FIRST QUARTER FISCAL 2008 COMPARED TO FIRST QUARTER FISCAL 2007
Our sales for the three months ended July 31, 2007 were $4,707,328, an increase of 53% from the three months ended July 31, 2006 with sales of $3,076,062. We experienced a 531% increase in earnings before taxes from the first quarter of 2006 to the first quarter of 2007. Our operating profit for the three months ended July 31, 2007 was $410,225, compared to $163,905 for the three months ended July 31, 2006, an increase of 150%.
Discussion of the specific changes by operation at each business segment follows:
Aircraft Modifications: Sales from Aircraft Modifications including modified aircraft decreased 7.2% from $2,041,446 in the first three months of fiscal year 2007 to $1,894,679 in the current three months of fiscal 2008. The modifications segment had an operating profit of $112,972 in the three months ended July 31, 2007, compared to a profit of $309,584 in the three months ended July 31, 2006. Avcon RVSM sales increased by approximately $234,982. Revenues generated from other modification services decreased $381,748 in the three months ended July 31, 2007.
We believe we will sell and install approximately an additional 25 to 50 Lear 20 & 30 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 positively 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, increases in fuel prices and general economic downturns.
Aircraft Acquisitions and Sales: There was no activity in the three months ended July 31, 2006 or in the three months ended July 31, 2007. We acquired no aircraft during the three months ended July 31, 2007.Management expects this business segment to have increased sales in the next year.FAA required modifications to the business aircraft fleet may increase customer demand for company owned aircraft.
Avionics: Sales from Avionics increased 711%, from $204,595 in the three months ended July 31, 2006, to $1,659,311 in the three months ended July 31, 2007. This increase is directly related to sales of defense products. Operating profits increased from a loss of $163,497 for the three months ended July 31, 2006 to a profit of $516,259 for the three months ended July 31, 2007. The increase in operating profit is related to an increase in sales in the first quarter.Management expects this business segment to significantly increase in future years due to the addition of new fuel system protection devices like the TSD, GFI, and other classic aviation defense products.
Services - SCADA Systems and Monitoring Services: Revenue increased from $399,849 for the three months ended July 31, 2006 to $471,610 for the three months ended July 31, 2007, an increase of 17.9%. During the three months ended July 31, 2007 we maintained a relatively level volume of long-term contracts with municipalities. We had increased revenue due to a significant contract for the rehabilitation of city lift stations. We anticipate the revenues from additional lift station rehabilitations to continue for the next few years. Revenue fluctuates due to the introduction of new products and services and the related installations of these types of products. Our contracts with our two largest customers have been renewed through fiscal 2008.
Gaming: Revenues from management services related to gaming decreased 2.5% from $360,409 for the three months ended July 31, 2006 compared to $351,277 for the three months ended July 31, 2007. This decrease was due to a flood that occurred in Oklahoma which caused the Stables to be shut down for seven days.
During the three months ended July 31, 2007 we expensed approximately $170,000 for the development of Gaming in Kansas compared to approximately $57,000 for the three months ended July 31, 2006 an increase of 200%. We expect these increased costs to continue for the remainder of the year.
Corporate / Professional Services: These services include the architectural services of BCS Design, Inc., arrangements for financing, on site contract management of gaming establishments, flight, and engineering services. Management consulting and professional fees, including sales related to completed projects, were $330,451 for the three months ended July 31, 2007 and $69,762 for the three months ended July 31, 2006, an increase of 373%. Projects under construction were approximately $1,883,000 at July 31, 2007.
Selling, General and Administrative (SG&A): Expenses were $1,114,216 or 24% of revenues for the three months ended July 31, 2007 compared to 26.6% of revenues for the three months ending July 31, 2006. Business overhead expenses were maintained at relatively the same level as last year.
Other Income (Expense): Other expenses increased from $119,930 in the three months ended July 31, 2006 to $132,639 for the three months ended July 31, 2007. The additional interest expenses of $12,709 were a combination of increased interest rates and additional borrowings.
Earnings:Our net income for the prior three months period ended July 31, 2006 was $43,975. Our net income for the current three months ended July 31, 2007 was $231,839.
Employees: We employed 88 at July 31, 2007 and 93 at July 31, 2006.
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LIQUIDITY AND CAPITAL RESOURCES
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 fiscal 2008 and beyond.
We do not, as of July 31, 2007, have any material commitments for other capital expenditures other than the terms of the Indian Gaming Management Agreements should any additional casinos materialize. We will need additional funds to complete our 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.
Analysis and Discussion of Cash Flow
During the first quarter of fiscal year 2008 our cash position decreased by $209,512 and can be attributed to the following. Cash provided by operating activities improved by $135,318. During the first quarter fiscal 2008 we reported net income of $231,839. Adjustments to net income provided by operations consisted of a non-cash deduction for depreciation of $37,160. Cash used for operating activities resulted in a reduction of accounts receivable of $218,298. Inventories were reduced by $476,288. We used funds for real-estate projects under construction of $350,684. We have reduced our build up of inventory for the avionics and aircraft modification divisions but continue to have approximately six months of additional inventory for the defense product components and RVSM components. Lead-time for the components is dictated by the market place resulting in the build up of inventory to support sales and avoid halting production because of material shortages. We believe our inventory will be reali zed in the normal course of business. Prepaid expenses and accounts payable used $69,665. Our defense customers decreased deposits with us resulting in a change of $513,000 during the first quarter fiscal 2008. We have invested approximately $23,000 for computer hardware and software in the first quarter of fiscal 2008. Cash used by financing activities was $322,164. We reduced our line of credit borrowing by approximately $500,000 while increasing our borrowings by a net of $185,047 of which can be attributed to real estate projects under construction. 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 off-the-shelf items and aircraft sales is recognized on the date of sale.
Revenue from Avionics are recognized when shipped and payment for materials are due within 30 days of invoicing. Revenue for SCADA services, Gaming Management, and other Corporate/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
Bad Debts: Bad debts are calculated on the historical write-off of bad debts of the individual subsidiaries. Invoices are considered a bad debt if no payment has been made in the past 90 days. We review these policies on quarterly basis, and based on these reviews we believe we maintain adequate reserves. We do not anticipate substantial changes to these estimates in the future.
Use of 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, 2007, 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. We believe we have enough future sales to fully amortize our STC development costs.
Advances for Indian Gaming Developments: We are advancing funds for the establishment of Indian gaming. These funds have been capitalized in accordance with Statements of Financial Accounting Standards (SFAS) 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects." Such standard requires costs associated with the acquisition, development, and construction of real estate and real estate-related projects to be capitalized as part of that project.
Our advances represent costs to be reimbursed upon approval of Indian gaming in several locations. We have agreements in place which require payments to be made to us for the respective projects upon opening of Indian gaming facilities. Once gaming facilities have gained proper approvals, we plan to enter into a note receivable arrangement with the Tribe to secure reimbursement of advanced funds for that particular project.
We have advanced and invested a total of $4,718,991 in Indian gaming developments. We have reserves of $2,912,440, at July 31, 2007 and July 31, 2006. We believe that our advances for Indian gaming developments will be totally reimbursed as casinos are opened. We believe it is necessary to establish reserves against the advances due to the fact that all of the proposed casinos are involved in legal and governmental actions whose outcome is not certain nor is there any time frame for resolution. The reserve amount is an estimate of the value we would receive if a Tribal casino was not opened and we were forced to liquidate the assets that we have acquired with our advances. These assets were intended to be used with Tribal casinos and consist of the purchase of land and land improvements related to the development of Indian Gaming facilities. We believe that these tracts could be developed and sold for residential and commercial use to recover our advances if the gaming enterprises do not open.
Changing Prices and Inflation
We did experience some pressure from inflation in fiscal 2008. These include increases in airplane travel and transportation costs. This additional cost may not be transferable to our customers resulting in lower income. We anticipate long-term fuel costs and interest rates to continue to rise.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Part I Item 3:
Quantitative and Qualitative Disclosures about Market Risk.
None
Part I Item 4
Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective.
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