The gross margin increase from 17.0 percent in 2000 to 25.2 percent in 2003 is due to improvement in inventory management through a reduction in safety stock from 20 percent over anticipated market share in 1999 to two percent over anticipated market share in 2003. The major component of operating expenses is related to product sales and includes commission compensation for the on-campus and regional representatives. Advertising expenses are included in product selling expenses. The chart below provides a break down of operating expenses from 1999 - 2003. The electronic commerce aspect of the business translates to minimal capital expenditure requirements for Mindshaker.
Management expects to lease warehouse space as well as office space.
Technical equipment on hand will be sufficient to support Mindshaker through the start-up phase. This investment represents the first round of venture capital funding management intends to seek. During the second year, management anticipates adding a line of credit to the capital structure secured by the company's receivables and inventory. Management is likely to seek additional funding over the next several years, but has decided to wait until the need arises rather than hold the money on Mindshaker's balance sheet. Based on a valuation after five years assuming the initial investment grows at a 50 percent hurdle rate, investors can expect to own approximately 23 percent of Mindshaker with management owning the remaining portion, This translates to an internal rate of return on invested capital of 66 percent.