First quarter fiscal 2006 compared to first quarter fiscal 2005
Our sales for the three months ended July 31, 2005 were $4,112,166, a decrease of 20.5% from the three months ended July 31, 2004 sales of $5,171,758. Our operating profit for the three months ended July 31, 2005 was $308,861, compared to $500,443 for the three months ended July 31, 2004.
Discussion of specific operations are as follows:
Aircraft Modifications:Sales from the Aircraft Modifications business segment including modified aircraft decreased 15.7% from $3,088,964 for the three months ended July 31, 2004, to $2,604,794 for the three months ended July 31, 2005. Revenues for the Aircraft Modification for Reduced Vertical Separation Minimums (RVSM) decreased by 46%. Considerable time was spent on additions to the RVSM STC and certification of special mission STC's for modification customers. These events used capacity and reduced RVSM completions. Revenues generated from other modification services increased 105%. The modifications segment had an operating profit of $69,712 for the three months ended July 31, 2005 compared to income of $528,622 for the three months ended July 31, 2004.
Looking forward to fiscal 2006 we anticipate continued revenues relating to RVSM installation. We have projected the installation and sales of approximately 50 to 100 Lear 20 series and Falcon 20 series RVSM kits during the next two years. In addition to the RVSM sales, we expect to experience some increase in our base modification sales. As the economy grows aircraft owners may elect to update, modify, and purchase business aircraft. A shift to business aircraft ownership directly impacts our aircraft modification revenues. Although we cannot anticipate the future we must always consider the negative impact of items such as the 9-11 event, hurricane Katrina, rapid raise in fuel prices or economic downturns.
Aircraft Acquisitions and Sales: There was no activity for the three months ended July 31, 2005 or July 31, 2004. Management expects this business segment to increase in future years due to increased aircraft acquisitions, modifications and resale's. FAA required modifications to the business aircraft fleet may increase customer demand for company owned aircraft.
Avionics:Sales from the Avionics business segment increased 20.9%, from $637,389 for the three months ended July 31, 2004, to $770,435 for the period ended July 31, 2005. This increase is directly related to sales of defense products. Operating profits increased from $51,964 in the three months ended July 31, 2004 to $219,629 for the period ended July 31, 2005. Management expects this business segment to significantly increase in future years due to the addition of new fuel system protection devices like the TSD and classic aviation defense products.
Services - SCADA Systems and Monitoring Services:Revenue from Monitoring Services increased from $284,745 for the three months ended July 31, 2004 to $338,111 for the three months ended July 31, 2005, an increase of 18.7%. During the three months ended July 31, 2005, we maintained a relatively level volume of long-term contracts with municipalities. We had increased revenue due to significant hurricane activity during fiscal 2005. Revenue fluctuates due to the introduction of new products and services and the related installations of these products. Our contracts with our two largest customers have been renewed for fiscal 2006. An operating profit of $25,157 in Monitoring Services was recorded for the three months ended July 31, 2005, compared to a loss of $1,318 for the three months ended July 31, 2004.
Gaming: Revenues from management services related to gaming declined 11.5% from $290,977 for the three months ended July 31, 2004, to $257,505 for the three months ended July 31, 2005. This decrease is related to the costs of changing from Class II to Class III operations.
Corporate / Professional Services:These services include the architectural services of BCS Design, Inc., arrangements for financing, and on site contract management of establishments for Indian tribes and others. Flight and engineering services are also provided. Management consulting and professional fees were $141,332 for the three months ended July 31, 2005 and $869,684 for the three months ended July 31, 2004. Sales recorded from the development programs related to these services for pass-thru costs were zero for the three months ended July 31, 2005.
Selling, General and Administrative (SG&A):Expenses were $1,557,142, or 37% of revenues for the three months ended July 31, 2005 and $772,577, or 15% of revenue for the three months ended July 31, 2004. Business insurance in 2004 was $94,000. We experienced a substantial increase of over 124% to approximately $211,000 for the three months ended July 31, 2005. In fiscal 2005 we increased both the sales, engineering and administrative staff to support the growth of the business. This increase in staffing accounted for over $320,000 in additional salaries. The sales per employee for the three months ended ending July 31, 2005 was $46,204 compared to $69,888 for the three months ended July 31, 2004. Additional rent and hangar space accounted for approximately $20,000 of the increase in general expenses. Fuel and aircraft maintenance increased by more than $55,000 during the first quarter of this fiscal year. In an effort to increase our sales in Mexico and the United States additional travel and marketing expense accounted for approximately $50,000. Outside professional services related to new STC applications in process were approximately $210,000.
Other Income (Expense):Other expense increased from $76,513 in the three months ended July 31, 2004 to $93,252 for the three months ended July 31, 2005. This interest expense was a result of financing additional inventory and asset purchases.
We employed 89 at July 31, 2005, and 74 at July 31, 2004.
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EARNINGS
Income for the three months ended July 31, 2005 was $215,609. This is comparable to income of $423,929 in the three months ended July 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Borrowed funds have been used primarily for working capital. Our first bank line of credit is $500,000. Our unused line of credit at July 31, 2005 was $339,838. Bank debt related to the Company's operating line was $160,162 at July 31, 2005, and $309,934 at July 31, 2004. The interest rate is prime plus two (with a floor of 7.0%). As of July 31, 2005, the interest rate was 8.6%. This note is collateralized by a first and second position on all assets of the Company.
We opened a second bank line of credit on February 10, 2004 of $1,500,000. This line of credit is used to support the additional inventory requirements of the RVSM product line. Debt relating to this line of credit at July 31, 2005 was $1,100,000. The interest rate is prime plus two (with a floor of 7.0%) As of July 31, 2005, the interest rate was 8.6%. This note is collateralized by a first and second position on all assets of the Company.
We believe both lines of credit will be extended when they are due and do not anticipate the repayment of these notes in fiscal 2006. Our first line of credit has been extended to February 2006 with no changes in the conditions of the terms. The second line of credit has been extended to September 2005 with principal payments of $200,000 per month. If the Bank were to demand repayment of all notes-payable we currently do not have enough cash to pay off the notes without materially adversely affecting the financial condition of the Company.
A note payable to a bank in the amount of $850,000 was entered into in December 2003, with interest of prime plus 2% (with a floor of 6 %). At July 31, 2005 and July 31, 2004 the balance was $830,000 and $850,000 respectively. The note is collateralized by an Aircraft and Engine Security Agreement. Until June 2005, we had made interest payments only. Thereafter the note was extended for one year with monthly principal payments of $10,000 plus interest.
A note payable to a bank in the amount of $650,000 was entered into in December 2003, with interest at prime. At April 30, 2005 and 2004 we had borrowed $650,000 and $55,000 respectively on this note. The note is collateralized by an Aircraft and Engine Security Agreement.
We have unsecured demand notes to individuals totaling $108,500. Interest ranges from 12% to 14% on these notes.
We are not in default of any of our notes as of July 31, 2005.
We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in 2006 and beyond.
We do not, as of July 31, 2005 have any material commitments for other capital expenditures other than the terms of the Indian gaming Management Agreements. Depending upon the development schedules, we will need additional funds to complete its currently planned Indian gaming opportunities. We will use current cash available as well as additional funds, for the start up and construction of gaming facilities. We anticipate initially obtaining these funds from internally generated working capital and borrowings. After a few gaming facilities become operational, gaming operations will generate additional working capital for the start up and construction of other gaming facilities. We expect that our start up and construction financing of gaming facilities will be replaced by other financial lenders, long term financing through debt issue, or equity issues.
Analysis and Discussion of Cash Flow
During the quarter our cash position increased by $308,083. The increase in the cash flow was attributed to an Aircraft loan of $1,660,000 of which $1,127,000 was used in the purchase of two (2) aircraft. RVSM inventory decreased by approximately $300,000.
The increase in inventory is expected to cover less than four months of aircraft modifications. We believe all our inventory will be realized in the normal course of business. Lead-time for the components is dictated by the market place resulting in a build up of inventory to support sales and to avoid halting production because of material shortages.
Revenue Recognition: We perform aircraft modifications under fixed-price contracts. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the direct labor costs incurred compared to total estimated direct labor costs.
Revenue for SCADA services, Gaming Management, and other Professional Services are recognized on a monthly basis as services are rendered. Payments for these services are received within 30 days of invoicing.
In regard to warranties and returns our products are special order and are not suitable for return. Our products are unique upon installation and tested prior to their release and have been accepted by the customers. In the rare event of a warranty claim, the claim is processed through the normal course of business; this may include additional charges to the customer. In our opinion any future warranty work would not be material to the financial statements.
Critical Accounting Policies:
Our accounting estimates include bad debt of the accounts receivable and amortization of the Supplemental Type Certificates (STC). Bad debt is calculated on the historical write-off of bad debt of the individual subsidiaries. In addition to the historical value, invoices are considered a bad debt if no payment has been made in the past 90 days. Based on these estimates we believe we maintain adequate reserves. Although we review these policies on quarterly basis, we do not anticipate substantial changes to these estimates in the future. Over 99% of the aircraft modifications are sold based on cash on delivery terms, and the remaining subsidiaries customer base is stable business and repeat sales. These factors are presented in the financial statements.
Estimates: 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.
Long-lived assets: Long-lived assets and identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from use of the assets and their eventual disposition. We determined that as of July 31, 2005, there had been no impairment in the carrying value of long-lived assets.
Supplemental Type Certificates: Supplemental Type Certificates (STCs) are authorizations granted by the Federal Aviation Administration (FAA) for specific modification of a certain aircraft. The STC authorizes us to perform modifications, installations and assemblies on applicable customer-owned aircraft. Costs incurred to obtain STCs are capitalized and subsequently amortized against revenues being generated from aircraft modifications associated with the STC. The costs are expensed as services are rendered on each aircraft through costs of sales using the units of production method. The legal life of an STC is indefinite.
Changing Prices and Inflation
From fiscal year 2004 to fiscal year 2005 we have experienced an increase in airplane and truck operating costs of approximately 100%. This is mainly related to increases in fuel costs. We anticipate fuel costs to continue to rise in fiscal year 2006.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
FORWARD LOOKING INFORMATION
The information set forth below includes "forward-looking" information as outlined in the Private Securities Litigation Reform Act of 1995. The Cautionary Statements, filed by us as Exhibit 99 to its Form 10-K, are incorporated herein by reference and you are specifically referred to such Cautionary Statements for a discussion of factors which could affect our operations and forward-looking statements contained herein
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