1
Filer : Brown & Brown, Inc.
Subject Company : Raleigh,
Schwarz & Powell, Inc.
Commission File No : 333-67408
This communication is filed pursuant to Rules 165 and 425 promulgated under
the Securities Act of 1933, as amended
RS&P ESOP PARTICIPANTS MEETING
AUGUST 20, 2001 - 1:30 PM
DOUBLE TREE @ SEA-TAC - GRAND 1
PRESIDING - RICHARD S. DEVINE - CHAIRMAN
SUGGESTED AGENDA
o GREETINGS/INTRODUCTIONS Richard DeVine, Chairman
. Seymour Zilberstein - Consulting Fiduciaries, Inc.
Independent Fiduciary representing the ESOP
. Patricia Luscombe - Duff & Phelps
Fairness Opinion on behalf of the ESOP
. Larry Goldberg - Ludwig, Goldberg & Kuenzel
Legal Counsel representing the ESOP
. Robert Best - Knight, Vale & Gregory
Tax Counsel
. Mark Patterson - Vandeberg, Johnson & Gandara
Corporate Legal Counsel for RS&P
(Introduction of Seymour Zilberstein to moderate program)
o CONSULTING FIDUCIARIES, INC. REPORT Sy Zilberstein
o TIMING/NEXT STEPS AND INSTRUCTIONS Sy Zilberstein
o QUESTIONS/ANSWERS Participants
o TAX IMPLICATION ISSUES
. ERISA Issues Larry Goldberg - Ludwig,
Goldberg & Kuenzel
. Non-ESOP Shareholders Robert Best - Knight,
Vale & Gregory
o TAX QUESTIONS/ANSWERS Participants
o HANDOUTS
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. Consulting Fiduciaries, Inc. Report
. ESOP Tax Memo/Larry Goldberg, Goldberg & Kuenzel
. Tax Memo/Robert Best - Knight, Vale & Gregory
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BROWN & BROWN HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION A
REGISTRATION STATEMENTS, WHICH CONTAIN PROXY STATEMENTS/PROSPECTUS TO BE USED BY
RALEIGH, SCHWARZ & POWELL AND GOLDEN GATE HOLDINGS IN CONNECTION WITH THEIR
SOLICITATION OF SHAREHOLDER APPROVAL OF THE PROPOSED MERGERS, AS WELL AS OTHER
RELEVANT DOCUMENTS CONCERNING THE PROPOSED MERGERS. YOU ARE URGED TO READ THE
REGISTRATION STATEMENT AND THE PROXY STATEMENT/PROSPECTUS REGARDING THE PROPOSED
MERGERS AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE
THEY CONTAIN IMPORTANT INFORMATION REGARDING BROWN & BROWN, RALEIGH, SCHWARZ &
POWELL, GOLDEN GATE HOLDINGS, THE PROPOSED MERGERS, AND INSTRUCTIONS AS TO HOW
TO VOTE YOUR SHARES OF RALEIGH, SCHWARZ AND POWELL OR GOLDEN GATE HOLDINGS
COMMON STOCK.
YOU CAN OBTAIN A FREE COPY OF THE PROXY STATEMENTS/PROSPECTUS INCLUDED IN THE
REGISTRATION STATEMENT, AS WELL AS OTHER FILINGS CONTAINING INFORMATION ABOUT
BROWN & BROWN, AT THE SECURITIES AND EXCHANGE COMMISSION'S INTERNET SITE
(HTTP://WWW.SEC.GOV). COPIES OF THE PROXY STATEMENTS/PROSPECTUS CAN ALSO BE
OBTAINED, WITHOUT CHARGE, BY DIRECTING A REQUEST TO BROWN & BROWN, INC., ATTN:
CORPORATE SECRETARY, 401 EAST JACKSON STREET, SUITE 1700, TAMPA, FLORIDA 33602
(813-222-4100), OR TO RALEIGH, SCHWARZ & POWELL, INC., ATTN: JOHN P. FOLSOM,
1201 PACIFIC AVENUE, TENTH FLOOR, TACOMA, WA 98402 (253-396-5500).
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CONSULTING FIDUCIARIES, INC.
--------------------------------------------------------------------------------
Professional Independent Fiduciary Services Northbrook, IL
CONSULTING FIDUCIARIES, INC. REPORT
TO
ESOP PARTICIPANTS REGARDING
RALEIGH, SCHWARZ & POWELL, INC. AND GOLDEN GATE HOLDINGS, INC.
TRANSACTION WITH BROWN & BROWN, INC.
Brown & Brown, Inc. ("B&B") has made a proposal to acquire the business of
Raleigh, Schwarz & Powell, Inc. ("RSP") through a merger of Brown & Brown Inc.
of Washington, a wholly-owned subsidiary of B&B with and into RSP. B&B has also
made a proposal to acquire the business of Golden Gate Holdings, Inc. ("GGH")
through a merger of an indirect wholly-owned subsidiary of B&B with and into
GGH. Following the merger, if approved, the companies will be a wholly owned
subsidiaries of B&B. The proposed merger must be approved by two-thirds of the
outstanding shares of RSP and a majority of the GGH Class A common stock and a
majority of the GGH Class B, respectively. The Raleigh, Schwarz & Powell, Inc.
Employee Stock Ownership Plan and Trust ("ESOP") owns 116,340 shares of RSP
common stock and 4000 shares of GGH common stock representing approximately 54%
of the outstanding common stock of RSP and GGH. The ESOP documents provide that
in an event such as this, the participants shall have an opportunity to indicate
how they wish to have their allocated shares voted.
This summary of the proposed terms of the merger is intended to provide
information to each participant in order to make an informed decision regarding
the direction to vote his or her allocated shares for or against the proposed
merger. This summary is provided for convenience, should not be considered
complete and is qualified in its entirety by reference to the full text of the
Agreement and Plan of Reorganization among B&B and RSP dated as of July 25,
2001, as amended ("Merger Agreement"), which is a part of the Preliminary Proxy
Statement/Prospectus, copies of which are being provided to each ESOP
participant.
In situations such as this, and in order to prevent a conflict of interest from
occurring because of the positions the individuals who serve as fiduciaries of
the ESOP have with respect to the consideration and negotiation of the proposal
from B&B, it is appropriate for the ESOP and its participants and beneficiaries
to be represented by an independent fiduciary in the review, consideration and
negotiation of the merger proposal from B&B.
Consulting Fiduciaries, Inc. ("CFI") has been appointed by RSP's Board of
Directors and the ESOP Trustees to serve as the Independent Fiduciary on behalf
of the ESOP for the purpose of reviewing the proposal, making a determination as
to what action the ESOP should take in response to the
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CFI Summary / Brown & Brown, Inc.
August 20, 2001
Page 2
proposal and conducting the pass through vote process to assure independence and
strict confidentiality for participants.
CFI has undertaken a process of review which included visits with the management
of RSP; discussions with the ESOP fiduciaries; review of relevant documents
regarding the business of RSP and the B&B proposal; discussions with outside
advisors and consultants to RSP; and an analysis of the terms of B&B proposal.
As part of this process, we reviewed other merger proposals as well as
possibilities for restructuring the company.
As each participant knows, the common stock of RSP has been valued each year for
ESOP purposes by an independent valuation firm. Ernst & Young, LLC provided the
value for 1998 and thereafter, Duff & Phelps, LLC of Chicago, Illinois ("DUF")
provided the annual valuation. These valuations have resulted in RSP being
valued at the following amounts based on the number of shares issued and
outstanding at the particular time:
December 31, 1998 $100 per share
December 31, 1999 $110 per share
December 31, 2000 $126 per share
B&B has offered to pay, subject to certain adjustments discussed below, an
amount of shares of B&B which will be calculated based upon the trading range of
its shares over a twenty day period. The offered price of $40 million, to
acquire the business of RSP and GGH, will be divided by the twenty day average
trading price of the B&B shares to determine the number of B&B shares which are
to be received on the closing date. An example of this calculation appears on
page 1 of the Preliminary Proxy Statement/Prospectus. Under this example, the
price per share equates to approximately $179 per share which represents a
premium of approximately 42% above the prior valuation.
As is typical in transactions of this type, B&B has required that certain
representations, warranties and indemnities be provided by RSP, GGH, their
shareholders and the ESOP. Ten per cent of the shares of B&B being received will
be held in an escrow account pending a one year period during which B&B will
have the ability to make claims against the escrow for breaches or violations of
the representations. The ESOP's maximum exposure will be limited to its portion
of the escrow. After the one year period, any of the ESOP's allocated portion
which remains will be distributed to the ESOP. The escrow agent, Northwestern
Trust, will also have specific instruction as to the retention of B&B shares
with the objective of preservation of value.
The purchase price is also subject to a downward dollar for dollar adjustment if
RSP and GGH's Total Net Worth is less than $13 million, as of a certain date. If
such an adjustment is made, the share price will be less than the share price
shown in the example appearing on page 1 of the Preliminary Proxy
Statement/Prospectus.
If the proposed merger is approved, then, subject to the satisfaction of certain
conditions in the Merger Agreement, all of the shares of RSP and GGH common
stock held in the ESOP (including any shares allocated to the ESOP account of
any participant who votes against the proposed merger) will be exchanged for
shares of B&B. As described in the Preliminary Proxy Statement/Prospectus, there
is a holding period during which these shares may not be freely traded. After
that period, as explained below, there may be some sales of B&B shares.
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CFI Summary / Brown & Brown, Inc.
August 20, 2001
Page 3
If the merger is approved, the ESOP will be terminated effective immediately
prior to the closing date. Upon the effective date of termination, each
participant will become 100% vested in his or her entire account balance in the
ESOP. If the closing occurs, RSP will also make an additional contribution to
the ESOP for the period up to the closing date. The ESOP termination will take a
number of months to complete, in part because it is prudent to obtain certain
government approvals before any distributions are made. The process of obtaining
these approvals can take several months or more. No distributions are expected
to be made from the ESOP until all the appropriate approvals have been received.
Once the approvals have been received, each participant will be entitled to
receive his or her account balance. Each participant will be notified when the
distributions are about to be made in order to give each participant the
opportunity to elect the eligible form of distribution preferred by the
participant. Distributions will be eligible to be rolled over to an Individual
Retirement Account or another qualified retirement plan. It is anticipated that
no distributions will be made until four to six months after the plan
termination date, subject to the IRS approval.
During the period after the closing date, which is presently anticipated to be
August 31, and prior to the end of the holding period described in the
Preliminary Proxy Statement/Prospectus, all participants will receive election
forms which will enable them to indicate whether they wish to hold or sell all
or a portion of the B&B shares in their accounts. This is intended to provide a
one-time opportunity to elect to dispose of or retain B&B shares prior to the
receipt to IRS approval of the termination and the actual distribution of the
assets in the accounts. The Trustee will use proper care and diligence in
carrying out the instructions received so as to both follow the instructions and
minimize any significant market fluctuation in the trading of the B&B shares.
Proceeds from the sale of any shares will be invested in a money market type of
investment with an objective of preserving principal and earning an appropriate
rate of interest. All earnings will be added to the participant accounts and
will be included in any distributions when they are made.
On behalf of the ESOP, DUF was retained as the independent financial advisor to
the ESOP to review the terms of the proposed merger for the purposes of
determining whether the consideration to be received by the ESOP for the RSP and
GGH common stock it holds is not less than fair market value and that the
proposed merger is fair to the ESOP from a financial point of view. DUF has
rendered their favorable opinions on both issues to the ESOP and they intend to
update their opinions on both issues to the ESOP at the closing.
After engaging in an appropriate due diligence review of the B&B merger proposal
on behalf of the ESOP, CFI has concluded, as of this date, that the proposed
merger is fair and in the best interests of the participants and beneficiaries
of the ESOP.
In line with this opinion and pursuant to the authority given CFI by its
appointment as the Independent Fiduciary to the ESOP, CFI expects to direct the
Trustees to vote all unallocated shares of RSP and GGH common stock held in the
ESOP as well as any allocated shares of RSP common stock held in the ESOP for
which participant directions are not received, in favor of the proposed merger.
It is important that all ESOP participants return their Direction Letters
indicating their decision regarding the proposed merger. The Direction Letters
must be received in CFI's offices no later than August 30, 2001 in order to be
counted. There will be a collection box for you to deposit your
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CFI Summary / Brown & Brown, Inc.
August 20, 2001
Page 4
sealed direction so that it may be transmitted directly to CFI, or you may use
the postage paid envelope provided to you along with the Direction Letter. If
any participant has any questions regarding the proposed merger, please contact
a representative of CFI on a confidential basis at (800) 714-8282 between the
hours of 9:00 AM and 5:00 PM, Chicago time.
August 20, 2001
For your information, Brown & Brown has filed with the Securities and Exchange
Commission a registration statements, which contain proxy statements/prospectus
to be used by Raleigh, Schwarz & Powell and Golden Gate Holdings in connection
with their solicitation of shareholder approval of the proposed mergers, as well
as other relevant documents concerning the proposed mergers. You are urged to
read the registration statement and the proxy statement/prospectus regarding the
proposed mergers and any other relevant documents filed with the Securities and
Exchange Commission, as well as any amendments or supplements to those
documents, because they contain important information regarding Brown & Brown,
Raleigh, Schwarz & Powell, Golden Gate Holdings, the proposed mergers, and
instructions as to how to vote your shares of Raleigh, Schwarz and Powell or
Golden Gate Holdings common stock.
You can obtain a free copy of the proxy statements/prospectus included in the
registration statement, as well as other filings containing information about
Brown & Brown, at the Securities and Exchange Commission's internet site
(http://www.sec.gov). Copies of the proxy statements/prospectus can also be
obtained, without charge, by directing a request to Brown & Brown, Inc., attn:
Corporate Secretary, 401 East Jackson Street, Suite 1700, Tampa, Florida 33602
(813-222-4100), or to Raleigh, Schwarz & Powell, Inc., attn: John P. Folsom,
1201 Pacific Avenue, Tenth Floor, Tacoma, WA 98402 (253-396-5500).
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August 20, 2001
TO: Participants of the
Raleigh, Schwarz & Powell, Inc. Employee Stock Ownership Plan
RE: ESOP BENEFIT DISTRIBUTIONS
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In connection with the proposed sale of all the common stock of the
Raleigh, Schwarz & Powell, Inc. (the "Company") to Brown & Brown of Washington,
Inc., a wholly-owned subsidiary of Brown & Brown, Inc. ("Brown & Brown"), the
Raleigh, Schwarz & Powell, Inc. Employee Stock Ownership Plan (the "ESOP") will
be terminated. As a result of the termination of the ESOP, if you are currently
an active employee of the Company, your ESOP Accounts will be 100% vested and
non-forfeitable (regardless of your actual years of credited service). In
addition, you will be offered an opportunity to receive a distribution of your
ESOP benefit.
Your distribution from the ESOP will be made in shares of common stock
of Brown & Brown ("B&B Stock") and cash, depending on the actual assets held in
your ESOP accounts at the time of distribution. Please note, however, that you
have the right to have your entire ESOP benefit paid to you in whole shares of
B&B Stock (with the value of any fractional share paid in cash). Shares of B&B
Stock are publicly traded on the New York Stock Exchange. Prior to the
distribution of your ESOP benefit, you will be permitted to elect to direct the
ESOP Trustee to sell any or all of the shares of B&B Stock allocated to your
Company Stock Account. The proceeds from any such sale shall be invested among
such principal preservation funds selected by the ESOP Trustee.
Distributions will not be offered until the Internal Revenue Service
("IRS") has issued a favorable determination letter with respect to the
termination of the ESOP. It is difficult to predict when this IRS letter will be
issued, but it is not expected for at least six to eight months following the
closing date of the acquisition of the Company by Brown & Brown.
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With respect to the distribution of your ESOP benefit, you will be
given a choice to:
(1) receive a direct distribution of shares of B&B Stock and cash;
(2) roll over your shares of B&B Stock and cash to an individual
retirement account or another employer's qualified retirement
plan; or
(3) roll over or transfer of your shares of B&B Stock and cash to
a 401(k) Plan maintained by Brown & Brown or its affiliates.
DIRECT DISTRIBUTION
If you elect to receive a direct distribution of your ESOP benefit, you
will receive a share certificate for the shares of B&B Stock in your Company
Stock Account and a check for the cash balance of your Other Investments Account
(less the 20% mandatory federal income tax withholding). Unless you are eligible
for special "NUA" treatment (see below), the value of your ESOP benefit will be
taxed to you at ordinary income tax rates.
TAX-DEFERRED ROLLOVER OPTIONS
You may defer payment of income taxes on your ESOP distribution by
rolling over the distribution in one of two ways.
(1) Direct Rollover
You are entitled to elect to have all or a portion of your ESOP benefit
distributed in a "direct rollover" (to an individual retirement arrangement
("IRA") or to another employer's qualified retirement plan). A "direct rollover"
requires the ESOP to transfer B&B Stock and cash to your IRA or new employer's
qualified retirement plan. If you elect a direct rollover of your ESOP benefit,
there will be no federal income tax withholding.
(2) 60-day Rollover
If you decide to have your benefit paid to you (less the 20% mandatory
federal income tax withholding), you may still make a tax-free rollover of all
or a portion of your ESOP benefit. When you receive your benefit distribution,
you will have 60 days to roll over the amount distributed (and the amount
withheld for tax purposes) on a tax-free basis to an IRA or new employer's
qualified retirement plan. If you wish to make a tax-free rollover that includes
the amount withheld for tax purposes, you must find other money within the
60-day period to contribute to the IRA or new employer's qualified retirement
plan to replace the money that was withheld. The 60-day period begins to run on
the date that your distribution is made to you. We will inform you of this date
in the letter you receive from us containing your benefit distribution.
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TRANSFER TO BROWN & BROWN 401(K) PLAN
If you fail to consent to a distribution from the ESOP, your ESOP
benefit will be transferred to a 401(k) plan maintained by Brown & Brown or one
of its affiliates, and will be subject to the provisions of that plan. Your ESOP
benefit will be taxed only when you receive a distribution from the 401(k) plan
maintained by Brown & Brown.
NET UNREALIZED APPRECIATION
Under certain very limited situations, special income tax treatment of
"net unrealized appreciation" is available for distributions of shares of
employer securities from an ESOP. Net unrealized appreciation is generally the
difference between the fair market value of the shares at the time that they are
distributed and the cost of the shares when they were originally acquired by the
ESOP trust. If a distribution of employer securities is part of a "lump sum
distribution," the value increase that occurred during the time that the shares
were held by the ESOP (i.e., the net unrealized appreciation, or "NUA") is not
taxed until you later sell the shares. If the distribution is not a lump-sum
distribution, the taxable amount is the amount of cash received plus the fair
market value on the date of distribution of any shares received.
In order for an ESOP distribution to be eligible for the special income
tax treatment of NUA, the distribution must be a "lump sum payment." In general,
a "lump sum payment" is a distribution or payment within a calendar year of the
entire interest of a participant, which becomes payable to the participant:
1. on account of the participant's death; or
2. after the participant attains age 59 1/2; or
3. on account of the employee's separation from service; or
4. after the employee has become disabled.
An ESOP distribution to a Participant will only be considered a "lump
sum payment" for purposes of the special income tax treatment of NUA if the
Participant has attained age 59 1/2 or terminated service with the Company.
Accordingly, the special income tax treatment of NUA will apply only to a very
limited number of Participants.
The cost basis of the shares to the plan, plus the cash distributed (if
any), is taxed as ordinary income when received by the participant (except to
the extent of a "rollover" to an IRA or qualified employee benefit plan - see
above). The special NUA tax treatment is not available for any shares of
employer securities that are "rolled over" to an IRA or an employee benefit
plan.
When you sell shares of B&B Stock that had been distributed from the
ESOP, there will be a taxable capital gain to the extent that the net sales
proceeds exceed the cost basis. The portion of the gain attributable to the time
the shares were held by the plan (i.e., the NUA) will be taxed as long-term
capital gain, regardless of how long the shares are held after the distribu-
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tion. Any gain (or loss) on the shares after the distribution will be taxed as
short-term or long-term capital gain depending on the holding period between the
distribution date and the sale of the shares.
* * * * * *
In the next few months, you will receive additional information
regarding the distribution of your ESOP benefit. We strongly encourage you to
consult with a tax advisor and other investment advisors before you make your
distribution decisions since the tax consequences of your distribution may
differ depending on your election and the way you instruct us to distribute.
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BROWN & BROWN HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION A
REGISTRATION STATEMENTS, WHICH CONTAIN PROXY STATEMENTS/PROSPECTUS TO BE USED BY
RALEIGH, SCHWARZ & POWELL AND GOLDEN GATE HOLDINGS IN CONNECTION WITH THEIR
SOLICITATION OF SHAREHOLDER APPROVAL OF THE PROPOSED MERGERS, AS WELL AS OTHER
RELEVANT DOCUMENTS CONCERNING THE PROPOSED MERGERS. YOU ARE URGED TO READ THE
REGISTRATION STATEMENT AND THE PROXY STATEMENT/PROSPECTUS REGARDING THE PROPOSED
MERGERS AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE
THEY CONTAIN IMPORTANT INFORMATION REGARDING BROWN & BROWN, RALEIGH, SCHWARZ &
POWELL, GOLDEN GATE HOLDINGS, THE PROPOSED MERGERS, AND INSTRUCTIONS AS TO HOW
TO VOTE YOUR SHARES OF RALEIGH, SCHWARZ AND POWELL OR GOLDEN GATE HOLDINGS
COMMON STOCK.
YOU CAN OBTAIN A FREE COPY OF THE PROXY STATEMENTS/PROSPECTUS INCLUDED IN THE
REGISTRATION STATEMENT, AS WELL AS OTHER FILINGS CONTAINING INFORMATION ABOUT
BROWN & BROWN, AT THE SECURITIES AND EXCHANGE COMMISSION'S INTERNET SITE
(HTTP://WWW.SEC.GOV). COPIES OF THE PROXY STATEMENTS/PROSPECTUS CAN ALSO BE
OBTAINED, WITHOUT CHARGE, BY DIRECTING A REQUEST TO BROWN & BROWN, INC., ATTN:
CORPORATE SECRETARY, 401 EAST JACKSON STREET, SUITE 1700, TAMPA, FLORIDA 33602
(813-222-4100), OR TO RALEIGH, SCHWARZ & POWELL, INC., ATTN: JOHN P. FOLSOM,
1201 PACIFIC AVENUE, TENTH FLOOR, TACOMA, WA 98402 (253-396-5500).
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To the Board of Directors
Raleigh, Schwarz and Powell, Inc.
Golden Gate Holdings, Inc.
1201 Pacific Avenue, Suite 1000
P. O. Box 1718
Tacoma, WA 98401-1718
Dear Board Members:
This letter is intended to discuss the tax consequences of a contemplated
transaction with Brown and Brown Inc. (B&B). The details of the transaction are
discussed in the Agreement and Plan of Merger and amendments thereto with
Raleigh, Schwarz and Powell, Inc. (RS&P) and Golden Gate Holdings, Inc. (GGH)
and are incorporated herein by this reference.
As contemplated, B&B will establish a separate legal entity that will merge into
RS&P with RS&P being the surviving corporation. In addition, before RS&P's
transaction with B&B, RS&P will establish a separate California subsidiary.
After the RS&P merger into B&B, the new California subsidiary will be merged
into GGH with GGH being the surviving corporation. The shareholders of RS&P and
GGH will receive stock of B&B in each transaction.
The transaction is contemplated as a stock for stock exchange whereby
shareholders of RS&P and GGH receive stock of B&B. It is intended that the
transaction be eligible for "pooling of interest" treatment for financial
reporting purposes and for "tax-free" reorganization treatment for tax purposes.
It is intended that the RS&P merger qualify as a tax-free reorganization under
IRC Section 368(a)(1)(A) and 368 (a)(2)(E). It is intended that the GGH
transaction qualify as a tax-free reorganization under IRC Section 368(a)(1)(B).
The balance of this letter assumes that both transactions qualify as tax-free
reorganizations.
CORPORATE TAX TREATMENT
RS&P and GGH will recognize no gain on the transaction with B&B. IRC Section
361(c)(1). Consequently, neither entity will have a tax liability associated
with the transaction. Both entities will be required to file a final tax return
from January 1, 2001 through the effective date of the transaction. Both
entities will be taxed on their operating income through the effective date of
the transaction.
California incorporates IRC Section 368 in its tax law. Section 23251, Rev. &
Tax. Code. Consequently, for state tax purposes GGH will be taxed similarly to
that discussed above.
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TAX TREATMENT FOR NON-ESOP SHAREHOLDERS
As a stock for stock exchange, the shareholders of RS&P and GGH will recognize
no gain or loss on the B&B stock received on their respective tax returns. IRC
Section 354(a)(1).
FOR EXAMPLE, assume a shareholder has 1,000 shares of RS&P stock with a
tax basis of $20,000. The shareholder exchanges the RS&P stock for B&B
stock worth $100,000. Even though the shareholder has realized a gain
of $80,000, the shareholder will recognize no gain on his tax return.
In general, the shareholders' tax basis in RS&P or GGH stock will become the tax
basis in their B&B stock. IRC Section 358(a)(1).
FOR EXAMPLE, as in the above example shareholder had 1,000 shares of
RS&P that he had purchased for $20 per share for a total cost of
$20,000. His tax basis in the B&B stock received in the exchange would
be $20,000.
In addition, the shareholders' holding period in RS&P or GGH stock will be
included in the shareholders' holding period in B&B stock for purposes of
determining long-term capital gain treatment. IRC Section 1223(1).
FOR EXAMPLE, as in the above example, shareholder purchased 1,000
shares of RS&P stock on January 1, 2000 for $20 per share. Shareholder
subsequently exchanges those shares for B&B shares on August 31, 2001.
The shareholder subsequently sells the B&B shares on November 1, 2001
for a gain. The gain is eligible for long-term capital gain treatment
as the shareholder's holding period is more than one year. The
shareholder's holding period is treated as beginning on January 1,
2000.
A tax-free reorganization is beneficial to the shareholders. The shareholders
have tax deferral at the time that they exchange their RS&P or GGH stock for
stock in B&B. In addition, the shareholders are entitled to include the time
they owned their RS&P or GGH stock in the holding period of their B&B stock.
When the shareholders sell their B&B stock, they will be required to report any
gain, probably as long-term capital gain, on their income tax return.
Golden Gate shareholders that reside in California are eligible for similar
treatment for California state tax purposes to that discussed above. Section
23251, Rev. & Tax. Code.
TREATMENT FOR ESOP PARTICIPANTS
As the transaction is currently contemplated, RS&P is to terminate its ESOP
simultaneous with its transaction with B&B. To terminate the plan means that the
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board would adopt a resolution terminating any new entry into the plan and
terminating any further contributions to the plan. The result of such an action
would be that all participants in the plan would become fully vested. Even
though the plan may be terminated the plan remains in existence until it
distributes all of its assets to participants. Typically, a plan will defer
distribution of its assets until after it has received a favorable determination
letter from the Internal Revenue Service that the termination of the plan will
not adversely affect its qualified status.
As a shareholder in RS&P the ESOP would participate in the transaction and
receive B&B stock for RS&P stock. Consequently, the discussion below will
indicate RS&P/B&B stock when discussing ESOP owned shares.
Also, as a shareholder of RS&P the ESOP is entitled to the same treatment as
that discussed for a non-ESOP shareholder, but for the fact that it would pay no
tax on any cash or other property received.
On termination of the plan, an ESOP participant has the ability to take a
distribution and roll it into an IRA, or another qualified plan, or take a
taxable lump sum distribution.
If the participant rolls a distribution to an IRA or another qualified plan, the
participant will be subject to tax when he takes distributions from the IRA or
qualified plan at ordinary income tax rates. No tax will be due at the time of
the rollover. IRC Section 402(c)(1).
Some participants may choose to take a taxable distribution of RS&P/B&B stock as
it is entitled to tax-favored treatment. The tax-favored treatment is available
only if the participant takes a "lump sum distribution" of employer stock. A
lump sum distribution requires that the participant's account balance be fully
distributed within one tax year. In addition, the lump sum distribution must be
payable to the participant 1.) on account of his death, 2.) after he has
attained the age of 59 1/2, 3.) on account of the participant's termination of
service, or 4.) after the employee has become disabled. IRC Section
402(e)(4)(D)(i). Only those employees who meet one of these conditions would be
eligible to receive a lump sum distribution. RS&P/B&B stock would qualify as
employer stock.
The tax-favored treatment is that the participant is only required to recognize
ordinary income on the ESOP's tax basis in the employer stock that is
distributed to him. The ordinary income is recognized at the time of
distribution. The participant defers the tax on any appreciation in the value of
the stock while the stock was held in the ESOP until the stock is sold. IRC
Section 402(e)(4)(B). The participant will be taxed on the stock appreciation
while the stock was held in the ESOP at long-term capital gain tax rates rather
than ordinary income rates. Internal Revenue Regulation (I.R. Reg.)
1.402(b)(1)(i). Thus, the participant has the advantage of both tax deferral and
a reduction in tax rates from potentially 39.6% to 20%. Any appreciation in the
stock,
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subsequent to the distribution of shares in the ESOP, is taxed at short or
long-term capital gain rates depending on the participant's holding period from
the date of the distribution. I.R. Reg. 1.402(b)(1)(i).
FOR EXAMPLE, assume an ESOP participant who is over age 59 1/2 has a
tax basis in the RS&P shares of $20,000 and the shares are worth
$100,000. The participant elects to take a lump sum distribution of the
shares on August 15, 2001 and does not roll them over to another
qualified plan. The participant exchanges the RS&P shares for B&B
shares at the time of the transaction.
On the participant's 2001 tax return, he is required to report $20,000
as an ESOP distribution. The $20,000 is subject to tax at ordinary
income tax rates. The $80,000 ($100,000-$20,000) stock appreciation is
not subject to tax until sold.
The participant sells the B&B shares on June 1, 2002 for $130,000. The
$80,000 appreciation while the stock was within the ESOP is subject to
tax at long-term capital gain tax rates regardless of the holding
period. The $30,000 ($130,000-$100,000) is subject to tax at short-term
capital gain rates as the stock was sold less than one year following
distribution from the ESOP.
Please note that the stock appreciation is measured on the date of the lump sum
distribution to the participant and not on the date of the transaction with B&B.
I.R. Reg.1.402(b)(1)(i). In addition, please note that if the participant wants
to take advantage of the tax-favored treatment, at the time of the distribution
he must terminate his interest in all ESOP's, including those of RS&P and, if
applicable, B&B. IRC Section 402(e)(4)(D)(ii).
This tax-favored treatment could be a significant advantage to an ESOP
participant. Consequently, every participant should be encouraged to consult
with his or her tax advisor.
After appropriate amendments to the ESOP, if any, we believe there may be two
instances when participants should give this tax-favored treatment serious
consideration. First, for a participant over age 59 1/2, he may choose to take a
lump sum distribution of RS&P stock before the transaction closes, even if he
intends to become an employee of B&B. Second, if an individual less than age 59
1/2 intends to terminate from service as a result of the transaction or shortly
after the transaction is closed, he may take a lump sum distribution from the
ESOP before the transaction closes. This individual may also take a lump sum
distribution after the transaction closes provided that he takes a lump sum
distribution out of any B&B plan that he is a participant in. Please note that
there may be other planning opportunities available for tax-favored treatment
that must be explored between now and the time the transaction closes.
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Please note that we have not researched whether California adopts the same tax
treatment for purposes of state taxation of employee participants as that
discussed above.
SUMMARY
From a tax perspective, the transaction as contemplated is beneficial to the
shareholders of RS&P and GGH. The transaction achieves tax deferral for all
shareholders and, potentially, tax deferral and rate reduction for some
participants in the company's ESOP.
This letter is intended as an overview of the tax consequences of the
transaction and is not intended to discuss any shareholders' individual tax
situation. All shareholders should be encouraged to consult with their tax
advisors.
If you have any questions regarding the above overview, please contact us. We
appreciate the opportunity to work on this project.
Very truly yours,
Knight, Vale & Gregory PLLC