complete stand-alone income statement and balance sheet, complete npv analysis of investment opportunity, complete combined pro forma income statement and balance sheet.

FLASH MEMORY INC. BUSINESS BACKGROUND O Founded in San Jose, California, by 4 engineers in the late 1990s O Company focused on solid state drive (SSD) I Market of SSD: $400 millin in 2007, $1.1 billion in 2009 1 Projected Market of SSD: $2.8 billion in 2011 and $5.3 billion in 2013 O Industry characteristics 1 Short produce life Need large spending in R&D to keep competitiveness O Competitors 1 Intel, Samsung, Micron Technology, SanDisk Corporation, and STEC, Inc. FLASH MEMORY INC. BUSINESS FORECAST Exhibit 3 Key Forecasting Assumptions and Relationships for 2010 Through 2012 Line Item Assumption or Ratio Cost of goods sold Research and development Selling, general and administrative Interest expense Other income (expenses) 81.10% of sales 5.0% of sales 8.36% of sales Beginning of year debt balance x interest rate $50,000 of expense each year Cash Accounts receivable 3.3% of sales 60 days sales outstanding 52 days of cost of good sold 0.4% of sales Beginning PP&E at cost + capital expenditures Beginning A/D +7.5% of beginning PP&E at cost Inventories Prepaid expenses Property, plant & equipment at cost Accumulated depreciation Accounts payable Purchases 30 days of purchases 60% of cost of goods sold 0.73% of sales 10% of income taxes expense 0.62% of sales Accrued expenses Income taxes payable Other current liabilities Income Statements, 20072009 ($000s except earnings per share) Exhibit 1 2007 2008 2009 Net sales $77,131 $62,519 $14,612 $80,953 $68,382 $12,571 $89,250 $72,424 $16,826 Cost of goods sold Gross margin Research and development Selling, general and administrative Operating income $3,726 $6,594 $4,292 $4,133 _$7,536 $902 $4,416 $7.458 $4,952 Interest expense Other income (expenses) $735 -$35 $480 --$39 $652 -$27 Income before income taxes $3,773 $223 $4,182 Income taxes Net income $1,673 $2,509 $1,509 $2,264 $89 $134 $0.09 Earnings per share $1.52 $1.68 In years 2007 and after, Flash's effective combined federal and state income tax rate was 40%. Exhibit 2 Balance Sheets, 2007-2009 ($000s except number of shares outstanding) December 31, 2007 2008 2009 $ 2,536 $ 10,988 $ 9592 $ 2,934 $ 14,671 $ 11,509 %24 $ 29 471 Cash Accounts receivable $ 2,218 $ 12,864 $ 11,072 Inventories Prepaid expenses Total current assets 309 324 357 $ 23425 $ 26,478 $ 5,306 Property, plant & equipment at cost Less: Accumulated depreciation Net property, plant & equipment $ 6,116 $ 1,174 $ 4,942 $ 7,282 792 24 1,633 $ 4,514 $ 27,939 $ 5,649 $ 31,420 $ 35,120 Total assets $ 3,084 $ 6,620 24 $ 4,268 $ 8,873 $ 3,929 $ 10,132 %24 Accounts payable Notes payable (a) Accrued expenses Income taxes payable (b) Other current liabilities 563 591 652 151 24 167 $4 $ 10,896 502 478 554 $ 14,243 $ 15,434 Total current liabilities Common stock at par value Paid in capital in excess of par value Retained earnings Total shareholders' equity 24 %24 $ 7,980 $ 11,691 $ 19,686 15 15 15 $ 7,980 $ 9,048 $ 17,043 $ 27,939 $ 7,980 $ 9,182 $ 17,177 $ 31,420 $ 35,120 Total liabilities & shareholders' equity Number of shares outstanding 1,491,662 1,491,662 1,491,662 a Secured by accounts receivable bTo avoid a penalty for underpayment of income taxes, Flash made equal estimated tax payments quarterly on the 15th of April, June, Septermber, and December of each year. The total of these four quarterly payments was required to equal at least the lesser of (a) 90% of the taxes that would actually be incurred in the same year, or (b) 100% of the taxes due on income of the prior year. STAND-ALONE PRO FORMA INCOME STATEMENT 2013 2010 2011 2012 2014 Sales COGS Gross Margin 144,000,000 144,000,000 128,000,000 105,000,000 120,000,000 Exhibit 3 Sales - COGS R&D Selling, general and admin Operating income Exhibit 3 Gross Margin - R&D - Selling expense Interest Other income (expense) Beginning NP*Interest (interest rate increase?) Exhibit 3 Income before tax Operating Income - Interest - Other expense Income tax Net income Income before tax * tax% Income before tax - Income tax EPS Net Income / # shares outstanding STAND-ALONE PRO FORMA BALANCE SHEET 2010 2011 2012 2013 2014| 2010 2011 2012 2013 2014 Cash AP Exhibit 3 AR External Financing Item NP Exhibit 3 Accrued expense Inv Exhibit 3 Prepaid Expense Income taxes payable Total CA Cash+AP+Inv+PE Other CL Total CL TL&TE - Total Equity PP&E Exhibit 3 CS at $0.01/share par value Accu. Dep Do not change from before PP&E - Accu. Dep Net PP&E PIS RE Previous RE + NI Total Equity CS+PIS+RE TA TL & TE Total CA + Net PP&E TA FLASH MEMORY INC. INVESTMENT OPPORTUNITY O $400,000 already spent in R&D O Expected sales: $21.6 million in 2011, $28 million in 2012 and 2013, $11 million in 2014, $5 million in 2015 O 21% gross margin O CAPEX, = $2.2 million O Straight-line depreciation to zero, zero salvage value O Annual NWC Need: 26.15% of next year's sales O SG&A: 8.36% of sales, MKT of $300,000 in 2011 O Required rate of return: 9.25% O Tax rate: 40% NPV ANALYSIS OF THE INVESTMENT OPPORTUNITY 2012 2011 2015 New Project Sales COGS Selling, general and admin M EBIT Dep Tax 2010 2013 2014 21,600,000 5,000,000 28,000,000 28,000,000 11,000,000 OCF All the Information is in the previous slide. NWC Need Chg in NWC CAPEX Total CF Cost of Capital INPV 9.25% COMBINED PRO FORMA FINANCIAL STATEMENT O This section provides extra 20 points O Extra 10 points for the IS and Extra 10 points for the BS O They have the same structure as the Stand Alone Pro Forma Financial Statements but includes the impact from the new project investment O The assumption is no new equity issuance and use 9.25% loan to support the required NP Forecasted Income Statement Assuming Acceptance of Investment in New Product Line (No Sale of Common Stock and Borrow at 9.25%) 2011 2010 2012 Sales COGS Gross Margin R&D Selling, general and admin (including MKT launch) Operating income Interest other income (expense) Income before tax Income tax Net income EPS Forecasted Balance Sheet Assuming Acceptance of Investment in New Product Line (No Sale of Common Stock and Borrow at 9.25%) 2012 2011 2010 Cash AR Inv Prepaid Expense Total CA PP&E Accu. Dep Net PP&E TA AP NP Accrued expense Income taxes payable other CL Total CL cs at $0.01/share par value PIS RE Total Equity TL & TE FLASH MEMORY INC. BUSINESS BACKGROUND O Founded in San Jose, California, by 4 engineers in the late 1990s O Company focused on solid state drive (SSD) I Market of SSD: $400 millin in 2007, $1.1 billion in 2009 1 Projected Market of SSD: $2.8 billion in 2011 and $5.3 billion in 2013 O Industry characteristics 1 Short produce life Need large spending in R&D to keep competitiveness O Competitors 1 Intel, Samsung, Micron Technology, SanDisk Corporation, and STEC, Inc. FLASH MEMORY INC. BUSINESS FORECAST Exhibit 3 Key Forecasting Assumptions and Relationships for 2010 Through 2012 Line Item Assumption or Ratio Cost of goods sold Research and development Selling, general and administrative Interest expense Other income (expenses) 81.10% of sales 5.0% of sales 8.36% of sales Beginning of year debt balance x interest rate $50,000 of expense each year Cash Accounts receivable 3.3% of sales 60 days sales outstanding 52 days of cost of good sold 0.4% of sales Beginning PP&E at cost + capital expenditures Beginning A/D +7.5% of beginning PP&E at cost Inventories Prepaid expenses Property, plant & equipment at cost Accumulated depreciation Accounts payable Purchases 30 days of purchases 60% of cost of goods sold 0.73% of sales 10% of income taxes expense 0.62% of sales Accrued expenses Income taxes payable Other current liabilities Income Statements, 20072009 ($000s except earnings per share) Exhibit 1 2007 2008 2009 Net sales $77,131 $62,519 $14,612 $80,953 $68,382 $12,571 $89,250 $72,424 $16,826 Cost of goods sold Gross margin Research and development Selling, general and administrative Operating income $3,726 $6,594 $4,292 $4,133 _$7,536 $902 $4,416 $7.458 $4,952 Interest expense Other income (expenses) $735 -$35 $480 --$39 $652 -$27 Income before income taxes $3,773 $223 $4,182 Income taxes Net income $1,673 $2,509 $1,509 $2,264 $89 $134 $0.09 Earnings per share $1.52 $1.68 In years 2007 and after, Flash's effective combined federal and state income tax rate was 40%. Exhibit 2 Balance Sheets, 2007-2009 ($000s except number of shares outstanding) December 31, 2007 2008 2009 $ 2,536 $ 10,988 $ 9592 $ 2,934 $ 14,671 $ 11,509 %24 $ 29 471 Cash Accounts receivable $ 2,218 $ 12,864 $ 11,072 Inventories Prepaid expenses Total current assets 309 324 357 $ 23425 $ 26,478 $ 5,306 Property, plant & equipment at cost Less: Accumulated depreciation Net property, plant & equipment $ 6,116 $ 1,174 $ 4,942 $ 7,282 792 24 1,633 $ 4,514 $ 27,939 $ 5,649 $ 31,420 $ 35,120 Total assets $ 3,084 $ 6,620 24 $ 4,268 $ 8,873 $ 3,929 $ 10,132 %24 Accounts payable Notes payable (a) Accrued expenses Income taxes payable (b) Other current liabilities 563 591 652 151 24 167 $4 $ 10,896 502 478 554 $ 14,243 $ 15,434 Total current liabilities Common stock at par value Paid in capital in excess of par value Retained earnings Total shareholders' equity 24 %24 $ 7,980 $ 11,691 $ 19,686 15 15 15 $ 7,980 $ 9,048 $ 17,043 $ 27,939 $ 7,980 $ 9,182 $ 17,177 $ 31,420 $ 35,120 Total liabilities & shareholders' equity Number of shares outstanding 1,491,662 1,491,662 1,491,662 a Secured by accounts receivable bTo avoid a penalty for underpayment of income taxes, Flash made equal estimated tax payments quarterly on the 15th of April, June, Septermber, and December of each year. The total of these four quarterly payments was required to equal at least the lesser of (a) 90% of the taxes that would actually be incurred in the same year, or (b) 100% of the taxes due on income of the prior year. STAND-ALONE PRO FORMA INCOME STATEMENT 2013 2010 2011 2012 2014 Sales COGS Gross Margin 144,000,000 144,000,000 128,000,000 105,000,000 120,000,000 Exhibit 3 Sales - COGS R&D Selling, general and admin Operating income Exhibit 3 Gross Margin - R&D - Selling expense Interest Other income (expense) Beginning NP*Interest (interest rate increase?) Exhibit 3 Income before tax Operating Income - Interest - Other expense Income tax Net income Income before tax * tax% Income before tax - Income tax EPS Net Income / # shares outstanding STAND-ALONE PRO FORMA BALANCE SHEET 2010 2011 2012 2013 2014| 2010 2011 2012 2013 2014 Cash AP Exhibit 3 AR External Financing Item NP Exhibit 3 Accrued expense Inv Exhibit 3 Prepaid Expense Income taxes payable Total CA Cash+AP+Inv+PE Other CL Total CL TL&TE - Total Equity PP&E Exhibit 3 CS at $0.01/share par value Accu. Dep Do not change from before PP&E - Accu. Dep Net PP&E PIS RE Previous RE + NI Total Equity CS+PIS+RE TA TL & TE Total CA + Net PP&E TA FLASH MEMORY INC. INVESTMENT OPPORTUNITY O $400,000 already spent in R&D O Expected sales: $21.6 million in 2011, $28 million in 2012 and 2013, $11 million in 2014, $5 million in 2015 O 21% gross margin O CAPEX, = $2.2 million O Straight-line depreciation to zero, zero salvage value O Annual NWC Need: 26.15% of next year's sales O SG&A: 8.36% of sales, MKT of $300,000 in 2011 O Required rate of return: 9.25% O Tax rate: 40% NPV ANALYSIS OF THE INVESTMENT OPPORTUNITY 2012 2011 2015 New Project Sales COGS Selling, general and admin M EBIT Dep Tax 2010 2013 2014 21,600,000 5,000,000 28,000,000 28,000,000 11,000,000 OCF All the Information is in the previous slide. NWC Need Chg in NWC CAPEX Total CF Cost of Capital INPV 9.25% COMBINED PRO FORMA FINANCIAL STATEMENT O This section provides extra 20 points O Extra 10 points for the IS and Extra 10 points for the BS O They have the same structure as the Stand Alone Pro Forma Financial Statements but includes the impact from the new project investment O The assumption is no new equity issuance and use 9.25% loan to support the required NP Forecasted Income Statement Assuming Acceptance of Investment in New Product Line (No Sale of Common Stock and Borrow at 9.25%) 2011 2010 2012 Sales COGS Gross Margin R&D Selling, general and admin (including MKT launch) Operating income Interest other income (expense) Income before tax Income tax Net income EPS Forecasted Balance Sheet Assuming Acceptance of Investment in New Product Line (No Sale of Common Stock and Borrow at 9.25%) 2012 2011 2010 Cash AR Inv Prepaid Expense Total CA PP&E Accu. Dep Net PP&E TA AP NP Accrued expense Income taxes payable other CL Total CL cs at $0.01/share par value PIS RE Total Equity TL & TE