The ESOP Association Midwest Conference

The ESOP Association Midwest Conference September 11, 2015 Alternative Forms of Capital for Mature ESOP Companies Presented by: Elizabeth Perdue Peter Pricco John Solimine

Agenda I. Mature ESOP Capital Needs and Financing Alternatives John Solimine, Principal, Verit Advisors II. Private Placement Overview Peter Pricco, Senior Vice President, Prudential Capital III. Relevant Case Studies Elizabeth (Betsy) Perdue, Partner, Holland & Knight IV. Q&A

I. Mature ESOP Capital Needs and Financing Alternatives

Traditional Capital Structure: ESOP Companies Short-term Bank Debt Senior Lender(s) Mezzanine Financing Junior Capital Provider Middle Market Company Subordinated Seller Financing Selling Shareholder(s) This has historically been the most common capital structure for 100% S-Corp ESOP companies, however, we have recently seen a trend in alternative capital structures involving various forms of senior debt and subordinated capital beyond seller financing

ESOP Companies: Competition for Capital ESOP companies must balance obligations to employee owners while maintaining sufficient flexibility and liquidity to pursue growth initiatives Capex and Debt Service Internal Capital (Cash/Earnings) Corporate Purposes Working Capital Needs Growth Initiatives/M&A Company Tax Payments/ Distributions Dividends External Capital (Debt + Equity) Return Cash to Stakeholders/ESOP Seller Note Debt Service Repurchase Obligations This balancing of capital needs has led ESOP companies to evaluate and implement flexible forms of third party capital that align and support corporate objectives

ESOP Companies: Capital Needs Over Time Growing capital needs vary over time and throughout the ESOP life cycle, well beyond their initial ESOP formation This presents an opportunity to evaluate and benchmark more patient forms of capital that can facilitate long-term flexibility 0-7 years..7-10 years 10 + years New ESOP Formed 2nd Stage ESOP Refinance Seller Notes/ Warrants Refinance Management Repurchase Obligations Growth Capital & Acquisitions Ongoing capital needs related to ESOP and non-esop obligations require proactive capital planning and access to sophisticated capital alternatives often times beyond traditional sources

Evaluating Capital Considerations Select Capital Strategies Solutions within the ESOP: Restructure ESOP Releveraging Mandatory diversification Rebalancing Re-ESOP Terminate ESOP 401(k) raise Corporate Solutions: Traditional bank debt Non-bank funding Private placements Subordinated debt Minority Private Equity Equity: LLC Other No two ESOP companies have the same capital structure. We have observed select opportunities to drive shareholder value and corporate strategy with changes in capital structure through an expanded suite of capital alternatives

Potential Financing Alternatives Senior Debt/Bank Financing Traditional financing usually provided by commercial banks based on the assets and/or cash flow of the Company. Typically a security interest in all Company assets and includes ABL revolvers, cash flow revolvers, term loans Non-Bank Financing/ Private Placement Senior debt alternative in the form of a private placement typically provided by insurance companies. Senior in security and can be pari passu with bank debt. Attractive opportunity to secure historically low interest rates with longer tenure and repayment flexibility Uni-Tranche Financing based on assets and enterprise value of the company. Blends senior and junior financing into one facility with blended rate that would be lower than senior/mezzanine structure. Provided by non-bank financial institutions, investment funds and business development companies ( BDCs ) Second Lien Financing based on the enterprise value of the Company, its cash flow, with a second lien on assets. Can work well with asset rich companies. Typically used where companies want to maximize leverage Mezzanine Debt Junior or subordinated debt that is typically unsecured. Typically includes a current coupon, PIK or warrant feature and is provided by mezzanine funds or institutional capital providers

Potential Financing Alternatives Seller Debt Flexible financing from selling shareholders that usually has no security interest. Common in majority ESOP transactions and typically carries current interest and warrant component with attractive wealth planning opportunities Equity Long-term capital often expressed as preferred or common stock (LLC), 401(k) equity raise, or institutional equity investor Joint Venture Legal agreement to share in the profits and losses of a particular entity, joining two or more parties What s new? The increase in non-bank financial institutions and the broader menu of capital markets solutions, including senior financing structures, are available to middle market companies These longer term, patient and flexible capital constructs present compelling strategic capital alternatives for ESOP companies

II. Private Placement Overview

Typical Capital Structure In Middle Market Short-term Floating Rate Bank Debt Senior Lender Subordinated Seller Financing Selling Shareholder(s) Middle Market Company Long-term Fixed Rate Private Placement Non-Bank Lender

What Is A Private Placement? BANK DEBT Revolving Line of Credit Floating Rate Term Loan SHORT TERM Accounts Receivable Inventory Other ST Assets PRIVATE PLACEMENT 5 15 year Term Loan Fixed Rate MEDIUM /LONG TERM Machinery & Equipment Facilities Acquisitions Share Purchases Mortgage Loan/ Mezzanine/Equity VERY LONG TERM Real Estate Share/Equity Activity

Private Placements Overview Traditional Private Placements on 12/31/2013 1 Firm Prudential Capital Group Portfolio ($B) 2013 Originations ($B) 59.50 12.06 Met Life 51.07 8.32 Northwestern Mutual 23.22 5.11 Sun Life Assurance Company of Canada 20.05 4.34 Mutual of Omaha 6.50 1.06 Private Placements Defined Debt Securities not registered or offered publicly Traditional private placements excludes quasi-public 144A securities The majority of issue sizes range from $25 million to $500 million Issued by both investment grade and below investment grade companies Primarily private companies or small to mid-sized public companies ($200 million to $1 billion+ in sales) Typically not rated by public rating agencies PRIVATE PLACEMENT TOTAL VOLUME (ANNUAL TOTALS FOR THE PAST 20 YEARS) Hartford Investment Management Fort Washington Investment Advisors 6.40 0.46 1.20 0.33 ($ in BNs) (1) Source: Source Media Private Placement Letter July 20, 2014 Buyside Survey. Represents annual private placements originated in 2012 and portfolio size for companies responding to survey. 2013 Originations includes Traditional, 144As, Project Finance, and Credit Tenant Lease. Source: Thomson Reuters (1994 through 2012) and Bank of America Merrill Lynch (EST 2013) Presented by Bank of America Merrill Lynch at 2013 Private Placement Conference, January, 2014.

Bank & Private Placement Financing Companies often consider private placement financing as a complement to their existing bank facility The use of both bank and private placement debt financing expands the pool of capital available to the company and diversifies the company s capital base to provide greater flexibility and resources to fund future growth. Reduced dependence on a single source of capital can be important, especially if bank regulators become more stringent. Insurance companies are capitalized differently than banks, which was demonstrated in the most recent financial crisis, during which insurance companies continued to provide capital while many banks were forced to sit on the sidelines.

Benefits of Long-term, fixed rate Debt Flexibility with Maturities and Principal Payments Reduced debt amortization requirements provide cash for growth opportunities. By reinvesting cash in the business rather than reducing debt, the Company can generate returns higher than its cost of capital, creating value for shareholders. Private placement debt holders may be willing to forgo amortization payments for up to 5 years, enabling the Company to more easily create economic value. Lower Fees While banks rely on ancillary services and fee generation to enhance investment return, non-bank lenders rely mostly on the yield from their loan to compensate for the risk of non-payment. Favorable Rate Environment Fixed rates are currently attractive on a historical basis and there may be upward pressure on rates as the economy improves.

Bank Debt and Private Placement Terms Bank Debt Private Placement Maturity Generally 3-5 years 5-15 years; customizable amortization Pricing Floating rate (Spread over LIBOR) Fixed rate (Spread over Treasuries) Covenants Extensive covenant package Typically similar to bank covenants Prepayment Revolving at par Can be prepaid with premium ( makewhole ) Ratings No ratings required No ratings required Size Varies based on company size Minimum issuance of $10 million

III. Relevant Case Studies

Partial to 100% ESOP Owned Company Leading US based manufacturer of equipment was partially ESOP owned with the balance held by the founders For succession planning purposes, the founders were seeking to sell the rest of their shares to the ESOP, making the business 100% ESOP owned Capital structure needed to accommodate the Company s CAPEX requirements and the desire to keep an investment grade profile. Company sought financing for the transaction, working with its existing bank group who provided a secured syndicated revolver and term loan (<5 years). Prudential Capital Group structured a long term strip of pari passu senior secured term debt which was interest-only in the early years and began amortizing after the bank term loan was paid off o Allowed the Company to create a more manageable amortization structure, preserving cash flow to reinvest into CAPEX.

100% ESOP S Corp with Private Placement Private Placement Lender ESOP Pari Passu Debt LLC (Partnership) S-Corp Bank Debt Lenders Debt Opco LLC (Disregarded)

Drop Down LLC/PE Case Study Company was 100% S corp ESOP, with founders holding notes and warrants Now seeking liquidity for a portion of the seller debt, plus patient capital to take advantage of a number of potential acquisitions Private equity provided debt and equity capital, with senior lender providing working capital line of credit

Benefits of Drop-Down LLC Structure Retains benefit of 100% ESOP ownership Permits investment by outside investors into a lower level entity typically an LLC which is disregarded for tax purposes Lower level investment may be debt or equity LLC structure provides flexibility in design of equity terms NB: Close attention must be paid to proper 409(p) testing

Drop-Down LLC with Equity and Mezzanine Debt Founders New Investor Subdebt & Warrants Warrants ESOP Long term debt [refinance senior and seller term debt] x% of Common Interest XYZ, LLC (Partnership) y% of Common Interest S-Corp Bank Debt Lenders [working cap revolver] Debt Opco, LLC (Disregarded)

401(k) Employee Capital Raise ESOP companies have an alternate source of equity capital their own employees Can be used in connection with an initial transaction or via an internal market for mature ESOP company Typically used as a source of capital to manage repurchase obligations, or allow new employees to participate, rather than for acquisitions

ESOP Employee Capital Raise Existing ESOP accounts: Allocated shares Unallocated shares ESOP 401(k) accounts 1. Existing ESOP repurchase liability requires funds from company to pay for shares of retirees, decedents, etc 2. Instead of company raising debt capital, offer employees the opportunity to rollover funds from other plans, such as 401(k) 3. Rollover funds are allocated to electing participants accounts, and used to repurchase shares internally from departing employees accounts S-Corp Various Senior Lenders Other Debt Financing

IV. Q&A

Elizabeth S. Perdue Elizabeth S. Perdue Partner (312) 578-6620 Elizabeth.S.Perdue@hklaw.com Elizabeth "Betsy" Perdue is a partner in Holland & Knight's Chicago office. She focuses her practice on finance transactions and corporate mergers and acquisitions, with a special focus on transactions involving employee stock ownership plans (ESOPs). Ms. Perdue represents institutional lenders, private equity, mezzanine lenders and borrowers in syndicated and other financings for ESOP transactions. Betsy also represents privately held companies in a range of acquisitions and dispositions, including mergers, asset and stock acquisitions and dispositions, leveraged buyouts and ESOP transactions.

Peter Pricco Peter Pricco Senior Vice President (612) 326-2202 peter.pricco@prudential.com Peter Pricco is a Senior Vice President in Corporate Finance for Prudential Capital Group and heads the Minneapolis Office. He leads a team responsible for marketing, originating and managing private placement and mezzanine investments in Iowa, Minnesota, Nebraska, North Dakota and South Dakota. Prior to joining Prudential in 2012, Peter spent eleven years in commercial banking, including four years as a managing director for The PrivateBank s Minneapolis commercial banking office and seven years at LaSalle Bank s Minneapolis commercial banking office. Peter received a BA from the University of St. Thomas and an MBA from the University of Minnesota's Carlson School of Management.

John Solimine John Solimine (312) 572-6214 john@verit.com John Solimine is a founding member and Principal of Verit Advisors. Mr. Solimine has 14 years of experience in investment banking and debt capital markets, particularly with middle market companies and private equity sponsors in succession and liquidity transactions. Mr. Solimine began his career at LaSalle Bank, NA (now Bank of America) where he provided debt financing alternatives for leading middle market financial sponsors and their portfolio companies. Mr. Solimine gained broad investment banking experience at both Bear Stearns & Co. and Jefferies & Company, Inc. in New York. Executing a wide array of middle market investment banking transactions, Mr. Solimine worked across several industry groups and product platforms including M&A, public and private equity offerings and leveraged finance. Mr. Solimine later joined Equibase Capital Group, a Chicago-based real estate private equity firm, where he worked with sophisticated high net worth investors and leading institutional investors of the firm s private investment vehicles. Mr. Solimine received a Bachelor of Science in Business Administration from Loyola University Chicago and a Master of Business Administration from the University of Chicago Booth School of Business. Mr. Solimine is a member of FINRA: Series 7 and 63.