1. CORPORATE TRANSITION Advanced Options Strategy For Privately Held Business Presented by: ATI Capital Group, Inc.

2. Capital Markets – An Overview Sales ($millions) 5 150 500 1,000 Small Lower Middle Upper Large BusinessesM I d d l e M a r k e t Companies 2-3x 4-7x 8-9x 10-11x >12x 5.4MM 300,000 2,000

3. ATICG © 2001-2005ATI Capital Group, Inc.3 Potential Buyers A Corporation An Individual A Qualified Plan

4. ATICG © 2001-2005ATI Capital Group, Inc.4 Where to Get Stock in a Private Company From the Corporation that MAKES IT! From an Existing Shareholder

5. Business Transfer Spectrum

6. External Transfers ● These are typically the big liquidity events ● The market value world dominates here ● 3 Subworlds: Asset, Financial, and Synergy ● We don’t want to transfer in Asset market value (although most private companies will transfer in this Sub-world)

7. It’s a Recast World Which level of earnings do you choose? ● Reported EBITDA ● Recast EBITDA ● Synergized recast EBITDA

8. Equity Recapitalizations ● Some businesses have major growth opportunities ● These owners may wish to take some chips off the table but still participate in the upside ● In an “equity recap,” owners sell some part of the business to a private equity group now, and the rest later (80/20% is popular) ● Negotiate the selling price and terms at the same time ● The second sale in 5-6 years usually nets more to the owner than the first sale

9. ATICG © 2001-2005ATI Capital Group, Inc.9 Internal Transfers Generally staged transactions A process not an event You have greater control over the process Greater flexibility in structure and outcome More rules and regulations to follow Have to “deal” with the IRS Results can be very powerful

10. ATICG © 2001-2005ATI Capital Group, Inc.10 What is an ESOP ESOP = Employee Stock Ownership Plan An ESOP is a QUALIFIED PLAN under the Employees’ Retirement Income Security Act of 1974 (ERISA) See Sections 401(a), 4975(e)(7), and 501(a) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(6) of ERISA, 1974

11. ATICG © 2001-2005ATI Capital Group, Inc.11 Unique Features of ESOT An ESOP trust “ESOT” has three very unique features: 1.ESOT must own “principally” stock in its sponsor company. 2.An ESOT is the ONLY qualified plan under ERISA allowed to BORROW MONEY!! 3.The trust can purchase the Company in “Stages” (multiple transactions).

12. ATICG © 2001-2005ATI Capital Group, Inc.12 Powerful Use #1: Exit Strategy ESOP $ Loan 2 Stock $ 3 QRPs Sec. 1042 Qualified Replacement Property= Stocks & Bonds Div’d $ $ 4 5 Collateral No Tax on Transaction Company Deducts Princ. On Loan Lender The Basic Transaction Corporation 1 $ Loan

13. ATICG © 2001-2005ATI Capital Group, Inc.13 Benefits to the Corporation  100% deductibility of PRINCIPAL and interest on ESOP loan to buy-out Shareholder.  Increased cash flow due to deductibility of principal on loan.  100% deductibility of DIVIDENDS paid to reduce ESOP debt or distribute to participants.  Collateral for ESOP created outside company.  Preferred terms on ESOP loan. Principal shareholder bought out for $0.66 dollars, compared to $1.52 dollars.

14. ATICG © 2001-2005ATI Capital Group, Inc.14 How to Deduct Principal Under ERISA Results: Tax Deductible Principal & Interest Assumptions: $10,000,000 ESOP transaction Terms: 8% APR; 10 yr. Amortization Monthly P + I = $121,328 Lender Step 3 Co. makes payment to lender $121,328 Step 2 ESOP makes mirror payment on Note Payable to Co. $ ESOP ABC Manufacturing Company Step 1 $121,328 Co. makes contribution to ESOP (fully deductible) $

15. ATICG © 2001-2005ATI Capital Group, Inc.15 Benefits to the Selling Shareholder Tax Deferral on 100% of the proceeds from the sale of stock to the ESOP, under Sec. 1042 of the Internal Revenue Code! If the transaction is structured properly, capital gains tax may be permanently deferred!! NO CAPITAL GAINS TAX ON THE SALE OF YOUR STOCK TO AN ESOP – EVER!

16. ATICG © 2001-2005ATI Capital Group, Inc.16 Powerful USE #2: Purchase of Capital Goods Lender Corporation ESOP Capital Goods 1 $ Loan 2 Stock 3 4 5 The Basic Transaction Collateral Capital Goods Purchased With Pre-Tax Dollars = INCREASED CASH FLOW $ Cash Cap. Goods CAUTION: Dilution!!

17. ATICG © 2001-2005ATI Capital Group, Inc.17 Benefits to the Corporation  100% deductibility of PRINCIPAL and interest on ESOP loan to buy capital goods.  In addition to above deduction, can write-off capital goods a second time by means of DEPRECIATION.  Increased cash flow due to deductibility of principal on loan.  Collateral for loan created by acquiring the capital goods.  Preferred terms on ESOP loan to acquire capital goods. Capital Goods Acquired for $0.66 dollars (PT), compared to $1.52 dollars (AT).

18. Consolidation Math Game Sales ($millions) 5 150 500 1,000 2-3x 4-7x 8-9x 10-11x >12x Small Lower Middle Upper Large Businesses M I d d l e M a r k e t Companies

19. The Rules of this Game ● Identify your market segment ● You have a platform company ● Determine which competitors are not adding value ● Go after all of them at once ● Use the Head-’n-Shoulders approach ● The toughest part is integrating the operations ● Don’t fall in love with the result

20. ATICG © 2001-2005ATI Capital Group, Inc.20 Powerful USE #3: Purchase of a Target Company Lender Corporation ESOP Target Company 1 $ Loan 2 Stock 3 4 5 The Basic Transaction Collateral Target Company Purchased With Pre-Tax Dollars = INCREASED RETURN ON INV. $ Cash Ownership CAUTION: Dilution!!

21. ATICG © 2001-2005ATI Capital Group, Inc.21 Benefits to the Corporation  100% deductibility of PRINCIPAL and interest on ESOP loan to buy Target Company.  Increased cash flow due to deductibility of principal on loan.  Collateral for loan created by acquiring the Target Company.  Preferred terms on ESOP loan to acquire Target Company. Target Company Acquired for $0.66 dollars (PT), compared to $1.52 dollars (AT).

22. The Rules of this Game ● Identify your market segment ● You have a platform company ● Determine which competitors are not adding value ● Go after them one at time ● Take advantage of the tax savings ● Use the Head-’n-Shoulders approach ● The toughest part is integrating the operations ● Stop when you have had enough & achieve the rest through internal growth