EMPLOYEE STOCK OWNERSHIP PLAN

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EMPLOYEE STOCK OWNERSHIP PLAN

• Employee Meeting Template
• Presented by
• YOU (Eventually)!

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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

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

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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.

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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

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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)

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Important Terms(A Group Project with Your SPD)

• Plan Year
• Participant
• Allocation
• Vesting
• Forfeiture
• Valuation Date
• Service
• Others?

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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 participants 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 Stocks 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 ????

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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.

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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

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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
Shareholders
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How Does a Leveraged ESOP Work?
Leveraged ESOP Transaction Structure (an Example)
Typical Term Loan
Company
Lender
May Be Longer or Shorter Term
Shareholders
Shares
ESOP Trust
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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
Shares Are Added to Participant Accounts as the
Debt is Repaid
ESOP Trust
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How Stock is Allocated to Your Account?
Term Loan Repayment
Company
LENDER
ESOP Loan Repayment
ESOP Trust
Fully Tax Deductible Contribution
Stock Allocations
Suspense Account
Participant Accounts
1
3
4
Year
2
5
6
10
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Shares are Added to Your Account Each Year as the
Debt is Repaid.
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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

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What is the ESOPs Role in Management?
Non-ESOP Shareholders Vote Directly
Shareholders Elect The Board Of Directors
The ESOP is Represented by the Trustee
The Board of Directors is the elected Body
Responsible for the Direction of 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.
In order to Operate The ESOP or Assist
Communication, the Board May Make Use
of Advisory Committees
Board of Directors
Appoints Officers Determines Compensation of
Company Management
- ESOP Administration - Communications - Other
Committees
OFFICERS MANAGE THE COMPANY
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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 ESOPs 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.

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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
• ???

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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 Vested Percent
• Less than 2 years 0 0
• 2 20 0
• 3 40 100
• 4 60
• 5 80
• 6 years or More 100
• Non Vested Stock is forfeited after termination
  and reallocated to the ESOP Trust.

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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.

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IN THE END, ITS ALL A MATTER OF VALUE!
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How is Value Determined?

• Independent Fair Market Valuation
• The valuation process
• Determine the value of all our assets,
• Analyze the Companys 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.

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An Exercise in Valuation

• Lets Try Our Hand At Valuing Something Fun!

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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

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Willing buyer and willing seller meet

• What affects Harrys 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?

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

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So What Does That Mean to Me?

• 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

What else do you do that affects Company
Performance? Value? The Future?
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Retirement Safeguards Under ERISA
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How ESOP Benefits Grow
Annual Contributions Add Shares to Participants
Accounts
Forfeitures Add Shares to Participants Accounts
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Your Interest Grows!
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Value Affects Us All!
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Questions?