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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 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Present Value of Years 1 -10 Present Value of Terminal Value TOTAL (A) (B) (A+B=C) Sales from current and future generations of product 400 450 500 550 600 650 700 750 750 750 3,021 1,325 4,347 COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) 240 270 300 330 360 390 420 450 450 450 1,813 795 2,608 Operating Income from exploitation 160 180 200 220 240 260 280 300 300 300 1,209 530 1,739 Intangible Development Costs 40 45 50 55 60 65 70 75 75 75 302 133 435 Lump-Sum Buy-in Calculation Item Amount Explanation PV of CFC's operating income 1,043.25 Total Operating Income * 60% RAB share -125.19 (Total oper. costs * .08) * 60% RAB share -260.81 Total Intang. Dev. Costs * 60% RAB share 657.25 (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. less PV of CFC's return to routine costs less PV of CFC's cost sharing payments equals lump sum buy-in zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ 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. Revenues COGS, SG&A & other operating expenses Operating Income Intang. Devel. Costs Year 11 amounts, current dollars 750 450 300 75 Terminal value in middle of Year 10 5,000 3,000 2,000 500 PV of terminal value at start of Year 1 1,325.38 795.23 530.15 132.54 zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ 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) Year 2 (actual) Year 3 (actual) Year 4 (actual) Year 5 (actual) Year 6 (extrapo- lated) Year 7 (extrapo- lated) Year 8 (extrapo- lated) Year 9 (extrapo- lated) Year 10 (extrapo- lated) Present Value of Years 1 - 10 Present Value of Terminal Value TOTAL (A) (B) (A+B=C) Sales from current and future generations of product 900 1,100 1,300 1,400 1,500 1,575 1,654 1,736 1,823 1,914 6,586 2,207 8,794 COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) 495 605 715 770 825 866 910 955 1,003 1,053 3,622 1,214 4,836 Operating Income from exploitation 405 495 585 630 675 709 744 781 820 861 2,964 993 3,957 Intangible Development Costs 180 220 195 210 225 236 248 260 273 287 1,072 331 1,403 Lump-Sum Buy-in Calculation Item Amount Explanation PV of CFC's operating income 1,582.85 Total Operating Income * 40% RAB share -96.73 (Total oper. costs * .05) * 40% RAB share less PV of CFC's cost sharing payments -561.35 Total Intang. Dev. Costs * 40% RAB share equals lump sum buy-in 924.77 (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. less PV of CFC's return to routine costs zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ (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. Revenues COGS, SG&A & other operating expenses Operating Income Intang. Devel. Costs Year 11 amounts, current dollars 1,914.42 1,052.93 861.49 287.16 Terminal value in middle of Year 10 10,635.68 5,849.62 4,786.06 1,595.35 PV of terminal value at start of Year 1 2,207.43 1,214.08 993.34 331.11 zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ 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) Year 2 (actual) Year 3 (actual) Year 4 (actual) Year 5 (actual) Year 6 (extrapo- lated) Year 7 (extrapo- lated) Year 8 (extrapo- lated) Year 9 (extrapo- lated) Year 10 (extrapo- lated) Present Value of Years 1 - 10 Present Value of Terminal Value TOTAL (A) (B) (A+B=C) Sales from current and future generations of product 900 1,100 1,300 1,400 1,500 1,575 1,654 1,736 1,823 1,914 6,586 2,207 8,794 COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) 495 605 715 770 825 866 910 955 1,003 1,053 3,622 1,214 4,836 Operating Income from exploitation 405 495 585 630 675 709 744 781 820 861 2,964 993 3,957 Intangible Development Costs 180 220 195 210 225 236 248 260 273 287 1,072 331 1,403 Determine royalty rate required in perpetuity as % of gross sales Item Amount Explanation lump sum buy-in payment 924.77 (From Exhibit A.2) divided by PV of CFC's total sales 3517.45 Total Sales *40% RAB share equals perpetual royalty rate 26.29% Assumptions: (1) For assumptions, See Exhibit A.2. zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ 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) Year 2 (actual) Year 3 (actual) Year 4 (actual) Year 5 (actual) Year 6 (extrapo- lated) Year 7 (extrapo- lated) Year 8 (extrapo- lated) Year 9 (extrapo- lated) Year 10 (extrapo- lated) Present Value of Years 1 -10 Sales from current and future generations of product 900 1,100 1,300 1,400 1,500 1,575 1,654 1,736 1,823 1,914 6,586 COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) 495 605 715 770 825 866 910 955 1,003 1,053 3,622 Operating Income from exploitation 405 495 585 630 675 709 744 781 820 861 2,964 Intangible Development Costs 180 220 195 210 225 236 248 260 273 287 1,072 Determine royalty rate required over 10 years as % of gross sales Item Amount Explanation lump sum buy-in payment 924.77 (From Exhibit A.2) divided by PV of CFC's Sales in Years 1 to 10 2634.48 Sales in years 1-10 *40% RAB share equals royalty rate payable over 10 years 35.10% Assumptions: (1) For assumptions, See Exhibit A.2. zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ 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 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Sales from current and future generations of product 60 65 70 80 92 106 122 140 147 154 COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) 24 26 28 32 37 42 49 56 59 62 Operating Income from exploitation 36 39 42 48 55 63 73 84 88 93 Intangible Development Costs 30 30 21 20 18 16 18 21 22 23 13% Discount Rate 10% Discount Rate 0% Growth Rate Post Year 10 5% Growth Rate Post Year 10 Present Value of Years 1 -10 Present Value of Terminal Value TOTAL Present Value of Years 1 -10 Present Value of Terminal Value TOTAL (A) (B) (A+B=C) (A) (B) (A+B=C) Sales from current and future generations of product 533 372 904 610 1,310 1,920 COGS, SG&A and other operating expenses attributable to product exploitation (routine costs) 213 149 362 244 524 768 Operating Income from exploitation 320 223 543 366 786 1,152 Intangible Development Costs 132 56 188 146 196 343 Ranges: Lump Sum Buy-in payment 119.07 to 272.57 Perpetual Royalty Rate 13.17% to 14.20% Royalty Payable over 10 Years 22.36% to 44.67% zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ Exhibit A.5 (cont'd) Calculation of lump sum buy-in payment, perpetual royalty rate and royalty payable over 10 years. 13% Discount Rate 10% Discount Rate 0% Growth Rate Post Year 10 5% Growth Rate Post Year 10 Lump-Sum Buy-in Calculation PV of CFC's operating income 189.88 403.23 less PV of CFC's routine returns -5.06 -10.75 less PV of cost sharing payments -65.75 -119.91 equals lump sum buy-in 119.07 272.57 Determine royalty rate required in perpetuity as % of gross sales Item lump sum buy-in payment 119.07 272.57 divided by PV of CFC's total sales 904 1,920 equals perpetual royalty rate 13.17% 14.20% Determine royalty rate required over 10 years as % of gross sales Item lump sum buy-in payment 119.07 272.57 divided by PV of CFC Sales to Year 10 533 610 equals royalty rate payable over 10 years 22.36% 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. zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ 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 10% discount rate, 5% growth post Year 10 Revenues COGS, SG&A & other operating expenses Operating Income Intang. Devel. Costs Revenues COGS, SG&A & other operating expenses Operating Income Intang. Devel. Costs Year 11 amounts, current dollars 154.26 61.70 92.56 23.14 161.98 64.79 97.19 24.30 Terminal value in middle of Year 10 1,186.63 474.65 711.98 178.00 3,239.51 1,295.80 1,943.71 485.93 PV of terminal value at start of Year 1 371.59 148.64 222.96 55.74 1,309.93 523.97 785.96 196.49 zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/ 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. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Present Value of Years 1 -10 Present Value of Terminal Value TOTAL (A) (B) (A+B=C) Sales from current and future generations of product 1,000 1,100 1,200 1,300 1,375 1,444 1,516 1,592 1,671 1,755 8,962 1,500 10,462 COGS, SG&A and other operating expenses attributable to product exploitation (routine costs so does not include intangible development costs) 800 825 840 910 894 938 910 875 919 965 5,878 825 6,703 Operating Income from exploitation 200 275 360 390 481 505 606 716 752 790 3,084 675 3,759 Intangible Development Costs 250 220 240 195 206 217 227 239 251 263 1,537 225 1,762 Calculate residual attributable to CFC's interest in buy-in and other pre-existing (i.e., marketing) intangibles Item Amount Explanation PV of CFC's operating income 2,067.69 Total Operating Income * 55% RAB share less PV of CFC's return to routine costs -258.06 (Total oper. costs * .07) * 55% RAB share less PV of CFC's cost sharing payments -969.00 Total Intang. Dev. Costs * 55% RAB share equals residual attributable to CFC intangibles 840.63 (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 Amount Explanation Value of CFC intangible assets 840.63 Residual calculated above less value of marketing intangibles of CFC -336.25 40% of value of CFC's intangible assets. equals lump sum Buy-in Payment 504.38 Assumptions: (5) Revenues and routine costs are distributed between U.S. parent and CFC pro rata to RAB share. (1) RAB share of CFC (buy-in payor) is 55%. (6) Terminal value taken as given (but source not specified). (2)Risk-adjusted discount rate is 9%. (7) Study indicates relative value of buy-intangible to CFC and private (3) CPM return to routine function is net cost plus 7% marketing intangible of CFC is 60%/40%. (4) Projection accepted as reliable (but source not specified). zycnzj.com/ www.zycnzj.com zycnzj.com/http://www.zycnzj.com/
