YEAR TO DATE OCTOBER 31, 2008 COMPARED TO YEAR TO DATE OCTOBER 31, 2007
Our sales for the six months ended October 31, 2008 were $9,259,896, an increase of 4% from the six months ended October 31, 2007 with sales of $8,941,361. Our operating profit for the six months ended October 31, 2008 was $651,072, compared to $745,411 for the six months ended October 31, 2007, a decrease of 13%.
Discussion of the specific changes by operation at each business segment follows:
Aircraft Modifications: Sales from Aircraft Modifications including modified aircraft increased 29.5% from $4,399,214 in the first six months of fiscal year 2008 to $5,698,049 in the current six months of fiscal 2009. The modifications segment had an operating profit of $520,072 in the six months ended October 31, 2008, compared to a profit of $148,865 in the six months ended October 31, 2007. Avcon RVSM sales decreased by approximately $668,000. Revenues generated from other modification services increased by approximately $1,966,000 in the six months ended October 31, 2008.
During the past few years we have seen a significant increase in aircraft camera modification. Several custom engineering projects and aircraft modifications have also attributed to our increase in 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 September 11, 2001event, increases in fuel prices, and general economic downturns.
Aircraft Acquisitions and Sales: There was no activity in the six months ended October 31, 2007 or in the six months ended October 31, 2008. We acquired no aircraft during the six months ended October 31, 2008.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 decreased 50%, from $2,601,091 in the six months ended October 31, 2007, to $1,305,966 in the six months ended October 31, 2008. Operating profits decreased from $488,540 for the six months ended October 31, 2007 to an operating loss of $299,374 for the six months ended October 31, 2008. The decrease in operating profit is directly related to the significant decreases in sales, material obsolescence, and rework labor costs. Due to changes in the current global economy we are unable to accurately forecast future revenue for the defense product lines. Our current backlog is approximately $1,500,000.
Services - SCADA Systems and Monitoring Services: Revenue increased from $848,412 for the six months ended October 31, 2007 to $940,068 for the six months ended October 31, 2008, an increase of 11%. During the six months ended October 31, 2008 we maintained a relatively level volume of long-term contracts with municipalities. Revenues from additional lift station rehabilitations resumed and will generate additional revenue over the next four 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 2009.
Gaming: Revenues from management services related to gaming decreased 7.0% from $715,597 for the six months ended October 31, 2007 compared to $665,690 for the six months ended October 31, 2008. Sales continue to remain relatively steady due to the addition of Class III casino gaming in Oklahoma.
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, were $218,102 for the six months ended October 31, 2008 and $208,546 for the six months ended October 31, 2007, an increase of 4.5%. Sales related to construction projects were $168,500 for the six months ending October 31, 2007 and $432,020 for the six months ending October 31, 2008.
Selling, General and Administrative (SG&A): Expenses were $1,994,932, 21.5% of revenues, for the six months ended October 31, 2008 compared to 26.5% of revenues for the six months ending October 31, 2007. Business overhead expenses were decreased overall due to the Kansas gaming endeavors. During the six months ended October 31, 2008 we expensed approximately $105,000 for the development of Gaming in Kansas compared to approximately $418,000 for the six months ended October 31, 2007.
Other Income (Expense): Other interest increased from $256,790 in the six months ended October 31, 2007 to $272,259 for the six months ended October 31, 2008.
Earnings:Our operating profit for the six months ended October 31, 2008 was $651,072, compared to $745,411 for the six months ended October 31, 2007, a decrease of 12.7%. Our net income for the prior six months period ended October 31, 2007 was $419,124. Our net income for the current six months ended October 31, 2008 was $272,183.
Employees: We employed 92 at October 31, 2008 and 86 at October 31, 2007.
SECOND QUARTER FISCAL 2009 COMPARED TO SECOND QUARTER FISCAL 2008
Our sales for the three months ended October 31, 2008 were $4,055,773, a decrease of 4.2% from the three months ended October 31, 2007 with sales of $4,234,033. Our operating loss for the three months ended October 31, 2008 was $4,978, compared to a profit of $335,186 for the three months ended October 31, 2007.
Discussion of the specific changes by operation at each business segment follows:
Aircraft Modifications: Sales from Aircraft Modifications including modified aircraft decreased $253,616 (10.1%) from $2,504,535 in the second quarter of fiscal year 2008 to $2,250,918 in the current quarter of fiscal 2009. Revenues from non RVSM modification services increased $378,145 or 22% in the second quarter of fiscal 2009. RVSM revenues decreased by 83% in the second quarter of fiscal 2009, compared to the second quarter of fiscal 2008.
Considerable time was spent on additions to the RVSM STC and certification of special mission STC's for our modification customers. These events reallocated used capacity and reduced RVSM completions. The modifications segment had an operating loss of $104,795 for the three months ended October 31, 2008 compared to operating profit of $165,893 for the three months ended October 31, 2007.
Aircraft Acquisitions and Sales: There was no activity for the three months ended October 31, 2008. We acquired no aircraft during the three months ended October 31, 2007. FAA required modifications to the business aircraft fleet may increase customer demand for company owned aircraft.
Avionics: Sales were $434,718 for the three months ended October 31, 2008 compared to $941,781 in the comparable period of the preceding year, a decrease of 54%. Operating loss for the three months ended October 31, 2008 was $151,768 compared to an operating profit of $137,281 for the three months ended October 31, 2007. The decrease in operating profit is directly related to the significant decreases in sales, material obsolescence, and rework labor costs. Due to changes in the current global economy we are unable to accurately forecast future revenue for the defense product lines. Our current backlog is $1,500,000.
Services - SCADA Systems and Monitoring Services: Revenue increased from $376,802 for the three months ended October 31, 2007 to $559,009 for the three months ended October 31, 2008, an increase of 48%. During the three months ended October 31, 2008 we maintained a relatively level volume of long-term contracts with municipalities. Revenue fluctuates due to the introduction of new products and services and the related installations of these products. Our contract with one of our largest customers has been renewed through fiscal 2009. We had an operating profit of $22,567 in Monitoring Services for the three months ended October 31, 2008, compared to $14,148 for the three months ended October 31, 2007.
Gaming: Revenues from management services related to gaming decreased for the three months ended October 31, 2008, from $364,319 for the quarter ending October 31, 2007 to $265,601.
Corporate / Professional Services: These services include the architectural services of BCS Design, Inc., arrangements for financing, and on site contract management of gaming establishments and engineering services. Flight and engineering services are also provided. Management consulting and professional fees were $113,506 for the three months ended October 31, 2008 and $46,595 for the three months ended October 31, 2007, an increase of 144%. Sales related to construction projects were $432,020 for the quarter ending October 31, 2008 and there were no construction sales for the quarter ending October 31, 2007.
Other Income (Expense): Interest expense decreased from $124,151 in the three months ended October 31, 2007 to $41,223 for the three months ended October 31, 2008. Corporate tax expense decreased by $27,250 in the three months ended October 31, 2008.
Earnings:Our net income for the prior three months period ended October 31, 2007 was $187,285. Our net loss for the current three months ended October 31, 2008 was $46,202.
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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 2009 and beyond.
Other than obligations related to the potential management of a gaming facility in Dodge City, Kansas and the purchase of the JET product line we do not, as of October 31, 2008, have any material commitments for other capital expenditures other than the terms of the Indian Management Agreements should any additional casinos be authorized. 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. During the quarter ended October 31, 2008 we entered into two short term promissory notes totaling $5,500,000 towards the privilege fee for the gaming facility in Ford county, Kansas.
Analysis and Discussion of Cash Flow
During the first quarter of fiscal year 2009 our cash position decreased by $1,292,478 and can be attributed to the following. Cash used in operation activities was $4,954,752. During the first quarter we made a large deposit of $5,500,000 as a Privilege Fee to the Kansas Lottery as part of our gaming application for Ford County. During the first six month of fiscal 2009 we reported net income of $272,183. Other cash provided by operating activities included a decrease in Accounts receivable of $756,271 and a decrease in customer deposits of $15,162. Accounts payable and accrued liabilities resulted in a net contribution of approximately $87,724. Inventory increase by more than $335,000 due to several large aircraft modification projects and STC usage increased by approximately $134,000. We invested approximately $1,027,000 towards the development of the land purchased in Dodge City and less than $63,000 for the addition of new equipment. Cash provided by financing activities contributed a net of $4,752,206. We had short term borrowing of $5,500,000 for the Privilege Fee as part of our gaming application for Ford County. We increased our line of credit by $223,810 and reduced all other borrowings by $971,604.
Critical Accounting Policies
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 usually 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.
Allowance for Doubtful Accounts: Allowance for doubtful accounts are calculated on the historical write-off of doubtful accounts of the individual subsidiaries. Invoices are generally considered a doubtful account if no payment has been made in the past 90 days. We review these policies on a quarterly basis, and based on these reviews, we believe we maintain adequate reserves.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) 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. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements.
Impairment of Goodwill, Other Intangible Assets and Long-lived Assets: We comply with the provisions of Statement of Financial Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), which requires that we evaluate our goodwill and other assets for impairment at least annually or whenever events or circumstances indicate the carrying value of that asset 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 the use of the assets and their eventual disposition. We determined that as of April 30, 2008 an impairment of $302,537 was necessary.
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 Gaming Developments: We are advancing funds for the establishment of 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 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 $5,153,174 at October 31, 2008 and $5,153,174 at April 30, 2008 in gaming developments. We have reserves of $3,346,623, at October 31, 2008 and $3,346,623 at April 30, 2008. We believe that our advances for gaming developments will be totally reimbursed as casinos are opened. We believe it is necessary to establish reserves against the advances because 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 net amount is an estimate of the value we would receive if a 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 casinos and consist of the purchase of land and land improvements related to the development of 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.
In fiscal year 2008 we added a reserve of approximately $434,000 for the proposed Dodge City gaming developments. We determine annually the amount of any increase in reserves based on our determination of the fair value of assets acquired by our advances for gaming developments.
Changing Prices and Inflation
We did experience some pressure from inflation in fiscal 2009. These include increases in airplane travel, fuel, material, and transportation costs. This additional cost may not be transferable to our customers resulting in lower income. We anticipate long-term fuel costs and possibly interest rates to rise in fiscal 2009 and 2010.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
None.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this Report, our Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2008. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2008.
Changes in Internal Control Over Financial Reporting
As of October 31, 2008 there were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In connection with the preparation of this Report, our Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our internal controls and procedures as of October 31, 2008. Based on that evaluation our Chief Executive Officer and our Chief Financial Officer have concluded that our internal controls and procedures were effective as of October 31, 2008.
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