Dual Multi-Period
Excess Earnings
in the Valuation
of Intangibles
October 2013
Contributing AUTHORS:
Randie Dial
Partner — CliftonLarsonAllen LLP
Carol Lewis
Partner — BKD, LLP
Michael Massey
Partner — Moss Adams LLP
Brian Steen
Principal — Dixon Hughes Goodman LLP
Reviewers:
The Forensic and Valuation Services team and the authors
thank the members of the 2012-13 AICPA Forensic and
Valuation Services Executive Committee and AICPA Business
Valuations Committee for reviewing this white paper.
Copyright © 2013 American Institute of CPAs. All rights reserved.
DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior technical committees of and does not
represent an official position of the American Institute of CPAs. It is distributed with the understanding that the AICPA is not rendering legal, accounting
or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should
be sought.
For more information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your
request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110.
TABLE OF CONTENTS
Executive Summary..................................................................................................2
Method Overview....................................................................................................3
Hierarchy Method....................................................................................................4
Cross-Charge Method...............................................................................................5
Partial Separation Method.........................................................................................6
Separation Method..................................................................................................7
Conclusion.............................................................................................................8
Examples..............................................................................................................9
Executive Summary
The purpose of this technical white paper is to discuss the application and issues
of the multi-period excess earnings method (“MPEEM”) when two intangible assets
are being valued using this method. This method typically is used to value the most
important asset(s), (i.e., primary asset(s)) while other methods are used to value
assets that are more secondary. Typically, the method is utilized to value only one
of the subject intangible assets. However, in certain situations the method may
be considered appropriate for two intangible assets when the assets are of similar
importance to the company. For example, this case could be made for a technology
company where technology is a driving force for the company, but strong customer
relationships are also very important.
This technical white paper will address the following related to utilizing the MPEEM
for more than one intangible asset (dual excess earnings):
Provide an overview of the methods
Discuss options to consider with examples
Identify advantages and disadvantages
It is important to note that this technical white paper is informational only
regarding the use of the MPEEM. It does not promote or criticize the use of the
methods discussed. This paper is prepared merely to provide information to the
valuation community regarding the methods and the potential pros and cons.
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 2
Method Overview
The MPEEM is a form of the income approach and is
generally reserved for the primary intangible asset with
the most direct relationship to the revenue and cash
flow stream. Unlike the discounted cash flow (”DCF”)
method, the MPEEM measures fair value by discounting
only the expected future cash flows attributable to a
single intangible asset. To determine the cash flows
attributable to a single intangible asset, those cash flows
must be isolated by deducting a charge for the use of all
the operating assets that contribute to the value of that
intangible asset. The charge for the use of the operating
assets is called a contributory charge. A contributory
charge is a form of economic rent for the use of assets
in generating the expected cash flows. After deducting
these charges, the remaining residual cash flows are
assumed to be the cash flows attributable to the subject
intangible asset.
When this method is used to value more than one
intangible asset, the primary issues that surface are:
1. Separating the cash flows for the two intangible assets;
and/or
2. Cross charging the intangible assets for the use of the
other intangible assets.
Splitting Revenues — One method for estimating the
value of two separate intangible assets is to isolate the
revenues and cash flows for the two intangible assets.
This method can be utilized when the assets have two
distinct revenue sources and the intangible assets are
not dependent upon each other. If this were the case,
the calculations would not require a cross charge for the
two intangible assets. Splitting revenues is not always
as straight forward as it sounds. For example, how do
you eliminate the overlap category “sales of current
technology to current customers?” This can often be
overlooked when splitting revenues.
Cross Contributory Charges — This issue relates to the
concept of charging one of the intangible assets for the
use of the other and vice versa. For example, servicing
the customer relationships requires the use of technology;
therefore, a contributory charge should be deducted
from the customer relationships’ cash flow for the use of
the technology and vice versa. One of the biggest issues
with this approach is the circular relationship between
the two calculations (i.e., the value of each intangible
asset depends on the contributory charge of the other
intangible asset). Opinions differ on the usefulness and
reliability of this approach. Some believe the method
results in reliable values, while others believe the method
results in values that may be overstated.
These issues are included and addressed in this white
paper through the presentation of four dual excess
earnings methods that exist. These methods include the
Hierarchy Method, the Cross-Charge Method, the Partial
Separation Method and the Separation Method. Each
of these methods is unique and has its own nuances
on how to deal with the above issues. This white paper
addresses each method below with examples as well
as the pros and cons.
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 3
Hierarchy Method
The Hierarchy Method assumes that a hierarchy, or
order of importance, exists between the two primary
intangible assets. Under this method, both intangible
assets are valued using an MPEEM and a contributory
asset charge from the primary intangible asset is applied
to the secondary intangible asset. However, the primary
intangible asset does not receive a contributory asset
charge from the secondary intangible asset.
The Hierarchy Method has additional theoretical
problems in that the value of the secondary intangible
asset has no impact on the value of the primary intangible
asset. In theory, the value of enabling intangible assets
should impact the value of the primary intangible asset.
In the Hierarchy Method, however, the primary intangible
asset value impacts the value of the secondary intangible
asset only.
If there is no acquired in-process research and
development (IPR&D) or backlog, the Hierarchy Method
is a relatively simplistic method for valuing dual primary
intangible assets. However, careful consideration must
be given to the selection of a primary intangible asset.
This selection is subjective in nature and has an impact
on the value of the primary and secondary intangible
assets. A factor that should be considered in identifying
the primary intangible asset includes the buyer’s
motivation for acquiring the intangible assets. A buyer
typically is able to identify the primary intangible asset
that motivated them to make the acquisition. The buyer’s
motivations likely reflect those of a market participant
buyer and may identify the primary intangible asset. Past
experience may also help the appraiser to identify the
primary intangible asset considering the nature of the
intangible assets and which intangible assets typically
have a higher value or a longer life.
This white paper provides a high-level example in the
section titled “Examples — Hierarchy Method.” This
example assumes that technology was deemed to be
the primary intangible asset while customer relationships
were deemed to be a secondary intangible asset. As
presented on Exhibits 2A and 2B, both intangible assets
are valued using the MPEEM, but only the secondary
intangible asset (i.e., customer relationships) is being
charged a contributory charge relating to the value
of the primary intangible asset (i.e., technology). The
contributory charge sheet (Exhibit 2C) shows the
calculation of the charges and how they are calculated.
Because a contributory asset charge from the primary
intangible asset is applied to the secondary intangible
asset, but no contributory asset charge from the
secondary intangible asset is applied to the primary
intangible asset, the Hierarchy Method naturally provides
a higher value for the primary intangible asset and a
lower value for the secondary intangible asset. This is
a main reason why the selection between primary and
secondary intangible assets is a very important decision.
In addition, because profits are not split between the
two intangible assets, profits may be double-counted,
further contributing to the overvaluation of the primary
intangible asset. Profits allocated to the two intangible
assets will not reconcile with total company profits.
Because the primary asset, technology, is not burdened
by a contributory asset charge relating to customer
relationships, its value may be overstated, as explained
above. This again illustrates that the determination of
which intangible asset is primary or secondary is very
important.
Because a contributory asset charge
from the primary intangible asset is
applied to the secondary intangible
asset, but no contributory asset charge
from the secondary intangible asset is
applied to the primary intangible asset,
the Hierarchy Method naturally provides
a higher value for the primary intangible
asset and a lower value for the secondary
intangible asset.
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 4
Cross-Charge Method
Unlike the Hierarchy Method, the Cross-Charge Method
does not require the identification of a primary and
secondary intangible asset. Under the Cross-Charge
Method, both intangible assets are valued using an
MPEEM and a contributory asset charge from each
intangible asset is assigned to the other intangible asset.
The Cross-Charge Method may result in a reasonable
value conclusion if the proper cross-charge assumptions
are included in the calculation. However, there are no
guidelines regarding how cross charges should be
calculated. This is a weakness because the Cross-Charge
Method is based on a circular reference due to the
cross charges that are applied to each intangible asset.
Therefore, intangible asset values can vary widely
depending on how the appraiser chooses to set up the
cross charges. This issue becomes more complicated if
the two intangible assets have significantly different lives
because the selected revenue base typically impacts the
contributory asset charge calculation.
In addition, the Cross-Charge Method does not
segregate profits. As a result, the profits allocated to the
two intangible assets will not reconcile to the company’s
total profit. This can result in the over or under-statement
of intangible asset values.
A high-level example is presented in the section of this
white paper titled “Examples — Cross-Charge Method.”
As presented on Exhibits 3A and 3B, both intangible
assets are valued using the MPEEM, but in this instance,
they are both charged for each other’s use. In the
technology valuation on Exhibit 3A, there is a charge
relating to the customer relationships. In addition, in the
valuation of the customer relationships on Exhibit 3B,
there is a charge relating to the technology.
1
Exhibit 3C illustrates the contributory asset charge
determination and how the calculation works. The first
step is to segregate the forecast into four buckets as
presented. These buckets represent both existing and
future technology revenue as well as both existing and
future customer relationships revenue. The return on
both technology and customers relationships is then
determined by taking the discount rate applicable to
each multiplied by their respective value. In Exhibit 3C,
the value of the technology is presented as $1,756 and a
discount rate of 16%. This implies a return of $281. This
is why the analysis becomes circular as you have to know
the “value” to determine the return required.
The valuation of IPR&D and backlog may result in
additional circular references.
The Appraisal Foundation recommends that the
Cross-Charge Method “is not best practice and should
be avoided.”1
The Cross-Charge Method may result in a
reasonable value conclusion if the proper
cross charge assumptions are included
in the calculation. However, there are no
guidelines regarding how cross charges
should be calculated.
Best Practices for Valuations in Financial Reporting: Intangible Asset Working Group — Contributory Assets, May 31, 2010, The Appraisal Foundation
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 5
Partial Separation Method
Under the Partial Separation Method, an MPEEM is
applied to one intangible asset using a contributory
asset charge for another intangible asset, the value of
which is determined in a two-step process. This method
is complex and is more easily demonstrated through
the use of a specific scenario. (See Examples — Partial
Separation Method.)
In this scenario, the company has technology and
customer relationships. This method determines a
contributory asset charge for the customer relationships
by applying an MPEEM to the existing customers based
on the future technology only (see Exhibit 4B). An MPEEM
is also applied to the company’s existing technology
(see Exhibit 4A). The contributory asset charge
for customer relationships that was applied in the
existing technology MPEEM is added to the customer
relationships/future technology cash flows in order
to arrive at total cash flows resulting from customer
relationships (see Exhibit 4C). These cash flows drive
the value of customer relationships and the contributory
asset charge applied to existing technology.
Finally, the method does not separate existing
technology revenues between existing and future
customers. As a result, this methodology may overstate
the value of existing customer relationships.
A high-level example is presented in the section of
this white paper titled “Examples — Partial Separation
Method.” Note that in the calculation of the value of
customer relationships, Exhibit 4B (Step 2a), that the
revenue reflects only the future technology sold to
existing customers. The residual profit from Step 2a is
added to the customer relationship CAC that is utilized
in Exhibit 4A (Step 1) to determine the total value of
customer relationships.
A benefit of the Partial Separation Method
is that it begins to separate cash flows
between the two assets to be valued.
However, the Partial Separation Method
has a number of challenges.
A benefit of the Partial Separation Method is that it
begins to separate cash flows between the two assets
to be valued. However, the Partial Separation Method
has a number of challenges. One challenge is that it
contains a circular reference. The customer relationships
contributory asset charge applied to existing technology
is based the total value of existing customer relationships,
which is based, in part, on the contributory asset charge
applied to existing technology. Therefore, it results in a
circular reference. In addition, some argue that business
enterprise revenue basis of the customer relationships
contributory asset charge calculation is subjective.
Similar to prior methodologies that we discussed
in previous sections of this white paper, the profits
allocated to the two assets will not reconcile to the
company’s total profit.
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 6
Separation Method
Following the scenario discussed above (assuming
technology and customer relationships), the last method
gets even more complicated. Under the Separation
Method, revenues are split between existing and future
customers and technology. In addition, research and
development expenses are split between existing and
future technology and sales and marketing expenses
are split between existing and future customers.
The development and presentation of the revenue
and expense splitting is referred to as Step 0 and is
presented on Exhibits 5A and 5B. The value of the
technology intangible asset and customer relationships
intangible asset is then determined in a multi-step
process as follows:
First, an MPEEM is applied to existing technology
attributable to future customers on Exhibit 5C. In this
analysis, only maintenance research and development,
future sales and marketing expense, and general
contributory asset charges are applied. This step
provides one portion of the existing technology value.
The existing technology royalty rate implied by the
first calculation is calculated using the revenue stream
attributable to existing technology and future customers
(Exhibit 5D).
Second, an MPEEM is applied to existing technology
and existing customers as presented on Exhibit 5E. In
this analysis, maintenance research and development,
maintenance sales and marketing, general contributory
asset charges and a technology contributory asset
charge (as determined by the royalty above) are applied
to arrive at a portion of the customer relationships
value. This step provides one portion of the customer
relationships value.
Third, the present value of the technology contributory
asset charge applied in the second step is calculated
(Exhibit 5F). This step provides the second portion of
the existing technology value.
Fourth, an MPEEM is applied to future technology and
existing customers. In this analysis, future research
and development, maintenance sales and marketing
expenses and general contributory asset charges are
applied to arrive at the second portion of the customer
relationships value (Exhibit 5G).
Finally, the result of Steps 1 and 3 are added to arrive
at existing technology value and the results of Steps 2
and 4 are added to arrive at the value of customer
relationships.
A high-level example is presented in the section of this
white paper titled “Examples — Separation Method.”
Note that the separation map for revenue and expenses
(Step 0) is included in Exhibits 5A and 5B, and that the
total revenue reconciles to the revenue presented in the
business enterprise value, Exhibit 1A. The conclusions of
Steps 1 and 3 (for technology) and Steps 2 and 4 are (for
customer relationships) presented in Exhibit 5H.
This separation of revenues and expenses enables the
valuation of existing technology and existing customers
without the use of circular references using profits that
reconcile to the Company’s total profit. Therefore, it is
believed it is more theoretically sound than the other
methods described above.
Drawbacks of the Separation Method revolve around the
complexity of mapping revenues and expenses between
existing and future customers and technology. This
process is further complicated if IPR&D or backlog is
introduced into the valuation as additional revenue and
expense maps must be built into the model.
If the existing technology is expected to generate
different returns when sold to future customers
compared to the returns generated from existing
customers, adjustments may need to be applied to
the implied royalty rate.
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 7
Conclusion
As presented in this paper, there are several methods
to choose from in applying a dual excess earnings
approach. These methods each have their benefits
and drawbacks. In practice, most appraisers are able
to find methods other than MPEEM to value one of the
intangible assets in order to avoid using a dual excess
earnings approach.
The examples are provided to give the reader a sense
of how complex these methods can get. They often
get very difficult reviews and questions because of the
embedded assumptions and circular equations within
the models. These examples were purely shown as
hypothetical situations and are not meant to be copied
and used. The narrative of this paper was meant to
discuss these methods at a summary level to give the
reader a sense of how the methods work and their
difficulties. This paper was not meant to give the reader
a roadmap of how to apply the methods, but was written
at more of a demonstrative level.
In the end, it is the choice of the practitioner on
which methods to ultimately employ and it is his/her
responsibility to justify the decision.
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 8
Examples
Examples for all the methods discussed above are
presented in this section. The examples consider a
technology industry company acquisition at the end of
2013 of about $16 million, where both the technology
and the customer relationships were the primary value
drivers of the transaction. Other important assumptions
for the analysis are:
Last Year of Technology
2018
Existing Customers Revenue
Growth percentage
2.00%
Customer Relationship Attrition
each year
20.00%
Point when existing customers
become less than 2% of sales
2025
In addition, although the examples do not present the
determination of the weighted average cost of capital, it
was determined that 16% was the required rate of return
for both the customer relationships and the technology.
The determination of the business enterprise value
is presented in Exhibit 1A (note that the internal rate
of return determined in the business enterprise value
analysis is 15.0%) and a mid-year convention is utilized.
Note that the conclusions under the various methods
vary significantly. Under the Hierarchy Method, the
technology value (it had been determined technology
was the primary intangible asset) is much greater than
the value determined in any of the other methods. The
conclusions under the other methods are more closely
aligned, as presented below.
Hierarchy Method Technology
$2,626
Customer Relationships
$1,725
Cross-Charge Method Technology
$1,756
Customer Relationships
$2,887
Partial Separation Method
Technology
$2,000
Customer Relationships
$1,900
Separation Method Technology
$2,300
Customer Relationships
$1,400
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 9
EXHIBIT 1A — DISCOUNTED CASH FLOW ANALYSIS – BUSINESS ENTERPRISE VALUE (BEV)
Most recentTerminal
12 months
2014 2015 2016 2017 2018 2019 2020
2021
2022 2023
2024
Period
Net Revenue
12,500 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500 22,000 22,500 Growth 20.00%16.67% 5.71% 2.70% 2.63% 2.56% 2.50% 2.44% 2.38% 2.33% 2.27%
Cost of Goods Sold
6,000 7,000 7,400 7,600 7,800 8,000 8,200 8,400 8,600 8,800 9,000 23,000
2.22%
9,200
Gross Profit
9,000 10,500 11,100 11,400 11,700 12,000 12,300 12,600 12,900 13,200 13,500 60.00%60.00%60.00%60.00%60.00%60.00%60.00% 60.00% 60.00%60.00% 60.00%
13,800 60.00%
R&D Expense
1,500 1,750 1,850 1,900 1,950 2,000 2,050 2,100 2,150 2,200 2,250 10.00%10.00%10.00%10.00%10.00%10.00%10.00% 10.00% 10.00%10.00% 10.00%
2,300
10.00%
S&M Expense
2,250 2,625 2,775 2,850 2,925 3,000 3,075 3,150 3,225 3,300 3,375 15.00%15.00%15.00%15.00%15.00%15.00%15.00% 15.00% 15.00%15.00% 15.00%
3,450 15.00%
G&A Expense
1,500 1,750 1,850 1,900 1,950 2,000 2,050 2,100 2,150 2,200 2,250 10.00%10.00%10.00%10.00%10.00%10.00%10.00% 10.00% 10.00%10.00% 10.00%
2,300 10.00%
Total Operating Expenses
5,250 6,125 6,475 6,650 6,825 7,000 7,175 7,350 7,525 7,700 7,875 8,050
EBITDA
3,750 4,375 4,625 4,750 4,875 5,000 5,125 5,250 5,375 5,500 5,625 25.00%25.00%25.00%25.00%25.00%25.00%25.00% 25.00% 25.00%25.00% 25.00%
5,750 25.00%
Depreciation
750 875 925 950 975 1,000 1,025 1,050 1,075 1,100 1,125 5.00%5.00%5.00%5.00%5.00%5.00%5.00% 5.00% 5.00%5.00% 5.00%
1,150 5.00%
Operating Income
3,000 3,500 3,700 3,800 3,900 4,000 4,100 4,200 4,300 4,400 4,500 20.00%20.00%20.00%20.00%20.00%20.00%20.00% 20.00% 20.00%20.00% 20.00%
Tax Expense
40.00%
After-Tax Operating Income
1,200 1,400 1,480 1,520 1,560 1,600 1,640 1,680 1,720 4,600
20.00%
1,760 1,800 1,840
1,800 2,100 2,220 2,280 2,340 2,400 2,460 2,520 2,580 2,640 2,700 2,760
Plus: Depreciation
750 875 925 950 975 1,000 1,025 1,050 1,075 1,100 1,125 1,150
Less: CapEx
6.00% (900)(1,050) (1,110) (1,140) (1,170)(1,200)(1,230) (1,260) (1,290)(1,320) (1,350)
(1,150)
Less: Changes in debt-free
Net Working Capital
10.00%(250)
(250)
(100)(50)(50)(50)(50) (50) (50)(50) (50)
(50)
Unlevered Free Cash Flow
1,400 1,675 1,935 2,040 2,095 2,150 2,205 2,260 2,315 2,370 2,425 9.33% 9.57%10.46%10.74%10.74%10.75%10.76% 10.76%10.77%10.77% 10.78%
2,710
11.78%
Partial Period Factor 1111111 1 11 1
Mid-Year Convention 0.51.52.53.54.55.56.5 7.5 8.59.510.5
Present Value Factor
15.00% 0.93250.8109 0.7051 0.61310.53320.46360.4031 0.3506 0.3048 0.2651 0.2305
Present Value of Cash Flow
Net Present Value of Discrete
Cash Flows
1,306 1,358 1,364 1,251 1,117 997 889 792 706 628 559 Net Present Value of Residual
Terminal Value
Cash Flows
5,205 Residual Cash Flow
2,710
Purchase Price
16,172 WACC15.00%
Implied Multiple of 2011 EBITDA
4.31
Long-term Growth
3.00%
Plus: Excess WC0
Divided by Cap Rate
12.00%
Plus: NonOperating Assets, Net 0
22,583
Plus: NonOperating Loss Valuation
0
PV Factor
0.2305
Total Consideration, Rounded 16,176
5,205
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 10
EXHIBIT 2A — HIERARCHY METHOD – EXISTING TECHNOLOGY VALUE (PRIMARY ASSET) as of Dec. 31, 2013
2014
2015
2016
2017
2018
Existing Technology Revenue
Growth
12,000 9,600 -20.00%
6,720 -30.00%
4,032 -40.00%
2,016
-50.00%
Cost of Goods Sold
4,800 3,840 2,688 1,613 806
Gross Profit
7,200 5,760 4,032 2,419 1,210
60.00%60.00%60.00%60.00%60.00%
Maintenance/R&D Expense
1,200 960 672 403 202
10.00%10.00%10.00%10.00%10.00%
S&M Expense
1,800 1,440 1,008 605 302
15.00%15.00%15.00%15.00%15.00%
G&A Expense
1,200 960 672 403 202
10.00%10.00%10.00%10.00%10.00%
Total Operating Expenses
4,200 3,360 2,352 1,411 706
EBITDA
3,000 2,400 1,680 1,008 504
25.00%25.00%25.00%25.00%25.00%
Depreciation
600 480 336 202 101
5.00%5.00%5.00%5.00%5.00%
Operating Income
2,400 1,920 1,344 806 403
20.00%20.00%20.00%20.00%20.00%
Tax Expense
40.00%
960 768 538 323 161
After-Tax Operating Income
1,440 1,152 806 484 242
After-Tax Capital Charges
Net Working Capital
0.60%
72 58 40 24 12
Fixed Assets
2.40%
288 230 161 97 48
Assembled Workforce
0.80%
96 77 54 32 16
456 365 255 153 77
Residual Profit
984 787 551 331 165
8.20%8.20%8.20%8.20%8.20%
Partial Period Factor11111
Mid-Year Convention0.51.52.53.54.5
Present Value Factor
16.00% 0.92850.80040.6900 0.5948 0.5128
Present Value of Cash Flow
Net Present Value of Discrete Cash Flows
914 630 380 197 85
2,205 Tax Amortization Benefit
420 Fair Value of Developed Technology
2,626 Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 11
EXHIBIT 2B — HIERARCHY METHOD – CUSTOMER RELATIONSHIPS VALUE (SECONDARY ASSET) as of Dec.31, 2013
Existing Customer Revenue
Growth
Cost of Goods Sold
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
12,000 9,792 7,990 6,520 5,320 4,341 3,543 2,891 2,359 1,925 1,571 1,282
-18.40%-18.40%-18.40%-18.40%-18.40%-18.40%-18.40%-18.40%-18.40% -18.40% -18.40%
4,800 3,917 3,196 2,608 2,128 1,737 1,417 1,156 944 770 628 513
Gross Profit
7,200 5,875 4,794 3,912 3,192 2,605 2,126 1,734 1,415 1,155 942 769
60.00%60.00%60.00%60.00%60.00%60.00%60.00%60.00%60.00%60.00% 60.00% 60.00%
R&D Expense
1,200 979 799 652 532 434 354 289 236 192 157 128
10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00% 10.00% 10.00%
Maintenance/S&M Expense
1,800 1,469 1,199 978 798 651 531 434 354 289 236 192
15.00%15.00%15.00%15.00%15.00%15.00%15.00%15.00%15.00%15.00% 15.00% 15.00%
G&A Expense
1,200 979 799 652 532 434 354 289 236 192 157 128
10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00% 10.00% 10.00%
Total Operating Expenses
4,200 3,427 2,797 2,282 1,862 1,519 1,240 1,012 826 674 550 449
EBITDA
3,000 2,448 1,998 1,630 1,330 1,085 886 723 590 481 393 320
25.00%25.00%25.00%25.00%25.00%25.00%25.00%25.00%25.00%25.00% 25.00% 25.00%
Depreciation
600 490 400 326 266 217 177 145 118 96 79 64
5.00%5.00%5.00%5.00%5.00%5.00%5.00%5.00%5.00%5.00% 5.00% 5.00%
Operating Income
2,400 1,958 1,598 1,304 1,064 868 709 578 472 385 314 256
20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00% 20.00% 20.00%
Tax Expense
40.00%
After-Tax Operating Income
960 1,440 783 1,175 639 959 522 782 426 638 347 521 283 425 231 347 189 283 154 231 126 188 103
154
After-Tax Capital Charges
Net Working Capital
0.60%
72 59 48 39 32 26 21 17 14 12 9
8
Fixed Assets
2.40%
288 235 192 156 128 104 85 69 57 46 38 31
Technology (% on Exhibit 2C)
662 469 327 223 147 120 98 80 65 53 43 35
Assembled Workforce
0.80%
96 78 64 52 43 35 28 23 19 15 13 10
1,118 841 630 470 349 285 233 190 155 126 103 84
Residual Profit
322 334 329 312 289 236 193 157 128 105 85 70
2.69% 3.41% 4.11%4.79%5.43%5.43%5.43%5.43%5.43%5.43% 5.43% 5.43%
Partial Period Factor 1111111111 1 1
Mid-Year Convention
0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.510.511.5
Present Value Factor
16.00%
0.92850.80040.6900 0.5948 0.51280.4421 0.38110.32850.2832 0.2441 0.2105 0.1814
Present Value of Cash Flow
Net Present Value of Discrete
Cash Flows
299 267 227 186 148 104 73 52 36 26 18 13
1,449 Tax Amortization Benefit276 Fair Value of Customer Relationships
1,725 Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 12
EXHIBIT 2C — HIERARCHY METHOD – Technology CAC Calculation
Value of Technology
2,626
Useful Life
5
Annual Amortization
525
Required Return on Technology
16.00%
After-Tax Return OF, Amortizing Return
ON over Existing Customer Revenue
20142015201620172018
Technology Amortization
Tax
Return OF Technology
Technology Value at Year-End
Return ON Technology
Total Return On and OF Technology
Existing Customers Portion of Technology
Total Technology CAC for Existing Customers
Existing Customers Revenues
Technology CAC
525 525 525 525 525
(210)(210)(210)(210)(210)
315 315 315 315 2,101 1,576 1,050 525 315
0
420 336 252 168 84
735 651 567 483 399
90%72%58%46%37%
662 469 327 223 147
12,000 9,792 7,990 6,520 5,320
5.51%4.79%4.09% 3.41%2.77%
Return OF, and Full Return ON over BEV Revenue
2014
2015
2016
2017
2018
Return OF Technology
525 525 525 525 525
Return ON Technology
420 420 420 420 420
Total BEV Revenues
15,000 17,500 18,500 19,000 19,500
Total Return On and OF Technology
6.30% 5.40% 5.11% 4.98%4.85%
Return OF, and Full Return ON
over BEV Revenue through Customer Life
2014
2015
2016
2017
2018
2019
2020
2021
Return OF Technology
525 525 525 525 525 0
0
0
Return ON Technology
420 420 420 420 420 420 420 420
Total BEV Revenues
15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000
Total Return On and OF Technology
6.30% 5.40% 5.11% 4.98% 4.85% 2.10% 2.05%2.00%
Return ON only over BEV Revenue
2014
2015
2016
2017
2018
Return OF Technology
0
0
0
0
0
Return ON Technology
420 420 420 420 420
Total BEV Revenues
15,000 17,500 18,500 19,000 19,500
Total Return On and OF Technology
2.80%2.40%2.27%2.21% 2.15%
Return ON only over BEV Revenue
through Customer Life
2014
2015
2016
2017
2018
2019
2020
2021
Return OF Technology
0
0
0
0
0
0
0
0
Return ON Technology
420 420 420 420 420 420 420 420
Total BEV Revenues
15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000
Total Return On and OF Technology
2.80%2.40%2.27% 2.21% 2.15% 2.10%2.05%2.00%
***Several methods here to use in determining the primary asset CAC. The value of the secondary asset will change depending on the method used but
the value of the primary asset will not change.
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 13
EXHIBIT 3A — CROSS-CHARGE METHOD – ESTIMATE OF EXISTING TECHNOLOGY as of Dec. 31, 2013
2014
2015
2016
2017
2018
Existing Technology Revenue
Growth
12,000 9,600 -20.00%
6,720 -30.00%
4,032 -40.00%
2,016
-50.00%
Cost of Goods Sold
4,800 3,840 2,688 1,613 806
Gross Profit
7,200 5,760 4,032 2,419 1,210 60.00%60.00%60.00%60.00%60.00%
Maintenance/R&D Expense
1,200 960 672 403 202
10.00%10.00%10.00%10.00%10.00%
S&M Expense
1,800 1,440 1,008 605 302
15.00%15.00%15.00%15.00%15.00%
G&A Expense
1,200 960 672 403 202
10.00%10.00%10.00%10.00%10.00%
Total Operating Expenses
4,200 3,360 2,352 1,411 706
EBITDA
3,000 2,400 1,680 1,008 504
25.00%25.00%25.00%25.00%25.00%
Depreciation
600 480 336 202 101
5.00%5.00%5.00%5.00%5.00%
Operating Income
2,400 1,920 1,344 806 403
20.00%20.00%20.00%20.00%20.00%
Tax Expense
40.00%
960 768 538 323 161
After-Tax Operating Income
1,440 1,152 806 484 242
After-Tax Capital Charges
Net Working Capital
0.60%
72 58 40 24 12
Fixed Assets
2.40%
288 230 161 97 48
CUSTOMER RELATIONSHIPS (Exhibit 3C)
2.72%
326 261 183 110 55
Assembled Workforce
0.80%
96 77 54 32 16
782 626 438 263 131
Residual Profit
658 526 368 221 111
5.48%5.48%5.48%5.48%5.48%
Partial Period Factor11111
Mid-Year Convention0.51.52.53.54.5
Present Value Factor
16.00% 0.92850.80040.6900 0.5948 0.5128
Present Value of Cash Flow
Net Present Value of Discrete Cash Flows
611 421 254 131 57
1,475 Tax Amortization Benefit
281 Fair Value of Developed Technology
1,756 Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 14
EXHIBIT 3B — CROSS-CHARGE METHOD – ESTIMATE OF CUSTOMER RELATIONSHIPS as of Dec. 31, 2013
Existing Customer Revenue
Growth
Cost of Goods Sold
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
12,000 9,792 7,990 6,520 5,320 4,341 3,543 2,891 2,359 1,925 1,571 1,282
-18.40%-18.40%-18.40%-18.40%-18.40%-18.40%-18.40%-18.40%-18.40% -18.40% -18.40%
4,800 3,917 3,196 2,608 2,128 1,737 1,417 1,156 944 770 628 513
Gross Profit
7,200 5,875 4,794 3,912 3,192 2,605 2,126 1,734 1,415 1,155 942 769
60.00%60.00%60.00%60.00%60.00%60.00%60.00%60.00%60.00%60.00% 60.00% 60.00%
R&D Expense
1,200 979 799 652 532 434 354 289 236 192 157 128
10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00% 10.00% 10.00%
Maintenance/S&M Expense
1,800 1,469 1,199 978 798 651 531 434 354 289 236 192
15.00%15.00%15.00%15.00%15.00%15.00%15.00%15.00%15.00%15.00% 15.00% 15.00%
G&A Expense
1,200 979 799 652 532 434 354 289 236 192 157 128
10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00%10.00% 10.00% 10.00%
Total Operating Expenses
4,200 3,427 2,797 2,282 1,862 1,519 1,240 1,012 826 674 550 449
EBITDA
3,000 2,448 1,998 1,630 1,330 1,085 886 723 590 481 393 320
25.00%25.00%25.00%25.00%25.00%25.00%25.00%25.00%25.00%25.00% 25.00% 25.00%
Depreciation
600 490 400 326 266 217 177 145 118 96 79 64
5.00%5.00%5.00%5.00%5.00%5.00%5.00%5.00%5.00%5.00% 5.00% 5.00%
Operating Income
Tax Expense
40.00%
After-Tax Operating Income
2,400 1,958 1,598 1,304 1,064 868 709 578 472 385 314 256
20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00%20.00% 20.00% 20.00%
960 783 639 522 426 347 283 231 189 154 126 103
1,440 1,175 959 782 638 521 425 347 283 231 188 154
After-Tax Capital Charges
Net Working Capital
0.60%
72 59 48 39 32 26 21 17 14 12 9
8
Fixed Assets
2.40%
288 235 192 156 128 104 85 69 57 46 38 31
TECHNOLOGY
1.65%
198 162 132 108 88 72 58 48 39 32 26 21
Assembled Workforce
0.80%
96 78 64 52 43 35 28 23 19 15 13 10
654 534 435 355 290 237 193 158 129 105 86 70
Residual Profit
786 641 523 427 348 284 232 189 155 126 103 84
6.55%6.55%6.55%6.55%6.55%6.55%6.55%6.55%6.55%6.55% 6.55% 6.55%
Partial Period Factor
1111111111 1 1
Mid-Year Convention
0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.510.511.5
Present Value Factor
16.00%
0.92850.80040.6900 0.5948 0.51280.4421 0.38110.32850.2832 0.2441 0.2105 0.1814
Present Value of Cash Flow
Net Present Value of Discrete
Cash Flows
730 513 361 254 179 126 88 62 44 31 22 15
2,425 Tax Amortization Benefit
462 Fair Value of Customer Relationships
2,887 Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 15
EXHIBIT 3C — CROSS-CHARGE METHOD – Technology CAC Calculation
Value of Technology
1,756
Useful Life
5
Annual Amortization
351
Required Return on Technology
Return of Technology
Value of Customer Relationships
13
Annual Amortization
16.00%
222
Required Return on Technology
281
2,887
Useful Life
16.00%
Return on Customers
462
2014
2015 2016 2017 2018 2019 20202021
Existing Technology to Existing Customers
9,792 6,991 4,021 1,685 0
0
0
0
Future Technology to Existing Customers
2,448 4,661 6,031 6,739 7,055 5,904 4,938 4,128
Existing Technology to Future Customers
2,208 3,509 3,379 2,115 0
0
0
0
552 2,339 5,069 8,461 12,445 14,096 15,562 16,872
15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000
2014
2015
2016
2017
2018
2019
2020
2021
15,000 16,250 17,000 17,500 17,900 18,250 18,571 18,875
281 281 281 281 281 281 281 281
1.87%
1.73%
Future Technology to Future Customers
Total BEV Revenues
Average BEV Revenues 2014 Cumulative Average BEV Revenues
Return ON Technology
Technology CAC% of Revenues
Return ON Customers
Customer Relationship CAC % of Revenues
1.65% ** 1.61% 1.57% 1.54% 1.51%1.49%
462 462 462 462 462 462 462 462
3.08%
2.84%
2.72%
2.64%
2.58%
2.53%
2.49%
2.45%
Return ON over Average BEV Revenue 2011 and 2016
Technology CAC
1.65%
Customers CAC
2.72%
0.0165
**The level of CAC depends on the selected average BEV Revenue Base
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 16
EXHIBIT 4A — PARTIAL SEPARATION METHOD Estimate of Existing Technology, Step 1
2014
2015
2016
2017
2018
Net Revenue
12,000 9,600 6,720 4,032 2,016
Growth
n/a-20.00%-30.00%-40.00%-50.00%
Cost of Goods Sold
4,800 3,840 2,688 1,613 806
Gross Profit
7,200 5,760 4,032 2,419 1,210
60.00%60.00%60.00%60.00%60.00%
Maintenance R&D Expense
1,200 960 672 403 202
10.00%10.00%10.00%10.00%10.00%
S&M Expense
1,800 1,440 1,008 605 302
15.00%15.00%15.00%15.00%15.00%
G&A Expense
1,200 960 672 403 202 10.00%10.00%10.00%10.00%10.00%
Total Operating Expenses
4,200 3,360 2,352 1,411 706
EBITDA
3,000 2,400 1,680 1,008 504
25.00%25.00%25.00%25.00%25.00%
Depreciation
600 480 336 202 101
5.00%5.00%5.00%5.00%5.00%
Operating Income
2,400 1,920 1,344 806 403
20.00%20.00%20.00%20.00%20.00%
Tax Expense
40.00%
960 768 538 323 161
After-Tax Operating Income
1,440 1,152 806 484 242
After Tax Capital Charges
Net Working Capital
0.60%
72 58 40 24 12
Fixed Assets
2.40%
288 230 161 97 48
Customer Relationships
2.00%
240 192 134 81 40
Assembled Workforce
0.80%
96 77 54 32 16
Total Capital Charges
696 557 390 234 117
Residual Profit
744 595 417 250 125
6.20%6.20%6.20%6.20%6.20%
Partial Period Factor
11111
Mid-Year Convention
0.51.52.53.54.5
Present Value Factor
16.00% 0.92850.80040.6900 0.5948 0.5128
Present Value of Cash Flow
Net Present Value of Residual Profit
Sum of Residual Profit
Tax Amortization Benefit
Estimate of Developed Technology Fair Value
691 476 287 149 64
1,667 318 1,985 Estimate of Developed Technology Fair Value, Rounded
2,000 Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 17
EXHIBIT 4B — PARTIAL SEPARATION METHOD Estimate of Existing Customer Relationships, Step 2A
2014 2015 2016 2017 2018
Net Revenue (Future Tech to Exist Cust)
2,400 Growth
2019
2020
20212022
2,891 4,420 5,088 5,136 4,770 4,341 3,543 n/a 84.18%
15.10%
0.95%
-7.13%
-8.99%
-18.40%
2,359
-18.40%-18.40%
Less: Revenue Valued as Backlog
- - - - - - - - -
Cost of Goods Sold
960 1,768 2,035 2,055 1,908 1,737 1,417 1,156 944
Gross Profit
1,440 2,652 3,053 3,082 2,862 2,605 2,126 1,734 1,415
60.00%60.00%60.00%60.00%60.00% 60.00% 60.00% 60.00%
60.00%
Future Technology R&D Expense
240 442 509 514 477 434 354 289 236
10.00%10.00%10.00%10.00%10.00% 10.00% 10.00% 10.00%
10.00%
Maintenance S&M Expense
360 884 1,018 1,027 954 868 709 578 472
15.00%20.00%20.00%20.00%20.00% 20.00% 20.00% 20.00%
20.00%
G&A Expense
240 442 509 514 477 434 354 289 236
10.00%10.00%10.00%10.00%10.00% 10.00% 10.00% 10.00%
10.00%
Total Operating Expenses
840 1,768 2,035 2,055 1,908 1,737 1,417 1,156 944
EBITDA
600 884 1,018 1,027 954 868 709 578 472
25.00%20.00%20.00%20.00%20.00% 20.00% 20.00% 20.00%
20.00%
Depreciation
120 221 254 257 239 217 177 145 118
5.00%5.00%5.00%5.00%5.00% 5.00% 5.00% 5.00%
5.00%
Operating Income
480 663 763 770 716 651 531 434 354
20.00%15.00%15.00%15.00%15.00% 15.00% 15.00% 15.00%
15.00%
Tax Expense
40.00%
192 265 305 308 286 260 213 173 142
After-Tax Operating Income
288 398 458 462 429 391 319 260 212
After Tax Capital Charges
Net Working Capital
0.60%
14 27 31 31 29 26 21 17 14
Fixed Assets
2.40%
58 106 122 123 114 104 85 69 57
Technology (Return ON only)
2.50%
60 111 127 128 119 109 89 72 59
Assembled Workforce
0.80%
19 35 41 41 38 35 28 23 19
Total Capital Charges
151 278 321 324 301 274 223 182 149
137 119 137 139 129 117 96 78 64
Residual Profit Net of Customer CAC
from Technology
5.70%2.70%2.70%2.70%2.70% 2.70% 2.70% 2.70%
2.70% Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 18
EXHIBIT 4C — PARTIAL SEPARATION METHOD Estimate of Existing Customer Relationships, Step 2A
2014 2015 2016 2017 2018
2019
2020
20212022
Residual Profit Net of Customer CAC
from Technology
137 119 137 139 129 117 96 78 64
Add: Customer CAC from Technology
(Step 1)
240 192 134 81 40 0
0
0
0
Residual Profit
377 311 272 219 169 117 96 78 64
Partial Period Factor11111 1 1 1
1
Mid-Year Convention0.51.52.53.54.5 5.5 6.5 7.5
8.5
Present Value Factor
16.00% 0.9285 0.8004 0.6900 0.5948 0.5128
0.4421
0.3811
0.32850.2832
Present Value of Cash Flow
Net Present Value of Residual Profit
PV of Existing Customer Future Technology
350 249 188 130 87 52 36 26 18
1,136 PV of Customer CAC taken from Technology
(Exhibit 4D)
538 Tax Amortization Benefit
217 Estimate of Customer Relationship Fair Value
1,891 Estimate of Customer Relationship Fair Value,
Rounded1,900 EXHIBIT 4D — SEPARATION METHOD Present Value of Customer CAC from Technology
Customer CAC from Technology Step 1
2014
2015
2016
2017
2018
240 192 134 81 40
Partial Period Factor
11111
Mid-Year Convention
0.51.52.53.54.5
Present Value Factor
16.00% 0.92850.80040.6900 0.5948 0.5128
Present Value of Cash Flow
Net Present Value of Residual Profit
223 PV of Customer CAC from Technology
538 154 93 48 21
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 19
EXHIBIT 5A — SEPARATION METHOD Dual Excess Earnings Method Revenue and Expense Map, Step 0
Revenue Map
Customers 2014 2015 2016 2017 2018
2019
Existing Customers 12,000 9,792 7,990 6,520 5,320 % of Total 80.0% 56.0% 43.2% 34.3% 27.3%
4,341 21.7%
2020
20212022
3,543 2,891 2,359
17.3% 13.8%11.0%
Future Customers 3,000 7,708 10,510 12,480 14,180 15,659 16,957 18,109 19,141
% of Total 20.0% 44.0% 56.8% 65.7% 72.7% 78.3% 82.7% 86.2%89.0%
Total Customers 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500
% of BEV Revenue 100%100%100%100%100% 100% 100% 100%
100%
Technology 2014
2015
2016
2017
2018
2019
2020
2021
2022
Existing Technology 12,000 9,600 6,720 4,032 2,016 - - - % of Total 80.0%
54.9%
36.3%
21.2%
10.3%0.0%0.0%0.0%
0.0%
Future Technology 3,000 7,900 11,780 14,968 17,484 20,000 20,500 21,000 21,500
% of Total 20.0%45.1% 63.7% 78.8% 89.7%100.0%100.0%100.0%
100.0%
Total Technology 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500
% of BEV Revenue100%100%100%100%100% 100% 100% 100%
100%
DEEM Revenue Map 2014
2015
2016
2017
2018
2019
2020
2021
2022
Existing Technology to Existing Customers 9,600 5,372 2,902 1,384 550 - - - Future Technology to Existing Customers 2,400 4,420 5,088 5,136 4,770 4,341 3,543 2,891 2,359
Existing Technology to Future Customers 2,400 4,228 3,818 2,648 1,466 - - - Future Technology to Future Customers 600 3,480 6,692 9,832 12,714 15,659 16,957 18,109 19,141
Total Revenue 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500
% of BEV Revenue 100%100%100%100%100% 100% 100% 100%
100%
Total BEV Revenue 15,000 17,500 18,500 19,000 19,500 20,000 20,500 21,000 21,500
EXHIBIT 5B — SEPARATION METHOD Dual Excess Earnings Method Revenue and Expense Map, Step 0
Expense Map
Research & Development
2014
2015
2016
2017
2018
2019
2020
2021
2022
Existing Technology Maintenance R&D 1,200 720 336 121 - - - - % of Revenue 10.0%
7.5%5.0%3.0%0.0%0.0%0.0%0.0%
0.0%
Future Technology R&D 300 1,030 1,514 1,779 1,950 2,000 2,050 2,100 2,150
% of Revenue 10.0%
13.0%12.9%11.9%11.2%10.0%10.0%10.0%
10.0%
Total BEV R&D Expense 1,500 1,750 1,850 1,900 1,950 2,000 2,050 2,100 2,150
% of Revenue 10%10%10%10%10% 10% 10% 10%
10%
Sales & Marketing 2014
2015
2016
2017
2018
2019
2020
Existing Customers Maintenance S&M % of Revenue 1,800 15.0%
1,958 20.0%
1,598 20.0%
1,304 20.0%
1,064 20.0%
868 20.0%
709 20.0%
578 472
20.0% 20.0%
Future Customers S&M % of Revenue 450 15.0%
667 8.6%
1,177 11.2%
1,546 12.4%
1,861 13.1%
2,132 13.6%
2,366 14.0%
2,572 2,753
14.2% 14.4%
Total BEV S&M Expense % of Revenue 2,250 15%
2,625 15%
2,775 15%
2,850 15%
2,925 15%
3,000 15%
3,075 15%
15,000 17,500 18,500 19,000 19,500 20,000 20,500 Total BEV Revenue 2021
3,150 15%
2022
3,225
15%
21,000 21,500
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 20
EXHIBIT 5C — SEPARATION METHOD Estimate of Existing Technology to Future Customers, Step 1
2014
Net Revenue
Growth
Cost of Goods Sold
2015
2016
2017
2018
2,400 4,228 3,818 2,648 1,466
n/a 76.18% -9.72%-30.63%-44.65%
960 1,691 1,527 1,059 586
Gross Profit
1,440 2,537 2,291 1,589 880
60.00%60.00%60.00%60.00%60.00%
Maintenance R&D Expense
240 423 382 265 147
10.00%10.00%10.00%10.00%10.00%
S&M Expense
360 366 428 328 192
15.00% 8.65%11.20%12.39% 13.12%
G&A Expense
240 423 382 265 147
10.00%10.00%10.00%10.00%10.00%
Total Operating Expenses
840 1,211 1,191 858 486
EBITDA
600 1,326 1,100 731 394
25.00% 31.35%28.80% 27.61%26.88%
Depreciation
120 211 191 132 73
5.00%5.00%5.00%5.00%5.00%
Operating Income
480 1,114 909 599 321
20.00%26.35%23.80% 22.61% 21.88%
Tax Expense
40.00%
192 446 363 240 128
After-Tax Operating Income
288 669 545 359 192
After Tax Capital Charges
Net Working Capital
0.60%
14 25 23 16 9
Fixed Assets
2.40%
58 101 92 64 35
Assembled Workforce
0.80%
19 34 31 21 12
Total Capital Charges
91 161 145 101 56
Residual Profit
197 508 400 259 137
8.20% 12.01%10.48% 9.77% 9.33%
Partial Period Factor11111
Mid-Year Convention0.51.52.53.54.5
Present Value Factor
16.00% 0.92850.80040.6900 0.5948 0.5128
Present Value of Cash Flow
Net Present Value of Residual Profit
183 407 276 154 70
Sum of Residual Profit
1,089 Tax Amortization Benefit
208 Estimate of Developed Technology Fair Value
1,297 Estimate of Developed Technology Fair Value, Rounded
1,300 EXHIBIT 5D — SEPARATION METHOD Estimate of Existing Technology to Future Customers, Step 1a
2014
2015
2016
2017
Net Revenue
2,400 4,420 5,088 5,136 Growth
n/a 84.18% 15.10%
0.95%
Royalty Rate
2018
2019
4,770 -7.13%
4,341 -8.99%
2020
3,543 -18.40%
2021
2022
2,891 2,359
-18.40%-18.40%
9.00%9.00%9.00%9.00%9.00%9.00% 9.00% 9.00%9.00%
9.00%
Pretax Royalties
216 398 458 462 429 391 319 260 212
40.00%
86 159 183 185 172 156 128 104 85
After-Tax Royalties
130 239 275 277 258 234 191 156 127
Tax Expense
Partial Period Factor
11111 1 1 1
1
Mid-Year Convention
0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.58.5
Present Value Factor
16.00% 0.9285 0.8004 0.6900 0.5948 0.5128 0.4421 0.3811 0.32850.2832
Present Value of Cash Flow
Net Present Value of Residual Profit
Sum of Residual Profit
Tax Amortization Benefit
Estimate of Developed Technology Fair Value
Estimate of Developed Technology Fair Value, Rounded
120 191 190 165 132 104 73 51 36
1,062 202 1,264 1,300 Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 21
EXHIBIT 5E — SEPARATION METHOD Estimate of Existing Customer Relationships from Existing Technology, Step 2
2014
2015
2016
2017
2018
Net Revenue
Growth
9,600 5,372 2,902 1,384 550
n/a-44.05%-45.97%-52.33%-60.25%
Cost of Goods Sold
3,840 2,149 1,161 553 220
Gross Profit
5,760 3,223 1,741 830 330
60.00%60.00%60.00%60.00%60.00%
Maintenance R&D Expense
960 537 290 138 55
10.00%10.00%10.00%10.00%10.00%
Maintenance S&M Expense
1,440 1,074 580 277 110
15.00%20.00%20.00%20.00%20.00%
G&A Expense
960 537 290 138 55
10.00%10.00%10.00%10.00%10.00%
Total Operating Expenses
3,360 2,149 1,161 553 220
EBITDA
2,400 1,074 580 277 110
25.00%20.00%20.00%20.00%20.00%
Depreciation
480 269 145 69 28
5.00%5.00%5.00%5.00%5.00%
Operating Income
1,920 806 435 208 83
20.00%15.00%15.00%15.00%15.00%
Tax Expense
40.00%
768 322 174 83 33
After-Tax Operating Income
1,152 483 261 125 50
After Tax Capital Charges
Net Working Capital
0.60%
58 32 17 8
3
Fixed Assets
2.40%
230 129 70 33 13
Technology
5.40%
518 290 157 75 30
Assembled Workforce
0.80%
77 43 23 11 4
Total Capital Charges
883 494 267 127 51
Residual Profit
269 (11)
(6)
(3)
(1)
2.80%-0.20%-0.20%-0.20%-0.20%
Partial Period Factor
11111
Mid-Year Convention
0.51.52.53.54.5
Present Value Factor
16.00% 0.92850.80040.6900 0.5948 0.5128
Present Value of Cash Flow
Net Present Value of Residual Profit
Sum of Residual Profit
Tax Amortization Benefit
Estimate of Customer Relationship Fair Value
250 (9)
(4)
(2)
(1)
235 45 280 300 Estimate of Customer Relationship Fair Value, Rounded
EXHIBIT 5F — SEPARATION METHOD Estimate of Existing Technology to Existing Customers, Step 3
After-Tax Royalties
2014
2015
2016
2017
518 290 157 75 2018
30 Partial Period Factor
11111
Mid-Year Convention
0.51.52.53.54.5
Present Value Factor
16.00% 0.92850.80040.6900 0.5948 0.5128
Present Value of Cash Flow
Net Present Value of Residual Profit
Sum of Residual Profit
Tax Amortization Benefit
Estimate of Existing Technology to Existing Customers,
481 232 108 44 15
881 168 1,049 Estimate of Existing Technology to Existing Customers, Rounded
1,000 Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 22
EXHIBIT 5G — SEPARATION METHOD Estimate of Existing Customers Buying Future Technology, Step 4
2014
2015
2016
2017
Net Revenue
2,400 4,420 5,088 5,136 Growth
n/a 84.18% 15.10% 0.95%
Less: Revenue Valued as Backlog
Cost of Goods Sold
- 960 - 1,768 - 2,035 - 2,055 2018
4,770 -7.13%
- 1,908 2019
2020
2021
2022
4,341 3,543 2,891 2,359
-8.99% -18.40% -18.40%-18.40%
- 1,737 - 1,417 - 1,156 944
Gross Profit
1,440 2,652 3,053 3,082 2,862 2,605 2,126 1,734 1,415
60.00%60.00% 60.00% 60.00% 60.00% 60.00% 60.00% 60.00%60.00%
Future Technology R&D Expense
240 576 654 610 532 434 354 289 236
10.00%
13.04%12.85%11.89%11.15%10.00%10.00%
10.00%
10.00%
Maintenance S&M Expense
360 884 1,018 1,027 954 868 709 578 472
15.00%20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%20.00%
G&A Expense
240 442 509 514 477 434 354 289 236
10.00%10.00%10.00%10.00%10.00% 10.00% 10.00%10.00%10.00%
Total Operating Expenses
840 1,902 2,180 2,151 1,963 1,737 1,417 1,156 944
EBITDA
600 750 872 930 899 868 709 578 472
41.67%
28.27%28.58%30.19%31.41%33.33%33.33%
33.33%
33.33%
Depreciation
120 221 254 257 239 217 177 145 118
5.00%5.00%5.00%5.00%5.00% 5.00% 5.00%5.00%5.00%
Operating Income
480 529 618 674 661 651 531 434 354
20.00%11.96%12.15%13.11%13.85%15.00%15.00%
15.00%
15.00%
Tax Expense
40.00%
192 212 247 269 264 260 213 173 142
After-Tax Operating Income
288 317 371 404 396 391 319 260 212
After Tax Capital Charges
Net Working Capital
0.60%
14 27 31 31 29 26 21 17 Fixed Assets
2.40%
58 106 122 123 114 104 85 69 Technology
0.00%
- - - - - - - - Assembled Workforce
0.80%
19 35 41 41 38 35 28 23 Total Capital Charges
91 168 193 195 181 165 135 110 14
57
19
90
Residual Profit
197 149 177 209 215 226 184 150 123
8.20%
3.38%3.49%4.07%4.51%5.20%5.20%
5.20%
5.20%
Partial Period Factor
11 1 1 1 1 1 11
Mid-Year Convention
0.51.5 2.5 3.5 4.5 5.5 6.5 7.58.5
Present Value Factor
16.00% 0.92850.8004 0.6900 0.5948 0.5128 0.4421 0.3811 0.32850.2832
Present Value of Cash Flow
Net Present Value of Residual Profit
Sum of Residual Profit
Tax Amortization Benefit
Estimate of Customer Relationship Fair Value
183 119 122 124 110 100 70 49 35
913 174 1,087 Estimate of Customer Relationship Fair Value, Rounded
1,100 EXHIBIT 5H — SEPARATION METHOD Conclusion of Fair Values
Customer Value
Technology Value
Step 2
300
Step 1
1,300
Step 4
1,100
Step 3
1,000
$ 1,400
$ 2,300
Dual Multi-Period Excess Earnings in the Valuation of Intangibles
| 23
Copyright © 2013 American Institute of CPAs. All rights reserved.
14212-378
888.777.7077 | [email protected] | aicpa.org/FVS