<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ________
Commission file number: 0-28483
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PINNACLE DATA SYSTEMS, INC.
---------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Ohio 31-1263732
---- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6600 Port Road, Groveport, Ohio 43125
----------------------------------------------
(Address of principal executive offices)
(614) 748-1150
---------------------------
(Issuer's Telephone Number)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date 5,316,004 common shares, without par
value, as of November 1, 2000.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
PART I - Financial Information
Item 1. Financial Statements.
To the Board of Directors
Pinnacle Data Systems, Inc. (dba PDSi)
Columbus, Ohio
Independent Accountants' Report
We have reviewed the accompanying balance sheet of Pinnacle Data
Systems, Inc. as of September 30, 2000, and the related statements of
income and cash flows for the thirteen weeks and thirty-nine weeks
then ended. These financial statements are the responsibility of the
management of Pinnacle Data Systems, Inc.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying financial
statements in order for them to be in conformity with generally
accepted accounting principles.
/s/ HAUSSER + TAYLOR LLP
Columbus, Ohio
October 17, 2000
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<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
BALANCE SHEET
September 30, 2000
(UNAUDITED)
ASSETS
------
CURRENT ASSETS
Cash $ 31,625
Accounts receivable, net of allowance for doubtful
accounts of $20,000 3,304,533
Inventory 5,068,861
Other prepaid expenses 261,853
Deferred income taxes 132,000
---------
8,798,872
---------
PROPERTY AND EQUIPMENT
Leasehold improvements 177,550
Furniture and fixtures 311,842
Computer equipment 1,241,812
Shop equipment 307,612
Vehicle 21,846
---------
2,060,662
Less accumulated depreciation 1,050,194
---------
1,010,468
---------
OTHER ASSETS
Deposits 18,112
---------
$ 9,827,452
=========
See accompanying notes to financial statements.
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<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
BALANCE SHEET
September 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES
Line of credit $ 2,063,200
Current portion of long-term debt 126,521
Accounts payable 2,956,134
Accrued expenses:
Wages and payroll taxes 159,384
Vacation 80,985
Profit sharing plan 59,670
Income taxes 277,687
Other 230,477
Unearned service revenue 69,463
---------
6,023,521
---------
LONG-TERM LIABILITIES
Long-term debt, less current portion 214,223
Deferred income taxes 14,000
---------
228,223
---------
6,251,744
---------
STOCKHOLDERS' EQUITY
Common stock; no par value; 10,000,000 shares authorized;
5,283,004 shares issued and outstanding 1,966,513
Preferred stock; no par value; 4,000,000 shares authorized;
no shares issued or outstanding -
Additional paid-in capital 214,506
Retained earnings 1,394,689
---------
3,575,708
---------
$ 9,827,452
=========
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Thirteen Weeks Ended For the Thirty-nine Weeks Ended
September 30, October 1, September 30, October 1,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
SALES
Product sales $ 4,877,515 $ 2,050,567 $ 14,787,463 $ 5,681,529
Service sales 1,392,918 838,728 3,249,568 2,281,011
------------- ------------- ------------- -------------
6,270,433 2,889,295 18,037,031 7,962,540
------------- ------------- ------------- -------------
COST OF SALES
Product sales 3,812,082 1,622,238 11,466,464 4,518,789
Service sales 733,156 501,856 1,927,755 1,363,963
------------- ------------- ------------- -------------
4,545,238 2,124,094 13,394,219 5,882,752
------------- ------------- ------------- -------------
GROSS PROFIT 1,725,195 765,201 4,642,812 2,079,788
OPERATING EXPENSES ------------- ------------- ------------- -------------
Selling, general and administrative 1,127,047 637,229 3,163,302 1,733,057
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 598,148 127,972 1,479,510 346,731
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest expense (56,348) (25,162) (150,863) (69,057)
Gain on sale of building - - - 85,922
------------- ------------- ------------- -------------
(56,348) (25,162) (150,863) 16,865
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 541,800 102,810 1,328,647 363,596
INCOME TAXES 211,000 41,977 518,000 148,901
------------- ------------- ------------- -------------
NET INCOME $ 330,800 $ 60,833 $ 810,647 $ 214,695
============= ============= ============= =============
BASIC EARNINGS PER COMMON SHARE $ 0.06 $ 0.01 $ 0.16 $ 0.04
============= ============= ============= =============
DILUTED EARNINGS PER COMMON SHARE $ 0.06 $ 0.01 $ 0.14 $ 0.04
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 5,105,722 4,867,871 4,972,202 4,860,137
============= ============= ============= =============
Diluted 5,883,650 5,147,486 5,664,808 5,120,079
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF CASH FLOWS
Thirty-nine weeks Ended September 30, 2000 and October 1, 1999
--------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 810,647 $ 214,695
Adjustments to reconcile net income to net cash used ------------ ------------
in operating activities:
Depreciation and amortization 251,958 232,862
Provision for doubtful accounts 10,000 9,000
Inventory reserves 119,342 (5,593)
Gain on sale of property and equipment - (85,922)
(Increase) decrease in assets:
Accounts receivable (844,452) (599,772)
Inventory (2,510,922) (1,157,857)
Prepaid expenses and other assets (126,815) (149,656)
Increase in liabilities:
Accounts payable 1,176,918 521,561
Accrued expenses and taxes 247,911 177,226
Unearned revenues 8,210 26,763
------------ ------------
Total adjustments (1,667,850) (1,031,388)
------------ ------------
Net cash used in operating activities (857,203) (816,693)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (406,208) (338,640)
Proceeds from the sale of property and equipment - 133,552
------------ ------------
Net cash used in investing activities (406,208) (205,088)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 763,200 1,020,000
Principal payments on long-term debt (254,335) (52,953)
Principal payments on capital lease obligation - (13,021)
Long-term borrowings 400,000 -
Net proceeds from exercise of stock options 350,875 43,500
----------- ------------
Net cash provided by financing activities 1,259,740 997,526
----------- ------------
DECREASE IN CASH (3,671) (24,255)
CASH - Beginning of period 35,296 35,101
----------- ------------
CASH - End of period $ 31,625 $ 10,846
=========== ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF CASH FLOWS (CONTINUED)
Thirty-nine weeks Ended September 30, 2000 and October 1, 1999
--------------------------------------------------------------
2000 1999
---- ----
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 135,529 $ 69,354
============ ============
Income taxes paid, net of refunds $ 430,534 $ 36,268
============ ============
See accompanying notes to financial statements.
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<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
Pinnacle Data Systems, Inc. (dba PDSi) (the Company) is an independent
provider of component-level depot repair services for electronic
equipment such as computers, peripherals and printed circuit board
assemblies. The Company's repair services are focused on UNIX/RISC
workstations for original equipment manufacturers (OEM's). The Company
also designs and manufactures custom printed circuit boards and
provides custom integration of standard computing equipment for OEM's.
Note 2. Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with instructions to form 10-QSB and Article
10 of Regulation S-X. Accordingly they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for fair presentation
of the results of operations for the periods presented have been
included. The financial statements should be read in conjunction with
the audited financial statements and the notes thereto for the fiscal
year ended December 31, 1999. Interim results are not necessarily
indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 3. Short-Term Debt
In February 2000, the Company entered into an agreement with a new
financial institution to establish a $2,500,000 line of credit, with
monthly interest payments at prime minus .25%. In May 2000, the
Company extended this agreement and increased the limit to $3,000,000.
In August 2000, the limit of the line of credit was increased to
$7,000,000 and the interest rate was reduced to prime (9.50% at
September 30, 2000) minus 0.85%. The line is payable on demand and is
collateralized by a "Blanket Lien" on all assets of the Company.
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<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 4. Long-Term Debt
In February 2000, the Company refinanced existing long-term debt at a
new financial institution. The Company borrowed $400,000 payable over
three years, in equal monthly payments of $12,627, including interest
at prime minus .25%, and is collateralized by a "Blanket Lien" on all
assets of the Company.
Note 5. Stockholders' Equity
On February 16, 2000, the Board of Directors amended the Pinnacle Data
Systems, Inc., 1995 Stock Option Plan, which was subsequently approved
by the shareholders on June 24, 2000, to increase the number of shares
reserved for issuance from 600,000 to 1,200,000 common shares.
On March 7, 2000, the Board of Directors declared a 2-for-1 stock
split in the form of a 100 percent stock dividend payable on March 31,
2000, to shareholders of record on March 14, 2000. All share and per
share amounts have been adjusted to reflect the 2-for-1 stock split.
On October 4, 2000, the Board of Directors declared a 2-for-1 stock
split in the form of a 100 percent stock dividend payable on October
31, 2000, to shareholders of record on October 16, 2000. All share and
per share amounts have been adjusted to reflect the 2-for-1 stock
split.
On June 24, 2000, the shareholders approved amendments to the
Company's Articles of Incorporation to increase the authorized number
of common shares from 5,000,000 to 10,000,000 and to authorize a class
of "blank check" preferred shares consisting of 4,000,000 authorized
shares. No preferred shares were issued or outstanding at June 30,
2000.
Note 6. Leases
In January 2000, the Company amended its facility lease to expand the
amount of square feet under lease to approximately 113,000 square
feet.
Note 7. Income Taxes
Income taxes for interim periods were computed using the effective tax
rate estimated to be applicable for the full fiscal year, which is
subject to ongoing review and evaluation by management.
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<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 8. Operating Segments
The Company's reportable segments include Service Sales and Product
Sales. The Company designs, assembles and sells computer products and
provides computer repair and other related services primarily to
Original Equipment Manufacturers (OEMs) in industries such as
telecommunications, medical systems, process control, and government.
Products are custom designed to meet the needs of customers. The other
column listed below reflects items that are not allocated to segments.
These items primarily represent assets and expenses for various
administrative functions within the Company. The Company evaluates
performance based on operating earnings of the reportable segments.
Segment information for the thirty-nine weeks ended September 30, 2000
and October 1, 1999, was as follows:
Thirty-nine Weeks Ended September 30, 2000
-------------------------------------------------------
Service Product
Sales Sales Other Total
----- ----- ----- -----
Sales $ 3,249,568 $ 14,787,463 $ - $ 18,037,031
Gross profit 1,321,812 3,321,000 - 4,642,812
Operating earnings 715,015 1,708,993 (944,498) 1,479,510
Depreciation and
amortization 107,439 76,020 68,499 251,958
Total assets 1,517,744 7,919,160 390,548 9,827,452
Capital expenditures 99,224 120,577 186,407 406,208
Thirty-nine Weeks Ended October 1, 1999
-------------------------------------------------------
Service Product
Sales Sales Other Total
----- ----- ----- -----
Sales $ 2,281,011 $ 5,681,529 $ - $ 7,962,540
Gross profit 917,048 1,162,740 - 2,079,788
Operating earnings 583,685 315,735 (552,689) 346,731
Depreciation and
amortization 117,775 36,793 78,294 232,862
Total assets 1,337,080 4,079,065 325,456 5,741,601
Capital expenditures 67,028 183,038 88,574 338,640
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<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 9. Effects of Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition
in Financial Statements." The guidance in SAB 101 must be
adopted during the fourth quarter of fiscal 2000 and the
effects, if any, are required to be recorded through a
retroactive, cumulative effect adjustment as of the beginning of
the fiscal year, with a restatement of all prior interim
quarters in the year. Management has not completed its
evaluation of the effects, if any, that SAB 101 will have on its
income statement presentation, operating results, or financial
position.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Financial
Statements and Notes contained herein.
The following sections contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risks and uncertainties, and the cautionary statements set
forth below identify important factors that could cause actual results over the
next few quarters to differ materially from those predicted in any such
forward-looking statements. Such factors include, but are not limited to,
adverse changes in general economic conditions, including adverse changes in the
specific markets for our products and services, adverse business conditions,
decreased or lack of growth in the computing industry, adverse changes in
customer order patterns, including any decline or change in product orders from
any of our major customers, three of whom accounted for 56% of our sales
during1999, increased competition, any adverse change in Sun Microsystems'
business or our relationship with Sun, around whose systems our business is
based, and with whom we have significant contracts, lack of acceptance of new
products, pricing pressures, lack of adequate financing to take advantage of
business opportunities that may arise, lack of success in technological
advancements, risks associated with our new business practices, processes and
information systems, including our ability to manage our growth effectively, and
other factors.
On March 7, 2000, the Board of Directors declared a 2-for-1 stock split in the
form of a 100 percent stock dividend payable on March 31, 2000, to shareholders
of record on March 14, 2000. On October 4, 2000, the Board of Directors declared
a 2-for-1 stock split in the form of a 100 percent stock dividend payable on
October 31, 2000, to shareholders of record on October 16, 2000. The effect of
both stock splits has been recognized in all share and per share data in the
following discussion of Results of Operations.
Results of Operations
Thirty-nine weeks ended September 30, 2000 (unaudited) compared to Thirty-nine
weeks ended October 1, 1999 (unaudited)
SALES
Our sales were $18,037,031 for the thirty-nine weeks ended September 30, 2000,
an increase of 127% over sales of $7,962,540 for the comparable period of 1999.
Our product sales increased 160% in the first thirty-nine weeks of 2000, to
$14,787,463. The increase in product sales was fully attributable to the
addition of new customers in 2000.
Our service sales for the first thirty-nine weeks of 2000 were $3,249,568, which
was 42% higher than the first thirty-nine weeks in 1999. We provide repairs and
logistics management services for a specific list of electronic computer circuit
boards and other computer components for one large and several smaller Original
Equipment Manufacturer (OEM) customers. During the first
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<PAGE>
quarter of 2000, we began providing additional logistics and material management
services to our largest customer, resulting in higher revenue.
Our relative levels of growth of product and service sales continued a
multi-year trend of an evolution in the mix of the two types of sales. Product
sales, as a percentage of total sales have grown from 56% in 1996, to 65% in
1997, to 68% in 1998, to 71% in 1999, to 82% through the first thirty-nine weeks
of 2000. Service sales, as a percentage of total sales, have gone from 44 %, to
35%, to 32%, to 29%, to 18% over the same period.
GROSS PROFIT
Our gross profit increased from $2,079,790 in the first thirty-nine weeks of
1999 to $4,642,813 in the first thirty-nine weeks of 2000, an increase of 123%.
Most elements of cost of goods sold declined as a percentage of revenue in 2000
compared to 1999, for both the product and service segments.
Overall, we have experienced some economies of scale in 2000. Direct labor
declined from 7% of sales to 6%. Overhead declined from 10% to 6%, despite a
significant increase in facility costs associated with doubling the size of our
facility.
The gross margin on product sales was 22% for the first thirty-nine weeks of
2000, compared to 20% for the first thirty-nine weeks of 1999. The improvement
was attributable entirely to declines in labor and overhead as a percentage of
sales. Material costs as a percentage of sales increased approximately 1% in
2000 compared to 1999. The primary reason for the relative increase in material
costs was the fact that a few large product projects were in the prototype stage
during 2000, which usually involves component changes, resulting in some scrap
and higher material usage than typically is found in the production stage.
The gross margin on our service sales increased slightly to 41% for the first
thirty-nine weeks of 2000, from 40% for the first thirty-nine weeks of 1999. The
continued shift from TPM to OEM service resulted in a reduction in the cost of
materials from 21% to 11%. The decline in material costs as a percentage of
service revenue was offset by an increase in the cost of labor from 20% of
revenue to 30% of revenue, due to the addition in 2000 of material and logistics
management services, which are more labor-intensive.
Our overall gross margin remained approximately 26% in the first thirty-nine
weeks of 2000, as it was in the comparable period in 1999.
OPERATING EXPENSES
Our operating expenses totaled $3,163,302 for the first thirty-nine weeks of
2000, compared with $1,733,057 for the first thirty-nine weeks of 1999. The 83%
increase from 1999 to 2000 was less than both the 127% rate of growth of sales
and the 123% increase in gross profit.
The majority of the increase came from higher wages from an expanded
professional technical staff, caused by the significantly higher number of
customer product design projects. The other major expense categories
contributing to the increase were facility costs, relating to our relocation to
a larger building, and higher professional fees, relating to becoming a fully
SEC-reporting company.
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<PAGE>
As a percentage of sales, operating expenses decreased from 22% in 1999 to 18%
in 2000. Income from operations increased 327% to $1,479,510 (8% of sales) for
the first thirty-nine weeks of 2000, from $346,736 (4% of sales) for the first
thirty-nine weeks of 1999.
OTHER INCOME AND EXPENSE
In anticipation of higher sales volumes, we entered into a new financing package
with Key Bank in March of 2000. The arrangement included an installment loan of
$400,000 and a revolving line of credit. The two new loans were used to
liquidate loans we had with our previous bank. At September 30, 2000 the balance
of the line of credit was $2,063,200. Primarily as a result of our increased use
of our line of credit to support higher accounts receivable and inventory,
interest expense in the first thirty-nine weeks of 2000 grew 118% from the first
thirty-nine weeks of 1999.
In May 1999, we sold the building in which we previously conducted operations.
The building sale resulted in a gain before taxes of $85,922. Netted against
interest expense, the net other income for the first thirty-nine weeks of 1999
was $16,865 compared to net other expense in 2000 of $150,863, a difference of
$167,728.
INCOME TAXES AND NET INCOME
The improved income from operations exceeded the increase in net other expense,
and resulted in income before income taxes of $1,328,647 for the first
thirty-nine weeks of 2000, compared to $363,596 for the first thirty-nine weeks
of 1999. Consequently, income tax expense increased, from $148,901 in 1999 to
$518,000 in 2000. Net income was $810,647 (4% of sales) for the first
thirty-nine weeks of 2000, compared to $214,695 (3% of sales) for the first
thirty-nine weeks of 1999, an increase of 278%. Without the building sale in
1999, net income would have been only 2% of sales.
Our basic earnings per share improved from $0.04 for the first thirty-nine weeks
of 1999, to $0.16 for the first thirty-nine weeks of 2000. Fully diluted
earnings per share improved from $0.04 for the first thirty-nine weeks of 1999,
to $0.14 for the first thirty-nine weeks of 2000. Without the building sale,
earnings per share in 1999 would have been only $0.03.
LIQUIDITY AND CAPITAL RESOURCES
During the first thirty-nine weeks of 2000, we used $857,203 of cash in our
operating activities, compared to a use of $816,693 for the first thirty-nine
weeks of 1999. The largest use of cash was an increase of $2,510,922 in
inventory. Primarily, the purchases of inventory were made for customer product
orders expected to be fulfilled in the 4th quarter of 2000. Another use of cash
was the increase in accounts receivable of $844,452. We expect to maintain a
substantial investment in inventory for the foreseeable future in order to
support our expected growth in product sales. The increases in inventory and
accounts receivable were partially offset by increases in our liabilities,
particularly accounts payable, which increased by $1,176,918 during the first
thirty-nine weeks of 2000. Expanded credit from our vendors was crucial to our
ability to increase our purchases of inventory components to support our
increased product sales.
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<PAGE>
We used $406,208 of cash in our investing activities in the first thirty-nine
weeks of 2000, compared to $205,088 in the comparable period of 1999. Most of
the investments were for furniture and computer equipment for new employees. We
also invested in leasehold improvements in our new facility. In 1999 our
investment of $338,640 in fixed assets was offset by proceeds of $133,552 from
the sale of our building.
In March 2000, we entered into a new loan agreement with Key Bank in order to
increase our borrowing capacity and to reduce our interest rates. The initial
package with Key included a revolving line of credit and a $400,000 term loan
requiring 36 monthly principal and interest payments of $12,627. Both
instruments had an interest rate of prime minus 0.25%. The line of credit
initially had a limit of the lower of $2,500,000, or a percentage of our
eligible accounts receivables and inventory. In August 2000, the limit of the
line of credit was increased to $7,000,000 and the interest rate was reduced to
prime minus 0.85%. The loan agreement also includes a $250,000 lease line of
credit for purchases of equipment and furnishings. The loan agreement requires
us to meet certain financial targets and to comply with certain other covenants,
including restrictions on paying dividends, incurring additional indebtedness
and liens, guarantees of other obligations, and reorganizations. Our obligations
under the loan agreement are collateralized by substantially all of our assets.
The initial draw on the line of credit was approximately $1,475,000. Combined
with the $400,000 term loan, the proceeds were used to retire a term loan and
line of credit at Firstar Bank. The payoffs of those loans were approximately
F$175,000 and $1,700,000, respectively. At September 30, 2000, the line of
credit balance was $2,063,200. We have not yet made any draws against the lease
line of credit.
In the first thirty-nine weeks of 2000, our overall financing activities
provided cash of $1,259,740 compared to $997,526, in the comparable period in
1999. Long-term debt increased by a net of approximately $146,000 and the line
of credit increased by approximately $763,200. We also received $350,875 from
the exercise of stock options. As a result of the stock option exercises and net
income earned during 2000, total stockholders equity has increased from less
than $2.5 million to more than $3.5 million.
As we continue to grow, we will need to obtain additional working capital, to
support higher levels of accounts receivable and inventory and we will need to
fund additional investments in capital equipment. The amount of additional
capital we will need will depend, in part, on the relative growth of our service
and product segments.
We believe that if we continue with steady growth, then the new bank loan
agreement will be sufficient to meet our immediate financing needs. However, we
believe that we would need to raise additional debt and/or equity capital in
order to fund larger product sales opportunities that may arise. We are
currently investigating several alternatives. Those alternatives include a
higher line of credit and specific bank financing for customer sales projects,
and for fixed asset acquisitions. We are also pursuing expanded credit terms
from some suppliers for specific projects. For the longer term we will consider
additional debt or equity financing.
-15-
