STEP BY STEP PROCESS FOR SELLING YOUR BUSINESS TO YOUR EMPLOYEES

1. STEP BY STEP PROCESS FOR SELLING YOUR BUSINESS TO YOUR EMPLOYEES Financing an ESOP Acquisition Akron, OH April 21, 2006 Kurt W. NicholsVice President ESOP Financial Services 312 904-5059 kurt.nichols@abnamro.com

2. MECHANICS OF ESOP FINANCING • UNIQUE FINANCIAL CHARACTERISTICS • SOURCES OF ESOP FINANCING • PREPARING TO SHOP FOR ESOP FINANCING • WHAT TO LOOK FOR IN YOUR LENDER • IRS CIRCULAR 230 DISCLOSURE

3. MECHANICS OF ESOP FINANCING

4. Loan Company Lender Inside Loan Stock ESOP Trust Shareholders Cash MECHANICS OF ESOP FINANCING Tax Deduction of Principal & Interest • Structure • The Company creates an ESOP Trust • The Company borrows funds and re-lends the proceeds (“inside loan”) to the ESOP • The ESOP uses the funds to purchase shares from existing shareholders. The shares are held in a suspense or “contra equity” account • The Company services the new debt by making tax deductible contributions to the ESOP. In turn, the ESOP repays the inside loan to the Company and the Company repays the debt to the lender • As the Company makes ESOP contributions, and the inside loan is repaid, shares are released from the suspense account and allocated to the employee accounts Leveraged ESOP Purchase of Existing Stock Repayment of ESOP Financing Lender Note Repayment Dividends & Contributions Company ESOP Trust Note Repayment

5. MECHANICS OF ESOP FINANCING Tax Deduction of Principal & Interest • ESOP Tax Savings

6. MECHANICS OF ESOP FINANCING • Deferral of Capital Gains for Selling Shareholders • C-Corp Transactions • Shareholders selling at least 30% of their stock to an ESOP will be able to defer capital gains tax indefinitely • Properly structured, the seller’s proceeds may eventually be transferred to the seller’s estate with a tax-basis that is “stepped-up” to the sale price, effectivelyeliminating forever the deferred taxassociated with the original sale of the stock Seller Defers Capital Gains Tax – 1042 Rollover

7. MECHANICS OF ESOP FINANCING • An ESOP is a tax exempt entity. In 1998, ESOPs were allowed to own stock in S-Corporations • If the ESOP owns 100% of the common stock, the Company can elect S-Corporation tax status and avoid paying federal income tax completely • By reducing its debt balances (all other things being equal), a Company is able to generate additional value for its equity holders Tax Exempt S-Corp ESOP

8. UNIQUE FINANCIAL CHARACTERISTICS

9. UNIQUE FINANCIAL CHARACTERISTICS Negative Net Worth • ESOP Accounting • Value of shares purchased by the ESOP creates a contra-equity item • May create negative net worth • Accounting anomaly • Standard bank measure of leverage, liabilities / equity, is not applicable • Need a lender experienced in ESOP financing

10. UNIQUE FINANCIAL CHARACTERISTICS Highly Leveraged Cash Flow • Redefine leverage • Debt / EBITDA + “E” • “E” = ESOP benefit expense

11. UNIQUE FINANCIAL CHARACTERISTICS Highly Leveraged Cash Flow • “E” – ESOP Benefit Expense • Tax deductible • Can be up to 25% of qualified payroll • Effectively a non-cash expense • ESOP uses the benefit, contributed by the company, to repay the “inside loan” from the company

12. UNIQUE FINANCIAL CHARACTERISTICS Highly Leveraged Cash Flow • Greater cash flow available to service debt • EBITDA + “E”

13. SOURCES OF ESOP FINANCING

14. SOURCES OF ESOP FINANCING What Do Lenders Look For In Companies?

15. SOURCES OF ESOP FINANCING • Asset Based Lenders • Cash Flow Senior Lenders • Subordinated Lenders (Institutional) • Seller Paper • Equity • Institutional • Employee-Based

16. SOURCES OF ESOP FINANCING Commercial Loans vs. Asset Based Loans Commercial Loans • Typically are less leveraged • Due to bank comfort level, company has limited reporting requirements • Lowest “spread”/pricing • Secured by assets – but limited monitoring Asset Based Loans • Due to higher leverage and or lack of earnings - banks very focused on asset values/borrowing base • Asset values need to be greater than loan needs • Daily A/R reporting • Weekly inventory reporting • Lock-box mechanism • More expensive

17. SOURCES OF ESOP FINANCING Asset Based Loans Underwriting Criteria Asset Values Current Assets • A/R x 80% • Inventory x 50% Fixed Assets • Equipment (OLV) x 80% • Real Estate x 75% Security Interest First Lien on All Assets “Floats” Based on LIBOR with Spread of 175 to 325 Pricing Maturity Three to Five Years

18. SOURCES OF ESOP FINANCING What if Debt Needs Exceed Loan Value of Collateral? • Asset Based with an Air Ball • Cash Flow Senior • Institutional Mezzanine Debt • Seller Debt • Equity

19. SOURCES OF ESOP FINANCING Asset Based with an “Air Ball” Underwriting Criteria Asset Values and Short-Term Earnings Outlook Security Interest Same as Asset Based Pricing “Floats” but Spread 50 to 150 Points Higher than Asset Based Maturity Air Ball Portion Amortized Over Two Years

20. SOURCES OF ESOP FINANCING Cash Flow Senior Loan Underwriting Criteria Enterprise Value (i.e. Multiple of EBITDA) Not Asset Value Security Interest First Lien on All Assets Pricing “Floats” Based on LIBOR with Spread of 300 to 375 Maturity Five Years

21. SOURCES OF ESOP FINANCING Institutional Mezzanine/Subordinated Debt Underwriting Criteria Earnings/Enterprise Value Security Interest Earnings/Enterprise Value Pricing Fixed Interest Rate: 11% to 13% Yield Enhancement: PIK Interest and/or Warrants Maturity Six to Seven Years

22. SOURCES OF ESOP FINANCING Seller Notes Underwriting Criteria None Security Interest None Pricing Varies but Typically Fixed at a Relatively Low Rate Maturity After All Other Debt

23. SOURCES OF ESOP FINANCING Equity Capital • Institutional Equity • Pricing: 20% – 30% • Board Rights • Exit Rights • Typically a Mezzanine or Private Equity Fund • Employee Based Equity • Existing ESOP • 401K/Pension/Profit Sharing Assets • “Hard Dollars” from Management

24. SOURCES OF ESOP FINANCING Current Market Conditions • Strong Supply of Capital • Traditional Senior Lenders are lending again • Hedge Funds, Insurance Companies, Mutual Funds, Institutional Mezzanine Funds – All “Chasing Yield” • Private Equity • Rising Rates Yet Lower “Spreads” • Increased Leverage

25. PREPARING TO SHOP FOR ESOP FINANCING

26. PREPARING TO SHOP FOR ESOP FINANCING What to Present to Your Potential Lender • 3-5 years of historical financial statements • 5-7 year financial forecast with assumptions • Feasibility study or summary of ESOP facts • Collateral support • A/R aging • Inventory breakdown • Fixed asset schedules • Description of business and market forecast • Outline of management

27. WHAT TO LOOK FOR IN YOUR LENDER

28. WHAT TO LOOK FOR IN YOUR LENDER • ESOP Experience • How many ESOP transactions completed? • Does the decision maker understand ESOP financing? • The vast majority of lenders have either a credit committee or a credit officer that makes the decision whether or not to lend • Commitment to the ESOP community • Member of The ESOP Association • Current with critical issues affecting ESOP’s • Understand current ESOP market dynamics • Commitment to your type of transaction • Structure (asset based/cash flow) • Size (small business, middle market, large corporate…) • Industry (service, specialized, manufacturing, construction…)

29. IRS CIRCULAR 230 DISCLOUSRE

30. IRS CIRCULAR 230 DISCLOSURE • To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended nor written to be used, and cannot be used, for the purpose of: (i) avoiding penalties under the Internal Revenue Code; (ii) avoiding penalties under applicable state or local tax law; or (iii) promoting, marketing, or recommending to another party any transaction or matters addressed by this written advice. All parties should seek tax advice based on that party's particular circumstances from an independent tax advisor.