Date: May 17, 2005

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Date May 17, 2005
The BDO Seidman, LLP
CFO Series
Mergers Acquisitions Planning Panelists from
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About this Seminar...

• This interactive seminar will cover what the
  financial executive needs to know to plan and
  execute a successful MA transaction
  post-Sarbanes Oxley, in a world of rising
  multiples. Included in this discussion will be
  such topics as
• Current Multiples, Pricing, and Leveraged Recap
  Alternatives
• Current Guidance on MA Taxation
• The impact of Sarbanes-Oxley on deal price and
  terms
• Funding Availability, Rates, Terms on various
  debt\equity forms 

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PanelistsJames J Calla, Executive Vice
President Head of Sovereign Banks Capital
Markets Group
Jim is the Executive Vice President - Director
of the Capital Markets Group located in
Philadelphia, PA. His responsibilities include
Securitization, Interest Rate Derivatives,
Foreign Exchange, Investment and Sales, Mergers
and Acquisitions. Jim is also the Chairman for
Sovereign Securities Corporation, LLC, a
separately capitalized, wholly owned subsidiary
of Sovereign Bank. Jim has been a senior
executive in the capital markets and Asset and
Liability Management areas since 1979. From 1988
to 1998, Mr. Calla served as Capital Markets
Director and Investment and Funding Manager for
CoreStates Bank. He managed over 140 trading and
sales professionals in Philadelphia and Reading,
PA, FT Lauderdale, FL, London, and Hong Kong.
Mr. Calla was instrumental in the formation of
CoreStates Securities Corporation, a NASD
registered broker dealer. Mr. Calla has
extensive experience in foreign exchange,
interest rate derivatives, fixed income, and
securitization markets. Jim has a Bachelor of
Science Degree in Finance from St. Josephs
University.
1500 Market StreetCentre Square -
ConcourseMailcode  20-210-CPCPhiladelphia, PA
19102phone [phone]fax [phone]jcalla
_at_sovereignbank.com
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PanelistsGordon Metz, Manager Director Sovereign
Banks Capital Markets Group
Gordon has over 17 years of merger and
acquisition experience. He joined Sovereign Bank
Capital Markets following positions as a
Corporate Development Executive at ADP and senior
investment banker at CoreStates and PNC in
Philadelphia and Chase Manhattan and Citicorp in
New York. Having executed corporate finance
transactions on a global basis including deals in
Europe, Latin America and Asia, Gordon is
familiar with the many financial and cultural
nuances that exist when deal making. He has
familiarity with numerous industries including
chemicals, forestry product, consumer products,
outsourcing services, textile and automotive
allowing for quick metric formulation in any
given situation. Representative clients include
large public corporations such as Dow Chemical
and Johnson and Johnson, to privately owned
mid-market firms Bellefonte Lime, PQ Corporation
and Caribbean Restaurants (one of the largest
Burger King Franchises). Gordon received his MBA
from the University of Michigan and is married
with three children.
Gordon Metz, Managing Director Capital Markets
Group Sovereign Bank 7 Coe Farm Road Brookside,
NJ 07926 [phone] gmetz_at_sovereignbank.com
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PanelistsRichard Rose, Partner Buchanan
Ingersoll MA Group
Richard D. Rose is a shareholder with Buchanan
Ingersoll and a member of the firm's Corporate
Finance Group and its Board of Directors. As
co-chair of the firms MA Group, his general
corporate counseling practice includes mergers
and acquisitions, financings and federal
securities matters. Richard also acts as outside
general counsel to a number of companies
including a vendor management company that
provide real estate settlement and title
insurance services in connection with residential
mortgage transactions throughout the United
States. Before attending law school, Richard was
a senior auditor for the multinational accounting
firm of Ernst Whinney and obtained his CPA
license. Richard serves on the Council to the
Pennsylvania Bar Association Business Law Section
and the Council to the Allegheny County Bar
Association Business Law Section. He is a
frequent lecturer on business law topics.
Richard received his law degree, cum laude, from
the University of Pittsburgh School of Law and he
is admitted to practice law in Pennsylvania,
Ohio, Michigan and Florida.
Richard Rose, Partner Buchanan Ingersoll, PC 301
Grant Street Pittsburgh, PA 15219 [phone] R
oserd_at_bipc.com
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PanelistsRandy Schwartzman, Tax Partner BDO
Seidmans Mergers Acquisitions Practice
Randy Schwartzman, CPA, MST, has over 20 years of
public accounting experience and plays an active
leadership role at BDO Seidman LLP. As the
partner in charge of BDOs Long Island tax
practice, Randy is responsible for tax planning
and consulting for many of BDOs Long Island
clients. Randy is also an active member of
BDOs National Corporate Tax Consulting Group and
regularly provides tax advice on corporate
mergers, acquisitions, divestitures, and
restructurings at a national level. Randys
responsibilities include servicing clients in the
NY metropolitan area and throughout the country.
He has a great deal of experience, ranging from
Fortune 500 publicly-held corporations through
closely held businesses and their owners in a
broad array of industries. His experience
includes domestic and international corporate
taxation with specialties in the areas of mergers
and acquisitions, consolidated tax returns,
subchapter S taxation, LLC taxation and tax
planning for high net worth individuals. He is a
discussion leader at local, regional and national
seminars for all types of audiences and is
frequently published in magazines such as The Tax
Advisor, The CPA Journal and The Trusted
Professional. Randy has served as the Chairman of
the NYS Society of CPAs Mergers and Acquisitions
Tax Committee and has been actively involved in
its S Corporation and Closely-Held Business Tax
Committee. Randy is also a member of the Federal
Tax Committee for the American Institute of
Certified Public Accountants.
Randy Schwartzman, Partner BDO Seidman, LLP 401
Broadhollow Rd Melville, NY 11747 [phone] Rs
chwartzman_at_bdo.com
.
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The Outlook for MA Transactions James J
Calla Sovereign Bank
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The Macroeconomic Outlook?

• ECONOMY Best of all worlds
• Low inflation
• Low interest rates
• GDP near 4 while Employment has picked up,
  fueling consumer confidence.
• In 2005, GDP is projected to grow near the 4
  pace experienced over the past 8 quarters.
• RATES
• Short-term rates are rising steadily long rates
  have remained low but volatile.
• Long-term rates will rise further if inflation
  continues to bubble.
• STOCKS A solid bounce in profits is being hurt
  by the surge in oil prices. Pricing power is
  improving and corporate costs have been
  significantly diminished. A big question mark,
  as companies focus more on improving dividends
  over stock price.
• INFLATION Leading inflation indicators are
  moving up, driven by energy, wages, and raw
  material prices. The rate of inflation doubled
  in 2004 from 2003.

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The Market for MA Transactions Gordon Metz
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Historical Deal Activity?
Source Thompson Financial Include net debt of
Target
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What has been historical deal activity?
Quick Fact Median Purchase Price between 1995
range from a low of 30 million (1995) to a high
of 56 million (2000).
Source Thompson Financial Include net debt of
Target
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Current Purchase Multiples?

• EBITDA Multiples
• Target Growth
• EBITDA Size

• lt 5x
• Low to none
• lt 5 million

• 5-8x
• Stable and moderate
• 10-15 million

• gt 8x
• Consistently high
• gt15 million

Quick Fact Most private deals derive value
through a DCF incorporating discounts for size,
industry and situation
Defense
Distribution
Communications
Technology
Energy
Manufacturing
Outsourcing
HealthCare
Retailing
Service
Specialty Chemicals
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What Deals Are Getting Done?

• Recognized name
• Large addressable market
• Proprietary/niche oriented
• Longstanding customer relationships
• Solid management team
• Financial track record

Deals are getting done!

• Historic market presence
• Infrastructure to grow
• Technology sophisticated

Must have in place

• Asset light
• Non-diversified revenue base
• Market with history
• Competitive threats

Deal Stoppers
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What types of deals are getting done?
Quick Fact Increasingly deals are incorporating
an earn-out component which accounts for 25 of
deal price.
NO DEAL
STRATEGIC
Price Structured Unstructured

Seller Driver Non-financial Price Now

MBO ESOPS LEVERAGED RECAP
FINANCIAL
Collateral base
Process Informal Methodical
Speed Slower
Quicker
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What funding is available?
Senior Senior Sub Mezzanine Private Equity
Total Return -- 10 - 14 /- 20 /- 30
Current Interest Based on Prime, Cost of Funds or LIBOR 10 - 14 11 - 13 --
Amount (Sweet Spot) Variable gt 10 million (25-50 million) gt 5 million (10-25 million) gt 2 million (5-10 million)
Term Variable 5-10 years 5-7 years 3-7 years
Exit (likely) Refinance payoff Refinance Payoff Refinance Sale Sale IPO
Use of funds Various Expansion-LBO Expansion - LBO Primarily Expansion LBO
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What metrics are being used to fund deals?

• Tight market that has bottomed out
• Gap in financing being filled by the mezzanine
  marketplace
• Returns have decreased
• Traditional asset based loans are the norm
• Strong equity commitment
• Senior debt service gt1.2x

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What are CEOs thinking about MA?

• Strategy, Strategy, Strategy
• How do I grow?
• Employing the cheapest form of capital
• Is this the right time?
• Which is better smaller or larger?
• What are the importance of non-financial
  considerations?
• Integration
• Sarbanes-Oxley

Quick Fact Private Companies wishing to sell to
a Public company need to focus on SOX compliancy
before entering into the market
Quick Fact Cash only deals account for 75 of
the transactions.
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The Impact of SOX on MA Transactions Richard D.
Rose Buchanan Ingersoll, PC
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The Impact of SOX in MA Transactions

• Sarbanes-Oxley has impact on
• Public company acquiring a public company
• Public company acquiring a private company
• Acquisitions that result in a future public
  company

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Areas of Concern in MA Process

• Due diligence
• Negotiation and documentation of transaction

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Due Diligence

• Accounting/Financial Condition
• Must be emphasized
• All transactions, regardless of GAAP treatment
  must be understood (i.e., off balance sheet
  financings)
• Accounting policies
• Certifications
• Internal Controls
• SOX 404 report will (at some point in time)
  involveacquired company
• Certifications
• Loans to Executives and Directors

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Due Diligence (continued)

• Corporate Governance Documentation
• Principles of corporate governance
• Charters and minutes of audit, compensation and
  nominating committees
• Board evaluations
• Corporate governance ratings ? third party
  services (ISS)
• Whistle-blower complaints
• Director Independence
• Issues arise if target personnel will assume
  position on the board of acquiring company
• Compliance and Ethics Culture

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Negotiations and Documentation

• Representations and Warranties
• Financial Statements Rep
• fairly present v GAAP
• Securitization transactions
• off-balance sheet agreements
• Auditors
• registered public accounting firm
• Independent
• Compliant with Exchange Act and PCAOB
• List all non-audit services

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Negotiations and Documentation (continued)

• Representations and Warranties (continued)
• Financial/Internal controls
• SEC Reports
• Certificates
• Disclosure controls required by 13a-15 or 15d-15
• Use of Non-GAAP Financial Measures
• Loans to Executives and Directors
• Timing of Transactions
• Valuation Issues

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Tax Issues for Mergers Acquisitions Randy
Schwartzman BDO Seidman, LLP
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Our Approach

• Identify tax and non-tax goals of each party
• Understand the economics of the deal
• Buyers perspective vs. Sellers perspective
• Type of consideration
• Continuing equity
• Installment note/debt

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Forms Of Consideration

• Cash
• Other Assets of the Corporation
• Stock
• Debt
• Convertible or Exchangeable Instruments
• Warrants

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How Do We Handle Disagreements?

• When conflicts arise, consider
• Installment note/debt
• Purchase price adjustments
• Contingent payment plans

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Basic Acquisition Structures

• Taxable Stock Sale
• Taxable Asset Sale
• Tax-Free Stock Sale
• Tax-Free Asset Sale

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Structuring Considerations

• Taxable Acquisitions vs. Tax-Free Reorganizations
• Asset Acquisitions vs. Stock Acquisitions
• Repeal of the General Utilities Doctrine
• Substance vs. Form Step Transaction Doctrine
• Section 338 Elections

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Structuring Considerations (continued)

• Corporate Structure of Target and Acquiring Group
• Inside Basis of Assets vs. Outside Basis of Stock
• Net Operating Losses and Tax Credits
• Built-in-gain or loss, income or deduction items
• Identity of the shareholders (i.e., corporate,
  individual, tax-exempt)
• Overlap in ownership between shareholders

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Structuring Considerations (continued)

• Consolidated Return Issues
• Deferred Intercompany Transactions
• Excess Loss Accounts
• Tax Sharing Agreements
• Loss Carrybacks
• NOL Elections
• Loss Disallowance Rules

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Specialty Services

• Employee Benefits
• Employment Agreements
• Deferred Compensation Plans
• Stock Option Plans
• State Local Tax
• Multistate Income Franchise Tax Issues
• Credits Incentives Opportunities
• Sales Tax Issues
• Transfer Pricing

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Specialty Services (continued)

• International Tax
• Anti-Deferral Regimes
• Foreign Tax Credit
• Transfer Pricing
• Double Dips

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Specialty Services (continued)

• Due Diligence
• Review tax filings/documentation for potential
  undisclosed liabilities
• Federal and state income taxes
• Payroll taxes
• Sales taxes
• ERISA/ DOL Exposure
• Prepare report documenting
• Findings
• Exposure

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Specialty Services (continued)

• Spin-Off Transactions PLRs Restricted
• Tax View Letter to Provide Comfort on
• Business Purpose
• Device Restriction
• Morris Trust Provisions

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Creative Planning

• Transaction Analysis
• Acquisition Cost Study
• ESOP Planning

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Creative Planning (continued)

• Net Operating Losses
• Section 382 Studies
• Planning Around 382
• Releasing SRLY Losses
• Built-in-Gains

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Creative Planning (continued)

• Bankruptcy Planning
• COD Issues
• Preservation of NOLS
• - Section 382(l)(5)
• - Section 382(l)(6)

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Creative Planning (continued)

• Use of Flow Through Entities
• S Corporations
• Partnerships
• LLCs
• Use of Disregarded Entities
• QSubs
• Single Member LLCs

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Creative Planning (continued)

• Structuring Buyouts
• Entire Company, Subsidiary or Division
• Key Acquisition Issues
• Debt Financing Issues
• Exit Strategies
• Structuring IPO
• Sale of VC Financed Portfolio Company

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Questions?
James J. Calla, Executive Vice President Capital
Markets Group Sovereign Bank 1500 Market
StreetCentre Square - ConcourseMailcode
 20-210-CPCPhiladelphia, PA 19102phone
267-256-2825fax [phone]jcalla_at_sovereignban
k.com
Gordon Metz, Managing Director Capital Markets
Group Sovereign Bank 7 Coe Farm Road Brookside,
NJ 07926 [phone] gmetz_at_sovereignbank.com
Randy Schwartzman, Partner BDO Seidman, LLP 401
Broadhollow Rd Melville, NY 11747 [phone] Rs
chwartzman_at_bdo.com
Richard Rose, Partner Buchanan Ingersoll, PC 301
Grant Street Pittsburgh, PA 15219 [phone] R
oserd_at_bipc.com