0. Calvin, Giordano & Associates, Inc. “Your ESOP & You”
Presented by
Alex Moss
Praxis Consulting Group, Inc.
Philadelphia, PA
October 29, 2002

1. Purposes of this presentation
To provide a hands-on illustration of how the ESOP works
To compare the ESOP to other retirement plan and ownership alternatives
To answer your questions
© 2002 Praxis Consulting Group, Inc. All rights reserved.

2. Calvin, Giordano Stock Ownership Before ESOP, 2000
© 2002 Praxis Consulting Group, Inc. All rights reserved.

3. What is an ESOP? “Employee Stock Ownership Plan”
Type of retirement plan, regulated by ERISA – the federal law that governs all retirement plans
This is permitted under the Internal Revenue Code
© 2002 Praxis Consulting Group, Inc. All rights reserved.

4. ESOPs vs. Other Pension Plans
Similarities:
Calvin, Giordano contributes cash on behalf of employees
Employees receive value of their accounts when they retire or leave the company
Calvin, Giordano gets tax deduction when it makes contributions
Employees don’t pay tax until they receive benefits in the future
Differences:
ESOP uses cash to buy Calvin, Giordano stock instead of outside investments
ESOP can borrow money to buy stock
ESOP benefits are not diversified
Employees can partly affect the value of their retirement
© 2002 Praxis Consulting Group, Inc. All rights reserved.

5. How are ESOPs used?
There are about 11,000 ESOPs in the U.S. covering about 8½ million employees
Most ESOPs are in successful companies where the owners are retiring within 5-15 years
The ESOP is an alternative to selling to an outsider
The ESOP allows for a gradual sale and transfer of management control
The government provides tax benefits to the Sellers, the company, and employees who participate
Companies that combine ownership with participation are significantly more successful
© 2002 Praxis Consulting Group, Inc. All rights reserved.

6. Other ESOP uses Troubled companies Large public companies
Unions sometimes initiate ESOPs to save jobs
Often significant wage/benefit sacrifices
National examples: United Airlines, Weirton Steel
Large public companies
Add-on retirement benefit program, often through matching employees’ 401(k) contributions, e.g. General Motors, Proctor & Gamble, Knight-Ridder
Corporate take-over defense, e.g. Polaroid
Tax strategy, e.g. Avis
© 2002 Praxis Consulting Group, Inc. All rights reserved.

7. Calvin, Giordano Structure: Before ESOP
Shareholders
4 Partners
Board of Directors
appoint and oversee
President
hires and oversees
Management Team
hire and oversee
Employees
© 2002 Praxis Consulting Group, Inc. All rights reserved.

8. Calvin, Giordano Structure: Where does the ESOP fit?
Shareholders
ESOP Trustees
Partners
are
represented by
Board of Directors
appoint and oversee
ESOP
Participants
when meet
eligibility
requirements
President
hires and oversees
Management Team
hire and oversee
Employees
© 2002 Praxis Consulting Group, Inc. All rights reserved.

9. Who’s Who: “Governance” Roles
Partners
Dennis Giordano
John Downes
Shelley Eichner
Board of Directors
ESOP Trustees
Dennis Giordano
John Calvin
Claussen Lexow, CPA
© 2002 Praxis Consulting Group, Inc. All rights reserved.

10. Getting the Stock: Round 1
The ESOP was effective as of January 1, 2000
The ESOP purchased 30% of Calvin, Giordano stock from Dennis & John C in January, 2001
The total purchase price was $1.2 million
Merrill Lynch loaned the money
The year ending December 31, 2000 was the first ESOP “Plan Year”
© 2002 Praxis Consulting Group, Inc. All rights reserved.

11. Stock Ownership: Before & After 1st ESOP Stock Purchase, 2001
© 2002 Praxis Consulting Group, Inc. All rights reserved.

12. 2. $1.2 million loan proceeds 3. $1.2 million purchase proceeds
Getting the Stock
1. Note & Collateral
Merrill Lynch
Calvin, Giordano
1. $1.2 million loan proceeds
4. Extra
Collateral:
Pledge
of Stock
2. $1.2 million loan proceeds
2. Note &
Pledge
of Stock
3. $1.2 million purchase proceeds
ESOP
Suspense
Account
Dennis & John C
3. 30% of Shares of
Calvin, Giordano stock
© 2002 Praxis Consulting Group, Inc. All rights reserved.

13. Paying for the Stock: Round 1
Calvin, Giordano makes cash contributions to the ESOP
Each year for the 5-year loan period,
Contributions are tax-deductible – this is the tax benefit to the company
The ESOP pays the cash back to the company
As the loan is repaid, the ESOP allocates some of the shares from the Suspense Account into Account of eligible participants
Participants get a benefit, but do not pay tax (yet)
The company repays Merrill Lynch
© 2002 Praxis Consulting Group, Inc. All rights reserved.

14. Paying for the Stock Merrill Lynch Calvin, Giordano ESOP
3. Loan Payment
Merrill Lynch
Calvin, Giordano
1. ESOP
Contribution
2. Loan
Payment
ESOP
Suspense
Account
Dennis & John C
© 2002 Praxis Consulting Group, Inc. All rights reserved.

15. Allocation of Shares from ESOP Suspense Account
The ESOP allocated shares of the stock to participants’ accounts each year as the ESOP contributions and loan payments were made
Participants who terminate (leave Calvin, Giordano) stop getting shares in their accounts
New participants will get accounts and begin to get shares after they become eligible
© 2002 Praxis Consulting Group, Inc. All rights reserved.

16. Allocation of Shares from ESOP Suspense Account
Shares are allocated to participants’ accounts each year as the loan is repaid
Active
Participant
Account #1
Account #2
...
Account #100
© 2002 Praxis Consulting Group, Inc. All rights reserved.

17. Allocation of Shares from ESOP Suspense Account
Shares are allocated to participants’ accounts each year as the loan is repaid
Active
Participant
Account #1
Terminated
Participant
Account #2
Active
Participant
Account #100
New Active
Participant
Account #101
...
© 2002 Praxis Consulting Group, Inc. All rights reserved.

18. What are the ESOP Rules? Eligibility = how do I get in?
Allocations = how much goes into my account?
Vesting = can I lose it?
Distributions = when do I receive benefits?
Voting = what control do I get?
Valuation = what’s it worth?
© 2002 Praxis Consulting Group, Inc. All rights reserved.

19. Eligibility Similar to “membership requirements” Employees must
work 1,000 hours in a Year of Service
be at least age 21
Employees enter the plan on the next January 1 or July 1 after they meet the requirements
© 2002 Praxis Consulting Group, Inc. All rights reserved.

20. Allocations Similar to “deposits” into your account
You will receive an allocation in any year during which you are eligible and you
either: reach Normal Retirement Age, become disabled, or die,
or: work 500 hours and are employed on the last day of the year (12/31)
© 2002 Praxis Consulting Group, Inc. All rights reserved.

21. Allocations: Timing & Other Rules
The allocations occurred as of December 31st each year
Eligible participants receive their ESOP statements the following year
Employees are not permitted and can not be required to contribute directly to the ESOP
Employees are not permitted to borrow against their ESOP account balances
© 2002 Praxis Consulting Group, Inc. All rights reserved.

22. Balancing Contributions to the ESOP and the 401(k) Plan
The government limits contributions to retirement plans, including 401(k) plans and ESOPs
In the past, companies sometimes had to limit 401(k) contributions to permit ESOP contributions
Congress significantly relaxed these limits for ESOP / 401(k) Plan Years beginning on or after 1/1/02
© 2002 Praxis Consulting Group, Inc. All rights reserved.

23. Vesting Similar to a “hold on your account”
Your benefits become 100% vested once you reach Normal Retirement Age, die, or become permanently disabled
Otherwise, your benefits become vested based on your Years of Service beginning on 1/1/00
You must be at least age 18 to receive vesting credit
© 2002 Praxis Consulting Group, Inc. All rights reserved.

24. Vesting Schedule
You must earn 1,000 Hours of Service in a Plan Year to earn a Year of Service
You will become vested according to the following schedule:
Years of Service
Vesting %
Less than 5 0%
5 or more
100%
© 2002 Praxis Consulting Group, Inc. All rights reserved.

25. Moe’s ESOP Shares [dummy #s]
© 2002 Praxis Consulting Group, Inc. All rights reserved.

26. Forfeiting Your Benefits
If you leave Calvin, Giordano before your benefits become vested, you will forfeit your benefits
The forfeited benefits will be re-allocated to remaining ESOP participants
© 2002 Praxis Consulting Group, Inc. All rights reserved.

27. Voting Technically, the Trustees do all the “voting”
The Trustees are the legal “shareholders” for the ESOP
The ESOP Trustees are Dennis, John C, & Claussen Lexow
On a small number of legally-required issues, Participants have the right to instruct the Trustees how to vote the shares allocated to their ESOP accounts: merger or consolidation, recapitalization, reclassification, liquidation, sale of substantially all assets, other issues if required by law
© 2002 Praxis Consulting Group, Inc. All rights reserved.

28. Distributions Similar to “withdrawals” from your account
You will receive most of your benefits only after you leave Calvin, Giordano – the timing depends on why you leave:
One set of rules applies if you retire or become permanently disabled or if you die
A different set of rules applies if you leave the company for any other reason
© 2002 Praxis Consulting Group, Inc. All rights reserved.

29. Retirement, Death or Disability
You will start to receive your benefits by the end of the year after the year in which you leave Calvin, Giordano
Normal Retirement Age is the date that you
reach age 65 and
have participated in the ESOP for 5 years
© 2002 Praxis Consulting Group, Inc. All rights reserved.

30. Selecting a Beneficiary
You must fill out a Beneficiary Form stating who will receive your benefits in the event of your death
Your spouse is your Beneficiary unless s/he consents to someone else on the Beneficiary Form
© 2002 Praxis Consulting Group, Inc. All rights reserved.

31. Form of Distribution
All payments from the ESOP to participants will be made in cash
Each participant will receive a series of payments over up to 5 years
You can choose to spread out your payments over your life expectancy
The share value in effect will be the most recent ESOP appraisal price
© 2002 Praxis Consulting Group, Inc. All rights reserved.

32. ESOP Distribution Timeline: Retirement, Death, Disability
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Participant
Terminates
Service
Payment #1
Payment #2
Payment #3
Payment #4
Payment #5
Payment #6
(if applicable)
© 2002 Praxis Consulting Group, Inc. All rights reserved.

33. ESOP Distribution Timeline: Retirement, Death, Disability
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Participant
Terminates
Service
Payment #1
© 2002 Praxis Consulting Group, Inc. All rights reserved.

34. ESOP Distribution Timeline: Retirement, Death, Disability
Dec 31
Dec 31
Year 0
Year 1
Participant
Terminates
Service
Payment #1
© 2002 Praxis Consulting Group, Inc. All rights reserved.

35. ESOP Distribution Timeline: Retirement, Death, Disability
Dec 31
Dec 31
Year 0
Year 1
Participant
Terminates
Service
ESOP Valuation Date
ESOP Valuation & Statements Finalized
Participants Receive 1/5 of Vested ESOP Shares
Participants Sell Shares Back to Calvin Giordano
Participants Receive Cash Payment For Value Of Shares
© 2002 Praxis Consulting Group, Inc. All rights reserved.

36. New ESOP Distribution Timeline: Retirement, Death, Disability
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Payment #1
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Participant
Terminates
Service
ESOP Valuation Date is 12/31 of prior year
ESOP Valuation & Statements Finalized
Participants Receive 1/5 of Vested ESOP Shares
Participants Sell Shares Back to Calvin Giordano
Participants Receive Cash Payment For Value Of Shares
Each Year:
Repeat this whole process in years 2-5 (and 6 if necessary)
© 2002 Praxis Consulting Group, Inc. All rights reserved.

37. All Terminations except Retirement, Death, and Disability
If your account is worth $5,000 or less, you will get your benefits by the end of the year after the year that you leave Calvin, Giordano
If your account is worth more than $5,000, you will start to get your vested benefits during the 6th year after the year that you leave Calvin, Giordano
However, you may not receive any benefits from shares purchased with an ESOP loan until the end of the year after that loan is repaid
© 2002 Praxis Consulting Group, Inc. All rights reserved.

38. New ESOP Distribution Timeline: All Other Terminations
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Payment #1
Payment #1
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Participant
Terminates
Service
© 2002 Praxis Consulting Group, Inc. All rights reserved.

39. New ESOP Distribution Timeline: All Other Terminations
Dec 31
Dec 31
Dec 31
Dec 31 No
Payments
Payments
1-6
Year 0
Years 1-5
Years 6-11
Participant
Terminates
Service
ESOP Valuation Date is 12/31 of prior year
ESOP Valuation & Statements Finalized
Participants Receive 1/5 of Vested ESOP Shares
Participants Sell Shares Back to Calvin Giordano
Participants Receive Cash Payment For Value Of Shares
Each Year (Years 6-11):
© 2002 Praxis Consulting Group, Inc. All rights reserved.

40. The Exception: Diversification
You can cash out up to 25% of your total ESOP shares once
You reach age 55 and
You have been in the ESOP for 10 years
You have this option each year for 5 years
In the 6th year, you can cash out up to 50% of your total ESOP shares
You do not have this option again – “use it or lose it”
© 2002 Praxis Consulting Group, Inc. All rights reserved.

41. Taxes on Your Benefits: Current Rules
The next 2 pages explain the current tax rules
Congress frequently changes the rules
You should consult a tax advisor before receiving your benefits so you understand the rules in effect at that time
© 2002 Praxis Consulting Group, Inc. All rights reserved.

42. Taxes on Your Benefits: Option 1
You can roll your benefits over into another “qualified” account
Example: an IRA or a 401(k) account
You won’t pay taxes until you take the cash out of that plan in the future
© 2002 Praxis Consulting Group, Inc. All rights reserved.

43. Taxes on Your Benefits: Option 2
You can keep some or all of the cash
The company will withhold 20% for income taxes
You will have to settle up with the IRS and the state at the end of the year – you might owe more income taxes, or you might get a refund
You will also pay a 10% “early withdrawal penalty” if you receive your benefits before age 59½ – this is in addition to income taxes
© 2002 Praxis Consulting Group, Inc. All rights reserved.

44. Disclosure to ESOP Participants
“Summary Plan Description”
Right to review the full ESOP plan documents – participants may also request a copy
Receive each year
a “Statement of Benefits” showing number of shares in your account and your current account value
a “Summary Annual Report” for the ESOP
© 2002 Praxis Consulting Group, Inc. All rights reserved.

45. Your Annual ESOP Statement
© 2002 Praxis Consulting Group, Inc. All rights reserved.

46. The Value of Calvin, Giordano Shares
Calvin, Giordano is “privately held” – the shares are not “publicly traded”
The value must be determined by an appraisal performed by an independent appraisal firm – Prairie Capital Advisors, Inc.
The appraisal firm works for the ESOP Trustees, not for Calvin, Giordano
The appraisal is done at least once each year
© 2002 Praxis Consulting Group, Inc. All rights reserved.

47. Factors that affect the share value
External market conditions
You don't control these factors
Examples: the health of the industry and the overall economy
Company performance
Your actions significantly affect these factors
Examples: profitability, billability, controlling costs, reimbursables, meeting budgets, getting new work, customer retention
© 2002 Praxis Consulting Group, Inc. All rights reserved.

48. Future Share Value
No one knows what the value of Calvin, Giordano stock will be in the future
Experience in other companies is mixed
Many ESOP companies have paid significant benefits to individual employees
Some ESOP companies have failed
The goals of the ESOP are
to provide the company with future stability
to share the wealth fairly
Your job: help to increase the stock value
© 2002 Praxis Consulting Group, Inc. All rights reserved.

49. Illustration of Sample ESOP Account Value [dummy #s]
© 2002 Praxis Consulting Group, Inc. All rights reserved.

50. What is an “Owner”? Think about a 1950’s style traditional owner
What words do you think your employee owners think of when they imagine this type of owner?
Describe a company that has 20, 500, or 10,000 of these owners
© 2002 Praxis Consulting Group, Inc. All rights reserved.

51. What is a “Co-Owner”?
Think about a time when you shared responsibility for something important with someone else
What words describe what it takes to make this work?
Which kind of ownership are you trying to create?
How to do it: Ownership Culture
© 2002 Praxis Consulting Group, Inc. All rights reserved.