ESOP - Tricom University



ESOP

Tricom Management, Inc,

October 20, 2004

Summary of Discussion

Tricom Management team members met at the Fairfield Inn by Marriott in Anaheim Hills, California on October 20, 2004 to discuss the ESOP with Marc Landau of the Berkley Group. The meeting convened at approximately 1:15 PM. The following team members were in attendance:

Joseph Rieckhoff, PSTC Sandra Herrejon, PI Katie Kraynak, PI

Therese Grybow, SDCE Yolanda De Leon, TRICOM Bill Johnson, PI

Herlie Helterline, TRICOM Brian Heller, TRS Mary Garcia, PSTC

Lisa Martin, TRICOM Dina Fischer, TRICOM Imelda Ibarra, PSTC

Enedelia Tello, PSTC Angelica Gonzalez, PSTC Maria Munoz, PSTC

Edelmira Madrigal, PSTC Silvia Almodovar, PSTC Albert Avelar, PSTC

Pam Reynier, PSTC Ellen Levering , TRICOM Thomas Jay,TRICOM

Ben Castaneda, TRICOM Jim Stillinger, TRICOM Chris Moscarella, PI

Tricia Deschamps, TRICOM Donna Palamara, TRICOM Monique La Cour, KCOA

Tana Adams, TRICOM Jesse Valenzuela, TRICOM Juan Guzman, Jr., PI

Alexandra Magana, TRICOM Nhan Truong, TRICOM Jeannetta Dao, PSTC

Carol Kent-Jeffreys, TRICOM Gloria Purcell, TRS Noah Arias, TRICOM

Bill McCarthy, SDV Eric Larson, CIS Brian Heller, TRS

Woody Cary, TRICOM Marc Landau, BERKLEY

• TRICOM= Tricom

• TRS= Tricom Realty Service

• PI= Platinum Interchange

• PSTC= Palm Springs Tennis Club

• SDCE= San Diego Country Estates

• KCOA= Kingsbury Crossing

• SDV= Sun Dunes Villas

• CIS= Channel Island Shores

• BW= Blue Whale

• SLL= Snow Lake Lodge

• MTR= Magic Tree Resort

• VENT= Ventura

• JC= Jockey Club

• AMV= Aquamarine Villas

Welcome Marc Landau

Following introductions, Woody introduced Marc Landau, Vice President and CFO of the Berkley Group. Mr. Landau thanked the team members for attending the meeting. He has been with the Berkley Group for a little over fifteen years. There are six members on the Berkley Group Board of Directors: Rebecca Foster, President; Marc Landau, V.P/CFO; J.P. Ottino, VP Corporate Development; Bruce Polansky, Senior VP Sales; Larry Hierholzer VP Marketing; and Jim Lambert, founder of the Berkley Group.

History of the ESOP

The ESOP started in 1994 when Mr. Lambert decided to come up with an exit strategy for the company and contemplated how best to unload his stock. After an analysis of his options, including selling to another company, selling to the employees, or going public, Mr. Lambert decided the best option was to sell to the employees. The employees own 95% of the stock of the Berkley Group. The Berkley Group is the parent company, which is also an operating, marketing, and management company that has two shareholders. The two shareholders are the ESOP and Mr. Lambert, who is a 5% shareholder.

Your ESOP

The way the ESOP works is the day you start working for the company, or the date that the Berkley Group acquired Tricom Management on January 1, 2004, you are eligible for contributions to the ESOP. The contributions are determined by a variety of figures. There was debt incurred to buy the stock and other contributions we have to make to buy stock back from people who have the left the company. We contribute anywhere from 2% of your pay up to 25% of your pay. The percentage is universal across the board for all employees.

The earlier you started with the company impacts your vesting. The ESOP works on a calendar year. The way you receive vested credit is to work 1,000 hours for that calendar year. The 1,000 hours, or any amount over 1,000, equals one vesting year credit. After three years of working 1,000 hours, you are 20% vested. That means you now own 20% of what is in your ESOP account. If you should leave before your three year time period, your stock becomes forfeiture and is reallocated to everyone that stays with the company. After working full time for four years with the company you are 40% vested; after five years you are 60% vested; after six you are 80% vested; and after seven years you are 100% vested. You still make contributions to the ESOP after seven years, but you cannot be more than 100% vested. If you work less than 1,000 hours for a calendar year, you will not receive a year’s vesting credit, but your contributions will be set aside for you.

Questions and Answers

Q: If every three months under the 401K participation we get a statement saying how

much money is in that account, do we get anything from ESOP?

A: You will get an ESOP statement once a year. They typically come out between

June and September of the following year. So if year-end is December 31st,

somewhere between June and September of the following year you will receive

your statement showing your balance and activity for the previous year.

Q: I don’t quite follow the vesting percentages (i.e., 80%, 100%). How much can I

get and when can I get it?

A: Let’s say you make $10,000 a year. The company decides it is going to put away

20%. So the company makes a $2,000 contribution into your account for that

year. That $2,000 goes to pay down the debt that was incurred with the purchase of the stock, and to buy stock back from people who have left the company. That might equate to $1,200 of actual stock value purchased in the current year. So if you have a $1,200 stock value in the year 2004, your statement will say you have 10 shares of stock worth $120 a share. You have $1,200 value in your account, but your vested balance is 0%. So if you left tomorrow, you are not entitled to any of that money because you have not been here long enough to have any vesting. After the 3rd year, you are 20% vested. So you are now 20% vested in that $1,200 stock value. If you left tomorrow, you are entitled to $240 of that $1,200. Let me caveat that by saying that when you cash out and get your payment, it us based on the stock value at that time, not the stock value on your last statement. If you leave the company by death, disability, or retirement, your first installment of typically five installments will begin one year after that event occurs. If you retire before retirement age, you will wait five years before your distributions start and they will be paid out over five years.

Q: Are these payments protected against tax liability?

A: You can roll these funds over into a qualified retirement plan and defer the

tax liability. It is similar to the 401K. If you cash out your 401K and took the

cash today before your retirement age , you are going to be taxed on that at your current tax rate plus a 10% penalty. This works the same way. If you roll the ESOP cash distributions over, it is the same as any other rollover of a retirement account.

Q: Do you invest the stock in a conservative placement?

A: We do not invest the stock per se. The ESOP owns company stock. That is all it

owns. It does not have cash in the bank that it turns around and invests in CDs

or in other stocks. Like any other stock, you can own IBM and in ten years it `could be worthless. You have the same risk as any other other stockholder. The difference is that you have a lot more control and impact over what happens to this company than someone who holds 100 shares of IBM. The employees themselves can have a very positive impact on the performance of their stock. But there is definitely a risk in an ESOP.

Q: Since we no longer make contributions to a 401K, can we make contributions to

an IRA?

A: You would need to talk to your tax accountant. Every individual’s circumstances

is different. Your W2s will be marked as being a participant in a qualified retirement plan.

Q: So let’s say I’ve been employed for 7 years and I am 100% invested and I leave

the company, but I am not retiring. I now start working for a company that has a

401K. Can I roll the whole value into another retirement package after I’ve left?

Or can I only be paid out from the ESOP over a five-year period in five installments?

A: It is over a five-year period in five installments. The only time you will get a

lump sum distribution is if your account balance is less than $5,000.

Q: So would they qualify to roll over each installment into another retirement

package?

A: Definitely. The main thing is making sure the company has your address and

knows where to find you so they can send you your distribution. When you are

ready for your distribution, you will be notified of your options. You will then notify us where you want those funds distributed.

Q: You mentioned that the contributions can be between 2-20%. For 2003, what was the contribution?

A: I believe it was about 18%. Historically, we have contributed 20-25%. A lot of

that is determined by our debt service and what we do to pay down the debt on our ESOP loan. We borrowed money to buy the stock. We have to pay that

money back. So depending on how that loan is going drives part of our

calculation. The other factor is how much we buy back from people who have

left the company. Another way you can receive money from the program is if you

have worked for the company for 10 years and you are at least 55 years old, you

are eligible to take out up to 25% of the value of your account at that point in

time. Over the next four years, you can take out another 25% of what is put away in those years. And at 60, you can take out another 25% of the whole value. This allows you to further diversify as you get closer to retirement age so not all your eggs are in one basket.

Q: I am 64 years old. If I work for three years (until 2006) so that I am 20% vested, and then work part time, am I required to work a certain number of years to continue to be vested?

A: You have to work at least 1,000 hours. Now, one caveat to that is, once you hit 65 and you are actively employed, you are automatically 100% vested.

Q: (en masse) – Wow! Say that again?

A: At age 65, if you are actively employed you are automatically 100% vested. Now, you have to retire to start getting your benefits. Also, if you are permanently disabled or die, you become 100% vested and your account gets paid out without the waiting period.

Q: Okay, so next year when I am 65, I will be 100% vested. Will you start

distributing the funds to me?

A: No. Not until you stop working. Or, until you hit age 70 ½. At this time you

would be notified that you are eligible to receive “x” amount of dollars as a

distribution, even though you are still working. If you retire at age 65, your five year waiting period goes away.

Q: I don’t really understand where this stock comes from. Is there an unlimited or a

finite amount of stock? Please explain to me how the stock gets created to be

given away.

A: Good question. The company was previously 100% owned by Jim Lambert. He

owned X number of shares. Those shares are what he is selling to the Plan. The

shares are recycled. We have the shares we bought from him on the initial purchase. Let’s say we bought 100% of his 100 shares of stock. We have those 100 shares that we start with. Those shares now are in everybody’s account. In theory, if nobody ever left the company, once those 100 shares are allocated, it is done. The reality is that people do leave the company all the time, and so we are recycling the stock. The ESOP is totally employer contribution, not employee contribution.

Q: So, depending on how many employees leave or retire, there is a varying number

of shares to be reallocated to the existing team member base?

A: Yes. If you leave before you are 100% vested, that unvested portion gets put back

into that pool and is reallocated.

Q: Are there any disadvantages to an ESOP?

A: An ESOP has the same risks as any stock. However, we are a governed by resolutions that dictate how the plan is operated. I am not only a Board member, but also one of two trustees of this plan. The other trustee is Rebecca Foster. We have a great deal of fiduciary responsibility in this position. We are also participants in the plan, just as you are. We do not get any favorable treatment. The trustees have hired independent counsel to make sure we are doing the right thing. This is separate from the counsel hired by the company. Whenever we have a question, we go to our attorney to ask for guidance on the correct way to handle the situation. We do not deal arbitrarily on the payment of accounts. All employees are treated the same across the board.

Q: Can an ESOP sell its stock? Would the Board of Directors make that decision?

A: If we were to ever sell the company, it would be put out to all the employees for

a vote. We are all shareholders. If the Board recommends a deal, it would be because we think it is something good for everybody. We will not get anything different than anybody else. My account is the same as anybody else’s. There is no preferential treatment for Board members or management. So if we were to sell the company, it would be to everyone’s benefit. If the purchasing company decides to keep the plan, it would go on unchanged except for new management. If the purchasing company decides to terminate the plan, immediately everybody becomes 100% vested and you get paid out whatever is in your plan. We would only sell the company for cash, and not for another company’s stock.

Q: So it is possible for an ESOP to go on the stock exchange?

A: There are some public companies that have ESOP plans. But we would be acquired by another company in that case.

Q: Is the Berkley Group considered public owned or privately owned?

A: Private. It is not traded. It is not on the stock exchange. That is why our stock is valued only once a year.

Q: Companies hopefully make a profit. What happens to the profits that Berkley makes? They don’t go into the ESOP because it is stock based.

A: We are one of the lowest leveraged companies in the timeshare business. We pay down our debt. We buy the Tricom’s of the world.

Q: You are using your cash for growth? No bonuses or anything like that?

A: There are bonus structures in place for sales people. And part of management’s compensation package is driven on the profitability of the company. We have not changed anything post-ESOP that we didn’t used to do pre-ESOP.

Q: Let me make sure I understand. The first batch of stock that we bought for the ESOP was at $10.00 a share. That value, as far as ESOP, never changes. In other words, anytime you buy at that pool, you are going to buy at $10.00?

A: No. The way that pool is set up is $10.00 per share. Once that pool is distributed the first time, that pool no longer exists. It now goes into the current market recycling pool. For example, we bought $2,000 worth of stock at $60 per share. The stock is now worth $120 per share. That $2,000 worth of stock is now worth $4,000.

Q: What is the valuation of the current stock?

A: It is a three-fold approach. We get our audits done by our external auditors. We do internal projections for the upcoming three years. We take that information and give it to an independent appraisal firm in D.C. They in turn value that by looking at our growth, or projected growth, how we have done in relation to our projections in the past, and the current market situations.

Q: Will our annual statements show what the stock will be worth in that current calendar year?

A: The statements will show your balance at the beginning of the year, contributions made during the year, how much stock was purchased in both the number of shares and the dollar amount put way per year, and at the bottom it will summarize your vesting, your value, and your vested value.

Q: So instead of looking at the dollar amount on your statement, you should be looking at the number of shares, because you will be paid out based on the dollar amount at the time, not what is reflected in your annual statement?

A: Yes. You will be paid out according to the value of the stock at each disbursement period, not the value of the stock at the time of retirement.

Q: How do you fund and how do you forecast the amount you will need each year for payouts?

A: We forecast on two different analyses. The pool is split up between terminated employees and active employees. Terminated employees we can kind of gauge based on current dollars. With active employees, we look and see who is at or near retirement age. That is how we forecast out three to five years to cover those payouts.

Q: Can you designate a beneficiary just like with any other retirement plan?

A: Absolutely. We will get beneficiary forms out to you guys. You have to pick a beneficiary. If you don’t, it will get tied up in probate. If you are married, your spouse must be your beneficiary. If they are anything less than a 100% beneficiary, they have to sign a beneficiary form and it has to be notarized.

Q: Is there any potential for individual liability on the part of the employee?

A: No more than usual. The ESOP is actually a trust.

Q: As stockholders, will we have access to the year-end financial statements?

A: (Please put your answer here). No. Since we are a privately held (not publicly traded) Company, that information is kept strictly confidential. You can imagine how much our competitors would like to see our financial status.

Q: It is a privately owned company and so you do not want to disclose the financial

statements; however, are [ERISA] going to come in to oversee the books to see

that there is no funny business?

A: ERISA governs, and the appraisers, accountants, and legal counsel are independent of the company.

Q: What does the acronym ESOP stand for?

A: Employee Stock Ownership Plan.

Q: If you are 100% vested, do you get the money after you quit?

A: Again, if you quit and you are not of retirement age, you have a five-year waiting period after the year that you leave. And you will receive five payments after that date.

Q: What are the qualifications for a corporation to even apply for an ESOP?

A: It is a pretty elaborate plan that is usually set up with closely held companies.

Q: What determines the percent we are going to get each year?

A: Basically debt service and profitability,

Q: Is there ever a situation where there would be 0% contribution?

A: No. The plans call for a minimum of 2% as it sits right now. The reality is that if and when all the stock is ultimately distributed,

we will get rid of one of the plans, and the minimum will go down to 1%.

Q: So the worst-case scenario, we will still have 1% contribution?

A: Yes.

Q: Everyone will start out at a different level based on their salary, so it is still a percent of your salary that determines your shares. So what does that percentage mean if it is not the same for everybody?

A: The individual’s salary will determine the number of shares. But it is the same

percentage across the board.

Q: Is it strictly based on salary?

A: Yes. It is equivalent to doing a dividend.

Q; What is the value of the stock as of December 2003?

A: I want to say it is $187 per share.

Q: What was it four years ago?

A: 1994 was the benchmark. It was $10.00 per share.

Q: Have you ever had a stock split?

A: No.

Q: When would you do a stock split?

A: If you wanted more shares to expand the number of share bases you had to create

an additional pool of stock.

Woody Cary and thanked Marc Landau for his time, and encouraged the team members who still have questions to talk to Dina, Jay, Jim, or Lisa, who all have a good understanding of the ESOP program.

The meeting concluded at 2:50 PM.

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