MAJOR LEAGUE SPORTS TEAM

Appraisal Economics Inc. has performed a valuation analysis of a U.S. major league sports team and its related regional sports network. As part of our analysis, we also determined the value of derivative interests in various entities that own the team and network. Our valuation included the discounted cash flow method of the income approach and elements of the market approach, including the application of market multiples. We also determined the value of preferred securities associated with the aforementioned entities, based on a full credit analysis and examination of prevailing market interest rates for similar securities. Finally, we determined appropriate minority discounts and discounts for lack of marketability.

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PREFERRED STOCK WITH EMBEDDED DERIVATIVE

Appraisal Economics Inc. has determined the value of the “embedded derivative” in convertible preferred securities issued by the operating partnership of a large publicly traded real estate investment trust (REIT). The preferred securities receive quarterly dividend payments and also contain an embedded derivative to convert into shares of the publicly traded REIT’s common stock, which is effectively a call option. We determined the fair value of the embedded derivative using binomial models and a “with and without” valuation method. We used a binomial model to determine the fair value of the aggregate preferred security and a second binomial model to determine the value of the preferred assuming that it was not convertible into common stock. The value of the embedded derivative is the difference in value indicated by the two models.

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PATENT PORTFOLIO

Appraisal Economics has valued a portfolio of patents and patent applications used to manufacture photovoltaic cells in the solar power industry. The portfolio was transferred as part of a legal settlement between two U.S.-based chemical companies that operate in China. One of the companies had developed a patented process for printing hot melt ink onto the substrate of a silicon wafer to manufacture solar cells. The other company developed similar procedures for manufacturing solar cells. Upon being made aware of the existence of the patented procedure, the second party filed a motion with the Chinese Patent Re-examination Board (CPRB) to invalidate the pre-existing patent. The CPRB rejected the request, upon which an agreement was reached to compensate the first party for patent infringement. The settlement called for valuing the patent portfolio, which was performed by Appraisal Economics.

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TRANSFER PRICING

Appraisal Economics has performed a transfer pricing analysis related to the transfer of intellectual property (IP) assets to an offshore holding company set up by a U.S.-based global media company. The transfer was part of a restructuring transaction designed to broaden the company’s product offerings of print and digital media and expand licensing opportunities for the company’s trademarks and logo. Section 482 of the Internal Revenue Code requires that royalty payments between related parties in different countries be set at arm’s length terms. This is intended to prevent opportunistically recognizing revenue, expenses, and profits in a way that results in taxable income being improperly shifted to lower-tax jurisdictions and evading U.S. taxes. The transaction was also required to comply with Section 367(d) of the Internal Revenue Code, which governs certain terms of cross-border reorganizations. Appraisal Economics performed a detailed analysis to determine the arm’s length royalties between the entities and determined the business enterprise value of each entity to support company management’s efforts to demonstrate compliance with the provisions of the relevant regulations.

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MERGER ARBITRAGE DISCOUNT

Appraisal Economics has valued a business in the process of being sold. We performed an analysis of the appropriate discount from a proposed transaction price to account for the time and uncertainty associated with the transaction being consummated as proposed, often referred to as “merger arbitrage.” A potential acquirer submitted a letter of intent to purchase a privately held company; however, there was substantial uncertainty whether the transaction would actually occur and, if so, what the ultimate price and terms would be after due diligence and final negotiations. Another consideration is how long shareholders of the target company would have to wait to realize the proceeds from a sale. To determine the fair market value of the company being sold shortly after the target company received a letter of intent, we performed research and analysis to determine the appropriate discount from the proposed transaction price. Appraisal Economics valued the subject interest for gift and estate tax planning purposes.

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NON-COMPETE AGREEMENT (NCA) VALUATION

Appraisal Economics has valued non-compete agreements (NCAs or covenants not to compete) of senior executives of a publicly traded real estate investment trust (REIT) that merged with another public REIT. As part of the merger, certain executive officers entered into covenants not to compete with the merged entity during, and for a period of time after, their employment. Section 280G and Section 4999 of the Internal Revenue Code relate to excess parachute payments upon certain corporate events, such as a change in control. Amounts that executives receive in exchange for committing to perform and abstain from certain activities specified in the NCAs are generally taxed at lower rates than amounts considered to be “golden parachutes”; however, only amounts that are “reasonable compensation” qualify for this favorable treatment. Appraisal Economics valued each NCA as part of our Section 280G analysis to determine the reasonable compensation of each executive.

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ELECTRONIC TRADING PLATFORM OPERATOR

Appraisal Economics Inc. has determined the value of a privately held company’s common equity on a per share basis. The company operates an electronic trading platform that allows institutional investors and investment banks to trade equities, fixed income, derivatives, and foreign exchange products globally across multiple markets. We determined the business enterprise value of the company and then, using a Monte Carlo method, we allocated the total equity value among the different classes of equity in the capital structure, including: preferred, common, restricted common, and common stock options. We adjusted the per share value of the common stock to account for its lack of marketability.

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CRAFT BREWING COMPANY

Appraisal Economics Inc. has determined the fair market value of a minority, non-controlling membership interest in a craft brewing company based in the northeastern United States. The brewery produces over 20 varieties of beer and ships tens of thousands of barrels annually. We determined the business enterprise value of the Company using the discounted cash flow method of the income approach and the guideline transaction method of the market approach. In the discounted cash flow method, we determined the aggregate present value of the Company’s expected future cash flows. In the guideline transaction method, we computed multiples to apply to the Company’s fundamentals based on the multiples from transactions of other similar companies. As part of our analysis, we made adjustments to the pro rata value of the subject interest to account for its lack of control and lack of marketability.

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SCENARIO ANALYSIS FOR LONG-TERM INCENTIVE PLAN DESIGN

Appraisal Economics Inc. has performed valuations under a series of proposed terms to assist company management in the design of its long-term incentive plan (LTIP). The company that granted the LTIP units is a large publicly traded real estate investment trust (REIT) that owns hundreds of office and industrial properties across the United States and internationally. The LTIPs are incentive units granted to management that vest into shares of the company’s common stock if certain market-based performance conditions are met. The long-term incentive plan has an absolute component, with vesting hurdles based on the Company’s total shareholder return (TSR) performance compared to fixed targets, and a relative component, with vesting hurdles based on the percentile rank of the Company’s TSR compared to the constituents of a real estate index. As part of our analysis, we determined the fair value of the LTIP units under a wide range of possible scenarios, each with different sets of absolute and relative performance hurdles. Our valuations helped enable management to design the terms of the LTIPs to best suit the Company’s needs.

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OUTPERFORMANCE PLAN WITH RELATIVE PERFORMANCE HURDLES

Appraisal Economics Inc. has determined the fair value of an outperformance plan (OPP) granted to employees of a large publicly-traded real estate investment trust (REIT), which owns thousands of industrial buildings in the United States and internationally. This OPP grants employees shares of the company’s common stock based on the achievement of certain relative performance hurdles at the end of the performance period. These market-based performance conditions are intended to align the incentives of the employee grantees with shareholders. Participants in the plan can earn an outperformance pool, paid in restricted shares of the Company’s common stock, based on the Company’s total return to shareholders (TRS) performance compared to that of a real estate index. We also compute a discount for lack of marketability for the award, to account for the post-vesting lock-up applicable to shares earned under the outperformance plan.

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