DUFF & PHELPS

What to do with Excess Cash

Ohio Employee Ownership Center Annual Conference
April 20, 2007
Akron, Ohio

Leslie Lauer Kim Abello Erin Turley

UBS Financial Services, Inc. Duff & Phelps LLC Morgan, Lewis & Bockius LLP
3455 Peachtree Road, NE, Suite 1700 311 S. Wacker Drive, 42nd Floor 1717 Main Street, Suite 3200
Atlanta, Georgia 30326 Chicago, Illinois 60606 Dallas, Texas 75201
leslie.lauer@ubs.com kabello@duffllc.com eturley@morganlewis.com
Introductions
ERIN TURLEY
Title: Partner
Firm: Morgan Lewis & Bockius, LLP.
10 years experience in all legal matters relating to ESOPs.
Member of ESOP Association’s Valuation Advisory Committee.
LLM in Taxation from Georgetown University with Employee Benefits Certification.

KIM ABELLO
Title: Managing Director
Firm: Duff & Phelps
18 years experience in ESOP transaction structuring and valuation
Member of the ESOP Association’s Legal and Regulatory Committee
Masters in Taxation, Certified Public Accountant, Accredited Senior Appraiser
AICPA Accredited in Business Valuation Exam Committee Member

LESLIE LAUER
Title: Financial Advisor
Firm: UBS Financial Services Inc.
14 years of ESOP related experience as the Director of Marketing for an ESOP administration firm, the
Director of Acquisitions for a 100% ESOP owned holding company and the Chairman and majority owner
of a 30% ESOP owned company. Currently the Chairman of the Finance Committee for The ESOP
Association and Board member for the National Center for Employee Ownership.

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Overview
ƒ Determine If you Really Have Excess Cash &
Know the Requirements Applicable thereto

ƒ Reasons for an Investment Policy and

Qualified Asset Manager

ƒ Markets Overview

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 Determine if You Really Have
Excess Cash & Know the
Requirements Applicable thereto

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Determine if you really have “Excess Cash”

ƒ To make this determination you will need

(at a minimum) to analyze the following
documents and consult with the
professionals that help you administer
them:
– Distribution policy
ƒ ESOP plan document
ƒ ESOP trust agreement
– Repurchase liability study
– Corporate strategic plan

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 Quantify the Amount of Excess Cash
ƒ Distribution policy considerations:
– Form of payout
– Timing of payout
– Lump sum or installment
– Participants loans, hardship withdrawals
– Diversification

ƒ Repurchase liability study:

– Considers distribution policy for your employee base
– Reasonableness of actuarial assumptions
– Reasonableness of stock price increases
– Conclusions current

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 Quantify the Amount of Excess Cash (cont’d)

ƒ Corporate strategic plan

– Reinvestment for growth
– Potential acquisitions
– Transactions with non-ESOP shareholders
– ESOP repurchase liability
– Management incentive plan payments
– Bonus policies
– Current debt terms
– Terms of ESOP debt
– Contingent liabilities

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 Impact of where the Excess Cash is Held
ƒ Excess cash retained on the Company’s balance sheet
– Included in the determination of the stock price
ƒ Excess cash is a non-operating asset
ƒ Increases the repurchase liability
– Subject to the risk of creditors
– Company retains ownership & control of the cash
– Investment subject to Corporate fiduciary rules
ƒ Excess cash contributed to the ESOP
– Contributions as an expense can reduce the stock price
– Can result in excess benefit costs
– Increases the liquidity of the ESOP trust
– Ownership by the participants
– Investment subject to ERISA fiduciary rules
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Excess Cash Held in the ESOP
ƒ Cash is a Plan asset and therefore is subject
to all the rules applicable to any other plan
asset:
– Must be held in trust
– Must be prudently invested by someone
– Must be diversified to minimize risk of large
losses
– Must be invested solely for the benefit of the Plan
participants and beneficiaries
– Carries with it fiduciary liability for the failure to
satisfy these requirements
ƒ If a plaintiff proves a failure to diversify, the burden
shifts to the defendant to prove prudence

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Difference in Investment Approach

ƒ Employer Securities
– Passive investment, once invested only required to divest in
very limited circumstances
– Continued investment in Employer Securities will typically be
presumptively prudent absent compelling circumstances
– Excepted from requirement to diversify
ƒ Cash not required to be invested in Employer
Securities
– Active investment, must determine what is best investment
option given overall investment of the Plan
– Must constantly review and analyze return of Plan in light of
investment risk taken, i.e. diversify
– Not excepted from requirement to diversify

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Options for “Excess Cash” held in ESOP
ƒ Several options for Investment of Excess Cash
– Let ESOP Trustee Invest
ƒ Discretionary
ƒ Directed
– Appoint Investment Manager
ƒ Will they accept fiduciary responsibility?
– Let Participant’s Direct Investment of Excess Cash
ƒ Who picks the investments from which Participants can
Choose?
ƒ How many options will be made available?
ƒ No One Size Fits all, whatever option is chosen
depends on the Plan sponsor’s desired involvement
with the investment process.

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 Allow ESOP Trustee to Invest
ƒ Requirements
– Decide whether Trustee will be directed or discretionary
– Properly delegate investment authority & draft Investment Policy to reflect
ƒ Pros
– If discretionary
ƒ Plan sponsor liable for properly appointing & monitoring trustee
ƒ Trustee will retain fiduciary liability for any imprudent investment
– If directed
ƒ Plan sponsor (or entity directing) will retain all fiduciary liability
ƒ Plan sponsor (or entity directing) will be charged with knowledge of a
“prudent expert” with respect to investment decisions
ƒ Cons
– If discretionary
ƒ Trustee may not want/be qualified to invest these assets, i.e. not able
to satisfy the “prudent expert” standard with respect to investment
ƒ Plan sponsor loses control over investments of the Plan assets and
potentially limits the availability of excess cash for “other purposes”
– If directed
ƒ Plan sponsor still retains all fiduciary liability
ƒ Plan sponsor will be required to actively invest
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 Allow Participants to Direct Investment
ƒ Requirements
– Plan must be drafted to allow participant investment and must
ƒ Offer no less than three (3) materially distinct investment alternatives
with unique risk/return profiles
ƒ Provide participants opportunity to exercise control, i.e. change
investment options at least quarterly
ƒ Participants must receive sufficient information regarding investment
options to make educated investment decisions
– Must properly delegate investment authority to Investment Manager and
draft Investment Policy reflective of such responsibility
ƒ Pros
– If done properly places fiduciary liability for investment of excess cash at
participant level vs. Plan sponsor, trustee or investment manager level
– Participants will most likely perceive this as an additional benefit
ƒ Cons
ƒ Investment Alternatives must still be properly selected and monitored and
Plan sponsor or trustee, depending on how this responsibility is set up,
will retain fiduciary liability with respect to this selection and monitoring
ƒ Typically requires involvement of an investment manager or investment
advisor to properly select and monitor investment alternatives to be made
available to participants

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Appoint an Investment Manager
ƒ Requirements
– Plan sponsor or trustee must properly select and appoint
the investment manager
– Must properly delegate investment authority to Investment
Manager and draft Investment Policy reflective of such
responsibility
ƒ Pros
– Investment Manager has training and background
required for the responsibility
– If Investment Manager is discretionary and accepts
fiduciary responsibility with respect to investment of
excess cash, then Plan sponsor and/or trustee relieved of
fiduciary liability, other than with respect to proper
selection and monitoring
ƒ Cons
– Plan sponsor and/or trustee lose control over how the
excess cash is invested
– Investment Manager will need to be paid for its services
so could increase costs of maintaining the Plan

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 The Important Factor Here is Process & Documentation
ƒ The courts typically view compliance with ERISA’s
standards as more important in evaluating potential
fiduciary liability than subsequent investment results.
ƒ The important thing is to have a reason for doing what is
being done and documenting those reasons.
– Donovan v. Mazzola 716 F.2d 1226 (9th Cir. 1983)
ƒ Conversely liability will almost always attach in light of
insufficient documentation and/or procedures.
– In Re Unisys Savings Plan Litigation 74 F.3d 420 (3rd
Cir. 1996)
ƒ Remember you don’t have to reach the right result, you
simply have to employ the right process in getting there.

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Reasons for an Investment Policy
and a Qualified Asset Manager

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The Importance of an Investment Policy for the ESOP

Why it’s Important

ƒ Helps to demonstrate compliance with ERISA asset
management regulations and guidelines
ƒ When followed, significantly increases the
effectiveness of the plan and probability of positive
results…fewer surprises
ƒ Provides guidance and limitations, particularly for
investment management and other advisors
ƒ Defines goals, time horizons, asset allocation, risk
parameters and constraints
ƒ Will be Exhibit 1 in defense of any litigation alleging
imprudent investment.

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Investment Policy Statements
An Investment Policy Statement can serve as a guide to the
operation of a plan or the management of a sinking fund on the
balance sheet for repurchase obligation funding.
An Investment Policy Statement can help you:
– Document and evaluate investment goals and objectives for the plan.
– Establish a baseline for the ongoing review of investment
performance.
– Consistently communicate these goals and objectives among
investment committee members, board members, plan administrators,
etc.
– Reduce emotional response to market downturns, keeping focus on
the long term by making disciplined and systematic decisions
– Significantly increases the effectiveness of the plan and probability of
positive results…fewer surprises
– Manage fiduciary risk and liability by demonstrating compliance with
ERISA asset management regulations and guidelines
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 What Should an Investment Policy Include?
ƒ A clear and concise purpose for the IPS
ƒ Background information relative to the Plan or Fund including any
applicable legal constraints
ƒ Roles and responsibilities of:
– Trustee

– Plan Committee
– Plan Sponsor
– Service providers
– Investment managers
ƒ The investment philosophy
ƒ Investment objectives and guidelines for permissible investments
ƒ Liquidity guidelines and control procedures for monitoring performance
ƒ Policy review timetable

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 Ideal Attributes of an ESOP Company's Asset Manager
ƒ ERISA Fiduciary Is your portfolio manager/advisor a Fiduciary as defined by ERISA?

ƒ Ongoing Due Diligence Does your portfolio advisor perform initial and ongoing due
diligence and how thorough is the process?
ƒ
ƒ Portfolio Managers Do you have access to institutional portfolio managers dedicated to full
time asset management?

ƒ Trustee/Third Party Administrator (TPA) Can your asset manager link up with your
existing trustee and TPA for participant reporting efficiency?

ƒ Fees Are fees and costs appropriate given the asset pool?

ƒ ESOP Experience Does your investment manager understand the unique attributes of an
ESOP company that affect investment recommendations?

ƒ Investment Recommendations Are the investment recommendations appropriate given

your repurchase obligation demands, diversification requirements and distribution options?

ƒ Custody Are your assets held in custody at a bank or insurance or trust company that
would allow plan to qualify for a limited scope audit, thereby reducing administration costs?
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Asset & Liability Analysis
Assets (9/30/06)
Calamos Asset Mgmt $912,028
Client Directed $4,104,831
Delaware Investments $782,148
Lord Abbett & Co. LLC $1,023,394
Metropolitan West Capital Mgmt $1,497,600
Santa Barbara Asset Mgmt $1,502,680
Trust Co. of the West $1,440,040
$11,262,721
Total Assets: $11,262,721

Liabilities (12/31/06)
Shares Outstanding 342,647
Price per Share 44.65 (based on 3% growth on last estimate 12/31/05 @ 43.35)
Total ESOP Stock Value $15,299,360
Note Principle Payable to Company$751,412
Total Liabilities: $16,050,772

Plan Surplus / (Deficit) ($4,788,051)

Assets to Liability Ratio 0.70

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What is the Appropriate Asset Allocation?

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Sample Asset Allocation Portfolios
Model 1: Conservative Strategy
Typical Investor Profile
„ International Stocks 6.00% ƒIs anticipating the need to withdraw money from the plan,
6% demanding stability in the full account value
15% „ Large Company Stocks 16.00% ƒModel Characteristics
16%
„ Bonds 63.00% ƒ Carries the least volatility risk
ƒ Subject to the most inflation risk
„ Stable Value Investments 15.00%
63%

Model 2: Moderately Conservative Strategy

Typical Investor Profile

„ International Stocks 11.00%
ƒ Plan with participants drawing closer to retirement (age 50-60)
and wants some exposure to stock market growth; or,
„ Small/Medium Company Stocks 8.00%
ƒ Is a newer plan with low risk tolerance; or,
11% 11%
„ Large Company Stocks 19.00% ƒ Is anticipating a need to withdraw money from the plan and,
therefore, wants most of the assets in the account to have little
8%
„ Bonds 51.00% exposure to stock market fluctuation
Model Characteristics
19% „ Stable Value Investments 11.00%
51% ƒModerately conservative with relatively small exposure to stock
investments
ƒHigher inflation risk than the subsequent models

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Sample Asset Allocation Portfolios
Model 3: Moderate Strategy
„ International Stocks 12.00% Typical Investor Profile
5.5% • Typical plan that has a diversified employee base with an average
12%
„ Small/Medium Company Stocks 15.50% age of 40-50 but prefers an even mix between the stability of less
volatile fixed income investments and the potential for growth
15.5%
„ Large Company Stocks 19.00% offered by stocks; or,
38%
• Is a newer plan that does not have a high risk tolerance and is
„ Bonds 38.00% willing to forego potentially higher investment returns for the comfort
19%
of a less volatile overall investment strategy; or,
10% „ Stable Value Investments 5.50%
• Is a pool of funds that can withstand some fluctuation in the
overall value of the account, but cannot tolerate the level of risk
„ Balanced 10.00% associated with more aggressive strategies.
Model Characteristics
• Less volatility risk than more aggressive models
• Over the long term, has less protection against inflation that more
aggressive strategies

Typical Investor Profile

Model 4: Moderately Aggressive Strategy
ƒ A plan with quite a few years to go before it will begin to retire
participants but prefers a moderate growth approach that balances
„ International Stocks 18.00% the relative stability of bond investments with the potential for growth
offered by stocks; or,
„ Small/Medium Company Stocks 19.50% ƒ Is an younger plan that has a moderate risk tolerance but still
18% seeks potentially higher investment returns; or,
26.5%
„ Large Company Stocks 26.00% ƒ a plan that can withstand some fluctuation in the overall value of
the account but cannot tolerate the level of risk associated with
19.5%
10% „ Bonds 26.50% more aggressive strategies

26% Model Characteristics

„ Balanced 10.00%
ƒ Less volatility risk
ƒ Over the long term, less protection against inflation than more
aggressive strategies

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 Sample Asset Allocation Portfolios
Model 5: Aggressive Strategy Typical Investor Profile
ƒ A start-up plan with many years to go until it begins to retire
participants and has a young age base (age 30-40) and has the
„ International Stocks 24.00% ability to ride out stock market fluctuations in pursuit of higher
16%
growth; or,
24% „ Small/Medium Company Stocks 30.00% ƒ the investment committee desires to have stock market exposure
with less volatility risk than the Very Aggressive Strategy; or,
30% „ Large Company Stocks 30.00% ƒ Is a plan with participants somewhat closer to retirement, but is
30% willing to accept the risk of seeking higher returns in a shorter
„ Bonds 16.00% timeframe
Model Characteristics
ƒ For investors with a fairly high tolerance for risk
ƒ Carries less volatility risk compared to the Very Aggressive
Strategy
ƒ Offers less potential protection against inflation over the longer
term

Typical Investor Profile

Model 6: Very Aggressive Strategy
„ International Stocks
„ Small/Medium Company Stocks
ƒ A plan with many years to go until retirement (age 20-30) and can
ride out stock market fluctuations in pursuit of higher growth
potential; or,
27.00% ƒ Is an investor who may be closer to retirement but has a very high
tolerance for risk and is seeking to maximize the potential for higher
33.00% growth in assets, regardless of possible large fluctuations in account
value; or,

40% 27% „ Large Company Stocks 40.00% ƒ Is an investor that may also have more plan assets to invest or
other assets outside of the plan
Model Characteristics
33% ƒ For investors with the highest risk tolerance
ƒ Most volatility risk of all the strategies

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Current vs. Target Risk and Return Assumptions
% % % % Total Std.
Cash Bond Stock Other Return Dev. Efficient Frontier

Very Conservative 10% 90% 0% 0% 5.28% 3.92%

9%
Conservative 2% 77% 21% 0% 5.90% 5.13%
8%
Moderately Conservative 2% 62% 36% 0% 6.35% 6.66%
7%

Return
Moderate 2% 46% 52% 0% 6.77% 8.42%

Current 18% 22% 61% 0% 6.85% 9.48% 6%

Moderately Aggressive 2% 31% 67% 0% 7.18% 10.25% 5%

Target 2% 31% 62% 5% 7.26% 10.49%

4%
Aggressive 2% 15% 83% 0% 7.63% 12.35% 3.9% 5.1% 6.7% 8.4% 10.3% 12.4% 14.3%
Standard Deviation
Very Aggressive 2% 0% 98% 0% 8.02% 14.31%

Cash and Cash

Alternatives
18%
U.S. Large
Proj. Current Current Target Target Company Equity
Asset Class Ret. Amount Pct. Amount Pct. 34%
Current
U.S. Large Company Equity 7.95% $3,987,637 35% $3,941,952 35% Allocation U.S. Short Term
Fixed Income
U.S. Small Company Equity 8.36% $2,130,819 19% $1,126,272 10% 22%

International Equity 8.21% $743,041 7% $1,914,663 17% International Equity U.S. Small
7% Company Equity
U.S. Short Term Fixed Income 5.19% $2,421,850 22% $1,689,408 15% 19%

U.S. Long-Term Fixed Income 6.10% $0 0% $1,802,035 16% Cash and Cash
Alternatives Other
Cash and Cash Alternatives 4.53% $1,979,374 18% $225,254 2% 2% 5%
U.S. Large
U.S. Long-
Company
Other 8.14% $0 0% $563,136 5% Term Fixed
Equity
Income
Target 35%
$11,262,721 $11,262,721 16%
Allocation U.S. Short
Term Fixed
Income
Source: Financial Goal Analysis 12/12/06 15%
U.S. Small
International
Company
Equity
Equity
17%
10%

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Sample Cash Flow and Funding Analysis
{A} {B} {C} {D} {E} {F} {G} {H} {I} {J} {K} {L} {M} {N} {O}
Inflows Outflows
Price
Beg. Asset Employer Earnings Debt Benefits Net Inflow / Est. Asset End. Asset # of Per End. Liability Plan Surplus / Plan Asset
1 2 3 4 5 6 7 8 9 10 11 12 13
Year Value Contr. Distr. Repayment Paid Outflow Return Value Shares Share Debt Value Deficit / Liability

2007 $11,262,721 $350,000 $1,370,588 ($179,411) ($2,001,403) ($460,226) $755,734 $11,558,229 342,647 45.99 $621,232 $16,379,573 ($4,821,344) 0.71

2008 $11,558,229 $350,000 $1,384,188 ($179,411) ($1,674,402) ($119,625) $787,642 $12,226,245 346,047 47.37 $481,697 $16,873,845 0.72
($4,647,600)

2009 $12,226,245 $350,000 $1,397,388 ($179,411) ($1,726,161) ($158,184) $832,080 $12,900,141 349,347 48.79 $332,136 $17,377,058 0.74
($4,476,917)

2010 $12,900,141 $350,000 $1,410,188 ($179,411) ($1,600,762) ($19,985) $882,975 $13,763,131 352,547 50.25 $171,828 $17,888,912 0.77
($4,125,781)

2011 $13,763,131 $350,000 $1,422,588 ($179,411) ($2,025,781) ($432,604) $927,958 $14,258,485 355,647 51.76 $0 $18,409,059 0.77
($4,150,574)

2012 $14,258,485 $0 $1,462,844 $0 ($2,062,870) ($600,026) $956,155 $14,614,614 365,711 53.33 $0 $19,502,127 0.75
($4,887,512)

2013 $14,614,614 $0 $1,488,336 $0 ($2,223,170) ($734,834) $975,933 $14,855,713 372,084 54.93 $0 $20,437,234 0.73
($5,581,521)

2014 $14,855,713 $0 $1,513,085 $0 ($2,090,090) ($577,005) $997,854 $15,276,562 378,271 56.57 $0 $21,400,395 0.71
($6,123,832)

2015 $15,276,562 $0 $1,537,114 $0 ($2,933,000) ($1,395,886) $998,635 $14,879,311 384,278 58.27 $0 $22,392,450 0.66
($7,513,138)

2016 $14,879,311 $0 $1,560,442 $0 ($2,345,200) ($784,758) $992,355 $15,086,909 390,111 60.02 $0 $23,414,267 0.64
($8,327,358)

2017 $15,086,909 $0 $1,583,091 $0 ($1,865,800) ($282,709) $1,023,770 $15,827,970 395,773 61.82 $0 $24,466,738 0.65
($8,638,768)

2018 $15,827,970 $0 $1,605,081 $0 ($1,676,600) ($71,519) $1,081,766 $16,838,218 401,270 63.67 $0 $25,550,783 0.66
($8,712,566)

2019 $16,838,218 $0 $1,626,430 $0 ($1,991,100) ($364,670) $1,140,928 $17,614,475 406,607 65.59 $0 $26,667,350 0.66
($9,052,875)

2020 $17,614,475 $0 $1,647,157 $0 ($2,193,400) ($546,243) $1,187,883 $18,256,115 411,789 67.55 $0 $27,817,414 0.66
($9,561,299)

Note: Asset Return is based on an expected returns of asset allocation only. Actual past returns of managers have been excluded from the model.
1. Employer Contribution - $350k per schedule provided
2. Employer Distribution - Calculated at $4 per share
3. Debt Repayment – annual P+I payments on remaining ESOP loan
4. Benefits Paid – Repurchase obligation of the ESOP
5. Net Inflow/Outflow – A+B (Inflows) less C+D (Outflows)
6. Estimated Asset Return Given Current Allocation – Investment portfolio return assuming net inflows and outflows come in once each year, mid-year.
7. End Asset Value – B (beginning value) + G (net flow) + H (earnings)
8. # of Shares – 2007 to 2011 Shares in ESOP being released, 2012 forward assumes annual contribution of $350K is being made in newly issued shares.
9. Price Per Share – Share price growing at 3% per year
10. Debt – ESOP debt outstanding
11. End Liability Value – JxK+L (Enterprise value of Stock within the ESOP)
12. Plan Surplus Deficit – I (Ending Asset Value) – M (Ending Liability Value)
13. Plan Asset Liability Ratio – I (Ending Asset Value) / M (Ending Liability Value)

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Given Target Allocation and Client Supplied
Assumptions (No increase in Earnings Distributions)
{A} {B} {C} {D} {E} {F} {G} {H} {I} {J} {K} {L} {M} {N} {O}
Inflows Outflows
Price Plan
Beg. Asset Employer Earnings Debt Benefits Net Inflow / Est. Asset End. Asset # of Per End. Liability Plan Surplus Asset /
1 2 3 4 5 6 7 8 9 10 11 12
Year Value Contr. Distr. Repayment Paid Outflow Return Value Shares Share Debt Value / Deficit Liability 13

2007 $11,262,721 $350,000 $1,370,588 ($179,411) ($2,001,403) ($460,226) $800,967 $11,603,462 342,647 45.99 $621,232 $16,379,573 ($4,776,110) 0.71

2008 $11,603,462 $350,000 $1,384,188 ($179,411) ($1,674,402) ($119,625) $838,069 $12,321,906 346,047 47.37 $481,697 $16,873,845 0.73
($4,551,939)

2009 $12,321,906 $350,000 $1,397,388 ($179,411) ($1,726,161) ($158,184) $888,828 $13,052,551 349,347 48.79 $332,136 $17,377,058 0.75
($4,324,508)

2010 $13,052,551 $350,000 $1,410,188 ($179,411) ($1,600,762) ($19,985) $946,890 $13,979,455 352,547 50.25 $171,828 $17,888,912 0.78
($3,909,457)

2011 $13,979,455 $350,000 $1,422,588 ($179,411) ($2,025,781) ($432,604) $999,205 $14,546,056 355,647 51.76 $0 $18,409,059 0.79
($3,863,003)

2012 $14,546,056 $0 $1,462,844 $0 ($2,062,870) ($600,026) $1,034,263 $14,980,293 365,711 53.33 $0 $19,502,127 0.77
($4,521,834)

2013 $14,980,293 $0 $1,488,336 $0 ($2,223,170) ($734,834) $1,060,895 $15,306,354 372,084 54.93 $0 $20,437,234 0.75
($5,130,880)

2014 $15,306,354 $0 $1,513,085 $0 ($2,090,090) ($577,005) $1,090,296 $15,819,645 378,271 56.57 $0 $21,400,395 0.74
($5,580,750)

2015 $15,819,645 $0 $1,537,114 $0 ($2,933,000) ($1,395,886) $1,097,836 $15,521,594 384,278 58.27 $0 $22,392,450 0.69
($6,870,856)

2016 $15,521,594 $0 $1,560,442 $0 ($2,345,200) ($784,758) $1,098,381 $15,835,217 390,111 60.02 $0 $23,414,267 0.68
($7,579,049)

2017 $15,835,217 $0 $1,583,091 $0 ($1,865,800) ($282,709) $1,139,374 $16,691,883 395,773 61.82 $0 $24,466,738 0.68
($7,774,855)

2018 $16,691,883 $0 $1,605,081 $0 ($1,676,600) ($71,519) $1,209,235 $17,829,598 401,270 63.67 $0 $25,550,783 0.70
($7,721,185)

2019 $17,829,598 $0 $1,626,430 $0 ($1,991,100) ($364,670) $1,281,191 $18,746,120 406,607 65.59 $0 $26,667,350 0.70
($7,921,231)

2020 $18,746,120 $0 $1,647,157 $0 ($2,193,400) ($546,243) $1,341,140 $19,541,016 411,789 67.55 $0 $27,817,414 0.70
($8,276,398)

Note: Asset Return is based on an expected returns of asset allocation only. Actual past returns of managers have been excluded from the model.

1. Employer Contribution - $350k per schedule provided

2. Employer Distribution - Calculated at $4 per share
3. Debt Repayment – annual P+I payments on remaining ESOP loan
4. Benefits Paid – Repurchase obligation of the ESOP
5. Net Inflow/Outflow – A+B (Inflows) less C+D (Outflows)
6. Estimated Asset Return Given Target Allocation – Investment portfolio return assuming net inflows and outflows come in once each year, mid-year.
7. End Asset Value – B (beginning value) + G (net flow) + H (earnings)
8. # of Shares – 2007 to 2011 Shares in ESOP being released, 2012 forward assumes annual contribution of $350K is being made in newly issued shares.
9. Price Per Share – Share price growing at 3% per year
10. Debt – ESOP debt outstanding
11. End Liability Value – JxK+L (Enterprise value of Stock within the ESOP)
12. Plan Surplus Deficit – I (Ending Asset Value) – M (Ending Liability Value)
13. Plan Asset Liability Ratio – I (Ending Asset Value) / M (Ending Liability Value)

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28
Given Target Allocation and Client Supplied Assumptions
(Model assumes earnings distributions increase in proportion with share price)
{A} {B} {C} {D} {E} {F} {G} {H} {I} {J} {K} {L} {M} {N} {O}
Inflows Outflows
Price Plan
Beg. Asset Employer Earnings Debt Benefits Net Inflow / Est. Asset End. Asset # of Per End. Liability Plan Surplus Asset /
1 2 3 4 5 6 7 8 9 10 11 12 13
Year Value Contr. Distr. Repayment Paid Outflow Return Value Shares Share Debt Value / Deficit Liability

2007 $11,262,721 $350,000 $1,411,706 ($179,411) ($2,001,403) ($419,108) $802,460 $11,646,073 342,647 45.99 $621,232 $16,379,573 ($4,733,500) 0.71

2008 $11,646,073 $350,000 $1,468,485 ($179,411) ($1,674,402) ($35,328) $844,222 $12,454,967 346,047 47.37 $481,697 $16,873,845 0.74
($4,418,878)

2009 $12,454,967 $350,000 $1,526,964 ($179,411) ($1,726,161) ($28,608) $903,192 $13,329,551 349,347 48.79 $332,136 $17,377,058 0.77
($4,047,508)

2010 $13,329,551 $350,000 $1,587,179 ($179,411) ($1,600,762) $157,006 $973,425 $14,459,982 352,547 50.25 $171,828 $17,888,912 0.81
($3,428,931)

2011 $14,459,982 $350,000 $1,649,169 ($179,411) ($2,025,781) ($206,023) $1,042,316 $15,296,275 355,647 51.76 $0 $18,409,059 0.83
($3,112,784)

2012 $15,296,275 $0 $1,747,091 $0 ($2,062,870) ($315,779) $1,099,047 $16,079,543 365,711 53.33 $0 $19,502,127 0.82
($3,422,584)

2013 $16,079,543 $0 $1,830,863 $0 ($2,223,170) ($392,307) $1,153,134 $16,840,370 372,084 54.93 $0 $20,437,234 0.82
($3,596,864)

2014 $16,840,370 $0 $1,917,147 $0 ($2,090,090) ($172,943) $1,216,333 $17,883,760 378,271 56.57 $0 $21,400,395 0.84
($3,516,634)

2015 $17,883,760 $0 $2,006,020 $0 ($2,933,000) ($926,980) $1,264,712 $18,221,492 384,278 58.27 $0 $22,392,450 0.81
($4,170,958)

2016 $18,221,492 $0 $2,097,559 $0 ($2,345,200) ($247,641) $1,313,891 $19,287,742 390,111 60.02 $0 $23,414,267 0.82
($4,126,525)

2017 $19,287,742 $0 $2,191,844 $0 ($1,865,800) $326,044 $1,412,125 $21,025,912 395,773 61.82 $0 $24,466,738 0.86
($3,440,826)

2018 $21,025,912 $0 $2,288,958 $0 ($1,676,600) $612,358 $1,548,710 $23,186,980 401,270 63.67 $0 $25,550,783 0.91
($2,363,803)

2019 $23,186,980 $0 $2,388,986 $0 ($1,991,100) $397,886 $1,697,818 $25,282,684 406,607 65.59 $0 $26,667,350 0.95
($1,384,667)

2020 $25,282,684 $0 $2,492,014 $0 ($2,193,400) $298,614 $1,846,363 $27,427,660 411,789 67.55 $0 $27,817,414 0.99
($389,754)

Note: Asset Return is based on an expected returns of asset allocation only. Actual past returns of managers have been excluded from the model.

1. Employer Contribution - $350k per schedule provided

2. Employer Distribution - Calculated at $4 per share and growing at 3% (stock price growth) (i.e. $4.12 per share in year two)
3. Debt Repayment – annual P+I payments on remaining ESOP loan
4. Benefits Paid – Repurchase obligation of the ESOP
5. Net Inflow/Outflow – A+B (Inflows) less C+D (Outflows)
6. Estimated Asset Return Given Target Allocation – Investment portfolio return assuming net inflows and outflows come in once each year, mid-year.
7. End Asset Value – B (beginning value) + G (net flow) + H (earnings)
8. # of Shares – 2007 to 2011 Shares in ESOP being released, 2012 forward assumes annual contribution of $350K is being made in newly issued shares.
9. Price Per Share – Share price growing at 3% per year
10. Debt – ESOP debt outstanding
11. End Liability Value – JxK+L (Enterprise value of Stock within the ESOP)
12. Plan Surplus Deficit – I (Ending Asset Value) – M (Ending Liability Value)
13. Plan Asset Liability Ratio – I (Ending Asset Value) / M (Ending Liability Value)

DUFF & PHELPS

29
Asset to Liability Ratio
1.10

1.00

0.90
Ratio

0.80

0.70

0.60
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Year
Current Plan
Target Plan w/o Increasing distributions/share
Target Plan increasing distributions with stock price

DUFF & PHELPS

30
Markets Overview

DUFF & PHELPS

31
M&A Market Overview
ƒ D&P Middle Market Insights

M&A Market Environment ƒ Aggregate U.S. Deal Volume

ƒ Multiples and Deal Volume by Industry

ƒ Re-emergence of the Corporate Take-over

Strategic Buyer Market ƒ Robust Equity Market Performance

ƒ Measures of Corporate Liquidity

ƒ LBO Transaction Multiples

Credit Markets ƒ The Yield Curve and Interest Rate Trends

ƒ Credit Defaults

ƒ Record Level of Private Equity Capital Raised

ƒ Contributions in Transactions
Private Equity Market ƒ Middle Market LBO Multiple Expansion
ƒ Financing LBO Transactions

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32
 M&A Market – D&P Middle Market Insights
ƒ Valuable market intelligence generated through D&P’s recent sale processes illustrate the overall
strength of the M&A and financing environment:

– Strong buyer demand exists for consumer and business service companies (particularly
companies with niche sector focuses)

– Private equity sponsors and cash flow lenders continue to be aggressive due to the excess capital
available in the market – capital raised by Private Equity firms reached record levels in 2006 Æ
$215.4 billion was raised by 322 funds in 2006

– Private equity deals accounted for nearly $740 billion in aggregate value, more than double the
value of 2005 deals

– Private equity sponsors are paying premium multiples (>8x EBITDA) for the “right” asset – those
exhibiting strong growth outlooks and profitability metrics

– M&A activity among strategic acquirors has continued to gain momentum due to strong earnings,
large cash reserves and the necessity for growth

– In 2006, 20.3% of all M&A deals involved financial sponsors versus just 3.1% 10 years ago

– Currency arbitrage is driving international demand for U.S. assets

– Uncertainty over the future general economic environment is driving business owners to capitalize
on the current robust M&A environment

DUFF & PHELPS

33
 M&A Market – Aggregate U.S. Deal Volume

Overall U.S. M&A Activity Middle Market U.S. M&A Activity(a)

1,600 14,000 180 9,000

160 8,000
1,400
12,000

Aggregate Deal Value ($ in billions)

Aggregate Deal Value ($ in billions)

140 7,000
1,200
10,000
120 6,000

Number of Deals
Number of Deals
1,000
8,000 100 5,000
800
80 4,000
6,000
600
60 3,000
4,000
400
40 2,000

2,000
200 20 1,000

0 0 0 0

92 93 4 95 996 997 998 999 000 001 002 003 004 005 006 007 2 93 994 995 996 997 998 999 000 001 002 003 004 005 006 007
19 19 1 99 19 1 1 1 1 2 2 2 2 2 2 2 12 1 99 19 1 1 1 1 1 1 2 2 2 2 2 2 2 12
Q Q
Deal Value Number of Deals Deal Value Number of Deals

Source: Mergerstat (U.S. Announced Deals), through 3/31/2007

(a) Middle Market defined as deals with enterprise values between $1mm and $500mm or undisclosed values

DUFF & PHELPS

34
 M&A Market – EBITDA Multiples/Deal Volume
ƒ Consumer Staples, Financial Services, and Information Technology companies garnered the
most attractive multiples thus far in 2007

Q1 2007 Median EBITDA Transaction by Industry Q1 2007 Deal Volume by Industry

16.0x
900 845
Enterprise Value as a Multiple of EBITDA

796
14.0x 800
Average: 10.1x 741
13.4x
12.0x 700
12.1x
11.7x 11.5x
600

Number of Deals
10.0x
10.3x
10.0x
9.5x 500
9.1x 444
8.0x
400
7.3x
6.0x 288
6.3x
300
225
4.0x 172
200
134
2.0x 80 86
100

0.0x 0

ls

s
e

gy
s
y

ns
y

ls

es
re
ry

es

ls

ns

rg

ie
al
le

ce
ar

ia
g

og
le

ca
ia
r ia

lo

io
na

ca

it
tri
p
er

iti

e
c

io

er
vi
ap

til
er

no
ta

at
vi

En
l

lth
io
t il

us
st

no

at
En

lth
tio

er

at

U
er

at

-S

ic
St

et
U
du

ch
ic

ea

d
S

M
ch
ea
e

un
S

cr
un

In
cr

Te
In

H
al
er
Te
H
al

is
er

m
is

ci
um
-D
ci

m
m
-D

n
n
m
n
n

io
na

co
su

io
na

co

s
er

at
er

on
at

le
on

Fi
le
Fi

m
um
m

rm

Te
C
Te
C

or
su

fo

f
on

In
on

In

C
C

Source: Capital IQ (U.S. Announced Deals), Through 3/31/2007

DUFF & PHELPS

35
 Strategic Buyer – Re-emergence of Corporate Take-over
ƒ Strong balance sheets and corporate liquidity have fueled a rebound in strategic acquisitions
since 2002

Q1 2007 Aggregate Deal Value and Deal Volume – Strategic Acquisitions

1,000 9,000

900 8,000
Aggregate Deal Value ($ in billions)

800
7,000

700
6,000

Number of Deals
600
5,000
500
4,000
400

3,000
300

2,000
200

100 1,000

0 0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q1
2007
Deal Value Number of Deals

Source: Mergerstat (U.S. Announced Deals), as of 3/31/2007

DUFF & PHELPS

36
 Strategic Buyer – Robust Equity Market Performance
ƒ Since the beginning of the economic rebound in 2003, mid-cap and small-cap stocks have
outperformed the overall market
700%

600%

500%

400%

300%

200%

100%

0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Q1
2007
DJIA Nasdaq Composite S&P 500 S&P Midcap 400 S&P SmallCap 600

Note: Nov 1994 = 100, S&P SmallCap 600 Began in Nov. 1994
As of 3/31/2007

DUFF & PHELPS

37
 Strategic Buyer – Measures of Corporate Liquidity
ƒ Strong balance sheets and efficient debt service ratios have given companies the ability
to reinvest fueling organic growth or expand through acquisitions

(a)
Measures of Corporate Liquidity

Industry Total Debt / EBITDA Current Ratio EBITDA / Interest Exp. Debt/Equity Debt/Total Capital

Consumer - Discretionary 2.3x 1.8x 9.3x 69.3% 37.6%

Consumer - Staples 1.4x 1.2x 10.1x 39.9% 25.5%

Energy 0.5x 1.3x 27.2x 25.5% 19.4%

Financial Services NA NA NA NA NA

Healthcare 0.8x 1.8x 20.8x 19.2% 15.5%

Industrials 2.8x 1.6x 8.4x 90.6% 43.9%

Information Technology 0.8x 1.8x 30.2x 16.9% 13.5%

Materials 1.1x 1.6x 12.0x 38.6% 25.2%

Telecommunications 1.7x 0.9x 9.3x 65.6% 35.7%

Utilities 2.5x 1.3x 4.9x 87.0% 42.8%

Source: Capital IQ, As of 3/31/2007

(a) Values are the average of public companies operating in the respective industry
Note: metrics not available for the financial services industry

DUFF & PHELPS

38
 Credit Markets – LBO Transaction Multiples
ƒ Senior debt lenders are driving leverage multiple expansion
– In 2006, lenders provided debt at 4.4x LTM EBITDA vs. 4.3x in 2005
– Subordinated debt contributions have remained relatively constant (1.0 – 1.1x LTM EBITDA)
Average Debt Multiples of Highly-Leveraged Loans
6.0x

5.0x
2.3x 2.1x
1.7x
2.5x 2.0
4.0x 2.5x
2.4x 1.2x 1.1x 1.0x
1.0x
1.2x
1.4x 1.6x
3.0x 1.5x

2.0x
3.5x 3.6x 3.5x
3.3x 3.3x 3.2x 3.2x 3.4x
2.7x 2.8x 2.9x
2.6x 2.4x
2.2x 2.3x
1.0x

0.0x
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Bank Debt/EBITDA Non-Bank Debt/EBITDA

Source: Merrill Lynch Transaction Trend Review

DUFF & PHELPS

39
 Credit Markets – Yield Curve and Interest Rates
ƒ The flat yield curve currently observed signifies uncertainty in the economy
ƒ Inflation concerns has led the FOMC to keep the Fed Funds Rate constant at 5.25% since June
2006

(a) (b)
Historic and Current Yield Curve Historic Federal Funds Rate
7.0%

6.0%
6.0%

Targeted Federal Funds Rate

5.0%
5.0%
Yield To Maturity

4.0% 4.0%

3.0% 3.0%

2.0% 2.0%

1.0% 1.0%

0.0% 0.0%
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
yr

yr
o

yr

yr

yr

19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
m

10

30
2

5
3

Jan-04 Jan-05 Jan-07 Mar-07 Targeted Rate

Source: U.S Treasury Department, Federal Reserve, As of 3/31/2007

(a): The 30-yr bond was re-issued in February, 2006
(b): Values only recorded if the FOMC changed the rate

DUFF & PHELPS

40
 Credit Markets – Credit Defaults
500 16
14.7

450 Default Rates

13.5
and Average Time To Default by Credit Rating
14

400 12.0
12

Average Time of Default (a)

350
11.3
Number of Defaults

9.7
10
300 8.8
9.2

250 7.3 8

6.3 6.3
200 6.3 5.9 5.8
6
4.9
150 4.0
3.3 4
2.9
100 2.7

1.6
2
50
13 13 18 12 0.2
5 1 7 37 23 54 61 46 102 251 440 244 115 32 28 1
0 0
A

+
B
+

-
B

C
-

-
A

B
B

C
A

B
B

C
A

C
B

C
A

B
B

C
A

C
B
A

C
B

C
B

C
Credit Rating
Default Volume Average Time to Default
Source: Standard and Poor’s, As of 3/31/2007
(a): For Defaulting Companies

DUFF & PHELPS

41
 PEG Market – Record Levels of Capital Raised in 2006
ƒ In 2006, $215 billion in private equity capital was raised by 322 funds breaking the record for
capital raised of $174 billion set in 2005
ƒ This surge in capital raised coupled with existing capital surpluses should promote a robust
M&A environment involving financial sponsors

Private Equity Funds Raised: 1992-2006 Investment Horizons for Existing Funds
$250 350

$215
$250
Commitments ($ in billions)

300
$200

Commitments ($ in billions)
$174

# of Funds Raised
250 $200

$150
200
$150
Maximum Investment Term
150
$100
$80 $100
$64 $65 100
$50 $47 $52
$50 $34 $30 $50
$27 $26 50
$18 $21
$12

$0 0 $0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
11
12
13
14
15
16
17
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Commitments ($ in billions) # of Funds Raised

Source: Private Equity Analyst

DUFF & PHELPS

42
 PEG Market – Contributions in Transactions
ƒ Capital overhang and increasing competition among private equity sponsors has required
equity funds to lower their required internal rate of return
ƒ Equity contributions to LBOs have remained relatively stable since 2000

Average Equity Contributions in LBOs

100%
Equity Percentage

75%
64.3% 62.2% 59.4% 60.0% 60.5% 64.7% 61.0%
70.0% 68.3% 67.0%
78.0% 74.8% 73.8% 76.3% 77.1%

50%

25%
35.7% 37.8% 40.6% 40.0% 39.5% 35.3% 39.0%
30.0% 31.7% 33.0%
22.0% 25.2% 26.2% 23.7% 22.9%

0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Equity Other Financing

Source: Standard & Poor’s, As of 3/31/2007

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43
 PEG Market – Middle Market LBO Multiples Expand
ƒ Average EBITDA multiples for LBO transactions of all sizes have continued to rise since
1999 with deals greater than $500 million attracting the highest multiples (despite a slight
fall-off early in 2007)

Average LBO EBITDA Multiples by Deal Size

10.0x

8.8x 8.8x
8.5x
8.0x 8.3x 8.3x 8.2x
8.0x
7.7x 7.8x 7.7x
7.5x 7.5x
7.2x 7.2x
6.9x 7.0x 7.0x 7.0x
6.8x 6.8x 6.7x 6.7x 6.8x
6.0x 6.5x 6.5x
6.1x 6.1x

4.0x

2.0x

0.0x
1999 2000 2001 2002 2003 2004 2005 2006 Q1 2007

<$250 mm $250 - $499 mm >$500 mm

Source: Standard & Poor’s, As of 3/31/2007

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44
 PEG Market – Financing LBO Transactions
ƒ Bank debt continues to be the dominant source for financial LBO Transactions
Average Sources of Proceeds in LBO’s – Q1 2007
2.1%
100.0%
3.5% 5.8% 8.7%
3.6%
90.0% 2.4%

80.0% 33.0%
32.9% 27.7%
70.0%

60.0% 0.7% 3.6%

7.0% 0.6%
6.3%
11.8%
50.0%

40.0%

30.0%
53.7% 50.8%
45.8%
20.0%

10.0%

0.0%
Transaction Value <$250mm Transaction Value $250 - $499mm Transaction Value >$500mm
Bank Debt Sub Debt Secured Debt Common Equity Rollover Equity Other Sources

Source: Standard & Poor’s, As of 3/31/2007

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45
The “Value” of Acquisitions
ƒ Assume the tax savings from the 100% S Corporation ESOP structure is fully devoted
to acquisitions.
ƒ The following chart illustrates what enterprise value will grow to without any organic
growth of the C Corporation ESOP or the Targets.
ƒ With organic growth of 5% the 10 year CAGR on Enterprise Value is 12.61%.

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
EBITDA 15.0 16.04 17.16 18.36 19.66 21.06 22.56 24.18 25.93 27.81
Implied multiple 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Enterprise value 75 80.2 85.8 91.8 98.3 105.3 112.8 120.9 129.7 139.1

EBITDA 15.0 16.04 17.16 18.36 19.66 21.06 22.56 24.18 25.93 27.81
Assume no debt, i.e. no interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Depreciation & Amortization 2.0 2.1 2.1 2.2 2.2 2.3 2.3 2.4 2.4 2.5
Taxable Income 13.00 13.99 15.06 16.21 17.46 18.81 20.26 21.83 23.53 25.36

Income Taxes 5.20 5.60 6.02 6.49 6.98 7.52 8.11 8.73 9.41 10.15

Purchased EBITDA (5.0x) 1.04 1.12 1.20 1.30 1.40 1.50 1.62 1.75 1.88 2.03

10 Year CAGR on Enterprise Value 7.10%

DUFF & PHELPS

46
What We're Seeing in the
Marketplace

DUFF & PHELPS

47
Questions?

DUFF & PHELPS

48