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

2. 2 I.MECHANICS OF ESOP FINANCING II.UNIQUE FINANCIAL CHARACTERISTICS III.SOURCES OF ESOP FINANCING IV.PREPARING TO SHOP FOR ESOP FINANCING V.WHAT TO LOOK FOR IN YOUR LENDER VI.IRS CIRCULAR 230 DISCLOSURE

3. 3 MECHANICS OF ESOP FINANCING

4. 4 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 CompanyLender ESOP Trust Shareholders Loan Stock Cash Inside Loan Lender Company ESOP Trust Repayment of ESOP Financing Note Repayment Dividends & Contributions Note Repayment Tax Deduction of Principal & Interest

5. 5 MECHANICS OF ESOP FINANCING ESOP Tax Savings (000’s omitted)NON-ESOP C-CORP ESOP Operating Profit$10,000 ESOP Expense (Principal Payment) $0($4,000) Pre-tax Income (EBIT)$10,000$6,000 TAXES (40%)($4,000) ($2,400) Cash Available$6,000$3,600 Debt Payment$4,000 $0,000 Excess Cash after Debt$2,000$3,600 Tax Deduction of Principal & Interest

6. 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, effectively eliminating forever the deferred tax associated with the original sale of the stock Seller Defers Capital Gains Tax – 1042 Rollover (000’s omitted) ESOP Transaction Non-ESOP Transaction Sale Proceeds $10,000 Less: Capital Gains Tax @ 15% 0($1,500) After-Tax Proceeds $10,000$8,500

7. 7 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 MECHANICS OF ESOP FINANCING (000’s omitted) YEAR 1YEAR 2YEAR 3YEAR 4YEAR 5 Pre-tax Income (EBIT)$10,000$11,000$12,000$13,000$14,000 Tax Savings @ 36% $3,600$3,960$4,320$4,680$5,040 Total Cash Savings to Sub-S Election $21,600 5-Year Average Annual Savings $4,320 Tax Exempt S-Corp ESOP

8. 8 UNIQUE FINANCIAL CHARACTERISTICS

9. 9 Negative Net Worth (000's omitted)Pre-ESOPESOPPost-ESOP Assets$5,000$0$5,000 Liabilities$2,000$4,000$6,000 Equity (Net Worth)$3,000($4,000)($1,000) Leverage (Liabilities / Equity)0.67Negative 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. 10 UNIQUE FINANCIAL CHARACTERISTICS Redefine leverage −Debt / EBITDA + “E” *“E” = ESOP benefit expense Highly Leveraged Cash Flow (000's omitted)Pre-ESOPPost-ESOP Senior Debt$2,000$6,000 EBITDA$2,000 Leverage (Debt / EBITDA)1.00x3.00x

11. 11 UNIQUE FINANCIAL CHARACTERISTICS Highly Leveraged Cash Flow (000's omitted) EBITDA$2,000 Plus: "E" - ESOP Benefit Expense$750 EBITDAE$2,750 “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. 12 UNIQUE FINANCIAL CHARACTERISTICS Greater cash flow available to service debt EBITDA + “E” Highly Leveraged Cash Flow (000's omitted)Pre-ESOPPost-ESOP Senior Debt$2,000$6,000 EBITDAE$2,000$2,750 Leverage (Debt / EBITDAE)1.002.18

13. 13 SOURCES OF ESOP FINANCING

14. 14 SOURCES OF ESOP FINANCING CharacteristicsLess FavorableTolerableBest IndustriesHigh TechCyclical Non-cyclical/ non- tech based Life CycleStart-ups Profitable last two years Mature Customer Concentration A few large customers Top five over 50% No concentration over 5% Earnings (in EBITDA) $0 - $5 million$5 - $10 millionOver $10 million CompetitionNo barriers to entryMultiple competitors Significant barriers to entry and limited competition Senior ManagementNew Combination of new and long-term Seasoned with equity stakes What Do Lenders Look For In Companies?

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

16. 16 SOURCES OF ESOP FINANCING 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 Commercial Loans vs. Asset Based Loans

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

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

19. 19 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 SOURCES OF ESOP FINANCING

20. 20 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 SOURCES OF ESOP FINANCING

21. 21 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 SOURCES OF ESOP FINANCING

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

23. 23 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 SOURCES OF ESOP FINANCING

24. 24 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 SOURCES OF ESOP FINANCING

25. 25 PREPARING TO SHOP FOR ESOP FINANCING

26. 26 PREPARING TO SHOP FOR ESOP FINANCING 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 What to Present to Your Potential Lender

27. 27 WHAT TO LOOK FOR IN YOUR LENDER

28. 28 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…) WHAT TO LOOK FOR IN YOUR LENDER

29. 29 IRS CIRCULAR 230 DISCLOUSRE

30. 30 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. IRS CIRCULAR 230 DISCLOSURE