Document:

financialstatements.htm

                                                                                                                                                                                                                                                                                                                              
Exhibit 10.16

      

      
 

      

       

      

       

      

       

      

       

      

       

      

       

      

       

      

       

      

       

      

       

      CS
        FINANCING CORPORATION

       

      

      (A
        DEVELOPMENT STAGE COMPANY)

      

      Corte
        Madera, California

      

      December
        31, 2006 and 2005

      

      

      

      

      

      

       

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               
                        (A DEVELOPMENT STAGE
              COMPANY)
              
      

                    
      
    

        

      

      TABLE
        OF
        CONTENTS

      

      
        	 	 
	
                Report
                  of Independent Registered Public Accounting Firm

              	
                F-2

              
	
                Financial
                  Statements

              	 
	
                Balance
                  Sheets

              	
                F-3

              
	
                Statements
                  of Operations

              	
                F-4

              
	
                Statements
                  of Stockholder’s Equity

              	
                F-5

              
	
                Statements
                  of Cash Flows

              	
                F-6

              
	
                Notes
                  to Financial Statements

              	
                F-7
                  to F-12

              

      

      

      
        
          
          

        

        
          F-1

          
            

          

        

        
          
          

        

      

      REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

      

      

      

      To
        the
        Board of Directors

      CS
        Financing Corporation

      Corte
        Madera, California

      

      

      We
        have
        audited the accompanying balance sheets of CS Financing Corporation as of
        December 31, 2006 and 2005, and the related statements of operations,
        stockholder's equity and cash flows for the period from August 19, 2005
        (inception) to December 31, 2005, the year ended December 31, 2006 and the
        period from August 19, 2005 (inception) to December 31, 2006.  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 the standards of the Public Company
        Accounting Oversight Board (United States).  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 CS Financing Corporation as
        of
        December 31, 2006 and 2005, and the results of its operations and its cash
        flows
        for the period from August 19, 2005 (inception) to December 31, 2005, the
        year
        ended December 31, 2006 and the period from August 19, 2005 (inception) to
        December 31, 2006, in conformity with U.S. generally accepted accounting
        principles.

      

      The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 1 to the financial
        statements, the Company has incurred recurring losses and negative cash flows
        from operating activities since inception and requires additional working
        capital and the offering up to $100,000,000 in aggregate principal amount
        of
        five year Notes to support
        future operations, which raises substantial doubt about its ability to continue
        as a going concern. Management’s plans in regards to these matters are also
        discussed in Note 1. The financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.

       

      

      

      

      

      Minneapolis,
        Minnesota

      March
        2,
        2007

      
 

      
        
          
          

        

        
          F-2

          
            

          

        

        
          
                                                 
              CS FINANCING CORPORATION
                    

            
                                 
                          (A DEVELOPMENT STAGE
                COMPANY)
              
      

             

             

             

          

        

      

      BALANCE
        SHEETS

      
        
          

        

      
 

      
        
          	 	 	 	
                  December
                    31,

                	 	
                  December
                    31,

                
	 	 	 	
                  2005

                	 	
                  2006

                
	
                  ASSETS

                	 	 	 	 	 
	 	
                  Cash
                    and cash equivalents

                	
                   $                 -

                	 	
                   $     127,271

                
	 	
                  Prepaid
                    insurance

                	
                             78,750

                	 	
                           78,750

                
	 	
                  Prepaid
                    expenses

                	
                                     -

                	 	
                           15,667

                
	 	
                  Debt
                    placement costs

                	
                           116,771

                	 	
                         396,525

                
	 	
                  Loan
                    origination costs

                	
                             20,000

                	 	
                           20,000

                
	 	 	 	 	 	 
	 	 	
                  Total
                    Assets

                	
                   $      215,521

                	 	
                   $     638,213

                
	 	 	 	 	 	 
	 	 	 	 	 	 
	
                  LIABILITIES
                    AND STOCKHOLDER'S EQUITY

                	 	 
	 	 	 	 	 	 
	
                  LIABILITIES

                	 	 	 	 
	 	
                  Due
                    to parent

                	
                   $      101,048

                	 	
                   $               -

                
	 	
                  Accounts
                    payable

                	
                                     -

                	 	
                         130,324

                
	 	
                  Note
                    payable

                	
                             64,199

                	 	
                           64,199

                
	 	
                  Bonds
                    payable

                	
                                     -

                	 	
                         225,000

                
	 	
                  Accrued
                    salaries

                	
                                     -

                	 	
                           54,167

                
	 	
                  Accrued
                    interest

                	
                                     -

                	 	
                                744

                
	 	 	
                  Total
                    Liabilities

                	
                           165,247

                	 	
                         474,434

                
	 	 	 	 	 	 
	
                  STOCKHOLDER'S
                    EQUITY

                	 	 	 
	 	
                  Common
                    stock, $.01 par value, 1,000,000 shares authorized;

                
	 	 	
                  77,736
                    and 237,709 shares issued and outstanding

                
	 	 	
                  at
                    December 31, 2005 and 2006, respectively

                	
                                 777

                	 	
                             2,377

                
	 	
                  Additional
                    paid-in capital

                	
                             76,959

                	 	
                         420,304

                
	 	
                  Deficit
                    accumulated during the development stage

                	
                            (27,462)

                	 	
                        (258,902)

                
	 	 	
                  Total
                    Stockholder's Equity

                	
                             50,274

                	 	
                         163,779

                
	 	 	 	 	 	 
	 	 	
                       Total
                    Liabilities and Stockholder's Equity

                	
                   $      215,521

                	 	
                   $     638,213

                

        

        
          
                                                                                                                                                                                                             See
              accompanying notes to financial statements.   

          

          
            F-3

            
              

            

          

          
            
            

          

        

                               CS
        FINANCING CORPORATION
                    

                        (A
          DEVELOPMENT STAGE COMPANY)
              
      

       

      STATEMENTS
        OF OPERATIONS

      
        
          

        

      
 

      
        
          	 	 	 	
                  August
                    19, 2005 (inception) to December 31, 2005

                	
                  Year
                    Ended December 31, 2006

                	
                  August
                    19, 2005 (inception) to December 31, 2006

                
	 	 	 	 	 	 	 	 
	
                  INTEREST
                    AND FEE INCOME

                	
                   $          -

                	 	
                   $              -

                	 	
                   $                 -

                
	 	 	 	 	 	 	 	 
	
                  OPERATING
                    EXPENSES

                	 	 	 	 	 
	 	
                  Insurance

                	 	
                      11,250

                	 	
                          90,000

                	 	
                            101,250

                
	 	
                  Payroll

                	 	
                              -

                	 	
                          74,167

                	 	
                             74,167

                
	 	
                  Professional
                    fees

                	
                       2,500

                	 	
                          48,659

                	 	
                             51,159

                
	 	
                  Interest
                    expense

                	
                              -

                	 	
                            2,836

                	 	
                               2,836

                
	 	
                  Other

                	 	
                      13,712

                	 	
                          15,778

                	 	
                             29,490

                
	 	 	
                  Total
                    Operating Expenses

                	
                      27,462

                	 	
                        231,440

                	 	
                            258,902

                
	 	 	 	 	 	 	 	 
	 	 	
                       NET
                    LOSS

                	
                   $(27,462)

                	
                   $          -

                	
                   $   (231,440)

                	
                   $          -

                	
                   $      (258,902)

                
	 	 	 	 	 	 	 	 
	
                  Basic
                    and diluted loss per common stock

                	
                   $   (0.35)

                	 	
                   $        (2.06)

                	 	
                   $           (2.52)

                
	 	 	 	 	 	 	 	 
	
                  Weighted
                    average basic and diluted shares outstanding

                	
                      77,736

                	 	
                        112,210

                	 	
                            102,902

                

        

       

      
        
                

                                                                                                                                                                                                                                          
              F-4
              
      

                              See
              accompanying notes to financial statements.
              
      

                    
      
    

          
          

        

        
          
          

          
            

          

        

        
          
          

                

              CS
              FINANCING CORPORATION      

                                      (A
              DEVELOPMENT STAGE
              COMPANY)                      

                    
      
    

        

      

      STATEMENTS
        OF STOCKHOLDER’S EQUITY

      
        
          

        

      

      

      

        
          	 	 	
                  Common
                    Stock

                	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	
                  Shares

                	 	 	
                  Amount

                	 	 	
                  Additional
                    Paid-in-Capital

                	 	 	
                  Deficit
                    Accumulated During the Development Stage

                	 	 	
                  Total
                    Stockholder's Equity

                	 
	
                  BALANCES,
                    August 19, 2005 (inception)

                	 	 	
                  -

                	 	 	$	
                  -

                	 	 	$	
                  -

                	 	 	$	
                  -

                	 	 	$	
                  -

                	 
	
                  Conversion
                    of advances due to

                     Capital
                    Solutions

                     Management,
                    LP at $1.00

                     per
                    common share in 2005

                	 	 	
                  77,736

                	 	 	 	
                  777

                	 	 	 	
                  76,959

                	 	 	 	
                  -

                	 	 	 	
                  77,736

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                  Net
                    Loss for the period from

                     August
                    19, 2005 (inception)

                     to
                    December 31, 2005

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	(27,462	)	 	 	(27,462	)
	
                  BALANCES,
                    December 31, 2005

                	 	 	
                  77,736

                	 	 	 	
                  777

                	 	 	 	
                  76,959

                	 	 	 	(27,462	)	 	 	
                  50,274

                	 
	
                  Conversion
                    of advances due to

                     Capital
                    Solutions

                     Management,
                    LP at $2.00

                     per
                    common share during

                     the
                    period from September 30,

                     2006
                    to December 31, 2006

                	 	 	
                  159,973

                	 	 	 	
                  1,600

                	 	 	 	
                  318,345

                	 	 	 	
                  -

                	 	 	 	
                  319,945

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                  Stock-based
                    compensation

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  20,000

                	 	 	 	
                  -

                	 	 	 	
                  20,000

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                  Conversion
                    of office related

                     expenses
                    for the Company

                     incurred
                    by Capital Solutions

                     Management,
                    LP into

                     additional
                    paid-in capital

                   

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  5,000

                	 	 	 	
                  -

                	 	 	 	
                  5,000

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
                  Net
                    Loss for the year ended

                     December
                    31, 2006

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	(231,440	)	 	 	(231,440	)
	
                  BALANCES,
                    December 31, 2006

                	 	 	
                  237,709

                	 	 	$	
                  2,377

                	 	 	$	
                  420,304

                	 	 	$	(258,902	)	 	$	
                  163,779

                	 

        

       

      
        
                                                          
      

                                                                                                                                                                                                                                           
               F-5
              
      

                              See
              accompanying notes to financial statements.
              
      

                    
      
    

          
          

        

        
          
          

          
            

          

        

        
          
          

                

                             
              CS
              FINANCING CORPORATION
              
                                                                                                                                                     (A DEVELOPMENT STAGE COMPANY)  
                                                         
      

                    
      
    

        

      

      STATEMENTS
        OF CASH FLOWS

      
        
          

        

      

        
          	 	 	
                  Period
                    from August 19, 2005 (inception) to December 31, 2005

                	
                  Year
                    Ended December 31, 2006

                	
                  Period
                    from August 19, 2005 (inception) to December 31, 2006

                
	 	 	 	 	 	 	 
	
                  CASH
                    FLOWS FROM OPERATING ACTIVITIES

                	 	 	 	 	 
	 	
                  Net
                    loss

                	
                   $                (27,462)

                	 	
                   $              (231,440)

                	 	
                   $              (258,902)

                
	 	
                  Adjustments
                    to reconcile net loss to cash

                       flows
                    from operating activities

                	 	 
	 	
                  Stock-based
                    compensation

                	
                                                   -

                	 	
                                       20,000

                	 	
                                       20,000

                
	 	
                  Contribution
                    to equity for office related expenses for the company incurred
                    by
                    parent

                	
                                                   -

                	 	
                                          5,000

                	 	
                                          5,000

                
	 	
                  Operating
                    expenses covered by parent

                       company
                    advances or accounts payable

                	
                                       16,212

                	 	
                                       32,311

                	 	
                                       48,523

                
	 	
                  Prepaid
                    insurance

                	
                                       11,250

                	 	
                                       90,000

                	 	
                                     101,250

                
	 	
                  Prepaid
                    expenses

                	
                                                   -

                	 	
                                      (15,667)

                	 	
                                      (15,667)

                
	 	
                  Accounts
                    payable

                	
                                                   -

                	 	
                                       36,705

                	 	
                                       36,705

                
	 	
                  Accrued
                    salaries

                	
                                                   -

                	 	
                                       54,167

                	 	
                                       54,167

                
	 	
                  Accrued
                    interest

                	
                                                   -

                	 	
                                             744

                	 	
                                             744

                
	 	
                            Net
                    Cash Flows from Operating Activities

                	
                                                   -

                	 	
                                        (8,180)

                	 	
                                        (8,180)

                
	 	 	 	 	 	 	 
	
                  CASH
                    FLOWS FROM INVESTING ACTIVITIES

                	 	 	 	 	 
	 	
                  Advance
                    from parent company

                	
                                                   -

                	 	
                                             500

                	 	
                                             500

                
	 	
                            Net
                    Cash Flows from Investing Activities

                	
                                                   -

                	 	
                                             500

                	 	
                                             500

                
	 	 	 	 	 	 	 
	
                  CASH
                    FLOWS FROM FINANCING ACTIVITIES

                	 	 	 	 	 
	 	
                  Principal
                    payments on note payable

                	
                                                   -

                	 	
                                      (25,801)

                	 	
                                      (25,801)

                
	 	
                  Payment
                    of debt placement costs

                	
                                                   -

                	 	
                                      (64,248)

                	 	
                                      (64,248)

                
	 	
                  Proceeds
                    from bonds payable

                	
                                                   -

                	 	
                                     225,000

                	 	
                                     225,000

                
	 	
                            Net
                    Cash Flows from Financing Activities

                	
                                                   -

                	 	
                                     134,951

                	 	
                                     134,951

                
	 	 	 	 	 	 	 
	
                  Net
                    Change in Cash and Cash Equivalents

                	
                                                   -

                	 	
                                     127,271

                	 	
                                     127,271

                
	 	 	 	 	 	 	 
	
                  Cash
                    and Cash Equivalents - Beginning of Period

                	
                                                   -

                	 	
                                                   -

                	 	
                                                   -

                
	 	 	 	 	 	 	 
	
                  Cash
                    and Cash Equivalents - End of Period

                	
                   $                             -

                	 	
                   $                127,271

                	 	
                   $                127,271

                
	 	 	 	 	 	 	 
	
                  Cash
                    paid for Interest expense

                	
                   $                             -

                	 	
                   $                    2,092

                	 	
                   $                    2,092

                
	 	 	 	 	 	 	 
	
                  Noncash
                    investing and financing activities

                	 	 	 	 	 
	 	
                  Parent
                    company advances for debt placement

                       costs

                	
                   $                116,771

                	 	
                   $                172,983

                	 	
                   $                289,754

                

        

        	 	
                Parent
                  company advances for loan origination

                     costs

              	
                 $                  20,000

              	 	
                 $                             -

              	 	
                 $                  20,000

              
	 	
                Conversion
                  of parent company advances to

                     common
                  stock

              	
                 $                  77,736

              	 	
                 $                319,945

              	 	
                 $                397,681

              
	 	
                Issuance
                  of note payable for prepaid insurance

              	
                 $                  90,000

              	 	
                      
                         
                  $                             -

              	 	
                 $                  90,000

              
	 	
                Parent
                  company advances for payments on

                     note
                  payable

              	
                 $                  25,801

              	 	
                 $                  64,199

              	 	
                 $                  90,000

              
	 	
                Debt
                  placement costs included in accounts

                     payable

              	
                    
                  $                             -

              	 	
                  
                  $                  98,013

              	 	
                 $                  98,013

              

        
          
                  

                                                                                                                                                                                                                                                F-6
                              
      

                                See
                accompanying notes to financial statements.
              
      

                      
      
    

            
            

          

          
            
            

            
              

            

          

          
            
            

                  

                                CS
                FINANCING CORPORATION
              
      

                                 (A
                DEVELOPMENT STAGE COMPANY)
              
      

                                Notes
                to Financial Statements
              
      

                                December
                31, 2005 and 2006
              
      

                      
      
    

          

        

      
        	
                NOTE
                  1 - Summary of Significant Accounting
                  Policies

              

      

      

      Nature
        of
        Operations

      

      CS
        Financing Corporation (the Company), a subsidiary of Capital Solutions
        Management, LP (Capital Solutions), was incorporated in Delaware on August
        19,
        2005.  The Company intends to make, purchase and service mezzanine
        loans and invest in financing mezzanine real estate lenders making such
        mezzanine real estate loans in the central United States from proceeds of
        the
        Company security offering.

      

      The
        Company is a development stage company that has not generated any revenues
        to
        date.  The financial statements have been prepared in accordance with
        the provisions of Statement of Financial Accounting Standards ("SFAS") No.
        7
        "Accounting and Reporting by Development Stage Enterprises," which requires
        development stage companies to employ the same accounting principles as
        operating companies.

      

      Liquidity
        and Capital
        Resources

      

      The
        Company had a net loss for the period from August 19, 2005 (inception) to
        December 31, 2005 and for the year ended December 31, 2006.  The
        Company's ability to continue as a going concern is dependent on obtaining
        adequate funding from Capital Solutions and/or obtaining proceeds from the
        Company's security offering to commence lending activity.  In the
        future, the Company may have to seek alternative sources of capital or
        reevaluate its operating plans, which may include cessation of its operations,
        if it is unable to generate sufficient cash flows from
        operations.  There is no assurance that funding will be available for
        the Company to finance its operations on acceptable terms, or at
        all.

      

      Cash
        and Cash
        Equivalents

      

      The
        Company classifies all highly liquid investments with initial maturities
        of
        three months or less as cash equivalents. The Company deposits its cash in
        high
        quality financial institutions. The balances, at times, may exceed federally
        insured limits.

      

      Debt
        Placement
        Costs

      

      Costs
        incurred in connection with the Company's contemplated Five Year Notes -
        Series
        A security offering will be deferred until the offering is substantially
        complete and then amortized over the term of the related financing agreements
        using the straight-line method, which approximates the interest
        method.  Total debt placement costs as of December 31, 2005 and 2006
        were $116,771 and $396,525, respectively.

      

      Fair
        Value of Financial
        Instruments

      

      The
        carrying amounts for all financial instruments approximate fair
        value.  The carrying amounts for debt placement costs, loan
        origination costs, due to parent and note payable approximate fair value
        because
        of the short maturity of these instruments.  The fair value of bonds
        payable approximates the carrying value because the terms are equivalent
        to
        borrowing rates currently available to the Company for debt with similar
        terms
        and maturities.

      

           Loan
        Origination Costs

      

      Loan
        origination costs were incurred by the Company in anticipation of loans that
        the
        Company intends to offer.  These costs will be amortized over the life
        of the anticipated loan as a reduction of the loan's yield.  Total
        loan origination costs at both December 31, 2005 and 2006 were
        $20,000.

      

      Start-Up
        Costs

      

      Costs
        of
        start-up activities are expensed as incurred in accordance with SOP 98-5,
        "Reporting on the Costs of Start-Up Activities."

      
        
                                                                                                                                                                                                                                               
            F-7                    

          
          

        

        
          
          

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               (A
              DEVELOPMENT STAGE COMPANY)
              
      

                              Notes
              to Financial Statements
              
      

                              December
              31, 2005 and 2006
              
      

                    
      
    

        

      

      

      

      
        	
                NOTE
                  1 - Summary of Significant Accounting Policies
                  (cont.)

              

      

       

      

       

      Income
        Taxes

       

      Income
        taxes are accounted for under the liability method. Deferred income taxes
        are
        provided for temporary differences between the financial reporting and the
        tax
        bases of assets and liabilities. Deferred tax assets are reduced by a valuation
        allowance to the extent that realization of the related deferred tax asset
        is
        not assured.

       

      

      Management's
        Use of Estimates

      

      The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those
        estimates.

      

      Stock-Based
        Compensation

       

      The
        Company has not adopted a stock option plan but has issued various stock
        option
        awards.  The options issued are administered by the Board of
        Directors, which selects persons to receive awards and determines the number
        of
        options subject to each award and the terms, conditions, performance measures
        and other provisions of the award.  The Company’s general policy is to
        grant stock options with an exercise price at fair value at the date of
        grant.  Refer to Note 5 for additional information related to these
        stock-based compensation awards.

       

      Effective
        January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payment (SFAS
        123R), which requires companies to measure and recognize compensation expense
        for all stock-based payments at fair value. SFAS 123R is being applied on
        the modified prospective basis.

      

      Under
        the
        modified prospective approach, SFAS 123R applies to new awards and to awards
        that were outstanding on January 1, 2006 that are subsequently modified,
        repurchased, cancelled or vest. Under the modified prospective approach,
        compensation cost recognized in 2006 includes compensation cost for all
        share-based payments granted prior to, but not yet vested on January 1, 2006,
        based on the grant-date fair value estimated in accordance with the provisions
        of SFAS 123R, and compensation cost for all shared-based payments granted
        subsequent to January 1, 2006, based on the grant-date fair value estimated
        in
        accordance with the provisions of SFAS 123R. Prior periods were not restated
        to
        reflect the impact of adopting the new standard as no options were granted
        prior
        to January 1, 2006.

       

      As
        a
        result of adopting SFAS 123R on January 1, 2006, the net loss and net loss
        per
        common share for the year ended December 31, 2006, were $20,000 and $0.18
        lower,
        respectively, and the net loss and net loss per common share for the period
        August 19, 2005 (inception) to December 31, 2006, were $20,000 and $0.19
        lower,
        respectively, than if the Company had accounted for stock-based compensation
        under APB Opinion No. 25.  Options and warrants issued to
        non-employees are recorded at fair value, as required by Emerging Issues
        Task
        Force (EITF) 96-18, “Accounting for Equity Instruments That are Issued to Other
        Than Employees for Acquiring, or in Conjunction with Selling, Goods or
        Services,” using the Black-Scholes pricing model.  From August 19, 2005
        (inception) to December 31, 2006, the Company did not issue any stock-based
        awards to non-employees.

      

      During
        the year ended December 31, 2006, 25,200 options were issued to board members,
        of which 8,400 options were exercisable at December 31, 2006.  In
        accordance with SFAS No. 123R the Company assessed performance based stock
        options and recorded compensation expense of $20,000 for the year ended December
        31, 2006.

      

      

      
        
                                                                                                                                                                                       F-8                                   

          
          

        

        
          
          

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               (A
              DEVELOPMENT STAGE COMPANY)
              
      

                              Notes
              to Financial Statements
              
      

                              December
              31, 2005 and 2006
              
      

                    
      
    

        

      

      
        	
                NOTE
                  1 - Summary of Significant Accounting Policies
                  (cont.)

              

      

      

      The
        Company uses the Black-Scholes option-pricing model to estimate fair value
        of
        stock-based awards with the following weighted average assumptions:

      
 

      
        
          	 	
                  2005

                	 	
                  2006

                
	
                  Expected
                    life (years)

                	
                  N/A

                	 	
                  10.00

                
	
                  Expected
                    volatility

                	
                  N/A

                	 	
                  40.00%

                
	
                  Dividend
                    yield

                	
                  N/A

                	 	
                  0.00%

                
	
                  Risk-free
                    interest rate

                	
                  N/A

                	 	
                  4.50%

                

        

      The
        weighted average fair value of stock options granted with an exercise price
        equal to the fair value of common stock on the date of grant during the period
        from August 19, 2005 (inception) to December 31, 2005, year ended December
        31,
        2006 and the period from August 19, 2005 (inception) to December 31, 2006
        was
        $0.00, $1.18 and $1.18 per option, respectively.

      

      The
        Company calculates expected volatility for stock options using 40% volatility
        as
        the Company believes the expected volatility will approximate this
        volatility.  The Company estimates the forfeiture rate for stock
        options of 0% as there is no historical data and the Company believes all
        stock
        options issued to date will vest.

      

      The
        risk-free rates for the expected terms of the stock options are based on
        the
        U.S. Treasury yield curve in effect at the time of grant.

      

      Net
        Loss Per Common Share

       

      In
        accordance with SFAS No. 128, Earnings Per Share, basic loss per common share
        is
        computed by dividing net loss by the weighted average common shares outstanding
        during the periods presented. Diluted loss per common share is computed by
        dividing net loss by the weighted average common and potential dilutive common
        shares outstanding computed in accordance with the treasury stock method.
        For
        all periods presented, diluted loss per common share is the same as basic
        loss
        per common share because the effect of outstanding options is antidilutive
        due
        to the net loss for all period presented.

      

      Recent
        Accounting Pronouncement

      

      In
        June
        2005, the Financial Accounting Standards Board ("FASB") issued SFAS No. 154,
        "Accounting Changes and Error Corrections," a replacement of APB Opinion
        No. 20
        and FASB Statement No. 3.  The statement applies to all voluntary
        changes in accounting principle, and changes the requirements for accounting
        for
        and reporting of a change in accounting principle. SFAS No. 154 requires
        retrospective application to prior periods' financial statements of a voluntary
        change in accounting principle unless it is impracticable.  SFAS No.
        154 is effective for accounting changes and corrections of errors made in
        fiscal
        years beginning after December 15, 2005.  Earlier application is
        permitted for accounting changes and corrections of errors made occurring
        in
        fiscal years beginning after June 1, 2005.  The statement does not
        change the transition provisions of any existing accounting pronouncements,
        including those that are in a transition phase as of the effective date of
        this
        statement.  The adoption of SFAS No. 154 did not have a material
        effect on the Company's financial statements.

      
        
                

                                      
      

                    
      
    

          
          

        

        
                F-9   

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               (A
              DEVELOPMENT STAGE COMPANY)
              
      

                              Notes
              to Financial Statements
              
      

                              December
              31, 2005 and 2006
              
      

                    
      
    

        

      

      
        	
                NOTE
                  1 - Summary of Significant Accounting Policies
                  (cont.)

              

      

      

      In
        December 2003, the FASB issued FASB Interpretation No. 46 (Revised December
        2003), “Consolidation of Variable Interest Entities, an Interpretation of ARB
        No. 51” (FIN 46R). This standard replaces FIN 46, Consolidation of Variable
        Interest Entities” that was issued in January 2003. FIN 46R modifies or
        clarifies various provisions of FIN 46. FIN 46R addresses the consolidation
        of
        business enterprises of variable interest entities (VIE’s), as defined by FIN
        46R. FIN 46R exempts certain entities from its requirements and provides
        for
        special effective dates for entities that have fully or partially applied
        FIN 46
        prior to issuance of FIN 46R. Otherwise, application of FIN 46R is required
        in
        financial statements of public entities that have interest in structures
        commonly referred to as special purpose entities for periods ending after
        December 15, 2003. Application by the Company for all other types of VIE’s is
        required in financial statements for periods ending no later than the quarter
        ended January 31, 2005. The adoption of FIN 46R did not have a material effect
        on the Company’s financial statements.

      

      

      
        	
                NOTE
                  2 - Due to Parent

              

      

      

      During
        2005, Capital Solutions made advances to the Company which are non-interest
        bearing, unsecured and due on demand.  Advances outstanding at
        December 31, 2005 and 2006 were $101,048 and $0, respectively. Capital Solutions
        converted advances of $77,736 in 2005 into common stock at $1.00 per share,
        and
        $319,945 in 2006 into common stock at $2.00 per share.

      

      

      
        	
                NOTE
                  3 - Note Payable

              

      

      

      On
        November 15, 2005, the Company entered into an agreement with First Insurance
        Funding Corporation to finance insurance premiums.  The agreement bore
        interest at a rate of 7.55% per annum and matured in August 2006 and required
        monthly principal and interest payments of $8,254.  The balance of the
        note payable was $64,199 and $0 at December 31, 2005 and 2006,
        respectively.

      

      On
        November 17, 2006, the Company entered into an agreement with First Insurance
        Funding Corporation to finance insurance premiums. The agreement bears interest
        at a rate of 7.55% per annum and will mature in August 2007 and requires
        monthly
        principal and interest payments of $8,254. The balance of the note payable
        was
        $64,199 at December 31, 2006.

      

      

      
        	
                NOTE
                  4 - Bonds Payable

              

      

      

      The
        Company issued $225,000 of five year notes on December 24, 2006 pursuant
        to the
        Company’s current S-1 registration statement.  The notes are due in
        December 2011 and bear interest at a fixed rate (calculated based upon a
        360-day
        year) of ten percent (10%). Interest is payable monthly with the first interest
        payment commencing thirty (30) days from issuance.

       

      The
        five
        year notes are not listed on any securities exchange and there is no public
        trading market for the five year note.  The Company may redeem the
        five year notes after two years and upon at least 30 days written notice.
        These
        five year notes are general unsecured obligations and are subordinated in
        right
        to payment to all future, if any, senior debt.

      

      
        
                

                                         
      

                    
      
    

          
          

        

        
               F-10

          
            

          

        

        
          
          

                

                              CS
              FINANCING CORPORATION
              
      

                               (A
              DEVELOPMENT STAGE COMPANY)
              
      

                              Notes
              to Financial Statements
              
      

                              December
              31, 2005 and 2006
              
      

                    
      
    

        

      

      

      
        	
                NOTE
                  5 - Income Taxes

              

      

      

      Income
        Tax

      

      At
        December 31, 2006, the Company had net operating loss carryforwards of
        approximately $248,000 and $247,000 for federal and state income tax purposes,
        respectively, that are available to offset future taxable income and begin
        to
        expire in the year 2025.  No benefit has been recorded for any loss
        carryforwards, and utilization in future years may be limited under
        Sections 382 and 383 of the Internal Revenue Code if significant ownership
        changes have occurred or from future tax legislation changes.

      

      The
        Company records a valuation allowance to reduce the carrying value of the
        net
        deferred taxes to an amount that is more likely than not to be realized.
        The
        increase in the valuation allowance was $10,985, $85,416 and $96,401 for
        the
        period from August 19, 2005 (inception) to December 31, 2005, year ended
        December 31, 2006 and the period from August 19, 2005 (inception) to December
        31, 2006, respectively.  The benefit for income taxes differs from the
        amount computed by applying the U.S. federal income tax rate to loss before
        income taxes as follows:

      

      
        	 	 	
                Period
                  from August 19, 2005 (inception) to December 31, 2005

              	 	 	
                Year
                  Ended December 31, 2006

              	 	 	
                Period
                  from August 19, 2005 (inception) to December 31, 2006

              	 
	
                Expected
                  benefit at statutory rate

              	 	$	(9,337	)	 	$	(72,602	)	 	$	(81,939	)
	
                State
                  tax effects

              	 	 	(1,648	)	 	 	(12,814	)	 	 	(14,462	)
	
                Increase
                  in valuation allowance

              	 	 	
                10,985

              	 	 	 	
                85,416

              	 	 	 	
                96,401

              	 
	 	 	$	
                -

              	 	 	$	
                -

              	 	 	$	
                -

              	 

      

      

      

      The
        following is a summary of deferred taxes at December 31, 2005 and
        2006:

      

        
          	 	 	 	 	 
	 	 	 	
                  2005

                	
                  2006

                
	
                  Deffered
                    tax asset:

                	 	 	 
	
                     Pre-opening
                    cost

                	 	
                   $        3,094

                	
                   $     3,094

                
	
                     Net
                    operating loss

                	 	
                            7,891

                	
                        93,307

                
	
                     Valuation
                    allowance

                	 	
                          (10,985)

                	
                       (96,401)

                
	 	 	 	
                   $             -

                	
                   $          -

                

        

        
          
            
            

          

          
            F-11

            
              

            

          

          
            
            

          

        

      
        	
                NOTE
                  6 - Stockholder’s Equity

              

      

      

      Stock
        Options

      

      On
        January 1, 2006, the Company issued nonqualified stock options to Company
        employees/directors to acquire an aggregate of 25,200 shares of common stock
        at
        $2.00 per share. The options vest on future contingent events as defined
        in the
        stock option agreements and expire ten years from the date of grant. Unexercised
        options are canceled 90 days after termination, and unvested awards are canceled
        on the date of termination of employment.

      

      The
        weighted average remaining contractual term of options exercisable at December
        31, 2006, was 9 years.

      

      The
        following table summarizes information about stock options outstanding at
        December 31, 2006:

      

      

      

        
          	 	 	
                  Options

                	 	 	
                  Weighted
                    Average Exercise Price

                	 	 	
                  Range
                    of Option Exercise Price

                	 	 	
                  Intrinsic
                    Value

                	 
	
                  Options
                    outstanding - August 19, 2005 (inception)

                	 	 	
                  -

                	 	 	$	
                  -

                	 	 	$	
                  -

                	 	 	 	 
	
                  Granted

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Canceled
                    or expired

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Exercised

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Options
                    outstanding - December 31, 2005

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Granted

                	 	 	
                  25,200

                	 	 	 	
                  2.00

                	 	 	 	
                  2.00

                	 	 	 	 
	
                  Canceled
                    or expired

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Exercised

                	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	
                  -

                	 	 	 	 
	
                  Options
                    outstanding - December 31, 2006

                	 	 	
                  25,200

                	 	 	$	
                  2.00

                	 	 	$	
                  2.00

                	 	 	$	
                  0

                	 
	
                  Options
                    exercisable - December 31, 2006

                	 	 	
                  8,400

                	 	 	$	
                  2.00

                	 	 	$	
                  2.00

                	 	 	$	
                  0

                	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

        

      As
        of
        December 31, 2006, there was $14,736 of total unrecognized compensation costs
        related to the outstanding stock options, which is expected to be recognized
        over a weighted average period of one year.

      

      
        	
                NOTE
                  7 – Marketing Support and Wholesaler
                  Agreement

              

      

      

      The
        Company entered into an agreement with Financial Products
        Distributors ("Distributor") on December 6, 2006, for wholesale
        distribution of its 5 year Note offering to NASD registered broker-dealers.
        The Distributor is compensated under the agreement based on the total volume
        of
        Note sales by broker-dealers. The compensation scale has 5 tiers and ranges
        from 1%-1.5% of Notes sold. There is no minimum compensation and maximum
        compensation is based on if the full Notes for $100 million are
        sold.

      

      
        	
                NOTE
                  8 - Subsequent Events

              

      

      

      The
        Company issued $220,000 in January of 2007, $100,000 on February 9, 2007,
        and
        $25,000 on February 22, 2007 of five year notes pursuant to the Company’s
        current S-1 registration statement.  The notes are due in January and
        February of 2012 and bear interest at a fixed rate (calculated based upon
        a
        360-day year) of ten percent (10%). Interest is payable monthly with the
        first
        interest payment commencing thirty (30) days from issuance.  Total
        notes issued and outstanding as of February 9, 2007 are $545,000 (including
        bonds issued as of December 31, 2006 – See Note 4).

       

      
        
                

                                                                                                                                                                                                                                            
              F-12Filed by Bowne Pure Compliance

 

Exhibit 10.1

FIRST AMENDMENT TO THE

QUANEX CORPORATION EMPLOYEES’ PENSION PLAN

THIS AGREEMENT by Quanex Corporation (the “Sponsor”) effective as of the 1st day of January
2007 or as otherwise set forth in the specific provision,

W I T N E S S E T H:

WHEREAS, the Sponsor maintains the Quanex Corporation Employees’ Pension Plan (the “Plan”);

WHEREAS, the Sponsor reserved the right in Section 10.01 to amend the Plan; and

WHEREAS, the Sponsor has determined to amend the Plan;

NOW, THEREFORE, the Plan is hereby amended as set forth below:

1. Effective January 1, 2007, Section 1.22 of the Plan is completely amended and restated to
provide as follows:

1.22 “Eligible Employee” means an Employee who (a) is classified by the Sponsor
as (1) working at the Sponsor’s Corporate Office in Houston, Texas; (2) working at
or for the Sponsor’s MACSTEEL group office in Jackson, Michigan and compensated on a
salaried basis; (3) working at or for the Sponsor’s MACSTEEL operating unit in
Jackson, Michigan and compensated on a salaried basis; (4) working at or for the
Sponsor’s MACSTEEL operating unit in Fort Smith, Arkansas and compensated on a
salaried basis; (5) working at or for the Sponsor’s MACSTEEL Heat Treating operating
unit in Huntington, Indiana and compensated on a salaried or hourly basis; (6)
working at or for the Sponsor’s Nichols Aluminum Casting division and compensated on
a salaried basis; (7) working at or for the Sponsor’s Homeshield-Chatsworth division
and compensated on a salaried or hourly basis; (8) working at or for the Sponsor’s
Homeshield-Rice Lake division and compensated on a salaried or hourly basis; (9)
working at or for the Sponsor’s Homeshield-The Dalles division and compensated on a
salaried or hourly basis; (10) working at or for the Sponsor’s Nichols Aluminum
Lincolnshire division and compensated on a salaried basis; (11) working at its
Homeshield-Dubuque division and compensated on a salaried or hourly basis; (12)
working at or for the Sponsor’s Nichols Aluminum General Office and compensated on a
salaried basis; (13) working at or for the Sponsor’s Nichols Aluminum Davenport
division and compensated on a salaried basis; or (14) working at or for the
Sponsor’s MACSTEEL NitroSteel division and compensated on a salaried or hourly
basis; or (b) is an Employee of MACSTEEL Monroe, Inc. and compensated on a salaried
basis; (c) is an Employee of Nichols Aluminum-Alabama, Inc. and compensated on a
salaried basis; (d) is an Employee of Colonial Craft, Inc. working at or for its
Homeshield-Mounds View

 

 

 

or Homeshield-Luck divisions and compensated on a salaried or hourly basis; (e)
is an Employee of Imperial Products, Inc. working at its Homeshield-Richmond
divisions and compensated on a salaried or hourly basis; (f) is an Employee of
Mikron Industries, Inc. and compensated on a salaried or hourly basis; (g) is an
Employee of Mikron Washington LLC and compensated on a salaried or hourly basis; (h)
is an Employee of Besten Equipment, Inc. and compensated on a salaried or hourly
basis; (i) is an Employee of TruSeal Technologies, Inc. and compensated on a
salaried basis or (j) effective February 1, 2007, is an Employee of MacSteel
Atmosphere Annealing, Inc. and compensated on a salaried or hourly basis.

2. Effective January 1, 2007, Sections 1.30, 1.31, 1.32, 1.33, 1.34, 1.35, 1.36, 1.37, 1.38,
1.39, 1.40, 1.41, 1.42, 1.43, 1.44, 1.45, 1.46, 1.47, 1.48, 1.49, 1.50, 1.51, 1.52, 1.53, 1.54,
1.55, 1.56, 1.57, 1.58, 1.59, 1.60, 1.61, 1.62, 1.63, 1.64, 1.65, 1.66, 1.67, 1.68 and 1.69 are
hereby renumbered as 1.31, 1.32, 1.33, 1.34, 1.35, 1.36, 1.37, 1.38, 1.39, 1.40, 1.41, 1.42, 1.43,
1.44, 1.45, 1.46, 1.47, 1.48, 1.49, 1.50, 1.51, 1.52, 1.53, 1.54, 1.55, 1.56, 1.57, 1.58, 1.59,
1.60, 1.61, 1.62, 1.63, 1.64, 1.65, 1.66, 1.67, 1.68, 1.69 and 1.70, respectively.

3. Effective January 1, 2007, a new Section 1.30 is hereby added to the Plan to provide as
follows.

1.30 “Grandfathered Cash Balance Member” means a Cash Balance Member who for
January 1, 2007, was classified by the Sponsor as: (1) working at or for the
Sponsor’s Nichols Aluminum Casting division and compensated on a salaried basis; (2)
working at or for the Sponsor’s Homeshield-Chatsworth division and compensated on a
salaried or hourly basis; (3) working at or for the Sponsor’s Homeshield-Rice Lake
division and compensated on a salaried or hourly basis; (4) working at or for the
Sponsor’s Homeshield-The Dalles division and compensated on a salaried or hourly
basis; (5) working at its Homeshield-Dubuque division and compensated on a salaried
or hourly basis; (6) working at or for the Sponsor’s Nichols Aluminum Lincolnshire
division and compensated on a salaried basis; (7) working at or for the Sponsor’s
Nichols Aluminum General Office and compensated on a salaried basis; (8) working at
or for the Sponsor’s Nichols Aluminum Davenport division and compensated on a
salaried basis; (9) an Employee of Nichols Aluminum-Alabama, Inc. compensated on a
salaried basis; (10) an Employee of Colonial Craft, Inc. working at or for its
Homeshield-Mounds View or Homeshield-Luck divisions and is compensated on a salaried
or hourly basis; and (11) an Employee of Imperial Products, Inc. working at or for
its Homeshield-Richmond division compensated on a salaried or hourly basis.

4. Effective January 1, 2007, Section 1.41 of the Plan, as renumbered herein, is completely
amended and restated to provide as follows:

1.41 “Notional Employer Contribution” means the percentage of a Member’s
Compensation accrued for a Plan Year, or portion thereof, in a Member’s Account as
provided under Section 3.02. Effective as of January 1,

 

 

 

2007, such percentage shall equal 4% of the Member’s Compensation for a Plan
Year; provided, however, that such percentage for the Grandfathered Cash Balance
Members described in the chart below shall equal the percentage corresponding to
such Member as reflected in the chart below:

	 	 	 	 	 
	For a Grandfathered Cash	 	For such	 	For such members
	Balance Member who was	 	Members who are	 	who are hourly
	working at or for the following on	 	salaried	 	compensated
	January 1, 2007	 	Employees	 	Employees
	Homeshield — Mounds View
	 	5%	 	5.5%
	Homeshield — Luck
	 	5%	 	5.5%
	Homeshield — Chatsworth
	 	5%	 	6.5%
	Homeshield — Rice Lake
	 	5%	 	6.5%
	Homeshield — The Dalles
	 	5%	 	6.5%
	Homeshield — Dubuque
	 	5%	 	6.5%
	Nichols Aluminum — Davenport &
General Office
	 	5%	 	N/A
	Nichols Aluminum — Casting
	 	5%	 	N/A
	Nichols Aluminum — Lincolnshire
	 	5%	 	N/A
	Nichols Aluminum — Alabama
	 	5%	 	N/A

If a Grandfathered Cash Balance Member is transferred from the division or
subsidiary at which or for which such Member was working on January 1, 2007, the
Notional Employer Contribution for such Member shall continue to be based on the
percentage that is provided to Grandfathered Cash Balance Members who were working
at or for such division or subsidiary on January 1, 2007, until such Member
Separates From Service and incurs a Period of Severance of at least one year. If an
Employee who is a Grandfathered Cash Balance Member Separates From Service, incurs a
Period of Severance of at least one year, is reemployed by an adopting Employer of
the Plan, and is eligible to recommence participation in the Plan, such Employee
shall be a Cash Balance Member but will no longer be a Grandfathered Cash Balance
Member.

5. Effective as of May 1, 2007, each reference to “Option D” in Sections 5.01(a)(2) and
5.01(b)(2) shall be changed to a reference to “Option E”.

6. Effective as of May 1, 2007, Section 6.07 of the Plan is hereby amended and restated to
provide as follows:

6.07 Optional Forms Of Distribution. Subject to the provisions of Sections
6.03 and 6.05, a Member may elect another pension which is the Actuarial Equivalent
of his Accrued Benefit, limited however, to one of the following options:

 

 

 

(a) Option A. A pension under which the Member shall receive equal monthly
payments for his life with no minimum number of payments guaranteed. (This is the
normal form of payment of benefits under the Plan.)

(b) Option B. A last survivor pension under which the Member shall receive 85
percent of the monthly pension benefit otherwise payable under Option A, and upon
the death of the Member, the Beneficiary shall receive 1/2 of the monthly pension
benefit paid to the Member prior to his death; provided however, that if the
Beneficiary is younger than the Member, the 85 percent factor shall be reduced by
one percent for each full year’s difference in the age of the Member and the
Beneficiary, and if the Beneficiary is older than the Member, the 85 percent factor
shall be increased by one percent for each full year’s difference in the age of the
Member and the Beneficiary (up to a maximum of 100 percent).

(c) Option C. A last survivor pension under which the Member shall receive a
monthly pension reduced from the monthly pension benefit otherwise payable under
Option A, and upon the death of the Member, the Beneficiary shall receive a monthly
pension benefit equal to that paid to the Member.

(d) Option D. A last survivor pension under which the Member shall receive a
monthly pension reduced from the monthly pension benefit otherwise payable under
Option A, and upon the death of the Member, the Beneficiary shall receive a monthly
pension benefit equal to 75 percent of that paid to the Member.

(e) Option E. A reduced monthly pension payable to the Member during his
lifetime, provided that, if the Member dies prior to his receipt of an amount equal
to 120 monthly payments, the then Present Value of the remainder of such 120 monthly
payments shall be payable to his Beneficiary in a lump sum. If a Member first
became eligible to participate in the Plan on or after November 3, 2005, his reduced
monthly pension shall be the Actuarial Equivalent of his Accrued Benefit. If a
Member was already a participant prior to November 3, 2005, his reduced monthly
pension shall be the greater of (A) the Actuarial Equivalent of his Accrued Benefit
or (B) an amount determined under the terms of the Plan applicable to Option D
immediately prior to November 3, 2005. If the Member dies prior to his receipt of
all of such 120 payments without having designated a Beneficiary, of if the
Beneficiary predeceases the Member, the then Present Value of any remaining payments
shall be paid in a lump sum to the Member’s estate. If the Beneficiary dies after
the Member and before all of such 120 monthly payments have been made, the then
Present Value of the unpaid balance of such payments shall be paid in a lump sum to
the Beneficiary’s estate.

(f) Option F. In the case of an Hourly Pension Plan Participant, a lump sum
payment if the requirements of Section 6.08 are satisfied.

(g) Option F. In the case of a Cash Balance Member, a lump sum payment.

 

 

 

Options B, C, D and E will not be available to any Member if the reduced
pension is less than $10.00 per month.

If the monthly pension benefit payable to a Member, his Spouse or his
Beneficiary would be less than $10.00 per month, quarterly payments equal in amount
to three times the monthly benefit otherwise payable will be made in lieu of monthly
payments, commencing on the date payments would otherwise commence to the payee.

Options B, C, D, E and F are not available to Hourly Pension Plan Participants.

Except otherwise as provided elsewhere in the Plan, any election shall be
automatically revoked if either the Member or Beneficiary should die before the
Member’s Annuity Starting Date.

If there is more than a 15-year age difference between the Member and his
Beneficiary, then the amount payable pursuant to either Option B or Option C will be
determined on an Actuarial Equivalent Basis.

In cases where the Beneficiary is a person other than the Member’s Spouse, the
Beneficiary under either Option B, C or D must be of such age and sex that the
amount payable to the Member will exceed 50 percent of the amount that would
otherwise be payable if such Member had elected the normal form of benefit.

No pension can exceed the life of the Member or the life of the Member and his
designated Beneficiary, or in the case of a period certain, the life expectancy of
the Member or the life expectancy of the Member and his designated Beneficiary.

An election of an option available under this Section may be made, rescinded,
or changed by a Member at any time prior to his Annuity Starting Date. An election
of an option or a change or rescission of one must be made by executing and properly
filing the form or forms approved by the Committee. Proof of age and other
information may be required by the Committee.

No pension payable under the Plan shall exceed the life of the Member or the
life of him and his Beneficiary, or in the case of a period certain, the life
expectancy of the Member or the life expectancy of him and his Beneficiary.

If the Member’s Spouse dies before the Member’s Annuity Starting Date and an
election or a failure to make an election under Section 6.05 would have caused such
Member to receive a pension based upon his and his Spouse’s joint life expectancy,
then the joint and survivor form of pension shall become inapplicable and, instead,
the Member shall become entitled to the normal form of monthly pension. If the
Member or his Spouse dies on or after his Annuity Starting Date, and he and his
Spouse were to receive a joint and survivor annuity,
such annuity shall continue in accordance with its terms and the amount of the
pension shall not be increased thereby.

 

 

 

7. Effective as of the first day of the month following the adoption of this Amendment,
Section 6.10 of the Plan is completely amended and restated to provide as follows:

6.10 Direct Rollover Option. To the extent required under Regulations, a
Distributee has the right to direct that any portion of his Eligible Rollover
Distribution will be directly paid in a Direct Rollover to an Eligible Retirement
Plan specified by him that will accept the Eligible Rollover Distribution.
Effective January 1, 2007, pursuant to Code section 402(c)(11), a designated
beneficiary (as defined in Code section 401(a)(9)(E)) who is not the surviving
Spouse of the Member may direct the Plan to make a direct trustee-to-trustee
transfer of all or any portion of the deceased Member’s Account to an individual
retirement plan described in Code section 402(c)(8)(B)(i) or 402(c)(8)(B)(ii)
established for purposes of receiving the distribution on behalf of such individual,
provided that such distribution satisfies all of the requirements to be an eligible
rollover distribution (as described under the Code and the regulations and guidance
issued thereunder) other than the requirement that the distribution be made to the
Member’s or former Member’s Spouse. To the extent inconsistent with the terms and
provisions of the Plan and this Section 6.10, the requirements of Code section
402(c)(11) and the regulations and guidance issued thereunder shall govern such
rollovers by nonspouse Beneficiaries.

8. Effective 180 days following the adoption of this Amendment, Section 6.11 of the Plan is
completely amended and restated to provide as follows:

6.11 Time of Payment of Distribution.

(a) Members Other than Cash Balance Members. Subject to Sections 6.03, 6.06
and 6.12, the benefit of a Member other than a Cash Balance Member shall be paid or
commence to be paid by the first day of the third month coincident with or next
following the later of (1) the date of his Separation From Service, or (2) the date
on which he attains age 55; provided, however, that such Member may elect to have
his Plan benefit paid or commence to be paid as of either (a) the first day of any
subsequent month, or (b) the first day of the first or second month following the
later of (i) the date of his Separation from Service, or (ii) the date on which he
attains age 55.

(b) Cash Balance Members. Subject to Sections 6.03, 6.06 and 6.12, a Cash
Balance Member’s Plan benefit may be paid or commence to be paid on the first day of
the third month coincident with or next following the date of his Separation From
Service; provided, however, that such Member may elect to have his Plan benefit paid
or commence to be paid as of either (a) the first day of any subsequent month or (b)
the first day of the first or second month following the date of his Separation from
Service.

 

 

 

(c) Notwithstanding the foregoing provisions of this Section 6.11, in no event
shall a Member’s Plan benefit be paid or commence to be paid later than the first
day of the third month following the later of the month in which (1) the Member
attains Normal Retirement Age, or (2) the Member’s final Separation from Service.

9. Effective 180 days following the adoption of this Amendment, Section 6.14 of the Plan is
completely amended and restated to provide as follows:

6.14 Information Provided To Members. Information regarding the form of
benefits available under the Plan shall be provided to Members in accordance with
the following provisions:

(a) QJSA Notice and Notice of Right to Defer Receipt of Distribution. Except
as otherwise provided in paragraph (c), the Sponsor shall provide a Member a written
notice explaining the terms and conditions of each retirement option, and in
particular (1) the automatic QJSA or life annuity, (2) the Member’s right to make,
and the effect of, a waiver of the automatic QJSA, (3) the right of the Member’s
Spouse to consent or not to consent to such a waiver, (4) the right to make, and the
effect of, a revocation of a previous waiver or election, (5) the eligibility
conditions and other material features of the optional forms of benefit, and, if
applicable (6) the Member’s right to defer receipt of the Member’s distribution.
The notice shall also either contain (1) a description, that is specific to the
Member, of the financial effect of the Member selecting an optional form of benefit
or (2) a general description of the financial effect of the election that complies
with the requirements of Department of Treasury Regulations issued under section 417
of the Code. If a general description of the financial effect of the election is
included in the notice, the notice must also be accompanied by a statement that
includes an offer to provide, upon the Member’s request, a statement of financial
effect and a description of how the Member may obtain this additional information.
The notice shall also either contain (1) a description, that is specific to the
Member, of the relative values of the optional forms of benefit compared to the
value of the QJSA or (2) a general description of the relative values that complies
with the requirements of Department of Treasury Regulations issued under section 417
of the Code. If a general description of the relative values is included in the
notice, the notice must also be accompanied by a statement that includes an offer to
provide, upon the Member’s request, a comparison of relative values that is specific
to the Member for any presently available optional form of benefit and a description
of how the Member may obtain this additional information. The notice requirements
set forth in this paragraph (a) are collectively referred to as the “QJSA Notice.

(b) Time for Giving QJSA Notice. Except as specified below in this paragraph
(b) or as permitted under Section 6.18, the QJSA Notice shall be provided to a
Member during the period beginning 90 days before his Annuity Starting Date and
ending 30 days before his Annuity Starting Date (or as soon after the expiration of
such period as is administratively practicable). If the

 

 

 

Member, after having received the QJSA Notice, affirmatively elects a form of
distribution with the consent of the Member’s Spouse (if necessary), the 30-day
timing requirement of this paragraph (b) will not apply if all of the following
conditions are satisfied: (1) the Sponsor informs the Member in writing that the
Member has a right to at least 30 days to consider whether to waive the QJSA and
consent to a form of distribution other than a QJSA, (2) the Member is permitted to
revoke an affirmative distribution election at least until the Annuity Starting
Date, or, if later, at any time prior to the expiration of the seven-day period that
begins the day after the QJSA Notice is provided to the Member, (3) the Annuity
Starting Date is after the date the QJSA Notice is provided to the Member, and (4) a
distribution of the Member’s benefit in accordance with the Member’s affirmative
election does not commence before the expiration of the seven-day period that begins
the day after the QJSA Notice is provided to the Member. The 90-day timing
requirement of this paragraph (b) will not be failed merely because, due solely to
administrative delay, a distribution commences more than 90 days after the QJSA
Notice is provided to the Member.

(c) Exception for Members with Small Benefit Amounts. Notwithstanding the
preceding provisions of this Section, no QJSA Notice shall be provided to the Member
if his benefit is payable in a lump sum under Section 6.03.

10. Effective 180 days following the adoption of this Amendment, Section 6.18(a) of the Plan
is completely amended and restated to provide as follows:

6.18 Failure to Timely Provide QJSA Notice Prior to the Originally Scheduled
Payment Date.

(a) Choice of Annuity Starting Dates. If for any reason a QJSA Notice is not
provided to a Member prior to his originally scheduled Annuity Starting Date (his
“Retroactive Annuity Starting Date”), the Member shall have the right to elect to
receive his Plan benefits calculated as of either (1) his Retroactive Annuity
Starting Date, or (2) the date for which the payment of his benefits will be
rescheduled to commence (his “Prospective Annuity Starting Date”).

 

 

 

IN WITNESS WHEREOF, the Sponsor has executed this Agreement this 1st day of May, 2007.

	 	 	 	 	 
	 	 	QUANEX CORPORATION
	 
	 	 	 	 
	 

	 	By:
	 	/s/ KEVIN P. DELANEY
	 

	 	 	 	 
	 

	 	Title:
	 	Senior Vice President-General Counsel and Secretary

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