1. Sales to an ESOP Stephen Baumgarten, CFA Senior Vice President Wealth Advisor L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\1

2. Sales to an ESOP The Basics What is an Employee Stock Ownership Plan (ESOP)? –An ESOP is a retirement benefit plan created to hold a corporation’s own stock for the benefit of its employees. Why sell stock to an ESOP? –First, an ESOP provides a mechanism for giving employees an equity stake in the company. –Second, if the requirements of IRC 1042 are met, the business owner can “cash out” of the company on a tax-deferred basis. In some circumstances, the income tax on the capital gain on the sale of the business owner’s stock can be avoided entirely. –Third, the business owner can achieve (varying levels of) diversification through the sale. Important information; please read This presentation is for the internal information purposes of the Company only and is based upon information made available to Morgan Stanley by the Company and publicly available sources. Morgan Stanley has not independently verified any of the information reviewed by us and makes no express or implied representation or warranty as to the accuracy or completeness of the information. In addition, this presentation is not and does not purport to be an appraisal or valuation of any securities, assets or businesses of the Company. L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\2 Please see important disclosures at the end of this material.

3. Sales to an ESOP Requirements In general, stock being sold must be the common stock of a domestic C corporation. The ESOP must own at least 30% of vote or value of the corporation after the sale. –For example, if the ESOP already owns 20% of the corporation, a sale of 10% of the corporation can qualify under IRC 1042. –Multiple selling shareholders can combine sales in order to meet the 30% test if the sales are part of an integrated transaction, e.g., two shareholders can each sell 5% of the corporation to an ESOP already owning 20% of the corporation and qualify under IRC 1042 (if the other requirements are met). L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\3 Please see important disclosures at the end of this material.

4. Sales to an ESOP Alternative Structures to Affect the Sale EmployeesCompany The ESOP already has funds to purchase shares, i.e., is not leveraged The ESOP is leveraged to make the purchase ESOP Trust Shareholder Employees Company $$ 2Stock Stock or $$ Bank ESOP Trust 1 Guarantee 1 $$ 1 Promissory Note 3 Annual Payment Shareholder Annual Payment Stock or $$ Stock 2 $$ 1.Company contributes cash to ESOP 2.ESOP buys stock 3.Employees receive stock or cash when they retire or leave company 1.Bank lends money to ESOP with company guarantee 2.ESOP buys stock from existing shareholder 3.Company makes tax-deductible contributions to ESOP, which, in turn, pays bank 4.Employees receive stock or cash when they retire or leave company $$ 1 3 3 4 L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\4 Please see important disclosures at the end of this material.

5. Sales to an ESOP QRP The selling shareholder can defer the capital gain on the sale of the company stock to the ESOP if he or she purchases “qualified replacement property” (QRP) in the 15-month period beginning 3 months before the sale and ending 12 months after it. –The selling shareholder is taxed only when the proceeds of the sale of the company stock exceed the cost of the QRP purchased. –The basis of the company stock sold is allocated pro rata to the QRP. –The holding period of the company stock is tacked onto the holding period of the QRP. QRP is any security issued by a domestic operating company that in the prior year did not receive more than 25% of its gross revenue from investment type income. –Excluded from QRP are, among other things, foreign stocks and bonds, U.S. Treasuries and state and local municipal bonds, real estate and mutual funds. Accordingly, when the exclusions are considered, QRP can be U.S. corporate common stock, preferred stock, bonds and convertible bonds (whether or not publicly traded). L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\5 Please see important disclosures at the end of this material.

6. Sales to an ESOP Capital Gains Tax Deferral The capital gain deferred on the sale to the ESOP is triggered on the later “disposition” of the QRP. A “disposition” includes a sale but does not include: –Certain tax-free exchanges –A gift –Death Because death is not a “disposition,” the deferred tax can be completely avoided by holding the QRP to death. Strategies can be employed to completely avoid the deferred capital gain and diversify into asset classes other than U.S. stocks and bonds, including: –Transfers to a Charitable Remainder Unitrust (CRUT) –Borrowing against QRP L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\6 Please see important disclosures at the end of this material.

7. QRPUse of CRUT or Borrowing Against QRP Greater diversification may be achieved through the use of a CRUT or borrowing against a long-term corporate bond Diversification Beyond QRP Sales to an ESOP L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\7 Please see important disclosures at the end of this material.

8. Sales to an ESOP Transfer to a CRUT The selling shareholder may transfer QRP to a CRUT and the CRUT can dispose of the QRP without triggering the deferred capital gain. The rationale for exchanging the QRP for an income interest in a CRUT is (i) to achieve greater diversification within the CRUT and (ii) the expectation that the CRUT will return more to the donor through the income interest than a taxable disposition of the QRP because of the tax-free growth of the CRUT and the commensurate growth of the unitrust amount. L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\8 Please see important disclosures at the end of this material.

9. Sales to an ESOP Borrowing Against QRP The selling shareholder may purchase an asset, typically a long-term corporate bond, and use it as collateral for borrowing. The bond will serve as QRP and the shareholder can acquire a more diversified basket of securities and buy and sell such securities without triggering the capital gain which was deferred on the original sale of the company stock. The long-term corporate bond usually purchased to serve as QRP and security for a loan is an “ESOP Floater.” ESOP Floaters, in general: –Bear a floating interest rate based on LIBOR –Are issued by companies rated “AA” or better –Have maturities of 40 years or more allowing most investors to hold the QRP to death and avoid capital gains tax –Have call protection for a period of time (typically 30 years) –Give the holder redemption rights (in the form of a put) for a period of time Important information; please read This presentation is for the internal information purposes of the Company only and is based upon information made available to Morgan Stanley by the Company and publicly available sources. Morgan Stanley has not independently verified any of the information reviewed by us and makes no express or implied representation or warranty as to the accuracy or completeness of the information. In addition, this presentation is not and does not purport to be an appraisal or valuation of any securities, assets or businesses of the Company. L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\9 Please see important disclosures at the end of this material.

10. Sales to an ESOP ESOP Floaters L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\10 Please see important disclosures at the end of this material.

11. Sales to an ESOP ESOP Floater Monetization Strategy The following analysis shows the cost of monetizing through an ESOP Floater where: A sale to an ESOP generates proceeds of $10,000,000 The selling shareholder purchases an ESOP Floater with a principal amount of $10,000,000 and which bears interest (initially) at the rate of 5% The selling shareholder borrows against 90% of the value of the ESOP Floater at an interest rate of 6% Example L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\11 Please see important disclosures at the end of this material.

12. Sales to an ESOP ESOP Floater Monetization Strategy (cont'd) Note 1.The net interest expense is tax deductible only to the extent the investor has other investment income such as interest, dividends, or short-term capital gains. Example L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\12 Please see important disclosures at the end of this material.

13. Sales to an ESOP ESOP Floater Monetization Strategy (cont'd) Example The following chart shows the investor’s net interest income or (expense) under a variety of interest rate assumptions. While the spread between the Floater Yield and the Borrow Rate may be exaggerated for a period of time due to timing differences in the interest rate reset dates, the Borrow Rate tends to exceed the Floater Yield, on average, by 1% to 1.50%. L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\13 Please see important disclosures at the end of this material.

14. Sales to an ESOP ESOP Floater Monetization Strategy (cont'd) Note 1.The total interest expense is tax deductible only to the extent the investor has other investment income such as interest, dividends, or short-term capital gains Example In the prior example, the investor diversified only 90% of the value of the ESOP Floater. To diversify 100% of the value of the ESOP Floater, the loan proceeds could, in turn, be margined. L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\14 Please see important disclosures at the end of this material.

15. Sales to an ESOP ESOP Floater Monetization Strategy (cont'd) Example The following chart shows the investor’s net interest income or (expense) under a variety of interest rate assumptions where 100% of the value of the ESOP Floater is monetized. While the spread between the Floater Yield and the Borrow Rate may be exaggerated for a period of time due to timing differences in the interest rate reset dates, the Borrow Rate tends to exceed the Floater Yield, on average, by 1% to 1.50%. L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\15 Please see important disclosures at the end of this material.

16. Sales to an ESOP Conclusion A sale to an ESOP can be an effective way to monetize an illiquid position and diversify without the current payment of an income tax. In the appropriate circumstances, a number of strategies can be employed to achieve a greater level of diversification than QRP offers and permanently avoid the capital gains tax. L:\pwm_marketing\PWM Web\PWM Marketing Materials\U.S. Estate and Financial Planning\sales_to_an_esop_bb.ppt\03 JAN 2001\7:21 PM\16 Please see important disclosures at the end of this material.

17. Important Disclosures These materials are solely informational, based upon publicly available information believed to be reliable, and may change without notice. Morgan Stanley shall not in any way be liable for claims relating to them, and makes no express or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in, or omissions from, them. The information and analyses contained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investment or other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Alternative investments are only suitable for long-term investors. There is no guarantee that the investment strategies discussed will achieve their objectives and investors could lose all, or a substantial part of their investment. Registered funds are offered by means of a Prospectus. Private placement offerings are made only to pre-qualified clients by means of a Private Placement Memorandum (PPM) or Confidential Offering Memorandum (COM). These materials do not constitute an offer to buy or sell any financial instrument or participate in any trading strategy. Investments and services are offered through Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., each an operating subsidiary of Morgan Stanley. These materials do not provide individually tailored investment advice. They have been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. The investments and strategies discussed or recommended in these materials may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary. Past performance is not necessarily a guide to future performance. Morgan Stanley does not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. © Morgan Stanley Sales to an ESOP