Note 8. Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in such matters, if any, could arise from time to time that may harm Titan’s business, financial condition and results of operations.
Note 9. Convertible Notes
In the prior fiscal year, the Company issued convertible notes to private parties for cash infusions into the Company. These notes were issued as convertible notes with a conversion price of $0.32 per share and carry an interest rate of 10% per annum with an expiration date of December 31, 2004. During the quarter ended November 30, 2004, the Company received extensions from these lenders extending the due date 90 days which were later extended an additional 90 days during the quarter ended May 31, 2005. A convertible note in the amount of $50 was repaid in the quarter ended February 28, 2005 in conjunction with an advance under the Note Payable - Related Party (see Note 4). The total amount due under these notes is $135 at May 31, 2005. These notes have been rewritten without a conversion feature and are now due July 31, 2005.
Note 10. Gain on Extinguishment of Debt
During the quarter ended November 30, 2003, the Company settled an unpaid capital lease obligation with a gain of approximately $349 which is included in miscellaneous income in the accompanying condensed consolidated statements of operations.
Note 11. Commitments
Included in the Company’s accrued liabilities are unpaid payroll taxes to the State of California of $37 and to the Internal Revenue Service of $210 for the calendar year 2004 and $77 to the State of California, $12 to the Commonwealth of Massachusetts and $424 to the Internal Revenue Service for calendar year 2005. The Company is currently working with counsel on payment plans for these unpaid payroll taxes.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and Plan of Operations and other portions of this report contain forward-looking information that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated by the forward-looking information. Factors that may cause such differences include, but are not limited to, availability and cost of financial resources, product demand, market acceptance and other factors discussed in this report under the heading “Business - Risk Factors.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and Plan of Operations should be read in conjunction with its consolidated financial statements and the related notes included elsewhere in this report.
Overview
A detailed overview of the Company's business and history is set forth in its Annual Report on Form 10-KSB for the year ended August 31, 2004, to which overview the Company makes reference.
Summary Corporate Background
The Company is a fabrication service provider of time sensitive, high tech, prototype and pre-production PCBs. The Company provides time-critical, PCB manufacturing services to original equipment manufacturers and electronic manufacturing services providers. The Company's prototype PCBs serve as the foundation in many electronic products used in telecommunications, medical devices, automotive, military applications, aviation components, networking and computer equipment. The Company's focus is on niche PCBs consisting of complex, high layer count, fine-lines and high-performance materials with capabilities to deliver in 24 hours, at premium pricing, as compared to standard 14 day lead time.
The Company's wholly-owned subsidiary Titan PCB West (“Titan”) was incorporated on March 27, 2001. On August 30, 2002, the Company acquired Titan through the merger of Titan EMS Acquisition Corp. with and into Titan. In connection with the Merger, the stockholders of Titan received shares of its common stock. For financial reporting purposes, the Merger has been treated as a reverse-merger, where Titan was the acquirer. Because the Merger is treated as a purchase of Ventures-National Incorporated, the historical financial statements of Titan became its historical financial statements after the Merger.
On August 6, 2002, Titan acquired all of the non-real estate assets and assumed all of the non-term loan liabilities of SVPC in exchange for the issuance to SVPC of 800,000 shares of Titan common stock, pursuant to the terms and conditions of a Contribution Agreement and Assignment and Assumption of Liabilities dated August 6, 2002.
Beginning in 2001, SVPC began acquiring cutting edge technology equipment, processes, customer lists and orders from competitors unable to remain in business principally due to a severe market downturn and excessive levels of indebtedness. On July 16, 2001, SVPC acquired all of the assets of SVPC Circuit Systems, Inc. and certain assets of CSI pursuant to a combined approved bankruptcy court sale. After these acquisitions, Titan acquired certain system integration division assets out of bankruptcy from creditors of Paragon Electronic Systems, Inc.
On August 6, 2002, Titan acquired certain intangible assets contributed by Louis George, a former executive officer and director, in exchange for 50,000 shares of Titan common stock valued at $1.50 per share, pursuant to the terms and conditions of a Contribution Agreement and Assignment and Assumption of Liabilities dated August 6, 2002.
Effective August 30, 2002, through its wholly-owned subsidiary Titan EMS Acquisition Corp. (“AcquisitionCo”), a Delaware corporation, the Company acquired all of the capital stock of Titan through an exchange of its common stock pursuant to an Agreement and Plan of Merger. In connection with the Merger, its fiscal year was also changed from June 30 in each year to August 31 in each year.
On February 27, 2003, through its wholly-owned subsidiary Titan PCB East, the Company acquired certain assets of Eastern Manufacturing Corporation ("EMC") for approximately $500,000 in a foreclosure sale from EMC’s secured lender Eastern Bank. The results from EMC’s operations have been reflected in its financial statements from the date of acquisition. No goodwill resulted from this acquisition.
Effective March 5, 2003, the Company purchased shares of common stock of Coesen representing 33.3% of its issued and outstanding shares of common stock from Mr. Howard Doane, the principal stockholder and an officer and director of EMC, in exchange for 30,000 shares of common stock and $5,000 in cash.
Plan of Operations
The Company's business strategy is to:
| · | target potential customers and industries needing prototype boards with required turnaround times of between 24 hours and the industry standard 14-days as well as preproduction needs requiring numerous types of materials; |
| · | aggressively market specialty manufacturing services for time sensitive, high-tech prototype and pre-production PCBs to the high technology industry and cater to customers who need time sensitive delivery of low to medium production runs with high quality and superior design and customer service interface whether for production or research and development; |
| · | expand its services to include flexible circuits andrigid-flex combinations in order to diversify sources of sales; |
| · | expand its sales through the marketing and manufacture of rigid-flex PCBs using the patented HVR Flex process available; |
| · | acquire and integrate strategic assets of companies producing time sensitive, high tech prototype and pre-production PCBs with other unique customers, technology or processes in order to accelerate entry into its target market; |
| · | acquire manufacturing facilities that have military certification and achieve military certification for its current facilities; |
| · | develop and continuously improve fabrication and sales processes in order to improve margins and competitive pricing; and |
| · | evaluation of other strategic acquisitions or initiatives outside of the company's core business. |
The Company plans to add and is in the process of adding additional independent sales representatives to extend its selling capacity. Commission costs therefore will fluctuate depending on the origin of sales orders with its internal sales team or its independent sales representative organization. The Company also plans to increase its marketing expenditures. There are no assurances that additional independent sales representatives or increased marketing expenditures will increase its sales.
Accounting Principles
Below the Company describes a number of basic accounting principles, which the Company employs in determining its recognition of sales and expenses, as well as a brief description of the effects that the Company believes that its anticipated growth will have on its sales and expenses in the future.
Sales
The Company recognizes sales upon shipment to its customers. The Company records net sales as its gross sales less an allowance for returns. At May 31, 2005, the Company had approximately 360 customers. The Company provides its customers a limited right of returns for defective PCBs and records an allowance against gross sales for estimated returns at the time of sale based on its historical results. Because its customers quickly test the PCBs the Company manufactures for them, the majority of returns for defects occur within the first 15 days following shipment. At May 31, 2005, the Company provided an allowance against accounts receivable for returns of $14,000. Actual returns may differ materially from its estimates, and revisions to the allowances may be required from time to time.
The Company expects the number and complexity of PCBs the Company sells to fluctuate with the changes in demand from its customers and, the prices the Company charges its customers to fluctuate as a result of intense competition in the PCB industry and the current economic situation and its impact on the high technology market. Until industry conditions improve and demand increases, the Company expects that decreased average pricing will continue to negatively affect its sales.
The Company expects sales to grow as the Company develops its reputation in its target market. Acquisitions will also increase sales as well as cause disruption as facilities, employees, and processes are integrated. The Company expects these fluctuations to be relatively short lived while expecting the sales growth to be more permanent with the variable of market demand as a condition.
Future demand and product pricing will depend on many factors including product mix, levels of advanced technology, capacity utilization, competitive pressure in the PCB industry, and economic conditions affecting the markets the Company serves and the electronics industry in general. The current uncertainty regarding the level and timing of an economic recovery in its product markets and volatility in its customer forecasts continue to make its forecasting less reliable than in prior periods.
In each case, the Company's plan of operations anticipates that its internal growth, as well as acquisitions shall materially contribute to its ability to increase its sales as described above.
Through the time of its acquisition of EMC, the Company’s primary source of sales were from rigid bare-board manufacturing that provides time sensitive, high technology, and superior quality PCB’s to the electronics industry at a competitive price. Currently Titan additionally receives sales from customers who need rigid-flex and flex bare-board manufacturing that provide time sensitive, high technology, and superior quality PCBs. In addition, Titan has expanded its sales focus to the military market place, which includes those vendors supplying the U.S. military with products in its target market.
Cost of Sales
Cost of sales consists of materials, labor, outside services and overhead expenses incurred in the manufacture and testing of its products. Many factors affect its gross margin, including, but not limited to, capacity utilization, production volume and yield. The Company does not participate in any long-term supply contracts and it believes there are a number of high quality suppliers for the raw materials the Company uses. Its cost of goods, as a percentage of sales, varies depending on the complexity of the PCBs the Company manufactures in any given period.
Based upon its plan of operations, the Company anticipates that its cost of sales will increase as its sales increase, but that cost of sales as a percentage of net sales shall generally decrease as its sales increase. The Company believes that the amount of the decrease of this percentage over the next several fiscal periods will be dependent in large part upon the source of the increase in sales. For example, an increase in its penetration in the existing market for its goods and services will permit us to increase sales at a low cost in part by causing us to utilize a greater portion of its existing manufacturing capacity, an expense which the Company already incurs. On the other hand, an increase in its sales attributable to offering a greater portfolio of products including much more complex products and services may result in less of a decrease in such percentage as such activities may initially be less efficient than its existing operations.
Included in cost of sales is overhead which is relatively fixed. Materials and labor are semi-variable and are influenced by the complexity of orders as well as the quantity of orders. As its business is continually changing with regard to the type of product produced, the Company plans to implement broader use of production systems to control the overtime in production as well as the use of materials in production. The Company anticipates that these systems will assist in the pricing of its products with the objective to be more competitive and profitable in its target market.
The Company intends to continue to expand and upgrade its production capability as well as its production systems and the financial systems interface in order to better manage material, labor and overhead costs.
Operating Expenses
The Company's operating expenses for the three and nine month periods ended May 31, 2005 and 2004 are comprised of costs for sales and marketing, general and administrative.
Sales and marketing expenses consist primarily of salaries and commissions paid to the Company's internal sales team, commissions paid to independent sales representatives and costs associated with advertising and marketing activities. The Company expects its selling and marketing expenses to fluctuate as a percentage of sales as the Company adds new personnel, develop new independent sales representative channels and advertise its products.
General and administrative expenses include all corporate and administrative functions that serve to support its current and future operations and provide an infrastructure to support future growth. Major items in this category include management and staff salaries and benefits, travel, network administration and systems/data processing, training, rent/leases and professional services. The Company expects these expenses to fluctuate as a percentage of sales as the Company expands its business. The Company intends to slightly expand its customer and sales support operation in order to support the increased complexity and volume of its PCB business and its anticipated use of indirect sales. The Company does not expect a material increase in sales and marketing expense that is not consistent with an increase in sales.
Interest Expense
Interest expense, including finance charges, relates primarily to an accounts receivable line of credit with Laurus, term loans with Laurus, and the associated amortization of discounts on convertible debt with Laurus and others. The Company expects interest expense to fluctuate based on the timing of borrowings under its lines of credit.
Results of Operations
The following table sets forth statement of operations data for the three and nine month periods ended May 31, 2005 and 2004 and should be read in conjunction with the“Management’s Discussion and Analysis of Financial Condition and Results of Operations and Plan of Operations” and its consolidated financial statements and the related notes appearing elsewhere in this report.
| | | Three Months Ended | | Nine Months Ended | |
| | | 05/31/05 | | 05/31/04 | | 05/31/05 | | 05/31/04 | |
| Net sales | | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | | | 89.6 | | | 81.1 | | | 93.2 | | | 87.3 | |
| Gross profit | | | 10.4 | | | 18.9 | | | 6.8 | | | 12.7 | |
| | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | |
| Sales and marketing | | | 7.6 | | | 7.6 | | | 9.3 | | | 8.8 | |
| General and administrative | | | 14.9 | | | 7.7 | | | 14.4 | | | 29.9 | |
| Total operating expenses | | | 22.5 | | | 15.3 | | | 23.7 | | | 38.7 | |
| | | | | | | | | | | | | | |
| Operating income (loss) | | | (12.1 | ) | | 3.6 | | | (16.9 | ) | | (26.0 | ) |
| Interest expense | | | (11.5 | ) | | (36.4 | ) | | (16.0 | ) | | (22.0 | ) |
| Miscellaneous | | | 0.0 | | | 0.0 | | | 0.0 | | | 1.7 | |
| Net loss | | | (23.6 | ) | | (32.8 | ) | | (32.9 | ) | | (46.3 | ) |
Three Months Ended May 31, 2005 Compared to the Three Months Ended May 31, 2004.
Net Sales
Net sales decreased by $156,000 or 3.3% from $4,727,000 in the three months ended May 31, 2004 to $4,571,000 in the three months ended May 31, 2005. This decrease resulted from increased sales in the Company's West facility which are primarily due to the generation of new customers; and a decline of sales in its East facility. Military contracts materialize slowly but when they materialize remain solid for a long span of time and at which time are expected to greatly increase the sales in the Company's East operation.
Cost of Sales
Cost of sales increased $264,000 or 6.9%, from $3,832,000 in the three months ended May 31, 2004 to $4,096,000 in the three months ended May 31, 2005. As a percentage of sales, these costs increased from 81.1% in the three months ended May 31, 2004 to 89.6% in the three months ended May 31, 2005. The increase in cost of sales percent resulted from a greater number of qualification boards built to the new military specifications which should result in future orders. In addition there has been a steady increase in the Company's percentage of products sold through it's offshore fulfillment program. These products have smaller margins than boards built by the Company's but provide additional access to customers through expanded production capabilities.
Gross Profit
Gross profit decreased by $420,000 or 46.9%, from $895,000 in the three months ended May 31, 2004 to $475,000 in the three months ended May 31, 2005. As a percentage of sales, gross profit decreased from 18.9% in the three months ended May 31, 2004 to 10.4% in the three months ended May 31, 2005. The decrease was primarily due to higher cost associate with the offshore fulfillment program described above.
Operating Expenses
Sales and marketing expenses decreased $14,000 from $361,000 in the three months ended May 31, 2004 to $347,000 in the three months ended May 31, 2005 and as a percentage of sales remained relatively flat at 7.6% of sales.
General and administrative expenses increased by $316,000 or 86.8%, from $364,000 in the three months ended May 31, 2004 to $680,000 in the three months ended May 31, 2005. This increase was due to an expense for potential uncollectible receivables from one customer and a settlement related to the departure of an executive from the company.
Interest Expense
Interest expense decreased by $1,196,000, or 69.5%, from interest expense of $1,721,000 in the three months ended May 31, 2004 to $525,000 in the three months ended May 31, 2005 and as a percentage of sales, interest expense decreased from 36.4% in the three months ended May 31, 2004 to 11.5% in the three months ended May 31, 2005. The large decrease was due to a non-cash charge in the prior year dealing with the conversion of notes from our largest shareholder into stock at beneficial conversion rates. In the three months ended May 31, 2005, interest expense relates primarily to amortization of loan discounts associated with the Crivello and Laurus notes.
Net Loss
Net loss decreased $473,000 from $1,550,000 in the three months ended May 31, 2004 to $1,077,000 in the three months ended May 31, 2005 mainly due to the decrease in non-cash interest expenses incurred in the three months ended May 31, 2005 due to the reasons noted above offset by reduced gross profit and increased general and administrative expenses.
Nine Months Ended May 31, 2005 Compared to the Nine Months Ended May 31, 2004.
Net Sales
Net sales increased by $454,000 or 3.8% from $11,976,000 in the nine months ended May 31, 2004 to $12,430,000 in the nine months ended May 31, 2005. This increase resulted primarily from the 17.9% additional sales achieved in the West operation which is primarily due to the generation of new customers; offset by the 12.7% decrease in sales in its East operation. The Company's East operation experienced a reduction during the first three months of the year but has since increased. This was due to sales efforts being spent on long-term military contracts due to the new military P31032 specification. Military contracts materialize slowly but when they materialize remain solid for a long span of time and at which time are expected to greatly increase the sales in the Company's East operation. No assurances can be given that such increases will be achieved.
Cost of Sales
Cost of sales increased $1,135,000, or 10.9%, from $10,451,000 in the nine months ended May 31, 2004 to $11,586,000 in the nine months ended May 31, 2005. As a percentage of sales, these costs increased from 87.3% in the nine months ended May 31, 2004 to 93.2% in the nine months ended May 31, 2005. The increase in cost of sales percent resulted from a greater number of qualification boards built to the new military specifications which should result in future orders. In addition there has been a steady increase in the Company’s percentage of product sold through its offshore fulfillment program. These products have smaller margins than boards built by the Company but provide additional access to customers through expanded production capabilities.
Gross Profit
Gross profit decreased by $681,000 or 44.7%, from $1,525,000 in the nine months ended May 31, 2004 to $844,000 in the nine months ended May 31, 2005. As a percentage of sales, gross profit decreased from 12.7% in the nine months ended May 31, 2004 to 6.8% in the nine months ended May 31, 2005. The decrease in gross profit resulted primarily from the higher costs mentioned above.
Operating Expenses
Sales and marketing expenses increased $93,000 from $1,057,000 in the nine months ended May 31, 2004 to $1,150,000 in the nine months ended May 31, 2005 and as a percentage of sales increased from 8.8% of sales in the nine months ended May 31, 2004 to 9.3% of sales in the nine months ended May 31, 2005. This was primarily due to an increase in activities from the outside sales representatives and the commissions associated with those sales.
General and administrative expenses decreased by $1,782,000 or 49.8%, from $3,579,000 in the nine months ended May 31, 2004 to $1,797,000 in the nine months ended May 31, 2005. The decrease was due in large part to the higher amortization of deferred compensation and stock issuances for consulting services issued in the prior fiscal year.
Interest Expense
Interest expense decreased by $651,000, or 24.6%, from interest expense of $2,642,000 in the nine months ended May 31, 2004 to $1,991,000 in the nine months ended May 31, 2005 and as a percentage of sales, interest expense decreased from 22.0% in the nine months ended May 31, 2004 to 16.0% in the nine months ended May 31, 2005. In the nine months ended May 31, 2004, interest expense related primarily to interest expense on a 60 day note which carried a 10% premium and the issuance of 600,000 shares of stock as well as the expense associated with the conversion of notes payable to related parties at beneficial conversion rates. In the nine months ended May 31, 2005, interest expense related mainly to the amortization of loan discounts associated with its Crivello and Laurus convertible debt as well as other convertible debt the Company has issued.
Miscellaneous
Miscellaneous income decreased $201,000 from $203,000 in the nine months ended May 31, 2004 to $2,000 in the nine months ended May 31, 2005. In the nine months ended May 31, 2004, the Company paid off a capitalized lease obligation that was on the books for $434,000 for $85,000 recording a $349,000 gain offset by the penalties incurred upon the early payoff of various debt obligations upon the closing of the Laurus transaction.
Net Loss
Net loss decreased $1,458,000 for the nine months ended May 31, 2005 from $5,550,000 in the nine months ended May 31, 2004 to $4,092,000 in the nine months ended May 31, 2005 for the reasons noted above offset by reduced gross profit and increased administrative expenses.
Liquidity and Capital Resources
The Company's principal sources of liquidity have been cash provided by Laurus and an infusion of capital from the Company's largest shareholder. The Company's principal uses of cash have been for operations, to meet debt service requirements, and to finance capital expenditures. The Company anticipates these uses will continue to be its principal uses of cash in the future.
The Company will require additional financing in order to implement its business plan. The Company currently anticipates capital expenditures of at least $1.0 million during the next 12 months. If the anticipated cash generated by its operations are insufficient to fund requirements and losses, the Company will need to obtain additional funds through third party financing in the form of equity, debt or bank financing. Particularly in light of its limited operating history and losses incurred, there can be no assurance that the Company will be able to obtain the necessary additional capital on a timely basis or on acceptable terms, if at all. In any of such events, the Company's business, prospects, financial condition, and results of operations would be materially and adversely affected. As a result of any such financing, the holders of its common stock may experience substantial dilution.
The following factors, among others, could cause actual results to differ from those indicated in the forward-looking statements included in this Form 10Q-SB: pricing pressures in the industry; the loss of any of its major customers; a continued downturn in the economy in general or in the technology sector; a further decrease in demand for electronic products or continued weak demand for these products; its ability to attract new customers. These factors or additional risks and uncertainties not known to us or that the Company currently deems immaterial may impair business operations and may cause its actual results to differ materially from any forward-looking statement.
Although the Company believes the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. The Company is under no duty to update any of the forward-looking statements after the date of this report to conform them to actual results or to make changes in its expectations.
In the nine months ended May 31, 2005, net cash used by operations was $1,085,000 while in the nine months ended May 31, 2004 cash used in operating activities was $3,663,000, a decrease of $2,578,000. This decrease was primarily the result of the Company's accounts receivable leveling off as well as the extension of payables and accruals due to an immediate cash shortage.
In the nine months ended May 31, 2005, the Company utilized $65,000 for the purchase of fixed assets compared to $228,000 used for the purchase of fixed assets in the nine months ended May 31, 2004, a decrease of $163,000, or 71.5%. As the Company achieves positive operating cash flow, the Company expects its spending on capital expenditures to increase during the fourth quarter of this fiscal year.
In the nine months ended May 31, 2005, net cash provided by financing activities was $652,000 while in the nine months ended May 31, 2004 cash provided by financing activities was $3,296,000. The large amount provided last year was the Laurus debt entered into in November 2003 offset by the debt that was extinguished upon the issuance of the Laurus debt.
On November 30, 2004, the Company entered into a 10% Convertible Promissory Note with Mr. Frank Crivello, a related party. This note is convertible into the Company's Common Stock at $0.12/share, expired on January 31, 2005 but has been extended by agreement from both parties. The Company initially borrowed $300,000 and during the quarter ended February 28, 2005 borrowed an additional net $282,500 with the ability to borrow up to $1,000,000. Since the fair market value of its stock on the borrowing dates ranged from $0.15 to $0.30 the Company recorded beneficial conversion features of which some were limited to the amount borrowed. These beneficial conversion features were recorded as additional paid in capital and as a discount on the debt which have all been amortized to interest expense during the nine months ended May 31, 2005.
On November 20, 2003, the Company entered into a loan and security agreement with Laurus pursuant to which the Company is permitted to borrow up to $4,000,000 under a revolving line of credit (the "Credit Agreement"). On April 4, 2005, the Company and Laurus entered into an agreement to provide up to an additional $1,000,000 over-advance pursuant to the terms of the Credit Agreement. Concurrently with such agreement, Farwell Equity Partners, LLC ("Farwell"), a Delaware limited liability company, pledged certain assets to secure the repayment of the over-advance. David Marks, a principal stockholder and chairman of the board of the Company is the managing member of Farwell. The Company also agreed to indemnify Farwell for any loss it may incur as a result of the pledge of assets. During the quarter ended May 31, 2005, the Company borrowed $450,000 under this over-advance.
On November 30, 2004, the Company's board of directors formed a strategic committee to explore the sale or merger of the Company and appointed Kenneth Shirley the chairman of this committee. This committee is still active but no longer has Mr. Shirley as its chairman. Effective June 17, 2005, Mr. Shirley resigned from the board of directors.
Quantitative And Qualitative Disclosures About Market Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s long-term debt since the interest rate charged by Laurus is prime plus 3% but at the present we do not enter into interest rate swap agreements to guard against any fluctuation in the prime rate.
The Company also has interest rate risk that effects the increase or decrease in the amount of interest income the Company can earn on our available funds for investment. The Company ensures the safety and preservation of its invested principal funds by limiting default risk, market risk and reinvestment risk. The Company mitigates default risk by investing in high quality, short-term securities. The Company does not believe that changes in interest rates will have a material effect on our liquidity, financial condition or results of operations.
Impact of Inflation
The Company believes that its results of operations are not dependent upon moderate changes in inflation rates as the Company expects it will be able to pass along component price increases to its customers.
Seasonality
The Company has experienced sales fluctuations due to customer business shut downs over December holidays and the slow down of purchasing activities in the summer during peak vacation months.
Contractual Obligations
The following table presents the Company's contractual obligations as of May 31, 2005 for the remaining of this fiscal year as well as over the next five fiscal years. The Company does not have any contractual obligations that extend beyond five fiscal years:
Payment by period
