ESOP Feasibility Presented at the 20 th Annual Ohio Employee Ownership Conference

1. ESOP FeasibilityPresented at the 20th Annual Ohio Employee Ownership Conference April 21, 2006

2. ESOP Feasibility - Overview • Thinking about an ESOP? • ESOP Considerations • ESOP Feasibility Issues • Q & A

3. THINKING ABOUT AN ESOP? • Goals & Objectives • Shareholder Liquidity / Diversification • Can sell a portion or all equity to an ESOP • Tax benefits (1042 for seller) • Employee ownership culture • Sharing wealth creation capability • Employee Retirement plan • Alignment of financial interests between owner & employees • Continuing legacy of business • Strategic reasons • “Friendly”, “patient” shareholder • Improve company cash flows / liquidity (temporarily), if benefit substitution occurs • Other?

4. THINKING ABOUT AN ESOP? • Characteristics of ESOP Candidates • Closely held U.S. based company • Ownership • Tax benefits available to individual owners rather than corporate owners • Corporate owners do not receive tax benefits on sale, but an ESOP can provide significant tax benefits to the company post-transaction that can facilitate an attractive transaction price • Company can be a C-corp or and S-corp • Currently section 1042 is only available to individuals owning stock of C-corps • More than 25 employees • Companies with small payroll bases may encounter 415 limitation problems • Profitable • As most of the company benefits are the result of tax savings, the company needs to be profitable to enjoy these benefits • Debt capacity • Since ESOPs are usually a specialized form of a leveraged buyout, the assets and/or cash flows of the business need to support the transaction debt.

5. THINKING ABOUT AN ESOP? • Characteristics of ESOP Candidates (continued) • Owners interested in a liquidity event • An ESOP can provide total or partial liquidity to the owner(s) • ESOP can be formed and provide liquidity for a minority or controlling interest • For the owner to receive the tax benefits of a section 1042 rollover, the ESOP has to end up owning more than 30% of the company on a post-transaction basis • Owners that are interested in diversifying their net worth currently trapped in the business • A minority sale to an ESOP now does not preclude a sale to a third party later • Owners that are interested in beginning a succession plan can transition ownership to the employees over time • Sharing the wealth creation potential

6. ESOP CONSIDERATIONS Business Considerations • Strength of management team • esp. if owner(s) totally cashing out • Capital constraints • Operating the business with debt increases financial risk • Market position / growth constraints while servicing debt? • Culture • Open environment • Communication • Helping employees understand what it means for them. • Who will participate? • In sale? • In ESOP? • Post transaction incentive plans for key employees

7. ESOP CONSIDERATIONS Other Considerations • Governance & Disclosure • ESOP, not individual employees own shares • Trustee – Internal vs. external • Trustees are not usually active in day to day company operations • Sharing of Information with employees • Minimum disclosure - employees need to receive a statement annually showing their account value, do not have to share company financials • Repurchase Liability • While initial ESOP contributions are cashless, ultimately the vested and allocated shares have to be repurchased from departing employees, which is a cash out flow of the business. • Repurchases can become a problem when capital is constrained and large blocks of stock are put, but… • ….Repurchase payments can be managed with proper planning • In most cases, no cash payments until after loan is repaid • ESOPs own stock – STOCK VALUES GO UP ANDDOWN

8. ESOP FEASIBILITY Feasibility Study • Understanding your goals & objectives • To sell at what price? • Fair market value vs. strategic value • ESOP is akin to a financial buyer • Control vs. minority • Typical valuation methods • Comparable companies, DCF, M&A transactions • Ultimately the purchase price based upon active negotiations with the ESOP trustee (who represents the buyer) and their advisors, and the seller and his/her advisors • ESOP cannot pay more than fair market value!

9. ESOP FEASIBILITY Feasibility Study (continued) • Tax Benefits • To selling shareholder(s) – 1042 election? • Need to sell at least 30% to make 1042 election • Stock must have been purchased to be eligible for 1042 • 1042 not yet available to S Corp shareholders • To company • Contributions are deductible • C-corp. vs. S-corp. post-transaction • 100% owned ESOP S-corp. creates a tax free entity!

10. ESOP FEASIBILITY Feasibility Study (continued) • Sizing the Transaction • Your Goals & Objectives • Total or partial liquidity • Dilution • Value • Borrowing capacity (for leveraged ESOPs) • Collateral base • Ability to service debt w/o over-stressing the company, esp. for companies not used to operating with debt • ESOP provides greater borrowing capacity…with the right lender • Need of Mezzanine or Seller financing? • Identifying 415 Limitation Issues

11. CONTACT • John C. O’BrienDirectorDuff & Phelps, LLC311 S. Wacker DriveChicago, IL 60606Phone: (312) 697-4545e-mail: john.obrien@duffandphelps.com