Flash Memory, Inc.

Exhibit 1 Actual and Forecasted Financial Statements Assuming No Investment in New Product Line, No Sale of New
Common Stock, and All Borrowings at 9.25%
Income Statement ($000s except EPS)
Actual

Forecast

2007

2008

2009

2010

2011

2012

$77,131
$62,519
81.1%
$14,612

$80,953
5.0%
$68,382
84.5%
$12,571

$89,250
10.2%
$72,424
81.1%
$16,826

$120,000
34.5%
$97,320
81.1%
$22,680

$144,000
20.0%
$116,784
81.1%
$27,216

$144,000
0.0%
$116,784
81.1%
$27,216

$3,726
4.8%
$6,594
8.5%
$4,292

$4,133
5.1%
$7,536
9.3%
$902

$4,416
4.9%
$7,458
8.4%
$4,952

$6,000
5.0%
$10,032
8.4%
$6,648

$7,200
5.0%
$12,038
8.4%
$7,978

$7,200
5.0%
$12,038
8.4%
$7,978

$480

$652

$735

-$39

-$27

-$35

$937
9.25%
-$50

$1,323
9.25%
-$50

$1,565
9.25%
-$50

Income before income taxes

$3,773

$223

$4,182

$5,661

$6,604

$6,363

Income taxes
- % of income before taxes
Net income

$1,509
40.0%
$2,264

$89
39.9%
$134

$1,673
40.0%
$2,509

$2,264

$2,642

$2,545

$3,396

$3,963

$3,818

$1.52

$0.09

$1.68

$2.28

$2.66

$2.56

Sales
- YOY growth
Cost of goods sold
- % of sales
Gross margin
Research and development
- % of sales
Selling, general and administrative
- % of sales
Operating income
Interest expense
- Interest rate %
Other income (expenses)

Earnings per share

Exhibit 1 (continued)
Balance Sheet ($000s except shares outstanding and book value per share)
Actual

Forecast

2007

2008

2009

2010

2011

2012

$2,536
3.3%
$10,988
33
$9,592
56
$309
0.3%
$23,425

$2,218
2.7%
$12,864
33
$11,072
59
$324
0.2%
$26,478

$2,934
3.3%
$14,671
37
$11,509
58
$357
0.2%
$29,471

$3,960
3.3%
$19,726
60
$13,865
52
$480
0.4%
$38,031

$4,752
3.3%
$23,671
60
$16,638
52
$576
0.4%
$45,637

$4,752
3.3%
$23,671
60
$16,638
52
$576
0.4%
$45,637

$5,306
$792
$4,514

$6,116
$1,174
$4,942

$7,282
$1,633
$5,649

$8,182
$2,179
$6,003

$9,082
$2,793
$6,290

$9,982
$3,474
$6,508

$27,939

$31,420

$35,120

$44,034

$51,926

$52,145

Accounts payable
- Days purchases
Notes payable

$3,084
30
$6,620

$4,268
38
$8,873

$3,929
33
$10,132

$4,799
30
$14,306

$5,759
30
$16,914

$5,759
30
$13,325

Accrued expenses

Cash
- % of sales
Accounts receivable
- Days of sales
Inventories
- Days of COGS
Prepaid expenses
- % of sales
Total current assets
Property, plant & equipment at cost
Less: Accumulated depreciation
Net property, plant & equipment
Total assets

$563

$591

$652

$876

$1,051

$1,051

Income taxes payable

- % of taxes
Other current liabilities
- % of sales
Total current liabilities

$151
10%
$478
0.6%
$10,896

$9
10%
$502
0.6%
$14,243

$167
10%
$554
0.6%
$15,434

$226
10%
$744
0.6%
$20,951

$264
10%
$893
0.6%
$24,881

$255
10%
$893
0.6%
$21,282

Common stock at $0.01 per share par value

Paid in capital in excess of par value
Retained earnings
Total shareholders' equity

$15
$7,980
$9,048
$17,043

$15
$7,980
$9,182
$17,177

$15
$7,980
$11,691
$19,686

$15
$7,980
$15,087
$23,082

$15
$7,980
$19,050
$27,045

$15
$7,980
$22,868
$30,863

Total liabilities & shareholders' equity

$27,939

$31,420

$35,120

$44,034

$51,926

$52,145

1,491,662

1,491,662

1,491,662

1,491,662

1,491,662

1,491,662

Book value per share

$11.43

$11.52

$13.20

$15.47

$18.13

$20.69

Return on equity
Interest coverage ratio (times)
Notes payable / accounts receivable
Notes payable / shareholders' equity
Total liabilities / shareholders' equity

13.3%
8.9
60.2%
38.8%
63.9%

0.8%
1.4
69.0%
51.7%
82.9%

12.7%
6.7
69.1%
51.5%
78.4%

14.7%
7.1
72.5%
62.0%
90.8%

14.7%
6.0
71.5%
62.5%
92.0%

12.4%
5.1
56.3%
43.2%
69.0%

Number of shares outstanding

$128,000
-11.1%

Flash Memory, Inc.

Exhibit 2 Calculation of Cost of Capital
Step 1 - Calculation of asset Beta for the industry using market value weights:

Micron Technology
D = book value of debt (4-30-2010)
BVE = book value of equity (4-30-2010)
MVE = market value of equity (4-30-2010)

$2,760
$5,603
$7,925

E = equity or levered beta

A = asset or unlevered beta
SanDisk Corporation
D = book value of debt (4-30-2010)
BVE = book value of equity (4-30-2010)
MVE = market value of equity (4-30-2010)

$975
$4,157
$9,135

9.6%
90.4%
1.36
1.28

$0
$276
$699

E = equity or levered beta

A = asset or unlevered beta

0.0%
100.0%
1.00
1.00

Average A for the industry

Exhibit 2 (continued)

74.2%
1.25
1.03

E = equity or levered beta

A = asset or unlevered beta
STEC, Inc.
D = book value of debt (4-30-2010)
BVE = book value of equity (4-30-2010)
MVE = market value of equity (4-30-2010)

25.8%

1.10

Calculation of Cost of Capital

Step 2 - Calculation of cost of equity capital for Flash Memory, Inc.:

Current weights of debt and equity
D = value of bank debt from 2009 balance sheet
E = value of equity at $25 per share

$10,132
$37,292

Since Flash is at the limit of its current loan agreement, management believes this is a
higher proportion of debt finance than optimal. As stated in the case, management has
set target capital structure weights equal to 18% debt and 82% equity.

21.4%
78.6%

Flash Memory, Inc.

D = target value of debt
E = target value of equity
A = average asset beta for the industry
E = equity or levered beta

18.0%
82.0%
1.10
1.25

Cost of equity capital for Flash

Ke = Rf + E x Market Risk Premium
Rf = risk-free rate of return
E = Flash's equity or levered beta
Assumed market risk premium
Ke = Flash's cost of equity capital

3.70%
1.25
6.00%
11.20%

Step 3 - Calculation of cost of capital for Flash Memory, Inc.:

K = Wd x Kd x (1 - T) + We x Ke
Wd = weight of debt in Flash's capital structure
Kd = Flash's cost of debt capital (a)
T = Flash's income tax rate
We = weight of equity in Flash's capital structure
Ke = Flash' cost of equity capital
K = Flash's cost of capital
(a) at 18% weight of debt Flash will be within the 70% of accounts receivable limit of
the existing loan agreement, thus the 7.25% cost of debt capital. If Flash was over
this limit and changed to factoring, the cost of debt capital would increase to 9.25%,
and the equity beta and cost of equity capital would also increase.

18.00%
7.25%
40.00%
82.00%
11.20%
9.96%

Flash Memory, Inc.

Exhibit 3 Net Present Value of Investment in New Product Line ($000s)
2010
-$2,200

2011

2012

2013

2014

2015

Total

Investment in equipment

Net working capital required to support sales

- % of sales
Investment in net working capital (the year-on-year change)

$5,648
26.15%
-$5,648

$7,322
26.15%
-$1,674

$7,322
26.15%
$0

$2,877
26.15%
$4,446

$1,308
26.15%
$1,569

$0
26.15%
$1,308

$0

$21,600
$17,064
79.00%
$0
$1,806
8.36%
$300

$28,000
$22,120
79.00%
$0
$2,341
8.36%
$0

$28,000
$22,120
79.00%
$0
$2,341
8.36%
$0

$11,000
$8,690
79.00%
$0
$920
8.36%
$0

$5,000
$3,950
79.00%
$0
$418
8.36%
$0

Income before income taxes

Income taxes @ 40%

$2,430
$972

$3,539
$1,416

$3,539
$1,416

$1,390
$556

$632
$253

Net income
Depreciation of equipment @ 20% SLM

$1,458
$440

$2,124
$440

$2,124
$440

$834
$440

$379
$440

Cash flow from operations

$1,898

$2,564

$2,564

$1,274

$819

$225

$2,564

$7,009

$2,843

$2,127

Sales
Cost of goods sold (includes equipment depreciation)
- % of sales
Research & development
Selling, general & administrative
- % of slaes
Launch promotion

Total cash flow

-$7,848

NPV @ cost of capital

IRR
MIRR

$3,014
21.9%
17.3%

Cost of capital

9.96%

$2,200

Flash Memory, Inc.

Exhibit 4 Change in Forecasted Financial Statements due to Acceptance of Investment in New Product Line
Financial Statement Account ($000s)

2007

Actual
2008

2009

2010

Sales
Cost of goods sold (includes equipment depreciation)
Research and development
Selling, general and administrative (includes launch)
Increase in operating income
Cash (3.3% of sales)
Accounts receivable (60 DSO)
Inventories (52 days of COGS)
Prepaid expenses (0.4% of sales)
Net property, plant & equipment
Accounts payable (60 days of purchases)
Accrued expenses (0.73% of sales)
Other current liabilities (0.62% of sales)

$2,200

Forecast
2011

2012

$21,600
$17,064
$0
$2,106
$2,430

$28,000
$22,120
$0
$2,341
$3,539

$713
$3,551
$2,431
$86
$1,760

$924
$4,603
$3,151
$112
$1,320

$842
$158
$134

$1,091
$204
$174

26.15%

26.15%

For informational purposes only:

NWC % of sales

Flash Memory, Inc.

Exhibit 5 Actual and Forecasted Financial Statements Assuming Acceptance of Investment in New Product Line, No Sale
of New Common Stock, and All Borrowings at 9.25%
Income Statement ($000s except earnings per share)

2007

Actual
2008

2009

2010

Forecast
2011

2012

$77,131
$62,519
$14,612

$80,953
$68,382
$12,571

$89,250
$72,424
$16,826

$120,000
$97,320
$22,680

$165,600
$133,848
$31,752

$172,000
$138,904
$33,096

$3,726
$6,594
$4,292

$4,133
$7,536
$902

$4,416
$7,458
$4,952

$6,000
$10,032
$6,648

$7,200
$14,144
$10,408

$7,200
$14,379
$11,517

$480
-$39

$652
-$27

$735
-$35

$937
-$50

$1,527
-$50

$2,118
-$50

Income before income taxes

$3,773

$223

$4,182

$5,661

$8,831

$9,349

Income taxes
Net income

$1,509
$2,264

$89
$134

$1,673
$2,509

$2,264
$3,396

$3,532
$5,299

$3,740
$5,609

$1.52

$0.09

$1.68

$2.28

$3.55

$3.76

Sales
Cost of goods sold
Gross margin
Research and development
Selling, general and administrative
Operating income
Interest expense
Other income (expenses)

Earnings per share

Exhibit 5 (continued)
Balance Sheet ($000s except shares outstanding and book value per share)

2007

Actual
2008

2009

2010

Forecast
2011

2012

$2,536
$10,988
$9,592
$309
$23,425

$2,218
$12,864
$11,072
$324
$26,478

$2,934
$14,671
$11,509
$357
$29,471

$3,960
$19,726
$13,865
$480
$38,031

$5,465
$27,222
$19,069
$662
$52,418

$5,676
$28,274
$19,789
$688
$54,427

$5,306
$792
$4,514

$6,116
$1,174
$4,942

$7,282
$1,633
$5,649

$10,382
$2,179
$8,203

$11,282
$3,233
$8,050

$12,182
$4,354
$7,828

$27,939

$31,420

$35,120

$46,234

$60,467

$62,255

Accounts payable
Notes payable
Accrued expenses
Income taxes payable
Other current liabilities
Total current liabilities

$3,084
$6,620
$563
$151
$478
$10,896

$4,268
$8,873
$591
$9
$502
$14,243

$3,929
$10,132
$652
$167
$554
$15,434

$4,799
$16,506
$876
$226
$744
$23,151

$6,601
$22,897
$1,209
$353
$1,027
$32,086

$6,850
$18,719
$1,256
$374
$1,066
$28,265

Common stock at $0.01 per share par value

Paid in capital in excess of par value
Retained earnings
Total shareholders' equity

$15
$7,980
$9,048
$17,043

$15
$7,980
$9,182
$17,177

$15
$7,980
$11,691
$19,686

$15
$7,980
$15,087
$23,082

$15
$7,980
$20,386
$28,381

$15
$7,980
$25,995
$33,990

Total liabilities & shareholders' equity

$27,939

$31,420

$35,120

$46,234

$60,467

$62,255

1,491,662

1,491,662

1,491,662

1,491,662

1,491,662

1,491,662

Book value per share

$11.43

$11.52

$13.20

$15.47

$19.03

$22.79

Return on equity
Interest coverage ratio (times)
Notes payable / accounts receivable
Notes payable / shareholders' equity
Total liabilities / shareholders' equity

13.3%
8.9
60.2%
38.8%
63.9%

0.8%
1.4
69.0%
51.7%
82.9%

12.7%
6.7
69.1%
51.5%
78.4%

14.7%
7.1
83.7%
71.5%
100.3%

18.7%
6.8
84.1%
80.7%
113.1%

16.5%
5.4
66.2%
55.1%
83.2%

Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Property, plant & equipment at cost
Less: Accumulated depreciation
Net property, plant & equipment
Total assets

Number of shares outstanding

Flash Memory, Inc.

Exhibit 6 Actual and Forecasted Financial Statements Assuming Acceptance of Investment in New Product Line, Sale
of 300,000 Shares of Common Stock Receiving Net Proceeds of $23 per share, and All Borrowings at 7.25%
Income Statement ($000s except earnings per share)

2007

Actual
2008

2009

2010

Forecast
2011

2012

$77,131
$62,519
$14,612

$80,953
$68,382
$12,571

$89,250
$72,424
$16,826

$120,000
$97,320
$22,680

$165,600
$133,848
$31,752

$172,000
$138,904
$33,096

$3,726
$6,594
$4,292

$4,133
$7,536
$902

$4,416
$7,458
$4,952

$6,000
$10,032
$6,648

$7,200
$14,144
$10,408

$7,200
$14,379
$11,517

$480
-$39

$652
-$27

$735
-$35

$735
-$50

$687
-$50

$1,112
-$50

Income before income taxes

$3,773

$223

$4,182

$5,863

$9,671

$10,355

Income taxes
Net income

$1,509
$2,264

$89
$134

$1,673
$2,509

$2,345
$3,518

$3,868
$5,802

$4,142
$6,213

$1.52

$0.09

$1.68

$1.96

$3.24

$3.47

Sales
Cost of goods sold
Gross margin
Research and development
Selling, general and administrative
Operating income
Interest expense
Other income (expenses)

Earnings per share

Exhibit 6 (continued)
Balance Sheet ($000s except shares outstanding and book value per share)

2007

Actual
2008

2009

2010

Forecast
2011

2012

$2,536
$10,988
$9,592
$309
$23,425

$2,218
$12,864
$11,072
$324
$26,478

$2,934
$14,671
$11,509
$357
$29,471

$3,960
$19,726
$13,865
$480
$38,031

$5,465
$27,222
$19,069
$662
$52,418

$5,676
$28,274
$19,789
$688
$54,427

$5,306
$792
$4,514

$6,116
$1,174
$4,942

$7,282
$1,633
$5,649

$10,382
$2,179
$8,203

$11,282
$3,233
$8,050

$12,182
$4,354
$7,828

$27,939

$31,420

$35,120

$46,234

$60,467

$62,255

Accounts payable
Notes payable
Accrued expenses
Income taxes payable
Other current liabilities
Total current liabilities

$3,084
$6,620
$563
$151
$478
$10,896

$4,268
$8,873
$591
$9
$502
$14,243

$3,929
$10,132
$652
$167
$554
$15,434

$4,799
$9,476
$876
$235
$744
$16,130

$6,601
$15,338
$1,209
$387
$1,027
$24,561

$6,850
$10,550
$1,256
$414
$1,066
$20,136

Common stock at $0.01 per share par value

Paid in capital in excess of par value
Retained earnings
Total shareholders' equity

$15
$7,980
$9,048
$17,043

$15
$7,980
$9,182
$17,177

$15
$7,980
$11,691
$19,686

$18
$14,877
$15,209
$30,104

$18
$14,877
$21,012
$35,907

$18
$14,877
$27,224
$42,119

Total liabilities & shareholders' equity

$27,939

$31,420

$35,120

$46,234

$60,467

$62,255

1,491,662

1,491,662

1,491,662

1,791,662

1,791,662

1,791,662

Book value per share

$11.43

$11.52

$13.20

$16.80

$20.04

$23.51

Return on equity
Interest coverage ratio (times)
Notes payable / accounts receivable
Notes payable / shareholders' equity
Total liabilities / shareholders' equity

13.3%
8.9
60.2%
38.8%
63.9%

0.8%
1.4
69.0%
51.7%
82.9%

12.7%
6.7
69.1%
51.5%
78.4%

11.7%
9.1
48.0%
31.5%
53.6%

16.2%
15.1
56.3%
42.7%
68.4%

14.8%
10.4
37.3%
25.0%
47.8%

Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets
Property, plant & equipment at cost
Less: Accumulated depreciation
Net property, plant & equipment
Total assets

Number of shares outstanding

Flash Memory, Inc.

Exhibit 7 Summary Statistics

No Investment in New Product Line

Sell No New Stock
Borrow at 9.25%
2010
2011
2012
Earnings per share
Interest coverage ratio (times)
Return on equity
Notes payable / accounts receivable
Notes payable / shareholders' equity
Total liabilities / shareholders' equity
Notes payable (000s)

$2.28
$2.66
$2.56
7.1
6.0
5.1
14.7%
14.7%
12.4%
72.5%
71.5%
56.3%
62.0%
62.5%
43.2%
90.8%
92.0%
69.0%
$14,306
$16,914
$13,325
Invest in the New Product Line
2010
2011
2012

Earnings per share

Interest coverage ratio (times)
Return on equity
Notes payable / accounts receivable
Notes payable / shareholders' equity
Total liabilities / shareholders' equity
Notes payable (000s)

$2.28
$3.55
$3.76
7.1
6.8
5.4
14.7%
18.7%
16.5%
83.7%
84.1%
66.2%
71.5%
80.7%
55.1%
100.3%
113.1%
83.2%
$16,506
$22,897
$18,719
Invest in the New Product Line
2010
2011
2012

Earnings per share

Interest coverage ratio (times)
Return on equity
Notes payable / accounts receivable
Notes payable / shareholders' equity
Total liabilities / shareholders' equity
Notes payable (000s)

$1.96
9.1
11.7%
48.0%
31.5%
53.6%
$9,476

$3.24
15.1
16.2%
56.3%
42.7%
68.4%
$15,338

$3.47
10.4
14.8%
37.3%
25.0%
47.8%
$10,550