plant to our Ferndale, Washington facility. We expect cash to increase during the final three months of fiscal year 2008
primarily as a result of cash generated from operations. We believe that our existing $2,000,000 line of credit with BB&T will suffice in covering
any potential cash shortfall for the foreseeable future. This line of credit is secured by inventory and accounts receivable, which we anticipate
should provide enough collateral to support the related debt. Interest is payable on funds advanced at the LIBOR rate plus 2.5%. The line of credit
matures on May 23, 2009. As of October 31, 2007, no borrowings were outstanding under the line of credit. If we do borrow against this line of credit,
we intend to pay it off before the end of fiscal year 2008. We will continue to closely monitor both current liabilities and current assets as they
relate to the generation of cash, with an emphasis on maximizing potential sources of cash.
Cash Generated from
Operations
During the first nine months of fiscal year fiscal year
2008 we generated $2,308,000 in cash from operating activities. If our sales continue to increase and we are able to continue to profitably produce our
products, we should be able to continue to generate cash from operating activities during the balance of fiscal year 2008, although it cannot be
assured that this will be the case.
Financing and Investing
Activities
Cash used for financing activities during the first nine
months of fiscal year 2008 was $719,000. This was the result of cash used to make principal payments on long-term debt. Cash was used during the first
nine months of fiscal year 2008 for investing activities mainly related to the move of our Bellingham, Washington production facility. Also, the cash
related to the debt facility for the plant move was drawn from a restricted account to be released as construction progresses. Cash used in investing
activities during the first nine months of fiscal year 2008 was approximately $1,831,000.
The first phase of our production expansion plan was
substantially completed during the third quarter of fiscal year 2004. This was the construction of our new west coast facility located in Ferndale,
Washington. We had previously been operating in five separate long-term leased facilities in Whatcom County, Washington. This new facility, which was
financed approximately half through debt and half through cash, consolidated four of these leased facilities, resulting in annual savings of
approximately $450,000 in lease payments. The consolidation of these facilities has also provided us with savings in other expenses caused by
inefficient logistics. The annual interest expense of the debt used to finance this facility is approximately $144,000 per year.
Phase two of our production expansion plan was the
commissioning of the facility located in Georgia. We purchased approximately fifteen acres of real property in Jesup, Georgia, with an existing 41,000
square foot facility, during August 2003 for $140,000, which we subsequently sold to, and leased back from, Wayne County IDA, as described in more
detail in our Annual Report on Form 10-K for the fiscal year ended January 31, 2007. We began construction during the fourth quarter of fiscal year
2004 on this property. The total project was completed at a cost of $6,650,000. Of the total cost, approximately $4,900,000 was financed through a
long-term bank debt instrument and the balance was financed with cash on hand. The annual interest expense of the debt used to finance this facility is
approximately $149,000 a year. This plant is now fully functional.
The third phase of our production expansion plan was the
relocation of our Bellingham, Washington production facility to our new Ferndale, Washington facility. This phase began during the second quarter of
fiscal year 2007 and cost approximately $4,200,000. Of this amount, $2,600,000 came from cash and the remaining $1,600,000 was generated through our
September 2006 bond financing with GECPF, as described above. This production facility became operational during the second quarter of fiscal year
2008.
We believe that this three-phase plan will give us the
ability to continue to grow our business, achieve significant cost savings, better serve our customers, expand our production lines, diversify and
expand our production capacity and physically move manufacturing in a manner which is transparent to the users of our products.
Environmental Matters
We are committed to being an environmentally friendly
company and to manufacturing products which benefit the quality of the environment. Hazardous wastes are not produced, treated, or stored at any
company-owned or operated facilities. State, federal, and local laws all have jurisdiction over production activities. We believe we are currently in
compliance with these laws and expect to remain so in the foreseeable future.
19
Off-Balance Sheet Arrangements
The SEC requires companies to disclose off-balance sheet
arrangements. As defined by the SEC, an off-balance sheet arrangement includes any contractual obligation, agreement or transaction arrangement
involving an unconsolidated entity under which a company 1) has made guarantees, 2) has a retained or a contingent interest in transferred assets, 3)
has an obligation under derivative instruments classified as equity, or 4) has any obligation arising out of a material variable interest in an
unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or
research and development services with the company.
We have examined our contractual obligation structures that
may potentially be impacted by this disclosure requirement and have concluded that no arrangements of the types described above exist with respect to
our company.
Critical Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated condensed financial statements and
accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. The SEC has defined a companys most critical accounting policies as
the ones that are most important to the portrayal of the companys financial condition and results of operations, and which require the company to
make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. For
additional information, see the notes to consolidated condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q and also
please refer to our Annual Report on Form 10-K for the year ended January 31, 2007 for a more detailed discussion of our critical accounting policies.
Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ
significantly from these estimates under different assumptions or conditions.
During the quarter ended October 31, 2007, we did not make
any material changes in or to our critical accounting policies.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. They can
be identified by the use of forward-looking words such as believes, expects, plans, may,
will, would, could, should or anticipates or other comparable words, or by discussions of
strategy, plans or goals that involve risks and uncertainties that could cause actual results to differ materially from those currently anticipated.
You are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those set
forth in our Annual Report on Form 10-K for the year ended January 31, 2007 and as described from time to time in our reports filed with the SEC,
including this Quarterly Report on Form 10-Q. Forward-looking statements include, but are not limited to, statements referring to our future growth
strategies, prospects for the future, potential financial results, market and product line growth, abilities to enter new markets, ability to introduce
new products, benefits from infrastructure improvements and our competitiveness and profitability as a result of new sales and marketing
programs.