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BASE CASE

COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 5,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 10,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 65% 25% 10% 0% 65% 25% 10%
U.S. forecasted units sold 0 3,250 1,250 500 0 3,250 1,250 500
U.K., Ireland, Europe forecasted units sold 0 1,300 500 200 0 1,300 500 200
Japan, New Zealand, Australia forecasted units sold 0 650 250 100 0 650 250 100
Canada forecasted units sold 0 325 125 50 0 325 125 50
Units sold by artist 0 975 375 150 0 975 375 150

Total sales $0 $52,886 $20,341 $8,136 $0 $52,886 $20,341 $8,136


Per unit Per unit
Cost of goods sold $0.90 $0 $5,850 $2,250 $900 $0.90 $0 $5,850 $2,250 $900
Mechanical royalties $0.85 $0 $4,696 $1,806 $723 $0.85 $0 $4,696 $1,806 $723
Recording-artist royalties $1.45 $0 $8,011 $3,081 $1,233 $1.75 $0 $9,669 $3,719 $1,488
Recoupables not recovered $8,675 $9,125
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $2,295 $2,295
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $39,025 $15,010 ($4,966) ($14,000) $32,671 $12,566 ($6,394)
Taxes(put rate in box) 40% $4,400 ($15,610) ($6,004) $1,986 $5,600 ($13,069) ($5,026) $2,557
Net operating profit after tax ($6,600) $23,415 $9,006 ($2,980) ($8,400) $19,603 $7,540 ($3,836)

Change in inventory ($7,341) $3,026 $1,121 $900 ($7,342) $3,026 $1,121 $900
Change in recoupables ($21,000) $8,011 $3,081 $1,233 ($24,000) $9,669 $3,719 $1,488
Free cash flow ($34,941) $34,453 $13,208 $10,123 ($39,742) $32,298 $12,379 $9,971

NPV Own $13,554 License $6,061


IRR 40.3% 23.1%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $7,342 $4,316 $3,195 $2,295 $7,342 $4,316 $3,195 $2,295
Recoupables 21,000 12,989 9,908 8,675 24,000 14,331 10,613 9,125
$10,970 $11,420
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
BASE CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 8,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 13,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 65% 25% 10% 0% 65% 25% 10%
U.S. forecasted units sold 0 5,200 2,000 800 0 5,200 2,000 800
U.K., Ireland, Europe forecasted units sold 0 1,300 500 200 0 1,300 500 200
Japan, New Zealand, Australia forecasted units sold 0 650 250 100 0 650 250 100
Canada forecasted units sold 0 325 125 50 0 325 125 50
Units sold by artist 0 975 375 150 0 975 375 150

Total sales $0 $70,525 $27,125 $10,850 $0 $70,525 $27,125 $10,850


Per unit Per unit
Cost of goods sold $0.90 $0 $7,605 $2,925 $1,170 $0.90 $0 $7,605 $2,925 $1,170
Mechanical royalties $0.85 $0 $6,354 $2,444 $978 $0.85 $0 $6,354 $2,444 $978
Recording-artist royalties $1.45 $0 $10,839 $4,169 $1,668 $1.75 $0 $13,081 $5,031 $2,013
Recoupables not recovered $4,325 $3,875
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $3,105 $3,105
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $52,081 $20,031 $583 ($14,000) $43,485 $16,725 ($290)
Taxes(put rate in box) 40% $4,400 ($20,833) ($8,013) ($233) $5,600 ($17,394) ($6,690) $116
Net operating profit after tax ($6,600) $31,249 $12,019 $350 ($8,400) $26,091 $10,035 ($174)

Change in inventory ($9,623) $3,904 $1,445 $1,170 ($9,623) $3,904 $1,445 $1,170
Change in recoupables ($21,000) $10,839 $4,169 $1,668 ($24,000) $13,081 $5,031 $2,013
Free cash flow ($37,223) $45,991 $17,632 $10,617 ($42,023) $43,076 $16,511 $9,989

NPV Own $25,454 License $16,709


IRR 63.3% 42.0%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $9,623 $5,720 $4,275 $3,105 $9,623 $5,720 $4,275 $3,105
Recoupables 21,000 10,161 5,993 4,325 24,000 10,919 5,888 3,875
$7,430 $6,980
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
BASE CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 5,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 10,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 65% 25% 10% 0% 65% 25% 10%
U.S. forecasted units sold 0 3,250 1,250 500 0 3,250 1,250 500
U.K., Ireland, Europe forecasted units sold 0 1,300 500 200 0 1,300 500 200
Japan, New Zealand, Australia forecasted units sold 0 650 250 100 0 650 250 100
Canada forecasted units sold 0 325 125 50 0 325 125 50
Units sold by artist 0 975 375 150 0 975 375 150

Total sales $0 $52,886 $20,341 $8,136 $0 $52,886 $20,341 $8,136


Per unit Per unit
Cost of goods sold $0.90 $0 $5,850 $2,250 $900 $0.90 $0 $5,850 $2,250 $900
Mechanical royalties $0.85 $0 $4,696 $1,806 $723 $0.85 $0 $4,696 $1,806 $723
Recording-artist royalties $1.45 $0 $8,011 $3,081 $1,233 $1.75 $0 $9,669 $3,719 $1,488
Recoupables not recovered $13,675 $14,125
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $2,295 $2,295
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $39,025 $15,010 ($9,966) ($14,000) $32,671 $12,566 ($11,394)
Taxes(put rate in box) 40% $4,400 ($15,610) ($6,004) $3,986 $5,600 ($13,069) ($5,026) $4,557
Net operating profit after tax ($6,600) $23,415 $9,006 ($5,980) ($8,400) $19,603 $7,540 ($6,836)

Change in inventory ($7,341) $3,026 $1,121 $900 ($7,342) $3,026 $1,121 $900
Change in recoupables ($26,000) $8,011 $3,081 $1,233 ($29,000) $9,669 $3,719 $1,488
Free cash flow ($39,941) $34,453 $13,208 $12,123 ($44,742) $32,298 $12,379 $11,971

NPV Own $9,977 License $2,485


IRR 29.8% 15.9%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $7,342 $4,316 $3,195 $2,295 $7,342 $4,316 $3,195 $2,295
Recoupables 26,000 17,989 14,908 13,675 29,000 19,331 15,613 14,125
$15,970 $16,420
Recoupables Recoupables
Production costs $20,000 Production costs $20,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $26,000 Total $29,000
BASE CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 2,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 7,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 65% 25% 10% 0% 65% 25% 10%
U.S. forecasted units sold 0 1,300 500 200 0 1,300 500 200
U.K., Ireland, Europe forecasted units sold 0 1,300 500 200 0 1,300 500 200
Japan, New Zealand, Australia forecasted units sold 0 650 250 100 0 650 250 100
Canada forecasted units sold 0 325 125 50 0 325 125 50
Units sold by artist 0 975 375 150 0 975 375 150

Total sales $0 $35,248 $13,557 $5,423 $0 $35,248 $13,557 $5,423


Per unit Per unit
Cost of goods sold $0.90 $0 $4,095 $1,575 $630 $0.90 $0 $4,095 $1,575 $630
Mechanical royalties $0.85 $0 $3,039 $1,169 $468 $0.85 $0 $3,039 $1,169 $468
Recording-artist royalties $1.45 $0 $5,184 $1,994 $798 $1.75 $0 $6,256 $2,406 $963
Recoupables not recovered $13,025 $14,375
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $1,485 $1,485
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $25,969 $9,988 ($10,515) ($14,000) $21,858 $8,407 ($12,497)
Taxes(put rate in box) 40% $4,400 ($10,388) ($3,995) $4,206 $5,600 ($8,743) ($3,363) $4,999
Net operating profit after tax ($6,600) $15,581 $5,993 ($6,309) ($8,400) $13,115 $5,044 ($7,498)

Change in inventory ($5,060) $2,149 $797 $630 ($5,060) $2,149 $797 $630
Change in recoupables ($21,000) $5,184 $1,994 $798 ($24,000) $6,256 $2,406 $963
Free cash flow ($32,660) $22,914 $8,783 $9,629 ($37,460) $21,520 $8,247 $9,954

NPV Own $1,654 License ($4,587)


IRR 15.5% 3.5%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $5,060 $2,912 $2,115 $1,485 $5,060 $2,912 $2,115 $1,485
Recoupables 21,000 15,816 13,823 13,025 24,000 17,744 15,338 14,375
$14,510 $15,860
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
BEST CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 5,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 10,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 80% 15% 5% 0% 80% 15% 5%
U.S. forecasted units sold 0 4,000 750 250 0 4,000 750 250
U.K., Ireland, Europe forecasted units sold 0 1,600 300 100 0 1,600 300 100
Japan, New Zealand, Australia forecasted units sold 0 800 150 50 0 800 150 50
Canada forecasted units sold 0 400 75 25 0 400 75 25
Units sold by artist 0 1,200 225 75 0 1,200 225 75

Total sales $0 $65,091 $12,205 $4,068 $0 $65,091 $12,205 $4,068


Per unit Per unit
Cost of goods sold $0.90 $0 $7,200 $1,350 $450 $0.90 $0 $7,200 $1,350 $450
Mechanical royalties $0.85 $0 $5,780 $1,084 $361 $0.85 $0 $5,780 $1,084 $361
Recording-artist royalties $1.45 $0 $9,860 $1,849 $616 $1.75 $0 $11,900 $2,231 $744
Recoupables not recovered $8,675 $9,125
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $2,295 $2,295
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $48,031 $9,006 ($7,968) ($14,000) $40,211 $7,540 ($8,907)
Taxes(put rate in box) 40% $4,400 ($19,212) ($3,602) $3,187 $5,600 ($16,084) ($3,016) $3,563
Net operating profit after tax ($6,600) $28,818 $5,403 ($4,781) ($8,400) $24,126 $4,524 ($5,344)

Change in inventory ($9,036) $5,506 $785 $450 ($9,036) $5,506 $785 $450
Change in recoupables ($21,000) $9,860 $1,849 $616 ($24,000) $11,900 $2,231 $744
Free cash flow ($36,636) $44,184 $8,037 $7,255 ($41,436) $41,532 $7,540 $7,270

NPV Own $14,386 License $6,832


IRR 45.1% 25.8%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $9,036 $3,530 $2,745 $2,295 $9,036 $3,530 $2,745 $2,295
Recoupables 21,000 11,140 9,291 8,675 24,000 12,100 9,869 9,125
$10,970 $11,420
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
BEST CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 8,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 13,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 80% 15% 5% 0% 80% 15% 5%
U.S. forecasted units sold 0 6,400 1,200 400 0 6,400 1,200 400
U.K., Ireland, Europe forecasted units sold 0 1,600 300 100 0 1,600 300 100
Japan, New Zealand, Australia forecasted units sold 0 800 150 50 0 800 150 50
Canada forecasted units sold 0 400 75 25 0 400 75 25
Units sold by artist 0 1,200 225 75 0 1,200 225 75

Total sales $0 $86,800 $16,275 $5,425 $0 $86,800 $16,275 $5,425


Per unit Per unit
Cost of goods sold $0.90 $0 $9,360 $1,755 $585 $0.90 $0 $9,360 $1,755 $585
Mechanical royalties $0.85 $0 $7,820 $1,466 $489 $0.85 $0 $7,820 $1,466 $489
Recording-artist royalties $1.45 $0 $13,340 $2,501 $834 $1.75 $0 $16,100 $3,019 $1,006
Recoupables not recovered $4,325 $3,875
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $3,105 $3,105
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $64,100 $12,019 ($3,424) ($14,000) $53,520 $10,035 ($3,635)
Taxes(put rate in box) 40% $4,400 ($25,640) ($4,808) $1,370 $5,600 ($21,408) ($4,014) $1,454
Net operating profit after tax ($6,600) $38,460 $7,211 ($2,054) ($8,400) $32,112 $6,021 ($2,181)

Change in inventory ($11,844) $7,139 $1,015 $585 ($11,844) $7,139 $1,015 $585
Change in recoupables ($21,000) $13,340 $2,501 $834 ($24,000) $16,100 $3,019 $1,006
Free cash flow ($39,444) $58,939 $10,727 $6,795 ($44,244) $55,351 $10,055 $6,390

NPV Own $26,569 License $17,741


IRR 71.2% 47.2%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $11,844 $4,705 $3,690 $3,105 $11,844 $4,705 $3,690 $3,105
Recoupables 21,000 7,660 5,159 4,325 24,000 7,900 4,881 3,875
$7,430 $6,980
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
BEST CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 2,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 7,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 80% 15% 5% 0% 80% 15% 5%
U.S. forecasted units sold 0 1,600 300 100 0 1,600 300 100
U.K., Ireland, Europe forecasted units sold 0 1,600 300 100 0 1,600 300 100
Japan, New Zealand, Australia forecasted units sold 0 800 150 50 0 800 150 50
Canada forecasted units sold 0 400 75 25 0 400 75 25
Units sold by artist 0 1,200 225 75 0 1,200 225 75

Total sales $0 $43,382 $8,134 $2,711 $0 $43,382 $8,134 $2,711


Per unit Per unit
Cost of goods sold $0.90 $0 $5,040 $945 $315 $0.90 $0 $5,040 $945 $315
Mechanical royalties $0.85 $0 $3,740 $701 $234 $0.85 $0 $3,740 $701 $234
Recording-artist royalties $1.45 $0 $6,380 $1,196 $399 $1.75 $0 $7,700 $1,444 $481
Recoupables not recovered $13,025 $14,375
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $1,485 $1,485
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $31,962 $5,993 ($12,512) ($14,000) $26,902 $5,044 ($14,179)
Taxes(put rate in box) 40% $4,400 ($12,785) ($2,397) $5,005 $5,600 ($10,761) ($2,018) $5,671
Net operating profit after tax ($6,600) $19,177 $3,596 ($7,507) ($8,400) $16,141 $3,026 ($8,507)

Change in inventory ($6,228) $3,872 $556 $315 ($6,228) $3,872 $556 $315
Change in recoupables ($21,000) $6,380 $1,196 $399 ($24,000) $7,700 $1,444 $481
Free cash flow ($33,828) $29,429 $5,348 $7,716 ($38,628) $27,713 $5,026 $8,149

NPV Own $2,204 License ($4,077)


IRR 17.1% 3.8%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $6,228 $2,356 $1,800 $1,485 $6,228 $2,356 $1,800 $1,485
Recoupables 21,000 14,620 13,424 13,025 24,000 16,300 14,856 14,375
$14,510 $15,860
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
BEST CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 5,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 4,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 12,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 80% 15% 5% 0% 80% 15% 5%
U.S. forecasted units sold 0 4,000 750 250 0 4,000 750 250
U.K., Ireland, Europe forecasted units sold 0 3,200 600 200 0 3,200 600 200
Japan, New Zealand, Australia forecasted units sold 0 800 150 50 0 800 150 50
Canada forecasted units sold 0 400 75 25 0 400 75 25
Units sold by artist 0 1,200 225 75 0 1,200 225 75

Total sales $0 $78,800 $14,775 $4,925 $0 $78,800 $14,775 $4,925


Per unit Per unit
Cost of goods sold $0.90 $0 $8,640 $1,620 $540 $0.90 $0 $8,640 $1,620 $540
Mechanical royalties $0.85 $0 $7,140 $1,339 $446 $0.85 $0 $7,140 $1,339 $446
Recording-artist royalties $1.45 $0 $12,180 $2,284 $761 $1.75 $0 $14,700 $2,756 $919
Recoupables not recovered $5,775 $5,625
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $2,835 $2,835
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $57,980 $10,871 ($4,986) ($14,000) $48,320 $9,060 ($5,440)
Taxes(put rate in box) 40% $4,400 ($23,192) ($4,348) $1,995 $5,600 ($19,328) ($3,624) $2,176
Net operating profit after tax ($6,600) $34,788 $6,523 ($2,992) ($8,400) $28,992 $5,436 ($3,264)

Change in inventory ($10,908) $6,595 $938 $540 ($10,908) $6,595 $938 $540
Change in recoupables ($21,000) $12,180 $2,284 $761 ($24,000) $14,700 $2,756 $919
Free cash flow ($38,508) $53,563 $9,745 $6,919 ($43,308) $50,287 $9,130 $6,655

NPV Own $22,010 License $13,606


IRR 61.6% 39.2%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $10,908 $4,313 $3,375 $2,835 $10,908 $4,313 $3,375 $2,835
Recoupables 21,000 8,820 6,536 5,775 24,000 9,300 6,544 5,625
$8,610 $8,460
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
WORST CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 5,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 10,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 50% 25% 25% 0% 50% 25% 25%
U.S. forecasted units sold 0 2,500 1,250 1,250 0 2,500 1,250 1,250
U.K., Ireland, Europe forecasted units sold 0 1,000 500 500 0 1,000 500 500
Japan, New Zealand, Australia forecasted units sold 0 500 250 250 0 500 250 250
Canada forecasted units sold 0 250 125 125 0 250 125 125
Units sold by artist 0 750 375 375 0 750 375 375

Total sales $0 $40,682 $20,341 $20,341 $0 $40,682 $20,341 $20,341


Per unit Per unit
Cost of goods sold $0.90 $0 $4,500 $2,250 $2,250 $0.90 $0 $4,500 $2,250 $2,250
Mechanical royalties $0.85 $0 $3,613 $1,806 $1,806 $0.85 $0 $3,613 $1,806 $1,806
Recording-artist royalties $1.45 $0 $6,163 $3,081 $3,081 $1.75 $0 $7,438 $3,719 $3,719
Recoupables not recovered $8,675 $9,125
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $2,295 $2,295
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $30,019 $15,010 $4,040 ($14,000) $25,132 $12,566 $1,146
Taxes(put rate in box) 40% $4,400 ($12,008) ($6,004) ($1,616) $5,600 ($10,053) ($5,026) ($458)
Net operating profit after tax ($6,600) $18,012 $9,006 $2,424 ($8,400) $15,079 $7,540 $688

Change in inventory ($5,647) $1,676 ($574) $2,250 ($5,648) $1,676 ($574) $2,250
Change in recoupables ($21,000) $6,163 $3,081 $3,081 ($24,000) $7,438 $3,719 $3,719
Free cash flow ($33,247) $25,850 $11,513 $18,725 ($38,048) $24,193 $10,685 $18,076

NPV Own $12,340 License $4,937


IRR 34.6% 20.0%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $5,648 $3,971 $4,545 $2,295 $5,648 $3,971 $4,545 $2,295
Recoupables 21,000 14,838 11,756 8,675 24,000 16,563 12,844 9,125
$10,970 $11,420
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
WORST CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 8,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 13,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 50% 25% 25% 0% 50% 25% 25%
U.S. forecasted units sold 0 4,000 2,000 2,000 0 4,000 2,000 2,000
U.K., Ireland, Europe forecasted units sold 0 1,000 500 500 0 1,000 500 500
Japan, New Zealand, Australia forecasted units sold 0 500 250 250 0 500 250 250
Canada forecasted units sold 0 250 125 125 0 250 125 125
Units sold by artist 0 750 375 375 0 750 375 375

Total sales $0 $54,250 $27,125 $27,125 $0 $54,250 $27,125 $27,125


Per unit Per unit
Cost of goods sold $0.90 $0 $5,850 $2,925 $2,925 $0.90 $0 $5,850 $2,925 $2,925
Mechanical royalties $0.85 $0 $4,888 $2,444 $2,444 $0.85 $0 $4,888 $2,444 $2,444
Recording-artist royalties $1.45 $0 $8,338 $4,169 $4,169 $1.75 $0 $10,063 $5,031 $5,031
Recoupables not recovered $4,325 $3,875
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $3,105 $3,105
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $40,063 $20,031 $12,601 ($14,000) $33,450 $16,725 $9,745
Taxes(put rate in box) 40% $4,400 ($16,025) ($8,013) ($5,041) $5,600 ($13,380) ($6,690) ($3,898)
Net operating profit after tax ($6,600) $24,038 $12,019 $7,561 ($8,400) $20,070 $10,035 $5,847

Change in inventory ($7,402) $2,149 ($776) $2,925 ($7,403) $2,149 ($776) $2,925
Change in recoupables ($21,000) $8,338 $4,169 $4,169 ($24,000) $10,063 $5,031 $5,031
Free cash flow ($35,002) $34,524 $15,411 $22,085 ($39,803) $32,281 $14,290 $20,783

NPV Own $23,828 License $15,205


IRR 53.9% 35.8%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $7,403 $5,254 $6,030 $3,105 $7,403 $5,254 $6,030 $3,105
Recoupables 21,000 12,663 8,494 4,325 24,000 13,938 8,906 3,875
$7,430 $6,980
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
WORST CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 2,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 7,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 50% 25% 25% 0% 50% 25% 25%
U.S. forecasted units sold 0 1,000 500 500 0 1,000 500 500
U.K., Ireland, Europe forecasted units sold 0 1,000 500 500 0 1,000 500 500
Japan, New Zealand, Australia forecasted units sold 0 500 250 250 0 500 250 250
Canada forecasted units sold 0 250 125 125 0 250 125 125
Units sold by artist 0 750 375 375 0 750 375 375

Total sales $0 $27,114 $13,557 $13,557 $0 $27,114 $13,557 $13,557


Per unit Per unit
Cost of goods sold $0.90 $0 $3,150 $1,575 $1,575 $0.90 $0 $3,150 $1,575 $1,575
Mechanical royalties $0.85 $0 $2,338 $1,169 $1,169 $0.85 $0 $2,338 $1,169 $1,169
Recording-artist royalties $1.45 $0 $3,988 $1,994 $1,994 $1.75 $0 $4,813 $2,406 $2,406
Recoupables not recovered $13,025 $14,375
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $1,485 $1,485
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $19,976 $9,988 ($4,522) ($14,000) $16,814 $8,407 ($7,453)
Taxes(put rate in box) 40% $4,400 ($7,990) ($3,995) $1,809 $5,600 ($6,725) ($3,363) $2,981
Net operating profit after tax ($6,600) $11,986 $5,993 ($2,713) ($8,400) $10,088 $5,044 ($4,472)

Change in inventory ($3,892) $1,204 ($371) $1,575 ($3,893) $1,204 ($371) $1,575
Change in recoupables ($21,000) $3,988 $1,994 $1,994 ($24,000) $4,813 $2,406 $2,406
Free cash flow ($31,492) $17,177 $7,615 $15,366 ($36,293) $16,104 $7,079 $15,369

NPV Own $852 License ($5,331)


IRR 13.6% 3.1%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $3,893 $2,689 $3,060 $1,485 $3,893 $2,689 $3,060 $1,485
Recoupables 21,000 17,013 15,019 13,025 24,000 19,188 16,781 14,375
$14,510 $15,860
Recoupables Recoupables
Production costs $15,000 Production costs $15,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $21,000 Total $24,000
WORST CASE
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions
ASSUMPTIONS
Sales projections Units Pricing Marketing and promotion
U.S. sales 5,000 U.S. wholesale unit price $11.45 Print advertising $3,000
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05 Posters and photos 500
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings 1,000
Canada sales 500 Euro/US$ exchange rate 1.224 Independent radio promoter 2,500
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57 Retail placement 5,000
Total–projected sales (units) 10,000 Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost $12,000
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00 CD mail-out units 2,000
Distribution fee 21% Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

CASH FLOWS
Own License
Years Years
0 1 2 3 0 1 2 3
Annual percentage sold in percent (totals 100%) 50% 25% 25% 0% 50% 25% 25%
U.S. forecasted units sold 0 2,500 1,250 1,250 0 2,500 1,250 1,250
U.K., Ireland, Europe forecasted units sold 0 1,000 500 500 0 1,000 500 500
Japan, New Zealand, Australia forecasted units sold 0 500 250 250 0 500 250 250
Canada forecasted units sold 0 250 125 125 0 250 125 125
Units sold by artist 0 750 375 375 0 750 375 375

Total sales $0 $40,682 $20,341 $20,341 $0 $40,682 $20,341 $20,341


Per unit Per unit
Cost of goods sold $0.90 $0 $4,500 $2,250 $2,250 $0.90 $0 $4,500 $2,250 $2,250
Mechanical royalties $0.85 $0 $3,613 $1,806 $1,806 $0.85 $0 $3,613 $1,806 $1,806
Recording-artist royalties $1.45 $0 $6,163 $3,081 $3,081 $1.75 $0 $7,438 $3,719 $3,719
Recoupables not recovered $13,675 $14,125
Promotion & marketing not recoupable $11,000 $0 $0 $0 $11,000 $0 $0 $0
Loss on inventory $2,295 $2,295
Upfront fee (advance) $0 $0 $0 $0 $3,000 $0 $0 $0
Taxable income ($11,000) $30,019 $15,010 ($960) ($14,000) $25,132 $12,566 ($3,854)
Taxes(put rate in box) 40% $4,400 ($12,008) ($6,004) $384 $5,600 ($10,053) ($5,026) $1,542
Net operating profit after tax ($6,600) $18,012 $9,006 ($576) ($8,400) $15,079 $7,540 ($2,312)

Change in inventory ($5,647) $1,676 ($574) $2,250 ($5,648) $1,676 ($574) $2,250
Change in recoupables ($26,000) $6,163 $3,081 $3,081 ($29,000) $7,438 $3,719 $3,719
Free cash flow ($38,247) $25,850 $11,513 $20,725 ($43,048) $24,193 $10,685 $20,076

NPV Own $8,763 License $1,361


IRR 25.8% 13.9%

WORKING CAPITAL
Own License
Years Years
0 1 2 3 0 1 2 3
Assets Assets
Inventory, incl. overage @... 30% $5,648 $3,971 $4,545 $2,295 $5,648 $3,971 $4,545 $2,295
Recoupables 26,000 19,838 16,756 13,675 29,000 21,563 17,844 14,125
$15,970 $16,420
Recoupables Recoupables
Production costs $20,000 Production costs $20,000
Marketing & promotion (1/2) 6,000 Marketing & promotion (1/2) 6,000
Advance 0 Advance 3,000
Total $26,000 Total $29,000