beneficiary, the method of distribution selected must assure that at least fifty percent (50%) of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (iii) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first distribution calendar year shall not be less than the quotient obtained by dividing the Participant's benefit by the lesser of (1) the applicable life expectancy or (2) if the Participant's spouse is not the Designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of section 1.401 (a)(9)-2 of the Income Tax Regulations. Distributions after the death of the Participant shall be distributed using the applicable life expectancy in paragraph (c)(i) above as the relevant divisor without regard to section 1.401 (a)(9)-2 of the regulations. (iv) The minimum distribution required for the Participant's first distribution calendar year must be made on or before the Participant's Required Beginning Date. The minimum distribution for other calendar years, including the minimum distribution for the distribution calendar year in which the Employee's Required Beginning Date occurs, must be made on or before December 31 of that distribution calendar year. (d) Commencement of Death Benefits. Upon the death of the Participant, the following distribution provisions shall take effect: (i) If the Participant dies after distribution of his or her interest has commenced, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. Upon the death of the Participant's Beneficiary, any undistributed interest shall be paid to the legal representatives of such Beneficiary's estate. (ii) If the Participant dies before distribution of his or her interest commences, the Participant's entire interest will be distributed by December 31 of the calendar year in which falls the fifth anniversary of the Participant's death except to the extent that an election is made to receive distributions in accordance with (1) or (2) below: (1) If any portion of the Participant's interest is payable to a Designated Beneficiary, distributions may be made in substantially equal installments over the life or over a period certain not greater than the life expectancy of the Designated Beneficiary commencing on or before December 31 of the calendar year immediately following the calendar year in which the Participant died. (2) If the Designated Beneficiary is the Participant's surviving spouse, the date distributions are required to begin in accordance with (1) above shall not be earlier than the later of (A) December 31 of the calendar year immediately following the calendar year in which the Participant died and (B) December 31 of the calendar year in which the Participant would have attained age seventy and one-half (70 1/2). If the Participant has not made an election pursuant to this Section 8.5(d)(ii) by the time of his or her death, the Participant's Designated Beneficiary must elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this Section, or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no Designated Beneficiary, or if the Designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest must be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (iii) For purposes of Section 8.5(d)(ii) above, if the surviving spouse dies after the Participant, but before payments to such spouse begin, the provisions of Section 8.5(d)(ii), with the exception of subparagraph (2) thereof, shall be applied as if the surviving spouse were the Participant. (iv) For purposes of this Section 8.5(d), any amount paid to a child of the Participant will be treated as if it had been paid to the Surviving Spouse if the amount becomes payable to the Surviving Spouse when the child reaches the age of majority. (v) For purposes of this Section 8.5(d), distribution of a Participant's interest is considered to begin on the Participant's Required Beginning Date (or, if Section 8.5(d)(iii) above is applicable, the date distribution is required to begin to the surviving spouse pursuant to Section 8.5(d)(ii) above). If distribution in the form of an annuity irrevocably commences to the Participant before the Required Beginning Date, the date distribution is considered to begin is the date distribution actually commences. (e) Definitions. For purposes of this Section 8.5, the following terms shall have the following meanings: (i) Designated Beneficiary. The individual who is designated as the Beneficiary under the Plan in accordance with section 401(a)(9) of the Code and the regulations thereunder. (ii) Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's Required Beginning Date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to Section 8.5(d) above. (iii) Life expectancy. The life expectancy (or joint and last survivor expectancy) calculated using the attained age of the Participant (or Designated Beneficiary) as of the Participant's (or Designated Beneficiary's) birthday in the applicable calendar year. The applicable calendar year shall be the first distribution calendar year. If annuity payments commerce before the required beginning date, the applicable calendar year is the year such payments commence. Life expectancy and joint and last survivor expectancy are computed by use of the expected return multiples in Tables V and VI of section 1.72-9 of the Income Tax Regulations. Unless otherwise elected by the Participant (or spouse, in the case of distributions described in Section 8.5(d)(ii)(2) above) by the time distributions are required to begin, life expectancies shall be recalculated annually. Such election shall be irrevocable as to the Participant (or spouse) and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. (A) The account balance as of the last valuation date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. (B) Exception for second distribution calendar year. For purposes of paragraph (A) above, if any portion of the minimum distribution for the first distribution calendar year is made in the second distribution calendar year on or before the Required Beginning Date, the amount of the minimum distribution made in the second distribution calendar year shall be treated as if it had been made in the immediately preceding distribution calendar year. (A) General rule. The Required Beginning Date of a Participant is the first day of April of the calendar year following the calendar year in which the Participant attains age seventy and one-half (70 1/2). (B) Transitional rules. The Required Beginning Date of a Participant who attains age seventy and one-half (70 1/2) before January 1, 1988, shall be determined in accordance with (1) or (2) below: (1) Non-Five percent owners. The Required Beginning Date of a Participant who is not a five percent (5%) owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age of seventy and one-half (70 1/2) occurs. (2) Five percent owners. The required beginning date of a Participant who is a five percent (5%) owner during any year beginning after December 31, 1979, is the first day of April following the later of: (i) the calendar year in which the Participant attains age seventy and one-half (70 1/2), or (ii) the earlier of the calendar year with or within which ends the plan year in which the Participant becomes a five percent (5%) owner, or the calendar year in which the Participant retires. The Required Beginning Date of a Participant who is not a five percent (5%) owner who attains age seventy and one-half (70 1/2) during 1988 and who has not retired as of January 1, 1989, is April 1, 1990. (C) Five percent owner. A Participant is treated as a five percent (5%) owner for purposes of this Section if such Participant is a five percent (5%) owner as defined in section 416(i) of the Code but without regard to whether the Plan is top-heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age sixty-six and one-half (66 1/2) or any subsequent Plan Year. (D) Once distributions have begun to a five percent (5%) owner under this Section, they must continue to be distributed, even if the Participant ceases to be a five percent (5%) owner in a subsequent year. (f) Transitional Rule. Notwithstanding the other requirements of this Section and subject to the requirements of Section 8.2, distribution on behalf of any Employee, including a five percent (5%) owner, may be made in accordance with all of the following requirements (regardless of when such distribution commences): (i) The distribution by the trust is one which would not have disqualified such trust under section 401(a)(9) of the Code as in effect prior to amendment by the Deficit Reduction Act of 1984. (ii) The distribution is in accordance with a method of distribution designated by the Employee whose interest in the trust is being distributed or, if the Employee is deceased, by a Beneficiary of such Employee. (iii)Such designation was in writing, was signed by the Employee or the Beneficiary, and was made before January 1, 1984. (iv) The Employee had accrued a benefit under the Plan as of December 31, 1983. (v) The method of distribution designated by the Employee or the Beneficiary specifies the time at which distribution will commence, the period over which distributions will be made, and in the case of any distribution upon the Employee's death, the Beneficiaries of the Employee listed in order of priority. A distribution upon death will not be covered by this transitional rule unless the information in the designation contains the required information described above with respect to the distributions to be made upon the death of the Employee. For any distribution which commences before January 1, 1984, but continues after December 31, 1983, the Employee, or the Beneficiary, to who such distribution is being made, will be presumed to have designated the method of distribution under which the distribution is being made if the method of distribution was specified in writing and the distribution satisfies the requirements in Subsections (i) through (v) above. If a designation is revoked, any subsequent distribution must satisfy the requirements of section 401(a)(9) of the Code and the regulations thereunder. If a designation is revoked subsequent to the date distributions are required to begin, the trust must distribute by the end of the calendar year following the calendar year in which the revocation occurs the total amount not yet distributed which would have been required to have been distributed to satisfy section 401(a)(9) of the Code and the regulations thereunder, but for the election under section 242(b)(2) of Pub. L. No. 97-248. For calendar years beginning after December 31, 1988, such distributions must meet the minimum distribution incidental benefit requirements in section 1.401(a)(9)-2 of the Income Tax Regulations. Any changes in the designation will be considered to be a revocation of the designation. However, the mere substitution or addition of another Beneficiary (one not named in the designation) under the designation will not be considered to be a revocation of the designation, so long as such substitution or addition does not alter the period over which distributions are to be made under the designation, directly or indirectly (for example, by altering the relevant measuring life). The rules of Q&A J-2 and J-3 of Income Tax Regulations section 1.401(a)(9)-1 shall apply to rollovers and transfers from one plan to another. 8.6 Available Forms of Distribution (a) If pursuant to Section 8.3, the Plan is a Profit Sharing Plan exempt from the Automatic Annuity Rules of Section 8.2, the normal form of distribution shall be a lump sum distribution. Unless specified otherwise in the Adoption Agreement, in lieu of the lump sum distribution, a Participant or Beneficiary may elect to receive installment payments payable monthly, quarterly, semi-annually or annually. (b) If the Plan is subject to the Automatic Annuity Rules of Section 8.2, the normal form of distribution shall be the applicable form of Automatic Annuity under Section 8.2. In lieu of the Automatic Annuity, a Participant or Beneficiary may elect a lump sum distribution or such other available forms of distribution as are set forth below or as are specified in the Adoption Agreement. Any such election by a Participant must be accompanied by the written consent of his spouse (consistent with the requirements for a Qualified Election under Section 8.2). The available forms of distribution shall be: (i) a joint and 100% survivor annuity contract purchased from an insurance company selected by the Committee. (ii) a single life annuity contract purchased from an insurance company selected by the Committee. (iii)a single life annuity contract, with 10 years guaranteed, purchased from an insurance company selected by the Committee. (iv) installments payable monthly, quarterly, semi-annually or annually. In the event a distribution of an account balance made to or on behalf of a Participant prior to the attainment of age fifty-nine and one-half (59 1/2) would be subject to the ten percent (10%) penalty tax set forth in section 72(t) or 72(m)(5) of the Code, the Participant may, within sixty (60) days of the distribution date, request that the distribution be transferred to another qualified retirement plan or an Individual Retirement Account as a rollover contribution if the distribution satisfies the requirements ofsection 402(a)(5) of the Code. Any balance in the Regular Account, Employer Discretionary Contribution Account or in the Employer Matching Contribution Account, if any, of a Participant who is separated from service, to which he is not entitled under the foregoing provisions, shall be forfeited and applied as provided in Sections 3.2 and 4.2 of this Plan, and Section X(E) of the Dreyfus Standardized/Paired Prototype Target Benefit Plan and Trust Adoption Agreement. (a) Subject to the provisions of Article VIII, upon the death of a Participant, such Participant's account balance shall be paid to his designated Beneficiary or if no such Beneficiary is designated or survives the Participant, to the legal representative of such Participant's estate. Such payment shall commence as soon as practicable after the Participant's death and after the Trustee is given such documentation as may be required under the provisions of the Trust Agreement or Custodial Agreement. (b) Subject to the provisions of the Custodial Agreement if the Plan is an Easy Retirement Plan, the Committee may prescribe the manner in which a Beneficiary is to be designated in writing and the Custodial Agreement, may prescribe the manner in which such designations shall be filed. Notwithstanding the foregoing, any designation (or change of designation) of a Beneficiary must be consented to by the Participant's Spouse pursuant to a Qualified Election under Section 8.2, if such Beneficiary is not the Participant's Spouse. Subject to the provisions of Article VIII, death benefits may be paid in any mode of benefit payment provided for in this Plan as elected by the Participant or Beneficiary, except in the event of the death of the Participant after payments have commenced under an annuity contract, by the Beneficiary. (a) Effective for Plan Years beginning January 1, 1987, non-deductible Voluntary Contributions shall not be permitted under this Plan. A separate Account shall be maintained for Voluntary Contributions made prior to such time. Such Account shall be nonforfeitable at all times. (b) A Participant may make withdrawals from the Voluntary Account at such time as the Committee shall designate, but not more than quarterly during a Plan Year provided that no single withdrawal shall be less than the total amount available for withdrawal under the other limitations of this Section 10.1 or five hundred dollars ($500), whichever is less. Notwithstanding the preceding sentence, if the Plan is an Easy Retirement Plan, a Participant may make such a withdrawal at any time. (c) If the Plan is subject to the Automatic Annuity rules of Section 8.2, the written consent of the Participant's spouse (consistent with the requirements for a Qualified Election under Section 8.2) must be obtained with respect to any withdrawal. (d) No forfeitures of amounts allocated to Participants from Employer contributions and earnings thereon, shall occur solely as a result of a Participant's withdrawal of voluntary contributions. (e) Voluntary Contributions for Plan years beginning after December 31, 1986 shall be subject to the Contribution Percentage tests and the rules applicable to Excess Aggregate Contributions set forth in Section 4.7. (a) Voluntary Tax-Deductible Contributions (within the meaning of section 72(o)(5)(A) of the Code) shall not be permitted under this Plan for taxable years beginning after December 31, 1986. A separate Voluntary Tax-Deductible Account shall be established for such contributions made for taxable years beginning on or before December 31, 1986. Such Account shall be nonforfeitable at all times. However, no part of the Voluntary Tax-Deductible Account will be used to purchase life insurance or available for loans under Article XII. (b) The Participant may withdraw any part of the Voluntary Tax-Deductible Account by making written application to the Committee. If the Plan is subject to the Automatic Annuity Rules of Section 8.2, the written consent of the Participant's Spouse (consistent with the requirements of a Qualified Election under Section 8.2) must be obtained to any withdrawal made after the first day of the first Plan Year beginning on or after January 1, 1989. 10.3 Transfers From Other Trusts Unless specified otherwise in the Adoption Agreement, the Committee may, in its discretion, direct the Trustee to accept a rollover contribution described in sections 401(a)(31), 402(a)(5), 403(a)(4) or 408(d)(3)(A)(ii) of the Code or a direct transfer of funds from a qualified retirement plan, provided that, in the opinion of counsel for the Employer, the transfer will not jeopardize the tax exempt status of the Plan or create adverse tax consequences to the Employer. The Committee shall exercise such discretion in a uniform and nondiscriminatory manner. A transfer or rollover contribution may be made on behalf of an Employee eligible to participate in the Plan who has not met the age and service requirements, if any, for participation. Such an Employee shall become a Participant on the date the Trustee accepts the rollover contribution or transfer for all purposes, except that no employer or employee contributions shall be made by or on behalf of such Employee and such Employee shall not share in Plan forfeitures until he has completed the age and service requirements for participation and become a Participant. A rollover contribution or transfer shall be maintained in a Participant's Rollover Account and Transfer Account, respectively. Notwithstanding the preceding sentence, amounts attributable to voluntary deductible employee contributions shall be maintained in a Participant's Voluntary Tax-Deductible Account. A Participant may take withdrawals from the Rollover Account at such time as the Committee shall designate, but not more than quarterly during a Plan Year, provided that no single withdrawal shall be less than the total amount available for withdrawal or five hundred dollars ($500) whichever is less. If the Plan is subject to the Automatic Annuity Rules of Section 8.2 and the Participant is married, the request for withdrawal must be consented to in writing by the Participant's spouse. Notwithstanding the preceding sentence, if the Plan is an Easy Retirement Plan, a Participant may make such a withdrawal at any time. Unless indicated otherwise in the Adoption Agreement, distributions shall be made from the Transfer Account upon meeting the requirements set forth under Articles VIII and IX of the Plan. If the Plan is subject to the Automatic Annuity Rules of Section 8.2 and the Participant is married, the request for distribution must be consented to in writing by the Participant's spouse. The written consent of the Participant's spouse (consistent with the requirements for a Qualified Election under Section 8.2) must be obtained with respect to any withdrawal. The Employer may elect in the Adoption Agreement to have the provisions of this Article XI apply. If so authorized, the Committee may elect to provide all Active Participants with the option of having life insurance or annuity contracts (hereinafter referred to as "policy") purchased on their behalf from a legal reserve life insurance company. The following rules shall be applicable to the acquisition, handling and disposition of any policy: (a) The basic options, cash surrender values and other material features of all policies shall be as nearly uniform as possible. No endowment policies shall be purchased. (b) The Trustee shall be designated as the sole owner of any policy purchased hereunder. However, all benefits, rights, privileges and options under such policy and any dividends or credits earned in insurance contracts will be allocated to the Participant's account balance derived from Employer contributions for whose benefit the contract is held. Notwithstanding any other provision of the Plan, in computing the amount of the vested interest of any Participant, the cash surrender value of any policy shall be included in the Participant's account balance. The applicable vested interest percentage shall be applied to this sum. The product of this computation shall then constitute the Participant's vested interest. (c) Payments made to any insurance company with respect to any such policy shall constitute an investment of the funds credited to the account balance of the Participant on whose behalf it was purchased and his account balance derived from Employer contributions shall accordingly be reduced by any such payments. (d) If the policy or policies purchased are ordinary life insurance, the aggregate premiums payable with respect to such policy or policies may not equal or exceed fifty percent (50%) of the aggregate Employer contributions and forfeitures credited to such Participant's account balance, exclusive of investment earnings. A Participant may upon consultation with the Committee and with its consent modify or terminate this election at any time. If the policy purchased is term or universal life insurance, the phrase "twenty-five percent (25%)" shall be substituted for the phrase "fifty percent (50%)." If the policy or policies purchased are ordinary life insurance and term insurance, the sum of one-half (1/2) the ordinary life premiums and the term premiums may not exceed twenty-five percent (25%) of the aggregate Employer contributions and forfeitures credited to such Participant's account balance, exclusive of investment earnings. For purposes of these incidental insurance provisions, ordinary life insurance contracts are contracts with both nondecreasing death benefits and nonincreasing premiums. (e) If a Participant is not insurable as a standard risk but may nevertheless be eligible for insurance coverage at an extra rating because of excess mortality hazards, the Committee, in its discretion, may agree or not agree to obtain insurance. The insurance to be purchased for a substandard life shall not exceed the face amount that could have been purchased by the premium that would have been available for the purchase of insurance had the Participant not been rated a substandard life. In determining whether or not to purchase insurance, the Committee shall not discriminate and shall accord uniform treatment to all of its Participants in a similar situation. (a) Upon the Participant's retirement, the Trustee shall, upon instructions from the Committee, either transfer and deliver to the Participant any policy held on his behalf (with such endorsements as the Committee may direct), convert such policy to an annuity, or surrender such policy, in which case the cash proceeds thereof shall be included as part of the account balance of such Participant and distributed accordingly. (b) The Committee shall offer to a vested Participant any policy held in his behalf at a price equal to the total cash surrender value of such policy. If the Participant elects to purchase such policy, the Trustee shall, upon instructions from the Committee, transfer ownership of the policy to such Participant, endorsed so as to vest in the transferee all right, title and interest thereto, free and clear of the Trust. If the Participant declines to purchase such policy, the Trustee shall, upon instructions from the Committee, liquidate the policy for its cash surrender value; transfer the policy to the Participant as a distribution of benefits; or if the Participant has terminated employment with the Employer other than by reason of retirement, death or disability, place the policy on a paid-up basis. The Committee may direct the Trustee to designate itself, if not so designated, as Beneficiary under such policy for the period prior to the date on which it is liquidated. (c) Subject to the Qualified Joint and Survivor Annuity Rules of Section 8.2, the contracts on a Participant's life will be converted to cash or an annuity or distributed to the Participant upon commencement of benefits. Subject to the Qualified Pre-Retirement Survivor Annuity Rules of Section 8.2, all death benefits payable under any policy held on behalf of a deceased Participant shall be paid to his Beneficiary. Such benefits may, as the Committee shall determine, be paid either to the Trust Fund, in which case the cash proceeds thereof shall be included as part of vested account balance of such Participant and distributed accordingly, or directly by the insurance company to the Beneficiary pursuant to the settlement option in effect at the time of the Participant's death. In the absence of such election, the benefits may be paid in a lump sum or under any other settlement option contained in such policy, as determined by the Committee. In the event of any conflict between the terms of this Plan and the terms of any policy issued hereunder, the Plan provisions shall control. If permitted under the Adoption Agreement, the Committee, in its discretion, may authorize and direct the Trustee to grant loans to Participants and Beneficiaries in accordance with written rules established by the Committee. Such loans: (a) Shall not exceed the lesser of: (1) fifty thousand dollars ($50,000) reduced by the excess, if any, of (i) the highest outstanding balance of loans from the Plan during the one (1) year period ending on the day before the date on which such loan was made, over (ii) the outstanding balance of loans from the Plan on the date such loan was made, or (2) one-half ( 1/2) of the Participant's or Beneficiary's vested interest under the Plan. For this purpose, all plans of the Employer and Affiliated Employers shall be treated as a single plan. (b) Shall be evidenced by a promissory note, secured by an assignment of a portion of the Participant's or Beneficiary's vested interest in the Plan, other than a Voluntary Tax-Deductible Account (effective for loans granted or renewed after October 18, 1989, the portion of a Participant's or Beneficiary's vested interest which may be used as security for a loan hereunder shall not exceed fifty percent (c) Shall bear a reasonable rate of interest as determined by the Committee to be a rate of interest commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances; and (d) Shall require substantially level repayments of principal and interest (with repayments made not less frequently than quarterly) over a period not to exceed five (5) years. Any such loan shall be nonrenewable except that if the loan was originally granted for a period of less than five (5) years, then the same may be renewed, in the discretion of the Committee, for a period of time equal to the difference between five (5) years and the duration of the original loan. The five (5) year repayment period shall not apply to any loan used to acquire any dwelling unit which within a reasonable period of time is to be used (to be determined at the time the loan is made) as the principal residence of the Participant. If the Plan is subject to the Automatic Annuity Rules of Section 8.2, the written consent of the Participant's spouse (consistent with the requirements for a Qualified Election under Section 8.2) must be obtained within the ninety (90) day period ending on the date the account balance is used as security for the loan. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse. However, a new consent shall be required if the account balance is used for renegotiation, extension, renewal or other revision of the loan. If Participant-directed investments have been elected in the Adoption Agreement, loans shall be treated as an investment of one or more of the borrower's separate Accounts, in accordance with rules established by the Committee. Repayments of principal and interest shall be allocated solely to the Account(s) of the borrower from which such loan was made, and any loss caused by non-payment or default shall be charged solely to such Account(s). Otherwise, all loans hereunder shall be treated as an investment of the Fund. 12.2 Provisions to be Applied in a Uniform and Nondiscriminatory Manner In deciding whether or not to grant any request for a loan hereunder, the Committee shall be guided by procedures and criteria designed to assure that the loans shall be made available to all Participants and Beneficiaries on a reasonably equivalent basis and shall not be available to Highly Compensated Employees in an amount greater than the amount made available to other Employees. In the event of default, foreclosure on the note and attachment of the security will not occur until a distributable event occurs under the terms of the Plan. If spousal consent (consistent with the requirements for a Qualified Election under Section 8.2) has been obtained, then, notwithstanding any other provision of the Plan, the portion of the Participant's vested account balance used as security for a loan shall be taken into account for purposes of determining the amount of the account balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than one hundred percent (100%) of the Participant's vested account balance (determined without regard to the preceding sentence) is payable to the surviving spouse, then the account balance shall be adjusted by first reducing the vested account balance by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving spouse. 12.4 Loans to Owner-Employees or Shareholder-Employees No loan shall be granted to an Owner-Employee or Shareholder-Employee unless an exemption has been obtained for such loan from the Secretary of Labor under Section 408 of the Act (and such loan is exempt from the excise tax imposed under Section 4975 of the Code). As specified in the Adoption Agreement, the provisions of this Article XIII will either (1) always supersede any conflicting provisions in the Plan or (2) only supersede such conflicting provisions in any Plan Year beginning after 1983, during which the Plan is or becomes Top-Heavy. For purposes of this Article and Article XVII, the following words shall have the following meanings: (a) "Compensation" shall mean Compensation as defined in Article I as limited by section 401(a)(17) of the Code. (b) "Determination Date" shall mean (1) the last day of the preceding Plan Year, or (2) in the case of the first Plan Year of any Plan, the last day of such Plan Year. (c) "Employer" shall mean the Employer and all Affiliated Employers. (d) "Key Employee" shall mean any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the Plan Year containing the Determination Date and the four (4) preceding Plan Years was: (1) An officer of the Employer if such individual's annual compensation exceeds fifty percent (50%) of the dollar limitation under section 415(b)(1)(A) of the Code (provided that the number of employees treated as officers shall be no more than fifty (50) or, if fewer, the greater of three (3) employees or ten percent (10%) of all employees); (2) An owner (or considered an owner under section 318 of the Code) of at least a one-half of one percent (.5%) interest and one of the ten (10) largest interests in the Employer if such individual's annual compensation exceeds one hundred percent (100%) of the dollar limitation under section 415(c)(1)(A) of (3) A five percent (5%) owner of the Employer; or (4) A one percent (1%) owner of the Employer who has an annual compensation of more than one hundred fifty thousand dollars ($150,000). For this purpose, annual compensation means compensation as defined in section 415(c)(3) of the Code, but including amounts excludible from the Employee's gross income by reason of sections 125, 402(a)(8), 402(h) or 403(b) of the Code. The determination of who is a Key Employee will be made in accordance with section 416(i)(1) of the Code and the regulations thereunder. (d) "Non-Key Employee" shall mean any Employee who is not a Key Employee. (e) "Permissive Aggregation Group" shall mean the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of sections 401(a)(4) and 410 of the Code. (f) "Present Value" shall be based on the interest and mortality table specified in the Employer's qualified defined benefit plan for Top-Heavy purposes, or if such assumptions are not specified in the Employer's qualified defined benefit plan, Present Value shall be based on the assumptions specified in the Adoption Agreement. (g) "Required Aggregation Group" shall mean (1) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the Plan has terminated), and (2) any other qualified plan of the Employer which enables a plan described in (1) to meet the requirements of Sections 401(a)(4) or 410 of the Code. (h) "Super Top-Heavy Plan": For any Plan Year after 1983, this Plan is Super Top-Heavy if the Top-Heavy Ratio for the Plan, the Required Aggregation Group or the Permissive Aggregation Group, as applicable, exceeds ninety percent (90%). (i) "Top-Heavy": For any Plan Year beginning after 1983, this Plan is Top-Heavy if any of the following conditions exist: (1) If the Top-Heavy Ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any Required Aggregation Group or Permissive Aggregation Group of plans. (2) If this Plan is a part of a Required Aggregation Group of plans, but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds sixty percent (60%). (3) If this Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds sixty percent (60%). (1) If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer has not maintained any defined benefit plan which during the five (5) year period ending on the Determination Date has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date (including any part of any account balance distributed in the five (5) year period ending on the Determination Date, and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the five (5) year period ending on the Determination Date, both computed in accordance with section 416 of the Code and the regulations thereunder. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under section 416 of the Code and the regulations thereunder. (2) If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one or more defined benefit plans which during the five (5) year period ending on the Determination Date has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees determined in accordance with (d) above, and the Present Value of accrued benefits under the aggregated defined benefit plan or plans for all employees as of the Determination Date, and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all participants, determined in accordance with (j)(1) above, and the Present Value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date, all determined in accordance with section 416 of the Code and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the five (5) year period ending on the Determination Date. (3) For purposes of (1) and (2) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve (12) month period ending on the Determination Date, except as provided in section 416 of the Code and the regulations thereunder for the first and second Plan years of a defined benefit plan. The account balances and accrued benefits of a participant who is not a Key Employee but who was a Key Employee in a prior year, or has not been credited with at least one Hour of Service for any Employer maintaining the Plan at any time during the five (5) year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with section 416 of the Code and the regulations thereunder. Deductible Employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with references to the Determination Date that falls within the same calendar year. (4) Solely for the purpose of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is Top-Heavy (within the meaning of section 416(g) of the Code) the accrued benefit of a Non-Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of section 411(b)(1)(C) of the Code. (k) "Valuation Date" shall mean the last day of the Plan Year and is the day on which account balances and accrued benefits are valued for purposes of calculating the Top-Heavy Ratio. For any Plan Year in which this Plan is Top-Heavy, one of the Top Heavy minimum vesting schedules as elected by the Employer in the Adoption Agreement will automatically apply to the Plan. The Top Heavy Minimum vesting schedule applies to all benefits within the meaning of section 411(a)(7) of the Code except those attributable to Employee contributions, including benefits accrued before the effective date of section 416 of the Code and benefits accrued before the Plan became Top-Heavy. Further, no reduction in a vested benefit may occur in the event the Plan's status as Top-Heavy changes for any Plan Year. However, this Section does not apply to the account balance of any Employee who does not have an Hour of Service after the Plan has initially become Top-Heavy and such Employee's account balance attributable to Employer contributions and forfeitures will be determined without regard to this Section. (a) Except as otherwise provided in (b), (c) and (d) below, when the Plan is Top-Heavy the Employer contributions and forfeitures allocated on behalf of any Participant who is a Non-Key Employee shall not be less than the lesser of three percent (3%) of such Participant's Compensation or, if neither the Employer nor an Affiliated Employer maintains a defined benefit plan which designates this Plan to satisfy sections 401(a)(4) or 410 of the Code, the largest percentage of Employer contributions and forfeitures, as a percentage of the Key Employee's Compensation, as limited by section 401(a)(17) of the Code allocated on behalf of any Key Employee for that year. For purposes of determining whether a Plan is Top-Heavy, Elective Deferrals are considered Employer contributions. However, neither Elective Deferrals nor Matching Contributions may be taken into account for purposes of satisfying the three percent (3%) minimum Top-Heavy contributions requirements for Plan Years beginning on or after January 1, 1989. The Minimum Allocation is determined without regard to a Social Security contribution. This Minimum Allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the year because of (1) the Participant's failure to complete one thousand (1,000) Hours of Service (or any equivalent provided in the Plan), (2) the Participant's failure to make mandatory employee contributions, or (3) the Participant's Compensation is less than a stated amount. (b) The provision in (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (c) If the Employer maintains a qualified defined benefit plan and this Plan is Top-Heavy, but is not Super Top-Heavy, each Participant who is a Non-Key Employee and is not covered by the defined benefit plan shall receive the Minimum Allocation under (a) above, except that "four percent (4%) "shall be substituted for "three percent (3%)". (d) The provision in (a) above shall not apply with respect to any Participant covered under any other qualified plan or plans of the Employer other than a paired plan of the Sponsor and the adopting Employer has elected in the Adoption Agreement that the minimum Top Heavy allocation or benefit will be met in the other plan or plans. If the Employer maintains a qualified defined benefit plan, other than Sponsor's paired defined benefit plan 02001, and the adopting Employer has elected in the Adoption Agreement to provide the Top Heavy minimum allocation or benefit under this Plan, then with respect to participants covered under both plans, "five percent (5%)" shall be substituted for "three percent (3%)" in (a) above if the Plan is Super Top Heavy and "seven and one-half percent (7 1/2%)" shall be substituted for "three percent (3%)" in (a) above if the Plan is Top Heavy, but not Super Top Heavy. (e) The Minimum Allocation required (to the extent nonforfeitable under section 416(b) of the Code) may not be forfeited under section 411(a)(3)(B) or 411(a)(3)(D) of the Code. 13.4 Adjustment to Defined Benefit Fraction and Defined Contribution Fraction under section 6.4. If the Plan is Super Top-Heavy, then "one-hundred percent (100%)" shall be substituted for "one hundred twenty-five percent (125%)" in the denominator of the Defined Benefit Fraction and the Defined Contribution Fraction under Section 6.4. 14.1 Creation of a Committee The Employer may appoint a person or persons to act as the Committee and serve at its pleasure. If no such Committee is appointed, the Employer shall act as the Committee. The Employer shall notify the Trustee of the appointment of the original members of the Committee and of each change in the membership of the Committee. Vacancies in the Committee shall be filled by the Employer. In the event that the Employer appoints such person or persons to act as the Committee, such Committee shall act by a majority of its members at a meeting (which can be by telephone) or in writing without a meeting. A member of the Committee who is also a Participant of the Plan shall not vote or act as a member of the Committee upon any matter relating solely to his rights or benefits under the Plan. Except as otherwise provided in Section 14.10, the Committee may designate a person or persons who shall be authorized to sign any document in the name of the Committee. The Trustee shall be fully protected in relying upon any notice, instruction or certification from the Committee or executed pursuant to the provisions of this Section. The Committee shall have such powers and duties as are necessary for the proper administration of the Plan, including but not limited to the power to make decisions with respect to the application and interpretation of the Plan. The Committee shall be empowered to establish rules and regulations for the transactions of its business and for the administration of the Plan. The determinations of the Committee with respect to the interpretation, application, or administration of the Plan shall be final, binding, and conclusive upon each person or party interested or concerned. Where provisions of this Plan are at the discretion of the Committee, all Participants shall be treated in a uniform and nondiscriminatory manner. The Committee shall maintain such records as may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. Employees may examine records pertaining directing to them. 14.7 Reliance on Professional Advice The Committee shall be entitled to rely conclusively on the advice or opinion of any consultant, accountant, or attorney and such persons may also act in their respective professional capacities as advisors to the Employer. All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the duties of the Committee, including, but not limited to, fees of consultants, accountants, and attorneys, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. However, the Employer may reimburse the Trust Fund for any administration expense incurred. Any administration expense paid to the Trust Fund as a reimbursement shall not be considered an Employer contribution. The Committee must discharge its duties solely in the interest of the Participants and their Beneficiaries. The Committee must carry out its duties with the care, skill, prudence and diligence under circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. The Committee, however, shall not be liable for any acts or decisions based on the advice or opinion of any consultant, accountant or attorney employed by the Committee in their respective professional capacities as advisors to the Employer, provided, however, that the Committee did not violate its general fiduciary duty in selecting or retaining such advisor. 14.10 Payment Certification to Trustee The Committee shall provide written instruction to the Trustee with respect to all payments which become due under the terms of the Plan and shall direct the Trustee to make such payments from the Trust Fund. All orders, requests and instructions by the Committee to the Trustee shall be in writing and signed by an authorized member of the Committee. The Trustee shall act and shall be fully protected in acting in accordance with such orders, requests and instructions. A Participant or Beneficiary ("Claimant") may file a written claim for benefits with the Committee. If the Committee decides that a Claimant is not entitled to all or any part of the benefits claimed, it shall within ninety (90) days of receipt of such claim, inform the Claimant in writing of its determination; the reasons for its determination, including specific references to the pertinent Plan provisions; and the Plan's review procedures. The Claimant or his authorized personal representative shall be permitted to review pertinent documents and within sixty (60) days after receipt of the notice of denial of claim to request to appear personally before it or to submit such further information or comments to the Committee as will, in the Claimant's opinion establish his right to such benefits. The Committee will render its final decision with the specific reason therefore in writing and will transmit it to the claimant by certified mail within sixty (60) days (or one hundred twenty (120) days, if special circumstances require an extension of time and the claimant is given written notice within the initial sixty (60) day period) of any such appearance. If the final decision is not made within such period, it will be considered denied. If, upon review of a request for benefits hereunder, the Committee finds the Participant ineligible for such benefits, it shall inform the Participant in writing the reason or reasons for such denial. In the event any Participant or Beneficiary disagrees with the conclusions of the Committee, the Committee must reconsider their decision based on the facts and evidence presented to them by the Participant or Beneficiary. Further, the Committee must substantiate in writing to any Participant or Beneficiary who disagrees with the amount of his benefit the method under which the benefit computations were made. 15.1 No Right of Continued Employment No Employee or Participant shall have any right or claim to any benefit under the Plan except in accordance with the provisions of the Plan. The adoption of the Plan shall not be construed as creating any contract of employment between the Employer and any Employee or otherwise conferring upon any Employee or other person any legal right to continuation of employment, nor as limiting or qualifying the right of the Employer to discharge any Employee without regard to the effect that such discharge might have upon his rights under the Plan. No benefit or interest available hereunder will be subject to assignment or alienation, either voluntarily or involuntarily. The preceding sentence shall not apply to loans made to the Participant under the Plan, or domestic relations orders which are determined by the Committee to be qualified domestic relations orders, as defined in section 414(p) of the Code and section 206(d)(3) of the Act, or were entered before January 1, 1985. Notwithstanding any provision in the Plan to the contrary, payments pursuant to a qualified domestic relations order may be made to an alternate payee prior to the time that the Plan may make payments to the affected Participant. 15.3 Incompetence of Participants and Beneficiaries If the Committee deems any person incapable of receiving benefits to which he is entitled by reason of minority, illness, infirmity, or other incapacity, it may direct the Trustee to make payment directly for the benefit of such person to a legal representative of such person. Such payment shall, to the extent thereof, discharge all liability of the Employer, the Committee, the Trustee and the Fund. If any benefit hereunder has been payable and unclaimed for four (4) years since the whereabouts or continued existence of the person entitled thereto was last known to the Committee, such benefit shall be placed in a segregated, interest-bearing suspense account with no further attempts to uncover the whereabouts of the person entitled thereto. The Committee shall rely upon notification from the Department of Health, Education and Welfare as to the whereabouts of such person when he applies for benefits under the Social Security Act. The four (4) year period may be extended by the Committee whenever, in its discretion, special circumstances justify such action. The Committee shall make a reasonable and diligent search for the Participant before any benefit is segregated. If a benefit is forfeited because the Participant or Beneficiary cannot be found, such benefit will be reinstated if a claim is made by the Participant or Beneficiary. 15.5 Separate Employer Trusts Maintained Except as provided in Section 16.5, the Plan of each Employer which adopts this Prototype Plan and corresponding Trust Agreement as part of its Plan shall be administered separately from those of any other Employer. The Plan shall be administered, construed and enforced to the state wherein the Trustee maintains its principal place of business, except to the extent preempted by the Act. Should any provision of the Plan or rules and regulations adopted thereunder be deemed or held to be unlawful or invalid for any reason, such fact shall not adversely affect the other provisions unless such invalidity shall render impossible or impractical the functioning of the Plan. In such case, the appropriate parties shall immediately adopt a new provision to take the place of the illegal or invalid provision. The masculine pronoun wherever used shall include the feminine pronoun and the singular shall include the plural and the plural shall include the singular, wherever appropriate to the context. The titles or headings of the respective Articles and Sections are inserted merely for convenience and shall be given no legal effect. 15.10 Failure of Employer's Plan to Qualify The use of this Prototype Plan and corresponding Trust Agreement shall be available only to the Plans of Employers which meet the requirements of section 401(a) of the Code. If the Employer's Plan fails to attain or retain qualification, such Plan will no longer participate in this Prototype Plan and will be considered an individually designed plan. Except as provided in Section 6.3, at no time shall any part of the corpus or income of the Fund be used for or diverted to purposes other than for the exclusive benefit of the Participants and their Beneficiaries and defraying reasonable expenses of the Plan. Any action, including the amendment or termination of the Plan as provided in Sections 16.1 and 16.2 of the Plan, by an Employer which is a corporation shall be taken by the board of directors of the corporation or any person or persons duly empowered to exercise the powers of the corporation with respect to the Plan. In the case of an Employer which is a partnership, any action, including the amendment or termination of the Plan as provided in Sections 16.1 and 16.2 of the Plan, shall be taken by any general partner or the partnership. In the case of an Employer which is a sole proprietorship, any action, including the amendment or termination of the Plan as provided in Sections 16.1 and 16.2 of the Plan, shall be taken by the sole proprietor. (a) The Employer expressly recognizes the authority of the Sponsor to amend the Plan and the Trust Agreement or Custodial Agreement from time to time, and the Employer shall be deemed to have consented to any such amendment. The Employer shall receive a written instrument indicating the amendment of the Plan and Trust Agreement and such amendment shall become effective as of the effective date of such instrument. (b) The Employer reserves the right to amend the Plan at any time. Except for (1) changes to the choice of options in the Adoption Agreement, (2) amendments stated in the Adoption Agreement which allow the Plan to satisfy section 415 of the Code or to avoid duplication of minimums under section 416 of the Code because of the required aggregation of multiple plans, or (3) amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as individually designed, an Employer will no longer participate in the Prototype Plan and will be considered to have an individually designed plan if it amends the Plan or obtains a waiver of the minimum funding requirement under Section 412(d) of the Code. (c) Notwithstanding anything in this Plan to the contrary, no amendment shall: (1) Increase the responsibility of the Trustee without the Trustee's (2) Have the effect of decreasing a Participant's account balance or eliminating an optional form of benefit with respect to accrued benefits, except to the extent permitted by section (3) In the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, decrease the nonforfeitable percentage (determined as of such date) of such Employee's right to his Employer-derived account balance below his non-forfeitable percentage computed under the Plan without regard to such (4) Violate the exclusive benefit rule of Section 15.11. 16.2 Termination and Partial Termination The adopting Employer may, at any time, by written notice to the Trustee in such form as is acceptable to the Trustee, terminate the Plan and discontinue all further contributions hereunder. Upon termination or partial termination of the Plan or upon complete discontinuance of contributions to a Profit Sharing Plan, each affected Employee shall have a one hundred percent (100%) vested and nonforfeitable interest in his account balance. Upon a termination or partial termination of the Plan (and subject to the limitations of section 4.10 in the case of a cash or deferred arrangement qualified under section 401(k) of the Code), each affected Participant's account balance may be distributed in accordance with the provisions of Article VIII or, at the option of the Employer and with the Trustee's consent, shall continue to be held by the Trustee for distribution as authorized by Articles VIII and IX. Notwithstanding the preceding sentence, a Profit Sharing Plan which does not offer an annuity form of benefit (purchased from a commercial provider) may distribute each affected Participant's account balance immediately in a single sum without Participant consent, provided that neither the Employer nor any Affiliated Employer maintains another defined contribution plan, other than an employee stock ownership plan (as defined in section 4975(e)(7) of the Code). If either the Employer or any Affiliated Employer maintains another such defined contribution plan, then a Participant's account balance may be transferred to such plan without his consent if the Participant does not consent to the single sum distribution from this Plan. 16.3 Plan Merger and Consolidation or Transfer of Plan Assets In the event of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant of this Plan would (if the Plan then terminated) receive an amount immediately after such merger, consolidation or transfer which is equal to or greater than the amount he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). 16.4 Amended and Restated Plans If this Plan is an amendment and restatement of an existing plan ("Existing Plan"), the following provisions shall apply: (a) Each Employee who was a participant in the Existing Plan immediately prior to the Effective Date shall become a Participant in this Plan on the Effective Date. (b) The balance of such Employee's accounts under the Existing Plan attributable to employer or employee contributions shall be allocated to the corresponding Accounts under this Plan or accounted for separately. (c) All years of service credited for vesting service under the Existing Plan shall be credited as years of Service under this Plan. The amendment and restatement shall not reduce the vested interest of a participant in the Existing Plan, and any change in the vesting schedule shall be subject to the provisions of Section 7.3. (d) The amendment and restatement shall not reduce a Participant's account balance and shall not eliminate any optional form of benefit. (e) Any beneficiary designation in effect under the Existing Plan immediately before the amendment and restatement shall be deemed to be a valid Beneficiary designation under this Plan, to the extent consistent with Article VIII. (a) With the consent of the Employer and Trustee, and by duly authorized action, any Affiliated Employer may adopt this Plan and become a Participating Employer. (b) Each such Participating Employer shall be bound by the same Adoption Agreement provisions as those selected by the Employer, and to use the same Trustee as the Employer. If the Employer does not make a contribution to the Plan, the Participating Employer shall be obligated to do so. (c) The Trustee may, but shall not be required to commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. (d) With respect to its relations with the Trustee and Committee for the purposes of this Plan, each Participating Employer shall be deemed to have irrevocably designated the adopting Employer as its agent. Amendment of this Plan by the adopting Employer at any time when there shall be a Participating Employer hereunder shall only be by the written action of the adopting Employer, with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan. (e) A Participating Employer may, at any time, by written notice to the Employer and Trustee in such form as is acceptable to the Employer and Trustee, discontinue its participation in the plan and discontinue all further contributions hereunder. The Employer shall direct the Trustee to transfer, deliver and assign Fund assets attributable to the Participants of such Participating Employer to such successor trustee as shall have been designated by such Participating Employer, in the event that it has established a separate plan for its Employees. If no successor trustee is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of Articles VIII and IX hereof. The provisions of this Article are applicable only if the Employer adopts a set of Dreyfus paired plans. Paired plans are a combination of standardized form plans offered by the Sponsor, so designed that if any single plan or combination of plans is adopted by an Employer each plan by itself, or the plans together, will meet the anti-discrimination rules set forth in section 401(a)(4) of the Code, the contribution and benefit limits set forth in section 415 of the Code and the Top-Heavy provisions set forth in section 416 of the Code. 17.1 Compliance With Section 415(e) of the Code If the Employer adopts one or two of Sponsor's paired defined contribution plans and Sponsor's paired defined benefit plan, the "1.0" aggregate limitation of section 415(e) of the Code on contributions and benefits will be met by freezing or reducing the rate of benefit accruals under the paired defined benefit plan. 17.2 Adjustment of Combined Plan Fractions Under Section 415 of the Code for Top-Heavy Ratio in Excess of Ninety Percent (90%) In any Plan Year in which the Plan becomes Super Top-Heavy, the denominators of the Defined Benefit Fraction (as defined in Section 6.4 of the Plan) and the Defined Contribution Fraction (as defined in Section 6.4 of the Plan) shall be computed using one hundred percent (100%) of the dollar limitation instead of one hundred twenty-five percent (125%). 17.3 Top-Heavy Minimum Benefits and Contributions (a) When the paired plans maintained by the Employer are Top-Heavy, but are not Super Top-Heavy, each Non-Key Employee who participates in paired defined contribution plan number 01001, 01003, 01004, 01005 or 01006, but does not participate in paired defined benefit plan number 02001, will receive the Minimum Allocation provided for in Section 13.3. Each Non-Key Employee who participates in two of the paired defined contribution plans, but not the paired defined benefit plan, shall receive the minimum Top-Heavy allocation under the paired defined contribution plan specified in the Adoption Agreement. Each Non-Key Employee who is a participant in this Plan and the paired defined benefit plan shall receive the minimum top-heavy benefit accrual under such plan and shall not receive any top-heavy minimum contribution under the paired defined contribution plan or plans. (b) When the paired plans maintained by the Employer are Super Top-Heavy, each Non-Key Employee who participates in paired defined contribution plan number 01001, 01003, 01004, 01005 or 01006 but who does not participate in paired defined benefit plan number 02001, will receive the Minimum Allocation provided for in Section 13.3. Each Non-Key Employee who participates in two of the paired defined contribution plans, but not the defined benefit plan, shall receive the minimum top-heavy allocation under the paired defined contribution plan specified in the Adoption Agreement. Each Non-Key Employee who is a Participant in this Plan and the paired defined benefit plan shall receive the minimum top heavy benefit accrual under such plan and shall not receive any top heavy minimum contribution under the paired defined contribution plan or plans. 17.4 Integration of Paired Plans If the Employer adopts paired plans, only one plan may allocate contributions or determine benefits on an integrated basis. THIS TRUST AGREEMENT is made by and between the Employer whose name is set forth on the attached adoption agreement (the "Adoption Agreement") and the person designated as Trustee in the Adoption Agreement (the "Trustee"). W I T N E S S E T H: WHEREAS, the Employer has adopted the qualified employee retirement plan described in the Adoption Agreement (the "Plan") for the exclusive benefit of its employees who are participants in such Plan (collectively the "Participants" and individually a "Participant") and their beneficiaries; WHEREAS, the Employer desires to appoint the Trustee as a "nondiscretionary trustee" (within the meaning of Section VI(g) of Prohibited Transaction Class Exemption 77-9 under Section 408(a) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) for the limited purposes WHEREAS, the Trustee desires to act as such a nondiscretionary trustee of the Plan for the limited purposes hereinafter set forth; NOW, THEREFORE, the Employer hereby establishes a fund with the Trustee that shall be held, managed and controlled by the Trustee without distinction between principal and income (the "Trust Fund") upon the terms and conditions hereinafter set forth: Section 1.1. The Plan, this Trust Agreement and the Trust Fund created hereunder are intended to meet all the applicable requirements of Sections 401(a) and 501(a) of the Internal Revenue Code of 1986, as amended (the "Code") and ERISA. The Employer assumes full responsibility to establish and maintain the Plan as a plan meeting the qualification requirements of Section 401(a) of the Code and hereby agrees to notify the Trustee promptly in the event of any change in such qualified status. Copies of all documents related to the Plan including, without limitation, the Plan, amendments to the Plan and the most recent determination letter received from the Internal Revenue Service with respect to the Plan (or an opinion of counsel satisfactory to the Trustee as to the plan's qualified status), upon request will be provided to the Trustee by the Employer. Section 1.2. The Employer certifies and represents to the Trustee that there are no duties imposed on the Trustee under the terms of the Plan that are not consistent with the provisions of this Trust Agreement. Section 1.3. The Trustee agrees to accept contributions that are paid to it by the Employer (as well as rollover contributions and transfers from other qualified retirement plans) in accordance with the terms of the Plan. The Trustee shall be entitled to rely upon the determination of the fiduciary named in the Plan as having the authority to control and manage the administration of the Plan and its delegates, designees, agents and employees (the "Committee") that all assets received by the Trustee are properly contributed or transferred in accordance with the terms of the Plan. Such contributions shall be in cash or in such other form that may be acceptable to the Trustee. All contributions received by the Trustee and all other receipts of the Trustee, whether by way of dividends, interest or otherwise, for the account of the Trust Fund shall be held, managed and controlled by the Trustee pursuant to the terms of this Trust Agreement without distinction between principal and income and may be commingled, and held and invested and, with all disbursements therefrom, accounted for by the Trustee, as a single fund. The Employer hereby agrees that the Employer and the Committee shall have the exclusive responsibility, and the Trustee shall not have any responsibility or duty under this Trust Agreement, to determine whether the amount, timing and type of any contribution by the Employer or any Participant is in accordance with the terms of the Plan or applicable law, or for the collection of any contributions under the Plan. Section 1.4 The Trustee, solely from assets held in the Trust Fund, shall make payments in such amounts and for such proper purposes as may be specified in the Committee's Directions (as defined in Section 2.1 herein). The Employer hereby agrees that the Committee shall have the exclusive responsibility, and the Trustee shall not have any responsibility or duty, under this Trust Agreement for determining that the Committee's Directions are in accordance with the terms of the Plan and applicable law, including without limitation, determining the amount, timing or method of payment or the identity of each person to whom such payments shall be made. The Trustee shall have no responsibility or duty to determine the tax effect of any payment or to see to the application of any payment, but shall be responsible for the proper application of amounts withheld from distributions for payment of taxes to the appropriate authorities. Section 1.5. The Trustee shall have no duties or obligations with respect to the Trust Fund unless such duties or obligations have been specifically undertaken by the Trustee by the express terms of the Trust Agreement or except to the extent such duties or obligations are required under applicable laws. INVESTMENT AND ADMINISTRATION OF THE FUND Section 2.1.1. In accordance with the provisions of ERISA, the Trustee shall have exclusive authority and discretion to manage and control the Trust Fund; provided, however, that the Trustee's authority and discretion with respect to the Trust Fund shall at all times, except to the extent that an Investment Manager has been appointed pursuant to Section 2.5, be subject to the proper, written directions of the Committee which are made in accordance with the terms of the Plan and which are not contrary to ERISA (the "Committee's Directions"). The Trustee shall be entitled to rely entirely on the Committee's Directions, shall be under no duty to determine or make inquiry whether the Committee's Directions received by it are in accordance with the provisions of the Plan or applicable law, and shall have no liability and shall be fully indemnified by the Employer for any action taken in accordance with, or any failure to act in the absence of, the Committee's Directions. Section 2.1.2. If the Committee advises the Trustee that the Plan provides for individual accounts and permits each Participant to direct the investment of the assets in the Participant's account, then, pursuant to the Committee's Directions, the Trustee shall invest the assets in such account among the investment options established pursuant to Section 2.3 as directed by each such Participant in accordance with such procedures as are acceptable to the Trustee. If such procedures include the effecting of exchanges among the investment options established pursuant to Section 2.3 or otherwise directing the investment of the assets allocated to a Participant's account by use of the telephone system maintained for such purpose by the trustee or its agent, the Trustee shall be entitled to rely on any telephonic direction reasonably believed by it to be genuine from any person representing himself or herself to be a Participant directing the investment of assets in his or her account, provided that the Trustee employs reasonable procedures for processing such directions, such as requiring a form of personal identification, to confirm that telephonic directions are genuine. If the Trustee does not follow such procedures, it may be liable for any losses due to processing unauthorized or fraudulent directions. Subject to the foregoing, the Trustee shall be entitled to rely entirely on Participants' directions, shall be under no duty to determine or make inquiry whether Participants' directions are in accordance with the provisions of the Plan or applicable law, and shall have no liability and shall be fully indemnified by the Employer for any action taken in accordance with, or any failure to act in the absence of, Participants' directions. Section 2.2 Except to the extent an Investment Manager has been appointed pursuant to Section 2.5, the Committee shall have authority and discretion to select the nature and amount of the investments to be made under the Plan. Subject to Section 2.5, the Trustee shall invest, reinvest and dispose of the assets comprising the Trust Fund in accordance with the Committee's Directions. The Committee shall exercise such authority and discretion solely in the interest of the Participants and their beneficiaries and (1) for the exclusive purpose of (a) providing benefits to the Participants and their beneficiaries and (b) defraying reasonable expenses of administering the Plan, (2) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, (3) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so and (4) in accordance with the terms of the Plan and with applicable law. The Trustee shall have no duty hereunder to review the investments held in the Trust Fund. The Trustee shall not make suggestions or otherwise render investment advice to the Committee or any Participant with respect to investment, reinvestment, or disposition of assets held in the Trust Fund. Section 2.3. Except to the extent required under applicable law, the authority and discretion of the Trustee with respect to the Trust Fund shall be limited to the following nondiscretionary powers which, with the exception of those powers set forth in Section 2.3(0), shall be exercised solely in accordance with the Committee's Directions or, to the extent provided in Section 2.1.2, the directions of Participants or, to the extent provided in Section 2.5, the directions of an Investment Manager: (a) To open and maintain accounts for the Plan, and to the extent that the Plan is a "defined contribution plan" (within the meaning of Section 3(34) of ERISA), individual accounts for each of the Participants. (b) To receive contributions from the Employer and to credit contributions made by the Employer to the individual accounts of Participants established pursuant to paragraph (a) above. (c) To invest contributions made by the Employer and other assets of the Plan in shares of any investment company sponsored, managed, advised, administered or distributed by The Dreyfus Corporation or any of its affiliates (the "Dreyfus Funds"), in equity securities issued by the Employer or an affiliate which are publicly traded and which are "qualifying employer securities" within the meaning of Section 407(d)(5) of ERISA ("Employer Stock"), in any collective investment fund maintained by a bank or trust company as a "group trust" for the collective investment of employee benefit plans qualified under Section 401(a) of the Code, and such other investments as may be acceptable to the Trustee and as agreed to in writing by The Dreyfus Corporation ("Sponsor") and the Committee (the Dreyfus Funds and such other investments shall be collectively referred to as the "Investments"); and to reinvest dividends and other distributions in the Dreyfus Funds or other Investments provided, however, that if the Plan is established pursuant to one of the Sponsor's prototype plan documents, investments shall be subject to such investment limitations or minimum requirements for investments in Dreyfus Funds as may be imposed by the Sponsor. The Employer hereby agrees that the Trustee shall not be restricted in making such investments to investments that are authorized by governing state laws (as determined under Section 9.5) for the investment of trust funds. If Plan assets are invested in any group trust, the terms of the group trust agreement or other governing document are hereby incorporated by reference and made a part of the Trust Agreement as long as the group trust remains exempt from taxation under Section 501(a) of the Code. The Trustee shall not be responsible in any way respecting the form, terms, payment provisions or issuer of any insurance contract which it is directed to purchase and/or hold to provide for the payment of benefits, or for performing any functions under any such insurance contract which it may be directed to purchase and/or hold as contract holder thereunder (other than the execution of any documents incidental thereto and transfer or receipt of funds thereunder in accordance with the Committee's Directions). (d) To redeem, transfer or exchange shares of the Dreyfus Funds, to sell, exchange, convey, transfer or otherwise dispose of any other Investments; and to make, execute and deliver to the purchasers thereof good and sufficient legal documents of conveyance therefor, and all assignments, transfers and other legal instruments, either necessary or convenient for passing the title and ownership of the Investments, and no person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency or propriety of any such sale or disposition. (e) To make distributions from the Trust Fund to Participants and their beneficiaries. (f) To deliver notices, prospectuses and proxy statements to Participants or to the Employer, and to vote in person or by proxy with respect to any securities held by the Trust Fund in accordance with the written directions of the Committee or of the Participants, as the case may be; and in accordance with such power, to exercise subscription, conversion and other rights and options and to take action or refrain from taking any action with respect to any reorganization, consolidation, merger, dissolution or other recapitalization or refinancing to the extent that the exercise of such rights and options or the taking or refraining from such actions may be deemed by the Trustee to be necessary or proper to protect the best interests of the Trust Fund. (g) To maintain records of contributions, investments, distributions and other transactions, and to report such transactions to the Employer or such other persons as may be designated by the Employer. (h) To make necessary filings with the Internal Revenue Service, the Department of Labor and other governmental agencies. (i) To hold any part of the Trust Fund in cash or cash balances. (j) To hold custody of the assets of the Plan; and with respect to any such assets held in custody by the Trustee, to cause any investment of the Trust Fund to be registered in the name of the Trustee or the name of its nominee or nominees or to retain such investment unregistered or in a form permitting transfer by delivery, provided that the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund. (k) To apply for, purchase, hold or transfer any life insurance, retirement income, endowment or annuity contract. (l) To consult and employ any suitable agent(s) to act on behalf of the Trustee and to contract for legal, accounting, clerical and other services deemed necessary by the Trustee to administer the Trust Fund according to the terms of this Trust Agreement and the instructions of the Committee. (m) To make loans from the Trust Fund to Participants in amounts and on terms approved by the Committee; and Employer hereby agrees that the Committee shall have the sole responsibility, and the Trustee shall not have any duty or responsibility, for computing and collecting any loan repayments required to be made under the Plan. (n) To pay from the Trust Fund all taxes imposed or levied with respect to the Trust Fund or any part thereof under existing or future laws, and to contest the validity or amount of any tax, assessment, claim or demand respecting the Trust Fund or any part thereof. (o) To pay out of the Trust Fund (i) all brokerage fees and transfer tax expenses and other expenses incurred in connection with the sale or purchase of investments, (ii) the Trustee's compensation and (iii) all other expenses of administering the Plan and the Trust Fund including, without limitation, any payments authorized by Section 1.4 of this Agreement, unless promptly paid to the Trustee, or otherwise, by the Employer. The Trustee shall have the authority to pay all fees and expenses described in this Section 2.3(0) out of the Trust Fund in the event such fees and expenses are not promptly paid by the Employer and the Trustee is not in receipt of Committee Direction to make such payments. (p) To do all such acts, and to exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary or proper to carry out any of the nondiscretionary powers set forth herein or otherwise in the best interests of the Trust Fund and required by applicable law. Section 2.4. Investments in Employer Stock shall be subject to the following notwithstanding any other provision in this Trust Agreement: (a) In accordance with the Committee's Directions, the Trust Fund may be invested in Employer Stock without regard to the ten percent (10%) limitation with respect to the acquisition and holding of employer securities set forth in Section 407(a)(2) of ERISA if the Plan qualifies as an "eligible individual account plan" under Section 407(d)(3) of ERISA. (b) The Committee shall be responsible for determining the appropriateness under the fiduciary responsibility and other applicable provisions of ERISA of acquiring and holding Employer Stock. The Trustee shall not be liable for any loss, or by reason of any breach, which arises from following directions with respect to the acquisition and holding of Employer Stock. (c) Subject to the provisions of Section 2.4(d), the Trustee shall purchase and sell Employer Stock in accordance with such procedures and guidelines as annexed hereto as Schedule A. (d) At the Committee's Directions, the Trustee shall purchase or sell Employer Stock on the open market or from or to the Employer. In addition, the Employer may contribute Employer Stock in lieu of cash to the Trust Fund. In the event the Trustee uses one of its affiliates to effect the purchase or sale of Employer Stock, the Trustee and such affiliate shall comply with the provisions of Prohibited Transaction Class Exemption 86-128. In the event that the Committee directs the Trustee to use a particular broker or dealer to effect the purchase or sale of Employer Stock, the Committee shall represent to the Trustee that such direction (i) is for the exclusive benefit of Participants and Beneficiaries of the Plan, and (ii) shall not constitute, or cause the Trust Fund to be engaged in, a "prohibited transaction" as defined in Section 406 of ERISA. In the event the Trustee purchases or sells Employer Stock from or to the Employer, such purchase or sale shall be for "adequate consideration" as defined in Section 3(18) of ERISA and no commission shall be charged. In the event that the Employer contributes Employer Stock in lieu of cash to the Trust Fund, such transfer shall be for "adequate consideration" as defined in Section 3(18) of ERISA and no commission shall be charged. (e) The Employer represents and warrants that it has filed and will file with the Securities and Exchange Commission and with all applicable state agencies or authorities all required registration statements relating to shares of Employer Stock and other interests which may be issued under the Plan. The Employer acknowledges that it is and shall be responsible for, and that the Trustee shall not be responsible for, preparing or filing such registration statements or for the accuracy of statements contained therein, or for preparing or filing any other reports, statements or filings required under federal or state securities laws with respect to the Trust Fund's investment in Employer Stock. (f) The Employer shall provide the Trustee with a copy of all proxy solicitation materials proposed to be sent to stockholders at least (7) days before the materials are sent to stockholders or if the issuer of Employer Stock held in the Trust Fund files preliminary proxy solicitation materials with the Securities and Exchange Commission, the Employer shall cause a copy of all materials to be simultaneously sent the Trustee. The Trustee, in its discretion, may prepare or amend any proxy voting form sent to Participants. The Trustee shall determine which of the procedures set forth in subparagraph (f)(i) or subparagraph (f)(ii) are to be followed in sending proxy solicitation materials, including any amended or supplemental materials, to Participants. (i) The Trustee shall provide the Employer or its designee with mailing labels and proxy labels for each Participant to whose account shares of Employer Stock (both vested and non-vested) are credited. Proxy labels so provided shall indicate the number of shares (including fractional interests in shares) of Employer Stock credited to each Participant's account (both vested and non-vested). At the time of mailing of notice of each annual or special stockholders' meeting of the issuer of Employer Stock, the Employer or its designee shall cause a copy of the notice, all proxy solicitation materials, and all other materials to be sent to stockholders to be sent to each affected Participant. The Employer shall provide the Trustee with a copy of all materials provided to Participants and shall certify to the Trustee that the materials have been mailed or otherwise sent to each affected Participant. (ii) The Employer shall provide the Trustee with such quantities of the notice of meeting, all proxy solicitation materials and all other materials to be sent to stockholders as may be requested by the Trustee. At the time of mailing of notice of each annual or special stockholders' meeting of the issuer of the Employer Stock, the Trustee or its designee shall send a copy of such materials and a voting instruction form prepared by the Trustee to each affected Participant. The proxy voting form shall be returnable to the Trustee or its designee. Each Participant shall be entitled to direct the Trustee by means of the proxy voting form as to the voting of shares (including fractional interests in shares) of Employer Stock credited to such Participant's account (both vested and non- vested). Upon timely receipt of the proxy voting form, the Trustee shall vote the shares of Employer Stock as instructed. Instructions received by the Trustee from Participants shall be held by the Trustee in strict confidence and shall not, except as may be required by law, be divulged or released to any person including officers or employees of the Employer or members of the Committee; provided, however, that the Trustee may advise the Employer, upon request, of the total number of votes that have been cast with respect to a particular issue. The Trustee shall not make recommendations to Participants on whether to vote or how to vote shares of Employer Stock. The Trustee shall not vote shares of Employer Stock credited to a Participant's account for which it has not received instructions from the Participant. The Trustee shall not be obligated to solicit a response from Participants from whom it has not received instructions. The Trustee shall vote shares of Employer Stock not credited to Participants' accounts in the same proportion on each issue as it votes those shares credited to Participants' accounts for which it received voting instructions from Participants. (g) In the event of a tender or exchange offer for any Employer Stock held in the Trust Fund, the Trustee shall use its best efforts to distribute or cause to be distributed to each affected Participant in a timely manner all information and materials that are distributed to the stockholders of the issuer of the Employer Stock in connection with the offer and directions as to how the Participant may instruct the Trustee whether or not to tender or exchange the Employer Stock credited to the Participant's account (both vested and non-vested). Alternatively, the Trustee may agree that the notification of Participants and distribution of the information, materials and directions described above are to be effected by the Employer or its designee. In such event, the Employer shall provide the Trustee with a copy of all information, materials and directions provided to Participants and shall certify to the Trustee that the information, materials and directions have been mailed or otherwise sent to each affected Participant. The Trustee, in its discretion, may prepare or amend any instruction form sent to Participants. Instructions shall be returnable to the Trustee or its designee. Each Participant shall be entitled to direct the Trustee to tender or exchange shares (including fractional interest in shares) of Employer Stock credited to such Participant's account (both vested and non- vested). Upon timely receipt of instructions, the Trustee shall act with respect to Employer Stock as instructed. Instructions received by the Trustee from Participants shall be held by the Trustee in strict confidence and shall not, except as may be required by law, be divulged or released to any person including officers or employees of the Employer or members of the Committee; provided, however, that the Trustee may advise the Employer, upon request, of the total number of shares of Employer Stock that have been tendered or exchanged. The Trustee shall not make recommendations to Participants on whether to tender or exchange. The Trustee shall not tender or exchange shares of Employer Stock credited to a Participant's account for which it has not received instructions from the Participant. The Trustee shall not be obligated to solicit a response from Participants from whom it has not received instructions. The Trustee shall tender or exchange that number of shares of Employer Stock not credited to Participants' accounts which is determined (after giving effect to the withdrawal of any shares of Employer Stock before the expiration of the offer or any earlier date set by the Trustee) by multiplying the total number of shares of Employer Stock not credited to Participants' accounts by a fraction of which the numerator is the number of shares of Employer Stock credited to Participants' accounts for which the Trustee has received instructions from Participants to tender or exchange and of which the denominator is the total number of shares of Employer Stock credited to Participants' accounts. A Participant who has instructed the Trustee to tender or exchange shares of Employer Stock credited to such Participant's account may, at any time prior to the expiration of the offer or any earlier date set by the Trustee, instruct the Trustee to withdraw a specified number of shares from the offer. A Participant shall not be limited as to the number of instructions that the Participant may give to the Trustee. If a Participant instructs the Trustee to tender or exchange shares of Employer Stock credited to the Participant's account, the Trustee shall credit to each account of such Participant from which the shares were taken the consideration received by the Trustee for the shares of Employer Stock tendered or exchanged from that account. Pending receipt of Committee Directions or, to the extent provided in Section 2.1.2 of the Trust Agreement, instructions from the Participant as to the investment of such proceeds, the Trustee shall invest any cash consideration in such money market mutual fund as is designated in writing by the Committee. (h) For purposes of this Section 2.4, the number of shares of Employer Stock deemed "credited" to a Participant's account shall be determined as of the last preceding valuation date for which an allocation has been completed and Employer Stock has actually been credited to Participants' accounts. The Trustee may, in its discretion, require a special valuation of Participant accounts and crediting of Employer Stock. (i) In the event that the Trustee, in its discretion, determines that time constraints make it unlikely that Participant voting or tender or exchange instructions can be received in a timely fashion, the Trustee shall notify the Committee and the Committee or its designee shall be responsible for such matter, and the Trustee shall vote proxies or respond to a tender or exchange offer in accordance with the Committee's Directions. (j) All costs incurred by the Trustee in handling proxy and tender or exchange offer matters, including without limitation all costs associated with the printing and mailing of Participant instruction forms and other materials and attorneys' fees, shall be expenses of the Trust Fund within the meaning of Section 6.1 of the Trust Agreement. Section 2.5. If permitted by the Plan, the Employer or the Committee may appoint one or more investment managers within the meaning of Section 3(38) of ERISA ("Investment Manager") to direct investments with respect to all or part of the Trust Fund. Any Investment Manager so appointed shall be (i) an investment adviser registered as such under the Investment Advisers Act of 1940, or (ii) a bank, as defined in that Act, or (iii) any insurance company qualified to perform investment management services under the laws of more than one state. Any Investment Manager so appointed shall, in writing, certify to the Employer that it is qualified to act in such capacity under clause (i), (ii) or (iii) of the preceding sentence, accept its appointment as Investment Manager, acknowledge that it is a fiduciary with respect to the Plan, and certify the identity of the person or persons authorized to give instructions or directions on its behalf. The Employer shall certify to the Trustee that it has appointed each Investment Manager in accordance with the provisions of the Plan and ERISA, and instruct the Trustee as to the portion of the Plan that is to be managed by each Investment Manager. The Trustee may continue to rely upon all certifications and agreements made under this Section 2.5 unless otherwise notified in writing by the Employer or the Investment Manager, as the case may be. The Trustee shall be entitled to rely entirely on an Investment Manager's directions, shall be under no duty to determine or make inquiry whether an Investment Manager's directions received by it are in accordance with the provisions of the Plan or applicable law, and shall have no duty to review or recommend the sale, retention, or other disposition of any asset purchased or retained in accordance with an Investment Manager's directions. The Trustee shall have no liability for any loss to the Trust Fund resulting from the purchase, sale, or retention of any asset in accordance with an Investment Manager's directions, or resulting from not having sold such assets so purchased or retained in the absence of an Investment Manager's directions, to make such sale or take any other action. The Trustee shall be fully indemnified by the Employer for any action taken in accordance with, or any failure to act in the absence of, an Investment Manager's directions. Section 3.1.1. The Trustee shall discharge its duties and responsibilities under this Trust Agreement solely in the interest of Participants and their (a) for the exclusive purpose of providing benefits to the Participants and their beneficiaries and defraying the reasonable expenses of administering the Plan; (b) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. Section 3.1.2. In the event that the Employer designates The Dreyfus Trust Company ("The Trust Company") as the Trustee in the Adoption Agreement hereto, and the Trustee has been designated as an additional Trustee for the Plan, The Trust Company as Trustee shall have no responsibilities other than as set forth herein, and this Trust Agreement shall constitute a supplemental trust agreement. The duties of The Trust Company shall be limited to assets held in the Trust Fund, and The Trust Company shall have no duties with respect to assets held by any other person including, without limitation, any other trustee for the Plan. The Employer hereby agrees that The Trust Company shall not serve as, and shall not be deemed to be, a co-trustee under any circumstances. Section 3.1.3. Subject to the limitations set forth in Section 3.1.2 herein, in the event that more than one individual Trustee has been designated in the Adoption Agreement, the action of such individual Trustees shall be determined by vote of the majority of such individual Trustees; provided, however, that any one of such individual Trustees may execute any applications for insurance or annuity contracts provided for herein and documents necessary for the exercise of ownership rights thereunder and may perform other such ministerial acts; and further provided, that the Trustees may enter into an agreement allocating among themselves specific responsibilities, obligations and duties. Section 3.1.4. The Trustee shall be solely responsible for its own acts and omissions. The Trustee shall have no duty to question, or otherwise inquire into, the performance of another fiduciary with respect to duties allocated to such other fiduciary under the Plan. The Trustee shall not be responsible for the breach of any other such fiduciary unless the Trustee (i) participates knowingly in, or knowingly undertakes to conceal, an act or omission of such other fiduciary, knowing such act or omission is a breach, (ii) has actual knowledge of a breach by such other fiduciary and fails to make reasonable effort under the circumstances to remedy the breach or (iii) has failed to perform its own specific fiduciary duties and thereby has enabled another fiduciary to commit a breach. Section 3.2. The Trustee shall keep full and accurate records of all receipts, investments, disbursements and other transactions hereunder, including such specific records as may be agreed upon in writing between the Company, the Committee and the Trustee. All such records shall be open to inspection during the Trustee's normal business hours by any authorized representative of the Employer or the Committee upon reasonable prior notice to the Trustee. Section 3.3. Within 90 days after the end of each Plan Year, as that term is defined in the Plan, or within 90 days after its removal or resignation, or the termination of the Plan or this Trust Agreement, the Trustee shall file with the Committee a written account of the administration of the Trust Fund showing all transactions effected by the Trustee subsequent to the period covered by the last such accounting, if any, to the end of such Plan Year or date of such removal or resignation, or the termination of the Plan or this Trust Agreement, and all property held at its fair market value at the end of the accounting period. Upon approval of such accounting by the Committee, neither the Employer nor the Committee shall be entitled to any further accounting by the Trustee. The Committee shall approve such accounting by written notice of approval delivered to the Trustee or by failure to express objection to such accounting in writing delivered to the Trustee within 60 days from the date on which the accounting is mailed to the Committee and, in either case, the Trustee shall be forever released and discharged from all liability and accountability with respect to the propriety of its acts and transactions as to which the Committee shall within such 60 day period file with the Trustee no such written objections. Section 3.4. The Trustee may from time to time consult with counsel and shall be entitled to rely entirely upon the advice of counsel with respect to any act or omission. Section 3.5. In the event of any disagreement resulting in conflicting instructions to, or adverse claims or demands upon, the Trustee with respect to payments or instructions, the Trustee shall be entitled, at its option, to refuse to comply with any such instruction, claim or demand so long as such disagreement shall continue, and in the exercise of such refusal, the Trustee may elect not to make any payment or other disposition of assets held pursuant to this Trust Agreement. The Trustee shall not be or become liable in any way for its failure or refusal to comply with any such conflicting instructions or adverse claims or demands, and it shall be entitled to continue to refrain from acting until such conflicting or adverse instructions, claims or demands (a) shall have been adjusted by agreement and it shall have been notified in writing therefor or (b) shall have been finally determined in a court of competent jurisdiction. Section 3.6. The Trustee shall not, by act, delay, omission or otherwise, be deemed to have waived any right or remedy it may have either under this Trust Agreement or generally, and no waiver shall be valid unless it is contained in a written instrument signed by the Trustee and only to the extent expressly set forth therein. A waiver by the Trustee under the terms of this Trust Agreement shall not be construed as a bar to, or waiver of, the same or any other such right or remedy that it would otherwise have on any other occasion. Section 3.7. The Trustee will not be compelled to do any act under this Trust Agreement or to take any action toward the execution or enforcement of the Trust Fund created hereunder or to prosecute or defend any suit in indemnified by the Employer to its satisfaction against any loss, costs, liability and expense; and the Trustee will be fully indemnified by the Employer for any liability or obligation to any person that results from any failure on the part of the Employer or the Committee to perform any of their respective obligations under the Plan or under the terms of this Trust Agreement, or for any error or omission whatsoever on the part of the Committee or the Employer. Section 3.8. Unless resulting from the Trustee's own gross negligence or willful misconduct, the Employer shall indemnify the Trustee and save it harmless from, against, for and in respect of any and all damages, losses, obligations, liabilities, liens, deficiencies, costs and expenses (including, without limitation, attorney's fees and other costs and expenses incident to any suit, action, investigation, claim or proceedings) suffered, sustained, incurred or required to be paid by the Trustee in connection with the Plan or this Trust Agreement. The provisions of this Section 3.8 shall survive termination of this Trust Agreement. Section 4.1. Except as provided in Section 4.2 herein, at no time prior to the satisfaction of all liabilities with respect to Participants and their beneficiaries under the Plan shall any part of the corpus or income of the Fund be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their beneficiaries, or for defraying reasonable expenses of administering the Plan. Section 4.2.1. Notwithstanding the provisions of Section 4.1, but subject to the provisions of Section 4.2.2 herein, contributions made by the Employer under the Plan shall be returned to the Employer under the following conditions and only as the Trustee is instructed in writing by the Committee: (a) If a contribution is made by mistake of fact, such contribution shall be returned to the Employer within one year of the payment (b) To the extent that contributions to the Plan are specifically conditioned upon their deductibility under the Code, and a deduction is disallowed for any such contribution, it shall be returned to the Employer within one year after the disallowance of (c) To the extent that contributions to the Plan are specifically conditioned on initial qualification of the Plan under the Code, and the Plan is determined to be disqualified, contributions and the earnings thereon made in respect of any period subsequent to the effective date of such disqualification shall be returned to the Employer within one year after the date of denial of qualification, provided that the Employer makes timely application to the Internal Revenue Service for a determination of the qualified status of the Plan. Section 4.2.2 Earnings attributable to any contributions returned to the Employer under Sections 4.2.1(a) and 4.2.1 (b) shall not be returned to the Employer. Losses attributable to any contributions returned to Employer under Section 4.2.1 shall reduce the amount to be so returned. COMMUNICATION WITH COMMITTEE AND THE EMPLOYER Section 5.1. Except as otherwise specifically provided herein, any action by an Employer that is a corporation pursuant to any of the provisions of this Trust Agreement shall be evidenced by (1) a resolution of its board of directors (the "Board") certified to the Trustee over the signature of its Secretary or Assistant Secretary or other duly authorized agent under the corporate seal, if any, or (2) by appropriate written authorization of any person or committee to which the Board has delegated the authority to take such action. Any action by an Employer that is a partnership or a sole proprietorship shall be evidenced by a written certification of a general partner of the partnership or the sole proprietor, as the case may be. The Trustee shall be entitled to rely entirely on, and shall be fully indemnified by the Employer for acting in accordance with, any such resolution, certification or other authorization. Section 5.2. The Employer shall provide to the Trustee a certificate, signed by an authorized officer of the Employer, that contains (a) the name, (b) specimen signature and (c) a description of the specific powers and duties, of each member of the Committee. The Employer shall give prompt written notice of any change in the identity, powers or duties of any member of the Committee, and the Trustee shall be entitled to rely entirely on its failure to receive such notice as a certification of the Employer that a designated member of the Committee and such member's duties and powers have not been changed. The Trustee shall have no duty to inquire into the qualifications of any member of the Committee. Section 5.3. The Committee's Directions shall be communicated to the Trustee in a certificate that sets forth the action of the Committee, signed by the person then acting as Chairman or Secretary of the Committee, or in a written statement signed by any two or more members of the Committee or any person or agent designated to act on behalf of the Committee. Such person or agent shall be so designated either under the provisions of the Plan or in a certificate by the Committee that contains (a) the name, (b) specimen signature and (c) a description of the specific powers and duties of each such person or agent. The Committee shall give prompt written notice of any change in the identity, powers and duties of any such person or agent, and the Trustee shall be entitled to rely entirely on its failure to receive such notice as a certification of the Committee that the identity, powers and duties of such person or agent have not been changed. Section 5.4. The Trustee shall have no liability hereunder for any action taken in good faith in reliance upon any instructions, directions, certifications and communications believed by the Trustee to be genuine and to have been signed or communicated by the proper person. Section 6.1. The Trustee shall receive reasonable compensation for its services in accordance with its schedule of compensation in effect when such services are rendered. The Trustee may amend the schedule from time to time, which amendment shall become effective no earlier than 30 days after written notice is sent to the Employer. The Trustee shall also be entitled to reimbursement for all reasonable expenses incurred by it in the performance of its duties hereunder including, without limitation, any expenses incurred in the consultation or employment of any agent pursuant to Section 2.3(l). Any such compensation or expenses and any income or other taxes which may be levied against the Trust Fund shall be paid out of the Trust Fund, unless paid directly by the Employer. RESIGNATION AND REMOVAL OF TRUSTEE Section 7.1. The Trustee may resign at any time by written notice to the Employer which shall be effective 30 days after delivery to the Employer of such notice, provided that a successor Trustee shall have been appointed by the Employer; provided, however, that such notice may be waived by the Employer. Section 7.2. The Trustee may be removed by the Employer at any time upon 30 days' prior written notice to the Trustee, provided that a successor Trustee shall have been appointed by the Employer; provided, however, that such notice may be waived by the Trustee. Section 7.3. The appointment of a successor Trustee hereunder shall be accomplished by and shall take effect upon the delivery to the resigning or removed Trustee, as the case may be, of written notice from the Employer appointing such successor Trustee, and an acceptance in writing of the successor Trustee. Any successor Trustee may be either a corporation authorized and empowered to exercise trust powers or one or more individuals. All of the provisions set forth herein with respect to the Trustee shall relate to each successor Trustee so appointed with the same force and effect as if such successor Trustee had been originally named herein as the Trustee hereunder. If a successor Trustee shall not have been appointed within 30 days after delivery to the Employer of notice of the Trustee's resignation pursuant to Section 7.1, the resigning Trustee may apply to a court of competent jurisdiction for the appointment of a successor Trustee. Section 7.4. Upon the appointment of a successor Trustee, the resigning or removed Trustee shall transfer and deliver the Trust Fund to such successor Trustee, after reserving such reasonable amounts as are necessary to provide for its reasonable expenses in the settlement of its account, the amount of any compensation due to it and any sums chargeable against the Trust Fund for which it may be liable. If the sums so reserved are not sufficient for such purposes, the resigning or removed Trustee shall be entitled to reimbursement for any deficiency from the Employer or out of the Trust Fund. Section 7.5. At the time the Trust Fund shall have been transferred and delivered to a successor trustee and the accounts of the Trustee have been approved pursuant to Section 3.3 herein, the Trustee shall be released and discharged from all further accountability or liability for the Trust Fund and shall not be responsible in any way for the further disposition of the Trust Fund or any part thereof. AMENDMENT AND TERMINATION OF THE TRUST AND PLAN Section 8.1. The Employer may terminate this Agreement at any time upon 30 days' prior written notice delivered to the Trustee; provided that such termination by the Employer is subject to the condition that a new trustee assumes the responsibilities and functions of the Trustee as set forth herein; and provided, further, that the trusteeship shall, if terminated by the Employer, continue thereafter for such period as may be necessary for the complete divestiture to a newly appointed trustee of all assets held in the Trust Fund. Section 8.2. If the Plan is terminated in whole or in part, or if the Employer permanently discontinues its contributions to the Plan, the Trustee shall distribute the Fund or any part thereof in accordance with the Committee's Directions. Upon the Employer's termination of the Plan in whole or in part or the revocation or termination of this Trust Agreement, the Trustee shall have the right to have its accounts approved. When the Trust Fund shall have been so applied or distributed, and the accounts of the Trustee shall have been approved pursuant to Section 3.3 herein, the Trustee shall not be responsible in any way for the further disposition of the Trust Fund (or that part thereof so applied or distributed, if the Plan is terminated only in part). The Trustee shall have the right to withhold distribution or application of any part of the Trust Fund unless and until written approval of any such termination has been granted by the Internal Revenue Service and, if the Plan is subject to the jurisdiction of the Pension Benefit Guaranty Corporation (the "PBGC"), (a) the period of time set forth in Section 4041(b)(2)(C) of ERISA has elapsed and the PBGC has not issued any notice of noncompliance or (b) the PBGC has notified the Plan Administrator that the requirements or a distress termination have been met pursuant to Section 4041(c)(3)(A) of ERISA. Assets of the Trust Fund shall not be returned to the Employer unless and until the Employer has delivered to the Trustee (a) a certification of an enrolled actuary stating that there is an amount remaining in the Trust Fund that is not required for the payment of the benefits provided under the Plan for participants or their beneficiaries and (b) an opinion of counsel satisfactory to the Trustee, stating that such return of assets is permitted under the terms of the Plan and applicable law. Section 8.3. This Trust Agreement may be amended or modified by a written agreement signed by the parties hereto or by the Trustee upon 60 days' prior written notice to the Employer. Section 9.1. This Trust Agreement shall be adopted by execution of the Adoption Agreement. Section 9.2. In the event that any provision of this Trust Agreement is deemed or held to be unlawful or invalid for any reason, such event shall not adversely affect any other provision contained herein unless such illegality shall make impossible or impracticable the functioning of this Trust Agreement, and in such case, the appropriate parties shall immediately amend this Trust Agreement. Section 9.3. The titles and headings of the Sections in this instrument are placed herein for convenience of reference only. In the event of any conflict, the text of this instrument, rather than such titles or headings, shall control the interpretation of any of the terms and provisions contained herein. Section 9.4. Except as otherwise specifically provided herein, all notices or other communications required or permitted to be given pursuant to this Agreement shall be given in writing and delivered by personal delivery or sent by U.S. first class mail, postage prepaid, addressed to their last respective address of record. Section 9.5. The construction, validity and administration of this Trust Agreement shall be governed by the laws of the state where the Trustee has its principal place of business, except to the extent that such laws are preempted by ERISA. This Dreyfus 403(b)(7) Retirement Plan (the "Plan") is intended for the use of eligible persons who may wish to have Employer contributions invested in shares of any regulated investment company under the Investment Company Act of 1940, as amended (a "Fund"), which is approved by Dreyfus Service Corporation (the "Sponsor") upon the following terms and conditions and in accordance with the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Any person who performs services as an Employee (the "Employee") for an Employer (the "Employer"), which is an organization described in Section 501(c)(3) of the Code and is exempt from tax under Section 510(a) of the Code, or who performs services as an Employee for an educational institution (as defined in Section 170(b)(1)(A)(ii) of the Code), which is a State or a political subdivision of a State or an agency or instrumentality thereof, and who obtains the consent of such Employer to participate herein, is eligible to adopt this Plan. An eligible person may adopt this Plan by signing and mailing the Custodial Account Application (the "Application") to The Dreyfus Trust Company, as Custodian (the "Custodian"). The Application and the Salary Reduction Agreement entered into between the Employee and the Employer, if applicable, are incorporated herein by reference and are made a part of this Plan. This Plan and the Dreyfus 403(b)(7) Retirement Plan Custodial Agreement (the "Custodial Agreement") will be deemed to be adopted when the Custodian shall have indicated its written acceptance of the Application and its appointment as Custodian on the Application. The Employee may direct the Employer to contribute cash to the Employee's account established and maintained pursuant to the Custodial Agreement (the "Custodial Account") in accordance with the Salary Reduction Agreement entered into between the Employee and the Employer. Such contributions may be made to the extent they do not exceed $9,500 or any greater amount permitted by Section 402(g) of the Code. The Employer may also make non-elective cash contributions to the Custodial Account on behalf of the Employee. Contributions in accordance with a Salary Reduction Agreement and non-elective Employer contributions may be made to the extent that they do not constitute "excess contributions" as that term is defined in Section 4973(c) of the Code (an "Excess Contribution"). In addition, the Employee or Employer may, in accordance with the Code, transfer or cause to be transferred in cash the Employee's balance in any other 403(b) plan, and the Employee may make a rollover contribution of any qualifying distribution from a 403(b) plan. The Sponsor, the Fund(s) and the Custodian shall not be responsible for determining the amount that may be contributed to the Custodial Account on behalf of the Employee, nor shall any of them be responsible to recommend or compel an Employer to make contributions to the Custodial Account. If during any taxable year the Employer contributed an amount that is an Excess Contribution, such Excess Contribution and any income attributable thereto shall, upon the written request of the Employee, be paid to the Employee by the Custodian or, at the Employee's election, be applied toward a contribution for the current or subsequent taxable year. If the amount of contributions made to the Custodial Account for any taxable year pursuant to a Salary Reduction Agreement exceeds the applicable dollar limitation of Section 402(g) of the Code, and is designated by the Employee, in writing, no later than March 1 of the following year, then the amount of contributions in excess of such limitation plus allocable earnings through the date of distribution shall be distributed by the Custodian no later than April 15 of the following year. The interest of the Employee in the Custodial Account shall be non- forfeitable at all times, may not be assigned, and shall not be subject to alienation, assignment, trustee process, garnishment, attachment, execution or levy of any kind, except with regard to payment of the expenses of the custodian as authorized by the provision of this Plan and the Custodial Agreement, and except as required by law. All contributions made or caused to be made to the Custodial Account by the Employer on behalf of the Employee shall be applied by the Custodian to purchase shares of the Fund(s) designated in writing by the Employee on the Application or such other form as may be acceptable to the Custodian. The Employee may direct the transfer of assets held in the Custodial Account from one Fund to another Fund at any time and from time to time, subject to the terms and conditions set forth in the then current Prospectus of the applicable Fund. All income dividends and capital gains distributions shall be reinvested in additional shares of the Fund(s) so designated by the Employee. The Employee may, however, authorize and direct the Custodian in writing to exchange any or all shares of any Fund held in the Custodial Account for shares of any other Fund subject to, and in accordance with, the terms and conditions of any exchange privilege, including the telephone exchange privilege, offered with respect to Fund Shares as described in the then current Prospectus of the applicable Fund. In addition, and where allowed by the Sponsor, the Employee may authorize an investment advisor to make exchanges for all amounts maintained in the Custodial Account under the Plan, subject to, and in accordance with, such terms and conditions as may be agreed upon in writing from time to time by the Sponsor and the Custodian. If the Employee elects the telephone exchange privilege on the Application or on another form acceptable to the Custodian, or if the Employee authorizes an investment advisor to make exchanges as described above, the Custodian shall be entitled to rely and act upon telephonic instructions received from any person directing the exchange of any or all Fund Shares held by the Custodian for the benefit of the Employee, and shall be fully protected by the Employee in acting in accordance with any such telephonic instructions. A. The Employee, or the beneficiary or estate of the Employee in the event of the Employee's death, shall be entitled to distribution of the assets in the Custodial Account in a form provided in Section V. B. below as follows: l. upon termination of employment before attaining age 55; 4. upon attaining age 59-1/2; 5. upon encountering financial hardship. For the purposes of this Plan, retirement shall mean termination of employment on or after attaining age 55. For purposes of this Plan, the Employee shall be considered disabled if the Employee is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or to be of long, continued and indefinite duration. Only contributions that are made on behalf of the Employee pursuant to the Salary Reduction Agreement entered into between the Employee and the Employer may be distributed on account of financial hardship. Non-elective Employer contributons and earnings on assets in the Custodial Account may not be distributed on account of financial hardship. For purposes of this Plan the term "financial hardship" shall mean, but shall not be limited to, the purchase of a residence, expenses incurred for the higher education of dependent children, and illness sustained by the Employee or the Employee's dependents. B. The Employee may elect a form of distribution from among the following alternatives: 1. a single payment, in cash or kind; 2. equal or substantially equal monthly, quarterly or annual installments over a period not to exceed the life expectancy of such Employee or the joint life and survivor expectancy of such Employee and his beneficiary; or 3. an immediate or deferred annuity contract purchased by the Custodian, which provides for payments over the life of the Employee or, if the Employee so elects, for payments over the lives of the Employee and the Employee's beneficiary. Such election shall be made at least sixty (60) days prior to the date on which distribution is expected to be made or to begin. Such an election shall be made in writing in such form as shall be acceptable to the Custodian. If the Plan and Custodial Agreement are determined to constitute an "employee pension benefit plan" subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), then all distributions shall be subject to the qualified joint and survivor annuity and qualified preretirement survivor annuity rules of Section 205 of ERISA. C. The Employee may designate a beneficiary(ies) of the Employee's choosing and may, in addition, name a contingent beneficiary. Such designation shall be made in writing in a form acceptable to the Custodian. The Employee may at any time revoke the Employee's designation of a beneficiary by filing with the Custodian a written notice of such revocation or change in a form acceptable to the Custodian. If no designation of a beneficiary shall have been made, distribution shall be made to the estate of the Employee. A beneficiary designation shall not be effective until received by the Custodian while the Employee is alive. D. Notwithstanding any other provision of this Section V, the Employee's entire interest in the Custodial Account must be or begin to be, distributed by the Employee's required beginning date, which is the April 1 following the calendar year in which the Employee reaches age 70-1/2. Notwithstanding the preceding sentence, if the Employee had attained age 70-1/2 prior to January 1, 1988, the required beginning date is the later of age 70-1/2 or termination of employment. By the applicable required beginning date, the Employee may elect in a manner acceptable to the Custodian to have the balance in the Custodial Account distributed in any of the methods described in section V.B. above. If the Employee does not choose any of the methods of distribution described in Section V.B. above before the required beginning date, distribution to the Employee will be made by that date in accordance with Section V.B.2 above based on the Employee's life expectancy only, without recalculation, and distribution will be made on an annual basis. If the Employee elects a means of distribution described in Section V.B.3 above, the annuity contract must satisfy the requirements of Section 72 or 403(b)(1) of the Code. If the Employee elects a means of distribution described in Section V.B.2 above, the annual payment required to be made by the Employee's required beginning date is for the calendar year the Employee reached age 70-1/2. Annual payments for subsequent years, including the year the Employee's required beginning date occurs, must be made by December 31 of that year. E. If the Employee dies before the Employee's entire interest is distributed to the Employee, the entire remaining interest will be distributed as follows: 1. If the Employee dies on or after the Employee's required beginning date, and after distributions have commenced, the entire remaining interest will continue to be distributed in the same manner as before the Employee's death. The preceding sentence shall not apply if the beneficiary(ies) elect otherwise to have the remaining interest distributed in some other form pursuant to Section V.B. above. 2. If the Employee dies before the Employee's required beginning date, the entire remaining interest will, at the election of the beneficiary(ies), either (a) be distributed by December 31 of the year in which the 5th anniversary of the Employee's death occurs, or (b) be distributed in equal or substantially equal payments over the life or life expectancy of the designated beneficiary(ies). The election of either Subsections E.2(a) or E.2(b) above must be made by December 31 of the year following the year of the Employee's death. If the beneficiary(ies) do not elect either of the distribution options described in Subsections E.2(a) and E.2(b) above, distribution will be made in accordance with Subsection E.2(b) if the beneficiary is the Employee's surviving spouse and in accordance with Subsections E.2(a) if the beneficiary(ies) are or include anyone other than the surviving spouse. In the case of distributions under Subsection E.2(b), distributions must commence by December 31 of the year following the year of the Employee's death. If the Employee's spouse is the beneficiary, distributions need not commence until December 31 of the year the Employee would have attained age 70-1/2, if later. 3. In the case of distributions over life expectancy in equal or substantially equal annual payments, to determine the minimum annual payment for each year, the Employee's entire interest in the Custodial Account as of the close of business on December 31 of the preceding year, will be divided by the life expectancy of the Employee (or the joint life and last survivor expectancy of the Employee and the Employee's beneficiary, or the life expectancy of the beneficiary, whichever applies). In the case of distributions over the joint life and survivor expectancy of the Employee, the initial life expectancy (or joint life and last survivor expectancy) will be determined using the attained ages of the Employee and the beneficiary as of their birthdays in the year the Employee reaches age 70-1/2. In the case of distribution in accordance with Section E.2(a), life expectancy will be determined using the attained age of the beneficiary as of the beneficiary's birthday in the year distributions are required to commence. Except as otherwise provided in Section V.B., unless the Employee (or spouse) elects to have life expectancy recalculated, the Employee's life expectancy (and the life expectancy of the Employee's spouse, if applicable) will not be recalculated annually using their attained ages as of their birthdays in the year for which the minimum annual payment is being determined. The life expectancy of the beneficiary (other than the spouse) will not be recalculated. The minimum annual payment may be made in a series of installments (e.g., monthly, quarterly, etc.) as long as the total payments for the year made by the date required are not less than the minimum amounts required. The Employee delegates to the Sponsor the following powers with respect to the Plan: (a) to remove the Custodian and select a successor Custodian; and (b) to amend this Plan (including retroactive amendment). The powers herein delegated to the Sponsor shall be exercised by such officer thereof as the Sponsor may designate from time to time, and shall be exercised only when similarly exercised with respect to all other Employees adopting the Plan. The Sponsor, The Dreyfus Corporation, and each of the Funds, and each of their respective officers, directors, trustees, general partners, affiliates, agents and employees shall have no responsibility or liability of any kind and shall be fully protected by the Employee with regard to the administration of the Plan except as provided in this Section VI of the Plan, and none of them shall incur any liability of any nature to the Employee or any beneficiary or other person in connection with any act done or omitted to be done in good faith in the exercise of any power or authority herein delegated to the Sponsor. The Employee agrees to indemnify and hold the Sponsor, The Dreyfus Corporation and each of the Funds, and each of their respective officers, directors, trustees, general partners, affiliates, agents and employees harmless from and against any and all claims, liabilities, losses, damages and expenses, including attorneys' and accountants' fees, incurred in connection with the exercise of, or omission to exercise, any of the powers delegated to the Sponsor under this Section VI, except such liabilities and expenses as may arise from the Sponsor's own negligence or willful misconduct. The Employee delegates to the Sponsor the power to amend this Plan (including retroactive amendment) upon written notice to the Employee. Any such amendment shall become effective upon mailing notice of such amendment to the Custodian and the Employee. No amendment shall be effective if it would cause or permit: (a) any part of the Custodial Account to be diverted to any purpose that is not for the exclusive benefit of the Employee and the Employee's beneficiaries; (b) the Employee to be deprived of any portion of the Employee's interest in the Custodial Account; or (c) the imposition of an additional duty on the Custodian without its prior written consent. The Employee reserves the right to terminate further contributions to the Custodial Account established under this Plan by agreement with the Employer provided that the Employee shall file with the Custodian an executed copy of such agreement. The Employee also reserves the right to transfer the assets of the Custodial Account to such other form of Section 403(b)(7) Retirement Plan as the Employee may determine, upon written instructions to the Custodian in such form as the Custodian may reasonably require. The Plan shall be administered, construed and enforced according to the laws of the State of New York, except to the extent preempted by the Act. It is intended that this Plan qualify under Section 403(b)(7) of the Code, and no provision of the Plan shall be construed to conflict with any requirement of Section 403(b)(7) of the Code. The Employer shall be solely responsible for compliance with the nondiscrimination rules of Section 403(b)(12) of the Code, if applicable. If the Plan and Custodial Agreement are determined to constitute an "employee pension benefit plan" subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), then the Employer shall comply with all applicable requirements of ERISA. The Employer may maintain a separate 403(b) plan document in addition to the Plan and Custodial Agreement. Such plan document shall be administered and maintained by the Employer in a manner consistent with the Plan and Custodial Agreement, and neither the Custodial nor the Sponsor shall have any duties or responsibilities with respect to such separate document. By signing the Dreyfus 403(b)(7) Retirement Plan Custodial Account Application (the "Application") for the Employee named thereon ("the Employee"), the Employer named thereon ("the Employer") adopts the Dreyfus 403(b)(7) Retirement Plan ("the Plan") and establishes a Custodial Account ("the Custodial Account"), and The Dreyfus Trust Company ("the Custodian"), by countersigning the Application, accepts the Custodianship thereof upon the terms and conditions set forth below. The Employer represents that it is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and is exempt from tax under Section 501(a) of the Code, or that it is an educational institution (as defined in Section 170(b)(1)(A)(ii) of the Code, which is a State, a political subdivision thereof, or an agency or instrumentality thereof. This Custodial Agreement is established for the purpose of establishing and maintaining a Custodial Account for the Employee and for investing such contributions as described in Paragraph 8 hereof. The Employer intends that this account qualify as a "Custodial Account for regulated investment company stock" within the meaning of Section 403(b)(7) of the Code. All contributions must be made in cash. The Custodian will accept only contributions received from the Employer with the exception of rollovers as defined in Section 403(b)(8) of the Code, and transfers from other retirement plans established under Section 403(b) of the Code. All contributions hereafter made to the Custodial Account shall be in accordance with the provisions of this Agreement. The Custodian shall have no obligation to verify the allowability of such contributions and may rely solely on the representations of the Employer or the Employee with respect thereto. The Employee's interest in the balance in his Custodial Account shall at all times be nonforfeitable. The Custodial Account is established for the exclusive benefit of the Employee and the Employee's beneficiary(ies) and for the purpose of holding in the Custodial Account such contributions of money made on behalf of the Employee as the Custodian may receive from time to time from the Employer and of the shares purchased therewith pursuant to Paragraph 8 hereof. At no time shall it be possible for any part of the assets of the Custodial Account to be used for, or diverted to, purposes other than for the exclusive benefit of the Employee and the Employee's beneficiary(ies). In connection with the making of any distributions, the Custodian may rely solely on the accuracy of all facts supplied at any time by the Employee, including any written designation of a beneficiary. The Employee's interest in the Account shall be distributed to the Employee or will begin to be distributed upon receipt by the Custodian of written instructions as to the method of distribution. The Employee may elect a form of distribution from among the following alternatives: (a) a single payment, in cash of kind; (b) equal or substantially equal monthly, quarterly or annual installments over a period not to exceed a period measured by the life expectancy of such Employee or the joint life and survivor expectancy of such Employee and the Employee's beneficiary; or (c) the purchase and distribution of an immediate or deferred annuity policy purchased by the Custodian, which provides for payments over the life of the Employee or, if the Employee so elects over the lives of the Employee and the Employee's beneficiary. The Employee may, by notice in writing delivered to the Custodian while the Employee is alive, designate or change a beneficiary(ies) who will receive any undistributed interest in the Custodial Account in the event of the Employee's death. In the absence of any such designation, any undistributed interest of the Employee shall be paid to the legal representative of the Employee's estate. The amount of each contribution to the Custodial Account shall be applied to the purchase of shares of ownership in one or more investment companies registered under the Investment Company Act of 1940, as amended (hereinafter referred to individually as a "Fund", which is approved by Dreyfus Service Corporation (the "Sponsor") and which the Custodian has agreed to hold, in accordance with the Fund's then current Prospectus. Such shares are referred to herein as "Fund Shares." The Custodian shall credit such Fund Shares to the separate Custodial Account of the Employee who shall be the beneficial owner of such shares. A confirmation for each contribution received showing the investment thereof and current status of the Custodial Account shall be prepared by the Custodian and sent to the Employee. All dividends and capital gains distributions received on the Fund Shares held by the Custodian in the Custodial Account shall be reinvested in accordance with the respective Fund's then current Prospectus in additional Fund Shares, which shall be credited to the Custodial Account. A confirmation showing the current status of the Custodial Account shall be prepared by the Custodian and sent to the Employee with respect to each such reinvestment. At least once each year the Custodian shall furnish the Employee with an annual report of all activity in the Custodial Account during the preceding calendar year, which shall be deemed to be the sole accounting required to be provided by the Custodian necessary under this Agreement. If the Custodian does not receive a written objection to such accounting from the Employee within one hundred eighty (180) days after the date the accounting is sent by the Custodian, the Employee shall be considered to have fully approved the accounting and the Custodian shall be relieved from all liabilities and responsibilities that may arise in connection with any matters covered by the accounting. The Employee may authorize and direct the Custodian in writing to exchange any or all Fund Shares held in the Custodial Account for any other Fund Shares, subject to, and in accordance with, the terms and conditions of any exchange privilege, including the telephone exchange privilege, offered with respect to Fund Shares as described in the then current Prospectus of the applicable Fund. The Sponsor may allow the Employee to authorize an investment advisor to make such exchanges subject to, and in accordance with, such terms and conditions as may be agreed upon in writing from time to time by the Sponsor and the Custodian. If the Employee elects, either in the Application or other form acceptable to the Custodian, the telephone exchange privilege or authorizes an investment advisor to make exchanges as described above, the Custodian shall be entitled to reply and act on telephone instructions from any person representing himself or herself to be the Employee directing the exchange of any or all shares of a Fund held in the Custodial Account for shares of any other Fund(s) as specified in such telephonic instructions, provided that such Fund is available for sale in the state of residence of the Employee. It is understood and agreed that the telephone exchange privilege is subject to the limitations specified above. The Employee affirms that, prior to requesting any exchange, the Employee shall obtain a copy of the then current Prospectus of each Fund into which any exchange is requested to be made. The Employee authorizes and directs the Custodian to respond to any telephonic inquiries relating to the status of shares owned, including, but not limited to, the number of shares held. The Employee and the Employee's beneficiary(ies), assignees and successors understand and agree that the Sponsor, the Custodian, each Fund and The Dreyfus Corporation, and each of their respective officers, directors, trustees, general partners, affiliates, agents and employees, will not be held liable and will be fully protected by the Employee against any and all claims, liabilities, losses, damages and expenses (including attorneys' and accountants' fees) arising out of any exchange request effected in accordance with any telephone instructions. The Employee certifies and agrees that the certifications, authorizations, directions and restrictions contained herein or otherwise provided to the Custodian will continue in effect until the Custodian receives written notice of any change or revocation. The Employee understands that each of the Funds and the Custodian reserves the right to refuse any telephonic instructions. All Fund Shares acquired by the Custodian for the benefit of the Employee shall be registered in the name of the Custodian or its nominee. 9. Charges Against Account-Taxes, Expenses, and Custodian's Compensation Any income taxes or other taxes of any kind whatsoever that may be levied or assessed upon, or in respect of, the Custodial Account shall be paid from the assets of the Custodial Account. Any transfer taxes incurred in connection to the investment and reinvestment of the assets of the Custodial Account, all other administrative expenses incurred by the Custodian in the performance of its duties hereunder (including without limitation, any expenses incurred by the Custodian in the preparation and filing of extraordinary returns or reports including unrelated business income tax return), including fees for legal services rendered to the Custodial Account, and such compensation to the Custodian as set forth in the Custodian's fee schedule as amended by the Custodian from time to time, shall be paid of the Custodial Account. (a) The Sponsor shall at any time have the right to remove the Custodian by delivering to it a notice in writing to that effect, which notice shall also designate a successor custodian. Upon receipt by the Custodian of written acceptance by the successor custodian of its appointment, the Custodian shall forthwith transfer and pay over to such successor custodian the assets of the Custodial Account and all records pertaining thereto. Upon receipt of such assets and records by the successor Custodian, the removal of the Custodian shall be effective. The Custodian may, however, reserve such Fund Shares as may be required for the payment of all its fees, compensation, costs and expenses and for the payment of all liabilities of, or against the assets of, the Custodial Account or Custodian and where necessary may liquidate such reserved Fund Shares. Any balance of such reserve remaining after the payment of all such expenses and liabilities shall be paid over to the successor custodian. Any successor custodian must meet the requirements in Section 401(f)(2) of the Code. (b) The Custodian shall at any time have the right to resign as Custodian under this Agreement by delivering to the Sponsor and the Employee a notice in writing to that effect. Upon receiving such notice of resignation, the Sponsor shall forthwith appoint a successor custodian and upon receipt by the Custodian of written acceptance by the successor custodian of such appointment, the Custodian is authorized to act in the same manner as provided in the preceding paragraph. In the event the Sponsor fails to appoint a successor Custodian within ninety (90) days of receiving notice of the Custodian's resignation, the Custodian may distribute to the Employee the assets of the Custodial Account, reserving such Fund Shares as may be required for the payment of all its fees, compensation, costs and expenses and for the payment of all liabilities of or against the assets of the Custodial Account or the Custodian, so that it may, where necessary, liquidate such shares with any balance remaining after payment of all such expenses and liabilities to be paid to the Employee. The Custodian shall keep accurate and detailed accounts of all contributions, receipts, investments, distributions, disbursements and all other transactions. The Custodian shall prepare and file any returns required to be filed by it as Custodian of a plan under Section 403(b) of the Code, and supply to the Internal Revenue Service any other information as may be required from a Custodial Account qualifying under Section 501(a) of the Code. The Custodian shall deliver to the Employee all notices, prospectuses, financial statements, proxies and proxy soliciting material relating to the Fund Shares held by it in the Custodial Account. The Custodian shall not vote any of the Fund Shares held hereunder except in accordance with the written instructions of the Employee. 13. Reports to Department of Labor Any reports or filings required to be made with the Department of Labor under the Employee Retirement Income Security Act of 1974 with respect to a Custodial Account established under this Agreement, shall be made by the Employer. The Custodian shall be under no duties whatsoever except such duties as are specifically set forth as such in this Custodial Agreement, and no implied covenant or obligation shall he read into this Custodial Agreement against the Custodian. In the performance of its duties the Custodian shall be liable only for its own gross negligence and willful misconduct. The Employee shall have the sole authority and responsibility for the enforcement or defense of the terms and conditions of the Custodial Agreement against, or on behalf of, any person(s) claiming any interest in the Custodial Account. The Custodian shall not he required to prosecute, defend or respond to any action and/or judicial proceeding relating to the Custodial Account unless it has previously received indemnification satisfactory to it in form and in substance. The Custodian reserves the right to amend all or any part of the terms of this Custodial Agreement in any manner that would not disqualify the Custodial Account from complying with Sections 403(b) and 501 of the (Code upon written notice to the Employee. The Employee hereby grants Dreyfus Service Corporation the right to amend the terms of this Agreement in order that the Custodial Account might qualify as a Custodial Account for regulated investment company stock within the meaning of Section 403(b)(7) of the Code, provided, however, that no such amendment which increases the duties or responsibilities of the Custodian shall become effective unless the Custodian has consented to such amendment. Any such amendment by Dreyfus Service Corporation shall become effective upon mailing notice of such amendment to the Custodian and the Employee. The Custodian shall not be liable for any action it shall take when such action or failure to act is in accordance with the written instructions of the Employer or the Employee or is due to the absence of such instructions. The Custodian shall not be required to give bond or security for the performance of its duties hereunder. The Employee shall at all times fully indemnify and save harmless the Custodian from any liability that may arise in connection with this Agreement, except liability from the negligence or willful misconduct of the Custodian. The benefits provided hereunder shall not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, and any attempt to cause such benefits to be so subjected shall not be recognized except to such extent as may be required by law. This Custodial Agreement shall be construed, administered and enforced according to the laws of the State of New York. The Plan shall be administered, construed and enforced according to the laws of the State of New York, except to the extent preempted by the Act. It is intended that this Plan qualify under Section 403(b)(7) of the Code, and no provision of this Plan shall be construed to conflict with any requirement of Section 403(b)(7) of the Code. The Employer shall be solely responsible for compliance with the nondiscrimination rules of Section 403(b)(12) of the Code, if applicable. If the Plan and Custodial Agreement are determined to constitute an "employee pension benefit plan" subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), then the Employer shall comply with all applicable requirements of ERISA. The Employer may maintain a separate 403(b) plan document in addition to the Plan and Custodial Agreement. Such plan document shall be administered and maintained by the Employer in a manner consistent with the Plan and Custodial Agreement, and neither the Custodian nor the Sponsor shall have any duties or responsibilities with respect to such separate document. Dreyfus Group Retirement Plans is a division of Dreyfus Service Corporation. 1992, Dreyfus Service Corporation NP/EMPYcust3-925 Custodial Account Application - Form #1 1. a. Name of Employee: ______________________________________________________ b. Employee's Social Security Number: _____________________________________ c. Date of Birth: _________________________________________________________ d. Telephone Number: ( ) ( ) 3. Employer's Name, Address and Telephone Number: ( ) 4. Please indicate below the name of each fund in which all contributions shall be invested and the percentage of each contribution to be allocated to each fund: Fund Name % of Contribution (no less than 10% in any one fund) If no selection is indicated, your money will be invested in Dreyfus Liquid Assets, Inc. This Application must be accompanied or preceded by a Dreyfus Liquid Assets, Inc. Prospectus. 5.[] If you wish to transfer assets from an existing 403(b) plan, check here and complete the enclosed Transfer Request Form-Form #3 . EMPLOYEE'S ACCEPTANCE By signing this Application, the Employee acknowledges that the Employee has received and agrees to be bound by the terms and conditions of the current Prospectus of each fund specified in paragraph 4 above, the Dreyfus 403(b)(7) Retirement Plan (the "Plan") and the Dreyfus 403(b)(7) Retirement Plan Custodial Agreement (the "Custodial Agreement"), and hereby appoints The Dreyfus Trust Company as Custodian under the Custodial Agreement. The Employee also designates the beneficiary (ies) specified on the Beneficiary Designation Form set forth on the reverse side of this Application and agrees to be bound by the terms and conditions set forth therein. The Employee agrees that the Custodian shall be entitled to deduct its fees and administration expenses as set forth in the Custodian's current fee schedule, a copy of which has been received by the Employee, and which may be amended by the Custodian in the future upon written notice to the Employee. By signing this Application, the Employee accepts the privilege to make exchanges, including telephone exchanges, among select Dreyfus funds pursuant to Section IV of the Plan and Section 8 of the Custodial Agreement. Prior to any exchange, a current Prospectus of the fund(s) into which exchanges are to be affected must be obtained. Exchanges can be made only between Dreyfus mutual fund accounts having identical registrations. The current exchange privilege is subject to certain other limitations, as described in the current Prospectus of each fund. A person wishing to make a telephone exchange should call The Dreyfus Trust Company at the appropriate number listed below: In the Continental US., as well as Alaska, Hawaii, Puerto Rico and the U.S. Virgin Islands, call toll free: 1-800-221-4060. Overseas, call: 401-455-3306. EMPLOYER'S ACCEPTANCE By signing this Application, the Employer named above agrees to the terms and conditions of the Plan, the Custodial Agreement and this Application, and certifies that the Employer is an organization described in Section 501(c)(3) of the Code, which is exempt from tax under Section 501(a) of the Code, or is another qualifying organization described in Section 403(b) of the Code. CUSTODIAN'S ACCEPTANCE By signing this Application, The Dreyfus Trust Company accepts this Application and its appointment as Custodian of the Employee's Custodial Account under the terms and conditions set forth in the Plan and the Custodial Agreement. This Application will be maintained by The Dreyfus Trust Company, as Custodian. The Dreyfus Trust Company, as Custodian Date Salary Reduction Agreement - Form #2 Complete this form to indicate the amount of money to be deferred from your salary and contributed to your account each pay period. This amount may be changed only once during a calendar year. Both you and your Employer must sign where indicated. This form should be retained by the Employer; you should keep a copy for your records. AGREEMENT made this ___________ day of ______________, 19___, by and between _____________________________ (the "Employee") and __________________________ (the "Employer"), whereby the Employer and Employee agree as follows: 1. The salary of the Employee will be reduced by $__________; or by _________% (minimum of $___________ per pay period). 2. The amount of such reduction shall be contributed by the Employer to: The Dreyfus Trust Company, as Custodian (or any successor custodian) of the Employee's Custodial Account in accordance with the Dreyfus 403(b)(7) Retirement Plan (the "Plan"), the Dreyfus 403(b)(7) Retirement Plan Custodial Agreement (the "Custodial Agreement"), and Section 403(b)(7) of the Internal Revenue Code of 1986, as amended (the "Code"). 3. The foregoing arrangement shall be subject to the limitations on the maximum amount(s) that can be contributed under a plan described in Section 403(b)(7) of the Code. The limitations are found in Sections 402, 403(b) and 415 of the Code. The Employee shall be solely responsible for ensuring that these limits are not violated. 4. All contributions made to the Employee's Custodial Account shall be administered in accordance with the terms and conditions of the Plan, the Custodial Agreement and the Custodial Account Application completed by the Employee and the Employer. 5. This Salary Reduction Agreement is legally binding and irrevocable with respect to all amounts earned by the Employee while this Agreement is in effect, provided, however, that the Employer may terminate this Agreement with respect to amounts not earned at the time of termination. It is further understood and agreed that the Employee will not be permitted to make more than one Salary Reduction Agreement, or to make more than one change in the amount or percentage of the salary reduction specified in the Employee's Salary Reduction Agreement, during any one taxable year of the Employee, except for any change required to comply with the limitations described in Paragraph 3 above. EXECUTED as of the date first written above. (Print Name of Employer) (Signature of Employee) Transfer Request Form - Form #3 This form should be completed if you wish to transfer assets from an existing 403(b) plan. Simply enter the information requested. Both you and your Employer must sign where indicated. IF YOU WISH TO TRANSFER ASSETS FROM YOUR EXISTING 403(b) PLAN, COMPLETE THIS FORM AND FORWARD IT TO: THE DREYFUS TRUST COMPANY, as Custodian, Dreyfus Mutual Funds, P.0. Box 6427, Providence, RI 02940-9808, Attn: (Name of Present Custodian or Insurance Carrier) To Whom it May Concern: It is my intention to effect a tax-free transfer of: [] all assets; or [] a portion of assets: $____________ in the above-referenced Tax Sheltered Annuity Contract(s)(2)(1)/ Tax Sheltered Custodial Account(s) to a Dreyfus 403(b)(7) Retirement Plan sponsored by Dreyfus Service Corporation. This letter represents my formal request to transfer all or a portion of such assets (cash or fund shares only(1)) to The Dreyfus Trust Company, as Custodian, for investment in certain mutual fund shares designated by me through a Custodial Account that conforms to Section 403(b)(7) of the Internal Revenue Code of 1986, as amended. Please make your check payable to The Dreyfus Trust Company, as Custodian, and forward it to: I confirm that I have entered into a binding agreement with my new Custodian and in the event that I receive a check for the proceeds of the above-referenced account(s), I will immediately endorse the check to The Dreyfus Trust Company, as Custodian, for deposit into my Dreyfus 403(b)(7) Retirement Plan Custodial Account (please indicate existing Dreyfus plan account number, if any: _____________________________________). The Dreyfus Trust Company accepts its appointment as Custodian and confirms the above. Please send the amount requested (check(s) made payable to The Dreyfus Trust Company, as Custodian). Acceptance by The Dreyfus Trust Company If you have any questions, call our Benefit Plans Division toll free: 1-800-358-5566. In New York City call: (718) 895-1397. In N.Y. State, call collect. 1. Special requirements apply if you are over the age of 70-1/2 and have a different beneficiary listed in your old plan. Contact the Custodian. 2. In Revenue Ruling 90-24, the Internal Revenue Service ("IRS") stated that a tax-free transfer can be made from a 403(b) annuity contract or a 403(b)(7) custodial account to a 403(b)(7) custodial account so long as the transferred assets continue to be subject to any restriction on early withdrawals found in the original investment. 3. In cash or, if shares, then only shares of ownership in an investment company registered under the Investment Company Act of 1940, as amended, the shares of which are underwritten and distributed by the Dreyfus Service Corporation, or shares in any other investment company as may, from time to time, be offered by Dreyfus Service Corporation, which the Custodian has agreed to hold in the Custodial Account. Naming more than one beneficiary You can name one or more persons as a beneficiary and you can designate each of them as a primary or secondary beneficiary. To name more than one primary or secondary beneficiary, include all information requested below on a separate piece of paper. Sign and date each additional page and attach it to this Application. If you name more than one primary beneficiary, or one secondary beneficiary, you can specify if they are to receive equal or unequal shares. If you do not specify, they will be paid in equal shares. Any secondary beneficiary or beneficiaries you name will receive all or a portion of your Dreyfus 403(b)(7) Custodial Account balance only if all primary beneficiaries die before you. It will also be assumed that you want your entire Dreyfus 403(b)(7) Custodial Account balance to be paid to the beneficiaries who survive you. Thus, if you name two primary beneficiaries but one of them dies before you, the entire balance will be paid to the surviving beneficiary. Naming a trust as beneficiary To name a trust as a primary or secondary beneficiary, write the name and address of the trustee, then give the date of the trust agreement and the name of each trust beneficiary. Other important points to remember By naming a beneficiary on this Application, you revoke any prior designation of beneficiary you may have made with respect to the assets in your Dreyfus 403(b)(7) Custodial Account. You have the right to change your beneficiaries at any time by filing a proper written request with the Custodian, which is received by the Custodian during your lifetime. If no beneficiary survives you, if no beneficiary designation is in effect at your death, or if your beneficiary is your estate, the balance in your Dreyfus 403(b)(7) Custodial Account will be paid to your estate. Date of Birth Social Security # Percent of Share Secondary Beneficiary (in case of death of primary beneficiary(ies) Date of Birth Social Security # Percent of Share If your Employer makes contributions to your Dreyfus 403(b)(7) Custodial Account, the Custodial Account is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and you are married and designate a primary beneficiary other than your spouse, you must have your spouse sign the below consent: I hereby consent to the above beneficiary designations and limit my consent to the beneficiaries indicated above. In addition, I waive my right to limit my consent to a specific form of benefit and consent to any form of benefit which may be elected under the Custodial Account. I understand that my spouse must execute a new Beneficiary Designation Form if he or she wants to designate another beneficiary. FOR DEALERS AND ADVISORS ONLY Name Address City State Zip Salesman's Name Salesman's # Branch & Dealer Code [] CHECK ONLY IF COPY OF CONFIRM SHOULD BE SENT TO BRANCH OFFICE INSTEAD OF HOME OFFICE. BRANCH ADDRESS (IF BOX ABOVE IS CHECKED)-ALSO BRANCH CODE MUST BE FILLED IN ABOVE. Dreyfus Prototype Simplified Employee Pension The Employer named in Section I.A. below hereby establishes or restates a Simplified Employee Pension ("SEP"). The terms of the SEP are set forth in this Adoption Agreement and the applicable provisions of the Dreyfus Prototype Simplified Employee Pension Basic Plan Document, as amended from time to time, which is hereby adopted and incorporated herein by reference. B. Employer is a [] corporation; [] S Corporation; [] partnership; [] sole proprietor; [] other. C. Employer's Tax ID Number: _____________________________ D. Employer's Fiscal Year: ___________________________________ E. Effective Date of Plan: ____________________________________ If this is an amendment and restatement of an existing SEP, enter the date originally adopted ______________________________ The Effective Date of this amended SEP __________________________. F. Plan Year shall mean: [] the calendar year. [] the Employer's fiscal year. All Employees shall be Eligible Employees, except: [] Employees who have not attained age __________________ (not to exceed age 21). [] Employees who have not performed service for the Employer during at least _____________________ (not to exceed 3) of the 5 calendar years immediately preceding such calendar year. [] Employees with total compensation (within the meaning of section 414(q)(7) of the Code) from the Employer for the calendar year of less than $300 (adjusted in accordance with section 408(k)(8) of the Code). [] Employees included in a unit of Employees covered by a collective bargaining agreement between the Employer and employee representatives, if retirement benefits were the subject of good faith bargaining ("Collectively Bargained Employees"). For this purpose, the term "employee representatives" does not include any organization more than half of whose members are Employees who are owners, officers or executives of the Employer. The determination of who is a Collectively Bargained Employee shall be made taking into consideration the special rules set forth in IRS Regulation Section 1.410(b)-6(d)(2). [] Employees who are nonresident aliens and who receive no earned income from the Employer which constitutes income from sources within the United States ("Nonresident Aliens"). The determination of who is a Nonresident Alien shall be made taking into consideration the special rules set forth in IRS Regulation Section 1.410(b)-6(c). Compensation shall mean all of each Participant's: [] Information required to be reported under sections 6041, 6051 and 6052 of the Code. Wages as defined in section 3401(a) and all other payments of compensation to the Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under sections 6041(d), 6051(a)(3) and 6052 but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). [] Section 3401(a) wages. Wages as defined in section 3401(a) of the Code for purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). [] Section 415 safe-harbor compensation. Wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or expense allowances under a nonaccountable plan (as described in Section 1.62-2(c)), excluding the following: (a) Employer contributions to a plan of deferred compensation to the extent that, before the application of the section 415 limitations to that plan, the contributions are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan described in section 408(k), or any distributions from a plan of deferred compensation regardless of whether such amounts are includible in the gross income of the Employee; (b) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) Amount realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) Other amounts which receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includible in the gross income of the Employee), or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of any annuity described in section 403(b) of the Code (whether or not the amounts are excludable from the gross income of the Employee). Note: Section 415 safe-harbor compensation is determined without regard to the exclusions from gross income in sections 931 and 933 of the Code. A similar rule is to be applied in determining the compensation of Self-Employed Individuals. which is actually paid or made available to the Participant during: [] The Plan Year. [] The taxable year ending with or within the Plan Year. For any Self-Employed Individual covered under the Plan, Compensation will mean Earned Income. [] Compensation shall be reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation and welfare benefits. [] Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Employee under sections 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. IV. Employer and Employee Contributions [] An amount fixed by appropriate action of the Employer. [] ________________% of Compensation of Participants for the Plan Year (not to exceed 15%). Employer Discretionary Contributions [] shall; [] shall not be integrated with Social Security. a. [] The Permitted Disparity Percentage shall be _________________%. b. [] The Permitted Disparity Percentage shall be determined annually by appropriate action of the Employer. c. [] The Integration Level shall be: [] The Taxable Wage Base [] $__________________ (a dollar amount less than the Taxable Wage Base). [] ________________% (not to exceed 100%) of the Taxable Wage Base. Note: If a Plan Year has fewer than twelve (12) months and Compensation is limited to compensation paid during the Plan Year, the Integration Level shall be prorated in accordance with IRS Regulation Section 1.401(1)-2(d)(5). The Permitted Disparity Percentage cannot exceed the lesser of: (i) the rate at which Employer contributions are allocated to the account of Employees with respect to the Compensation of Employees at or below the integration level (expressed as a percentage of Compensation), or (ii) the greater of 5.7% or the tax rate under section 3111(a) of the Code attributable to the old age insurance portion of the Old Age, Survivors and Disability Income provisions of the Social Security Act (as in effect on the first day of the Plan Year). If the Integration Level selected above is other than the Taxable Wage Base ("TWB"), the 5.7% factor in the preceding sentence must be replaced by the applicable percentage determined from the following table. If the Integration Level is: more than but not more than The Applicable Factor is X* 80% of TWB 4.3% 80% of TWB Y** 5.4% X = the greater of $10,000 or 20% of TWB *Y = any amount more than 80% of TWB, but less than 100% of TWB [] Shall not be permitted A Participant may elect to have his or her Compensation reduced by the following percentage or amount per pay period: [] An amount not excess of __________________% of Compensation [cannot exceed the lesser of 15% of Compensation (determined without regard to the Employer contributions made under this Plan) or the dollar limitation of section 402(g) of the Code for the calendar year ($9,240 for 1995, as indexed)]. [] An amount not in excess of $ ________________ of Compensation [cannot exceed the lesser of 15% of Compensation (determined without regard to the Employer contributions made under this Plan) or the dollar limitation of section 402(g) of the Code for the calendar year ($9,240 for 1995, as indexed)]. A Participant may elect to commence Elective Deferrals the next pay period following: ________________ (enter date or period -- at least once each calendar year). A Participant may modify the amount of Elective Deferrals as of ________________________________ (enter date or period -- at least once each calendar year). A Participant [] may; [] may not base Elective Deferrals on cash bonuses that, at the Participant's election, may be contributed to the CODA or received by the Participant in cash. Such election shall be effective as of the next pay period following _____________________ or as soon as administratively feasible thereafter. B. Contributions Not Limited by Net Profits Indicate whether Employer Discretionary Contributions are to be limited to Net Profits of the Employer for the taxable year of the Employer ending with or within the Plan Year. [] Yes [] No [] The provisions of Article V of the Plan shall always apply. [] The provisions of Article V of the Plan shall only apply in Plan Years during which the Plan is or becomes Top-Heavy. B. Indicate whether the determination of Top-Heavy status is to be determined by comparing the aggregate contributions that have been made to the SEP on behalf of Key and Non-Key Employees rather than by comparing the account balances of Key and Non-Key Employees. [] Yes [] No If a Participant in this Plan who is a Non-Key Employee is covered under another qualified plan maintained by the Employer, the minimum Top-Heavy allocation or benefit required under section 416 of the Code shall be provided to such Non-Key Employee under: [] This Plan. [] The Employer's other qualified defined contribution plan. [] The Employer's qualified defined benefit plan. D. Determination of Present Value If the Employer maintains a defined benefit plan in addition to this Plan, and such plan fails to specify the interest rate and mortality table to be used for purposes of establishing present value to compute the Top-Heavy Ratio, then the following assumptions shall be used: Note: If the Employer maintains or has ever maintained a defined benefit plan, the Plan may not permit Elective Deferrals to be made to the Plan. VI. Notice to Adopting Employers If Elective Deferrals are permitted, the "Notice to Adopting Employers" attached hereto is hereby made a part of this Plan. VII. Employer Representations and Covenants The Employer hereby represents and covenants that: a. It is aware of, and agrees to be bound by, the terms of the SEP. b. It understands that the Sponsor will not furnish legal or tax advice in connection with the adoption or operation of the SEP and has consulted legal and tax counsel to the extent necessary. c. The failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. d. It understands that it may not rely upon the opinion letter received for the SEP by the Sponsor in the event that it maintains or has ever maintained a defined benefit pension plan. e. It will provide each Participant with a current copy of the Adoption Agreement, the Basic Plan Document, the Questions and Answers attached hereto, and, if Elective Deferrals are permitted under the SEP, the "Notice to Employees" attached hereto. f. It will notify each Participant in the SEP in writing of any Employer Discretionary Contributions or contributions on account of such Participant's Elective Deferrals made under the SEP to the Participant's IRA not later than the later of: (i) January 31 of the year following the Plan Year for which a contribution is made, or (ii) 30 days after such contribution is made. g. It will furnish each Participant with a copy of any amendment to the terms of the SEP and a clear explanation in writing of its effect within 30 days of the effective date of such amendment. This Adoption Agreement may be used only in conjunction with the Dreyfus Prototype Simplified Employee Pension Basic Plan Document, as amended from time to time. In the event the Sponsor amends the plan document or this Adoption Agreement or discontinues this type of plan, it will inform the Employer. The Sponsor, The Dreyfus Corporation, is available to answer questions regarding the intended meaning of any SEP provisions, or the adoption of the Plan at 144 Glenn Curtiss Boulevard, Uniondale, New York 11556-0144 [(800) 358-0910]. IN WITNESS WHEREOF, the Employer has executed this instrument the ______________ day of _______________________, 19_________. If applicable, the appropriate corporate seal has been affixed and attested to. Attest: Name and Title (Corporations or Partnerships) A Simplified Employee Pension Plan ("SEP") is a plan that provides you with a simplified way to enhance your employee's retirement income. Under an elective SEP, employees may choose whether to make elective deferrals to the SEP or to receive the amounts in cash. If elective deferrals are made, you contribute the amounts deferred by employees directly into an individual retirement arrangement ("IRA") set up by or on behalf of the employee with a bank, insurance company, or other qualified financial institution. The IRA must be one for which the Internal Revenue Service has issued a favorable opinion letter or a model IRA published by the Service as Form 5305-Individual Retirement Trust Account or Form 5305-A-Individual Retirement Custodial Account. The information provided below is intended to assist you in understanding and administering the elective deferral provisions of your SEP. This Notice to Adopting Employer is a part of the Dreyfus Prototype Simplified Employee Pension. I. Employers Who May Not Use This SEP This elective SEP may not be used if you are an employer who: A. Has any leased employees as defined in section 414(n)(2) of the B. Maintains or has maintained a defined benefit plan, even if now C. Had more than 25 employees eligible to participate in the SEP at any time during the prior plan year. (If you are a member of one of the groups described in section VIII. B. below, you may use this SEP, provided that in the prior plan year there never were more than 25 employees eligible to participate in this SEP, in total, of all the members of such groups, trades, or businesses. In addition, all eligible employees of all the members of such groups, trades, or businesses must be eligible to make elective D. Is a state or local government or a tax-exempt organization. This SEP agreement is considered made when: A. You have completed all blanks on the form; and B. You have given all eligible employees copies of this SEP agreement and the "Notice to Employees" and, upon request by any eligible employee, this "Notice to Adopting Employer." (Any individual who, in the future, becomes eligible to participate in this SEP must be given the "Notice to Employees" upon This SEP agreement is effective upon adoption. No elective deferrals may be made by an employee on the basis of compensation that the employee received or had a right to receive before adoption of this agreement and execution by the employee of the deferral election. You may deduct, subject to the otherwise applicable limits, those contributions made to a SEP. Contributions to the SEP are deductible for your taxable year with or within which the plan year of the SEP ends. Contributions made for a particular taxable year and contributed by the due date of your income tax return, including extensions, are deemed made in that taxable year. You may permit your employees to make elective deferrals through salary reduction or on the basis of bonuses that, at the employee's option, may be contributed to the SEP or received by the employee in cash during the year. You are responsible for telling your employees how they may make, change, or terminate elective deferrals based on either salary reduction or cash bonuses. You must also provide a form on which they may make their deferrals. This requirement may be satisfied by use of the "Model SEP Deferral Form" provided for this purpose at the end of these instructions. You may instead use a form that sets forth, in a manner calculated to be understood by the average plan participant, the information contained in the Model SEP Deferral Form. Remember that no deferral election may be made with respect to compensation already received. A. Beginning January 1, 1994, elective deferrals may not be based on more than $150,000 of compensation, as adjusted in accordance with section 408(k)(8) of the Code for cost-of-living changes. Compensation is the employee's total compensation from the employer (determined without including the SEP-IRA contributions) and include: 1. Amounts received for personal services actually performed (see section 1.219-1(c) of the Income Tax Regulations), 2. Earned income defined under section 401(c)(2). B. The maximum limit on the amount of compensation an employee may elect to defer under a SEP for a year is the lesser of 15% of the employee's compensation or the limitation under section 402(g) of the Code, as explained below. Note: The deferral limit is 15 percent of compensation (less employer SEP-IRA contributions). Compute this amount using the following formula: compensation (before subtracting employer SEP-IRA contributions) x 13.0435%. C. If you make nonelective contributions to this SEP for a plan year, or maintain any other SEP or qualified plan to which contributions are made for such plan year, then contributions to all such SEPs and qualified plans may not exceed the lesser of $30,000 or 15% of compensation for any employee. If these limits are exceeded on behalf of any employee for a particular plan year, that employee's elective deferrals for that year must be reduced to the extent of the excess. D. If you are a new employer who had no employees during the prior plan year, you will meet the limitation in section 408(k)(6)(B) of the Code (regarding no more than 25 eligible employees during the preceding year) if you had 25 or fewer employees throughout the first 30 days that you were in existence. VII.Excess Elective Deferrals -- 402(g) Limit Section 402(g) of the Code limits the maximum amount of compensation an employee may elect to defer under a SEP (and certain other arrangements) during the calendar year. This limit, which originally was $7,000, is indexed according to the cost of living. (The section 402(g) limit for 1995, is $9,240, as indexed.) In addition, the limit may be increased if the employee makes elective deferrals to a salary reduction arrangement under section 403(b) of the Code. Amounts deferred for a year in excess of this limit are considered "excess elective deferrals" and are subject to the consequences described below. The section 402(g) limit applies to the total elective deferrals the employee makes for the calendar year, from all employers, under the following arrangements: A. Elective SEPs under section 408(k)(6) of the Code; B. Cash or deferred arrangements under section 401(k) of the Code; C. Salary reduction arrangements under section 403(b) of the Code. Thus, an employee may have excess elective deferrals even if the amount deferred under this SEP alone does not exceed the section 402(g) limit. If an employee elects to defer compensation under this SEP and any other SEP or arrangement has made excess elective deferrals for a calendar year, he or she must withdraw those excess elective deferrals by April 15 following the calendar year to which the deferrals relate. Those excess deferrals not withdrawn by April 15 will be subject to the IRA contribution limitations of sections 219 and 408 of the Code and thus may be considered an excess contribution to the employee's IRA. Such excess elective deferrals therefore may be subject to the six percent tax on excess contributions under section 4973. Income on excess elective deferrals is includible in gross income in the year withdrawn from the IRA and must be withdrawn by April 15 following the calendar year to which the deferrals relate. Income withdrawn from the IRA after that date may be subject to the ten percent tax on early distributions under section 72(t) of the Code if the recipient is not 59 1/2. VIII.Excess SEP Contributions -- Deferral Percentage Limitation The amount each of your highly compensated employees may contribute to this elective deferral SEP is also restricted by the "deferral percentage limitation." This is a limitation based on the amount of money deferred, on average, by your non-highly compensated employees. Deferrals made by a highly compensated employee that exceed this deferral percentage limitation for a plan year are considered "excess SEP contributions" and must be removed from the employee's SEP-IRA, as discussed in more detail below. The deferral percentage limitation for your highly compensated employees is computed by first averaging the "deferral percentages" (as defined below) for each eligible non-highly compensated employee for the plan year and then multiplying this result by 1.25. The deferral percentage for a plan year of any highly compensated employee eligible to participate in this SEP may not be more than the resulting product, the "deferral percentage limitation." Only elective deferrals are included in this computation. Nonelective SEP contributions may not be included. The determination of the deferral percentage for any employee is to be made in accordance with section 408(k)(6) of the Code and should satisfy such other requirements as may be provided by the Secretary of the Treasury. For purposes of making this computation, the calculation of the number and identity of highly compensated employees, and their deferral percentages, is made on the basis of the entire "affiliated employer." In addition, for purposes of determining the deferral percentage of a highly compensated employee, the elective deferrals and compensation of the employee will also include the elective deferrals and compensation of any "family member." This special rule applies, however, only if the highly compensated employee is a 5% owner or is one of a group of the ten most highly compensated employees. The elective deferrals and compensation of family members used in this special rule do not count in computing the deferral percentages of individuals who do not fall into this group. The following definitions apply for purposes of the deferral percentage computation: A. "Deferral percentage" shall mean the ratio (expressed as a percentage) of an employee's elective deferrals for a year to the employee's compensation for that year. The deferral percentage of an employee who is eligible to make an elective deferral, but who does not make a deferral during the year, is zero. B. "Affiliated employer" shall mean any corporation that is a member of a controlled group of corporations (as described in section 414(b) of the Code) that includes the employer; any trade or business (whether or not incorporated) that is under common control (as defined in section 414(c)) with the employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in section 414(m)) that includes the employer; and any other entity required to be aggregated with the employer pursuant to regulations under section 414(o). C. "Family member" shall mean an individual who is related to a highly compensated employee as a spouse, or as a lineal ascendant (such as a parent or grandparent) or descendant (such as a child or grandchild) or spouse of either of those, in accordance with section 414(q) of the Code and the regulations thereunder. D. "Highly compensated individual" shall mean an individual described in section 414(q) of the Code who, during the current or preceding year: 1. Was a 5% owner as defined in section 416(i)(1)(B)(i) of the 2. Received compensation in excess of $50,000, as indexed according to the cost of living in accordance with section 414(q)(1), and was in the top-paid group (the top 20% of 3. Received compensation in excess of $75,000, as indexed according to the cost of living in accordance with section 4. Was an officer and received compensation in excess of 50% of the dollar limit under section 415 of the Code for defined benefit plans. (No more than three employees need be taken into account under this rule. At least one officer, the highest-paid officer if no one else meets this test, however, must be taken into account.) IX. Excess SEP Contributions -- Tax Consequences and Notification of You are responsible for notifying each affected employee, if any, within 2 1/2 months following the end of the plan year, of the amount of excess SEP contributions to that employee's SEP-IRA. Such excess SEP contributions are includible in the employee's gross income in the calendar year as of the earliest date that any elective deferrals by the employee during the plan year would have been received by the employee had he or she originally elected to receive the amounts in cash. However, if the excess SEP contributions (not including allocable income) total less than $100, then the excess contributions are includible in the employee's gross income in the calendar year of notification. Income allocable to the excess SEP contributions is includible in gross income in the year of withdrawal from the IRA. If you fail to notify any of your affected employees within 2 1/2 months following the end of the plan year of an excess SEP contribution, you must pay a tax equal to 10% of the excess SEP contribution. If you fail to notify your employees by the end of the plan year following the plan year in which the excess SEP contributions arose, the SEP no longer will be considered to meet the requirements of section 408(k)(6) of the Code. If the SEP no longer meets the requirements of section 408(k)(6), then any contribution to an employee's IRA will be subject to the IRA contribution limitations of sections 219 and 408 and thus may be considered an excess contribution to the employee's IRA. Your notification to each affected employee of the excess SEP contributions must specifically state in a manner calculated to be understood by the average employee: A. The amount of the excess SEP contributions attributable to that B. That the excess SEP contributions are includible in the employee's gross income for the calendar year or years in which the amounts deferred would have been received by the employee in cash had he or she not made an election to defer and that the income allocable to such excess SEP contributions is includible in the year C. That the employee must withdraw the excess SEP contributions (and allocable income) from the SEP-IRA by April 15 following the calendar year of notification by the employer. Those excess contributions not withdrawn by April 15 following the year of notification will be subject to the IRA contribution limitations of sections 219 and 408 of the Code for the preceding calendar year and thus may be considered an excess contribution to the employee's IRA. Such excess contributions may be subject to the six percent tax on excess contributions under section 4973. If income allocable to an excess SEP contribution is not withdrawn by April 15 following the calendar year of notification by the employer, the income may be subject to the ten percent tax on early distributions under section 72(t) when withdrawn. For information on reporting excess SEP contributions, see Notice 87-77, 1987-2 C.B. 385, and Notice 88-33, 1988-1 C.B. 513, as modified by Notice 89-32, 1989-1 C.B. 671. X. Failure to Satisfy the 50% Test If you discover, as of the end of any plan year, that more than half of your eligible employees have chosen not to make elective deferrals for that year, then all elective deferrals made by your employees for that plan year shall be considered "disallowed deferrals," i.e., IRA contributions that are not SEP-IRA contributions. You must notify each affected employee, within 2 1/2 months following the end of the plan year to which the disallowed deferrals relate, that his or her deferrals are no longer considered SEP-IRA contributions. Such disallowed deferrals are includible in the employee's gross income in the calendar year as of the earliest date that any elective deferrals by the employee during the plan year would have been received by the employee had he or she originally elected to receive the amounts in cash. Income allocable to the disallowed deferrals is includible in the employee's gross income in the year of withdrawal from the IRA. Your notification to each affected employee of the disallowed deferrals must specifically state in a manner calculated to be understood by the average employee: A. The amount of the disallowed deferrals: B. The calendar year in which the disallowed deferrals are includible C. That the employee must withdraw the disallowed deferrals ( and allocable income) from the SEP-IRA by April 15 following the calendar year of notification by the employer. Those disallowed deferrals not withdrawn by April 15 following the year of notification will be subject to the IRA contribution limitations of sections 219 and 408 of the Code and thus may be considered an excess contribution to the employee's IRA. These disallowed deferrals thus may be subject to the six percent tax on excess contributions under section 4973. If income allocable to a disallowed deferral is not withdrawn by April 15 following the calendar year of notification by the employer, the income may be subject to the ten percent tax on early distributions under section 72(t) when withdrawn. Disallowed deferrals should be reported in the same manner as are excess SEP contributions. Your employees may not withdraw or transfer from their SEP-IRA any SEP contributions (or income on these contributions) attributable to elective deferrals made during a particular plan year until 2 1/2 months after the end of that plan year. If you choose to do so before this 2 1/2 month period has expired, however, you may notify your employees when the deferral percentage limitation test has been completed for a particular plan year and that this withdrawal restriction is thus no longer applicable. In general, any transfer or distribution made before expiration of the applicable 2 1/2 month period (or notification, if sooner) will be includible in the employee's gross income and may also be subject to a ten percent penalty tax for early withdrawal. This restriction does not apply to an employee's excess elective deferrals. To obtain more information concerning the rules governing this SEP, please contact The Dreyfus Corporation at 144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144 [(800) 358-0910]. IF YOU ARE ESTABLISHING A SEP, A SAR-SEP, OR A SEP/SAR-SEP, THIS MUST BE DISTRIBUTED TO EMPLOYEES. THESE QUESTIONS AND ANSWERS MUST BE PROVIDED TO ALL EMPLOYEES WHEN YOU ADOPT YOUR SEP OR, IF LATER, AT THE TIME THEY ARE EMPLOYED. A Simplified Employee Pension, or SEP, is an arrangement through which employers can make contributions toward their employees' retirement income without becoming involved in more complex retirement plans. Under a SEP an employer makes contributions directly to each employee's Individual Retirement Account or Annuity (IRA). The IRA to which the employer contributes is referred to as a SEP-IRA. An employer who signs a SEP agreement is not statutorily required to make any contribution to the SEP-IRAs of eligible employees. However, if any contribution is made, the contribution may not discriminate in favor of officers, shareholders, or highly compensated employees. The participation requirements that the employer may impose cannot be more restrictive than the law provides, but can be less restrictive. The law provides that all employees who are at least 21 years old and have worked for the employer for some period of time (however short) in any three of the immediately preceding five calendar years, are eligible to receive SEP contributions. Certain nonresident aliens, and certain union employees who have already negotiated with respect to retirement benefits, may be excluded from participation. Employees who earn less than $300 (adjusted for the cost of living) may also be excluded. This information and the following "Questions and Answers" should provide a basic understanding of what a SEP is and how it works. If your employer's SEP permits you to make elective deferral contributions, you should read these Questions and Answers in conjunction with the "Notice to Employees" which will be provided to you. An employee who has unresolved questions concerning SEPs should call the Federal tax information number, or the toll free number shown in the white pages of the local telephone directory. 1. Q. Who controls my SEP-IRA? A. You own and control your SEP-IRA. You may invest your SEP-IRA assets in such manner as is permitted by applicable law and the terms of your SEP-IRA. Your employer sends SEP contributions to the financial institution in which your IRA is maintained, but SEP contributions become your property when they are deposited in your IRA. However, you may incur a tax penalty if you withdraw funds from your IRA earlier than allowed by law without penalty. See Question 7. 2. Q. Must my employer contribute to my IRA under the SEP? A. There is no statutory requirement that an employer make or maintain a particular level of contributions and it is possible for the contributions to be discretionary. Therefore, whether or not your employer must make a SEP contribution depends on the SEP contribution agreement your employer adopts. However, if a contribution is made under the SEP, it must be allocated to all eligible employees according to the SEP agreement. 3. Q. May I also contribute to an IRA if my employer has signed a SEP Agreement? A. You may be entitled to make regular IRA contributions to the SEP-IRA to which your employer contributes. In addition to belonging to the SEP-IRA Plan, you as an employee can open a regular IRA and contribute up to the limit -- $2000 or 100% of compensation, whichever is less. These contributions will be subject to the regular IRA deduction rules. 4. Q. Can SEP contributions be deposited in any IRA? A. No. Under your employer's SEP, contributions must be deposited into a Dreyfus Individual Retirement Account (a prototype IRA upon which a favorable opinion letter has been issued by the Internal Revenue Service). Other IRAs may provide different rates of return and may have different terms concerning, among other things, transfers and withdrawals. 5. Q. What happens if I don't want a SEP-IRA? A. Your employer may require that you become a participant in such an arrangement as a condition of employment. However, if the employer does not require all eligible employees to become participants and an eligible employee elects not to participate, all other employees of the same employer are prohibited from entering into a SEP-IRA arrangement with that employer. 6. Q. Can I move funds from my SEP-IRA to another ta-sheltered IRA? A. You may find it to your advantage to move contributions made to your SEP-IRA to another IRA. Other IRAs may provide different rates of return, or may have different or more beneficial terms (such as favorable transfers and withdrawal provisions). Depending on the contractual terms of the IRA to which you employer contributes, you may be able to move your funds to another IRA. Even if contractually permitted, for tax purposes there are only two permissible ways for you to move funds from the SEP-IRA to another IRA. First, it is permissible for you to withdraw or receive funds from your SEP-IRA, and no more than 60 days later, place such funds in another IRA or SEP-IRA. This is called a "rollover" and may not be done more frequently than at one year intervals without penalty. Second, you can make a transfer of funds between trustees. There are no restrictions on the number of times you may make "transfers" if you arrange to have such funds transferred between the trustees, so that you never have possession. 7. Q. What happens if I withdraw my employer's SEP contribution from my IRA? A. If you don't want to leave the employer's SEP contribution in your IRA you may withdraw it at any time, but any amount withdrawn (and not rolled over) is includible in your income. Also, if withdrawals occur before you reach age 59 1/2, and are not on account of death, disability, or a current year excess contribution, you may be subject to the imposition of an extra penalty tax. 8. Q. May I participate in a SEP even though I'm covered by another plan? A. Yes. You can participate in a SEP (other than a model SEP) even though you participate in another plan of the same employer. However, the combined contribution limits are subject to certain limitations described in section 415 of the Internal Revenue Code. Also, if you work for several employers, you may be covered by the SEP of one employer and a pension or profit-sharing plan of another employer. 9. Q. What is the maximum amount that may be contributed to my SEP-IRA by employer? A. Your employer contributions to your SEP-IRA may not exceed the lesser of: (a) 15% of your compensation (determined without regard to any contributions made to your SEP-IRA); and (b) $22,500. If your employer's SEP is integrated with Social Security and you are a highly compensated employee, the $22,500 figure is reduced by the amount of contributions made on your behalf based on compensation over the integration level. Any elective deferral contributions you may make to the plan are considered employer contributions for purposes of this limitation. 10. Q. What happens if too much is contributed to my SEP-IRA in any one year? A. If the contributions by your employer to your SEP-IRA exceed the lesser of 15% of your compensation or $22,500, the excess amount will be included in your income and treated as a contribution by you to your IRA subject to the IRA contribution limitations of sections 219 and 408 of the Code. As a result, you likely will have excess contributions made to your IRA for the taxable year, subject to the 6% excise tax set forth in section 4973 of the Code. You may avoid the 6% excise tax by withdrawing the excess contribution, and any allocable income, by April 15 following the year to which the deferrals relate 11. Q. Do I need to file any additional forms with IR because I participate in a SEP? A. No. 12. Q. Are the contributions my employer makes subject to Social Security tax? A. No. Your employer's contributions are not included as income on the W-2, and are not considered wages for the purpose of determining Social Security taxes. 13. Q. Is my employer required to provide me with information about SEP-IRA and the SEP agreement? A. Yes. In addition to the SEP Disclosure Information contained in this document, your employer or plan administrator must provide you with the following information: (a) At the time you become eligible to participate in the SEP your employer or plan administrator must inform you in writing that a SEP agreement has been adopted and state which employees may participate, how employer contributions are allocated, and who can provide you with additional information. (b) Your employer or plan administrator must inform you in writing of all employer contributions to your SEP-IRA (this information must be supplied by January 31st of the year following the year the contribution is made or 30 days after the contribution is made, whichever is later). (c) If your employer amends the SEP, or replaces it with another SEP, the employer or plan administrator must furnish a copy of the amendment or new SEP (with a clear written explanation of its terms and effects) to each participant within 30 days of the date the SEP or amendment becomes effective. (d) If your employer selects or recommends the IRAs into which the SEP contribution will be deposited (or substantially influences you or other employees to choose them) your employer or plan administrator must ensure that a clear written explanation of the terms of those IRAs is provided at the time each employee becomes eligible to participate. The explanation must include information about the terms of those IRAs, such as rates of return, and any restrictions on a participant's ability to roll over, transfer, or withdraw funds from the IRAs (including restrictions that allow rollovers or withdrawal but reduce earnings of the IRAs or impose other penalties). (e) If your employer selects, recommends, or substantially influences you to choose a specific IRA and the IRA prohibits the withdrawal of funds, your employer or plan administrator may be required to provide you with additional information. Regulations promulgated by the Department of Labor under Title I of ERISA should be consulted in this regard. 14. Q. Is the financial institution where I establish my IRA also required to provide me with information? A. Yes. It must provide you with a disclosure statement which contains the following items of information in plain, nontechnical language: (a) the statutory requirements which relate to your IRA; (b) the tax consequences which follow the exercise of various options and what those options are: (c) participation eligibility rules, and rules on deductions for (d) the circumstances and procedures under which you may revoke your IRA, including the name, address, and telephone number of the person designated to receive your notice of revocation (this explanation must be prominently displayed at the beginning of the disclosure statement); (e) explanations of when penalties may be assessed against you because of specified prohibited or penalized activities (f) financial disclosure information which: (1) either projects value growth rates of your IRA under various contribution and retirement schedules, or describes the method of computing and allocating annual earnings and charges which may be assessed; (2) describes whether, and for what period, the growth projections for the plan are guaranteed, or a statement of the earnings rate and terms on which the projection (3) stipulates the sales commission to be charged in each year expressed as a percentage of $1,000.00; and (4) shows the proportional amount of any nondeductible life insurance which may be a feature of your IRA. See Publication 590 available at any IRS office, for a more complete explanation of the disclosure requirements. In addition to this disclosure statement, the financial institution is required to provide you with a financial statement each year. It may be necessary to retain and refer to statements for more than one year in order to evaluate the investment performance of the IRA. 15. Q. Can SEP contributions be reduced by employer contributions to Social Security? A. Although employer contributions under the SEP agreement must bear a uniform relationship to employee's compensation, your employer is entitled to offset or reduce its contribution by certain amounts already paid by your employer on your account as social security taxes. This reduction may substantially reduce the allocation you would otherwise receive. This is called "integration" with social security, and is permissible only if statutory requirements are satisfied. If your employer chooses to integrate with social security, the SEP allocation information your employer provides you must clearly show the integration formula. IF YOU ARE ESTABLISHING A SAR-SEP OR A SEP/SAR-SEP, THIS MUST BE DISTRIBUTED TO EMPLOYEES. IF YOUR SEP PERMITS EMPLOYEES TO MAKE ELECTIVE DEFERRALS, THIS NOTICE MUST BE PROVIDED TO ALL EMPLOYEES WHO ARE ELIGIBLE TO PARTICIPATE IN THE SEP AND TO ALL EMPLOYEES WHO, IN THE FUTURE, BECOME ELIGIBLE TO PARTICIPATE IN THE SEP. The following information explains what a simplified employee pension plan ("SEP") is, how contributions are made, and how to treat these contributions for tax purposes. For more specific information, refer to the SEP agreement itself and the accompanying "Notice to Adopting Employer." I. Simplified Employee Pension -- Defined A SEP is a retirement income arrangement. In this "elective" SEP, you may choose to defer compensation to your own Individual Retirement Account or Annuity ("IRA"). You may base these "elective deferrals" either on a salary reduction arrangement or on bonuses that, at your election, may be contributed to an IRA or received in cash. This type of elective SEP is available only to an employer with 25 or fewer eligible employees. Your employer must provide you with a copy of the SEP agreement containing eligibility requirements and a description of the basis upon which contributions may be made. All amounts contributed to your IRA belong to you, even after you quit working for your employer. II. Elective Deferrals -- May Be Disallowed You are not required to make elective deferrals to this SEP-IRA. However, if more than half of your employer's eligible employees choose not to make elective deferrals in a particular year, then no employee may participate in your employer's elective SEP for that year. If you make elective deferrals during a year in which this happens, then your deferrals for that year will be "disallowed," and the deferrals will be considered ordinary IRA contributions (which may be excess IRA contributions) rather than SEP-IRA contributions. "Disallowed deferrals" and allocable income may be withdrawn, without penalty, until April 15 following the calendar year in which you are notified of the "disallowed deferrals." Amounts left in the IRA after that date will be subject to the same penalties discussed in Section VII below applicable to excess SEP contributions. III. Elective Deferrals -- Annual Limitation The maximum amount that you may defer to this SEP for any calendar year is limited to the lesser of fifteen percent of compensation (determined without including the SEP-IRA contribution) or a dollar limit under section 402(g) of the Internal Revenue Code that originally was $7,000 (and is now subject to cost-of-living increases). The fifteen percent limit may be reduced if your employer also maintains a SEP to which nonelective contributions are made for a plan year, or any qualified plan to which contributions are made for such plan year. In that case, total contributions on your behalf to all such SEPs and qualified plans may not exceed the lesser of $22,500 or fifteen percent of your compensation. If these limits are exceeded, the amount you may elect to contribute to this SEP for the year will be correspondingly reduced. The dollar limit under section 402(g) of the Code is an overall limit on the maximum amount that you may defer in each calendar year to all elective SEPs and cash or deferred arrangements under section 401(k) of the Code, regardless of how many employers you may have worked for during the year. The section 402(g) limit is indexed according to the cost of living. In addition, the section 402(g) limit may be increased to $9,500 if you make salary reduction contributions under a section 403(b) tax-sheltered annuity arrangement. If you are a highly compensated employee, there may be a further limit on the amount that you may contribute to a SEP-IRA for a particular year. This limit is calculated by your employer and is known as the "deferral percentage limitation." This deferral percentage limitation is based on a mathematical formula that limits the percentage of pay that highly compensated employees may elect to defer to a SEP-IRA. As discussed below, your employer will notify each highly compensated employee who has exceeded the deferral percentage limitation. IV. Elective Deferrals -- Tax Treatment The amount that you may elect to contribute to your SEP-IRA is excludable from gross income, subject to the limitations discussed above, and is not includible as taxable wages on Form W-2. However, these amounts are subject to FICA taxes. If you are not a "key employee," your employer must make an additional contribution to your SEP-IRA for a year in which the SEP is considered "top-heavy." (Your employer will be able to tell you whether you are a key employee.) This additional contribution will not exceed three percent of your compensation. It may be less if your employer has already made a contribution to your account, and for certain other reasons. VI. Elective Deferrals -- Excess Amounts Contributed There are three different situations in which impermissible excess amounts arise under the SEP-IRA. The first way is when "excess elective deferrals" (i.e., amounts in excess of the section 402(g) limit) are made. You are responsible for calculating whether you have exceeded the section 402(g) limit in the calendar year. For 1995, the section 402(g) limit for contributions made to an elective SEP is $9,240, as indexed. The second way is when "excess SEP contributions" (i.e., amounts in excess of the deferral percentage limitation referred to above) are made by highly compensated employees. The employer is responsible for determining whether such an employee has made excess contributions. The third way is when more than half of an employer's eligible employees choose not to make elective deferrals for a plan year. In that case, any elective deferrals made by any employees for that year are considered "disallowed deferrals" as discussed above. Your employer is also responsible for determining whether deferrals must be disallowed on this basis. Excess elective deferrals are calculated on the basis of the calendar year. Excess SEP contributions and disallowed deferrals, however, are calculated on the basis of the SEP plan year, which may or may not be a calendar year. VII. Excess Elective Deferrals -- How To Avoid Adverse Tax Consequences Excess elective deferrals are includible in your gross income in the calendar year of deferral. Income on the excess elective deferrals is includible in the year of withdrawal from the IRA. You should withdraw excess elective deferrals under this SEP, and any allocable income, from your SEP-IRA by April 15 following the year to which the deferrals relate. These amounts may not be transferred or rolled over tax-free to another SEP-IRA. If you fail to withdraw excess elective deferrals, and any allocable income, by April 15, the excess elective deferrals will be subject to the IRA contribution limitations of sections 219 and 408 of the Code and thus may be considered an excess contribution to your IRA. Such excess deferrals may be subject to a six percent excise tax for each year they remain in the SEP-IRA. Income on excess elective deferrals is includible in your gross income in the year you withdraw it from your IRA and must be withdrawn by April 15 following the calendar year to which the deferrals relate. Income withdrawn from the IRA after that date may be subject to a ten percent tax on early distributions if you are not 59 1/2. If you have both excess elective deferrals and excess SEP contributions (as described below), the amount of excess elective deferrals that you withdraw by April 15 will reduce any excess SEP contributions that must be withdrawn for the corresponding plan year. VIII. Excess SEP Contributions -- How To Avoid Adverse Tax Consequences If you are a "highly compensated employee," your employer is responsible for notifying you if you have made any excess SEP contributions for a particular plan year. This notification should tell you the amount of the excess SEP contributions, the calendar year in which you must include these contributions in income, and that the contributions may be subject to penalties if you do not withdraw them from your IRA within the applicable time period. Your employer should notify you of the excess SEP contributions within 2 1/2 months of the end of the plan year. Generally you must include the excess SEP contributions in income for the calendar year in which the original deferrals were made. This may require you to file an amended individual income tax return. However, an excess SEP contribution of less than $100 (not including earnings) is includible in the calendar year of notification. Income on these excess contributions is includible in your gross income when you withdraw it from your IRA. You are responsible for withdrawing these excess SEP contributions (and earnings) from your IRA. You may withdraw these amounts, without penalty, until April 15 following the calendar year in which you were notified by your employer of the excess SEP contributions. If you fail to withdraw the excess SEP contributions by April 15 following the calendar year of notification, the excess SEP contributions will be subject to the IRA contribution limitations of sections 219 and 408 of the Code and thus may be considered an excess contribution to your IRA. Thus, such excess SEP contributions may be subject to a six percent excise tax each year they remain in your IRA. If you do not withdraw the income on these excess SEP contributions by April 15 following the calendar year of notification by your employer, the income may be subject to a ten percent tax on early distributions if you are not 59 1/2 when you withdraw it. IX. Income Allocable to Excess Amounts The rules for determining and allocating income to excess elective deferrals, excess SEP contributions, and disallowed deferrals are the same as those governing regular IRA contributions. The trustee or custodian of your SEP-IRA will inform you of the income allocable to excess amounts. X. Availability of IRA Contribution Deduction to SEP Participants In addition to any SEP amounts, you may contribute the lesser of $2,000 or 100% of compensation to an IRA. However, the amount that you may deduct is subject to various limitations. See Publication 590, "Individual Retirement Arrangements," for more specific information. XI. SEP-IRA Amounts -- Rollover or Transfer to Another IRA You may not withdraw or transfer from your SEP-IRA any SEP contributions (or income on these contributions) attributable to elective deferrals made during the plan year until 2 1/2 months after the end of the plan year or, if sooner, when your employer notifies you that the deferral percentage limitation test (described above) has been completed for that year. In general, any transfer or distribution made before this time will be includible in your gross income and may also be subject to a ten percent penalty tax for early withdrawal. You may, however, remove excess elective deferrals from your SEP-IRA before this time, but you may not roll over or transfer these amounts to another IRA. After the restriction described in the preceding paragraph no longer applies, and with respect to contributions for a previous plan year, you may withdraw, or receive, funds from your SEP-IRA, and no more than 60 days later, place such funds in another IRA or SEP-IRA. This is called a "rollover" and may not be done without penalty more frequently than at one-year intervals. However, there are no restrictions on the number of times that you may make "transfers" if you arrange to have such funds transferred between the trustees so that you never have possession of the funds. You may not, however, roll over or transfer excess elective deferrals, excess SEP contributions, or disallowed deferrals from your SEP-IRA to another IRA. These excess amounts may be reduced only by a distribution to you. You do not need to file any additional forms with the IRS because of participation in the SEP. XIII. Employer To Provide Information on SEP-IRAs and the SEP Agreement Your employer must provide you with a copy of the executed SEP agreement, this Notice to Employees, the form you should use to defer amounts to the SEP, the notice of excess SEP contributions or disallowed deferrals (if applicable) and a statement for each taxable year showing any contribution to your SEP-IRA. Your employer must also notify you, if you are a highly compensated employee, when the deferral percentage limitation test ha been completed for a plan year. XIV. Financial Institution Where IRA Is Established To Provide The financial institution must provide you with a disclosure statement that contains the following items of information in plain nontechnical language: 1. The statutory requirements that relate to the IRA; 2. The tax consequences that follow the exercise of various options and what those options are; 3. Participation eligibility rules, and rules on the deductibility and nondeductibility of retirement savings; 4. The circumstances and procedures under which you may revoke the IRA, including the name, address, and telephone number of the person designated to receive notice of revocation (this explanation must be prominently displayed at the beginning of 5. Explanations of when penalties may be assessed against you because of specified prohibited or penalized activities 6. Financial disclosure information which: (a) Either projects value growth rates of the IRA under various contribution and retirement schedules, or describes the method of computing and allocating annual earnings and charges which may be assessed; (b) Describes whether, and for what period, the growth projections for the plan are guaranteed, or a statement of earnings rate and terms on which these projections are (c) States the sales commission to be charged in each year expressed as a percentage of $1,000. See Publication 590, "Individual Retirement Arrangements," which is available at most IRS offices, for a more complete explanation of the disclosure requirements. In addition to the disclosure statement, the financial institution is required to provide you with a financial statement each year. It may be necessary to retain and refer to statements for more than one year in order to evaluate the investment performance of your IRA and in order that you will know how to report IRA distributions for tax purposes. IRS Approval Serial Number D110849b By signing the Application, you establish an Individual Retirement Custodial Account sponsored by The Dreyfus Corporation ("we" or "us") and The Dreyfus Trust Company (the "Custodian"), by countersigning the Application, accepts the Custodianship upon the following conditions. You intend this account ("Account") be administered and this Agreement be interpreted to qualify at all times as an Individual Retirement Account ("IRA") under section 408 of the Internal Revenue Code of 1986, as amended (the "Code"). The Account is established for the exclusive benefit of you and your designated beneficiary ("Beneficiary"), and solely for the purpose stated in this Agreement. Your interest in the Account shall at all times be nonforfeitable. (a) Except for rollover contributions described in sections 402(c), 403(a)(4), 403(b)(8), or 408(d)(3) of the Code, you may contribute for any tax year to the Account the lesser of $2,000 or 100% of your compensation. Rollover contributions may be in cash or in property acceptable to the Custodian. All other contributions must be in cash. Employer contributions to a SEP-IRA may not exceed the lesser of 15% of your compensation or $30,000. Contributions must be made no later than the due date for filing your income tax return (excluding extensions). (b) Excess contributions shall be distributed to you upon receipt of a written request. If a distribution of an excess contribution is to be made on or before the due date of your tax return (including extensions), it shall include the net income attributable to such excess contribution. "Excess Contribution" means the excess of (i) the amount contributed for the tax year (other than a rollover contribution) over (ii) the amount allowable as a contribution. (c) Contributions shall be in accordance with this Agreement, but the Custodian will have no obligation to verify the allowability or amount of contributions and may rely solely on your representations with respect thereto. (a) If you are totally disabled or have reached age 59 1/2, you may make withdrawals from the Account. Withdrawals prior to such time will be subject to a penalty tax of 10% of the amount withdrawn which is includible in your gross income, over and above the regular income tax. A withdrawal from a time deposit before maturity may result in other penalties as required or permitted by law. In connection with making any distributions, the Custodian may rely solely on the accuracy of all facts you supply at any time, including a Beneficiary designation described in paragraph 2(e). (b) "Total Disability" is the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long, continued and indefinite duration, as certified to the Custodian by a physician. (c) Distributions will begin when you provide the Custodian with written instructions, in a form acceptable to it, as to the method and reason (if it is to be made before reaching age 59 1/2) for the distribution; but in all events, distribution of your entire interest shall be made or commence in cash or in kind (at your option), by April 1st following the year in which you reach age 70 1/2 (this is your required beginning date). For each succeeding year, a distribution must be made on or before December 31st. By your required beginning date, you may elect, in a form and at such time as may be acceptable to the Custodian, to have the balance in the Account distributed: (i) in a single sum payment; (ii) in equal or substantially equal monthly, quarterly or annual payments over a specified period that may not be longer than your life expectancy or the joint life and last survivor expectancy of you and your Beneficiary; or (iii) by the purchase and prompt distribution of an immediate annuity policy from an insurance company that provides for equal or substantially equal payments for your life, or for the joint lives of you and your Beneficiary. You may also elect, in a form and at such time as may be acceptable to the Custodian, to have only a part of the balance in the Account distributed to you. If a distribution option is not selected by the time distribution must begin, distribution will be made under option (ii) based on your life expectancy only, without recalculation, and distribution will be made on an annual basis. Even though distributions have commenced, you may receive a distribution of the balance in the Account (or any portion) at any time upon written notice to the Custodian. The amount to be distributed each year, beginning with the first calendar year for which distributions are required and then for each succeeding calendar year, shall not be less than the quotient obtained by dividing your entire interest by the lesser of (1) the applicable life expectancy or (2) if your spouse is not your designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 or Q&A-5, as applicable, of section 1.401(a) (9)-2 or the Proposed Income Tax Regulations. Distributions after your death shall be distributed using the applicable life expectancy as the relevant divisor without regard to proposed regulations section 1.401(a) (9)-2. Life expectancy and joint life and last survivor expectancy are computed by use of the return multiples contained in section 1.72-9 of the Federal Income Tax Regulations. Unless otherwise elected by you prior to the commencement of distributions pursuant to this paragraph (2)(c), your life expectancy and that of your spouse will not be recalculated for purposes of this paragraph (2)(c). An election to recalculate shall be irrevocable and shall apply to all subsequent years. The life expectancy of a non-spouse Beneficiary may not be recalculated. Instead, life expectancy will be calculated using the attained age of such Beneficiary during the calendar year in which the individual attains age 70 1/2, and payments for subsequent years shall be calculated based on such life expectancy reduced by one for each calendar year which has elapsed since the calendar year life expectancy was first calculated. (d) If your death occurs after your required beginning date, then, upon your death, te balance in the Account shall be distributed at least as rapidly as under the method of distribution before your death. After your death, the Beneficiary shall provide the Custodian with written instructions, in a form acceptable to the Custodian, regarding the method of distribution. If your death occurs before your required beginning date, your entire Account balance must be distributed as you have elected or, if you have not so elected, as elected by your Beneficiary, as follows: (i) by December 31st of the year containing the fifth anniversary of your death, or (ii) in equal or substantially equal payments over a period certain not to exceed your Beneficiary's life expectancy starting by December 31st of the year following the year of your death. If the Beneficiary is your surviving spouse, however, distribution may be made over a period certain not to exceed the life expectancy of your surviving spouse and need not commence until December 31st of the year in which you would have reached age 70 1/2 had you lived. After your death, if your surviving spouse dies before distributions begin, the five-year rule shall be applied as if the surviving spouse were you. A surviving spouse Beneficiary has the right to elect to treat the IRA as his or her own, subject to the normal IRA distribution rules. This election will be deemed to have been made if such surviving spouse makes a regular IRA contribution to the Account, makes a rollover to or from such Account, or fails to elect one of the options set forth in this paragraph (2)(d). Only a surviving spouse Beneficiary may make additional cash or rollover contributions to the Account. For purposes of the above, payments will be calculated by use of the tables described in paragraph 2)(c) above. Unless otherwise elected by a surviving spouse Beneficiary when you die before your required beginning date, the life expectancy of your surviving spouse Beneficiary will not be recalculated for purposes of this paragraph (2)(d). An election to recalculate shall be irrevocable and shall apply to all subsequent years. In the case of any other designated Beneficiary, life expectancies shall be calculated using the attained age of such Beneficiary during the calendar year in which distributions are required to begin pursuant to this section, and payments for any subsequent calendar year shall be calculated based on such life expectancy reduced by one for each calendar year which has elapsed since the calendar year life expectancy was first calculated. Distributions under this section are considered to have begun if the distributions are made on account of your reaching your required beginning date. If you receive distributions prior to the required beginning date and die, distributions will not be considered to have begun. (e) You may designate or change a Beneficiary who is to receive your Account. To be effective, such designation or change must be in writing and must be received by the Custodian prior to your death. Absent such designation, any undistributed interest of yours shall be paid to the legal representative of your estate. (f) You may satisfy the minimum distribution requirements under sections 408(a)(6) and 408(b)(3) of the Code by receiving a distribution from one IRA (such as this IRA or another IRA) that is equal to the amount required to satisfy the minimum distribution requirements for two or more IRAs. For this purpose, the owner of two or more IRAs may use the "alternative method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the minimum distribution requirements described above. (g) Notwithstanding any provisions of this Agreement to the contrary, the distribution of your interest shall be made in accordance with the minimum distribution requirements of section 408(a)(6) or section 408(b)(3) of the Code and the regulations thereunder, including the incidental death benefit provisions of section 1.401(a)(9)-2 of the proposed regulations, all of which are herein incorporated by reference. (3) Investments. Contributions to your Account shall be applied to the investments described below ("Investments") which you select. No part of the Account shall be invested in life insurance contracts, or in collectibles as defined in section 408(m) of the Code, nor may the assets of the Account be commingled with other property except in a common trust fund or common investment fund (within the meaning of section 408(a)(5) of the Code). (a) Shares of ownership in an investment company registered under the Investment Company Act of 1940, as amended, which are managed, advised, sub-advised or administered by us or any of our affiliates, or shares in any other investment company as may from time to time be offered by us, which the Custodian has agreed with us in writing to hold in the Account ("Fund Shares"). (b) Other investments as allowed by law, offered by us and which the Custodian has agreed with us in writing to hold in the Account. (c) All dividends and capital gains distributions received on the Fund Shares (whether or not there is an election to receive them in other property) shall be reinvested in accordance with the respective Fund's current Prospectus in such Shares and credited to such Account. The Custodian shall furnish you with statements of the Account at least once a calendar year which shall be deemed to be the sole accounting by the Custodian necessary under this Agreement. If within one hundred and eighty (180) days of the mailing of such accounting you do not deliver a written objection or exception to any specific item set forth therein, such accounting shall be deemed to be settled and approved and the Custodian shall be released and discharged with respect to all matters set forth therein. The Custodian, upon receipt of your written instructions or those of your duly authorized investment advisor, may exchange Fund Shares for any other Fund Shares or Investments subject to and in accordance with the terms and conditions of the exchange privilege, including the telephone exchange privilege, as outlined in the current Fund Prospectuses. The ability to exchange Fund Shares for other Fund Shares or Investments shall be subject to the prior written agreement of the Custodian and us. A telephone exchange may not be made from an Investment in a time deposit account unless we have otherwise agreed in writing with the Custodian. If you elect the telephone exchange privilege in the Application or authorize an investment advisor to make exchanges, the Custodian shall be entitled to rely and act upon telephonic instructions, deemed by it to be in proper form and reasonably believed by it to be genuine, directing the exchange of Investments for other Investments allowed to be exchanged, provided that such Investments are available for sale in your state of residence, and shall not be liable for any liability, cost or expense arising out of any telephonic exchange request effected pursuant to such telephonic instructions. The Custodian will employ reasonable procedures, such as requiring a form of personal identification, to confirm that telephonic instructions are genuine and, if it does not follow such procedures, it may be liable for any losses due to unauthorized or fraudulent instructions. All Investments acquired on your behalf by the Custodian shall be registered in the name of the Custodian or its nominee, but you shall be the beneficial owner of such investments. You will be solely responsible for the consequences of any exchange including any penalty for an early withdrawal from a time deposit investment, if applicable. It is understood and agreed that the telephone exchange privilege is subject to the limitations specified above. You authorize and direct the Custodian to respond to any telephonic inquiries relating to the status of Investments in the Account. You agree that the certifications, authorizations, directions and restrictions contained herein will continue until the Custodian receives written notice of any change or revocation. You understand that the Custodian reserves the right to refuse any telephonic instructions. (4) Expenses and Other Charges. Except for any excise taxes that may be required by the Code to be paid by you, any income taxes or other taxes of any kind whatsoever that may be levied or assessed upon or in respect of the Account, including any penalty for the early withdrawal from a time deposit investment, any transfer taxes incurred in connection with the investment and reinvestment of the assets of the Account, all other administrative expenses incurred by the Custodian in the performance of its duties, such compensation to the Custodian as set forth in the fee schedule as from time to time amended by the Custodian in writing, and, to the extent directed by you in writing, the fees of an investment advisor authorized to direct the investment of the Account, shall be paid from the Account assets. (5) Custodian - Removal, Resignation. (a) You shall at any time have the right to remove the Custodian on thirty days' notice in writing in a form acceptable to it, designating a successor custodian. Removal of the Custodian shall be effective upon receipt by it of written acceptance by the successor custodian of its appointment. The Custodian shall forthwith transfer and pay over to such successor the assets of the Account and all records pertaining thereto. The Custodian may reserve such assets as may be required for the payment of all its fees, compensation, costs and expenses, and for the payment of all liabilities of or against the assets of the Account or of the Custodian, and where necessary may liquidate such reserved assets. Any balance of such reserve remaining after the payment of all such fees, compensation, costs, expenses and liabilities shall be paid over to the successor custodian. Any successor custodian must be a bank as defined in section 408(n) of the Code, or any person who demonstrates to the satisfaction of the Secretary of the Department of the Treasury that the manner in which it will administer the Account will be consistent with the requirements of section 408 of the Code. (b) The Custodian shall, at any time, have the right to resign as Custodian under this Agreement by delivering a written resignation notice to you and us. Upon receipt of such notice of resignation, we shall forthwith appoint a successor custodian and upon receipt by the Custodian of written acceptance by the successor custodian of such appointment, the Custodian is authorized to act in the same manner as provided in paragraph 5(a). If we fail to appoint a successor custodian within 90 days of receiving the Custodian's resignation, the Custodian may distribute to you the assets of the Account, reserving such Fund Shares as may be required for the payment of all the Custodian's fees, compensation, costs and expenses and for the payment of all liabilities of or against the assets of the Account or the Custodian, so that the Custodian may, where necessary, liquidate such shares with any balance remaining after payment of all such fees, compensation, costs, expenses and liabilities to be paid to you. Upon completion of such distribution, the Custodian shall be relieved of any liability with respect to the Account assets. (6) Duties and Liabilities of Custodian. The Custodian shall deliver to you all notices, prospectuses, financial statements, proxies, and proxy soliciting materials relating to the Fund Shares held by it, and shall not vote any of the Fund Shares held except in accordance with your written instructions. The Custodian shall keep accurate and detailed accounts of all contributions, receipts, investments, distributions, disbursements and all other transactions, and shall prepare and file any returns required to be filed by it as Custodian of an Individual Retirement Account under the Code. The Custodian shall be under no duties whatsoever except such duties as are specifically set forth as such in this Custodial Agreement, and no implied covenant or obligation shall be read into the Custodial Agreement against the Custodian. In the performance of its duties, the Custodian shall be liable only for its own gross negligence or willful misconduct. In performing its duties under this Agreement, the Custodian may hire agents, experts and attorneys and delegate discretionary powers to, and rely upon, information and advice furnished by such agents, experts and attorneys. You shall have the sole authority and responsibility for the enforcement or defense of the terms and conditions of the Custodial Agreement against or on behalf of any person or persons claiming any interest in the Account. The Custodian shall not be required to prosecute, defend or respond to any action or any judicial proceeding relating to the Account unless it has previously received indemnification satisfactory to it in form and in substance. The Custodian shall be liable only for its gross negligence or willful misconduct in failing to perform the terms of this Agreement and shall not be liable for any action or failure to act when such action or failure to act is in accordance with your written authorization or instructions or is due to the absence of written instructions. The Custodian shall not be required to give bond or security for the performance of its duties. You shall at all times fully indemnify and save harmless the Custodian from any liability, cost, or expense which may arise in connection with this Agreement, except any liability, cost, or expenses arising from the gross negligence or willful misconduct of the Custodian. (7) Amendments. The Custodian reserves the right to amend all or any part of the terms of this Custodial Agreement, upon written notice to you, in any manner which would not disqualify the Custodial Agreement from complying with section 408 of the Code. You agree that the Custodian may amend its fee schedule from time to time on written notice. In addition, you and the Custodian delegate to us the power to amend all or any part of the terms of this Agreement, including the removal of the Custodian and the appointment of a successor custodian. Such amendment must be submitted to you and to the Custodian and shall be effective at such time provided that: a) we shall not have power to amend or terminate this Custodial Account in such manner as would cause or permit any part of the assets in the Custodial Account to be diverted to purposes other than for the exclusive benefit of you or your Beneficiaries, (b) we shall not have the right to modify or amend the Account retroactively in such manner as to deprive you, or your Beneficiary, of any benefit to which you were entitled unless such modification or amendment is necessary to conform this Agreement to, or satisfy the conditions of, any law, governmental regulation or ruling, and to permit this Agreement to meet the requirements of section 408 of the Code, or any similar statute enacted in lieu thereof and (c) no such amendment which increases the Custodian's duties or responsibilities or affects its fees shall become effective unless the Custodian has consented to such amendment in writing. You shall be deemed to have consented to any such amendment. (8) Termination. Upon termination of the Account, any and all assets remaining in the Account together with any earnings shall be distributed to you in cash or kind in one or more ways provided by paragraph 2(c), as directed by you (or in the absence of such direction, in a lump sum). Upon the completion of such distribution, the Custodian shall be relieved from all further liability with respect to all amounts so paid. (a) The Custodian may rely on your or your Beneficiary's representations on matters relating to this Agreement and shall be under no duty to make any further investigations. (b) Neither the establishment of the Account nor the creation of any fund or account, nor the payment of any benefits, shall be construed as giving you or any other person any legal or equitable right against he Custodian except as herein provided. (c) It is a condition of this Custodial Agreement, and you expressly agree, that you shall look solely to the assets of the Account for the payment of any benefit to which you are entitled under this Agreement. (d) This Custodial Agreement shall be construed, administered and enforced according to the laws of the State of New York. (10) Inalienability of Benefits. The benefits provided hereunder shall not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, and any attempt to cause such benefits to be so subjected shall not be recognized except to such extent as may be required by law. This Disclosure Statement explains the rules governing your Individual Retirement Account ("IRA"). Your Right to Cancel. If you have received this Disclosure Statement within seven days of opening your IRA, you have seven days to cancel and get back the full amount paid for your IRA by mailing or delivering a written request to cancel no later than the seventh day after opening to: After seven days following receipt of this Disclosure Statement, you cannot cancel. The Disclosure Statement is deemed to be received as of the date of your check or transfer instructions. The notice will be considered mailed on the date of the postmark (or, if sent by certified or registered mail, the date of certification or registration) if properly addressed and mailed in the U.S., first class postage prepaid. Contributions. You can contribute in any tax year before the year in which you reach age 70 1/2 up to the lesser of $2,000 in cash (except for rollovers) or 100% of your compensation. Contributions made for a taxable year must be made no later than the due date for filing your Federal income tax return (not including extensions). Compensation includes amounts received as payment for personal services and alimony or separate maintenance payments, but not interest, dividends, other earnings from property or other amounts not included in your gross income. The funds in your IRA are always yours; they are not subject to forfeiture other than penalties required or permitted by law. IRA earnings generally are not taxable until distribution begins. - Deductible Contributions. Contributions made for the tax year are fully deductible if neither you nor your spouse (if married) is an active participant in a pension, profit sharing or stock bonus plan under section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), an annuity plan under section 403(a) of the Code, an annuity contract or plan under section 403(b) of the Code, a simplified employee pension plan under section 408(k) of the Code ("SEP-IRA"), or a trust under section 401(c)(18) of the Code. Active participant status can be determined if you refer to your or your spouse's year-end "Wage and Tax Statement," IRS Form W-2. If considered an active participant, the deduction for your IRA contribution is reduced if (a) you are single and your adjusted gross income ("AGI") exceeds the threshold level of $25,000, (b) you are married filing a joint return and your and your spouse's AGI exceeds he threshold level of $40,000, or (c) you are married filing a separate return and your AGI exceeds the threshold level of $0. The deductible amount of your IRA contribution is reduced by an amount that bears the same ratio to the regular limit as your AGI, in excess of the threshold level, bears to $10,000. When AGI levels reach $35,000 (if single), $50,000 (if married filing joint return), and $10,000 (if married filing separate return), no deduction is allowed. Until the deductible amount equals zero, as determined above, the amount you can contribute and deduct will not be lower than $200. - Nondeductible Contributions. You may make nondeductible IRA contributions not to exceed the lesser of $2,000 ($2,250 for Spousal IRA) or 100% of your compensation, minus the amount of any allowable deductible contribution. Earnings on nondeductible contributions generally are tax deferred until distributed to you. You must indicate on your tax return the extent to which your IRA contributions are nondeductible. If you overstate the amount of your nondeductible contributions, a penalty of $100 will be assessed unless it was due to reasonable cause. Spousal IRAs. If you file a joint return and have not reached age 70 1/2, you can set up two accounts - one IRA for yourself and one for your spouse ("Spousal IRA"). You can contribute in the aggregate up to the lesser of 100% of your compensation or $2,250 to the accounts, but no more than $2,000 to either one. You can still contribute to your IRA even if your spouse has reached age 70 1/2, provided you have not reached age 70 1/2 during the tax year. Simplified Employee Pension (SEP)-IRA. Your employer can make contributions to a SEP-IRA on your behalf in an amount not to exceed the lesser of 15% of your compensation or $30,000. Contributions must be made under a written allocation formula which cannot discriminate in favor of key or highly compensated employees. Contributions are considered discriminatory unless they bear a uniform relationship to the first $200,000 of each participating employee's total compensation. If your employer does not maintain an integrated plan (i.e., a plan integrated with Social Security benefits) at any time during the taxable year, Old Age and Survivor Disability Insurance ("OASDI") contributions may be taken into account as contributions to your SEP-IRA, but only if such OASDI contributions are taken into account for each employee maintaining a SEP-IRA. If the SEP-IRA is part of a top-heavy plan as defined in the Code, your employer must make a minimum contribution required to each non-key employee's SEP-IRA for each year that the plan is top-heavy. Generally, a plan is top-heavy if the sum of the accounts of key employees as defined in Code section 416 exceeds 60% of the sum of the accounts of all employees. If your employer maintains more than one plan, such plans may, or under certain circumstances must, be combined to determine whether the SEP-IRA is top-heavy. Generally, the minimum contribution required to be made to the SEP-IRA of each non-key employee in a top-heavy year is 3% of that employee's compensation. Your employer must cover each employee who has attained age 21 and has performed service during at least 3 of the immediately preceding 5 calendar years. Employees who earn less than $300 a year, employees covered by certain collective bargaining agreements and certain nonresident aliens may be excluded from the plan. "Leased employees" as defined in Code section 414(n) must be treated as regular employees for the purposes of making SEP-IRA contributions, unless the leasing organization provides prescribed minimum pension benefits to the leased employees. Any SEP-IRA contribution made by the leasing organization attributable to services performed for your employer may be used to reduce your employer's contribution to a leased employee's SEP-IRA. Contributions made by your employer to your SEP-IRA for a taxable year are excludable from your gross income and deductible by your employer. In addition, you may contribute on your own behalf an amount up to the lesser of 100% of your compensation or $2,000; however, the amount you can deduct is dependent on your AGI level (see "Contributions - Deductible Contributions" above). Except as provided above, your SEP-IRA generally is subject to the rules governing a Regular IRA. Your rights to withdraw amounts held in a SEP-IRA cannot be restricted by your employer. If your employer has 25 employees or less, your employer may choose to accept "elective" tax-deferred contributions not to exceed $7,000 (as adjusted for cost of living increases) through a salary reduction arrangement. For such an arrangement, at least 50% of all employees must elect to contribute to the SEP-IRA, and a certain deferral percentage is applied to highly compensated employees. Penalty for Excess Contributions. Excess contributions are nondeductible and are subject to an annual nondeductible excise tax of 6% of the excess for each year the excess is not withdrawn or eliminated. The tax is paid by the person for whose benefit the IRA was opened. If no deduction is taken for the excess contribution and the excess plus the net earnings on the excess are withdrawn on or before the due date (including extensions) for filing the Federal tax return for the contribution year, the 6% excise tax will not apply; but the earnings on the excess will be includible in your gross income and the 10% tax on premature distributions will be applied to such earnings, unless you are age 59 1/2 or disabled. If the excess contribution is withdrawn after such time, the excess will be subject to the 6% excise tax and will be includible in your gross income and subject to the 10% tax on premature distributions (if applicable). However, if an IRA contribution for a year does not exceed $2,250 (excluding rollover amounts), an excess contribution which was not claimed as a deduction may be withdrawn (without the net income attributable thereto) at any time without incurring the 10% tax on premature distributions or including it in income. The 6% excise tax will be imposed each year until the excess is withdrawn or eliminated. Instead of withdrawing the excess contribution, it may be eliminated by making reduced contributions in later years. The 6% excise tax will apply until the excess is eliminated in a later year in which the maximum contribution has not been made. You may withdraw tax-free and without penalty any excess rollover contribution if it occurred because you reasonably relied on erroneous information required to be supplied by the entity making the distribution that was rolled over. If your IRA is invested in a time deposit, a withdrawal (including a withdrawal of any excess contributions) may be subject to early withdrawal penalties in addition to tax penalties. The rules discussed above generally apply to SEP-IRAs as well. Rollovers (Direct and Regular). All or a portion of certain distributions from your or your deceased spouse's qualified retirement plan, annuity or another IRA may be eligible to be rolled over into a tax-deferred IRA. Distributions from another IRA may be rolled over within 60 days after receipt. If a distribution from your or your deceased spouse's qualified retirement plan or 403(b) annuity is eligible for rollover treatment, you must arrange to have the trustee or custodian of such plan directly transfer the distribution to the trustee or custodian of your Rollover IRA if you wish to avoid 20% Federal income tax withholding on the distribution. This is known as a "direct rollover." If you receive a distribution that is eligible for rollover (and thus have 20% of your distribution withheld), you may still effect a rollover into a tax-deferred IRA within 60 days after receipt of the distribution. This is known as a "regular rollover." If you plan on rolling over the proceeds of a distribution from a qualified plan or 403(b) annuity, you generally will be better off effecting a direct rollover so as to avoid mandatory 20% withholding on your distribution. When you receive a distribution from your or your deceased spouse's qualified retirement plan or 403(b) annuity, you should receive a detailed tax notice describing the various rules applicable to your distribution, including your rollover options. Rollover contributions to your IRA are not deductible. Accumulated voluntary deductible contributions to a qualified retirement plan or governmental plan may be eligible for rollover treatment when distributed. Rollovers from an employer's qualified plan to your Rollover IRA may later be rolled over to another qualified retirement plan only if funds from other sources were not contributed to such IRA and no part is attributable to contributions made for you as a self-employed individual to a self-employed (HR-10 or Keogh) retirement plan. A rollover distribution from an IRA may be made only once in any twelve month period. There is no limit on direct transfers of IRA assets from one IRA custodian or trustee to another. Inherited IRAs. An inherited IRA is an IRA which is acquired by a Beneficiary who is not your spouse on your death. Such a Beneficiary cannot make cash or rollover contributions to that IRA or treat it as his or her own. Withdrawal Restrictions. A taxable distribution before age 59 1/2 will be included in your gross income and will be subject to a nondeductible 10% tax penalty, any early withdrawal penalties on time deposits and other penalties required or permitted by law. There is no 10% tax penalty for distributions made because of death, permanent disability, rollovers or timely removal of an excess contribution or for distributions made in the form of substantially equal periodic payments over your life expectancy (or the joint life expectancies of you and your Beneficiary). Prohibited Transactions. If you engage in a "prohibited transaction," as defined in section 4975 of the Code, the IRA loses its tax exemption and the total value of your IRA must be included in your gross income. If you pledge any portion of your IRA as security for a loan, the amount pledged must be included in your gross income. Prior to disability or age 59 1/2, the additional 10% penalty tax on premature distributions will be imposed on amounts included in your gross income by reason of a prohibited transaction. The same rules apply to a spouse's use of his or her Spousal IRA. Distributions During Your Life. No tax penalty is imposed on distributions from your IRA after you reach age 59 1/2 or become permanently disabled. Distributions must begin no later than the first day of April following the calendar year in which you reach age 70 1/2. Generally, you are permitted to receive your IRA in a lump sum or installments over a period not extending beyond your life expectancy or the joint life and last survivor expectancy of you and your Beneficiary. You may also request a distribution of any part of your IRA balance. Life expectancies are determined in accordance with the IRS tables. Unless otherwise elected by you prior to the required commencement of your distributions, your life expectancy and that of your spouse will not be recalculated annually. An election by you to recalculate shall be irrevocable and shall apply to all subsequent years. The life expectancy of a nonspousal Beneficiary cannot be recalculated. All distributions are taxed at ordinary income tax rates and are not eligible for capital gains treatment or five-year averaging. If you direct distributions to be made over your life or the joint lives of you and your designated Beneficiary, the Custodian will purchase with your IRA an immediate annuity contract from an insurance company you choose and your payments will be made under the annuity. You must provide a completed annuity application from the insurance company of your choosing. When requesting a distribution, you must specify the reason for the distribution. Examples are: premature distributions (i.e., distributions before age 59 1/2), rollovers, disability, death, normal (at or after age 59 1/2), excess contribution returns and other. Distributions On and After Your Death. If you die after you are required to begin receiving distributions, your designated Beneficiary must receive the balance of your IRA at least as rapidly as under your method of distribution. If you die before you are required to begin receiving distributions, distribution must be made to your Beneficiary in one of the following ways: (i) by December 31st of the year containing the fifth anniversary of your death (if a distribution option is not selected, this option (ii) in equal or substantially equal installments over a set period not extending beyond your Beneficiary's life expectancy, beginning no later than December 31st of the year following the (iii) in the case of a spousal Beneficiary who so elects within the five-year period following your death, installment payments over a set period not extending beyond your spousal Beneficiary's life expectancy commencing at any date prior to December 31st of the year in which you would have reached age 70 1/2; or (iv) unless you direct the Custodian otherwise in writing, and if your spouse is your Beneficiary, then notwithstanding the foregoing, he or she may elect to treat the account as his or her own IRA, in which case the normal IRA distribution rules will apply. Election (iv) is considered to have been made if your spouse makes a regular IRA contribution to this IRA, makes a rollover to or from this IRA or fails to elect any of the above distribution provisions. Payments will be calculated by the use of the IRS tables. Unless otherwise elected by your surviving spouse Beneficiary when you die before you are required to begin receiving distributions, the life expectancy of your surviving spouse Beneficiary will not be recalculated. An election to recalculate shall be irrevocable and shall apply to all subsequent years. The life expectancy of a nonspousal Beneficiary cannot be recalculated. You may designate a change of Beneficiary on a form provided by the Sponsor or the Custodian. The change will not be effective unless the Custodian receives a properly completed form prior to your death. If after your death your designated Beneficiary is receiving (or entitled to receive) payments over a set period, he or she may designate a Beneficiary to receive the balance of the IRA (if any) on his or her death in accordance with the above rules. A written authorization filed with the Custodian (which can be on your Beneficiary designation form) permits a designated Beneficiary receiving installment payments, from time to time, to choose to increase the frequency or amount of payments and/or withdraw all or any portion of the IRA. Distribution After Age 70 1/2. Minimum Distribution Requirements. If the amount distributed to you for any tax year after you reach age 70 1/2 is less than the minimum amount required by law, the IRS may impose a penalty tax equal to 50% of any such deficiency unless it is satisfied that reasonable steps are being taken to remedy the deficiency. The amount required to be distributed in any year is generally based on your life expectancy or the joint life expectancies of you and your designated Beneficiary. However, if your Beneficiary is not your spouse, the law imposes an additional requirement which is called the minimum distribution incidental benefit requirement. In general, this requirement is designed to prevent you from naming a Beneficiary who is much younger than yourself in order to extend your payout period. You may wish to consult your tax advisor to determine your minimum distribution. These rules on distribution apply equally to Spousal IRAs. Distribution of Nondeductible Contributions. Withdrawals which include nondeductible contributions will be treated as part taxable and part nontaxable. The amount considered nontaxable is the portion which bears the same ratio to the total distribution that your aggregate nondeductible contributions bear to your Account balance at the end of the year for all of your IRAs, plus adding back any distributions for the year. The 10% tax penalty on distributions prior to age 59 1/2 will apply for the taxable portion of the distribution. Penalty for Excess Distributions. A 15% tax penalty is imposed on the sum of all annual distributions received during the calendar year in excess of $150,000 (or $112,500 adjusted for cost of living increases, if higher). Please consult with your tax advisor for more complete information, including the availability of favorable elections. The excess distribution penalty tax will not apply to a distribution of nondeductible contributions, or a distribution to an alternate payee under a qualified domestic relations order. Estate and Gift Tax Exemption. Generally, your IRA will be included in your estate for Federal estate tax purposes. Your IRA may qualify for a deduction for purposes of that tax if the Beneficiary is your spouse. Designation of a Beneficiary to receive your IRA on your death is not treated as a gift subject to the Federal gift tax. Fees and Charges; Commissions. The Custodian of your IRA will charge against your Account an annual maintenance fee for each mutual fund account, bank deposit account and other investment in your IRA. The Custodian may also charge against your Account any taxes assessed on it, administrative expenses incurred by it (including, without limitation, attorneys' fees), and penalties required or permitted by law (including penalties for early withdrawals of time deposits). The Custodian may liquidate assets held in your IRA and apply the proceeds to pay such fees and expenses. In lieu of charging such fees and expenses against your Account, the Custodian may, in its sole discretion, allow you to pay such fees and expenses directly by separate check. To the extent directed by you in writing, the Custodian of your IRA will also charge against your Account the fees of an investment advisor authorized to direct the investment of your Account. The Custodian will liquidate assets held in your IRA and apply the proceeds to pay such advisory fees in accordance with your written instructions. The payment of advisory fees out of your Account will not be reported to the IRS as a taxable distribution provided that you certify to the Custodian that your IRA is solely liable for the payment of such fees. The Custodian's current fee schedule is set forth in the Application and may be amended from time to time upon written notice to you. In the case of a mutual fund that charges a sales commission on the purchase of shares, a sales commission will also be charged against each investment in such mutual fund as described in the mutual fund's prospectus. Federal Income Tax Withholding and Filing Requirements. Distributions from your IRA are subject to Federal income tax withholding unless you (or your Beneficiary) elect not to have withholding apply. The current withholding rate set by law is 10%. When you want to receive a distribution from your IRA, contact the Custodian which will supply you with additional information and election forms. Form 5329 must be filed with the IRS for each tax year you owe tax penalties, such as taxes on excess contribution, early distribution or underdistributions over age 70 1/2. Form Approved by IRS. A form of your Dreyfus IRA has been approved by the IRS. Questions About Your IRA. You can obtain further information about IRAs from any IRS district office or from Dreyfus Service Corporation. Investment and Holding of Contributions. Contributions to your IRA and any earnings on such contributions are invested in shares of mutual funds managed by The Dreyfus Corporation and such other investments as may be authorized from time to time by The Dreyfus Corporation and approved by the Custodian. Your IRA assets are held in a Custodial Account exclusively for your benefit and the benefit of such Beneficiaries as you may designate in writing delivered to the Custodian. Your right to the entire balance in your IRA is nonforfeitable. No part of your IRA assets may be invested in life insurance contracts or in collectibles such as works of art, antiques or stamps; however, investments in gold and silver coins issued by the United States are permitted, if permitted as investments by the Custodian. Financial Information. The growth in the value of mutual fund investments held in your IRA can neither be guaranteed nor projected. 1.1 "Actual Deferral Percentage" shall mean the ratio (expressed as a percentage) of Elective Deferrals (including excess elective deferrals) contributed on behalf of an Eligible Employee for the Plan Year to the Eligible Employee's Compensation for the Plan Year. The Actual Deferral Percentage of an Eligible Employee who does not make an Elective Deferral is zero. 1.2 "Adoption Agreement" shall mean the document executed by the adopting Employer which contains all the options which may be selected and which incorporates this basic plan document by reference. 1.3 "Average Actual Deferral Percentage" shall mean the average (expressed as a percentage) of the Actual Deferral Percentages of the Eligible Employees in a group. 1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.5 "Committee" shall mean the person or persons appointed by the Employer to administer the Plan in accordance with Section 6.1. If no such Committee is appointed by the Employer, the Employer shall act as the Committee. 1.6 "Compensation" shall mean, unless otherwise specified in the Adoption Agreement, in the case of an Employee other than a Self-Employed Individual, his or her section 3401(a) wages, which are actually paid during the applicable period. In the case of a Self-Employed Individual, Compensation shall mean his or her Earned Income. Unless otherwise specified in the Adoption Agreement, the applicable period shall be the Plan Year. If elected by the Employer in the Adoption Agreement, Compensation shall also include Employer contributions made pursuant to a salary reduction agreement with an Employee which are not currently includible in the gross income of the Employee by reason of the application of sections 125, 402(e)(3), 402(h)(1)(B) or 403(b) of the Code. Compensation shall not include amounts in excess of $150,000, as adjusted by the Secretary of the Treasury at the same time and in the same manner as under section 415(d) of the Code. In determining Compensation for purposes of the adjusted $150,000 limitation, the family member rules of section 414(q)(6) of the Code shall apply except that in applying such rules, the term "family" shall include only the Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. If, as a result of the application of such family member rules, the adjusted $150,000 limitation is exceeded, then (except for purposes of determining the portion of Compensation up to the Integration Level if this Plan is integrated with Social Security), the adjusted $150,000 limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of the adjusted $150,000 limitation. 1.7 "Earned Income" shall mean the annual net earnings from self-employment in the trade or business with respect to which the Plan is established, provided that personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions by the Employer to a qualified plan to the extent deductible under section 404 of the Code. Net earnings shall be determined with regard to the deduction allowed to the taxpayer by section 164(f) of the Code. 1.8 "Elective Deferrals" shall mean any Employer contributions made to the Plan at the election of the Participant, in lieu of cash compensation, pursuant to a salary reduction agreement or other deferral mechanism. 1.9 "Eligible Employee" shall mean, for a particular Plan Year, each Employee who is not excluded from eligibility to participate in the Plan under the Adoption Agreement. The determination of eligibility shall be made on the last day of the Plan Year. 1.10 "Employee" shall mean any person employed by the Employer and any person treated as an employee under section 401(c) of the Code. A "leased employee" shall also be treated as an Employee. The term "leased employee" means any person (other than an employee of the recipient employer) who pursuant to an agreement between the recipient employer and any other person ("leasing organization") has performed services for the recipient employer (or for the recipient employer and related persons determined in accordance with section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. Notwithstanding the preceding paragraph, a leased employee shall not be considered an employee of the recipient employer if: (i) such employee is covered by a money purchase pension plan providing (1) a nonintegrated employer contribution rate of at least ten percent (10%) of Compensation, as defined in section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under section 125, section 402(a)(8), section 402(h) or section 403(b) of the Code,(2) immediate participation and (3) full and immediate vesting; and (ii) leased employees do not constitute more than twenty percent (20%) of the recipient employer's non-highly compensated workforce. 1.11 "Employer" shall mean the corporation, partnership, proprietorship or other business entity which shall adopt the Plan or any successor thereof and any employer required to be aggregated with such entity under section 414(b), (c), (m) or (o) of the Code. 1.12 "Family Member" shall, with respect to a five percent (5%) owner or top-ten Highly Compensated Employee described in section 414(q)(6)(A) of the Code, include the spouse and lineal ascendants and descendants of an Employee and the spouses of such lineal ascendants and descendants. The determination of who is a Family Member will be made in accordance with section 414(q) of the Code. 1.13 "Highly Compensated Employee" shall include any Employee who performs services for the Employer during the Determination Year and who, during the Look-Back Year: (i) received Compensation from the Employer in excess of $75,000 (as adjusted pursuant to section 415(d) of the Code); (ii) received Compensation from the Employer in excess of $50,000 (as adjusted pursuant to section 415(d) of the Code), and was a member of the top-paid group for such year; or (iii) was an officer of the Employer and received Compensation during such year that is greater than fifty percent (50%) of the dollar limitation in effect under section 415(b)(1)(A) of the Code. The term "Highly Compensated Employee" also includes: (i) an Employee who is described in the preceding sentence if the term "Determination Year" is substituted for the term "Look-Back Year" and the Employee is one of the 100 most highly compensated Employees of the Employer during the Plan Year; and (ii) an Employee who is a five percent (5%) owner of the Employer at any time during the Look-Back or Determination Year. For this purpose, the Determination Year shall be the Plan Year, and the Look-Back Year shall be the twelve (12) month period immediately preceding the Determination Year unless the Employer has elected to use the calendar year ending with or within the Determination Year as the Look-Back Year for purposes of its employee benefit plans. If the Employer has so elected to use such calendar year as the Look-Back Year for its employee benefit plans, the Determination Year shall be the "lag period," if any, by which the applicable Determination Year extends beyond such calendar year. The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of employees in the top-paid group, the top 100 employees, the number of employees treated as officers and the compensation that is considered, will be made in accordance with section 414(q) of the Code and the regulations thereunder. 1.14 "IRA" or "SEP-IRA" shall mean the Dreyfus Individual Retirement Account (a prototype IRA upon which a favorable opinion letter has been issued by the Internal Revenue Service). 1.15 "Integration Level" shall mean the Taxable Wage Base or such lesser amount elected by the Employer in the Adoption Agreement. 1.16 "Net Profits" shall mean the current and accumulated earnings of the Employer before Federal and State taxes and contributions to this and any other qualified plan. 1.17 "Non-Highly Compensated Employee" shall mean an Employee of the Employer who is neither a Highly Compensated Employee nor a Family Member. 1.18 "Participant" shall mean an Eligible Employee participating in the Plan in accordance with Section 2.1. 1.19 "Plan" shall mean this Prototype Simplified Employee Pension and the Adoption Agreement of the Adopting Employer, as from time to time amended. 1.20 "Plan Year" shall mean the calendar year, unless the Employer's fiscal year is specified as the Plan Year in the Adoption Agreement. 1.21 "SEP" shall mean a Simplified Employee Pension within the meaning of section 408(k) of the Code. 1.22 "Sponsor" shall mean The Dreyfus Corporation. 1.23 "Taxable Wage Base" shall mean the contribution and benefit base in effect under Section 230 of the Social Security Act at the beginning of the Plan Year. The Employer shall promptly notify each Employee that satisfies the Plan's eligibility requirements set forth in the Adoption Agreement that he/she may take the necessary steps to commence participation in the Plan. If an Eligible Employee cannot be located or refuses to establish an IRA to receive contributions made to the Plan, the Employer may execute the necessary documents to establish an IRA on such Eligible Employee's behalf. An Eligible Employee shall commence participation in the Plan by establishing an IRA to receive contributions made to the Plan, notifying the Committee of the establishment of the IRA, and, if applicable, entering into a "salary reduction agreement" as described in Section 3.4 with the Employer. 3.1 Limit on Employer Contributions Employer contributions for each Plan Year (including, if applicable, Elective Deferrals) shall be determined in accordance with the Adoption Agreement, but shall not exceed the maximum amount which shall constitute an allowable deduction under section 404(h) of the Code. Unless otherwise specified in the Adoption Agreement, Employer contributions may only be made out of Net Profits. In no event shall Employer contributions (including Elective Deferrals made pursuant to Section 3.4) made on behalf of any Participant exceed the lesser of 15% of the Participant's Compensation includible in the Participant's gross income for the year (determined without regard to the Employer contributions made under this Plan), or the limitation in effect under Section 415(c)(1)(A) of the Code (currently $30,000). In the case of a Participant who is a Highly Compensated Employee, the limitation in effect under Section 415 (c)(1)(A) of the Code (currently $30,000) shall be reduced, if the Plan is integrated with Social Security, by the amount of contributions made on behalf of the Participant based on Compensation over the Integration level. [Note: The Plan may not be integrated with Social Security if the Plan permits only Elective Deferrals.] All businesses of a Self-Employed Individual shall be aggregated for purposes of applying the 15% of Compensation described in this Section 3.2. The following provisions shall apply if the Employer has elected in the Adoption Agreement to make Employer Discretionary Contributions. (a) If the Plan is not integrated with Social Security, the Employer Discretionary Contribution for any Plan Year shall be allocated to the IRA established for each Participant in the ratio which each Participant's Compensation for the Plan Year bears to that of all Participants for such Plan Year. (b) If the Plan is integrated with Social Security, the Employer Discretionary Contribution shall be allocated as follows: (i) If under Article V, the Plan is Top-Heavy for the Plan Year and the minimum Top-Heavy contribution is made under the Plan, then contributions shall be allocated to each Participant's IRA in the ratio that each Participant's aggregate Compensation bears to that of all Participants for the Plan Year, up to three percent (3%) of each Participant's aggregate Compensation for the Plan Year. Any remaining contributions shall be allocated to each Participant's IRA in the ratio that each Participant's Compensation in excess of the Integration Level bears to the sum of all Participant's Compensation in excess of the Integration Level for the Plan Year, up to three V (3%) of each Participant's Compensation for the Plan Year in excess of the Integration Level. (ii) If the Plan is not Top-Heavy for the Plan Year, contributions (or if the Plan is Top-Heavy, contributions remaining after step (i) above) shall be allocated to each Participant's IRA in the ratio that the sum of each Participant's aggregate Compensation and Compensation in excess of the Integration Level bears to the sum of all Participants' aggregate Compensation and Compensation in excess of the Integration Level for the Plan Year, up to the product of (a) the Permitted Disparity Percentage as specified in the Adoption Agreement (reduced by three percent (3%) if the Plan is Top-Heavy) times (b) each Participant's aggregate Compensation plus Compensation in excess of the Integration Level for the Plan Year. Any remaining contributions will be allocated to all Participants in the ratio that each Participant's aggregate Compensation bears to all Participants' aggregate Compensation for the Plan Year. (c) Employer Discretionary Contributions will be paid by the Employer to Participants' IRA within the time period prescribed in Section 404(h) of the Code. The following provisions shall apply if the Employer has elected in the Adoption Agreement to permit Elective Deferrals. (a) Elective Deferrals shall be permitted for a Plan Year only if: (i) Not less than 50% of Eligible Employees elect, or have an election in effect, to have Elective Deferrals made to the (ii) The Employer had no more than 25 Eligible Employees at any time during the prior Plan Year. (b) In the event that the 50% requirement of Section 3.4(a)(i) is not satisfied as of the end of any Plan Year, then all Elective Deferrals made by Participants for that Plan Year shall be considered "disallowed deferrals," i.e., IRA contributions that are not SEP-IRA contributions. The Employer shall notify each affected Participant, within 2 1/2 months following the end of the Plan Year to which the disallowed deferrals relate, that the Elective Deferrals are no longer considered SEP-IRA contributions. Such notification shall specify the amount of the disallowed deferrals and the calendar year in which they are includible in income and must provide an explanation of applicable penalties if the disallowed deferrals are not withdrawn in a timely fashion. (c) The Employer shall contribute and allocate to each Participant's IRA an amount equal to the amount of the Employee's Elective Deferrals. Elective Deferrals will be paid by the Employer to the Participant's IRA trustee or custodian as soon as practicable in compliance with Department of Labor Regulation Section 2510.3-102. (d) An Eligible Employee may elect to have Elective Deferrals made under this Plan by entering into a salary reduction arrangement with his Employer. A salary reduction arrangement is an agreement whereby the Employee accepts a reduction in Compensation in consideration of a contribution by the Employer on such Employee's behalf in the same amount to the Employee's IRA established under the Plan. A salary reduction arrangement may also include an agreement whereby the Employee elects to have all or part of a cash bonus contributed to his/her IRA rather than paid to him/her in cash. An Eligible Employee may elect to enter into such an agreement with the Employer by filing a written election with the Committee, on a form supplied by the Committee, specifying a dollar amount or a whole percentage of his/her Compensation or cash bonus he/she wishes to be contributed by the Employer to the IRA he/she has established pursuant to the Plan. No Elective Deferrals may be based on Compensation an Employee received, or had a right to receive, before execution of the salary reduction agreement. An election shall remain in force until changed or canceled in writing by a Participant in accordance with rules established by the Committee on a form supplied by the Committee. (e) Under no circumstances may a Participant's Elective Deferrals in any calendar year exceed the limitation under section 402 (g) of the Code based on all of the plans of the Employer. Each Participant shall be solely responsible for determining whether such Participant's Elective Deferrals have exceeded such limitation. (f) If the Employer contributes nonelective employer contributions to this Plan or any other SEP for a Plan Year, or contributes to any qualified defined contribution plan for such Plan Year, then an Employee's Elective Deferrals may be limited to the extent necessary to satisfy the maximum contribution limitations under section 415(c)(1)(A) of the Code. (g) In no event shall the percentage of Compensation deferred by a Highly Compensated Employee in a Plan Year exceed the Average Actual Deferral Percentage of all Eligible Employees who are Non-Highly Compensated Employees in such Plan Year multiplied by 1.25. The Compensation and Elective Deferrals of Family Members shall be attributed to Highly Compensated Employees in computing the percentage of compensation deferred by a Highly Compensated Employee in any Plan Year, and Family Members shall be disregarded as separate employees. In computing the Average Actual Deferral Percentage of all Eligible Employees who are not Highly Compensated Employees, Eligible Employees not participating in the Plan shall be counted as contributing 0% of Compensation. Amounts in excess of the deferral percentage limitation will be deemed excess SEP contributions on behalf of the affected Highly Compensated Employee or Employees. (h) The Employer shall notify each affected Highly Compensated Employee, within 2 1/2 months following the end of the Plan Year to which the excess SEP contributions relate, of any excess SEP contributions to the Highly Compensated Employee's SEP-IRA for the applicable year. Such notification shall specify the amount of the excess SEP contributions and the calendar year in which the contributions are includible in income and must provide an explanation of applicable penalties if the excess SEP contributions are not withdrawn in a timely fashion. (i) The Employer shall notify each Participant who makes an Elective Deferral to the Plan that, until 2 1/2 months after the end of a particular Plan Year, any transfer or distribution from that Participant's SEP-IRA of SEP contributions (or income on these contributions) attributable to Elective Deferrals made during that Plan Year will be includible in income for purposes of sections 72(t) and 408(d)(1) of the Code. (j) The Committee shall have the right to monitor and limit a Highly Compensated Employee's Elective Deferrals to prevent such Highly Compensated Employee from making Elective Deferrals in excess of the limitations set forth in Sections 3.4(e), 3.4(f), and 3.4(g) of the Plan. Article IV: Participants' Rights to Benefits All contributions made to this Plan by the Employer on behalf of a Participant shall be fully vested and nonforfeitable at all times. The right of a Participant to withdraw amounts or to otherwise receive distributions from the IRA selected by the Participant upon commencement of participation in the Plan shall be determined by reference to the terms of such IRA, subject to such rules as may be issued by the Internal Revenue Service relating to excess contributions. Except as provided in the preceding sentence, Employer contributions are not conditioned on the retention in the Plan of any portion of the amount contributed and there is no prohibition imposed on withdrawals from the Plan. In the event of a Participant's death, disposition of the Participant's IRA shall be determined by reference to the terms of such IRA and any designation of beneficiary(ies) made by Participants pursuant thereto. For purposes of this Article, the following words shall have the following meaning: (a) "Determination Date" shall mean (i) the last day of the preceding Plan Year, or (ii) in the case of the first Plan Year of any Plan, the last day of such Plan Year. (b) "Key Employee" shall mean any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the Plan Year containing the Determination Date and the four (4) preceding Plan Years was: (1) An officer of the Employer if such individual's annual Compensation exceeds fifty percent (50%) of the dollar limitation under section 415(b)(1)(A) of the Code (provided that the number of Employees treated as officers shall be no more than fifty (50) or, if fewer, the greater of three (3) Employees or ten percent (10%) of all Employees); (2) An owner (or considered an owner under section 318 of the Code) of at least a one-half of one percent (.5%) interest and one of the ten (10) largest interests in the Employer if such individual's annual Compensation exceeds one hundred percent (100%) of the dollar limitation under section 415(c)(1)(A) of the Code; (3) A five percent (5%) owner of the Employer; or (4) A one percent (1%) owner of the Employer who has an annual Compensation of more than one hundred fifty thousand dollars ($150,000). For this purpose, annual Compensation means Compensation as defined in section 415(c)(3) of the Code, but including amounts excludable rom the Employee's gross income by reason of sections 125, 401(a)(8), 402(h) or 403(b) of the Code. The determination of who is a Key Employee will be made in accordance with section 416(i)(1) of the Code and the regulations thereunder. (c) "Non-Key Employee" shall mean any Employee who is not a Key Employee. (d) "Permissive Aggregation Group" shall mean the Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of sections 401(a)(4) and 410 of the Code. (e) "Present Value" shall be based on the interest and mortality table specified in the Employer's qualified defined benefit plan for Top-Heavy purposes, or if such assumptions are not specified in the Employer's qualified defined benefit plan, Present Value shall be based on the assumptions specified in the Adoption Agreement. (f) "Required Aggregation Group" shall mean (1) each qualified defined contribution plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the Plan has terminated), and (2) any other qualified defined contribution plan of the Employer which enables a plan described in (1) to meet the requirements of sections 401(a)(4) or 410 of the Code. (g) "Top-Heavy Ratio." (1) If the Employer maintains one or more defined contribution plans (including this or any other SEP) and the Employer has not maintained any defined benefit plan which during the five (5) year period ending on the Determination Date has or has had accrued benefits, the Top-Heavy Ratio for this Plan alone or for the Required or Permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date (including any part of any account balance distributed in the five (5) year period ending on the Determination Date), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the five (5) year period ending on the Determination Date), both computed in accordance with Section 416 of the Code and the regulations thereunder. The Employer may elect in the Adoption Agreement to consider the contributions that have been made to this Plan on behalf of Key Employees and all Employees rather than the account balances of Key Employees and all Employees under this Plan in computing the Top-Heavy Ratio. Both the numerator and denominator of the Top-Heavy Ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Section 416 of the Code and the regulations thereunder. (2) If the Employer maintains one or more defined contribution plans (including this or any other Simplified Employee Pension) and the Employer maintains or has maintained one or more defined benefit plans which during the five (5) year period ending on the Determination Date has or has had any accrued benefits, the Top-Heavy Ratio for any Required or Permissive Aggressive Group as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees determined in accordance with the above rules, and the Present Value of accrued benefits under the aggregated defined benefit plan or plans for all Employees as of the Determination Date, and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with the rules above, and the Present Value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date, all determined in accordance with section 416 of the Code and the regulations thereunder. The Employer may elect in the Adoption Agreement to consider the contributions that have been made to this Plan on behalf of Key Employees and all Employees rather than the account balances of Key Employees and all Employees under this Plan in computing the Top-Heavy Ratio. The accrued benefits under a defined benefit plan in both the numerator and denominator of the Top-Heavy Ratio are increased for any distribution of an accrued benefit made in the five (5) year period ending on the Determination Date. (3) For purposes of (1) and (2) above, the value of account balances and the Present Value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve (12) month period ending on the Determination Date, except as provided in section 416 of the Code and the regulations thereunder for the first and second Plan Years of a defined benefit plan. The account balances and accrued benefits of a Participant who is not a Key Employee but who was a Key Employee in a prior year, or has not been credited with at least one hour of service for the Employer maintaining the Plan at any time during the five (5) year period ending on the Determination Date, will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account, will be made in accordance with section 416 of the Code and the regulations thereunder. Deductible Employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the Determination Date that falls within the same calendar year. (4) Solely for the purpose of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is Top-Heavy (within the meaning of section 416(g) of the Code) the accrued benefit of a Non-Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate of section 411(b)(1)(C) of the Code. (h) "Valuation Date" shall mean the last day of the Plan Year and is the day on which account balances are valued for purposes of determining whether the Plan is Top-Heavy. The Plan shall be Top-Heavy for any Plan Year if any of the following conditions exist: (a) If the Top-Heavy Ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any Required Group or Permissive Group of plans. (b) If this Plan is a part of a Required Aggregation Group of plans, but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of plans exceeds sixty percent (60%). (c) If this Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds sixty percent (60%). If the Plan is determined to be Top-Heavy for any Plan Year pursuant to Section 5.2, a minimum nonelective Employer contribution shall be made to the Plan on behalf of each Eligible Employee who is Non-Key Employee. Such minimum contribution shall be in an amount equal to the lesser of (i) 3% of the Non-Key Employee's Compensation, or (ii) the highest Employer contribution as a percentage of Compensation allocated on behalf of any Key Employee in such Plan Year. The minimum contribution will not be required under this Plan (assuming the Plan is Top-Heavy) with respect to any Participant covered under any other qualified plan or plans of the Employer if the adopting Employer has elected in the Adoption Agreement that the minimum Top-Heavy allocation will be met in such plan. For purposes of determining whether a Plan is Top-Heavy, Elective Deferrals are considered Employer contributions. However, Elective Deferrals may not be used to satisfy this 3% minimum contribution requirement. Such minimum contribution shall be determined without regard to a Social Security contribution. The Employer may appoint a person or persons to act as the Committee and serve at its pleasure. If no Committee is appointed, the Employer shall act as the Committee. The Committee shall have the sole responsibility for the administration of the Plan. A Participant or beneficiary ("Claimant") may file a written claim for benefits under the Plan with the Committee. If the Committee decides that a Claimant is not entitled to all or any part of the benefits claimed, it shall, within ninety (90) days of receipt of such claim, inform the Claimant in writing of its determination; the reasons for its determination, including specific references to the pertinent Plan provisions; and the Plan's review procedures. The Claimant or his authorized personal representative shall be permitted to review pertinent documents and within sixty (60) days after receipt of the notice of denial of claim to request to appear personally before it or to submit such further information or comments to the Committee as will, in the Claimant's opinion, establish his right to such benefits. The Committee will render its final decision with the specific reason therefore in writing and will transmit it to the claimant by certified mail within 60 days (or 120 days, if special circumstances require an extension of time and the Claimant is given written notice within the initial 60 day period) of any such appearance. If the final decision is not made within such period, it will be considered denied. If, upon review of a request for benefits hereunder, the Committee finds the Participant ineligible for such benefits, it shall inform the Participant in writing of the reason or reasons for such denial. In the event any Participant disagrees with the conclusions of the Committee, the Committee must reconsider their decision based on the facts and evidence presented to them by the Participant. Further, the Committee must substantiate in writing to any Participant who disagrees with the amount of his benefit the method under which the benefit computations were made. The Committee shall maintain such records as may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. Employees may examine records pertaining directly to them. The Committee shall have such powers and duties as are necessary for the proper administration of the Plan, including but not limited to the power to make decisions with respect to the application and interpretation of the Plan. The Committee shall be empowered to establish rules and regulations for the transactions of its business and for the administration of the Plan. The determinations of the Committee with respect to the interpretation, application, or administration of the Plan shall be final, binding, and conclusive upon each person or party interested or concerned. In the event that the Employer appoints a person or persons to act as the Committee, such Committee shall act by a majority of its members at a meeting or in writing without a meeting. A member of the Committee ho is also a Participant of the Plan shall not vote or act as a member of the Committee upon any matter relating solely to his rights or benefits under the Plan. 6.6 Reliance on Professional Advice The Committee shall be entitled to rely conclusively on the advice or opinion of any consultant, accountant, or attorney and such persons may also act in their respective professional capacities as advisors to the Employer. The Committee may require a Participant to complete and file with the Committee any and all forms approved by the Committee, and to furnish all pertinent information requested by the Committee. The Committee shall be entitled to rely upon all such information. The Committee must discharge its duties solely in the interest of the Participants. The Committee must carry out its duties with the care, skill, prudence and diligence under circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. The Committee, however, shall not be liable for any acts or decisions based on the advice or opinion of any consultant, accountant or attorney employed by the Committee in their respective professional capacities as advisors to the Employer, provided, however, that the Committee did not violate its general fiduciary duty in selecting or retaining such advisor. 7.1 No Right of Continued Employment No Employee or Participant shall have any right or claim to any benefit under the Plan except in accordance with the provisions of the Plan. The adoption of the Plan shall not he construed as creating any contract of employment between the Employer and any Employee or otherwise conferring upon any Employee or other person any legal right to continuation of employment, nor as limiting or qualifying the right of the Employer to discharge any Employee without regard to the effect that such discharge might have upon his rights under the Plan. (a) The Employer expressly recognizes the authority of the Sponsor to amend the Plan from time to time, and the Employer shall be deemed to have consented to any such amendment. The Employer shall receive a written instrument indicating the amendment of the Plan and such amendment shall become effective as of the effective date of such amendment. (b) The Employer reserves the right to make from time to time any amendments to this Plan which do not cause any part of contributions hereunder to be used for any purpose other than the exclusive benefit of Participants. Participants will be provided with a copy of any such amendment within thirty days of the later of: (i) such amendment's effective date, or (ii) the date such amendment is adopted. If the Employer amends the Plan, the Employer shall be deemed to have an individually designed SEP and shall not be entitled to rely on the opinion letter obtained by the Sponsor with respect to the Plan. The Plan has been established with the intent that it be permanent, but the Employer reserves the right to terminate the Plan at any time. The Plan shall be administered, construed and enforced in accordance with the laws of the state wherein the Employer maintains its principal place of business, except to the extent preempted by the Employee Retirement Income Security Act of 1974, as amended.	485BPOS	EX-99	1996-01-12T00:00:00	1996-01-12T15:34:02
0000925751-96-000002	0000925751-96-000002_0000.txt	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange For the quarterly period ended November 30, 1995. (Exact name of registrant as specified in its charter.) (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1801 West International Speedway Boulevard, Daytona Beach, Florida 32114-1243 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (904) 254-2700 Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: Common Stock, $0.10 Par Value - 2,299,870 shares as of January 5, 1996. PART I. - FINANCIAL INFORMATION Item 1. - Financial Statements Cash and cash equivalents........................... $ 8,661 $ 7,871 Receivables, less allowance of $35.................. 3,656 1,794 Prepaid expenses and other current assets........... 2,001 3,122 Deferred income taxes............................... 728 - Total Current Assets.................................. 26,221 44,895 Property and Equipment - at cost - less accumulated depreciation of $31,964 ($30,692 at August 31)....... 77,246 70,299 Cash surrender value of life insurance (Note 3)..... 1,229 489 Equity investments (Note 5)......................... 17,772 2,913 See accompanying notes and accountants' review report. Accounts payable.................................... $ 2,584 $ 2,619 Income taxes payable................................ 106 324 Other current liabilities........................... 586 1,279 Total Current Liabilities............................. 28,348 24,074 Deferred income taxes................................. 10,530 10,250 Common stock, $.10 par value, 5,000,000 shares authorized; 3,502,585 issued at November 30 and August 31..................................... 350 350 Capital in excess of par value...................... 2,350 2,350 Less: Treasury stock - at cost, 1,209,520 shares.... 5,599 5,599 Unearned compensation - restricted stock...... 716 796 Total Shareholders' Equity............................ 84,307 85,247 Total Liabilities and Shareholders' Equity............ $123,185 $119,571 See accompanying notes and accountants' review report. Condensed Consolidated Statements of Operations Admissions, net.................................... $ 3,458 $ 2,874 Food, beverage and souvenir income................. 1,747 1,315 Other related income............................... 3,183 2,374 EXPENSES: Prize and point fund monies and NASCAR sanction fees....................... 1,442 1,125 Food, beverage and souvenir expenses............. 1,648 1,225 Other direct expenses............................ 854 824 Promotion, general and administrative expenses..... 3,848 3,335 Other related expenses............................. 937 690 Loss before income tax benefit....................... (1,338) (1,411) Income tax benefit................................... 318 540 Net Loss............................................. $(1,020) $ (871) Loss per share (Note 2).............................. $ (.44) $ (.38) Dividends per share.................................. $ -- $ -- See accompanying notes and accountants' review report. Condensed Consolidated Statements of Shareholders' Equity Stock In Excess Treas- sation - Share- $.10 Par of Par Retained ury Restricted holders' Value Value Earnings Stock Stock Equity August 31, 1994... $ 350 $1,861 $72,290 $(5,599) $(625) $68,277 Unaudited...... - - (871) - - (871) ______ ________ ___________ _________ _______ ________ - Unaudited....... 350 1,861 71,419 (5,599) (575) 67,456 Unaudited...... - - 19,234 - - 19,234 - unaudited... - - (1,605) - - (1,605) - unaudited.... - - (106) - - (106) - unaudited.... - 489 - - (489) - unaudited...... - - - - 268 268 August 31, 1995... 350 2,350 88,942 (5,599) (796) 85,247 Unaudited...... - - (1,020) - - (1,020) unaudited...... - - - - 80 80 - Unaudited....... $350 $2,350 $87,922 $(5,599) $(716) $84,307 See accompanying notes and accountants' review report. Condensed Consolidated Statements of Cash Flows Net loss........................................ $(1,020) $ (871) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of unearned compensation....... 80 50 Deferred income taxes....................... (448) (605) Undistributed loss of affiliate............. 116 153 Gain on disposition of property and Changes in operating assets and liabilities: Prepaid expenses and other current assets... 1,121 388 Cash surrender value of life insurance...... (740) (2) Income taxes payable........................ (218) (52) Other current liabilities................... (693) (677) Net cash provided by operating activities....... 2,933 2,949 Acquisition of investments.................... (12,987) (5,679) Proceeds from maturities of investments....... 34,040 5,402 Investment in PSH Corp........................ (14,975) - Proceeds from sale of assets.................. 8 - Net cash used in investing activities........... (2,143) (3,147) Net increase (decrease) in cash and cash equivalents.......................... 790 (198) Cash and cash equivalents at beginning of period........................... 7,871 5,227 Cash and cash equivalents at end of period...... $ 8,661 $5,029 See accompanying notes and accountants' review report. Notes to Condensed Consolidated Financial Statements November 30, 1995 and August 31, 1995 (Unaudited - See Accountants' Review Report) The accompanying condensed consolidated financial statements have been prepared in compliance with Rule 10-01 of Regulation S-X and generally accepted accounting principles but do not include all of the information and disclosures required for complete financial statements. The statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K. The statements have been reviewed by the Company's independent accountants. In management's opinion, the statements include all adjustments which are necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to conform to the financial presentation at November 30, 1995. Because of the seasonal concentration of racing events, the results of operations for the three-month periods ended November 30, 1995 and 1994 are not indicative of the results to be expected for the year. Loss per share has been computed on the weighted average total number of common shares outstanding during the respective periods. Weighted average shares outstanding for the three-month periods ended November 30, 1995 and 1994 were 2,293,065 and 2,289,248, respectively. 3. Related Party Disclosures and Transactions All of the racing events that take place during the Company's fiscal year are sanctioned by various racing organizations such as the Sports Car Club of America (SCCA), Automobile Racing Club of America (ARCA), American Motorcyclist Association (AMA), the Championship Cup Series (CCS), International Motor Sports Association (IMSA), World Karting Association (WKA), Federation Internationale de l'Automobile (FIA), Federation Internationale Motorcycliste (FIM), and the National Association for Stock Car Auto Racing, Inc. (NASCAR). NASCAR, which sanctions some of the Company's principal racing events, is a member of the France Family Group which controls in excess of 60% of the outstanding stock of the Company and some members of which serve as directors and officers. Standard NASCAR sanction agreements require racetrack operators to pay sanction fees and prize and point fund monies for each sanctioned event conducted. The prize and point fund monies are distributed by NASCAR to participants in the events. Prize and point fund monies paid by the Company to NASCAR for disbursement to competitors totaled approximately $1,218,000 and $991,000 for the three-month periods ended November 30, 1995 and 1994, respectively. In October 1995 the Company entered into collateral assignment split-dollar insurance agreements covering the lives of William C. France and James C. France and their respective spouses. Pursuant to the agreements, the Company will advance the annual premiums of approximately $1,205,000 each year for a period of eight years. Upon surrender of the policies or payment of the death benefits thereunder, the Company is entitled to repayment of an amount equal to the cumulative premiums previously paid by the Company. The Company may cause the agreements to be terminated and the policies surrendered at any time after the cash surrender value of the policies equals the cumulative premiums advanced under the agreements. During the quarter ended November 30, 1995, the Company recorded a net insurance expense of approximately $81,000 representing the excess of the premiums paid over the increase in cash surrender value of the policies associated with these agreements. Poe & Brown, Inc., the servicing agent for the split-dollar insurance agreements, received a commission for its participation in the transactions. J. Hyatt Brown, President and Chief Executive Officer of Poe & Brown, Inc., is a Director of the Company. 4. Supplemental Disclosures of Cash Flow Information Cash paid for income taxes for the three months ended November 30, 1995 and 1994 is as follows: Income taxes paid $ 347 $59 On November 22, 1995, Facility Investments, Inc., a newly formed wholly-owned subsidiary of the Company, purchased 200 shares of the common stock, representing 20% of the outstanding shares, of PSH Corp., a newly formed Delaware corporation, for $14,975,000 in cash. Penske Corporation contributed 100% of the outstanding shares of Penske Speedway, Inc. and its subsidiaries and the sum of $5,000,000 in cash for an indirect beneficial interest in the remaining 80% of the outstanding shares of PSH Corp. PSH Corp. owns 85% of the outstanding shares of Penske Speedways Holding Corp. The remaining 15% of Penske Speedways Holding Corp., represented by convertible preferred stock, is owned by Kaiser Ventures Inc., for which Kaiser contributed all of the issued and outstanding stock of Speedway Development Corporation, its wholly owned subsidiary, which owned approximately 460 acres of real property near Ontario, California. Penske Speedways Holding Corp. owns 100% of the outstanding shares of Penske Speedway, Inc., which owns and operates Michigan International Speedway, owns approximately 85% of Nazareth Speedway in Pennsylvania, 2% of North Carolina Motor Speedway (Rockingham), 100% of a racing souvenir retailer called Motorsports International Corp and 100% of The California Speedway Corporation, which is constructing the California Speedway on the land formerly owned by Kaiser. The acquisition of the 20% interest in PSH Corp. is accounted for using the equity method of accounting and is included in equity investments on the condensed consolidated balance sheet, along with the Company's equity investment in Watkins Glen International, Inc. The Company's share of undistributed equity in the earnings of PSH Corp. for the quarter ended November 30, 1995, was not significant. The Company's preliminary determination is that the investment exceeded its share of the underlying net assets of PSH Corp. by approximately $7 million. The excess is being amortized into expense by decreasing the equity in income of equity investments using the straight-line method over twenty years. The amount amortized for the quarter ended November 30, 1995, was not significant. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management believes that a high degree of liquidity is desirable due to the inherent insurance and weather risks associated with the production of large outdoor sporting and entertainment events. The trend during the past several years has been for the Company to have increasing liquidity. This trend has been due to a general increase in interest in motor sports, reflected in increased live and broadcast audiences, and generally favorable weather conditions for the events conducted at the Company's facilities. However, the Company experienced a decrease in liquidity from August 31, 1995 to November 30, 1995 as it began to utilize its liquid assets for capital projects and investments as described below under the caption "Capital Resources". Liquidity is expected to continue to decrease as the Company completes the Daytona USA (R) and Winston Tower capital projects described below. The Company's combined position in cash and cash equivalents and short- and long-term investments at November 30, 1995 decreased from August 31, 1995 primarily as a result of payments made for capital projects and the investment in PSH Corp. The decrease was offset in part by cash flows from operations. The Company's working capital at November 30, 1995 decreased from August 31, 1995 due primarily to the use of cash for the investment in PSH Corp. and to finance capital improvements. Working capital also decreased due to the decrease in inventories and the recognition of the August 31, 1995 prepaid expenses related to the September 1995 events held at the Darlington Raceway. These working capital decreases were offset in part by the deferred income tax asset which arises from the tax benefit of the carryforward of the first quarter's loss from operations. This loss and related deferred tax asset result from the seasonal fluctuation in the Company's business. Receivables and deferred revenue increased for the three months ended November 30, 1995, as compared to the three months ended November 30, 1994, primarily due to an increase in advance billings for promotions and facility rentals for the 1996 Daytona racing season. Deferred revenue also increased for the three months ended November 30, 1995, as compared to the same period of 1994, due to an increase in seating capacity and certain ticket prices for future motorsports events to be held at the Company's Daytona and Talladega facilities. The increase in cash surrender value of life insurance for the three-months ended November 30, 1995, as compared to the three-months ended November 30, 1994, is due to collateral assignment split-dollar insurance agreements entered into by the Company during the first quarter of fiscal 1996. These agreements cover the lives of the Company's Chief Executive Officer and President, and their respective spouses. Pursuant to the agreements, the Company will advance the annual premiums of approximately $1,205,000 each year for a period of eight years. Upon surrender of the policies or payment of the death benefits thereunder, the Company is entitled to repayment of an amount equal to the cumulative premiums previously paid by the Company. The Company may cause the agreements to be terminated and the policies surrendered at any time after the cash surrender value of the policies equals the cumulative premiums advanced under the agreements. The increase in proceeds from and acquisitions of investments during the three months ended November 30, 1995, as compared to the corresponding period of 1994, is due to increased short-term investment activity. This increased activity resulted from a shift in the Company's investment portfolio and the use of proceeds from the Company's liquid assets to finance capital projects and the investment in PSH Corp. The Company intends to continue to maintain the policy of investing excess cash primarily in short-term investments. The staggered maturities of these short-term investments would provide the Company with sufficient cash to cover the expenses arising from a delay, postponement or cancellation of an event due to poor weather conditions or other contingencies. Management believes that the Company has the ability to generate adequate amounts of cash through operations and outside financing, if necessary, to meet the Company's operational needs on both a long- and short-term basis. The Company continues to invest in the general improvement and expansion of its aging facilities. The amount of capital expenditures, however, can materially change from year to year based on approved projects and the availability of working capital resources. The Company's Board of Directors has approved general improvement and expansion projects with an estimated cost to complete of approximately $6 million at November 30, 1995. These projects consist primarily of additions and renovations to spectator capacity, paving, concession facilities and equipment. Management anticipates the completion of these projects within the next 24 months based on the availability of working capital resources. In addition to the general capital projects described above, the Company's Board of Directors approved two significant new capital expenditures in fiscal 1994 - an addition to the Winston Tower at the Daytona International Speedway and the development of a motor sports themed amusement complex at the Daytona facility to be called "Daytona USA"(R). The Winston Tower addition will encompass additional grandstands and suites, as well as catering and concession facilities. Construction began in July 1995. The project is expected to be completed in the fall of 1996. The total anticipated cost remaining for this project is approximately $7.8 million. "Daytona USA"(R) will combine interactive mediums, theaters and numerous historical memorabilia and exhibits to form a motor sports themed amusement complex. The complex is being constructed adjacent to the existing Visitors Center at Daytona International Speedway. Construction began in July 1995 and opening is scheduled for the summer of 1996. Total remaining costs related to this project are expected to approximate $10.5 million. During the three-months ended November 30, 1995, capital expenditures for increased spectator capacity and general improvement and expansion projects were relatively consistent with the same period of the preceding year. However, during the first quarter of fiscal 1996 the Company spent approximately $1.5 million for expansion of the Company's administrative facilities and approximately $2.3 million and $2 million for the Daytona USA (R) and Winston Tower projects, respectively, as described above. Based on the Company's current liquidity, cash and investment positions, as well as the Company's unused lines of credit of approximately $16 million, management believes that its present capital resources are sufficient to meet anticipated financing requirements in fiscal 1996. As both the Winston Tower addition and "Daytona USA"(R) projects are under construction concurrently, the Company may negotiate outside financing as needed. In management's opinion, financing resources are available to provide sufficient liquidity for continuing operations. Equity investments increased from August 31, 1995 as a result of the purchase by Facilities Investments, Inc., a newly formed wholly-owned subsidiary of the Company, of 200 shares of the common stock, representing 20% of the outstanding shares, of PSH Corp. for $14,975,000 in cash. PSH Corp. owns 85% of the outstanding shares of Penske Speedways Holdings Corp. Penske Speedways Holding Corp. owns 100% of the outstanding shares of Penske Speedway, Inc., which owns and operates Michigan International Speedway, owns approximately 85% of Nazareth Speedway in Pennsylvania, 2% of North Carolina Motor Speedway (Rockingham), 100% of a racing souvenir retailer called Motorsports International Corp., and 100% of The California Speedway Corporation, which is constructing the California Speedway on 460 acres of land near Ontario, California. The acquisition of the 20% interest in PSH Corp. is accounted for using the equity method of accounting. The Company's share of undistributed equity in the earnings of PSH Corp. for the quarter ended November 30, 1995 was not significant. The increase in equity investments from August 31, 1995 was partially offset by the recognition of the Company's 50% share of the current loss from operations at Watkins Glen International. The Company uses the equity method to account for its investment in Watkins Glen. Due to the concentration of Watkins Glen's events during the summer months, the results at November 30, 1995 are not indicative of the results to be expected for the year. The Company incurs a net operating loss during its first quarter due to the seasonal fluctuation of its business. As a result, the financial statements reflect a deferred income tax asset for the tax benefit of the loss carryforward. The first quarter is not indicative of the results to be expected for the year and, therefore, management believes the operations of the Company during the remainder of the fiscal year will eliminate this deferred income tax asset. The deferred income tax liability increased from August 31, 1995 primarily as a result of differences between financial and tax accounting treatments relating to depreciation expense. Management does not believe that inflation has had a material impact on operating costs and earnings of the Company. The Company has demonstrated the ability to appropriately adjust prices in reaction to changing costs and has aggressively pursued an ongoing cost improvement effort. Admission income increased during the first quarter of fiscal 1996, as compared to the first quarter of fiscal 1995, due to increased attendance and increases in certain ticket prices. Attendance at the September NASCAR Winston Cup event conducted at the Company's Darlington facility during the three months ended November 30, 1995 increased approximately 7% over attendance at the comparable event in the prior year. This increased attendance is due to both the continued overall increased interest in motorsports and increased seating capacity at the Company's Darlington facility. During the first quarter of fiscal 1996, the Company's wholly-owned subsidiary, Americrown Service Corporation, continued to expand its operations by providing food and beverage services at an outdoor sporting event unrelated to International Speedway Corporation. The revenue generated by this new business opportunity accounted for over 80% of the increase in food, beverage and souvenir income during the first quarter of fiscal 1996 as compared to the first quarter of fiscal 1995. Substantially all of the remaining increase in food, beverage and souvenir income for the period ended November 30, 1995, as compared to the period ended November 30, 1994, resulted from increased attendance at the September events conducted at the Company's Darlington facility and related concession and souvenir sales. The increased interest in motorsports is reflected in both live and broadcast audiences. This continued interest has enabled the Company to successfully negotiate favorable current year contracts for broadcast rights, promotional fees and advertising. The combined effect of these contracts accounted for substantially all of the increase in other related income for the three-months ended November 30, 1995 as compared to the same period of the preceding year. The motor sports industry generates significant revenues each year from the promotion, sponsorship and advertising of various companies and their products. General economic conditions and government regulation can adversely impact the availability to motor sports of these promotion, sponsorship and advertising revenues. In August 1995, the federal Food and Drug Administration ("FDA") announced proposed regulations that, if implemented, could potentially restrict tobacco industry sponsorship of sporting events. Revenue generated by tobacco industry sponsorship of the Company's events accounted for less than 1% of other related income for the three months ended November 30, 1995 and 1994. The lengthy regulatory rulemaking process related to the FDA's proposed regulations encompasses several phases. The first phase of the process, which entailed an opportunity for official comment, came to a close on January 2, 1996. There are several legal challenges pending which will likely extend the process. The final outcome of these proposed regulations is uncertain, and the impact on International Speedway Corporation, if any, is unclear. Standard NASCAR sanction agreements require a percentage of broadcast revenues be paid as prize money to participants in the events. As a result of increased broadcast revenues, the Company experienced a corresponding increase in prize money. This increased prize money, combined with increased point fund money, accounted for approximately 71% of the increase in prize and point fund monies and NASCAR sanction fees for the three-month period ended November 30, 1995 as compared to the three-month period ended November 30, 1994. As food, beverage and souvenir income increases, the Company experiences a corresponding increase in related expenses. Food, beverage and souvenir expenses, as a percent of food, beverage and souvenir income, remained relatively constant at 94% and 93% for the periods ended November 30, 1995 and 1994, respectively. The high percentage of expenses in relation to income for the first quarter of the Company's fiscal year is due to the seasonal concentration of racing and other outdoor sporting events and is not indicative of the results to be expected for the current year. Promotion, general and administrative expense increased during the first quarter of fiscal 1996, as compared to the first quarter of fiscal 1995, due primarily to increased payroll and personnel costs and professional fees. However, combined admissions and other related income increased approximately 27% in the first quarter of fiscal 1996 as compared to the first quarter of fiscal 1995, while payroll and personnel costs increased only 7%. As a result, promotion, general and administrative expenses decreased as a percentage of combined admissions income and other related income during the three-months ended November 30, 1995 as compared to the three-months ended November 30, 1994. Other related expenses remained constant at approximately 29% of other related revenue for the three-months ended November 30, 1995 and 1994. Because of the seasonal concentration of racing events, the results of operations for the three-month periods ended November 30, 1995 and 1994 are not indicative of the results to be expected for the year. Review Report of Independent Certified Public Accountants We have reviewed the accompanying condensed consolidated balance sheet of International Speedway Corporation as of November 30, 1995, and the related condensed consolidated statements of operations, shareholders' equity and cash flows for the three-month periods ended November 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of International Speedway Corporation as of August 31, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (not presented separately herein) and in our report dated October 20, 1995, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of August 31, 1995, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young, LLP PART II - OTHER INFORMATION Item #4 Submission of Matters to a Vote of Security Holders. The company held its annual meeting of shareholders on January 10, 1996 -- after the close of the quarter being reported. The following persons were re- elected to serve as directors for the indicated period at that meeting: to hold office until January 1999. Lloyd E. Reuss was elected to serve as a director until January 1999. Robert E. Smith was elected to serve as a director to fill the unexpired term of Paul A. Cameron and hold office until January 1997. The following persons' term of office as directors continued after the meeting: Item #6 Exhibits and Reports on Form 8-K I. (27) - Article 5 Fin. Data Schedule for 1st Qtr 10-Q B. Reports on Form 8-K A report on Form 8-K dated November 22, 1995 was filed on December 7, 1995 reporting the acquisition of assets by Facility Investments, Inc., a newly formed wholly-owned subsidiary of the Company, which purchased 200 shares of the common stock, representing 20% of the outstanding shares, of PSH Corp., a newly formed Delaware corporation, for $14,975,000 in cash. The acquisition of the 20% interest in PSH Corp., which is accounted for by the equity method, does not result in the direct or indirect acquisition of control of the underlying assets, including businesses, indirectly controlled by PSH Corp. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date January 11, 1995 /s/ James C. France	10-Q	10-Q	1996-01-12T00:00:00	1996-01-12T09:34:23
0000948630-96-000002	0000948630-96-000002_0002.txt	RE: REGISTRATION OF SHARES OF BENEFICIAL INTEREST UNDER RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF 1940 This opinion is being furnished in connection with the filing of the registration statement on Form N-1A under the Investment Company Act of 1940, as amended (the "1940 Act"), and the Securities Act of 1933, as amended (the "1933 Act"), of BT Global Investors, a Massachusetts business trust (the "Trust"), and in conjunction with the registration, pursuant to Rule 24f-2 under the 1940 Act, of an indefinite number of Shares of Beneficial Interest (par value $0.00001 per share) (the "Shares") of each claas of the Trust's initial series - - U.S. Bond Index Fund Institutional Class Shares, U.S. Bond Index Fund Advisor Class Shares, EAFE(R) Equity Index Fund Institutional Class Shares, EAFE(R) Equity Index Fund Advisor Class Shares, Equity 500 Equal Weighted Index Fund Istitutional Class Shares, Equity 500 Equal Weighted Index Fund Advisor Class Shares, Small Cap Index Fund Institutional Class Shares and Small Cap Index Fund Advisor Class Shares -- under the 1933 Act. This opinion is limited solely to the laws of the Commonwealth of Massachusetts as applied by courts in such Commonwealth. This opinion is limited solely to the Shares as reflected on the audited balance sheets of the Trust dated January 2, 1996. I understand that the foregoing limitation is acceptable to you. I have examined copies of the Trust's Declaration of Trust, its By-Laws, resolutions adopted by its Board of Trustees and such other records and documents as I have deemed necessary for purposes of this opinion. Based upon the subject of the foregoing, please be advised that it is my opinion that the Trust's Shares are legally issued and (to the extent still outstanding) are fully paid and non assessable, except that, as set forth in the Trust's registration statement as currently in effect filed with the Securities and Exchange Commission pursuant to the 1933 Act, shareholders of the Trust may under certain circumstances be held personally liable for its obligations.	N-1A EL/A	EX-99.B10	1996-01-12T00:00:00	1996-01-12T16:13:30

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