Exhibit (c)(vii)
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THE ORCHARD ENTERPRISES, INC.
Fairness Opinion Addendum
Offer by Dimensional Associates, LLC
to Buyout Remaining Common Stockholders
of The Orchard Enterprises, Inc.
At a Per Share Price of $2.05
March 15, 2010
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| THE ORCHARD ENTERPRISES, INC. | Page 1 |
1.0 STATEMENT OF PURPOSE
We have been informed by the Special Committee (the "Committee") of the Board of Directors of The Orchard Enterprises, Inc. ("Orchard" or "Company") that Dimensional Associates, LLC ("Dimensional"), a current preferred and common shareholder of the Company, has tendered an offer to purchase all of the remaining outstanding common shares (the "Common Shares") of the Company. The offer consists of a cash payment in the amount of $2.05 per share (the "Offer").
The above transaction is hereinafter collectively referred to as the "Transaction".
The Special Committee has requested that we perform certain procedures and, upon the completion of those procedures, issue a letter setting forth our opinion as to whether the Transaction is fair, from a financial point of view, to the holders of the remaining Common Shares.
2.0 EVALUATION PROCEDURES
The procedures we have employed in evaluating whether the Transaction is fair, from a financial point of view, to the holders of the Common Shares, include the following:
| 1. | We have estimated the Fair Market Value and Strategic Values of the common equity of the Company on a per share basis. |
| 2. | We have compared the estimated Fair Market Value and Strategic Values of the common equity of the Company on a per share basis to the Offer in order to ascertain whether the Transaction is fair, from a financial point of view, to the holders of the Common Shares. |
The term "Fair Market Value", as used in our fairness opinion letter and in this Addendum, is defined as the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties are able, as well as willing, to trade and are well informed about the asset and the market for such asset.
The term "Strategic Value", as used in our fairness opinion letter and this Addendum, is defined as the value based on expected earnings or monetary return to a specific investor, in this case Dimensional Associates, LLC.
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| 3.0 | INDICATED RESULTS |
Procedure 1 - Equitp Valuation of Orchard
Our valuation analysis for Orchard is based in part on its audited financial statements for the years ended December 31, 2006 to December 31, 2008, unaudited financial statements for the nine-months ended September 30, 2009 and management provided financial forecasted income statements for the years ending December 31, 2010 to 2014. A summary of the income statements, balance sheets and forecasts are included in Exhibits 1-4.
The market value of invested capital ("MVIC") or business enterprise value is the total capitalization value for an entity. By definition, the MVIC includes the total market value of all classes of stock plus all interest bearing debt.
The equity value of Orchard is considered equal to the MVIC since no interest bearing debt existed as of both September 30, 2009 and March 15, 2010.
In analyzing the equity value of Orchard, the Market and Income Approaches of valuation were employed.
Market Approach
The market approach compares Orchard with similar companies that have recently been sold or with companies that are publicly traded. The primary criteria for selecting guideline comparable companies include similarities in lines of business and other relevant factors such as size, profitability, leverage, growth prospects, market position and risk.
The Guideline Public Company Analysis Method
One of the fundamental approaches to estimating the value of a business is to look to the public market for evidence of the prices investors are willing to pay for similar businesses. The guideline public company analysis method derives valuation multiples from public companies engaged in the same or similar lines of business as the subject company in order to develop relationships between an entity's value and the various calculated value measurement multiples.
After inquiring of management regarding public companies that are competitors and analyzing various databases in order to identify public companies that are engaged in providing various digital media services including music and audio recordings and video programming, we selected nine publicly traded companies for a comparative analysis. Rarely is there an exact comparability between the subject of the valuation and the companies selected for comparative evaluation. Differences typically exist in terms of size, products, product mix and structure.
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Despite the potential infirmities underlying the comparative evaluation process, it is still a valid method for formulating valuation multiples. First of all, to the extent the companies are engaged in business lines similar to that of Orchard, investor perception as to the desirability or attractiveness of an investment in Orchard can be ascertained. Secondly, multiples indicated by the guideline publicly traded companies can be adjusted to reflect the economic advantages or disadvantages of Orchard on a comparative basis.
The nine publicly traded companies selected for comparative evaluation with Orchard are summarized below.
| · | Glu Mobile Inc.: Glu Mobile Inc. designs, markets, and sells games for mobile phones worldwide. The company's games are based on licensed intellectual property (Call of Duty, Deer Hunter, and World Series of Poker) and its own intellectual property (Brain Genius, My Hangman, and Bonsai Blast). The Company sells its products through wireless carriers and other distributors. |
| · | EDGAR Online, Inc.: EDGAR Online, Inc creates and distributes financial data and public filings for equities, mutual funds, and a range of other publicly traded assets. The Company delivers its information products in the form of online end-user subscriptions, as well as through data licenses and bulk data feeds. The company also engages in advertising and e-commerce activities. The Company sells its subscriptions and data feeds directly to end-users or embedded in other websites, and through a range of data redistributors. |
| · | Limelight Networks, Inc.: Limelight Networks, Inc is a provider of content delivery network services. It is engaged in providing content for media companies, or content providers, including businesses operating in the television, music, radio, newspaper, magazine, software and social media industries, as well as enterprises and government entities doing business online. |
| · | Salary.Com, Inc.: Salary.com, Inc. is a provider of on-demand compensation, payroll, human resource management, performance management, and competency management solutions in the human capital software-as-a-service (SaaS) market. The Company offers software and services that are integrated with its data sets to help businesses and individuals manage pay and employee performance. |
| · | WebMediaBrands Inc.: WebMediaBrands Inc is a global provider of images, original information and events for information technology (IT), business and creative professionals. WebMediaBrands includes three distinct online networks: Internet.com for information technology (IT), business professionals and for developers and Mediabistro.com and Graphics.com for media and creative professionals. |
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| · | Image Entertainment, Inc.: Image Entertainment, Inc is a licensee and distributor of entertainment programming in North America. The Company releases its library of content on a variety of formats and platforms, including digital versatile disc (DVD), blu-ray disc (Blu-ray), digital (video-on-demand, electronic sell-through and streaming), broadcast television, cable, and satellite, theatrical and non-theatrical exploitation. Image also acquires rights to audio content for distribution via digital platforms and on compact disc (CD). |
| · | RealNetworks Inc: RealNetworks, Inc. creates and delivers digital media content such as music, games and video to consumers worldwide. It sells digital entertainment services to consumers for use with a variety of platforms such as personal computer (PC), portable music players, mobile phones, home entertainment systems and other consumer electronic devices. The Company's products and services include RealPlayer, Rhapsody, and RealArcade. |
| · | Internap Network Services Corp.: Internap Network Services Corporation markets products and services that optimize the performance and reliability of business Internet applications for e-commerce, customer relationship management (CRM), multimedia streaming, voice-over Internet protocol (VoIP), virtual private networks (VPNs) and supply chain management. The Company also provides products and services for storing and delivering audio and video digital media to audiences over the Internet through a subsidiary, VitalStream Holdings, Inc. |
| · | LiveWire Mobile, Inc: LiveWire Mobile, Inc. is a provider of managed personalization services for mobile operators and mobile subscribers. The Company's integrated managed service offerings, which includes ringback tones, ringtones, full track downloads, and other applications, as well as, dedicated content and service marketing, integrated storefront management and merchandising. The Company sells its offerings as a managed service to mobile operators who then offer these services to their subscribers. |
Comparative Analysis
The above companies have annual sales ranging from $16.8 million to $562.3 million. The MVIC or business enterprise minority values of these companies ranged from $10.7 million to $248.5 million. Market and financial data on the publicly traded companies is presented in Exhibit 5 to this addendum. The financial data on these companies was obtained from their most recent 10-K and 10-Q filings with the Securities and Exchange Commission.
Based upon the financial data set forth as Exhibit 5 to this Addendum, we formulated valuation multiples which were applied to the appropriate earnings stream for Orchard. In selecting the proper industry multiple to apply to Orchard, we utilized a public guideline company ranking analysis presented in Exhibit 6 which summarizes various profitability, liquidity and leverage ratios for Orchard and the comparative public guideline companies.
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Valuation multiples have been developed in order to calculate total capitalization (debt and equity) or MVIC for the nine public guideline companies. An invested capital valuation method is commonly used to minimize the effects of leverage between the subject company and the guideline companies due to differences in capital structures. Cash and marketable securities are often subtracted out of the MVIC when there is excess cash or securities or shortages of cash between the guideline companies and the subject company. Our definition of MVIC, for this analysis, subtracts cash and marketable securities. Since cash has been subtracted in developing MVIC multiples, after applying these multiples to the subject company, cash is then added back to arrive at an indication of value.
In using the Market Approach, we developed MVIC multiples for the guideline public companies utilizing the last twelve months ("LTM") of financial data available which ended no later than December 31, 2009. For some of the comparables including Orchard, public financial data was only available through September 30, 2009. We developed and applied multiples to Orchard's normalized results from operations.
The adjustments posted to Orchards's reported net loss for the twelve months ended September 30, 2009 (Exhibit 3) consisted of the following non-recurring expense and income items:
· Removing $14.114 million of goodwill impairment charges
· Removing $312,000 of restructuring charges
· Adding back $46,000 gain from property and equipment disposal
· Removing $462,000 of non-operating income
After posting the adjustments noted above, the Company had a loss from operations and negative EBITDA for the twelve months ended September 30, 2009 as reflected in Exhibit 3.
Due to operational losses, we were unable to develop and apply commonly used income multiples such as MVIC to earnings before interest, taxes, depreciation and amortization (EBITDA) to historical results. We calculated MVIC multiples of revenue for the nine public guideline companies based on results as of September 30, 2009 (December 31, 2009 when available) and stock prices as of March 10, 2010 with our selected pricing multiples to be applied against Orchard's LTM of historical revenues for period ended September 30, 2009 as follows:
| Selected Pricing | Industry Multiples | |||||||||||||||||||
| Multiple | Low | High | Mean | Median | Selected | |||||||||||||||
| MVIC/Revenues | 0.31 | 1.83 | 0.82 | 0.64 | 0.60 | |||||||||||||||
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Revenue multiples for the nine public comparable companies had a median multiple of .64 and a low and high multiple of .31 and 1.83, respectively. We selected and applied a revenue multiple of .60 to the LTM of adjusted revenues of $61.729 million for the Company. The revenue multiple selected, which approximates the median, is warranted since Orchard's financial results are in line with the public comparables.
We also calculated MVIC to EBITDA for the guideline companies to apply against Orchard's forecasted 2010 base case results from operations from Exhibit 4. Again, in selecting the proper industry multiple to apply to Orchard, we utilized a public guideline company ranking analysis presented in Exhibit 6. The multiples calculated from the public guideline companies and our selected pricing multiple to apply against Orchard's forecasted 2010 base case EBITDA is as follows:
| Selected Pricing | Industry Multiples | |||||||||||||||||||
| Multiple | Low | High | Mean | Median | Selected | |||||||||||||||
| MVIC/EBITDA | 3.41 | 41.35 | 18.61 | 11.08 | 10.00 | |||||||||||||||
EBITDA multiples for the nine public comparable companies ranged from 3.41 to 41.35. The mean and median multiples were 18.61 and 11.08, respectively. We selected and applied an EBITDA multiple of 10 to the 2010 forecasted EBITDA of $2.475 million for the Company. The EBITDA multiple selected, which is slightly below the median, is warranted since we are applying a multiple calculated with historical results of operations for the public comparables against forecasted results for Orchard.
Our definition of MVIC for this valuation excluded cash and marketable securities. After applying the appropriate multiples, $4.5 million of cash is required to be added back to the indication of value. This balance represents the cash position as of March 15, 2010. In addition, as previously discussed, MVIC represents a value for both debt and equity. Therefore, in order to estimate the value of the Company's total equity, we need to subtract the value of its interest bearing debt. As of both September 30, 2009 and March 15, 2010, Orchard had no outstanding interest bearing debt.
The guideline public company method, by definition, provides a freely-tradable or a marketable, minority value. Therefore, the value indication represents a marketable, minority interest operating under a going concern premise of value. In order to determine equity value on a controlling interest basis, a control premium needs to be added. In almost all transactions in which control is transferred, a significant premium is paid. Mergerstat/Shannon Pratt's Control Premium Study (Santa Monica FactSet Mergerstat LLC 2007) indicates that control premiums have ranged from 20.7% to 37.7%. We also searched the Mergerstat/BVR Control Premium Study by Standard Industrial Classification (SIC) code 7375 (Informational Retrieval Services) which correspond to the industry that Orchard operates within. We applied a 20% control premium to arrive at an indication of controlling, marketable equity value.
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Orchard has 448,707 shares of Series A Preferred stock outstanding with a liquidation preference of $24,992,980 as of September 30, 2009 and March 15, 2010. In order to calculate the residual value available to common shareholders, the preferred shareholders liquidation preference must first be subtracted. Orchard has 6,378,252 common shares issued and outstanding at March 15, 2010.
Based upon the above described multiples and modifications to indicated values, equity value indications ranged from $1.58 per share based on MVIC to Orchard's 2010 forecasted EBITDA and $3.90 per based on MVIC to Orchard's LTM of historical revenues for the period ended September 30, 2009. The $3.90 indication of value based on revenues was considered an outlier. This metric was not considered a good indication of value since it relies on revenues and not the actual earnings of Orchard. See Exhibit 12 for indication of values summary.
Guideline Company Transaction Method
The guideline company transaction analysis method derives valuation multiples from the acquisition prices of companies that operate in similar industries to the subject company. The value of the subject company is then estimated by applying an appropriate valuation multiple derived from the transactions against the appropriate benefit stream of the subject company.
We analyzed publicly reported filings as well as various transaction databases including Pratt's Stats, Public Stats and Mergerstat and identified ten transactions for companies that operate or provide digital media services including music and audio recordings and video programming. All of the transactions selected were stock deals. A brief description of each of the selected guideline company transactions is summarized below:
| · | Visual Connection, was purchased by KIT Digital, Inc., a publicly held company, in October 2008 for total consideration (MVIC) of $4.3 million. Visual Connection is a digital media and IPTV solutions provider. Visual Connection reported revenues of $10.3 million in 2007. Reported EBITDA was not meaningful. |
| · | Audible, Inc. was purchased by Amazon.com, Inc., a publicly held company, in March 2008 for total consideration (MVIC) of $277.4 million. Audible, Inc. provides audio services for content download and playback on personal computers. Audible, Inc. reported revenues of $101.9 million in the last twelve months. Reported EBITDA was $2.3 million for the same period. |
| · | Vyvx Ads Business (A carve-out of Level 3 Communications Inc., a publicly held company), was purchased by DG Fast Channel Inc., a publicly held company, in June 2008 for total consideration (MVIC) of $129 million. Vyvx provides video and audio content distribution to advertisers. Vyvx reported revenues of $36.4 million in 2007. Reported EBITDA was $10.5 million. |
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| · | Applied Graphics Technologies Inc. was purchased by Digital Generation Systems, Inc, a public held company, in June 2004 for total consideration (MVIC) of $14.1 million. Applied Graphics Technologies, Inc. distributes programming and advertising content to television and radio stations. Reported revenues were $21.5 million in 2002. Reported EBITDA was $274,000. |
| · | Good Times Entertainment, a privately held company, was purchased by GAIAM, Inc., a public held company, in September 2005 for total consideration (MVIC) of $34.4 million. Good Times Entertainment is a distributor of entertainment programming and home video products. Good Times reported revenues of $141.9 million for 2004. Reported EBITDA was not meaningful. |
| · | Movielink, LLC, a privately held company was purchased by Blockbuster, Inc., a publicly held company, in August 2007 for total consideration (MVIC) of $7 million. Movielink, LLC is a digital distributor of motion pictures over the internet. Movielink LLC reported revenues of $4 million in 2006. Reported EBITDA was not meaningful. |
| · | Creatas, LLC, a privately held company was purchased by Jupitermedia Corp, a privately held company, in March 2005 for total consideration (MVIC) of $60.4 million. Creatas, LLC markets and distributes digital images and provides visual content. Creatas, LLC reported revenues of $43 million in 2004. Reported EBITDA was $2.9 million. |
| · | Trusonic Inc, was purchased by Fluid Media Networks, Inc., a publicly held company, in October 2007 for total consideration (MVIC) of $6 million. Trusonic provides digital background music and messaging services via the internet. Trusonic reported revenues of $2.8 million for 2006. Reported EBITDA was not meaningful. |
| · | Ringtone.com, LLC, a privately held company, was purchased by New Motion, Inc., a publicly held company, in June 2008 for total consideration (MVIC) of $8.6 million. Ringtone.com provides downloadable mobile content including ringtones, background wallpaper and text alerts. Ringtone.com reported revenues of $10.2 million in 2007. Reported EBITDA was not meaningful. |
| · | AMV Holding Limited, a privately held company, was purchased by Mandalay Media, Inc. a publicly held company, in October 2008 for total consideration (MVIC) of $22.5 million. AMV Holding Limited provides direct to consumer mobile internet content and services. AMV Holding Limited reported $29.5 million and $4.2 million in revenues and EBITDA, respectively, for 2007. |
The last reported annual sales of the target companies for the ten transactions selected ranged from $2.8 million to $141.9 million. See Exhibit 7 for a summary of the transaction selected.
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We developed MVIC to revenue multiples from the ten guideline company transactions selected and applied to the LTM of revenues reported by Orchard for the period ended September 30, 2009. The multiple of revenues calculated from the guideline company transactions and our selected pricing multiple to apply against historical reported revenues for Orchard is as follows:
| Selected Pricing | Industry Multiples | |||||||||||||||||||
| Multiple | Low | High | Mean | Median | Selected | |||||||||||||||
| MVIC/Revenues | 0.24 | 3.54 | 1.44 | 1.12 | 0.60 | |||||||||||||||
Revenue multiples had a median multiple of 1.12 and a low and high multiple of .24 and 3.54, respectively. We selected and applied a revenue multiple of .60, which was between the low and the median, to the LTM of adjusted revenues of $61.729 million for the Company. The lower than median revenue multiple is warranted since several of the guideline company's had positive EBITDA and/or larger in size.
In order to estimate the value of the Company's total equity, we need to subtract the value of its interest bearing debt. As stated previously, as of both September 30, 2009 and March 15, 2010, Orchard had no outstanding interest bearing debt. In addition, we subtracted Series A Preferred stock liquidation preferences of $24,992,980 in order to calculate the residual value available to common shareholders.
Based upon the above described revenue multiple and modifications to indicated value, an equity value indication of $1.89 per share was calculated based on 6,378,252 common shares issued and outstanding. See Exhibit 12 for indication of value summary.
Orchard Stock Price
The closing stock price for Orchard on March 12, 2010 was $1.70 per common share. A control premium, as previously discussed, of 20% was added to the minority, marketable per share value of $1.70. The resulting stock price on a controlling basis would approximate $2.04 per share. See Exhibit 12 for indication of value summary.
Income Approach
In applying the Income Approach, a discounted cash flow analysis was employed. This analysis was based on management's "base case scenario", "worst case scenario" and "aggressive case scenario" forecasts of net cash flows for 2010 to 2014 as illustrated in Exhibit 4.
In addition, we considered the strategic nature of the Transaction and the possibility that Dimensional could integrate the operations of Orchard into its eMusic operation and would take Orchard private. Management of Orchard estimated the potential savings to Dimensional from these two scenarios. We assumed that a buyer and seller would most likely negotiate a price based on sharing equally in the savings. The estimated savings are illustrated in Exhibit 10.
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We therefore considered two scenarios using the discounted cash flow method. The first scenario is based on Orchard remaining a public company and their forecasted results without the Dimensional Transaction. This scenario assumes that Orchard will continue to take advantage of its net operating tax loss carryforwards. The second is based on the assumption that Dimensional would acquire the remaining common shares, integrate the operations of Orchard into its eMusic operation and take Orchard private thereby creating synergistic and cost savings to Dimensional. This scenario assumes that, due to limitations imposed on net operating tax loss carryforwards as a result of certain changes in ownership, such net operating tax loss carryforwards would be significantly limited.
For each scenario, a sensitivity analysis was also performed using base case, worst case and aggressive case scenarios. In calculating the per share value using the discounted cash flow method, we utilized the aggressive case scenarios as this scenarios illustrate the highest value that the Company would be expected to achieve. The results of these discounted cash flow scenarios are illustrated in Exhibit 8 and 9.
The discounted cash flow technique has two value components. The first equals the sum of the present value of the cash flows over the forecast period. The residual value, or terminal value, equals the present value of the forecasted cash flow in the terminal year, capitalized into perpetuity using a capitalization rate derived from the discount rate. The residual reflects the ongoing potential of the business.
Available cash flows are typically equal to the sum of net income plus non-cash charges such as depreciation and amortization, less capital expenditures and working capital requirements.
A company's cost of capital, or discount rate, is equal to the weighted average of its after-tax cost of debt and equity. This rate represents a rate of return that could be expected by an investor given the risk associated with the investment. Exhibit 11 illustrates the results of our weighted average cost of capital analysis.
We used two primary methods to estimate the cost of equity: the modified capital asset pricing model ("MCAPM") and the build-up method. We used two data sources in applying these methods: Ibbotson Associates (acquired by Morningstar), and Duff & Phelps. Both have performed extensive studies regarding the cost of equity. The Duff & Phelp's studies rely upon alternative measurements of size to assess the risk of a company under a form of the build-up method.
We begin with a safe rate of return using the return on a 20-year U.S. Treasury Bond. Added to the safe rate of return is an equity risk premium representing the additional risk that the investor would encounter from investing in large company equity securities. A size premium is then added for the additional return the investor would expect over the large equity security by investing in smaller company equities.
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Industry specific risk is considered for business and operating risks associated with the industry in which the subject company operates. Finally, a premium representing risks specific to the subject company is assessed.
In the MCAPM approach, the market premium is adjusted by the market beta which most represents the industry of the subject company. In this case, we utilized the betas of the comparable public companies. We did not un-lever and re-lever the betas since the capital structure of the comparable public companies for the most part, were similar the subject Company. The mean beta was selected as the most appropriate beta to use in the MCAPM approach.
The discount rate should also be increased if there are significant company-specific risks. We added a 1% company-specific risk rate to discount rate due to the following company-specific risks of the subject Company:
1. The Company's ability to achieve revenue levels and profitability as forecasted.
2. The Company's ability to capitalize on its business strategy.
3. The impact on the Company of the general economic recession.
4. The uncertainty of costs and reputation risk of Dimensional's proposal on the overall Company and its financial results.
We concluded that the appropriate discount rate, based on the weighted average cost of capital of the Company was 20% at the valuation date. This rate represents a rate of return that could be expected by the specific investor given the risk associated with the investment. The residual year's net cash flows were estimated using a long term sustainable growth rate and "capitalized" using the capitalization rate. The capitalization rate was derived by subtracting this long term growth rate from the discount rate.
The capitalized residual value, as well as the net cash flows for the forecast period, was discounted back to a present value as of December 31, 2009 using the discount rate. The sum of these values plus any present value of net operating tax loss canyforwards available after 2014 resulted in an indication of the Company's market value of invested capital at December 31, 2009, which approximates the value as of March 15, 2010.
The terminal or residual value of the Company has been estimated through use of the Gordon Growth Model. This model estimates a residual value through the capitalization of a stabilized amount that is assumed to grow annually at a constant growth rate. This model is expressed as follows:
R V = (Eo x (1 + g))/ (r - g)
| Where: | RV | = Residual Value | |
Eo | = Stabilized Earnings Stream | ||
| g | = Long-term Sustainable Growth Rate | ||
| r | = Discount Rate |
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Assumptions required under the Gordon Growth Model include an estimate of the future stabilized earnings stream and the long-term sustainable growth rate. The long-term sustainable growth rate has been estimated at 4%. The Residual column in Exhibits 8 and 9 present the stabilized, net cash flow stream used in our calculation.
Based upon this long-term earnings growth rate, the stabilized earnings stream is increased at "1 + g" or by a factor of 1.04. The resulting amount is then capitalized into perpetuity at "r - g", or 16% (20% - 4%) in order to provide a terminal value of the Company at the end of 2014. The indicated future value of the Company is then calculated using this capitalization rate. This calculated future value is discounted to present value using the discount rate.
Preferred stock preferences were then subtracted to arrive at the final value available to the common stockholders. The value available to the common stockholders was divided by the number of common shares outstanding as of March 15, 2010 to determine our per share values.
Summary of Fairness Evaluation for Orchard
Our valuation procedures considered both the Market and Income Approaches. The Market Approach produced the following value indications for the common equity of Orchard on a per share basis:
| Guideline Public Company Method: | ||||
| - MVIC to LTM revenues ended September 30, 2009 | $ | 3.90 | ||
| - MVIC to 2010 forecasted EBITDA | $ | 1.58 | ||
| Guideline Transaction Method | $ | 1.89 | ||
| Current Stock Price (March 12, 2010) Minority Value | $ | 1.70 | ||
| Current Stock Price (March 12, 2010) Control Value | $ | 2.04 | ||
The Income Approach produced the following value indications for the common equity of Orchard on a per share basis:
| Discounted Cash Flow Method - Non-Strategic | $ | 1.05 | ||
| Discounted Cash Flow Method - Strategic | $ | 1.37 |
See Exhibit 12 for indication of values summary.
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Procedure 2 - Comparison of the value indications of the Equity of Orchard on a per share basis to the Offer on a per share basis.
We considered the methods and values in Exhibit 12 in our analysis. Based upon the foregoing analysis, we believe the appropriate range of indicated values for the common stock of Orchard as of March 15, 2010 is between $1.37 per share and $2.04 per share. The Offer from Dimensional Associates, LLC is $2.05 per share.
The indicated values per share, as summarized in Exhibits 12 and 14, reflects that the majority of the values are equal to or below $2.05 per share. We therefore believe that this transaction is fair, from a financial point of view, to the remaining common stockholders of The Orchard Enterprises, Inc.
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EXHIBITS
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Exhibit 1
The Orchard Enterprises, Inc.
Summary of Historical and Common Size Balance Sheets
($000's)
| September 30, | December 31, | Public | ||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | Comps | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | % | % | % | % | % | ||||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | 4,695 | 4,521 | 10,637 | 1,676 | — | 11.1 | 7.8 | 20.0 | 25.6 | |||||||||||||||||||||||||||
| Accounts receivable, net | 8,936 | 12,577 | 7,636 | 3,127 | — | 21.2 | 21.7 | 14.4 | 47.8 | |||||||||||||||||||||||||||
| Inventory | 102 | 133 | 0 | 0 | — | 0.2 | 0.2 | — | — | |||||||||||||||||||||||||||
| Royalty advances | 5,420 | 2,720 | 3,508 | 586 | — | 12.8 | 4.7 | 6.6 | 9.0 | |||||||||||||||||||||||||||
| Prepaid expenses and other current assets | 617 | 981 | 440 | 174 | — | 1.5 | 1.7 | 0.8 | 2.7 | |||||||||||||||||||||||||||
| Total current assets | 19,770 | 20,932 | 22,221 | 5,563 | 57.6 | 46.9 | 36.0 | 41.9 | 85.0 | |||||||||||||||||||||||||||
| Royalty advances, less current portion | 1,455 | 2,152 | 1,258 | 183 | — | 3.4 | 3.7 | 2.4 | 2.8 | |||||||||||||||||||||||||||
| Music and Audio Content, net | 4,826 | 5,605 | 4,168 | 135 | — | 11.4 | 9.7 | 7.9 | 2.1 | |||||||||||||||||||||||||||
| Property and Equipment, net | 2,451 | 1,610 | 1,046 | 651 | 11.9 | 5.8 | 2.8 | 2.0 | 10.0 | |||||||||||||||||||||||||||
| Intangible assets, net | 820 | 907 | 0 | 0 | — | 1.9 | 1.6 | — | — | |||||||||||||||||||||||||||
| Goodwill | 12,350 | 26,464 | 24,328 | 0 | 30.5 | 29.3 | 45.6 | 45.8 | — | |||||||||||||||||||||||||||
| Other assets | 524 | 410 | 74 | 10 | — | 1.2 | 0.7 | 0.1 | 0.2 | |||||||||||||||||||||||||||
| Total assets | 42,196 | 58,080 | 53,095 | 6,542 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||||||||||||||
| Liabilities, Redeemable Preferred Stock and Stockholders' Equity | ||||||||||||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||||||||||||
| Accounts payable | 951 | 908 | 1,085 | 250 | — | 2.3 | 1.6 | 2.0 | 3.8 | |||||||||||||||||||||||||||
| Accred royalties | 18,908 | 17,757 | 12,308 | 5,688 | — | 44.8 | 30.6 | 23.2 | 86.9 | |||||||||||||||||||||||||||
| Accused expenses | 1,300 | 1,224 | 1,136 | 1,061 | — | 3.1 | 2.1 | 2.1 | 16.2 | |||||||||||||||||||||||||||
| Due to affiliated entities | 0 | 0 | 0 | 46 | — | — | — | — | 0.7 | |||||||||||||||||||||||||||
| Deferred revenue | 1,206 | 1,535 | 543 | 146 | — | 2.9 | 2.6 | 1.0 | 2.2 | |||||||||||||||||||||||||||
| Accrued interestpayable to a related party | 0 | 0 | 0 | 1,228 | — | — | — | — | 18.8 | |||||||||||||||||||||||||||
| Convertible debt payable to a related party | 0 | 0 | 0 | 6,600 | — | — | — | — | 100.9 | |||||||||||||||||||||||||||
| Total current liabilities | 22,365 | 21,424 | 15,072 | 15,019 | 43.0 | 53.0 | 36.9 | 28.4 | 229.6 | |||||||||||||||||||||||||||
| Long term debt | 0 | 0 | 0 | 0 | 4.8 | — | — | — | — | |||||||||||||||||||||||||||
| Other long term liabilities | 0 | 0 | 0 | 0 | 4.7 | — | — | — | — | |||||||||||||||||||||||||||
| Total liabilities | 22,365 | 21,424 | 15,072 | 15,019 | 52.5 | 53.0 | 36.9 | 28.4 | 229.6 | |||||||||||||||||||||||||||
| Commitments and Contingencies | ||||||||||||||||||||||||||||||||||||
| Redeemable Preferred Stock | ||||||||||||||||||||||||||||||||||||
| Series A convertible preferred stock | 7,015 | 7,015 | 7,017 | 0 | — | 16.6 | 12.1 | 13.2 | — | |||||||||||||||||||||||||||
| Stockholders' equity: | ||||||||||||||||||||||||||||||||||||
| Series A convertible preferred stock | 0 | 0 | 0 | 8 | — | — | — | — | 0.1 | |||||||||||||||||||||||||||
| Series B convertible preferred stock | 0 | 0 | 0 | 8 | — | — | — | — | 0.1 | |||||||||||||||||||||||||||
| Common stock | 64 | 63 | 62 | 2 | — | 0.2 | 0.1 | 0.1 | 0.0 | |||||||||||||||||||||||||||
| Stock subscription receivable | 0 | 0 | 0 | (2 | ) | — | — | — | — | (0.0 | ) | |||||||||||||||||||||||||
| Additional paid in capital | 56,691 | 55,926 | 55,051 | 7,999 | — | 134.4 | 96.3 | 103.7 | 122.3 | |||||||||||||||||||||||||||
| Accumulated deficit | (43,874 | ) | (26,348 | ) | (24,093 | ) | (16,491 | ) | — | (104.0 | ) | (45.4 | ) | (45.4 | ) | (252.1 | ) | |||||||||||||||||||
| Accumulated other comprehensive loss | (65 | ) | 0 | (14 | ) | (1 | ) | — | (0.2 | ) | — | (0.0 | ) | (0.0 | ) | |||||||||||||||||||||
| Total stockholders' equity (deficit) | 12,816 | 29,641 | 31,006 | (8,477 | ) | 47.5 | 30.4 | 51.0 | 58.4 | (129.6 | ) | |||||||||||||||||||||||||
| Total liabilities, redeemable preferred stock and stockholders' equity | 42,196 | 58,080 | 53,095 | 6,542 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||||||||||||||
Note: Some amounts may not foot due to rounding
Source: SEC Filings
Draft For Discussion Purposes Only |
Exhibit 2
The Orchard Enterprises, Inc.
Summary of Historical and Common Size Income Statements
(000's)
Nine Months Ended September 30, | Year Ended December 31, | Public Comps % | ||||||||||||||||||||||||||||||||||
2009 $ | 2008 $ | 2007 $ | 2006 $ | 2009 % | 2008 % | 2007 % | 2006 % | |||||||||||||||||||||||||||||
| Net revenues | 45,555 | 57,356 | 28,549 | 14,918 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||||||||||||||
| Cost of Revenues | 33,399 | 40,272 | 20,894 | 10,717 | 52.0 | 73.3 | 70.2 | 73.2 | 71.8 | |||||||||||||||||||||||||||
| Gross Profit | 12,156 | 17,084 | 7,655 | 4,201 | 48.0 | 26.7 | 29.8 | 26.8 | 28.2 | |||||||||||||||||||||||||||
| Operating expenses | 30,104 | 19,700 | 14,356 | 9,783 | 63.6 | 66.1 | 34.3 | 50.3 | 65.6 | |||||||||||||||||||||||||||
| Income (loss) from operations | (17,948 | ) | (2,616 | ) | (6,701 | ) | (5,582 | ) | (15.6 | ) | (39.4 | ) | (4.6 | ) | (23.5 | ) | (37.4 | ) | ||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||||||||||
| Beneficial conversion feature | 0 | 0 | (477 | ) | 0 | 0.0 | 0.0 | 0.0 | (1.7 | ) | 0.0 | |||||||||||||||||||||||||
| Interest income | 6 | 171 | 38 | 3 | 0.3 | 0.0 | 0.3 | 0.1 | 0.0 | |||||||||||||||||||||||||||
| Interest expense | (48 | ) | 0 | (423 | ) | (520 | ) | (1.0 | ) | (0.1 | ) | 0.0 | (1.5 | ) | (3.5 | ) | ||||||||||||||||||||
| Loss from disposal of property and equipment | 0 | 0 | 0 | 0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||||||||||||||||||||||||
| Other income (expense) | 463 | 190 | (39 | ) | 130 | 0.0 | 1.0 | 0.3 | (0.1 | ) | 0.9 | |||||||||||||||||||||||||
| Total Other Income | 421 | 361 | (901 | ) | (387 | ) | (0.7 | ) | 0.9 | 0.6 | (3.2 | ) | (2.6 | ) | ||||||||||||||||||||||
| Net income (loss) | (17,527 | ) | (2,255 | ) | (7,602 | ) | (5,969 | ) | (16.3 | ) | (38.5 | ) | (3.9 | ) | (26.6 | ) | (40.0 | ) | ||||||||||||||||||
| Depreciation expense | 1,387 | 1,451 | 347 | 151 | ||||||||||||||||||||||||||||||||
| Stock based compensation expense | 773 | 956 | 2.283 | 84 | ||||||||||||||||||||||||||||||||
| Gross cash flow (net income + depreciation and amortization) | (16,140 | ) | (804 | ) | (7,255 | ) | (5,818 | ) | ||||||||||||||||||||||||||||
| Earnings before interest, taxes, depreciation and amortization (EBITDA) | (16,098 | ) | (975 | ) | (6,870 | ) | (5,301 | ) | ||||||||||||||||||||||||||||
| EBITDA + Stock based compensation | (15,325 | ) | (19 | ) | (4,587 | ) | (5,217 | ) | ||||||||||||||||||||||||||||
| Earnings (loss) before interest and taxes (EBIT) | (17,485 | ) | (2,426 | ) | (7,217 | ) | (5,452 | ) | ||||||||||||||||||||||||||||
| Earrings (loss) before taxes (EBT) | (17,527 | ) | (2,255 | ) | (7,602 | ) | (5,969 | ) | ||||||||||||||||||||||||||||
Note: Some amounts may not foot due to rounding
Source: SEC Filings
Draft For Discussion Purposes Only |
Exhibit 3
The Orchard Enterprises, Inc.
Normalized Income Statement
Twelve Months Ended September 30, 2009
(000's)
Year Ended December 31, | Nine Months Ended September 30, | Three Months Ended December 31, | Nine Months Ended September 30, | Twelve Months Ended September 30, | Valuation | Normalized Twelve Months Ended September 30, | Public | Normalized | ||||||||||||||||||||||||||||
| 2008 | 2008 | 2008 | 2009 | 2009 | Adjustments | 2009 | Comps | 2009 | ||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | % | % | ||||||||||||||||||||||||||||
| Net revenues | 57,356 | 41,182 | 16,174 | 45,555 | 61,729 | 61,729 | 100.0 | 100.0 | ||||||||||||||||||||||||||||
| Cost of Revenues | 40,272 | 29,438 | 10,834 | 33,399 | 44,233 | 44,233 | 52.0 | 71.7 | ||||||||||||||||||||||||||||
| Gross Profit | 17,084 | 11,744 | 5,340 | 12,156 | 17,496 | 17,496 | 48.0 | 28.3 | ||||||||||||||||||||||||||||
| Operating expenses: | 19,700 | 14,047 | 5,653 | 30,104 | 35,757 | (14,380 | ) | 21,377 | 63.6 | 34.6 | ||||||||||||||||||||||||||
| Income (loss) from operations | (2,616 | ) | (2,303 | ) | (313 | ) | (17,948 | ) | (18,261 | ) | 14,380 | (3,881 | ) | (15.6 | ) | (6.3 | ) | |||||||||||||||||||
Other income (expense): Beneficial conversion feature | 0 | 0 | 0 | 0 | 0 | 0 | 0.0 | 0.0 | ||||||||||||||||||||||||||||
| Interest income | 171 | 163 | 8 | 6 | 14 | 14 | 0.3 | 0.0 | ||||||||||||||||||||||||||||
| Interest expense | 0 | 0 | 0 | (48 | ) | (48 | ) | (48 | ) | (1.0 | ) | (0.1 | ) | |||||||||||||||||||||||
| Loss from disposal of property and equipment | 0 | 0 | 0 | 0 | 0 | 0 | 0.0 | 0.0 | ||||||||||||||||||||||||||||
| Other income (expense) | 190 | 191 | (1 | ) | 463 | 462 | (462 | ) | 0 | 0.0 | 0.0 | |||||||||||||||||||||||||
| Total Other Income | 361 | 354 | 7 | 421 | 428 | (462 | ) | (34 | ) | (0.7 | ) | (0.1 | ) | |||||||||||||||||||||||
| Net income (loss) | (2,255 | ) | (1,949 | ) | (306 | ) | (17,527 | ) | (17,833 | ) | 13,918 | (3,915 | ) | (16.3 | ) | (6.3 | ) | |||||||||||||||||||
| Impairment of goodwill | 0 | 0 | 0 | 14,114 | 14,114 | |||||||||||||||||||||||||||||||
| Restructuring expenses | 0 | 0 | 0 | 312 | 312 | |||||||||||||||||||||||||||||||
| Writedown of property | 0 | 22 | (22 | ) | (24 | ) | (46 | ) | ||||||||||||||||||||||||||||
| 14,380 | ||||||||||||||||||||||||||||||||||||
| Depreciation expense | 1,451 | 1,016 | 435 | 1,387 | 1,822 | 1,822 | ||||||||||||||||||||||||||||||
| Stock based compensation expense | 956 | 662 | 294 | 773 | 1,067 | 1,067 | ||||||||||||||||||||||||||||||
| Gross cash flow (net income + depreciation and amortization) | (2,093 | ) | ||||||||||||||||||||||||||||||||||
| Earnings before interest, taxes, depreciation and amortization (EBITDA) | (2,059 | ) | ||||||||||||||||||||||||||||||||||
| EBITDA + Stock based compensation | (992 | ) | ||||||||||||||||||||||||||||||||||
| Earnings (loss) before interest and taxes (EBIT) | (3,881 | ) | ||||||||||||||||||||||||||||||||||
| Earnings (loss) before taxes (EBT) | (3,915 | ) | ||||||||||||||||||||||||||||||||||
Note: Some amounts may not foot due to rounding
Source: SEC FIlings
Draft For Discussion Purposes Only |
Exhibit 4
The Orchard Enterprises, Inc.
Management Prepared Forecast
| For Years Ending December 31, | ||||||||||||||||||||||||||||||||||||||||
| AGGRESSIVE CASE: | 2010 | % | 2011 | % | 2012 | % | 2013 | % | 2014 | % | ||||||||||||||||||||||||||||||
| Revenue | $ | 76,566,622 | 100.0 | % | $ | 88,319,598 | 100.0 | % | $ | 100,684,343 | 100.0 | % | $ | 110,752,777 | 100.0 | % | $ | 119,612,999 | 100.0 | % | ||||||||||||||||||||
| Cost of Sales | 57,347,121 | 74.9 | % | 67,476,173 | 76.4 | % | 76,922,838 | 76.4 | % | 85,058,133 | 76.8 | % | 91,862,784 | 76.8 | % | |||||||||||||||||||||||||
| Gross Margin | 19,219,501 | 25.1 | % | 20,843,425 | 23.6 | % | 23,761,505 | 23.6 | % | 25,694,644 | 23.2 | % | 27,750,216 | 23.2 | % | |||||||||||||||||||||||||
| Operating Expenses | 17,188,840 | 22.4 | % | 18,457,782 | 20.9 | % | 19,446,416 | 19.3 | % | 20,224,273 | 18.3 | % | 21,033,244 | 17.6 | % | |||||||||||||||||||||||||
| Stock Based Comp | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | ||||||||||||||||||||||||||||||
| Adj Operating Expenses | 16,088,840 | 17,357,782 | 18,346,416 | 19,124,273 | 19,933,244 | |||||||||||||||||||||||||||||||||||
| Pretax Income | 3,130,661 | 2.7 | % | 3,485,643 | 2.7 | % | 5,415,089 | 4.3 | % | 6,570,372 | 4.9 | % | 7,816,972 | 5.6 | % | |||||||||||||||||||||||||
| Income Taxes @40% | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | 2,967,495 | 2.5 | % | |||||||||||||||||||||||||
| Net Income | 3,130,661 | 2.7 | % | 3,485,643 | 2.7 | % | 5,415,089 | 4.3 | % | 6,570,372 | 4.9 | % | 4,849,477 | 3.1 | % | |||||||||||||||||||||||||
| Less(Add): | ||||||||||||||||||||||||||||||||||||||||
| Capital Expenditures | 843,000 | 579,000 | 540,000 | 500,000 | 500,000 | |||||||||||||||||||||||||||||||||||
| Depreciation | (769,000 | ) | (758,000 | ) | (682,000 | ) | (668,360 | ) | (654,993 | ) | ||||||||||||||||||||||||||||||
| Amortization | (930,425 | ) | (930,425 | ) | (930,425 | ) | (930,425 | ) | (875,942 | ) | ||||||||||||||||||||||||||||||
| Changes to Working Capital | 150,666 | 117,530 | 123,647 | 100,684 | 88,602 | |||||||||||||||||||||||||||||||||||
| Net Cash Flow | $ | 3,836,420 | $ | 4,477,539 | $ | 6,363,867 | $ | 7,568,473 | $ | 5,791,810 | ||||||||||||||||||||||||||||||
| For Years Ending December 31, | ||||||||||||||||||||||||||||||||||||||||
| BASE CASE: | 2010 | % | 2011 | % | 2012 | % | 2013 | % | 2014 | % | ||||||||||||||||||||||||||||||
| Revenue | $ | 71,566,622 | 100.0 | % | $ | 82,558,045 | 100.0 | % | $ | 94,651,209 | 100.0 | % | $ | 104,116,330 | 100.0 | % | $ | 112,445,636 | 100.0 | % | ||||||||||||||||||||
| Cost of Sales | 53,602,205 | 74.9 | % | 63,074,346 | 76.4 | % | 72,313,524 | 76.4 | % | 79,961,341 | 76.8 | % | 86,358,249 | 76.8 | % | |||||||||||||||||||||||||
| Gross Margin | 17,964,417 | 25.1 | % | 19,483,699 | 23.6 | % | 22,337,685 | 23.6 | % | 24,154,989 | 23.2 | % | 26,087,388 | 23.2 | % | |||||||||||||||||||||||||
| Operating Expenses | 17,188,840 | 24.0 | % | 18,457,782 | 22.4 | % | 19,446,416 | 20.5 | % | 20,224,273 | 19.4 | % | 21,033,244 | 18.7 | % | |||||||||||||||||||||||||
| Stock Based Comp | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | ||||||||||||||||||||||||||||||
| Adj Operating Expenses | 16,088,840 | 17,357,782 | 18,346,416 | 19,124,273 | 19,933,244 | |||||||||||||||||||||||||||||||||||
| Pretax Income | 1,875,577 | 1.1 | % | 2,125,917 | 1.2 | % | 3,991,269 | 3.1 | % | 5,030,716 | 3.8 | % | 6,154,144 | 4.5 | % | |||||||||||||||||||||||||
| Income Taxes @40% | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
| Net Income | 1,875,577 | 1.1 | % | 2,125,917 | 1.2 | % | 3,991,269 | 3.1 | % | 5,030,716 | 3.8 | % | 6,154,144 | 4.5 | % | |||||||||||||||||||||||||
| Less(Add): | ||||||||||||||||||||||||||||||||||||||||
| Capital Expenditures | 843,000 | 579,000 | 540,000 | 500,000 | 500,000 | |||||||||||||||||||||||||||||||||||
| Depreciation | (769,000 | ) | (758,000 | ) | (682,000 | ) | (668,360 | ) | (654,993 | ) | ||||||||||||||||||||||||||||||
| Amortization | (930,425 | ) | (930,425 | ) | (930,425 | ) | (930,425 | ) | (875,942 | ) | ||||||||||||||||||||||||||||||
| Changes to Working Capital | 100,666 | 109,914 | 120,932 | 94,651 | 83,293 | |||||||||||||||||||||||||||||||||||
| Net Cash Flow | $ | 2,631,336 | $ | 3,125,428 | $ | 4,942,763 | $ | 6,034,850 | $ | 7,101,786 | ||||||||||||||||||||||||||||||
| For Years Ending December 31, | ||||||||||||||||||||||||||||||||||||||||
| WORST CASE: | 2010 | % | 2011 | % | 2012 | % | 2013 | % | 2014 | % | ||||||||||||||||||||||||||||||
| Revenue | $ | 65,466,622 | 100.0 | % | $ | 75,548,481 | 100.0 | % | $ | 86,578,560 | 100.0 | % | $ | 95,236,416 | 100.0 | % | $ | 102,855,329 | 100.0 | % | ||||||||||||||||||||
| Cost of Sales | 49,058,486 | 74.9 | % | 57,945,683 | 76.7 | % | 66,492,334 | 76.8 | % | 73,141,567 | 76.8 | % | 78,992,893 | 76.8 | % | |||||||||||||||||||||||||
| Gross Margin | 16,408,136 | 25.1 | % | 17,602,798 | 23.3 | % | 20,086,226 | 23.2 | % | 22,094,849 | 23.2 | % | 23,862,436 | 23.2 | % | |||||||||||||||||||||||||
| Operating Expenses | 16,641,754 | 25.4 | % | 17,883,341 | 23.7 | % | 18,777,508 | 21.7 | % | 19,528,608 | 20.5 | % | 20,309,753 | 19.7 | % | |||||||||||||||||||||||||
| Stock Based Comp | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | (1,100,000 | ) | ||||||||||||||||||||||||||||||
| Adj Operating Expenses | 15,541,754 | 16,783,341 | 17,677,508 | 18,428,608 | 19,209,753 | |||||||||||||||||||||||||||||||||||
| Pretax Income | 866,382 | -0.4 | % | 819,457 | -0.4 | % | 2,408,718 | 1.5 | % | 3,666,240 | 2.7 | % | 4,652,684 | 3.5 | % | |||||||||||||||||||||||||
| Income Taxes @40% | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
| Net Income | 866,382 | -0.4 | % | 819,457 | -0.4 | % | 2,408,718 | 1.5 | % | 3,666,240 | 2.7 | % | 4,652,684 | 3.5 | % | |||||||||||||||||||||||||
| Less(Add): | ||||||||||||||||||||||||||||||||||||||||
| Capital Expenditures | 843,000 | 579,000 | 540,000 | 500,000 | 500,000 | |||||||||||||||||||||||||||||||||||
| Depreciation | (769,000 | ) | (758,000 | ) | (682,000 | ) | (668,360 | ) | (654,993 | ) | ||||||||||||||||||||||||||||||
| Amortization | (930,425 | ) | (930,425 | ) | (930,425 | ) | (930,425 | ) | (875,942 | ) | ||||||||||||||||||||||||||||||
| Changes to Working Capital | 39,666 | 100,819 | 110,301 | 86,579 | 76,189 | |||||||||||||||||||||||||||||||||||
| Net Cash Flow | $ | 1,683,141 | $ | 1,828,064 | $ | 3,370,843 | $ | 4,678,447 | $ | 5,607,429 | ||||||||||||||||||||||||||||||
Draft For Discussion Purposes Only |
Exhibit 5
The Orchard Enterprises, Inc.
Guideline Public Company Method
Exchange Symbol Last Twelve Months (LTM) Ending | Orchard NASDAQ: ORCD September 30, 2009 | G1u Mobile, Inc. NASDAQ: GLUU September 30, 2009 | EDGAR Online, Inc. NASDAQ: EDGR September 30, 2009 | Limelight Networks, Inc. NASDAQ: LLNW September 30, 2009 | Salary.Com, Inc. and Subsidiaries NASDAQ: SLRY December 31, 2009 | WebMediaBrands Inc. NASDAQ: WEBM September 30, 2009 | Image Entertainment, Inc. NASDAQ: DISK PK December 31, 2009 | RealNetworks, Inc. NASDAQ: RNWK December 31, 2009 | Intenap Network Services NASDAQ: INAP December 31, 2009 | LiveWire Mobile, Inc. NASDAQ: LVWR.PK December 31, 2009 | ||||||||||||||||||||||||||||||
| Stock Price as of March 10, 2010 | $ | 1.75 | $ | 1.03 | $ | 1.28 | $ | 4.03 | $ | 2.71 | $ | 1.04 | $ | 0.25 | $ | 5.32 | $ | 6.01 | $ | 3.95 | ||||||||||||||||||||
| Shares Out. (000) | 6,378 | 30,302 | 26,855 | 84,674 | 16,817 | 36,922 | 25,356 | 135,140 | 50,951 | 4,601 | ||||||||||||||||||||||||||||||
| Minority Value Indication | 11,162 | 31,211 | 34,374 | 341,236 | 45,574 | 38,399 | 6,339 | 718,945 | 306,216 | 18,174 | ||||||||||||||||||||||||||||||
| Preferred Stock | 7,015 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| M .V. of Total Equity | 18,177 | 31,211 | 34,374 | 341,236 | 45,574 | 38,399 | 6,339 | 718,945 | 306,216 | 18,174 | ||||||||||||||||||||||||||||||
| Add: Short and Long Term Interest Bearing Debt | — | 15,626 | 2,028 | — | 2,525 | 7,197 | 27,118 | — | 23,242 | 360 | ||||||||||||||||||||||||||||||
| Less: Cash and Marketable Securities | 4,695 | 9,861 | 1,747 | 152,814 | 11,225 | 4,134 | 322 | 384,900 | 80,926 | 7,834 | ||||||||||||||||||||||||||||||
| Market Value of Invested Capital (Minority Value) | 13,482 | 36,976 | 34,655 | 188,422 | 36,874 | 41,462 | 33,135 | 334,045 | 248,532 | 10,700 | ||||||||||||||||||||||||||||||
| Comparative Balance Sheets: | ||||||||||||||||||||||||||||||||||||||||
| CurrentAssets | 19,770 | 38,415 | 4,367 | 189,896 | 31,309 | 9,582 | 51,707 | 481,653 | 108,754 | 11,014 | ||||||||||||||||||||||||||||||
| Net Plant and Equipment | 2,451 | 3,620 | 2,444 | 39,653 | 2,213 | 2,114 | 1,374 | 57,114 | 91,151 | 1,342 | ||||||||||||||||||||||||||||||
| Other Assets | 19,975 | 23,538 | 4,915 | 10,087 | 33,492 | 34,077 | 23,045 | 68,116 | 67,597 | 175 | ||||||||||||||||||||||||||||||
| Total Assets | 42,196 | 65,573 | 11,726 | 239,636 | 67,014 | 45,773 | 76,126 | 606,883 | 267,502 | 12,531 | ||||||||||||||||||||||||||||||
| Current Liabilities Including Short Term Debt | 22,365 | 34,724 | 6,336 | 28,162 | 51,109 | 6,269 | 77,219 | 203,455 | 34,215 | 3,790 | ||||||||||||||||||||||||||||||
| Long Term Debt | — | 3,062 | 1,528 | — | — | 7,197 | — | — | 23,217 | 170 | ||||||||||||||||||||||||||||||
| Other Long Term Liabilities | — | 10,107 | 206 | 3,006 | 4,382 | 1,788 | — | 20,364 | 25,668 | 114 | ||||||||||||||||||||||||||||||
| Preferred Stock | 7,015 | |||||||||||||||||||||||||||||||||||||||
| Stockholder's Equity | 12,816 | 17,680 | 3,456 | 208,468 | 11,523 | 30,519 | (1,093 | ) | 383,064 | 184,402 | 8,457 | |||||||||||||||||||||||||||||
| Total Liabilities and Equity | 42,196 | 65,573 | 11,726 | 239,636 | 67,014 | 45,773 | 76,126 | 606,883 | 267,502 | 12,531 | ||||||||||||||||||||||||||||||
| Comparative Income Statements: | ||||||||||||||||||||||||||||||||||||||||
| Revenues | 61,729 | 81,869 | 18,894 | 133,936 | 46,167 | 119,648 | 105,215 | 562,264 | 256,259 | 16,808 | ||||||||||||||||||||||||||||||
| Cost of Revenues | 44,233 | 36,862 | 4,395 | 85,337 | 14,949 | 83,113 | 86,619 | 222,142 | 198,023 | 5,932 | ||||||||||||||||||||||||||||||
| Gross Margin | 17,496 | 45,007 | 14,499 | 48,599 | 31,218 | 36,535 | 18,596 | 340,122 | 58,236 | 10,876 | ||||||||||||||||||||||||||||||
| Operating Expenses | 21,377 | 63,423 | 15.735 | 83,059 | 50,340 | 43,856 | 28,390 | 397,760 | 72,434 | 13,087 | ||||||||||||||||||||||||||||||
| Income (Loss) from Operations | (3,881 | ) | (18,416 | ) | (1,236 | ) | (34,460 | ) | (19,122 | ) | (7,321 | ) | (9,794 | ) | (57,638 | ) | (14,198 | ) | (2,211 | ) | ||||||||||||||||||||
| Other Income (Expense) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Interest Income | 14 | 161 | 37 | 1,720 | 30 | 480 | — | 3,969 | 150 | — | ||||||||||||||||||||||||||||||
| Interest Expense | (48 | ) | (1,036 | ) | (438 | ) | (45 | ) | — | (3,628 | ) | (2,535 | ) | — | (720 | ) | — | |||||||||||||||||||||||
| Earnings Before Tax (EBT) | (3,915 | ) | (19,291 | ) | (1,637 | ) | (32,785 | ) | (19,092 | ) | (10,469 | ) | (12,329 | ) | (53,669 | ) | (14,768 | ) | (2,211 | ) | ||||||||||||||||||||
| Tax Expense (Benefit) | — | 3,436 | 646 | 91 | 1,164 | 15 | 3,321 | 342 | 297 | |||||||||||||||||||||||||||||||
| Net Income (Loss) From Continuing Operations | (3,915 | ) | (22,727 | ) | (1,637 | ) | (33,431 | ) | (19,183 | ) | (11,633 | ) | (12,344 | ) | (56,990 | ) | (15,110 | ) | (2,508 | ) | ||||||||||||||||||||
| Depreciation and Amortization | 1,822 | 11,532 | 2,074 | 27,716 | 6,437 | 19,496 | 6,306 | 31,454 | 36,631 | 571 | ||||||||||||||||||||||||||||||
| Stork Based Compensation | 1,067 | (259 | ) | 1,356 | 18,646 | 8,272 | 3,121 | 137 | 21,460 | 5,613 | 293 | |||||||||||||||||||||||||||||
| Gross Cash Flow (Net Income + Depreciation and Amortization) | (2,093 | ) | (11,195 | ) | 437 | (5,715 | ) | (12,746 | ) | 7,863 | (6,038 | ) | (25,536 | ) | 21,521 | (1,937 | ) | |||||||||||||||||||||||
| Earnings Before Interest, Taxes, Depreciation and Amortization(EBITDA) | (2,859 | ) | (6,884 | ) | 838 | (6,744 | ) | (12,685 | ) | 12,175 | (3,488 | ) | (26,184 | ) | 22,433 | (1,640 | ) | |||||||||||||||||||||||
| EBITDA + Stock Based Compensatior. | (992 | ) | (7,143 | ) | 2,194 | 11,902 | (4,413 | ) | 15,296 | (3,351 | ) | (4,724 | ) | 28,046 | (1,347 | ) | ||||||||||||||||||||||||
| Earnings Before Interest and Taxes (EBIT) | (18,416 | ) | (1,236 | ) | (34,460 | ) | (19,122 | ) | (7,321 | ) | (9,794 | ) | (57,638 | ) | (14,198 | ) | (2,211 | ) | ||||||||||||||||||||||
| Earnings Per Share | $ | -0.61 | $ | -0.75 | $ | -0.06 | $ | -0.39 | $ | -1.14 | $ | -0.32 | $ | -0.49 | $ | -0.42 | $ | -0.30 | $ | -0.55 | ||||||||||||||||||||
| Gross Margin/Revenues | 28.3 | % | 55.0 | % | 76.7 | % | 36.3 | % | 67.6 | % | 30.5 | % | 17.7 | % | 60.5 | % | 22.7 | % | 64.7 | % | ||||||||||||||||||||
| Operating Expenses/Revenues | 34.6 | % | 77.5 | % | 83.3 | % | 62.0 | % | 109.0 | % | 36.7 | % | 27.0 | % | 70.7 | % | 28.3 | % | 77.9 | % | ||||||||||||||||||||
| EBITDA/Revenues | -3.3 | % | -84 | % | 44 | % | -5.0 | % | -27.5 | % | 10.2 | % | -3.3 | % | -4.7 | % | 8.8 | % | -9.8 | % | ||||||||||||||||||||
| EBITDA+Stock Based Compensation/Revenues | -l.6 | % | -87 | % | 11.6 | % | 8.9 | % | -9.6 | % | 12.8 | % | -3.2 | % | 0.8 | % | 10.9 | % | -8.0 | % | ||||||||||||||||||||
| EBIT/Revenues | -6.3 | % | -22.5 | % | -6.5 | % | -25.7 | % | 41.4 | % | -6.1 | % | -9.3 | % | -10.3 | % | -5.5 | % | -13.2 | % | ||||||||||||||||||||
| Depr. & Amort./Revenues | 3.0 | % | 14.1 | % | 11.0 | % | 20.7 | % | 13.9 | % | 16.3 | % | 6.0 | % | 5.6 | % | 14.3 | % | 3.4 | % | ||||||||||||||||||||
| Depr. & Amort./Total Assets | 4.3 | % | 17.6 | % | 17.7 | % | 11.6 | % | 9.6 | % | 42.6 | % | 8.3 | % | 5.2 | % | 13.7 | % | 4.6 | % | ||||||||||||||||||||
| Net Income/Revenues | -6.3 | % | -27.8 | % | -8.7 | % | -25.0 | % | -41.6 | % | -9.7 | % | -11.7 | % | -10.1 | % | -5.9 | % | -14.9 | % | ||||||||||||||||||||
| Net Income/Equity | -30.5 | % | -128.5 | % | -44.8 | % | -16.0 | % | -166.5 | % | -38.1 | % | 1129.4 | % | -14.9 | % | -8.2 | % | -29.7 | % | ||||||||||||||||||||
| Gross Cash Flow/Revenues | -3.4 | % | -13.7 | % | 2.3 | % | -4.3 | % | -27.6 | % | 6.6 | % | -5.7 | % | -4.5 | % | 8.4 | % | -11.5 | % | ||||||||||||||||||||
| Long Term Debt/Equity | 0.0 | 0.2 | 0.4 | 0.0 | 0.0 | 0.2 | 0.0 | 0.0 | 0. | l | 0.0 | |||||||||||||||||||||||||||||
| Working Capital | -2,595 | 3,691 | -1,969 | 161,734 | -19,800 | 3,313 | -25,512 | 278,198 | 74,539 | 7,224 | ||||||||||||||||||||||||||||||
| Working Cap/Revenues | -4.2 | % | 4.5 | % | -10.4 | % | 120.8 | % | -42.9 | % | 2.8 | % | -24.2 | % | 49.5 | % | 29.1 | % | 43.0 | % | ||||||||||||||||||||
| Current Ratio | 0.9 | 1.1 | 0.7 | 6.7 | 0.6 | 1.5 | 0.7 | 2.4 | 3.2 | 2.9 | ||||||||||||||||||||||||||||||
| Market Value of Invested Capital to: | ||||||||||||||||||||||||||||||||||||||||
| Revenues | 0.22 | 0.45 | 1.83 | 1.41 | 0.80 | 0.35 | 0.31 | 0.59 | 0.97 | 0.64 | ||||||||||||||||||||||||||||||
| EBITDA | NM | NM | 41.35 | NM | NM | 3.41 | NM | NM | 11.08 | NM | ||||||||||||||||||||||||||||||
Draft For Discussion Purposes Only |
Exhibit 6
The Orchard Enterprises, Inc.
Guideline Public Company Method Ranking Analysis
Gross Margin/Revenues | Operating Expenses/Revenues | EBITDA/Revenues | EBITDA +Stock Based Compensation /Revenues | |||||||||||
| EDGAR Online, Inc. | 76.7% | Image | 27.0% | WebMediaBrands Inc. | 10.2% | WebMediaBrands Inc. | 12.8% | |||||||
| Salary.Com, Inc. | 67.6% | Internap | 28.3% | Intemap | 8.8% | EDGAR Online, Inc. | 11.6% | |||||||
| LiveW ire | 64.7% | Orchard | 34.6% | EDGAR Online, Inc. | 4.4% | Intemap | 10.9% | |||||||
| RealNetworks, Inc. | 60.5% | WebMediaBrands Inc. | 36.7% | Image | -3.3% | Limelight | 8.9% | |||||||
| Glu Mobile, Inc. | 55.0% | Limelight | 62.0% | Orchard | -3.3% | RealNetworks, Inc. | -0.8% | |||||||
| Limelight | 36.3% | RealNetworks, Inc. | 70.7% | RealNetworks, Inc. | -4.7% | Orchard | -1.6% | |||||||
| WebMediaBrands Inc. | 30.5% | Glu Mobile, Inc. | 77.5% | Limelight | -5.0% | Image | -3.2% | |||||||
| Orchard | 28.3% | LiveWire | 77.9% | Glu Mobile, Inc. | -8.4% | LiveWire | -8.0% | |||||||
| Internap | 22.7% | EDGAR Online, Inc. | 83.3% | LiveWire | -9.8% | Glu Mobile, Inc. | -8.7% | |||||||
| Image | 17.7% | Salary.Com, Inc. | 109.0% | Salary.Com, Inc. | -27.5% | Salary.Com, Inc. | -9.6% | |||||||
| Average | 48.0% | 63.6% | -3.9% | 1.5% | ||||||||||
| Median | 55.0% | 70.7% | -4.7% | -0.8% |
Long Term Debt/Equity | Working Cap/Revenues | Current Ratio | EBIT/Revenues | |||||||||||
| Salary.Com. Inc. | 0.0 | Limelight | 120.8% | Limelight | 6.7 | Intemap | -5.5% | |||||||
| RealNetworks, Inc. | 0.0 | RealNetworks, Inc. | 49.5% | Intemap | 3.2 | WebMediaBrands Inc. | -6.1% | |||||||
| Orchard | 0.0 | LiveWire | 43.0% | LiveWire | 2.9 | Orchard | -6.3% | |||||||
| Limelight | 0.0 | Internap | 29.1% | RealNetworks, Inc. | 2.4 | EDGAR Online, Inc. | -6.5% | |||||||
| Image | 0.0 | Glu Mobile, Inc. | 4.5% | WebMediaBrands Inc. | 1.5 | Image | -9.3% | |||||||
| LiveWire | 0.0 | WebMediaBrands Inc. | 2.8% | Glu Mobile, Inc. | 1.1 | RealNetworks, Inc. | -10.3% | |||||||
| Internap | 0.1 | Orchard | -4.2% | Orchard | 0.9 | LiveWire | -13.2% | |||||||
| Glu Mobile, Inc. | 0.2 | EDGAR Online, Inc. | -10.4% | EDGAR Online, Inc. | 0.7 | Glu Mobile, Inc. | -22.5% | |||||||
| WebMediaBrands Inc. | 0.2 | Image | -24.2% | Image | 0.7 | Limelight | -25.7% | |||||||
| EDGAR Online, Inc. | 0.4 | Salary.Com, Inc. | -42.9% | Salary.Com, Inc. | 0.6 | Salary.Com,.Inc. | -41.4% | |||||||
| Average | 0.1 | 19.1% | 2.2 | -15.6% | ||||||||||
| Median | 0.0 | 4.5% | 1.5 | -10.3% |
Draft For Discussion Purposes Only |
Exhibit 7
The Orchard Enterprises, Inc.
Guideline Company Transaction Detail
(000's)
| Sale | Latest Fiscal Year | MVIC/ | ||||||||||||
| Business Description | Target Company Name | Acquiring Company Name | Date | Revenues | EBITDA | MVIC | Revenues | |||||||
| Digital media and IPTV solutions provider | Visual Connection | KIT Digital,Inc | 10/5/2008 | 10,356 | N/M | 4,344 | 0.42 | |||||||
| Provides Audio services for content download and playback on personal computers | Audible, Inc. | Amazon.com Inc. | 3/19/2008 | 101,979 | 2,326 | 277,377 | 2.72 | |||||||
| Provider of video and audio content distribution to advertisers | Vyvx Ads Business | DG FastChannel, Inc. | 6/5/2008 | 36,411 | 10,516 | 129,000 | 3.54 | |||||||
| Distribution of program and advertising content to television and radio stations | Applied Graphics Technologies, Inc. | Digital Generation Systems, Inc. | 6/10/2004 | 21,546 | 274 | 14,100 | 0.65 | |||||||
| Distribution of entertainment programming and home video products | GoodTimes Entertainment | Gaiam Inc | 9/13/2005 | 141,954 | N/M | 34,405 | 0.24 | |||||||
| Digital distribution of motion pictures over the internet | Movielink | Blockbuster | 8/812007 | 4,053 | N/M | 7,000 | 1.73 | |||||||
| Markets and distributes digital images and provides visual content | Creatas LLC | Jupitermedia Corp | 3/7/2005 | 43,073 | 2,949 | 60,400 | 1.40 | |||||||
| Provides digital background music and messaging services via the internet | Trusonic Inc. | Fluid Media Networks, Inc. | 10/17/2007 | 2,838 | N/M | 6,000 | 2.11 | |||||||
| Provides downloadable mobile content including ringtones and background wallpaper and text alerts | Ringtone.com LLC | New Motion, Inc. | 6/30/2008 | 10,226 | N/M | 8,653 | 0.85 | |||||||
| Direct to consumer mobile internet content and services | AMV Holding Limited | Mandalay Media, Inc. | 10/23/2008 | 29,497 | 4,244 | 22,552 | 0.76 | |||||||
| Note: Some amounts may not foot due to rounding | ||||||||||||||
| Low | 0.24 | |||||||||||||
| High | 3.54 | |||||||||||||
| Mean | 1.44 | |||||||||||||
| Median | 1.12 | |||||||||||||
| Standard Deviation | 1.08 | |||||||||||||
| Coefficient of Variation (Standard Deviation Mean) | 0.75 | |||||||||||||
SOURCE: Pratt's Stats, Public Stats and Mergerstat N/M = Not Meaningful MVIC = Market Value of Invested Capital | ||||||||||||||
Draft For Discussion Purposes Only |
Exhibit 8
The Orchard Enterprises, Inc.
Business Enterprise Value - Without eMusic Synergies and Private Company Cost Savings
Discounted Cash Flow Method
December 31, 2009
(000's)
| Aggressive Case | 2010 | 2011 | 2012 | 2013 | 2014 | Residual | ||||||||
| Debt Free Cash Flow (Net Cash Flow to Invested Capital) | $3,836 | $4,478 | $6,364 | $7,568 | $5,792 | $4,878 | ||||||||
| Capitalized Residual Value | 30,488 | |||||||||||||
| Present Value Mid-Year Discount Factor @ | 20% | 0.91287 | 0.76073 | 0.63394 | 0.52828 | 0.44023 | 0.44023 | |||||||
| Net Present Value of Cash Flow | 3,502 | 3,407 | 4,034 | 3,998 | 2,550 | 13,422 | ||||||||
| Indicated Enterprise Value (Market Value of Invested Capital) | 30,913 | |||||||||||||
| Less: Interest Bearing Debt | 0 | |||||||||||||
| Plus- present value of NOL carryforward tax benefit after 2014 | 792 | |||||||||||||
| Less: Series A Preferred Stock Liquidation Preference | (24,993 | ) | ||||||||||||
| Indication of Controlling, Marketable Equity Value - Common Stock | $6,712 | |||||||||||||
| Base Case | 2010 | 2011 | 2012 | 2013 | 2014 | Residual | ||||||||
| Debt Free Cash Flow (Net Cash Flow to Invested Capital) | $2,631 | $3,125 | $4,943 | $6,035 | $7,102 | $3,840 | ||||||||
| Capitalized Residual Value | 24,000 | |||||||||||||
| Present Value Mid-Year Discount Factor @ | 20% | 0.91287 | 0.76073 | 0.63394 | 0.52828 | 0.44023 | 0.44023 | |||||||
| Net Present Value of Cash Flow | 2,402 | 2,377 | 3,134 | 3,188 | 3,127 | 10,566 | ||||||||
| Indicated Enterprise Value (Market Value of Invested Capital) | 24,793 | |||||||||||||
| Less: Interest Bearing Debt | 0 | |||||||||||||
| Plus- present value of NOL carryforward tax benefit after 2014 | 792 | |||||||||||||
| Less: Series A Preferred Stock Liquidation Preference | (24,993 | ) | ||||||||||||
| Indication of Controlling, Marketable Equity Value - Common Stock | $592 | |||||||||||||
| Worst Case | 2010 | 2011 | 2012 | 2013 | 2014 | Residual | ||||||||
| Debt Free Cash Flow (Net Cash Flow to Invested Capital) | $1,683 | $1,828 | $3,371 | $4,678 | $5,607 | $2,903 | ||||||||
| Capitalized Residual Value | 18,144 | |||||||||||||
| Present Value Mid-Year Discount Factor @ | 20% | 0.91287 | 0.76073 | 0.63394 | 0.52828 | 0.44023 | 0.44023 | |||||||
| Net Present Value of Cash Flow | 1,536 | 1,391 | 2,137 | 2,471 | 2,468 | 7,988 | ||||||||
| Indicated Enterprise Value (Market Value of Invested Capital) | 17,991 | |||||||||||||
| Less: Interest Bearing Debt | 0 | |||||||||||||
| Plus- present value of NOL carryforward tax benefit after 2014 | 1,326 | |||||||||||||
| Less: Series A Preferred Stock Liquidation Preference | (24,993 | ) | ||||||||||||
| Indication of Controlling, Marketable Equity Value - Common Stock | ($5,676 | ) | ||||||||||||
| Summary | Indicated Enterprise Value | Indicated Common Value | Common Shares o/s | Common Share Price |
| Aggressive Case | $31.705 | $6,712 | 6,378,252 | $1.05 |
| Base Case | 25,585 | 592 | 6,378,252 | $0.09 |
| Worst Case | 19,317 | 0 | 6,378,252 | $0.00 |
Draft For Discussion Purposes Only |
Exhibit 9
The Orchard Enterprises, Inc.
Business Enterprise Value - Buyer Scenerio With eMusic Synergies and Private Company Cost Savings
Discounted Cash Flow Method
December 31, 2009
(000's)
| Aggressive Case | 2010 | 2011 | 2012 | 2013 | 2014 | Residual | ||||||||
| Debt Free Cash Flow (Net Cash Flow to Invested Capital) | $2,864 | $3,364 | $4,477 | $5,219 | $5,912 | $4,878 | ||||||||
| Add eMusic Synergies and Private Co. Cost Savings, net of taxes | 910 | 956 | 1,004 | 1,054 | 1,106 | 1,151 | ||||||||
| Total Debt Free Cash Flow | 3,774 | 4,319 | 5,481 | 6,273 | 7,019 | 6,029 | ||||||||
| Capitalized Residual Value | 37,679 | |||||||||||||
| Present Value Mid-Year Discount Factor @ | 20% | 0.91287 | 0.76073 | 0.63394 | 0.52828 | 0.44023 | 0.44023 | |||||||
| Net Present Value of Cash Flow | 3,445 | 3,286 | 3,474 | 3,314 | 3,090 | 16,588 | ||||||||
| Indicated Enterprise Value (Market Value of Invested Capital) | 33,197 | |||||||||||||
| Present value of NOL tax benefit post 2014 | 547 | |||||||||||||
| Less: Interest Bearing Debt | 0 | |||||||||||||
| Less: Series A Preferred Stock Liquidation Preference | (24,993 | ) | ||||||||||||
| Indication of Controlling, Marketable Equity Value | $8,751 | |||||||||||||
| Base Case | 2010 | 2011 | 2012 | 2013 | 2014 | Residual | ||||||||
| Debt Free Cash Flow (Net Cash Flow to Invested Capital) | $2,161 | $2,555 | $3,626 | $4,302 | $4,920 | $3,840 | ||||||||
| Add eMusic Synergies and Private Co. Cost Savings, net of taxes | 910 | 956 | 1,004 | 1,054 | 1,106 | 1,151 | ||||||||
| Total Debt Free Cash Flow | 3,071 | 3,510 | 4,629 | 5,355 | 6,027 | 4,991 | ||||||||
| Capitalized Residual Value | 31,192 | |||||||||||||
| Present Value Mid-Year Discount Factor @ | 20% | 0.91287 | 0.76073 | 0.63394 | 0.52828 | 0.44023 | 0.44023 | |||||||
| Net Present Value of Cash Flow | 2,803 | 2,670 | 2,935 | 2,829 | 2,653 | 13,732 | ||||||||
| Indicated Enterprise Value (Market Value of Invested Capital) | 27,623 | |||||||||||||
| Present value of NOL tax benefit post 2014 | 547 | |||||||||||||
| Less: Interest Bearing Debt | 0 | |||||||||||||
| Less: Series A Preferred Stock Liquidation Preference | (24,993 | ) | ||||||||||||
| Indication of Controlling, Marketable Equity Value | $3,177 | |||||||||||||
| Worst Case | 2010 | 2011 | 2012 | 2013 | 2014 | Residual | ||||||||
| Debt Free Cash Flow (Net Cash Flow to Invested Capital) | $1,616 | $1,779 | $2,687 | $3,491 | $4,027 | $2,903 | ||||||||
| Add eMusic Synergies and Private Co. Cost Savings, net of taxes | 910 | 956 | 1,004 | 1,054 | 1,106 | 1,151 | ||||||||
| Total Debt Free Cash Flow | 2,526 | 2,735 | 3,690 | 4,544 | 5,133 | 4,054 | ||||||||
| Capitalized Residual Value | 25,338 | |||||||||||||
| Present Value Mid-Year Discount Factor @ | 20% | 0.91287 | 0.76073 | 0.63394 | 0.52828 | 0.44023 | 0.44023 | |||||||
| Net Present Value of Cash Flow | 2,306 | 2,081 | 2,339 | 2,401 | 2,260 | 11,155 | ||||||||
| Indicated Enterprise Value (Market Value of Invested Capital) | 22,541 | |||||||||||||
| Present value of NOL tax benefit post 2014 | 547 | |||||||||||||
| Less: Interest Bearing Debt | 0 | |||||||||||||
| Less: Series A Preferred Stock Liquidation Preference | (24,993 | ) | ||||||||||||
| Indication of Controlling, Marketable Equity Value | ($1,904 | ) |
| Sununary | Indicated Enterprise Value | Indicated Common Value | Common Share o/s | Common Share Price |
| Aggressive Case | $33,744 | $8,751 | 6,378,252 | $1.37 |
| Base Case | 28,170 | 3,177 | 6,378,252 | $0.50 |
| Worst Case | 23,089 | 0 | 6,378,252 | $0.00 |
Draft For Discussion Purposes Only |
Exhibit 10
The Orchard Enterprises, Inc.
eMusic Synergies and Private Company Cost Savings
| eMusic | Private | |||||||||||
| Synergistic | Company | |||||||||||
| Management's estimated cost savings: | Cost Savings | Cost Savings | Total | |||||||||
Employee expenses | $ | 853,218 | $ | 469,551 | ||||||||
Professional services | 190,000 | 782,700 | ||||||||||
Insurance and SG&A | 122,000 | 47,798 | ||||||||||
Marketing and promotion | 119,000 | 0 | ||||||||||
Office expenses | 350,000 | 0 | ||||||||||
Travel and entertainment | 100,000 | 0 | ||||||||||
Total management's estimated cost savings | 1,734,218 | 1,300,049 | ||||||||||
| Income taxes at 40% | 693,687 | 520,020 | ||||||||||
| After-tax cost savings | $ | 1,040,531 | $ | 780,029 | $ | 1,820,560 | ||||||
| Assumed split between buyer and seller | 50 | % | ||||||||||
| Assumed after-tax savings that buyer would be willing to pay for | $ | 910,280 | ||||||||||
Note: Some amounts may not foot due to rounding
Draft For Discussion Purposes Only |
Exhibit 11
The Orchard Enterprises, Inc.
Weighted Average Cost of Capital Analysis
| MCAPM, Cost of Equity | |||||
| (1) Risk-Free Rate | 4.53% | ||||
| (2) Beta | 1.20 | ||||
| (3) Market Premium | 6.50% | 7.80% | |||
| (4) Size Premium | 5.81% | ||||
| (5) Company Specific Risk Premium | 1.00% | ||||
| Build-Up Method, Cost of Equity | 19.14% | ||||
| (1) Risk-Free Rate | 4.53% | ||||
| (7) Industry Risk Premium | 4.03% | ||||
| (3) Market Premium | 6.50% | ||||
| (4) Size Premium | 5.81% | ||||
| (5) Company Specific Risk Premium | 1.00% | ||||
| Duff & Phelps Risk Premium Study Report on Size Characteristics | 21.87% | ||||
| (1) Risk-Free Rate | 4.53% | ||||
| (6) Size Specific Equity Risk Premium | 11.32% | ||||
| (7) Industry Risk Premium | 4.03% | ||||
| (5) Company Specific Risk Premium | 1.00% | ||||
| 20.88% | |||||
| Range | = | 19.14% | to | 21.87% | |
| Concluded Cost of Equity | = | 20.00% | |||
| After-tax Cost of Debt | |||||
| Borrowing Rate | 0.00% | ||||
| Estimated Tax Rate | 0.00% | ||||
| After-tax Cost of Debt | 0.00% |
Weighted Average Cost of Capital (WACC)
| Capital | Weighted | |||||||
| Structure [8] | Cost | Cost | ||||||
| Debt | 0.00% | 0.00% | 0.00 | % | ||||
| Equity | 100.00% | 20.00% | 20.00 | % | ||||
| WACC | = | 20.00 | % |
| (1) | Based on 20-year U.S. Treasury at March 10, 2010 as published by Federal Reserve Board of Saint Louis |
| (2) | Beta estimated from analysis of betas of guideline public companies |
| (3) | Ibbotson: Stocks, Bonds, Bills, and Inflation Yearbook 2009 Valuation Edition |
| (4) | Ibbotson: SBBI: Valuation Edition 2009 Yearbook (Long-term Returns in Excess of CAPM Estimates for Decile Portfolios of the NYSE/AMEX/NASDAQ - 10th Decile) |
| (5) | Based on company-specific factors described in Addendum |
| (6) | Size specific equity risk premiums are based on comparison of Company to risk premium groups presented in the Duff & Phelps Study |
| (7) | SIC 7375 Information Retrieval Services from Ibbotson Associates Stocks, Bonds, Bills, and Inflation Valuation Edition 2009 Yearbook |
| (8) | Based on analysis of Company's industry |
Draft For Discussion Purposes Only |
Exhibit 12
The Orchard Enterprises, Inc.
Indications of Value Summary
(000's Except per Share Value)
| (000's) | Industry Multiples Selected | Indicated Value (000's) | Less: Interest Bearing Debt | Add: Cash & Mkt Securities | Minority Equity Value on Marketable Basis | Add: 20% Control Premium | Controlling Marketable Equity Value | Less: Series A Preferred Stock Liquidation Preference | Residiual Value Available for Common Shareholders | Indicated Value Per Share Rounded | |||||||||||||||||||||||||||||||
Guideline Public Company Method MVIC Approach LTM (Last Twelve Months) Based on Adjusted September 30, 2009 | |||||||||||||||||||||||||||||||||||||||||
| MVIC/Revenues | $ | 61,729 | 0.60 | 37,037 | - | 4,500 | 41,537 | 8,307 | 49,844 | (24,993 | ) | $ | 24,851 | $ | 3.90 | ||||||||||||||||||||||||||
Guideline Public Company Methoc MVIC Approach Based on Base Case Forecasted 2010 | |||||||||||||||||||||||||||||||||||||||||
| �� | |||||||||||||||||||||||||||||||||||||||||
| MVIC/EBITDA | $ | 2,475 | 10.00 | 24,750 | - | 4,500 | 29,250 | 5,850 | 35,100 | (24,993 | ) | $ | 10,107 | $ | 1.58 | ||||||||||||||||||||||||||
Guideline Company Transaction Method MVIC Approach LTM (Last Twelve Months) Based on Adjusted September 30, 2009 | |||||||||||||||||||||||||||||||||||||||||
| MVIC/Revenues | $ | 61,729 | 0.60 | 37,037 | - | - | 37,037 | - | 37,037 | (24.993 | ) | $ | 12,044 | $ | 1.89 | ||||||||||||||||||||||||||
Discounted Cash Flow Approach Equity Approach | |||||||||||||||||||||||||||||||||||||||||
| Non-strategic (without eMusic synergies and private cost savings) | 31,705 | - | - | 31,705 | - | 31,705 | (24,993 | ) | $ | 6,712 | $ | 1.05 | |||||||||||||||||||||||||||||
| Strategic (with eMusic synergies and private cost savings) | 33,744 | - | - | 33,744 | - | 33,744 | (24,993 | ) | $ | 8,751 | $ | 1.37 | |||||||||||||||||||||||||||||
| Market Approach | |||||||||||||||||||||||||||||||||||||||||
| Orchard closing stock price on March 12, 2010 | $ | 1.70 | |||||||||||||||||||||||||||||||||||||||
| Orchard closing stock price on March 12, 2010 (with 20% control premium) | $ | 2.04 | |||||||||||||||||||||||||||||||||||||||
| Note : Total common shares issued and outstanding | 6,378,252 | ||||||||||||||||||||||||||||||||||||||||
Exhibit 13
The Orchard Enterprises Inc.
Historical Stock Price - Trailing Twelve Months
Exhibit 14
The Orchard Enterprises Inc.
Illustrative Summary of Values
