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    Valuation Valuation Document Transcript

    • Valuation ApproachDefinition of Fair Market ValueThis report describes the valuation analysis performed by KPMG to estimate the FMV of a 100percent equity interest in ITFX as of the Valuation Date. Fair market value is definedherein as “the price at which the property would change hands between a willing buyer and awilling seller when the former is not under any compulsion to buy and the latter is not under anycompulsion to sell, both parties having reasonable knowledge of relevant facts.”Valuation Approaches ConsideredIn preparing our valuation, KPMG considered the three generally accepted valuation approaches:(i) the income approach, (ii) the market approach, and (iii) the cost approach. A brief descriptionof the three approaches follows.Income ApproachThe income approach (“Income Approach”) recognizes that the value of an investment ispremised on the receipt of future economic benefits. These benefits can include earnings, costsavings, tax deductions, and the proceeds from disposition. The discounted cash flow method(“DCF Method”) is a form of the Income Approach that is commonly used to value businessinterests. The DCF Method involves estimating the future cash flows of the business anddiscounting them to their present value. The discount rate selected is based on consideration ofthe risks inherent in the investment and market rates of return available from alternativeinvestments of similar type and quality as of the Valuation Date.
    • More specifically, the DCF Method bases the value of a company on the cash flow attributable tothat company. This approach is based on the assumptions that: (i) a company is worth what itcan generate in future cash flows to its owners; (ii) the future cash flows are reasonablypredictable; and (iii) the cost of capital and investors’ required rates of return on invested capitalcan be estimated. This approach assumes that the income derived from a company will, to alarge extent, control the value of that company.Market ApproachThe market approach (“Market Approach”) measures the value of a company through an analysisof recent sales or offerings of comparable companies. The guideline public company method(“Guideline Public Company Method”) and the guideline transactions method (“GuidelineTransaction Method”) are two forms of the Market Approach commonly used to value businessinterests. The Guideline Public Company Method involves comparing the subject company tosimilar companies whose stock is freely traded on an organized exchange. The GuidelineTransaction Method compares the subject company to similar companies recently sold in arm’slength transactions. The application of these two methods generally entails the development ofrevenue or earnings multiples based on the market value of the guideline companies. Thesemultiples are then used to develop an estimate of value for the subject company. When applyingthese methods, consideration is given to differences in the financial condition and operatingperformance of the subject company versus the guideline companies.Cost ApproachThe cost approach (“Cost Approach”) considers reproduction or replacement cost as an indicatorof value. The Cost Approach is based on the assumption that a prudent investor would pay nomore for an entity than the amount for which he could replace or re-create it. Historical costs areoften used to estimate the current cost of replacing the entity valued. In doing so, adjustmentsfor physical deterioration and obsolescence are taken into account. When using the CostApproach to value a business enterprise, the equity value is estimated as the appraised value ofthe individual assets that comprise the business less the value of the liabilities that encumberthose assets.Valuation Approaches AppliedWe relied on both the Income and Market Approaches to arrive at our estimate of the FMV ofthe equity. Under the Income Approach, we utilized a DCF Method to arrive at our estimate ofFMV. Under the Market Approach, we applied the Guideline Public Company Method. We didnot use the Guideline Transaction Method to calculate an estimated FMV. KPMG chose not touse the Guideline Transaction Method due to a lack of publicly available data for comparabletransactions required to select the most appropriate transaction and corresponding multiples.While KPMG did not rely on the Guideline Transaction Method, we did observe valuationmultiples that were generally consistent with the Guideline Public Company Method. KPMGalso considered the Guideline Transaction Method when selecting a control premium. SeeSection 5.2.1 for further discussion. KPMG also did not utilize the Cost Approach because itwould not be expected to render a reliable FMV for a cash flow generating going-concern suchas ITFX.
    • Valuation AnalysisIncome ApproachThe DCF Method projects the net amount of cash flows a company will generate from operatingand investing activities in the future. The DCF Method captures the value of a business bydiscounting its future expected free cash flows to their present value at a discount rate thatreflects the time value of money and the riskiness of the cash flow stream. The key issues withrespect to this method are the determination of the free cash flows, the discount rate, and theterminal value. Each of these issues is addressed separately below.DCF MethodFree Cash FlowsFree cash flow is the amount of a company’s cash flow that can be distributed to investorswithout impairing the future operations of the business. In other words, it is a company’s cashflow derived from conducting its day-to-day business activities less the amount of investmentrequired to keep the company running as a going concern. For the purpose of this valuation, weare focused on free cash flow to equity holders. A definition of free cash flow to equity, asestimated for the purpose of this valuation analysis, is provided below. NET INCOME PLUS INVESTMENT IN ASSETS PLUS CHANGE IN LIABILITIES EQUALS FREE CASH FLOW TO EQUITYThe Company provided KPMG with financial statement projections for FY 2011 through FY2016. Beyond the projection period provided by Company management, KPMG trended revenuegrowth down to a growth rate of five percent in 2021 and applied the same net income marginused in the projection period provided by Company management going forward. We used theseprojections as the basis for the Subject Company’s free cash flow projections. For the fiscal year2011, KPMG adjusted the Company’s Net Income in the financial projections provided byadding back a $140,000 related to a one time litigation settlement.Projected Assets and LiabilitiesIn order to arrive at free cash flow to equity holders, KPMG analyzed the GLCs’ financialmetrics in order to forecast the required investment in assets and change in liabilities required tosupport the Company’s growth. KPMG first projected the required assets necessary to achievethe Company’s revenue projections. For the first year of the projection period, FY 2011, KPMGforecasted the asset balance by taking the Company’s asset balance as of September 30, 2011 asa percentage of the Company’s LTM revenue as of September 30, 2011. KPMG applied thatsame percentage to the Company’s FY 2011 revenue projection to arrive at the projected FY2011 asset balance. For each subsequent fiscal year, KPMG set asset growth equal to revenuegrowth.
    • After projecting the required asset growth, KPMG determined the required equity by targeting along term Equity/Assets ratio of 25.0 percent. The target Equity/Assets ratio was determined byreviewing GLCs Equity/Asset ratios.11 As of September 30, 2011, InvestTechFX’s Equity/Assetsratio was approximately 61.0 percent, well above the median or average for the GLCs. Over theprojection period, KPMG trended the Equity/Asset ratio down to 25.0 percent, which isconsistent with levels exhibited by GLCs. KPMG multiplied the Equity/Assets ratio in each yearby the respective asset balances in order to arrive at the required equity. After forecasting therequired asset and equity balances in each year, the corresponding liability is equal to thedifference between the two.Discount RateWe prepared the free cash flow projections for the valuation analysis based on free cash flow toequity holders and reflect the cash flows available for distribution to equity holders only.Accordingly, the discount rate applied to the free cash flows reflects the return required by equityholders. This discount rate represents ITFX’s cost of equity (“Re”).Terminal ValueFor the purposes of valuation, the life of a business is essentially separated into two time periods,(1) during and (2) after the explicit projection period. The terminal value reflects the presentvalue of all free cash flows occurring after the last year of the explicit projection period.The terminal value was calculated based on capitalization theory using the Gordon Growthmodel. The Gordon Growth model estimates the value of cash flow received, assuming stableannual growth in perpetuity. The residual value calculation estimates the value of the annual cashflow to be received after the discrete projection period. We adjusted the residual value for theequity retention (three percent of fiscal year 2021’s equity balance) necessary to fund assetgrowth into perpetuity.ResultsThe sum of (i) the present value of the free cash flows for the explicit projection period, fiscalyear 2011 through fiscal year 2021, plus (ii) the present value of the terminal value represents theFMV value of InvestTechFX. The resulting FMV indicated by the DCF Method is approximately$100.0 million (rounded).17While our conclusion of value based on the DCF Method isapproximately $100.0 million, we present a range of values in Schedule 1 based on discountrates 100 basis points above and below our calculated Ke of 17.0 percent and Terminal GrowthRates (“TGR”) 50 basis points above and below the 3.0 assumed in the analysis presented inSchedule 5. The resulting indicated range is between $91.0 million and $111.0 millionMarket ApproachKPMG estimated the fair market value of InvestTechFX’s equity by applying market multiplesof comparable publicly-traded companies obtained through the Guideline Public CompanyMethod.
    • Guideline Public Company MethodWe performed the Guideline Public Company Method to analyze valuation multiples of publicly-traded comparable companies. Although no two companies are entirely alike, the companiesselected as guideline companies are engaged in the same or a similar line of business as theCompany. Other relevant factors, such as size, growth and profitability are considered to makethe most valid comparison.After a thorough search of several databases using strict criteria, the following public companieswere selected as GLCs: FXCM, Inc. (“FXCM”); BGC Partners, Inc. (“BGC”); Gain CapitalHoldings, Inc. (“GCAP”); GFI Group, Inc. (“GFI”); MarketAxess Holdings, Inc. (“MKTX”);and Interactive Brokers Group, Inc. (“IBKR”). See Schedule 7 for a description of each of theaforementioned GLCs.In addition to selecting reasonably similar publicly-traded companies, the application of theGuideline Public Company Method includes: - Analysis of the GLCs financial and operating performance, growth, size, leverage and risk relative to the Company; - Calculation of equity multiples for the selected GLCs; - Selection of appropriate market multiples to account for differences between the GLCs and - InvestTechFX; and - Application of the market multiples to the Company’s financial metrics to arrive at an - indication of value.We applied valuation multiples to the Company’s LTM 9/30/2011 normalized net income. Inorder to select an appropriate multiple, KPMG looked at InvestTechFX’s size, growth, andprofitability in relation to the GLCs. After assessing these factors, KPMG selected a Price/LTMNet Income range between 12.0x and 15.0x. After applying the multiples to the Company’snormalized LTM net income, KPMG arrived at a range of FMV on a minority interest basisbetween approximately $76.0 million and $94.0 million. In order to arrive at an estimated FMVfor the Company on a controlling interest basis, KPMG applied a control premium of 10.0percent. The control premium is based on observed 30-day stock premiums of guidelinetransactions in addition to additional research performed by KPMG.19 After applying the controlpremium, the resulting indicated range of FMV on a controlling interest basis was between $83.0million and $104.0 million.Guideline Transaction MethodThe Guideline Transaction Method is similar to the Guideline Public Company Method, exceptthat instead of using the prices of publicly traded securities as the benchmark, we examined theprices paid in recent sales of similar businesses in the industry. KPMG searched the Capital IQdatabase to find recent transactions involving acquired companies similar to InvestTechFX.When conducting our transaction search, we identified 15 guideline transactions that wereexecuted between January 1, 2008 and the Valuation Date. Of these 15 transactions, the majoritydid not disclose the financial terms of the deals, making it difficult for KPMG to conclude on anappropriate multiple. Accordingly, as previously mentioned, KPMG did not utilize the GuidelineTransaction Method to estimate FMV. However, we did consider it in our analysis. Furthermore,we did rely on the observed 30-day stock premiums paid for the transactions that we identified.
    • Final Value ConclusionIn order to estimate the range of FMV for InvestTechFX, weightings were applied to the valueconclusions from the DCF Method and the Guideline Public Company Method. Since the DCFMethod incorporates assumptions and expectations specific to the Company, this approachgenerally provides a reliable indication of value. A weighting of 50.0 percent was given to theIncome Approach. The Market Approach provides relevant market pricing data that should be In arriving at our opinion, KPMG appliedconsidered and, when applied correctly, should correlate with the results obtained from anIncome Approach. As a result, KPMG also assigned a weighting of 50.0 percent to theGuideline Public Company Method. KPMG applied these weightings to the low and high endrange of each methodology.As presented in the valuation conclusions summary (Schedule 1), the recommended range ofFMV on a controlling interest basis of ITFX, as of the Valuation Date, is estimated to beBetween: $87,000,000 - $108,000,000In arriving at our opinion, KPMG applied generally accepted valuation procedures based upon economic andmarket factors.Summary of ExhibitsSchedule 1 Summary of Valuation ApproachesSchedule 2 Historical Balance SheetsSchedule 3 Historical & Projected Income StatementsSchedule 4 Historical & Projected Ratio AnalysisSchedule 5 Discounted Cash Flow Analysis
    • RE: Estimation of the Fair Market Value of the Equity of ITFX Technologies, Inc.as of November 30, 2011Pursuant to your request, KPMG LLP (“KPMG”) performed a valuation engagement in order todetermine the fair market value (“FMV”) of a 100 percent equity interest in ITFXTechnologies, Inc. (“ITFX,” the “Company” or the “Client”) as of November 30, 2011(the “Valuation Date”).CONCLUSION OF VALUEBased on the valuation analysis described in the accompanying report and supporting schedules,the recommended FMV of ITFX’s equity is reasonably estimated to be between $87.0million and $108.0 million. This conclusion of value is based on the assumption that a potentialthird party acquirer retains the Company’s current tax structure in which a zero percent effectivecorporate tax rate is achieved.1 KPMG has has prepared a sensitivity table in Schedule 5 whichshows the potential impact that alternative tax rate assumptions could have on theaforementioned FMV range.Our analysis assumes that the Company had no undisclosed real or contingent assets orliabilities, no unusual obligations or substantial commitments, other than in the ordinary courseof business, nor had any litigation pending or threatened that would have a material effect on ouranalysis. These assumptions are limitations to KPMG’s analysis.Respectfully submitted,