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NAPSTER, INC.
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(Name of Registrant as Specified in Its Charter)
PERRY H. ROD, THOMAS SAILORS, KAVAN P. SINGH
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Perry H. Rod, Thomas Sailors and Kavan P. Singh today released the press
release below relating to Napster, Inc.
PERRY H. ROD, THOMAS SAILORS AND KAVAN P. SINGH INTEND TO MAKE A PRELIMINARY
FILING WITH THE SECURITIES AND EXCHANGE COMMISSION OF A PROXY STATEMENT AND
AN ACCOMPANYING PROXY CARD TO BE USED TO SOLICIT PROXIES IN CONNECTION WITH
THE NAPSTER, INC. 2008 ANNUAL MEETING. SECURITY HOLDERS ARE ADVISED TO READ
THE PROXY STATEMENT AND OTHER DOCUMENTS RELATED TO THE SOLICITATION OF
PROXIES FROM STOCKHOLDERS OF NAPSTER, INC. FOR USE AT THE 2008 ANNUAL
MEETING WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION, INCLUDING INFORMATION RELATING TO THE PARTICIPANTS IN SUCH PROXY
SOLICITATION. WHEN COMPLETED, A DEFINITIVE PROXY STATEMENT AND A FORM OF
PROXY WILL BE MADE AVAILABLE TO STOCKHOLDERS OF NAPSTER, INC. AND WILL BE
AVAILABLE AT NO CHARGE AT THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE
AT HTTP://WWW.SEC.GOV. INFORMATION RELATING TO THE PARTICIPANTS IN SUCH PROXY
SOLICITATION WILL BE CONTAINED IN SUBSEQUENT FILINGS BY ROD WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IN AMENDMENTS THERETO.
Press Release, June 26, 2008
On May 21, 2008 Napster shareholders Perry H. Rod, Thomas Sailors and Kavan
P. Singh requested that Napster's nominating committee consider their
nominations for the three board seats up for election at the next annual
meeting. The company responded on June 13 by indicating the nominating
committee had rejected the nominations. We are therefore preparing an
independent proxy that will allow shareholders to vote on our nominations as
well as the following corporate governance proposals that we are sponsoring:
1) a proposal urging the company to separate the roles of chairman and CEO,
2) a proposal asking the company to allow a non-binding shareholder vote on
executive compensation, and 3) a bylaw to require a majority vote for the
election of directors.
In December 2004 and January 2005 Napster, Inc. common stock traded as high
as ten dollars per share giving the company a market capitalization of $355
million based on approximately 35.5 million shares outstanding at that time.
Net cash on the balance sheet was approximately $140 million and the company
had no debt, implying an enterprise value of $215 million. Subsequently, 85%
of Napster's shareholder value has evaporated and enterprise value has shrunk
to nil as the stock declined to a fifty day moving average price of $1.50.
At this price Napster's market capitalization is $69 million, slightly less
than cash on the balance sheet at fiscal year end March 2008. Despite
trailing twelve months revenue of $127.5 million, no debt, a portfolio of
valuable intangible strategic assets, and having reduced cash burn to
breakeven, Napster's stock is trading as if the company has zero going
concern value.
While considerable venture capital has flowed into digital music startups
over the last five years, primarily into revenue-challenged experimental
business models that have been largely disappointing, the market fails to
discern and account for important differences that set Napster apart,
assigning no value to this strategic media asset with 760,000 paying
subscribers, a growing, globally scalable business model and multiple revenue
streams. As a point of reference, in May 2007 CBS paid $280 million for
Last.fm, a VC-funded streaming music model supported by undisclosed
advertising revenue and negligible, if any, paying subscribers./1/ We
believe Napster may hold considerably more value than Last.fm as it not only
has comparable intangible assets, which are difficult and expensive to
duplicate, but impressive subscriber revenue, a valuable brand, and cash.
The following table illustrates a liquidation analysis of Napster's readily
salable assets and related liabilities as reported in the company's most
recent 10-K for the fiscal year ending March 2008 or from estimates footnoted
below:
READILY SALABLE ASSETS $(000) RELATED LIABILITIES $(000)
Cash 69,800 A/P 1,700
A/R 2,400 Accruals 31,100
Napster Brand (1) 5,700 Debt 0
Subscribers (2) 38,000 Total 32,800
Total 115,900 Est. Liquidation Value 83,100
(1) In November 2002, after the original Napster was adjudicated
illegal and bankrupt, the trademark and related intangibles
were purchased by Napster's predecessor, Roxio, for $5.7 million.
(2) $50 per subscriber, approximately one times gross profit.
In January 2007 Napster effectively paid $50 per head for
225,000 subscribers generating substantially less average
annual revenue (est. at $120 each) in a purchase from AOL.
__________
/1/ In January 2008 Last.fm announced plans to add a subscription
element to its business model but at this time only offers the option of
eliminating advertising from the limited streaming user experience at a cost
of 2.50 pounds per month. It has not implemented unlimited streaming, tethered
downloads or track purchases like Napster. Warner Music pulled its entire
catalog from the site on June 6 according to a June 12 report in The Guardian
and widespread other reports in the trade press.
Under the assumptions presented above, with 46.4 million shares outstanding,
if Napster were simply liquidated its stock would be worth $1.79 per share.
This excludes any value for net operating loss carry forwards or the
intangible asset portfolio. If Napster were purchased by a strategic buyer
we believe the following intangibles would form the basis for the majority of
total enterprise value:
- An internally developed digital content engine capable of tracking,
delivering and monetizing a vast and constantly changing catalog of music and
video supporting multiple revenue and delivery models, including tethered
subscriptions, a la carte downloads, over-the-air ("OTA") mobile, and webcast
streams. This "backend" is a unique strategic asset built and maintained by
56 software engineering and 13 customer support personnel.
- The largest legal DRM-free mp3 digital music library in existence at
over 6 million songs. It is the only digital library with DRM-free mp3 files
from all four major recording labels, as well as thousands of independents,
offering digital music under an unlimited subscription model, an a la carte
purchase model, an over-the-air mobile phone delivery model and a free
streaming advertising supported model. Assembly and maintenance of such a
library involves multiple levels of intellectual property negotiations in
multiple legal venues as internet delivered services are available throughout
the U.S., Canada, the U.K., Germany and Japan.
- Strategic partnerships with cellular phone operators providing Napster
Mobile OTA music download services in the U.S. and abroad: United
States/ATT, United Kingdom/O2, Ireland/O2, Japan/NTT & KDDI,
Switzerland/Swisscom, Italy/Telecom Italia, Portugal/TMN, and Chile/Entel.
Due to Japan's pervasive and mature 3G network, Napster Mobile Japan also
includes OTA subscription synchronization allowing unlimited downloads to
one's mobile phone, comparable to that offered via the internet in N. America
and Europe, for a set monthly subscription price.
- An independent analysis of Napster's net operating loss carry forward
("NOL") published by Bear Stearns on February 11, 2008 disclosed the
following: $82 million in federal NOLs, $78 million in state NOLs, and $10
million in foreign NOLs yielding an estimated net present value ("NPV") to an
acquirer of $14 million. This assumes the company is acquired by a taxable
entity at an unlikely acquisition price of $1.63 per share/2/ thus limiting
the acquirer's deduction to $60 million, $3 million per year over twenty
years, of the $82 million federal NOL. No value was assigned to the
remaining $22 million in federal NOLs or any of the state or foreign NOLs. A
higher purchase price and ability to utilize state and/or foreign NOLs would
yield a higher NPV estimate of NOL value to a purchaser.
Returning to the Last.fm comparison, while not directly interchangeable
without modification, Napster's intangible assets comprise a component of the
enterprise comparable to Last.fm, a company with negligible tangible assets,
no comparable subscription product and few, if any, paying subscribers. To
be conservative, and to accommodate for hypothetical modification expenditure
necessary to replicate similar functionality and market positioning, assume
Napster's non-cash, non-subscriber assets are worth $80 million less than the
price CBS paid, or $200 million. Under that assumption Napster should have a
market value of at least $297.1 million, comprised of $83.1 million net
liquidation value, $200 million intangible asset value, and $14 million NOL
value; or 2.2 times revenue and $6.40 per share./3/
__________
/2/ When the Bear Stearns report was published Napster stock was
trading at $1.63 per share. Bear noted in the report that it was unlikely
the company would be acquired at such a low valuation but used that price in
its NOL NPV calculation to be conservative.
/3/ For comparative valuation purposes only. We do not advocate a
wholesale change in Napster's business model although the use of social
networking functionality should be explored.
2
A second, more direct, comparable can be derived from Viacom's August 2007
purchase of 49% of a newly formed joint venture containing Real Networks'
U.S. portion of the Rhapsody digital music service, a nearly identical
competitor to the domestic portion of Napster's business in terms of number
of subscribers and services offered, with one important exception: Rhapsody
had not yet deployed its U.S. mobile strategy with Verizon, whereas Napster
and ATT were already six months into the deployment of their strategic
partnership. According to an August 22, 2007 analysis by Jefferies and Co.,
Viacom's contribution to the joint venture valued Rhapsody America at
approximately $230 million. Again, to be conservative, Napster's business in
the U.K., Germany, Japan and overseas mobile efforts will be ignored in the
comparison. Using Viacom's investment as a comparable valuation benchmark
and adding Napster's cash, brand and NOL value produces market value again
approximating $300 million, or 2.3 times revenue and $6.47 per share.
We believe it is instructive that two recent arms length transactions
involving similar or nearly identical assets produced approximately
equivalent comparative values for Napster. Indeed, with an invigorated
mobile strategy riding on an expanding 3G network deployment in the U.S., and
a new marketing plan that connects with adult music enthusiasts, both of
which are discussed below, it would not be unreasonable to believe Napster
should approach market value of $500 million. To summarize, at $1.50 per
share Napster's stock trades substantially below the value we believe it is
worth today and less than its rock bottom liquidation value of $1.79 per
share. At today's valuation, Napster has the dubious distinction of being
worth more dead than alive. We believe this discrepancy is a result of
negative sentiment surrounding almost all music content businesses due to the
unresolved effects of piracy, but also due to a lack of confidence in the way
the company is governed.
Over a period of years, we have attempted to communicate concerns and hold
substantive discussions with management regarding subscriber metrics and
corporate strategy. Although management has periodically provided limited
telephonic and email exchanges with the nominees, such communications have
been unsatisfactory in addressing our concerns. By its own admission,
management has been focusing almost entirely on the mobile phone strategy to
reinvigorate subscriber growth. So far, this has not occurred. We also
believe there has been a certain degree of "just wait it out" mentality
permeating strategic decision making, perhaps based on anticipation or hope
the iPod fashion would fade, that forces might converge to make Apple's DRM
interoperable with third party content, or that the internet service
providers, Congress, the courts or regulatory authorities would act to reduce
rampant intellectual property theft via illegal file sharing. Regardless,
sales and marketing spend was curtailed in fiscal 2007, and dramatically so
in 2008, as a result of disappointing results from previous expenditures.
Although it was clearly wise to stop what wasn't working, we believe
Napster's advertising was ineffective primarily due to improper focus.
It is our view that Napster's demographic profile for the subscription model
revolves around financially secure adults of all ages, and we believe there
is exceptional opportunity to focus on adults who have not fully altered
their in-home music consumption patterns from physical to digital. We
believe the value proposition is unique and compelling for this demographic
but we do not believe the company has effectively connected or communicated
with these people. In our opinion, much greater focus should be directed
toward explaining exactly how to set up one's home entertainment system with
Napster's unlimited music service and how a single subscription can supply an
entire family's music demand with legal, virus-free unlimited access to
virtually all genres and artists at an affordable price.
With respect to Napster's mobile music strategy, we believe it holds great
promise if the offering is positioned and delivered properly. So far,
Napster's U.S. mobile partner, while clearly an excellent choice due to the
size of its subscriber base, has been somewhat disappointing with respect to
1) how it has positioned the brand and value proposition with its
subscribers, and 2) failure to facilitate a seamless user interface and
overall music experience. In order to be attractive we believe the mobile
offering must include OTA subscription synchronization, more hardware
compatibility, better software integration, and integrated billing. With ATT
scheduled to roll out its 3G network this summer it should have the capacity
to support OTA subscription synchronization comparable to that deployed by
Napster's mobile partners in Japan.
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In summary, we believe that Napster shareholders deserve better
representation overall and that the company would benefit from a fresh
perspective. We believe the value discrepancy is largely due to lack of
confidence in governance. An example of laxity in governance is reflected in
the level of performance-based incentives granted over the last three years
in the face of a dramatic decline in shareholder value. Also, according to
SEC filings, none of the non-executive directors have made material open
market purchases of stock, i.e., almost all their shares were granted
outright or through option grants. We believe the incumbent board has had
ample opportunity to demonstrate its effectiveness and that shareholders
would be better served by directors who have risked capital and expect to
share in the same potential rewards. Although our ideas and effort will be
channeled toward achieving profitability and building value as an independent
entity, we are open minded to the possibility that the most productive
strategy for recovering shareholder value may be one of further cost
reductions and exploration of strategic alternatives for the business as a
whole. We cannot know the answer, however, until access to the board is
obtained and more due diligence is performed.
(Consent to cite or quote the publications mentioned in this article has not
been sought or obtained.)
____________________________________________________________________
About the nominees
Perry H. Rod, 29, is an independent professional investor from Encino,
California. Aside from working in that capacity for over eight years, Mr. Rod
is also president of Market Rap LLC, which is developing a collaborative
community website for investors, as well as chairman of the board of
directors of The Paradise Project, a non- profit religious organization. Mr.
Rod is a cum laude graduate of Georgetown University who has performed
professionally as a musician in the Los Angeles area. He is the holder of
73,001 shares of Napster, Inc. common stock at this time.
Thomas Sailors, 49, managing member of Cloverdale Investments LLC, a personal
investment holding company. Prior to September 2002, he was managing director
at Banc of America Securities, established and managed the Chicago office of
the leveraged finance division of US West Capital Corporation, was an
associate at Morgan Stanley and Co. in New York and Chicago, was an
investment analyst with the private advisory investment services group at
Merrill Lynch in Miami, Florida, and was a corporate lending officer at the
First National Bank in Dallas. Mr. Sailors is a Chartered Financial Analyst,
holds an MBA from the Kelley School of Business at Indiana University and a
BSc. in finance from Kansas State University, and is a board member of the
KSU Department of Finance Advisory Board. He has been a shareholder of
Napster since 2005 and holds 566,000 shares at this time.
Kavan P. Singh, 26, entrepreneur, began franchise ownership in Cold Stone
Creamery in 2004 and currently owns and operates 10 franchise locations in
California and Missouri through Amrit LLC and Ardaas LLC, respectively, of
which he is president. In 2006, Mr Singh expanded business ventures in the
health care industry through Lindenwood Care Corp., of which he is president,
by acquiring a 109- bed assisted living facility in St. Louis, Missouri. Mr.
Singh is also a consultant and business development officer for the family-
owned medical practice, Singh Medical Specialists, which was founded in 1975
and is a subsidiary of Farid LLP, of which he is a limited partner. His
projects in development at Farid LLP include private healthcare investments
including acquiring additional assisted living facilities, development of a
dialysis center, non-invasive imaging diagnostics, and an urgent care center.
From 2001 to 2005 Mr. Singh was employed as a broker at World Group
Securities, Inc., where he last held the title of Marketing Director. Mr.
Singh is currently a beneficial shareholder of 9,179 shares.
Interested parties may contact the nominees at the following numbers:
Perry H. Rod: (818) 577-7389
Thomas Sailors: (214) 390-5799
Kavan P. Singh: (714) 926-0273
PERRY H. ROD, THOMAS SAILORS AND KAVAN P. SINGH INTEND TO MAKE A PRELIMINARY
FILING WITH THE SECURITIES AND EXCHANGE COMMISSION OF A PROXY STATEMENT AND
AN
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ACCOMPANYING PROXY CARD TO BE USED TO SOLICIT PROXIES IN CONNECTION WITH THE
NAPSTER, INC. 2008 ANNUAL MEETING. SECURITY HOLDERS ARE ADVISED TO READ THE
PROXY STATEMENT AND OTHER DOCUMENTS RELATED TO THE SOLICITATION OF PROXIES
FROM STOCKHOLDERS OF NAPSTER, INC. FOR USE AT THE 2008 ANNUAL MEETING WHEN
THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION,
INCLUDING INFORMATION RELATING TO THE PARTICIPANTS IN SUCH PROXY
SOLICITATION. WHEN COMPLETED, A DEFINITIVE PROXY STATEMENT AND A FORM OF
PROXY WILL BE MADE AVAILABLE TO STOCKHOLDERS OF NAPSTER, INC. AND WILL BE
AVAILABLE AT NO CHARGE AT THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE AT
HTTP://WWW.SEC.GOV. INFORMATION RELATING TO THE PARTICIPANTS IN SUCH PROXY
SOLICITATION WILL BE CONTAINED IN SUBSEQUENT FILINGS BY ROD WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IN AMENDMENTS THERETO.
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