Question 1

Who are Nypro's customers? What are their needs?

Question 2

Besides its ESOP, what are Nypro's strengths and weaknesses? How do these strengths and weaknesses affect its ability to meet its customers' needs and maximize value?

Question3

What is an employee stock ownership plan (ESOP)? Evaluate the advantages and disadvantages of an ESOP using Nypro's plan as an example.

Question 4

Explain the basic structure of a leveraged ESOP. How could such an ESOP be used as a takeover defense?

9B14N028 NYPRO INC. (A): THE EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) David T.A. Wesley, Shelia Puffer and Olubunmi Faleye wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of Ivey Publishing, the exclusive representative of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2014, Northeastern University, D'Amore-McKim School of Business Version: 2014-09-10 In early 2012, as Ted Lapres, president and chief executive officer (CEO) of Nypro Inc. (Nypro), headquartered in Clinton, Massachusetts, considered his company's future, he became increasingly concerned that another market downturn might result in a liquidity crisis. During the 2008 recession, a small percentage of the company's employee shareholders had decided to cash in their shares, which the company was required to repurchase. Although the stock redemptions were draining the company of the funds needed to pursue valuable market opportunities, Nypro somehow still managed to outperform many of its competitors. However, Lapres knew that the company's current trajectory was unsustainable. Another market downturn could prompt an exodus of employees, which would leave the company without operating funds. \"Our banks are still supportive of us,\" Lapres explained. \"But they are beginning to talk a little more about where this is going to go.\" BACKGROUND Founded in 1955 in Clinton 1 under the name Nylon Products, Inc., Nypro was a global leader in manufactured precision plastic products. In 1962, Gordon Lankton, a former DuPont engineer who had recently returned from a year-long motorcycle expedition across Asia, saw a classified advertisement in the newspaper seeking a buyer for Nypro. 2 Although Lankton did not have the nearly $1 million needed to purchase the company, he secured a loan through an acquaintance at State Street Bank. The company flourished under Lankton, who preferred to spend his time on the shop floor rather than in his corporate office. 1 Clinton is a mill town located 40 miles west of Boston. In 2012, its population was approximately 16,000. Gordon Lankton was also founder of the Russian Icon Museum. Located next to Nypro Inc.'s headquarters in Clinton, MA, the museum contained 600 pieces of art, mostly of Russian origin. \"The mission of the Museum of Russian Icons is to enhance relations between Russia and the United States through the medium of art, especially Russian icons.\" See http://museumofrussianicons.org/, accessed March 7, 2014. 2 Page 2 9B14N028 Lankton quickly grew the company from a local injection molding plant to a global leader in precision plastics, all the while ensuring that Nypro's employees shared in the fruits of the company's success. Lapres explained: There are few people who you come across in the business world who stand for the things he stood for rewarding employees, a total focus on the customer, always driving innovation, always thinking about what is the next development that is going to happen. Wherever he went, he commanded the awe, respect and love of the employees. Nypro's main competency was in contract manufacturing of high-end precision plastics. Early in its history, the company made a strategic decision to focus on a few large customers and to reject orders from many smaller customers. Nypro worked closely with its customers both in the development and manufacture of new products. Because product development and production cycles were much longer, new product launches were critical to the company's long-term success. It also meant that the end of a product cycle had a greater impact on the company. Fortunately, Nypro's rate of growth was sufficient to mitigate any negative impact end-of-life products might have on revenues. In some cases, it forced the company to explore new lines of business. For instance, in the 1970s and early 1980s, 70 per cent of the company's revenue came from the production of price tags for a single customer. When that product line declined in the mid-1980s, the impact was significant, leading some to question Nypro's continued viability. The potential demise was halted when Nypro secured new opportunities producing precision plastics for two large pharmaceutical companies. Soon after, health care products became a leading engine of sustainable growth. Health care consumables and diagnostic equipment required absolute levels of precision and quality control. As a result, labour and related costs were less important than specialized competency, allowing manufacturing of health care products to continue in high cost regions, such as North America and Europe. Eventually, Nypro grew to become a global leader in precision medical device manufacturing. The research and development process for health care products averaged between four and five years, which was considerably longer than most plastic molded products. However, product life cycles were also much longer, lasting between eight and 10 years. As such, health care manufacturing was significantly less volatile than other plastics, even during economic downturns. Nypro's growing reputation in health care products attracted computer and electronics firms that needed specialized precision manufacturing for emerging products, such as inkjet cartridges. 3 Because electronics firms required production to be located near their factories, Nypro opened new plants in the western United States, Ireland, Singapore, Puerto Rico and China. The rapid market growth of personal computers and cellular phones in the 1990s propelled the company's consumer and electronics (C&E) business much faster than its other product lines, including medical devices. However, consumer product life cycles were far shorter than the company's traditional product lines, exposing Nypro to increased market risk. In the mid-2000s, Nypro suddenly found itself unable to maintain its competitive advantage due to declining costs by overseas competitors. \"All of that market moved to Asia or Mexico or Eastern Europe,\" explained Lapres. During this decline, the company's 3 Although inkjet and laser printing technology had existed since the 1970s, mass production did not begin until the 1980s. Declining prices eventually allowed inkjet and laser printers to displace dot matrix printers as the ubiquitous printer of choice for home and small business users. Page 3 9B14N028 pension liabilities (see below) limited its ability to close idle plants in response to market shifts. Instead, Nypro retooled affected plants for other purposes. A strategic decision was then made to enter the packaging sector, which proved very different from health care and electronics. Although packaging was a much larger market, it also required less precision, and therefore Nypro faced a large number of small incumbents. Yet, most of these competitors were unsophisticated, allowing Nypro to adapt its advanced technology to displace existing players. This competitive advantage could be seen in the company's in-mold labeling (IML) technology that it created to make designs on plastic cellular phone casings and later adapted these to packaging products with a visual appeal that far exceeded existing products. By 2006, the packaging business had become sufficiently viable to warrant a corporate restructuring. Nypro moved away from its centralized matrix structure to create global strategic business units (SBUs) centered on packaging, health care and C&E. \"You wanted your medical folks to eat, breathe and drink that market,\" explained Lapres. Their strategies, while still based in plastics precision, recognized that the market needed new things, how to bring products to market, the language you used, the regulatory environment slow, deliberate, and long term. The C&E market was more Asia based fast (you had to build tools in weeks, you had to bring a new cell phone product in months and you had to be ready to ramp it up immediately), whereas health care, you may need three years or five years to validate a product through the FDA [the U.S. Food and Drug Administration]. Then, when you got it, it went for 10 years. By 2009, the restructuring of Nypro was complete with separate boards of directors and advisory boards for each SBU. In 2012, Nypro had 20 manufacturing plants in 10 countries generating annual revenues in excess of $1.2 billion (see Exhibits 1 to 3). Revenue contribution from health care, C&E and packaging was 45 per cent, 32 per cent, and 23 per cent, respectively. The Stock Bonus Plan From 1968 to 1969, Lankton owned 100 per cent of the company. Then in 1969, he formed a stock bonus plan and began appointing five to 10 stockholders per year based on pay rate, years of service and performance. The bonus plan was open to all employees from cleaning staff to senior management. Lankton's reasoning was simple: I had lived with the downtrodden people of the world for that year on a motorcycle. I liked the people in the molding plant, because they were in somewhat of a similar position. I started an arrangement to give stock to people that were good and it made no difference what their job was, just that they were outstanding people. Over the next 40 years, the number of bonus plan shareholders grew to nearly 300 people globally. By 1999, the company was 30 per cent employee-owned through bonus allocations. Jack McCabe, Nypro's vice-president of mergers and acquisitions, believed that the stock bonus plan improved overall performance. Page 4 9B14N028 When he would give the profit sharing presentation, he would say, \"Nypro Puerto Rico has had great success, but they are struggling right now. They need new sales.\" He would then appeal to everybody in the room. \"Who can help get some sales down in Puerto Rico?\" And everybody couldn't wait to figure out how you could go do it and went running to Gordon saying, \"I've got a new customer for Puerto Rico.\" And sometimes the plant manager would say, \"If I can get some new robots or if I can phase out these old molding machines and get new machines, I could cut the cycle time down and I could get a better yield.\" That was how he drove it. The Employee Stock Ownership Plan In 1998, Lankton extended employee ownership by formally supporting the establishment of an employee stock ownership plan (ESOP). At the time, he believed that the plan would help increase productivity and ensure the long-term viability of the company. An ESOP was a defined contribution plan that gave employees ownership of their company through the distribution of company stocks. ESOPs varied in structure and size. For instance, some companies were wholly owned by employees, while others limited ESOP participation to as low as 20 per cent of total stock equity. Lankton viewed Nypro's ESOP as \"a reaffirmation of incentivizing and benefiting the employees.\" He said, \"They're the ones who made this company great, so they should get the benefits of it.\" According to the National Center for Employee Ownership (NCEO), ESOPs offered a number of benefits to both companies and employees. ESOP companies experienced higher growth and better performance, while employees enjoyed higher wages and significantly better funded retirement plans.4 Moreover, an ESOP could be used as a form of succession planning that would allow Lankton to transfer ownership to the employees. \"Gordon never had his family involved in the business,\" explained Lapres. It was a privately run business, but it wasn't a family business. Without family, it is harder to decide what to do next. A few people mentioned ESOPs, but they said you have to be 100 per cent ESOP and he didn't want to give up the employee stock bonus plan. He was weighing different ideas and none felt right to him, particularly because he didn't want to go public. He didn't want to face the quarterly stock market and he didn't have a high regard for Wall Street and investment bankers. But he also didn't want to sell off to a large company. He thought you would lose the nimbleness and speed that an entrepreneurial company needs in contract manufacturing. You have to make fast decisions, you have to know your customers and you never want to have a bureaucracy built into your company. In 1997, the company's audit and legal firms offered a strategy that maintained the stock bonus plan and created an ESOP. However, the plan had a limitation. One of the main benefits of an ESOP was the ability to form a tax-exempt \"S corporation,\" which would have allowed Nypro to avoid most U.S. taxes. 5 4 The National Center for Employee Ownership was a non-profit organization that served as a clearinghouse for information on ESOPs and other employee compensation programs. 5 \"Originally, S corporations could not have ESOPs because a nonprofit trust (like an ESOP trust, which is the actual owner of ESOP-held stock) could not be an S corporation shareholder. In legislation passed in 1996 and 1997, however, Congress allowed ESOPs and other employee benefit trusts to own stock in an S corporation, effective January 1, 1998. The law provides that any profits attributable to the ESOP's ownership of stock in an S corporation are not subject to federal income tax; most states follow this provision in their own tax laws.\" National Center for Employee Ownership, \"ESOPs in S Corporations,\" www.nceo.org/articles/esops-s-corporations, accessed January 8, 2014. Page 5 9B14N028 However, an S corporation must be nearly 100 per cent ESOP owned (see Exhibit 4), and Lankton did not want to abandon the stock bonus plan. 6 He decided to set up an ESOP and forgo the tax benefits. Moreover, he instructed the auditors to value the company on a post-transaction basis after all the debt was taken on. This valuation method allowed the ESOP trustee to purchase Lankton's shares for the lowest possible price. Lankton's shares were acquired principally by borrowing money from institutional investors to create what is known as a leveraged ESOP. When the transaction was completed, the ESOP Trust held 70 per cent of the company's shares and 30 per cent remained in the stock bonus plan. 7 The ESOP was also given majority voting rights, and the company's \"articles of organization\" required a shareholder vote of 85 per cent before any major corporate event, such as a sale or merger, could be approved. 8 Each year, employees were allocated common stock and a lesser amount of preferred stock based on the respective year's earnings. 9 The new ownership structure made Nypro one of the largest ESOP-owned companies in the United States. 10 Although the company's board of directors supported the ESOP, a few worried about longer term implications. One board member recalled how Bain Capital created an ESOP in the 1980s, but the plan was heavily leveraged, and when revenues declined, it forced the firm into bankruptcy. 11 Employees, on the other hand, unanimously supported the idea, and for many \"it just strengthened the awe, respect and love the people had for Gordon,\" said Lapres. At the time, I was the corporate controller and I was working closely with our CFO [chief financial officer] on the whole structure of the deal. [The board member who] was probably the most knowledgeable about ESOPs thought it was good but also said it's going to create liabilities down the road in the form of purchase obligations, and you really need to know what that means. We did a number of different projections, but given the relatively low value and our relatively underleveraged position at the time, most projections predicted the ESOP could run for a considerable period of time without impeding our ability to invest in the business, which was the case. However, the ESOP ran into difficulties almost immediately. As a privately held company, no market existed where employees could value or sell their shares. Instead, shares were valued by an independent firm once a year, after which an employee who retired, or otherwise left the company, could sell the shares back to Nypro. Some employees, if they thought the price of the stock was going to go down, might decide to leave Nypro before the next annual valuation in order to cash in their shares at the highest possible value. \"The accountants began to raise issues about that, plus we were nervous that everything was riding on whether the stock was going to go up or down on June 30,\" explained Lapres. 6 An S corporation transfers any tax liability to shareholders, who are required to pay income taxes on any funds withdrawn, typically in the form of retirement annuities. 7 Technically, Lankton was the ESOP Trustee. However, because he was also chairman of the board, under ERISA regulations, he was required to appoint an independent fiduciary to act on his behalf, which was State Street Bank (Boston). As such, for the purposes of the case study, State Street Bank is described as the de facto trustee. 8 Specifically, \"Nypro's articles of organization require the consent of at least 85 per cent of the outstanding shares of Nypro Common Stock and Nypro Series A Preferred Stock, voting as a single class, to approve any transaction which results in the acquisition of 50 per cent or more of outstanding Nypro Common Stock by a single entity.\" . 9 The preferred stock portion included a small dividend. 10 The largest was Publix Supermarkets with 145,000 employees. National Center for Employee Ownership, \"ESOP (Employee Stock Ownership Plan) Facts,\" www.esop.org/, accessed November 1, 2013. 11 A brief summary of the Bain ESOP can be found in W. Kiechel, Lords of Strategy: The Secret Intellectual History of the New Corporate World, Harvard Business Review Press, Boston, 2013, pp. 224-225. Page 6 9B14N028 You want to relieve the pressure a little, so we moved to twice a year valuation. We also introduced ways for employees to sell up to 10 per cent of their stock if they had been with us for a long enough period of time, just to release the pressure valve if you will. So that employees weren't faced with if I leave I get all my stock, if I stay I am rolling the dice for another year. We had times when a really important mid-50s engineer just said, \"I am not sure the stock is going to continue going up and I've got so much gained here that I have to lock it in.\" So he or she would leave. It was more the ones who had gained from the stock bonus program over the years, because in the early years of the ESOP there wasn't as much that accrued to you from the ESOP and it was more spread over 2,000 people. But before long, ESOP employees began thinking this way too. In 2003, an ESOP employee may have accumulated $100,000 in an ESOP, whereas a stock bonus plan person who had been receiving shares for 15 years might have $100,000 in the ESOP and stock bonus shares worth $2 million. So that 50-something engineer who has seen his stock go up and up would decide to lock it in by leaving and may get some consulting work with Nypro. By 2003, a Nypro share was worth approximately $1,000 each, compared to $297 when the ESOP was created. Meanwhile, ESOP contributions grew to as much as 14 per cent of an employee's base pay, compared to a predicted 6 to 8 per cent. 12 As company profits increased each year through 2007, more employees began to worry about the risk of a potential market decline. \"Everybody looks at the stock market and the turbulence, and wonders, 'how can I lock this thing in?'\" recalled McCabe. \"Really, it was a golden handcuff, because you had to leave the company to get it.\" An accounting manager who had been with the company for 17 years saw the impact first hand. At first, \"it was a big retention tool and a very positive thing from an employee relations perspective,\" he said. \"But people's accounts grew at such a rapid rate that you start to lose people, because they say, 'I have too much at risk to stay.' It was the exact opposite of what you want.\" Nypro decided to modify the plan to reduce the number of shares distributed each year. However, the company's ability to do this was restricted by the Employee Retirement Income Security Act of 1974 (ERISA), a \"federal law that sets minimum standards for pension plans in private industry.\" According to the U.S. Department of Labor: ERISA does not require any employer to establish a pension plan. It only requires that those who establish plans must meet certain minimum standards. The law generally does not specify how much money a participant must be paid as a benefit. ERISA requires plans to regularly provide participants with information about the plan including information about plan features and funding; sets minimum standards for participation, vesting, benefit accrual and funding; requires accountability of plan fiduciaries; and gives participants the right to sue for benefits and breaches of fiduciary duty. 13 Nypro's fiduciary duty required it to secure support from employees before making major changes to the plan or the company's ownership structure. In exchange for their support, Nypro allowed shareholders to diversify their holdings by as much as 10 per cent a year, up to 30 per cent for longer term employees with larger holdings. This was done by selling the shares back to the company and converting the 12 The annual allocation was based on the number of shares. Therefore, when the stock price went up, the value of the shares allocated to each employee also went up. This had no impact on the company's cash flow until the shares were redeemed. 13 U.S. Department of Labor, \"Overview of the Employee Retirement Income Security Act,\" www.dol.gov/compliance/laws/comp-erisa.htm, accessed January 6, 2014. Page 7 9B14N028 proceeds into other retirement vehicles, such as mutual funds. The vesting period was also reduced from five years to three years. \"The explanation became important to get people to accept that it was reasonable,\" noted one employee. People have questions, they have worries, they have concerns, but we trusted that Gordon and the management team were doing what was in our best interest. And we saw the results, whether it was accounts growing or the continued prosperity of the company. It led us to believe that our trust was well placed. The other thing we saw was that realistically, you can't pay that much money out. It would kill the company. People here understand that we are all in it together. You have to explain it, sometimes more than once, but in the end, we were pretty accepting of it. CRISIS AND GROWTH The advent of the 2008 economic crisis created enough volatility for some employees to again question the longer term value of their shares. Net income declined significantly starting in 2007, and more employees left the company or retired, cashing in their shares. Increasingly, cash disbursements and cashon-hand requirements associated with the ESOP severely limited Nypro's ability to invest in new plants and equipment, secure bank financing and acquire other companies. In addition, an ESOP rule limiting non-employee stock ownership to 10 per cent prevented Nypro from raising equity capital. \"Paradoxically, the success of our employee ownership structure put us in a position where we didn't have the resources to fund all the great opportunities we have in these markets,\" Lapres observed.14 Eventually, equity could not be replenished at a rate that kept up with stock redemptions (see Exhibit 5). Although revenues improved by continued market growth in health care and packaging and significantly lower borrowing costs, 15 the steep declines of two major electronics customers that accounted for as much as 26 per cent of Nypro sales only created further uncertainty. \"We need to bring more stability and predictability and less volatility to this business or we're never going to survive,\" Lapres told the company's Board of Directors. \"We can't make this ESOP work.\" An ESOP can only grow at a fairly controlled rate. If we can guarantee steady single digit growth, strong cash flow and predictable redemptions, it can go a pretty long time. But whenever there's lumpiness, a surge in growth or big drop off in growth either one of those puts a big strain on the company. At the same time, C&E companies were no longer content to outsource plastics manufacturing to specialized companies like Nypro. Apple, Samsung and Nokia, for instance, wanted complete solutions that included metal fabrication, electronics and plastics. As such, large diverse electronics manufacturers such as Foxconn, Flextronics and Jabil were better positioned to take advantage of their customers' changing supply chain strategies. While recognizing these challenges, Nypro found it difficult to move away from C&E, which continued to account for a large portion of overall revenues. 14 Bill Bregar, \"Nypro Says Sale to Jabil Will Facilitate Growth,\" Plastics News, February 4, 2013, www.plasticsnews.com/article/20130204/NEWS/130209984ypro-says-sale-to-jabil-will-facilitate-growth, accessed October 3, 2013. 15 In 2008, the U.S. Federal Reserve reduced short-term interest rates to 0.25 per cent from 5.0 per cent in 2007. See U.S. Federal Reserve, \"Why Are Interest Rates Being Kept at a Low Level?,\" www.federalreserve.gov/faqs/money_12849.htm, accessed January 7, 2014. Page 8 9B14N028 As ESOP redemptions accelerated, Nypro's ability to respond to market changes became more limited. Although the company tried to diversify its supply chain to meet the needs of its larger C&E customers, the executive team worried that capital needs could not be met if ESOP redemptions continued to accelerate. By 2012, more than 60 per cent of the ESOP had been allocated to employees; cumulative redemptions for the prior decade exceeded $300 million and repurchase obligations were accelerating. \"Every time you had a major customer [decline in sales], people would get nervous and you would lose a few people,\" Lapres noted. \"It was never one big surge, but it began to increase in a cumulative way to be significant.\" We were always concerned about the liquidity. Our banks were still supportive of us. We had three refinancings along the way, including two years before this happened. But the banks were beginning to talk a little more about where this was going to go. The year we did the ESOP, our equity was really high and our debt was really low, but by this time, our equity was $100 million and our debt was $300 million. The company's bank credit was based on earnings before interest, taxes, depreciation and amortization (EBITDA), which remained strong throughout the economic crisis. Therefore, as far as the banks were concerned, Nypro continued to meet its obligations. However, the company's senior leadership knew that the financial risk was increasing and the current structure could not be maintained indefinitely. \"When you continue to project out and you make some decisions on what the stock price is going to be, what the redemptions are going to be, what the replenishment of equity is going to be and what the capital demands are, we begin to see stress in the system,\" observed McCabe. By early 2012, Nypro was experiencing the most challenging period in recent memory. Without massive capital expenditures, Asia, which had driven much of the company's recent growth in tandem with demand growth for smartphones and other small electronics devices, was increasingly viewed as a lost cause. Acquiring new customers was also not easily achieved. \"A new customer comes and says 'I'm going to give you $30 million in business,' but you've got to buy 20 molding machines and you've got to set up a new factory,\" explained Lapres. But with ESOP redemptions averaging more than $30 million per year, Nypro simply did not have the cash needed to make such investments. At this point, the company's continued viability rested almost exclusively on the health care and packaging units, which were primarily located in North America. Page 9 9B14N028 EXHIBIT 1: NYPRO INC. CONSOLIDATED BALANCE SHEET Assets Current Assets Cash and Cash equivalents Accounts and notes recievable Inventories Mold costs in excess of billings Prepaid expenses and other current assets Income taxes recievable Deferred income taxes Current assets held for sale Total current assets Investments and advancements to affiliates Deferred income taxes Other noncurrent assets Goodwill and intangible assets Net property plant and equipment Long term assets held for sale Total Assets 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 50,685 62,250 18,011 5,551 4,385 0 1,484 0 142,366 17,339 0 13,383 0 88,928 0 262,016 66,273 82,956 24,131 3,533 4,045 0 2,903 0 183,841 20,142 0 14,568 0 96,413 0 314,964 79,597 88,293 21,429 2,479 5,776 0 5,938 0 203,512 20,015 0 13,653 0 103,878 0 341,058 128,359 101,194 29,870 3,278 6,170 2,204 1,228 0 272,303 13,989 1,949 24,338 0 156,244 0 468,823 100,634 107,116 34,277 3,375 475 7,333 1,492 0 254,702 18,025 4,885 27,702 0 174,584 0 479,898 92,728 125,903 42,898 7,722 10,477 0 2,925 0 282,653 17,705 7,297 18,696 13,706 171,976 0 512,033 62,125 145,303 44,504 10,826 13,385 0 3,583 0 279,726 23,085 12,748 14,737 18,518 187,878 0 536,692 76,218 219,851 79,031 4,407 16,348 0 6,346 0 402,201 2,283 16,515 11,846 24,234 252,769 0 709,848 65,974 201,830 74,156 5,115 14,084 0 6,927 0 368,086 2,899 21,652 13,625 22,436 244,976 7,163 680,837 56,361 212,998 83,157 5,357 17,791 3,092 11,097 1,485 391,338 3,766 22,358 15,060 24,775 271,277 10,647 739,221 52,271 156,641 61,458 3,903 16,091 2,092 9,426 1,959 303,841 1,874 26,209 17,284 23,161 231,434 15,541 619,344 77,682 226,446 79,503 3,270 18,529 2,203 9,708 0 417,341 4,080 28,152 23,421 19,855 218,841 8,236 719,926 74,853 205,711 83,455 14,998 17,080 891 6,274 2,463 405,725 4,657 23,076 28,993 37,069 252,657 9,856 762,033 44,289 195,588 88,331 20,250 18,127 2,690 11,760 0 381,035 3,111 13,019 34,500 31,683 256,202 1,099 720,649 Page 10 9B14N028 EXHIBIT 1 (CONTINUED) Source: Company files. Page 11 9B14N028 EXHIBIT 2: NYPRO INC. CONSOLIDATED INCOME STATEMENT Source: Company files. Page 12 9B14N028 EXHIBIT 3: NYPRO INC. CONSOLIDATED CASH FLOW Page 13 9B14N028 EXHIBIT 3: NYPRO INC. CONSOLIDATED CASH FLOW (CONTINUED) Source: Company files. Page 14 9B14N028 EXHIBIT 4: S CORPORATION, U.S. INTERNAL REVENUE SERVICE (IRS) S corporations are corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flowthrough of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level. To qualify for S corporation status, the corporation must meet the following requirements: Be a domestic corporation Have only allowable shareholders - including individuals, certain trusts and estates and - may not include partnerships, corporations or non-resident alien shareholders Have no more than 100 shareholders* Have only one class of stock Not be an ineligible corporation (i.e., certain financial institutions, insurance companies and domestic international sales corporations). * ESOP employees do not directly hold shares and the ESOP Trustee is counted as one shareholder. Source: www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/S-Corporations, accessed January 8, 2014. Page 15 9B14N028 EXHIBIT 5: NYPRO INC. EMPLOYEE STOCK OWNERSHIP INCOME AND EXPENSE STATEMENT INCOME Contributions Total Earnings on Investments Total Interest Total Dividends 2011 2010 2009 2008 (7,369,146) 8,365,581 (15,734,727) 63,354,954 3,892,827 59,462,127 $40,575,185 $3,887,546 $36,687,639 ($21,042,177) $3,882,607 ($24,926,357) 28 11 $1,636 $12,527 39,295 41,578 $44,271 $50,805 0 $0 $0 0 0 $0 $0 (15,774,050) 59,420,538 $36,641,732 ($24,989,689) 0 0 $0 $1,573 9,222,234 9,599,190 $13,780,856 $7,884,501 7,888,325 1,103,569 230,340 7,763,829 1,626,747 208,614 $11,833,619 $1,747,988 $199,249 $5,674,250 $1,862,502 $347,749 162,602 128,755 $129,653 $283,290 56,406 63,179 $68,804 $54,897 0 0 $0 $101 11,332 16,680 $792 $9,461 (16,591,380) 53,755,764 $26,794,329 ($28,926,678) 0 0 $0 $0 707,448 127,930 $300,044 $123,059 Rents Net gain (loss) on sale of assets Total Unrealized Appreciation (depreciation) of assets Other Income EXPENSES Total Benefit Payments Interest expense Total Administrative Expenses Professional Fees Contract Administrator Fees Investment Advisory and management fees Other NET INCOME Transfers of Assets to this Plan Transfers of Assets from this Plan Source: Form 5500, Nypro Inc., www.brightscope.com/form-5500/basic-info/10538/Nypro-Inc/451075/Nypro-Inc-EmployeeStock-Ownership-Plan/, accessed October 4, 2013