EMPLOYEE STOCK OWNERSHIP PLAN Employee Meeting Template Presented

EMPLOYEE STOCK OWNERSHIP PLAN Employee Meeting Template Presented by: YOU (Eventually)!

Agenda • • A history lesson for the future… What is an ESOP? Why do we have one? How does our ESOP work? • ESOP terms at-a-glance • How is value determined? • What can I do to affect value? • Questions, Questions

A History Lesson for the Future 1920's Employee-Owners First Modern 1950's Louis Kelso 1974 Russell Long and ERISA 10, 000+ ESOPs Today Millions of Employee-Owners

On average, ESOP companies have… • Faster Growth Companies with ESOPs grow 2. 3% to 2. 4% faster measured in sales, employment, and productivity growth. • Higher compensation 5 -12% higher wages than in comparable non-ESOP companies. • More assets ESOP employees have 2. 5 times the retirement assets in companysponsored plans. • Improved company stability Less likely to face bankruptcy or acquisition; 20% better “survival” rate.

What Is An ESOP? • Employee Stock Ownership Plan • An ESOP is a retirement plan (just like a pension, profit sharing or 401(k) plan) with two significant differences: – An ESOP is designed (in fact, required) to invest primarily in our own Company Stock; and – Our ESOP can borrow money based on the credit of the Company to buy stock.

How Do Companies Benefit From ESOPs? • ESOPs Help Companies: • • • Increase employee motivation and productivity Achieve faster growth Provide tax benefits to selling shareholders Accomplish business succession planning with pre-tax dollars Transition ownership of the business without damage to operations Take advantage of significant tax benefits as operating ESOP companies • ESOPs are a very effective vehicle to accomplish a wide range of corporate objectives: • • • Shareholder liquidity Growth through acquisition Business succession Employee benefit Ownership culture

How Does An ESOP Work? • Each employee who meets certain basic eligibility requirements has an account in the ESOP trust • Each year, the company may contribute to the ESOP, and the trustee will either buy stock directly for employees or make a payment on ESOP debt • Shares that are purchased (or paid for) are then added to participants’ accounts (either as a uniform percent of pay or as earnings on shares previously allocated) • On retirement, death, disability or following other termination of service, employees are entitled to receive their vested shares (or the cash value)

Important Terms (A Group Project with Your SPD) • Plan Year: • Participant: • Allocation: • Vesting: • Forfeiture: • Valuation Date: • Service: • Others?

Important Terms • Plan Year: The accounting period for the ESOP • Participant: An employee who has met the eligibility requirements and entered the ESOP • Allocation: The annual process of determining each participant’s entitlement under the ESOP • Vesting: The process of earning a right to benefits through service to the Company • Forfeiture: The non-vested portion of his or her account that is left behind when a participant terminates before completing the required vesting service • Valuation Date: The date each year on which the Company Stock’s value is determined by the independent appraiser • Service: Time employed by the Company. There is usually a different service requirement for entry, allocations and vesting • Others: ? ?

Why Do We Have An ESOP? • To provide for the orderly retirement of a founder over several years. • To create liquidity for a shareholder without selling the Company. • To create a stock based employee benefit that provides benefits for employees that are directly related to the success of the Company • To create a program of ownership that will enhance all of our stakeholders’ future value. • To provide an employee benefit that is cost effective and aligns employee motivations with those of the shareholders.

How Do ESOPs Benefit Employees? • The ESOP is fully funded by the company • Employees develop ownership without investment of their own funds • ESOP accounts grow on a tax-deferred basis • ESOP ownership creates no liability for employee shareholders • ESOP benefits are protected from creditors • ESOPs allow employees to share directly in the success they are helping to create

The Basic Non-Leveraged ESOP Basic ESOP Funding Structure (an Example) Company Contributes cash or newly issued shares to the ESOP Purchase Shares At Current FMV ESOP Trust Build Employee Equity Over Time Sharehold ers

How Does a Leveraged ESOP Work? Leveraged ESOP Transaction Structure (an Example) Typical Term Loan Company Lender May Be Longer or Shorter Term Shares ESOP Trust Shareholders

How Does a Seller Financed ESOP Work? ESOP Financed by Selling Shareholder(s) Your Company Contributions, Loans or Earnings Shareholder Purchase Shares And Makes Payments on ESOP Loan ESOP Trust Shares Are Added to Participant Accounts as the Debt is Repaid

How Stock is Allocated to Your Account? $ Term Loan Repayment Company LENDER $ ESOP Loan Repayment ESOP Trust Stock Allocations $ Fully Tax Deductible Contribution Suspense Account Participan t Accounts Year 1 2 3 4 5 6 7 8 9 Shares are Added to Your Account Each Year as the Debt is Repaid. 10

ESOP Accounts Grow! • Each year, Employees who qualify have shares of stock added to their accounts • Employees become vested in their shares based on years of service with the company • Since the ESOP is invested in Company Stock, its value reflects the value of the Company • As the company grows in value, ESOP shares grow in value based on independent appraisal of fair market value

What is the ESOP’s Role in Management? The ESOP is Represented by the Trustee ESOP TRUSTEE - Is Appointed by the Board of Directors - Is An ESOP Fiduciary - May be an Institution or Individuals - Is the Legal Owner of Shares - Votes Shares on All Matters (including Election of Directors) - May solicit voting instructions from Participants on major issues. Shareholders Elect The Board Of Directors The Board of Directors is the elected Body Responsible for the Direction of the Company Board of Directors Appoints Officers & Determines Compensation of Company Management OFFICERS MANAGE THE COMPANY Non-ESOP Shareholders Vote Directly In order to Operate The ESOP or Assist Communication, the Board May Make Use of Advisory Committees - ESOP Administration - Communications - Other Committees

Who Controls an ESOP Company? • ESOP is a vehicle to share value, not corporate control – Shareholders elect the board of directors – The board of directors appoints the ESOP trustee • The Trustee is the shareholder for all legal purposes and is charged with the responsibility to protect the value for participants • The Trustee votes the ESOP’s stock – As the Trustee determines in closely held companies; – As directed by participants in public companies; – As all participants direct on major corporate issues • Mergers, sales of all assets, recapitalizations, etc.

ESOP AT - A - GLANCE • Become an ESOP Participant: – Employees become ESOP participants on _____ after: • ? ? ? • Except Leased Employees, Independent Contractors and Union Employees. • Qualify for an allocation of the Contribution: • ? ? ?

ESOP AT - A - GLANCE • Become 100% vested: – Upon retirement (DEFINE), disability, death or – Based on years of vesting service (DEFINE beginning DEFINE). Vesting Service at Termination Less than 2 years 2 3 4 5 6 years or More Vested Percent 0% 0% 20% 0% 40% 100% 60% 80% 100% § Non Vested Stock is forfeited after termination and reallocated to the ESOP Trust.

ESOP AT - A - GLANCE • Participants will be entitled to begin receiving a distribution of the fair market value of ESOP stock: – During the year following the year of retirement, disability or death, or – Within the year that includes the 6 th anniversary of termination for other reasons, or, if later – Following the end of the year in which the last ESOP loan payment is made. • Benefits will be based on independently determined fair market value at the time your stock is cashed out.

IN THE END, IT’S ALL A MATTER OF VALUE!

How is Value Determined? • Independent Fair Market Valuation • The valuation process: – Determine the value of all our assets, – Analyze the Company’s past performance, – Compare us to similar reporting companies, and – Compute a present value of our future earnings. • The appraiser issues a report to the ESOP for review and approval. • The per share value you see each year is the result of this process.

An Exercise in Valuation Let’s Try Our Hand At Valuing Something Fun!

The Tale of Harry the Horse • Harry is a 4 year old race horse – Harry is owned by a syndicate of 5 investors; one owns 60% and each of the others own 10% – Harry raced 17 times in the last two years and won $300, 000 – The annual cost to keep Harry in feed and board is about $250, 000 – Harry is for sale because two of the minority investors are pressing the syndicate to buy them out – There is no complete agreement among the syndicate members on the price the horse should bring, nor is there complete agreement as to whether he should be sold at all

Willing buyer and willing seller meet… • What affects Harry’s Value? – Do past earnings indicate future performance? • What is the “useful life” of a horse? • What are other horses trading for? • Are you getting control of all the winnings? – How much profit is Harry really making for the syndicate? • Is $50, 000 the “real Profit” number? • What about their initial investment? • What about other types of expenses? – What are the industry considerations for you as a buyer? • Do you know the ins and outs of horse racing?

Or put another way, what would YOU pay for Harry?

So What Does That Mean to Me? We May Not Be Able to Influence: But Most Keys to Value are in Our Power: • Changes in the business cycle • Overall Economy • Natural Disasters • Increased Productivity • Reduced Waste • Customer satisfaction What else do you do that affects Company Performance? Value? The Future?

Retirement Safeguards Under ERISA E MPLOYEES' ETIREMENT R I NCOME S ECURITY A CT 1. SPONSORS ARE FIDUCIARIES -No Self-Dealing -Minimize Risk of Loss 2. DISCRIMINATION NOT ALLOWED -Required Coverage -Consistent Participation 3. VESTED BENEFITS PROTECTED -Reasonable Schedule -Vested Means Non-forfeitable 4. EXCLUSIVE BENEFIT RULES -BUT- THE PERFORMANCE OF THE FUND IS NOT GUARANTEED ESOP BENEFITS ARE YOUR BUSINESS!

How ESOP Benefits Grow Annual Contributions Add Shares to Participants’ Accounts Forfeitures Add Shares to Participants’ Accounts

Your Interest Grows! Vesting Increases the Value of Participants’ Benefits

Value Affects Us All! Growth in Stock Value Means Growth in Participants’ Accounts Work Smart and Watch Your Future Grow

Questions?