COMPASS RECORDS

Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Unit Assumptions

ASSUMPTIONS
Sales projections Units Pricing
U.S. sales 5,000 U.S. wholesale unit price $11.45
U.K., Ireland, Europe sales 2,000 Less distribution fee $9.05
Japan, New Zealand, Australia sales 1,000 U.K., Ireland, Europe price (euro) EUR 7.00
Canada sales 500 Euro/US$ exchange rate 1.224
Units sold by artist 1,500 U.K., Ireland, Europe price (US$) $8.57
Totalprojected sales (units) 10,000 Japan, NZ, Australia price (US$) $6.50
Canada price (US$) $7.00
Weighted average cost of capital 12% Unit price for artist-sold units $6.00
Distribution fee 21%

CASH FLOWS
Own
Years
0 1 2 3
Annual percentage sold 0% 75% 20% 5%
U.S. forecasted units sold 0 3,750 1,000 250
U.K., Ireland, Europe forecasted units sold 0 1,500 400 100
Japan, New Zealand, Australia forecasted units s 0 750 200 50
Canada forecasted units sold 0 375 100 25
Units sold by artist 0 1,125 300 75

Total sales $0 $61,023 $16,273 $4,068

Per unit
Cost of goods sold $0.90 $0 $6,750 $1,800 $450
Mechanical royalties $0.85 $0 $5,419 $1,445 $361
Recording-artist royalties $1.45 $0 $9,244 $2,465 $616
Recoupables not recovered $13,675
Promotion & marketing not recoupable $11,000 $0 $0 $0
Loss on inventory $2,295
Upfront fee (advance) $0 $0 $0 $0
Taxable income ($11,000) $45,029 $12,008 ($12,968)
Taxes @... 40% $4,400 ($18,012) ($4,803) $5,187
Net operating profit after tax ($6,600) $27,017 $7,205 ($7,781)

Change in inventory ($8,471) $4,491 $1,235 $450

Change in recoupables ($26,000) $9,244 $2,465 $616
Free cash flow ($41,071) $40,752 $10,905 $9,255

NPV Own $10,596

IRR 32.2%

WORKING CAPITAL
Own
Years
0 1 2 3
Assets
Inventory, incl. overage @... 30% $8,471 $3,980 $2,745 $2,295
Recoupables 26,000 16,756 14,291 13,675
 $15,970
Recoupables
Production costs $20,000
Marketing & promotion (1/2) 6,000
Advance 0
Total $26,000
 Marketing and promotion
Print advertising $3,000
Posters and photos 500
E-card mailings 1,000
Independent radio promoter 2,500
Retail placement 5,000
Total marketing & promo cost $12,000

CD mail-out units 2,000

Cost per mail-out unit per unit $0.50
Postage and collateral per unit $2.00
Total cost for CD mail-out $5,000

License
Years
0 1 2 3
0% 75% 20% 5%
0 3,750 1,000 250
0 1,500 400 100
0 750 200 50
0 375 100 25
 0 1,125 300 75

$0 $61,023 $16,273 $4,068

Per unit
$0.90 $0 $6,750 $1,800 $450
$0.43 $0 $2,709 $723 $181
$1.75 $0 $11,156 $2,975 $744
$0
$11,000 $0 $0 $0
$2,295
$3,000 $0 $0 $0
($14,000) $40,407 $10,775 $399
$5,600 ($16,163) ($4,310) ($160)
($8,400) $24,244 $6,465 $239

($8,471) $4,491 $1,235 $450

($9,500) $9,500 $0 $0
($26,371) $38,235 $7,700 $2,984

License $16,030
66.6%

License
Years
0 1 2 3
Assets
$8,471 $3,980 $2,745 $2,295
9,500 0 0 0
 $2,295
Recoupables
Production costs $500
Marketing & promotion (1/2) 6,000
Advance 3,000
Total $9,500
COMPASS RECORDS
Discounted Cash Flow Analysis for "License" and "Produce and Own" Alternatives
Using Base-Case Percentage of Sales Assumptions

ASSUMPTIONS
Sales projections (units) Units % of total
U.S. sales 5,000 50%
U.K., Ireland, Europe sales 2,000 20%
Japan, New Zealand, Australia sales 1,000 10%
Canada sales 500 5%
Units sold by artist 1,500 15%
Totalprojected sales (units) 10,000 100%

Weighted average cost of capital 12%

CASH FLOWS
Own
Years
0 1
Annual % sold 0% 75%
US forecasted units sold 0 3,750
U.K., Ireland, Europe forecasted units sold 0 1,500
Japan, New Zealand, Australia forecasted units 0 750
Canada forecasted units 0 375
Units sold by artist 0 1,125

Total sales $0 $61,023

Per unit
Cost of goods sold $0.90 $0 $6,750
Mechanical royalties $0.85 $0 $5,419
Recording-artist royalties $1.45 $0 $9,244
Recoupables not recovered
Promotion & marketing not recoupable $11,000 $0
Loss on inventory
Upfront fee (advance) $0 $0
Taxable income ($11,000) $45,029
Taxes @... 40% $4,400 ($18,012)
NOPAT ($6,600) $27,017

Change in inventory ($8,471) $4,491

Change in recoupables ($26,000) $9,244
Free cash flow ($41,071) $40,752

NPV Own $10,596

IRR 32.2%

WORKING CAPITAL
Own
Years
0 1
Assets
Inventory, incl. overage @... 30% $8,471 $3,980
Recoupables $26,000 $16,756

Recoupables
Production costs $20,000
Marketing & promotion (1/2) $6,000
Advance $0
Total $26,000

Incremental NPV and IRR Sensitivity to Total Units Sold

Produce and Own License
Total Forecasted Units Sold NPV IRR NPV
2,000 ($18,039) -21% ($8,380)
3,000 ($14,459) -15% ($4,973)
4,000 ($10,880) -8% ($1,565)
5,000 ($7,301) -2% $1,842
6,000 ($3,721) 5% $5,250
7,000 ($142) 12% $8,234
8,000 $3,437 19% $10,886
9,000 $7,017 25% $13,485
10,000 $10,596 32% $16,030
11,000 $14,175 39% $18,575
12,000 $17,755 45% $21,120
13,000 $21,334 52% $23,665
14,000 $24,913 58% $26,209
15,000 $28,493 64% $28,754
16,000 $32,072 70% $31,299
17,000 $35,651 76% $33,844
18,000 $39,230 81% $36,389
19,000 $42,810 87% $38,933
20,000 $46,389 92% $41,478
30,000 $76,550 130% $66,926
50,000 $133,840 169% $117,822
Pricing Marketing and promotion
U.S. wholesale unit price $11.45 Print advertising
Less distribution fee $9.05 Posters and photos
U.K., Ireland, Europe price (euro) EUR 7.00 E-card mailings
Euro/US$ exchange rate 1.224 Ind. radio promoter
U.K., Ireland, Europe price (US$) $8.57 Retail placement
Japan, NZ, Australia price (US$) $6.50 Total marketing & promo cost
Canada price (US$) $7.00
Unit price for artist-sold units $6.00 CD mail-out units
Distribution fee 21% Cost per mail-out per unit
Postage and collateral per unit
Total cost for CD mail-out

License
Years
2 3 0 1
20% 5% 0% 75%
1,000 250 0 3,750
400 100 0 1,500
200 50 0 750
100 25 0 375
300 75 0 1,125

$16,273 $4,068 $0 $61,023

Per unit
$1,800 $450 $0.90 $0 $6,750
$1,445 $361 $0.43 $0 $2,709
$2,465 $616 $1.75 $0 $11,156
$13,675
$0 $0 $11,000 $0
$2,295
$0 $0 $3,000 $0
 $12,008 ($12,968) ($14,000) $40,407
($4,803) $5,187 $5,600 ($16,163)
$7,205 ($7,781) ($8,400) $24,244

$1,235 $450 ($8,471) $4,491

$2,465 $616 ($9,500) $9,500
$10,905 $9,255 ($26,371) $38,235

License $16,030
66.6%

License
Years
2 3 0 1
Assets
$2,745 $2,295 $8,471 $3,980
$14,291 $13,675 $9,500 $0
$15,970
Recoupables
Production costs
Marketing & promotion (1/2)
Advance
Total

License
IRR
-19%
-7% This Sensitivity analysis shows that "Produce and own" option is better if
6%
19%
32% However, License is better if they sell less than 15000 units. It is a safer o
42%
52%
60%
67%
73%
79%
85%
90%
95%
100%
104%
108%
112%
116%
146%
180%
eting and promotion
$3,000
s and photos 500
1,000
dio promoter 2,500
5,000
marketing & promo cost $12,000

2,000
er mail-out per unit $0.50
e and collateral per unit $2.00
ost for CD mail-out $5,000

2 3
20% 5%
1,000 250
400 100
200 50
100 25
300 75

$16,273 $4,068

$1,800 $450
$723 $181
$2,975 $744
$0
$0 $0
$2,295
$0 $0
 $10,775 $399
($4,310) ($160)
$6,465 $239

$1,235 $450
$0 $0
$7,700 $2,984

2 3

$2,745 $2,295
$0 $0
$2,295

$500
$6,000
$3,000
$9,500

Produce and own" option is better if Compass records could sell more than 15000 units, thus making larger profits

less than 15000 units. It is a safer option with less risk and lesser payback period.
making larger profits