Exhibit A.1 Initial Buy-in: CPM-based Income Method Calculating a Lump Sum Buy-in Payment Using Taxpayer's Projections. (units = millions of US dollars) This Example addresses simultaneous transfers to CFC of: (1) make-sell rights for current product; and (2) "platform" rights, allowing further R&D to be conducted. Half-year convention is used for present value calculations. Terminal value calculations are presented on page 2.
Year 1 Sales from current and future generations of product COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) Operating Income from exploitation Intangible Development Costs
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Present Present Value of Value of Terminal Value Year 10 Years 1 -10 (A) (B) 750 3,021 1,325
TOTAL (A+B=C) 4,347
400
450
500
550
600
650
700
750
750
240
270
300
330
360
390
420
450
450
450
1,813
795
2,608
160 40
180 45
200 50
220 55
240 60
260 65
280 70
300 75
300 75
300 75
1,209 302
530 133
1,739 435
Lump-Sum Buy-in Calculation Item PV of CFC's operating income less PV of CFC's return to routine costs less PV of CFC's cost sharing payments equals lump sum buy-in Amount 1,043.25 -125.19 -260.81 657.25 Explanation Total Operating Income * 60% RAB share (Total oper. costs * .08) * 60% RAB share Total Intang. Dev. Costs * 60% RAB share (Note: Totals from column (C), above)
Assumptions: (1) RAB share of buy-in payor is 60%. (2) Risk-adjusted discount rate is 15%. (3) CPM return to routine functions is net cost plus 8%. (4) Taxpayer projections are reliable. (5) Revenues and routine costs are distributed between U.S. parent and CFC pro rata to RAB share.
Exhibit A.1 (cont'd) Terminal value calculation Terminal value calculated using Gordon Constant Growth Model, which treats value in Year 10 of payments from Year 11 onward as equal to (payment in Year 11)/(Discount Rate -Growth Rate). In this Exhibit, after Year 10, current dollar sales and all costs are assumed to grow at 0% rate.
COGS, SG&A & other operating Operating Revenues expenses Income Year 11 amounts, current dollars Terminal value in middle of Year 10 PV of terminal value at start of Year 1 750 5,000 1,325.38 450 3,000 795.23 300 2,000 530.15
Intang. Devel. Costs 75 500 132.54
Exhibit A.2 Initial Buy-in: CPM-based Income Method Calculating a Lump Sum Buy-in Payment Using Projections Based on Extrapolation from Actual Experience. (units = millions of US dollars) This Example addresses simultaneous transfers to CFC of: (1) make-sell rights for current product; and (2) "platform" rights, allowing further R&D to be conducted. Half-year convention is used for present value calculations. Terminal value calculations are presented on page 2.
Year 1 (actual) Sales from current and future generations of product COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) Operating Income from exploitation Intangible Development Costs
Year 2 (actual)
Year 3 (actual)
Year 4 (actual)
Present Year 6 Year 7 Year 8 Year 9 Year 10 Value of Year 5 (extrapo- (extrapo- (extrapo- (extrapo- (extrapo- Years 1 lated) lated) lated) lated) lated) (actual) 10 (A) 1,500 1,575 1,654 1,736 1,823 1,914 6,586
Present Value of Terminal Value (B) 2,207
TOTAL (A+B=C) 8,794
900
1,100
1,300
1,400
495
605
715
770
825
866
910
955
1,003
1,053
3,622
1,214
4,836
405 180
495 220
585 195
630 210
675 225
709 236
744 248
781 260
820 273
861 287
2,964 1,072
993 331
3,957 1,403
Lump-Sum Buy-in Calculation Item PV of CFC's operating income less PV of CFC's return to routine costs less PV of CFC's cost sharing payments equals lump sum buy-in Amount 1,582.85 -96.73 -561.35 924.77 Explanation Total Operating Income * 40% RAB share (Total oper. costs * .05) * 40% RAB share Total Intang. Dev. Costs * 40% RAB share (Note: Totals from column (C), above)
Assumptions: (1) RAB share of buy-in payor is 40%. (2) Risk-adjusted discount rate is 18%. (3) CPM return to routine function is net cost plus 5%. (4) Taxpayer projections are not available or are not reliable. (5) Actual results for CSA are available for first 5 years after inception. (6) Revenues and routine costs are distributed between U.S. parent and CFC pro rata to RAB share. Projections: (1) Years 1 to 5 are actual results. (2) Projections for years 6 to 10 are based on constant 5% growth factor from Year 5.
(3) R&D costs are set at 15% of gross sales after year 5. (4) Routine costs are assumed to be the same percentage of sales (55%) as in Years 1 to 5. Exhibit A.2 (cont'd) Terminal value calculation Terminal value calculated using Gordon Constant Growth Model, which treats value in Year 10 of payments from Year 11 onward as equal to (payment in Year 11)/(Discount Rate -Growth Rate). In this Exhibit, after Year 10, current dollar sales and all costs are assumed to grow at 0% rate. COGS, SG&A & other operating Operating Revenues expenses Income Year 11 amounts, current dollars Terminal value in middle of Year 10 PV of terminal value at start of Year 1 1,914.42 10,635.68 2,207.43 1,052.93 861.49
Intang. Devel. Costs 287.16 1,595.35 331.11
5,849.62 4,786.06 1,214.08 993.34
Exhibit A.3 Initial Buy-in: CPM-based Income Method Converting a Lump-sum Buy-in Payment (from Exhibit A.2) into a Perpetual Royalty. (units = millions of US dollars or percentages) Calculation of lump sum buy-in payment is from Exhbit A.2
Year 1 (actual) Sales from current and future generations of product COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) Operating Income from exploitation Intangible Development Costs
Year 2 (actual)
Year 3 (actual)
Year 4 (actual)
Year 5 (actual)
Year 6 Year 7 Year 8 Year 9 Year 10 (extrapo- (extrapo- (extrapo- (extrapo- (extrapolated) lated) lated) lated) lated)
Present Value of Years 1 10 (A) 6,586
Present Value of Terminal Value TOTAL (B) (A+B=C) 2,207 8,794
900
1,100
1,300
1,400
1,500
1,575
1,654
1,736
1,823
1,914
495
605
715
770
825
866
910
955
1,003
1,053
3,622
1,214
4,836
405 180
495 220
585 195
630 210
675 225
709 236
744 248
781 260
820 273
861 287
2,964 1,072
993 331
3,957 1,403
Determine royalty rate required in perpetuity as % of gross sales Item lump sum buy-in payment divided by PV of CFC's total sales equals perpetual royalty rate Amount 924.77 3517.45 26.29% Explanation (From Exhibit A.2) Total Sales *40% RAB share
Assumptions: (1) For assumptions, See Exhibit A.2.
Exhibit A.4 Initial Buy-in: CPM-based Income Method Converting a Lump-sum Buy-in Payment (from Exhibit A.2) into a Royalty payable over 10 years. (units = millions of US dollars or percentages) Calculation of lump sum buy-in payment is from Exhbit A.2
Year 1 (actual) Sales from current and future generations of product COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) Operating Income from exploitation Intangible Development Costs
Year 2 Year 3 Year 4 (actual) (actual) (actual)
Year 6 Year 7 Year 8 Year 9 Year 10 Year 5 (extrapo- (extrapo- (extrapo- (extrapo- (extrapo(actual) lated) lated) lated) lated) lated)
Present Value of Years 1 -10
900
1,100
1,300
1,400
1,500
1,575
1,654
1,736
1,823
1,914
6,586
495
605
715
770
825
866
910
955
1,003
1,053
3,622
405 180
495 220
585 195
630 210
675 225
709 236
744 248
781 260
820 273
861 287
2,964 1,072
Determine royalty rate required over 10 years as % of gross sales Item lump sum buy-in payment divided by PV of CFC's Sales in Years 1 to 10 equals royalty rate payable over 10 years Amount 924.77 2634.48 35.10% Explanation (From Exhibit A.2) Sales in years 1-10 *40% RAB share
Assumptions: (1) For assumptions, See Exhibit A.2.
Exhibit A.5 Initial Buy-in: CPM-based Income Method Arm's Length Range of Results. (units = millions of US dollars) This Example addresses simultaneous transfers to CFC of: (1) make-sell rights for current product; and (2) "platform" rights, allowing further R&D to be conducted. Half-year convention is used for present value calculations. Ranges calculated on page 2. Terminal value calculated on page 3. Year 1 Sales from current and future generations of product COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) Operating Income from exploitation Intangible Development Costs Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
60
65
70
80
92
106
122
140
147
154
24 36 30
26 39 30
28 42 21
32 48 20
37 55 18
42 63 16
49 73 18
56 84 21
59 88 22
62 93 23
13% Discount Rate 0% Growth Rate Post Year 10 Present Present Value of Value of Terminal Years 1 -10 Value TOTAL (A) (B) (A+B=C) Sales from current and future generations of product COGS, SG&A and other operating expenses attributable to product exploitation (routine costs) Operating Income from exploitation Intangible Development Costs Ranges: Lump Sum Buy-in payment Perpetual Royalty Rate Royalty Payable over 10 Years 533 372 904
10% Discount Rate 5% Growth Rate Post Year 10 Present Present Value of Value of Terminal Years 1 -10 Value TOTAL (A) (B) (A+B=C) 610 1,310 1,920
213 320 132
149 223 56
362 543 188
244 366 146
524 786 196
768 1,152 343
119.07 to 272.57 13.17% to 14.20% 22.36% to 44.67%
Exhibit A.5 (cont'd) Calculation of lump sum buy-in payment, perpetual royalty rate and royalty payable over 10 years. 13% Discount Rate 0% Growth Rate Post Year 10 Lump-Sum Buy-in Calculation PV of CFC's operating income less PV of CFC's routine returns less PV of cost sharing payments equals lump sum buy-in Determine royalty rate required in perpetuity as % of gross sales Item lump sum buy-in payment divided by PV of CFC's total sales equals perpetual royalty rate Determine royalty rate required over 10 years as % of gross sales Item lump sum buy-in payment divided by PV of CFC Sales to Year 10 equals royalty rate payable over 10 years 189.88 -5.06 -65.75 119.07 403.23 -10.75 -119.91 272.57 10% Discount Rate 5% Growth Rate Post Year 10
119.07 904 13.17%
272.57 1,920 14.20%
119.07 533 22.36%
272.57 610 44.67%
Assumptions: (1) RAB share of buy-in payor is 35%. (2) Risk-adjusted discount rate is 10 to 13%. (3) CPM return to routine function is net cost plus 4%. (4) Revenues and routine costs are distributed between U.S. parent and CFC pro rata to RAB share. Projections: (1) Projection accepted as reliable (but source not specified). (2) Terminal value calculated assuming perpetual growth of either 0% or 5% per annum after year 10. Note: other combinations of assumptions (10% discount rate and 0% growth rate after Year 10 or 13% discount rate and 5% growth rate after Year 10) produce lump sum buy-in payments and royalty rates that fall within the arm's length range reported above. Therefore, calculations of the lump sum buy-in payment or royalty rates under these assumptions are not reproduced in this exhibit.
Exhibit A.5 (cont'd) Terminal value calculation Terminal value calculated using Gordon Constant Growth Model, which treats value in Year 10 of payments from Year 11 onward as equal to (payment in Year 11)/(Discount Rate -Growth Rate). 13% discount rate; 0% growth post Year 10 COGS, SG&A & other operating Operating Revenues expenses Income Year 11 amounts, current dollars Terminal value in middle of Year 10 PV of terminal value at start of Year 1 154.26 1,186.63 371.59 61.70 474.65 148.64 92.56 711.98 222.96 10% discount rate, 5% growth post Year 10 COGS, SG&A & other operating Revenues expenses 161.98 3,239.51 1,309.93 64.79 1,295.80 523.97
Intang. Devel. Costs 23.14 178.00 55.74
Operating Income 97.19 1,943.71 785.96
Intang. Devel. Costs 24.30 485.93 196.49
Exhibit A.6 Initial Buy-in: CPM-based Income Method Providing separate return to Marketing Intangibles used privately by CFC in exploiting the results of the CSA. (units = millions of US dollars) This Example addresses simultaneous transfers to CFC of: (1) make-sell rights for current product; and (2) "platform" rights, allowing further R&D to be conducted. Half-year convention is used for present value calculations. Method of calculating terminal value not specified in thie Exhibit. Present Present Value of Value of Terminal Year 10 Years 1 -10 Value (A) (B) 1,755 8,962 1,500
Year 1 Sales from current and future generations of product COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) Operating Income from exploitation Intangible Development Costs
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
TOTAL (A+B=C) 10,462
1,000
1,100
1,200
1,300
1,375
1,444
1,516
1,592
1,671
800
825
840
910
894
938
910
875
919
965
5,878
825
6,703
200 250
275 220
360 240
390 195
481 206
505 217
606 227
716 239
752 251
790 263
3,084 1,537
675 225
3,759 1,762
Calculate residual attributable to CFC's interest in buy-in and other pre-existing (i.e., marketing) intangibles Item PV of CFC's operating income less PV of CFC's return to routine costs less PV of CFC's cost sharing payments equals residual attributable to CFC intangibles Amount 2,067.69 -258.06 -969.00 840.63 Explanation Total Operating Income * 55% RAB share (Total oper. costs * .07) * 55% RAB share Total Intang. Dev. Costs * 55% RAB share (Note: Totals from column (C), above)
Calculate Lump Sum Buy-in payment as the value of CFC's interest in intangibles minus value of CFC interest in other pre-exixting (i.e.marketing) intangibles. Item Value of CFC intangible assets less value of marketing intangibles of CFC equals lump sum Buy-in Payment Amount 840.63 -336.25 504.38 Explanation Residual calculated above 40% of value of CFC's intangible assets.
Assumptions: (1) RAB share of CFC (buy-in payor) is 55%. (2)Risk-adjusted discount rate is 9%. (3) CPM return to routine function is net cost plus 7% (4) Projection accepted as reliable (but source not specified).
(5) Revenues and routine costs are distributed between U.S. parent and CFC pro rata to RAB share. (6) Terminal value taken as given (but source not specified). (7) Study indicates relative value of buy-intangible to CFC and private marketing intangible of CFC is 60%/40%.