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, Questions

1920's 1950's 1974 TodayFirst ModernEmployee-Owners Louis Kelso Russell Long andERISA

10,000+ ESOPs

Millions of Employee-Owners

A History Lesson for the Future

On average, ESOP companies have…

• Faster GrowthCompanies with ESOPs grow 2.3% to 2.4% faster measured in sales, employment, and productivity growth.

• Higher compensation5-12% higher wages than in comparable non-ESOP companies.

• More assetsESOP employees have 2.5 times the retirement assets in company-sponsored plans.

• Improved company stabilityLess 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

ESOP Trust Build Employee Equity Over Time Shareholders

Purchase SharesAt Current FMV

Contributes cash or newly issuedshares to the ESOP

How Does a Leveraged ESOP Work?

Leveraged ESOP Transaction Structure (an Example)

Typical Term Loan

Company

ESOP Trust

Shares Shareholders

Lender

May Be Longer or Shorter Term

How Does a Seller Financed ESOP Work?

ESOP Financed by Selling Shareholder(s)

Shares Are Added to Participant Accounts as the Debt is Repaid

Shareholder

Purchase SharesAnd Makes Payments

on ESOP Loan

Your Company

ESOP Trust

Contributions,Loans or Earnings

How Stock is Allocated to Your Account?

Stock Allocations

$ Term Loan Repayment

$ ESOP Loan Repayment

$ Fully Tax DeductibleContribution

1 2 3 4 5 6 10987 Year

Shares are Added to Your Account Each Year as the Debt is Repaid.

Company

LENDER

ESOP Trust

Suspense Account

Participant Accounts

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?

Non-ESOP Shareholders Vote Directly

Shareholders Elect The Board Of Directors

Board of Directors

The Board of Directors is the elected Body

Responsible for the Direction of the

Company

OFFICERS MANAGE THE

COMPANY

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.

- ESOP Administration- Communications- Other Committees

Appoints Officers &

Determines Compensation

of Company Management

In order to OperateThe ESOP or Assist Communication, the Board May Make Use ofAdvisory Committees

The ESOP is Represented by

the Trustee

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 TerminationVesting Service at Termination Vested PercentVested PercentLess than 2 years Less than 2 years 0% 0% 0%0%

22 20% 20% 0%0%33 40% 40% 100%100%44 60% 60%55 80% 80%

6 years or More6 years or More 100% 100%

Non Vested Stock is forfeited after termination and reallocated to the Non Vested Stock is forfeited after termination and reallocated to the ESOP Trust.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 6th 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?

We May Not Be Able to Influence:

• Changes in the business cycle

• Overall Economy• Natural Disasters

But Most Keys to Value are in Our Power:

• Increased Productivity• Reduced Waste• Customer satisfaction

So What Does That Mean to Me?

What else do you do that affects Company What else do you do that affects Company

Performance? Value? The Future?Performance? Value? The Future?

What else do you do that affects Company What else do you do that affects Company

Performance? Value? The Future?Performance? Value? The Future?

Retirement Safeguards Under ERISA

ERIS

MPLOYEES'ETIREMENT

NCOME

ECURITY

A CT

1.

2.

3.

SPONSORS ARE FIDUCIARIES

-Minimize Risk of Loss

DISCRIMINATION NOT ALLOWED-Required Coverage-Consistent Participation

-Reasonable Schedule-Vested Means Non-forfeitable

4.

VESTED BENEFITS PROTECTED

THE PERFORMANCE OF THE FUND IS NOT GUARANTEED-BUT-

-No Self-Dealing

EXCLUSIVE BENEFIT RULES

ESOP BENEFITS ARE YOUR BUSINESS!

Annual Contributions

Add Shares to Participants’ Accounts

Forfeitures Add

Shares to Participants’ Accounts

How ESOP Benefits GrowHow ESOP Benefits Grow

Vesting Increases

the Value of Participants’ Benefits

Your Interest Grows!Your Interest Grows!

Growth in Stock Value

Means Growth in Participants’ Accounts

Work Smart and Watch Your Future Grow

Value Affects Us All!Value Affects Us All!

Questions?