ESOP POWER An Advanced Planning Strategy

1. ESOP POWERAn Advanced Planning Strategy For For Private Corporations Presented by: ATI Capital Group, Inc.

2. What is an ESOP • ESOP= Employee Stock Ownership Plan • An ESOPis a QUALIFIED PLANunder 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 ATI Capital Group, Inc.

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

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

5. Benefits to the Corporation • 100% deductibility ofPRINCIPALand interest on ESOP loan to buy-out Shareholder. • Increased cash flowdue to deductibility of principal on loan. • 100% deductibility ofDIVIDENDSpaid to reduce ESOP debt or distribute to participants. • Collateralfor ESOP created outside company. • Preferred termson ESOP loan. Principal shareholder bought out for $0.66dollars, compared to $1.52 dollars. ATI Capital Group, Inc.

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

7. 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! ATI Capital Group, Inc.

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

9. Benefits to the Corporation • 100% deductibility ofPRINCIPALand interest on ESOP loan to buy capital goods. • In addition to above deduction, can write-off capital goods a second time by means ofDEPRECIATION. • Increased cash flowdue to deductibility of principal on loan. • Collateralfor loan created by acquiring the capital goods. • Preferred termson ESOP loan to acquire capital goods. Capital Goods Acquired for $0.66 dollars (PT), compared to $1.52 dollars (AT). ATI Capital Group, Inc.

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

11. Benefits to the Corporation • 100% deductibility ofPRINCIPALand interest on ESOP loan to buy Target Company. • Increased cash flowdue to deductibility of principal on loan. • Collateralfor loan created by acquiring the Target Company. • Preferred termson ESOP loan to acquire Target Company. Target Company Acquired for $0.66 dollars (PT), compared to $1.52 dollars (AT). ATI Capital Group, Inc.

12. ESOPs For ‘S’ Corporations A New Opportunity For Tax Planning

13. New LegislationNew Opportunities • UNDER THE TAXPAYERS RELIEF ACT OF 1997 (effective January 1, 1998) • UBIT No longer imposed ‘S’ CORPORATIONS CAN NOW UTILIZE ESOPs ATI Capital Group, Inc.

14. Tax Consequences • Assumptions: • S Corp 50% owned by ESOP and 50% owned by individuals who pay tax at a 39.6% MTR • C Corp pays no dividends and pays tax at a 34% MRT • Both corporations earn $1M taxable income • Earnings net of tax left in company ATI Capital Group, Inc.

15. Tax Consequences • Assumptions: • S Corp 100% owned by ESOP and 0% owned by individuals who pay tax at a 39.6% MTR • C Corp pays no dividends and pays tax at a 34% MRT • Both corporations earn $1M taxable income • Earnings net of tax left in company ATI Capital Group, Inc.

16. The Power & The Reality of‘S’ Corporation ESOPs You can have a “For Profit” corporation that is “NOT” subject to Federal Income Tax on any level!! ATI Capital Group, Inc.

17. ‘C’ Corp. ESOPs Sellercantake advantage of Sec. 1042 25% of qualified payroll is deductible if leveraged; 15% if not leveraged Earnings of Corp.arefully taxable ‘S’ Corp. ESOPs Sellercannottake advantage of Sec. 1042 25% of qualified payroll is deductible Earnings of Corp.are notsubject to Federal Income Tax, to extent company is owned by ESOP What Are the Differences?? ATI Capital Group, Inc.

18. ‘C’ Corp. ESOPs Seller, family of Seller, & 25% S/H are excluded from ESOP Second class of stock allowed in ESOP, if it is the highest class of stock or convertible into the highest class of stock Valuation reflects tax-affecting ‘S’ Corp. ESOPs Extensive exclusions for family members and 10% or greater S/Hs under anti-abuse rules Second class of stock not allowed (can have common non-voting) Valuation often does not reflect tax-affecting What Are the Differences?? ATI Capital Group, Inc.

19. Okay, But Who’s in Control?? Because if it’s not me, I don’t want any part of this ESOP concept!! All I want is to control my business now and after I die. ATI Capital Group, Inc.

20. The Structure of Control • If an ESOP holds a minority interest in its Sponsoring Company’s Securities,control has not changed. No further action is necessary. B. If an ESOP holds a controlling interest in its Sponsoring Company’s Securities,control has technically passed& further action is necessary. ATI Capital Group, Inc.

21. Methods of Maintaining Control Maintaining Absolute Voting Control • Don’t Do Any Planning & Don’t Sell Any Portion of Your Stock Holdings • Own 51% Voting Control Outside of ESOP ATI Capital Group, Inc.

22. Methods of Maintaining Control Maintaining Function Voting Control • Be Appointed Trustee of ESOP – (temporary) • Become Chairman of ESOP Committee That Directs the Trustee • Obtain Lifetime Appointment as Chairman of the Board of Directors • Obtain Lifetime Appointment as CEO ATI Capital Group, Inc.

23. The Flow of Control • Company BOD Appoints: • ESOP Committee • Trustee of Plan Control is a matter of proper structuring! ESOP Committee Trustee Directives V o t e Chairperson of Committee controls Block could be controlling interest or minority interest. Shares not in Participant’s account. Unallocated ESOP Shares Participants Shares actually in Partici- pant’s account. Allocated Shares Minority shareholders Vote - merger - reorganization - sale of assets - acquisition - liquidation ATI Capital Group, Inc.

24. The Emotional Issue of Control • ASSIGNMENT: • Defend financially(not emotionally)why anyone would insist on owning 100% of a company, if he/she controls the vote. ATI Capital Group, Inc.

25. The Alliance Project Manager/Consultant CPA Attorney for ESOP Attorney for Corporation Valuation Professional Insurance Professional Trustee Plan Administrator Lender Investment Advisor ESOP Alliance Your Strategic Partner We Provide Your One-Stop-Shop ATI Capital Group, Inc.

26. Contact Information Web Sites: www.aticg.com • Sam G. Torolopoulos, CPA-ABV • 222 West Las Colinas Blvd., Ste. 1346-E, Irving, TX 75039 • 214-920-1616, fax 214-920-1617 • sam@aticg.com ATI Capital Group, Inc.