Item 1. BUSINESS
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 the Company as Exhibit 99 to this 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 the Company's operations and forward-looking statements contained herein.
General
Butler National Corporation (the "Company" or "BNC") is a Delaware corporation formed in 1960, with corporate headquarters at 19920 West 161st Street, Olathe, Kansas 66062.
Current Activities. The Company's current product lines and services include:
(1)Aircraft Modifications - principally includes the modification of business-size aircraft from passenger to freighter configuration, addition of aerial photography capability, and stability enhancing modifications for Learjet, Beechcraft, Cessna, and Dassault Falcon aircraft along with other modifications. The Company provides these services through its subsidiary, Avcon Industries, Inc. ("Aircraft Modifications" or "Avcon").
(2)Avionics - principally includes the manufacture of airborne radio and instrument switching units used in DC-9, DC-10, DC- 9/80, MD-80, MD-90 and the KC-10 aircraft. The Company provides these services through its subsidiary, Woodson Avionics, Inc. ("Switching Units", "Avionics" or "WAI").
(3) Gaming - principally includes business management services to Indian tribes in connection with the Indian Gaming Regulatory Act of 1988. The Company provides these services through its subsidiary, Butler National Service Corporation ("Management Services", "Gaming" or "BNSC").
(4)SCADA Systems and Monitoring Services - principally includes the monitoring of water and wastewater remote pumping stations through electronic surveillance for municipalities and the private sector and related repair services. The Company provides these services through its subsidiary, Butler National Services, Inc. ("Monitoring Services" or "BNS").
(5)Temporary Services - provides temporary employee services for corporate clients. The Company provides these services through its subsidiary, Butler Temporary Services, Inc. ("Temporary Services" or "BTS").
Assets as of April 30, 1998 and Net Revenues for the year ended April 30, 1998.
Industry Segment Assets Revenue
Aircraft Modifications 53.1% 71.0% Avionics 6.6% 8.9% Gaming 31.3% 0.0% Monitoring Services 1.2% 20.1% Temporary Services 0.2% 0.0% Corporate Office 7.6% 0.0%
Discontinued Operations.
RF, Inc., dba Redi-Foods: On April 14, 1998, the Company discontinued the operation of its wholesale food Distribution segment, a wholly owned subsidiary , RF, Inc., a Missouri corporation. This segment is being liquidated and the Company does not plan any future operations in the wholesale food distribution industry.
The Company acquired RF, Inc. on April 21, 1994. The Company exchanged 650,000 shares of the Company's common stock for 100% of the issued and outstanding shares of RF, Inc. At the date of acquisition, RF, Inc.'s total assets were $565,605, consisting of cash of approximately $200,000, accounts receivable of approximately $280,000, and inventory of approximately $60,000. RF, Inc.'s liabilities included approximately $260,000 of vendor payables, and $115,000 of accrued payroll and payroll taxes.
The individuals who sold RF, Inc. to the Company had sought for some time to reacquire from the Company the ownership of RF, Inc. The individual (the "Employee") filed a lawsuit against the Company seeking to rescind the sale of RF, Inc. stock and for damages. The Company and the Employee reached an agreement to settle and release all claims and counterclaims effective April 30, 1997, ("Release Agreement"). The Employee dismissed the lawsuit with prejudice. In addition to the releases, under the terms of the agreement, the Company received, on June 26, 1997, 600,000 shares of the Company's common stock and a commitment for certain payments over the next three years. The Company released the Employee from the terms of his employment contract and the April 24, 1994 Stock Purchase Agreement, including his agreement not to compete with the Company in the food distribution industry. The Company recorded a net gain of $432,989 (principally noncash) in the first quarter of 1998 for this transaction after consideration of $1,078,544 of costs associated with the claims, counter-claims and settlement.
RF, Inc. continued operations with transition management after the release of the Employee by the Company. However, product sales slowed and product selection and availability was restricted because of the industry knowledge associated with the Employee and the loss of sales personnel to the Employee. A bank credit line of $1,200,000 arranged in 1996, was used to purchase approximately $600,000 of inventory. Without providing samples as requested, a major chicken products supplier shipped approximately $250,000 of product in the summer of 1997 against an order scheduled for delivery in February 1997.
Sales at RF, Inc. declined in the fall 1997 compared to the previous year. The decline was accelerated more than expected due to the level of market confusion and the non acceptance of RF, Inc. without the Employee. A part of the unrest was a result of the growing dispute with a chicken supplier over the product shipped late. In December 1997, the pressure from the chicken supplier for complete payment of the late shipment was building, the product inventory was high, bank interest was using available funds, and payments on accounts receivable had slowed.
On January 7, 1998, the chicken supplier filed suit to collect approximately $44,000 remaining unpaid for the late shipment. An attachment order was issued which stopped shipment of all RF, Inc. products. The attachment order effectively eliminated the ability of RF, Inc. to respond to the needs of its customers. By February 1, 1998, because it was slow, expensive, and sometimes not possible to have product released to fill orders and because the actions of the chicken supplier had created a feeling of doom in the industry regarding RF, Inc., all the personnel at RF, Inc. were terminated. Some personnel were called back to assist with liquidation of the inventory under the current conditions.
On March 27, 1998, the chicken supplier and two transportation companies filed a petition for involuntary bankruptcy against RF, Inc. On May 12, 1998, the court determined that RF, Inc. was bankrupt and a trustee was appointed on June 11, 1998. All the assets of RF, Inc. were pledged as security for the bank line of credit.
After the bank obtains control of all the assets of RF, Inc., the Company plans to cooperate in the collection of accounts receivable through a law firm, the liquidation of the inventory and to purchase the fixed assets, primarily office equipment, from the bank. The RF, Inc. bank debt is approximately $637,000, plus interest and legal collection costs. The Company believes that an orderly liquidation of the assets at retail and the purchase of the fixed assets should allow the bank to recover substantially the amount due on the bank line of credit. Unsecured creditor claims, less the claims of the three unsecured creditors filing the involuntary bankruptcy petition, the bank claims and the Company claims, are expected to be approximately $200,000.
As of April 30, 1998, the operations of RF, Inc. have been deconsolidated due to the Chapter 7 involuntary bankruptcy liquidation of the wholly owned subsidiary. The entire investment in RF, Inc. was written-off through the current year loss from discontinued operations. The assets and liabilities of RF, Inc. at April 30, 1998, were comprised of accounts receivable $716,478, inventory $359,103, other assets $44,423, bank liabilities $637,947 and other accrued liabilities $397,903. The revenues associated with RF, Inc. for the years ended 1998, 1997, and 1996 were $3,783,132, $17,478,540, and $13,685,871 respectively.
Valu Foods, Inc., dba Valu Foods: On April 14, 1998, the Company discontinued the operation of its retail food store, a wholly owned subsidiary , Valu Foods, Inc., a Kansas corporation. This retail operation is being liquidated and the Company does not plan any future operations in the retail food industry.
The Company formed Valu Foods, Inc. to market test the concept of selling frozen food overruns, seconds, and other discounted products to the rural market. A retail store owned by an individual in a rural Kansas community had been operating since September 1996 market testing these lines of products. In August 1997, the Company opened a retail store in the Kansas City area to market test products packaged under the registered trade name, Valu Foods® and other products. Store sales were as expected at the opening and continued to grow through the fall of 1997. The test project was discontinued when the Company discontinued the operation of the wholesale food Distribution segment. The Company plans to liquidate the Valu Foods, Inc. assets in the ordinary course of business and the store will close the sooner of the completion of the inventory liquidation or on January 31, 1999, when the lease expires. The loss on discontinued operations is approximately $23,965 (net of taxes. The loss includes anticipated legal costs, rental costs and payroll.
As of April 30, 1998, the operations of Valu Foods, Inc. have been discontinued due to the planned closing of the wholly owned subsidiary. The entire investment in Valu Foods, Inc. was written-off through the current year loss from discontinued operations. The assets and liabilities of Valu Foods, Inc. at April 30, 1998, were comprised of property, plant and equipment including leasehold improvements of $332,953 and inventory $24,779. The revenues associated with Valu Foods, Inc. for the year ended 1998 was $143,550.
Financial Information about Industry Segments
Information with respect to the Company's industry segments are found at Note 13 of Notes to Consolidated Financial Statements for the year ended April 30, 1998, located herein at page 52.
Narrative Description of Business
Aircraft Modifications. The Company's subsidiary, Avcon, modifies business type aircraft at Newton, Kansas. The modifications include aircraft conversion from passenger to freighter configuration, addition of aerial photography capability, stability enhancing modifications for Learjets, and other special mission modifications. Avcon offers aerodynamic and stability improvement products for selected business jet aircraft.
Sales of the Aircraft Modifications product line are handled directly through Avcon. Specialty modifications are quoted individually by job. The Company is geographically located in the marketplace for Aircraft Modifications products. The Company believes there are four primary competitors (AAR of Oklahoma, AVTEC, Dee Howard Company, and Raisbeck Engineering) in the industry in which the Aircraft Modifications division participates.
The Aircraft Modifications business derives its ability to modify aircraft from the authority granted to it by the Federal Aviation Administration ("FAA"). The FAA grants this authority by issuing a Supplemental Type Certificate ("STC") after a detailed review of the design, engineering and functional documentation, and demonstrated flight evaluation of the modified aircraft. The STC authorizes Avcon to build the required parts and assemblies and to perform the installations on applicable customer-owned aircraft.
Avcon owns over 200 STC's. When the STC is applicable to a multiple number of aircraft it is categorized as Multiple-Use STC. These Multiple-Use STC's are considered a major asset of the Company. Some of the Multiple-Use STC's include the Beechcraft Extended Door, Learjet AVCON FINS, Learjet Extended Tip Fuel Tanks, Learjet Weight Increase Package and Dassault Falcon 20 Cargo Door.
On May 3, 1996, Avcon received approval from the Federal Aviation Administration of a Supplemental Type Certificate ("STC") (no. ST00432WI) for its AVCON FIN Modification for installation on Learjet Model 35 and 36 Aircraft. FAA pilots thoroughly evaluated the test aircraft, and determined that the fins substantially increase the aerodynamic stability in all flight conditions. The AVCON FIN STC eliminates the operational requirement for Yaw Dampers which are otherwise required in both Learjet models to control
adverse yaw tendencies in certain flight conditions, particularly during approach and landing. Learjets equipped with AVCON FINS exhibit the same aerodynamic stability and improved operating efficiency offered on newer Learjet models, while maintaining the outstanding range, speed and load-carrying capabilities that made the Learjet Models 35 and 36 among the most popular Business Jets ever produced. Mounted like the fins of an arrow on the rear of the aircraft, Learjets equipped with AVCON FINS have a new look much the same as the current production aircraft. This modification will give the Learjets produced in the 1970's and 1980's the look of the 21st century.
Avionics - Switching Units. The Company has an agreement with Boeing McDonnell Douglas to manufacture and repair airborne switching systems for Boeing McDonnell Douglas and its customers. The Company subcontracts with its wholly owned subsidiary, Woodson Avionics, Inc., for the manufacture and repair of Switching Units. Switching Units are used to switch the presentation to the flight crew from one radio system to another, from one navigational system to another and to switch instruments in the aircraft from one set to another. The Switching Units are designed and manufactured to meet Boeing McDonnell Douglas and FAA requirements. Most Boeing McDonnell Douglas commercial aircraft are equipped with one or more Butler National Switching Units.
Marketing is accomplished directly between the Company and Boeing McDonnell Douglas. Competition is minimal. However, sales are directly related to Boeing McDonnell Douglas' production of DC-9, DC-10, DC9/80, MD-80, MD-90, MD-11 and KC-10 tanker aircraft. The current Boeing McDonnell Douglas contract has been extended through fiscal year 1999. However, the customer plans to stop aircraft production in the year 2000.
The Company sells to Boeing McDonnell Douglas on terms of 2% 10 days, net 30 days. Most payments have been and continue to be within these terms. The Company has ordinary course of business purchase orders from the commercial division (Douglas Aircraft Company) for products with scheduled shipment dates into the fiscal year 1999. However, should Boeing McDonnell Douglas financially reorganize or for some other reason not accept shipment against these orders, the Company could suffer significant loss of revenue.
Management Services. BNSC is engaged in the business of providing management services to Indian Tribes in connection with the Indian Gaming Regulatory Act of 1988. The Company has three management agreements in place; however, the performance of these agreements is contingent upon and subject to approval by the Secretary of Interior, Bureau of Indian Affairs, National Indian Gaming Commission and the appropriate State, if required. Also, the Company has signed consulting engagement letters with two tribes to study and develop plans for Indian gaming. See Liquidity and Capital Resources, page 16.
During fiscal 1997, the Company received approval by the National Indian Gaming Commission of the management agreement between the Miami Tribe of Oklahoma, the Modoc Tribe of Oklahoma and its subsidiary, Butler National Service Corporation, to construct and manage a Class II (High Stakes Bingo) and Class III (Off-Track Betting) establishment. Construction of this project, known as the STABLES, is scheduled for completion in July 1998. Opening is planned in August 1998.
The services to be provided by the Company include consulting and construction management services for the development of the facilities and operational management for the Tribes. The Company will provide the necessary funds to construct the facilities and will be repaid the principal plus interest out of the profits of the operation. Additionally, the Company will receive a thirty percent (30%) share of the profits for its management services. The Company has arranged for construction and operating financing of the establishment.
SCADA Systems and Monitoring Services. BNS is engaged in the sale of monitoring and control equipment and the sale of monitoring services for water and wastewater remote pumping stations through electronic surveillance by radio or telephone. BNS contracts with government and private owners of water and wastewater pumping stations to provide both monitoring and preventive maintenance services for the customer.
The Company expects a high percentage of BNS business to come from municipally owned pumping stations. Currently, BNS is soliciting business in Florida only. While the Company has exposure to competitive forces in the monitoring and preventive maintenance business, management believes the competition is limited.
Temporary Services. BTS provides managed temporary personnel to corporate clients to cover personnel shortages on a short and/or long term basis. This service is being marketed in Kansas, Missouri and Oklahoma. Currently, this Company is inactive. BTS plans to provide contract staffing for the STABLES establishment opening in August 1998.
Raw Materials. Raw materials used in the Company's products are currently available from several sources. Certain components, used in the manufacture of the Switching Units, are long lead time components and are single sourced.
Patents. There are no patents, trademarks, licenses, franchises, or concessions held by the Company that need to be held to do business other than the FAA, PMA and Repair Station licenses. However, the Company maintains certain airframe alteration certificates, commonly referred to as Supplemental Type Certificates ("STCs"), issued to it by the FAA, for its Aircraft Modification and Avionic businesses.
Seasonality. The Company's business is generally not seasonal. Demand for the Falcon 20 cargo aircraft modifications is related to seasonal activity of the automotive industry in the United States. Many of these modified aircraft are used to carry automotive parts to automobile manufacturing facilities. The peak modification demand occurs in late spring and early summer. Peak usage of the modified aircraft is from June to December. Future changes in the automotive industry could result in the fluctuation of revenues at the Aircraft Modifications Division.
Customer Arrangements. Most of the Company's products are custom-made. Except in isolated situations no special inventory-storage arrangements, merchandise return and allowance policies, or extended payment practices are involved in the Company's business. The Company is not dependent upon any single customer except for Switching Units. Switching Units are sold to Boeing McDonnell Douglas and Douglas Aircraft Company customers. The Company has required deposits from its customers for aircraft production schedule dates.
Backlog. The Company's backlog as of April 30, 1998, 1997, and 1996, was as follows:
Industry Segment 1998 1997 1996
Aircraft Modifications 5,747,505 2,468,169 820,694
Avionics 173,174 316,558 390,066
Monitoring Services 1,124,191 1,317,580 1,645,844
Temporary Services - - -
$7,044,870 $4,102,307 $2,856,604
The Company's backlog as of July 17, 1998, totaled $5,226,191; consisting of $4,213,334, $84,674, $928,183 and $0, respectively, for Aircraft Modifications, Avionics, Monitoring Services, and Temporary Services. The backlog includes firm orders which may not be completed within the next twelve months. Backlog that the Company expects not to be filled within the next year totals $1,272,000; consisting of $1,065,000, $0, $207,000, and $0.
The Company's backlog in Monitoring Services increased due to our annual contract with a major customer being extended to a five year contract. Four years remain on this contract.
Employees. The Company employed 66 people on April 30, 1998, compared to 54 people on April 30, 1997, and 53 people on April 30, 1996. As of July 17, 1998, the Company employed 67 people. None of the Company's employees are subject to any collective bargaining agreements.
"Year 2000". The Company has considered and continues to evaluate the "Year 2000" computer processing issues in all business segments. The Company has purchased and plans to replace its central computer system and all operating and application software with Year 2000 compatible products in the summer of 1998. The cost of this replacement is approximately $125,000.
Financial Information about Foreign and Domestic Operations, and Export Sales.
Information with respect to Domestic Operations may be found at Note 13 of Notes to Consolidated Financial Statements for the year ended April 30, 1998, located herein at page 52. There are no foreign operations.
Item 2.
Item 2. PROPERTIES
The corporate headquarters is located in a 9,000 square feet owned facility for office and storage space at 19920 West 161st Street, in Olathe, Kansas. The facilities are adequate for current and anticipated operations.
The Company's Aircraft Modifications Division is located at the municipal airport in Newton, Kansas in facilities occupied under a long-term lease extending to April 30, 2002, at an annual rental of $33,000. The lease is renewable for an additional seven-year term. In February 1989, the Company entered into a long-term capital lease with the City of Newton, Kansas for a
second hangar. The lease extends to February 28, 2009, at an initial annual rental of $55,200. Commencing November 1, 1991, the annual rental declined to $50,400 for the remaining term of the lease. The Company entered into a letter of agreement with the landlord to reduce the lease payments to $33,000 per year on a month-to-month basis and to retain an option to reinstate the capital lease as originally contracted. These facilities are adequate for current and anticipated operations.
The Company's wholly-owned subsidiary, Butler National Services, Inc. has its principal offices in Ft. Lauderdale, Florida in facilities occupied under a three-year lease ending March 31, 1999. The annual rental is approximately $25,903. The facilities are adequate for current and anticipated operations.
The Company's wholly-owned subsidiary, Woodson Avionics, Inc., had its principal offices and manufacturing operations in Arkansas. During May 1996, the Company relocated to 5032 South Ash Avenue, Tempe, Arizona. As of June 1, 1996, the Company rents 3,865 square foot of space for $2,358 per month. The lease expires December 31, 1999. The facilities are adequate for current and anticipated operations.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company had an employment agreement with an individual who the Company terminated in April 1995. This individual filed a lawsuit against the Company, the President of the Company, and various corporate subsidiaries, alleging the Company wrongfully terminated the individual's employment in breach of the contract. The suit was filed in October, 1995, in State Court in Johnson County, Kansas.
The Company and the individual reached an agreement to settle and release all claims and counterclaims on May 1, 1997. The individual dismissed the lawsuit with prejudice. The terms of the settlement include payments by the Company to the individual during fiscal 1998 and fiscal 1999.
The Company acquired RF, Inc. on April 21, 1994. The Company exchanged 650,000 shares of the Company's common stock for 100% of the issued and outstanding shares of RF, Inc. The individuals who sold RF, Inc. to the Company have sought for some time to reacquire from the Company the ownership of RF, Inc. The individual filed a lawsuit against the Company seeking to rescind the sale of RF, Inc. stock and for damages.
The Company and the individual reached an agreement to settle and release all claims and counterclaims effective April 30, 1997, ("Release Agreement"). The individual dismissed the lawsuit with prejudice. In addition to the releases, under the terms of the agreement, the Company received on June 26, 1997, 600,000 shares of the Company's common stock and certain payments over the next three years. The Company released the individual from the terms of his employment contract and the April 24, 1994 Stock Purchase Agreement. These documents released the individual from his agreement not to compete with the Company in the food distribution industry.
The Company recorded a net gain (principally noncash) in the first quarter of 1998 for this transaction after consideration of $1,078,544 of costs associated with the claims, counter-claims and settlement. In addition the Company will recognize an additional gain as the promissory note payments are received in cash. Although the effective date of the transaction as agreed to by both parties is April 30, 1997, the transfer of the stock and related proceeds was not completed until June 1997, see also Item 1, General, Discontinued Operations, page 2, regarding the bankruptcy of RF, Inc.
In December of 1997, the Company sold Convertible Preferred Stock to certain offshore investors. Beginning in February of 1998, these investors began converting the Preferred Stock into Common Stock and the price of the Company's stock declined. As reported earlier, the Company received notice from NASDAQ stating that the Common Stock of the Company would be delisted by NASDAQ if the price did not trade at a bid price of $1.00 or more for ten (10) business days prior to August 6, 1998. The delisting of the Company's Common Stock would be a default under the terms of the Convertible Preferred Stock, as well as under the terms of certain Convertible Debentures previously issued. The Company considered a number of alternative actions including a reverse stock split, a repurchase of common shares on the open market and/or the repurchase of the convertibles at a premium to increase the price of the Common Stock.
After evaluation of various alternatives and as a result of what the Company believed were inappropriate actions and representations by the holders of the Convertible Preferred Stock and the Convertible Debentures, the
Company announced plans to stop conversions of the Convertible Preferred Stock and Convertible Debentures at prices below $2.75 per share. On July 17, 1998, two of the holders of the Convertible Preferred Stock filed a lawsuit (the "Action") against the Company in Chancery Court in Delaware alleging among other things, breach of contract, violation of Delaware law and violation of the terms of the Convertible Preferred Stock. The Action seeks an injunction to force the Company to convert the Convertible Preferred Stock in accordance with its terms and for unspecified monetary damages. The Company will defend the Action and continue to evaluate all potential courses of action.
The Company used an outside engineering firm to assist with the Aircraft Modification Avcon Fin project and the related STC's. The individual filed suit against the Company for final payment under the contract. However, the Company did not feel that all work products had been delivered. The Company is in the process of making final settlement with this engineer to be paid upon delivery of the engineering work product as required by the contract. The Company has an account payable to the individual equal to the agreed upon settlement to be paid upon delivery of the complete engineer work product.
As of July 17, 1998, there are no other known legal proceedings pending against the Company. The Company considers all such unknown proceedings, if any, to be ordinary litigation incident to the character of the business. The Company believes that the resolution of those unknown claims will not, individually or in the aggregate, have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders during the fourth quarter of fiscal 1998.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Company was initially listed in the national over-the-counter market in 1969, under the symbol "BUTL." Effective June 8, 1992, the symbol was changed to "BLNL." On February 24, 1994, the Company was and is listed on the NASDAQ Small Cap Market under the symbol "BUKS."
The range of the high and low bid prices per share of the Company's common stock, for fiscal years 1998 and 1997, as reported by NASDAQ, is set forth below. Such market quotations reflect intra-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.
Year Ended April 30, 1998 Year Ended April 30, 1997
High Low High Low
First Quarter 1 15/16 15/16 3 3/16 2 1/16
Second Quarter 1 3/32 15/16 2 5/8 1 3/4
Third Quarter 1 1/16 13/16 3 3/16 1 7/8
Fourth Quarter 1 5/8 2 1/4 1 5/8
(b) Holders. The approximate number of holders of record of the Company's common stock, as of July 17, 1998, was 3,105.
(c) Dividends. The Company has not paid any cash dividends on its common stock, and the Board of Directors does not intend to declare any cash dividends in the foreseeable future.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and with the Consolidated Financial Statements and related Notes included elsewhere in the report.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal 1998 compared to fiscal 1997
The Company's sales for fiscal 1998 were $5,456,106, an increase of 34.3% from fiscal 1997 sales of $4,061,775. Discussion of specific changes by operation follows.
Aircraft Modification: Sales from the Aircraft Modifications business segment increased 42.2%, from $2,724,217 in fiscal 1997, to $3,874,490 in fiscal 1998. This segment earned an operating profit of $844,320 in 1998, compared to income of $501,984 in 1997. Primarily product sales increased due to the expanded business base related to the multiple-use Supplemental Type Certificates ("STC") developed by the Company. The increase in operating income is due to the increase in sales and margins related to the proprietary products.
As previously noted on page 2, (Item 1. Business), on May 3, 1996 the Company's subsidiary, Avcon Industries, Inc., received approval from the Federal Aviation Administration of a Supplemental Type Certificate (no. ST00432WI) for its AVCON FIN Modification for installation on Learjet Model 35 and 36 Aircraft. The STC authorizes Avcon to build the required parts and assemblies and to perform the installations on applicable customer-owned Learjets. The Company believes the potential market for fin installations to be approximately 1,000 aircraft and that approximately 500 fin installations will be performed over the next several years. The Company plans to market the fin installation with related options. The installed package price for seventeen AVCON FIN packages installed in fiscal 1998 averaged approximately $150,000 per aircraft.
In fiscal 1998, the Company invested $499,454 to design, engineer, build, and demonstrate to the FAA, flight characteristics of Avcon products; thereby adding to its ownership of multiple-use STC's. The Company's direction is to continue to invest in activities that should expand the aircraft modification market. The Company believes that the increased modification- market, through STC's for the Learjet and the Beechcraft KingAir, will enable this segment to be an even greater contributor to the overall growth of the Company.
Switching Units: Sales from the Avionics Switching Unit business segment increased 74.6%, from $277,513 in fiscal 1997, to $484,518 in fiscal 1998. Sales to the major OEM customer decreased 18.3%. Sales for aircraft repair and refurbishment increased 4.8 times, from fiscal 1997 to fiscal 1998. Operating profits increased from $123,571 in fiscal 1997 to $146,744 in fiscal 1998. Management expects this business segment to continue to be stable in future years.
SCADA Systems and Monitoring Services: Revenue from Monitoring Services increased from $1,060,045 in fiscal 1997 to $1,097,098 in fiscal 1998, an increase of 3.5%. During fiscal 1998, the Company maintained a relatively level volume of long-term contracts with municipalities. Revenue increased due to the introduction of new products and services. The Company's contracts with its two largest customers have been renewed for fiscal 1999. An operating profit of $228,488 in Monitoring Services was recorded in fiscal 1998, compared to fiscal 1997 operating profit of $230,738. The Company was able to secure performance bonds during the first quarter of fiscal 1995. This division has since bid on certain jobs requiring performance bonds, and completed two special jobs with revenue totaling approximately $100,000.
The Company believes this segment will continue to grow at a moderate rate. This segment has experienced consistent increases over the past few years and the Company expects this trend to continue.
Temporary Services: This operation provides temporary employee services for corporate clients. This segment was inactive during fiscal 1998. If and when the Company is able to open Indian gaming facilities, management expects that a majority of the personnel in the various Indian gaming enterprises will be staffed by Temporary Services personnel.
Management Services: -General- In the current fiscal year the Company received no revenue and incurred $32,569 in general and administrative expenses associated with its continued efforts to explore opportunities related to the Indian Gaming Act of 1988. Additionally, the Company amortized $77,864 and $66,458 in fiscal years 1998 and 1997, respectively, related to shares issued for services rendered to the Company.
The Company has invested $1,812,628 in land, land improvements, and professional design fees related to the development of Indian Gaming facilities. Included in this investment is 160 acres of land, located adjacent to the Linn Valley Lakes resort and residential development in Linn County, Kansas, and a group of selected lots within the resort development. The Company believes that this tract could be developed and sold for residential and commercial use, other than Indian gaming, if the gaming enterprise does not open. Additional improvements, including access roads, water and sewer services, etc. are planned for this land. After these improvements, the land may be sold in small tracts. This may allow the Company to recover the majority, if not all, of the $1,812,628 investment.
-Princess Maria Casino- The Company has a management agreement with the Miami Tribe to provide management services to the Miami Tribe. The Tribe requested a compact with the State of Kansas for Class III Indian gaming, on Indian land, known as the Maria Christiana Miami Reserve No. 35, located in Miami County, Kansas, on July 9, 1992.
The Miami Tribe's 1992 compact was the subject of a lawsuit filed in February 1993, in the Federal District Court, by the Miami Tribe, alleging the failure to negotiate a compact in good faith by the State of Kansas. The United States District Court dismissed the Miami Tribe's suit against the State of Kansas, citing the United States Supreme Court's ruling in Seminole v. State of Florida. The Supreme Court ruled that the "failure to negotiate" provision of the IGRA did not allow an Indian tribe to compel a state by litigation to negotiate a compact.
In February, 1993, former Kansas Governor Finney requested a determination of the suitability of the Miami Indian land for Indian Gaming, under the IGRA, from the Bureau of Indian Affairs (the "BIA"). In May, 1994,the NIGC again requested the same determination. Finally, in May, 1995, an Associate Solicitor within the BIA issued an opinion letter stating that the Miami Tribe has not established jurisdiction over the Miami land in Kansas. This was the first definitive statement received from the central office of the BIA in three years. The latest opinion is contrary to a September, 1994 opinion of the Tulsa Field Solicitor, in an Indian probate, stating that the Miami Tribe has jurisdiction over the Miami Indian land in Kansas. On July 11, 1995, the U.S. Department of Justice issued a letter to the Associate Solicitor expressing concern about the conclusions reached, based upon the analysis of the case.
The Miami Tribe challenged this opinion in Federal Court. To prove and protect the sovereignty of the Miami Tribe, and other Indian tribes, relating to their lands, on April 11, 1996, the Court ruled that the Miami Tribe did not have jurisdiction because the BIA had not approved the Tribal membership of the Princess Maria heirs, at the time the management agreement was submitted; therefore, the Court ordered that the NIGC's determination (that Reserve No. 35 is not "Indian land", pursuant to IGRA) was affirmed. However, the Court noted in its ruling that nothing precludes the Tribe from resubmitting its management agreement to the NIGC, along with evidence of the current owners' consent, and newly adopted tribal amendments. On February 22, 1996, the BIA approved the Miami Tribe's constitution and the membership of the heirs. The Tribe resubmitted the management agreement. Although the Court noted that the Tribe could resubmit the management agreement, the Court did not pass on whether or not a new submission will obtain approval.
The Tribe resubmitted the management agreement and land question to the NIGC in June, 1996. In July, 1996, the NIGC again requested an opinion from the BIA. On July 23, 1997, the Tribe and the Company were notified that the BIA had again determined that the land was not suitable for gaming, for political policy reasons, without consideration of the membership in the Miami Tribe or recent case law, and the NIGC had to again deny the management agreement. The Tribe filed a suit in the Federal District Court in Kansas City, Kansas. On May 15, 1998 the Court determined that the land was suitable for gaming and remanded the case to the BIA for the documentation. Therefore, even though the Company and the Tribe believe the BIA will agree with the Court that the land is "Indian land", and in compliance with all laws and regulations, for a variety of reasons, there is no assurance that the management agreement will be approved.
-Stables Bingo and Off-Track Betting- Additionally, the Company has a signed Management Agreement with the Miami and Modoc Tribes. A class III Indian Gaming Compact for a joint-venture by the Miami and Modoc Tribes, both of Oklahoma, has been approved by the State of Oklahoma and by the Assistant Secretary, Indian Affairs for the U.S. Department of the Interior. The Compact was published in the Federal Register on February 6, 1996, and is therefore, deemed effective. The Compact authorizes Class III (Off-Track Betting "OTB") along with Class II (high stakes bingo) at a site within the City of Miami, Oklahoma.
The Company is providing consulting and construction management services in the development of the facility and will manage the joint-venture operation for the tribes. The STABLES facility is approximately 22,000 square- feet and located directly south of the Modoc Tribal Headquarters building in Miami. The complex will contain off-track betting windows, a bingo hall, sports bar, and a restaurant. The Company's Management Agreement was approved by the NIGC on January 14, 1997. Under the Management Agreement, as approved, the Company, as manager, is to receive a 30% share of the profits and reimbursement of development costs.
Construction on the STABLES began with the ground breaking on March 27, 1997. Opening is expected in August, 1998. The estimated project cost is approximately $3,500,000. Funds have been provided from the Company's operations and long-term financing for project completion is arranged.
As a part of the Management Contract approved by the NIGC on January 14, 1997, between the Company's wholly owned subsidiary, Butler National Service Corporation, and the Miami Tribe of Oklahoma and the Modoc Tribe of Oklahoma (the "Tribes"); the Company agreed to loan the Tribes $3,500,000 at 2% over prime, to be repaid over five years, for the construction and operation of the Stables gaming establishment. At April 30, 1998, the Company had advanced $2,074,797 to the Tribes under the contract and reported $408,333 current note receivable and $1,666,464 long-term note receivable. Security under the contract includes the Tribes' profits from all tribal gaming enterprises and all assets of the Stables except the land and building.
-Shawnee Reserve No. 206- Since 1992, the Company has maintained a business relationship with approximately seventy Indian and non-Indian heirs (the "Owners") of the Newton McNeer Shawnee Reserve No. 206 ("Shawnee Reserve No. 206"). This relationship includes assistance in the defense of the property against adverse possession (by one family member) in exchange for being named the manager for any Indian gaming enterprises that may be established on the land. As a result of the Company's assistance, the Owners are in the process of becoming the undisputed beneficial owners of approximately 72 acres of the Shawnee Reserve No. 206, as ordered by the United States District Court for the District of Kansas. The Company has purchased an additional 9 acres contiguous to the Indian land providing access.
Shawnee Reserve No. 206 has been a part of the Shawnee Reservation in Kansas Territory since 1831 and was reserved as Indian land and not a part of the State of Kansas, when Kansas became a state in 1861. The Indian land is located on West 83rd Street, within the boundaries of Johnson County, Kansas and the Kansas City metro area, approximately 25 miles southwest from downtown Kansas City, Missouri.
The Company maintains a relationship and agreement to manage the proposed establishment with the owners and the Shawnee Tribe of Oklahoma. The Shawnee Tribe of Oklahoma is not a federally recognized tribe. The tribe, sometimes known as the Loyal Shawnee Tribe, is a tribe organized by a 1960 federal resolution operating within and as a part of the federally recognized Cherokee Nation of Oklahoma. The Indian Owners of Shawnee Reserve No. 206 have federal Indian membership cards showing them to be Cherokee-Shawnee members of the Cherokee Nation of Oklahoma. The Shawnee and the Cherokee are currently working to reaffirm the Shawnee's jurisdiction over the Indian land and to obtain federal recognition for the Shawnee Tribe.
The Company believes that there is a significant opportunity for Indian gaming on the Shawnee Reserve No. 206. However, none of the above agreements have been approved by the BIA, or the Cherokee Nation, or any other regulatory authority. There can be no assurance that these or future agreements will be approved nor that any Indian gaming will ever be established on the Shawnee Reserve, or that the Company will be the Management Company.
-Modoc Bingo- The Company has a management agreement with the Modoc Tribe to construct and operate an Indian gaming facility on Modoc Reservation lands in Eastern Oklahoma. The Management Agreement was filed with the NIGC on June 7, 1994, for review and approved on July 11, 1997. The Tribe and the Company have not determined a schedule for this project. There is no assurance that further action will be taken until the Stables is in operation or if ever.
-Other Gaming- The Company is currently reviewing other potential Indian gaming opportunities with other tribes. These discussions are in the early stages of negotiation and there can be no assurance that these gaming opportunities will be successful.
The various management agreements have not yet been approved by the various governing agencies and therefore are not filed as exhibits to this document.
Selling, general and administrative (SG&A): Expenses increased $270,320 (19.1%) in fiscal year 1998. These expenses were $1,687,178, or 30.1% of revenue, in fiscal 1998, and $3,330,874, or 34.9% of revenue in fiscal 1997.
Other income (Expense): Expenses decreased due to the writedown of the land and building in Overton, Nebraska in fiscal 1995. This facility became idle in 1994. The Company was unable to complete the negotiated sale of the land and building. Therefore, the Company reduced the value of the asset by $157,200 in order to record the asset at its estimated net realizable value. The Company entered into an agreement, on September 13, 1995, with the Village of Overton, for the sale of the building in Overton, Nebraska. The Company received a cash payment of $30,000 at closing on September 18, 1995, and may receive an additional $70,000 if the Village of Overton is either able to sell or lease the building in the future. During fiscal year 1998 this building was sold for $45,000.
Fiscal 1997 compared to fiscal 1996
The Company's sales for fiscal 1997 were $4,061,775, an increase of 11.2% from fiscal 1996 sales of $3,653,095. Discussion of specific changes by operation follows.
Aircraft Modification: Sales from the Aircraft Modifications business segment increased 7.6%, from $2,531,504 in fiscal 1996, to $2,724,217 in fiscal 1997. This segment earned an operating profit of $501,984 in 1997, compared to income of $356,916 in 1996. Primarily product sales increased due to the expanded business base related to the multiple-use Supplemental Type Certificates ("STC") developed by the Company. The increase in operating income is due to the increase in sales and margins related to the proprietary products.
As previously noted on page 2, (Item 1. Business), on May 3, 1996 the Company's subsidiary, Avcon Industries, Inc., received approval from the Federal Aviation Administration of a Supplemental Type Certificate (no. ST00432WI) for its AVCON FIN Modification for installation on Learjet Model 35 and 36 Aircraft. The STC authorizes Avcon to build the required parts and assemblies and to perform the installations on applicable customer-owned Learjets. The Company believes the potential market for fin installations to be approximately 1,000 aircraft and that approximately 500 fin installations will be performed over the next several years. The Company plans to market the fin installation with related options. The installed package price for nine AVCON FIN packages installed in fiscal 1997 averaged approximately $150,000 per aircraft.
In fiscal 1997, the Company invested $1,174,535 to design, engineer, build, and demonstrate to the FAA, flight characteristics of Avcon products; thereby adding to its ownership of multiple-use STC's. The Company's direction is to continue to invest in activities that should expand the aircraft modification market. The Company believes that the increased modification-market, through STC's for the Learjet and the Beechcraft KingAir, will enable this segment to be an even greater contributor to the overall growth of the Company.
Switching Units: Sales from the Avionics Switching Unit business segment increased 6.6%, from $260,399 in fiscal 1996, to $277,513 in fiscal 1997. Sales to the major OEM customer increased 12.4%. Sales for aircraft repair and refurbishment declined 7.0%, from fiscal 1996 to fiscal 1997. Sales have remained relatively stable between years. Operating profits increased from $79,545 in fiscal 1996 to $123,571 in fiscal 1997. Management expects this business segment to continue to be stable in future years.
SCADA Systems and Monitoring Services: Revenue from Monitoring Services increased from $861,192 in fiscal 1996 to $1,060,045 in fiscal 1997, an increase of 23.1%. During fiscal 1997, the Company maintained a relatively level volume of long-term contracts with municipalities. Revenue increased due to the introduction of new products and services. The Company's contracts with its two largest customers have been renewed for fiscal 1998. An operating profit of $230,738 in Monitoring Services was recorded in fiscal 1997, compared to fiscal 1996 operating profit of $227,028. The increased profit resulted from special jobs completed, in addition to the long term contracts with the municipalities. The Company was able to secure performance bonds during the first quarter of fiscal 1995. This division has since bid on certain jobs requiring performance bonds, and completed two special jobs with revenue totaling approximately $100,000.
The Company believes this segment will continue to grow at a moderate rate. This segment has experienced consistent increases over the past few years and the Company expects this trend to continue.
Temporary Services: This operation provides temporary employee services for corporate clients. This segment was inactive during fiscal 1997. If and when the Company is able to open Indian gaming facilities, management expects that a majority of the personnel in the various Indian gaming enterprises will be staffed by Temporary Services personnel.
Management Services: -General- In the current fiscal year the Company received no revenue and incurred $243,728 in general and administrative expenses associated with its continued efforts to explore opportunities related to the Indian Gaming Act of 1988. Additionally, the Company amortized $66,458 and $143,124 in fiscal years 1997 and 1996, respectively, related to shares issued for services rendered to the Company.
The Company has invested $1,539,892 in land, land improvements, and professional design fees related to the development of Indian Gaming facilities. Included in this investment is 160 acres of land, located adjacent to the Linn Valley Lakes resort and residential development in Linn County, Kansas, and a group of selected lots within the resort development. The Company believes that this tract could be developed and sold for residential and commercial use, other than Indian gaming, if the gaming enterprise does not open. Additional improvements, including access roads, water and sewer services, etc. are planned for this land. After these improvements, the land may be sold in small tracts. This may allow the Company to recover the majority, if not all, of the $1,539,892 investment.
-Princess Maria Casino- The Company has a management agreement with the Miami Tribe to provide management services to the Miami Tribe. The Miami Tribe requested a compact with the State of Kansas for Class III Indian gaming, on Indian land, known as the Maria Christiana Miami Reserve No. 35, located in Miami County, Kansas, on July 9, 1992.
The Miami Tribe's 1992 compact was the subject of a lawsuit filed in February 1993, in the Federal District Court, by the Miami Tribe, alleging the failure to negotiate a compact in good faith by the State of Kansas. The United States District Court dismissed the Miami Tribe's suit against the State of Kansas, citing the United States Supreme Court's ruling in Seminole v. State of Florida. The Supreme Court ruled that the "failure to negotiate" provision of the IGRA did not allow an Indian tribe to compel a state by litigation to negotiate a compact.
In February, 1993, former Kansas Governor Finney requested a determination of the suitability of the Miami Indian land for Indian Gaming, under the IGRA, from the Bureau of Indian Affairs (the "BIA"). In May, 1994, the NIGC again requested the same determination. Finally, in May, 1995, an Associate Solicitor within the BIA issued an opinion letter stating that the Miami Tribe has not established jurisdiction over the Miami land in Kansas. This was the first definitive statement received from the central office of the BIA in three years. The latest opinion is contrary to a September, 1994 opinion of the Tulsa Field Solicitor, in an Indian probate, stating that the
Miami Tribe has jurisdiction over the Miami Indian land in Kansas. On July 11, 1995, the U.S. Department of Justice issued a letter to the Associate Solicitor expressing concern about the conclusions reached, based upon the analysis of the case.
The Miami Tribe challenged this opinion in Federal Court. To prove and protect the sovereignty of the Miami Tribe, and other Indian tribes, relating to their lands, on April 11, 1996, the Court ruled that the Miami Tribe did not have jurisdiction because the BIA had not approved the Tribal membership of the Princess Maria heirs, at the time the management agreement was submitted; therefore, the Court ordered that the NIGC's determination (that Reserve No. 35 is not "Indian land", pursuant to IGRA) was affirmed. However, the Court noted in its ruling that nothing precludes the Tribe from resubmitting its management agreement to the NIGC, along with evidence of the current owners' consent, and newly adopted tribal amendments. On February 22, 1996, the BIA approved the Miami Tribe's constitution and the membership of the heirs. The Tribe resubmitted the management agreement. Although the Court noted that the Tribe could resubmit the management agreement, the Court did not pass on whether or not a new submission will obtain approval.
The Tribe resubmitted the management agreement and land question to the NIGC in June, 1996. In July, 1996, the NIGC again requested an opinion from the BIA. On July 23, 1997, the Tribe and the Company were notified that the BIA had again determined that the land was not suitable for gaming, for political policy reasons, without consideration of the membership in the Miami Tribe or recent case law, and the NIGC had to again deny the management agreement. The Tribe plans to file suit in the Federal District Court in Kansas City, Kansas before the end of July, 1997. Therefore, even though the Company and the Tribe believe the Court will find the land to be "Indian land", in compliance with all laws and regulations, because of political reasons, there is no assurance that the management agreement will be approved.
-Stables Bingo and Off-Track Betting- Additionally, the Company has a signed Management Agreement with the Miami and Modoc Tribes. A class III Indian Gaming Compact for a joint-venture by the Miami and Modoc Tribes, both of Oklahoma, has been approved by the State of Oklahoma and by the Assistant Secretary, Indian Affairs for the U.S. Department of the Interior. The Compact was published in the Federal Register on February 6, 1996, and is therefore, deemed effective. The Compact authorizes Class III (Off-Track Betting "OTB") along with Class II (high stakes bingo) at a site within the City of Miami, Oklahoma.
The Company will provide consulting and construction management services in the development of the facility and plans to manage the joint-venture operation for the tribes. The STABLES facility is planned to be approximately 22,000 square-feet and to be located directly south of the Modoc Tribal Headquarters building in Miami. It is currently planned that the complex will contain off-track betting windows, a bingo hall, and a restaurant. The Company's Management Agreement was approved by the NIGC on January 14, 1997. The Management Agreement was filed in September, 1994 with the NIGC, and rejected, pending approval of this Compact. On January 25, 1996, the Management Agreement was resubmitted. Under the Management Agreement, as approved, the Company, as manager, is to receive a 30% share of the profits and reimbursement of development costs.
Construction on the STABLES began with the ground breaking on March 27, 1997. Opening is expected in November, 1997. The estimated project cost is approximately $3,000,000. Initial funds have been provided from the Company's operations. Long-term financing for project completion is being arranged.
-Shawnee Reserve No. 206- Since 1992, the Company has maintained a business relationship with approximately seventy Indian and non-Indian heirs (the "Owners") of the Newton McNeer Shawnee Reserve No. 206 ("Shawnee Reserve No. 206"). This relationship includes assistance in the defense of the property against adverse possession(by one family member) in exchange for being named the manager for any Indian gaming enterprises that may be established on the land. As a result of the Company's assistance, the Owners are in the process of becoming the undisputed beneficial owners of approximately 72 acres of the Shawnee Reserve No. 206, as ordered by the United States District Court for the District of Kansas. The Company has purchased options for an additional 17 acres contiguous to the Indian land.
Shawnee Reserve No. 206 has been a part of the Shawnee Reservation in Kansas Territory since 1831 and was reserved as Indian land and not a part of the State of Kansas, when Kansas became a state in 1861. The Indian land is located on West 83rd Street, within the boundaries of Johnson County, Kansas and the Kansas City metro area, approximately 25 miles southwest from downtown Kansas City, Missouri.
The Company maintains a relationship and agreement to manage the proposed establishment with the owners and the Shawnee Tribe of Oklahoma. The Shawnee Tribe of Oklahoma is not a federally recognized tribe. The tribe, sometimes known as the Loyal Shawnee Tribe, is a tribe organized by a 1960 federal resolution operating within and as a part of the federally recognized Cherokee Nation of Oklahoma. The Indian Owners of Shawnee Reserve No. 206 have federal Indian membership cards showing them as Cherokee-Shawnee members of the Cherokee Nation of Oklahoma. The Shawnee and the Cherokee are currently working to reaffirm the Shawnee's jurisdiction over the Indian land and to obtain federal recognition for the Shawnee Tribe.
The Company believes that there is a significant opportunity for Indian gaming on the Shawnee Reserve No. 206. However, none of the above agreements have been approved by the BIA, or the Cherokee Nation, or any other egulatory authority. There can be no assurance that these or future agreements will be approved nor that any Indian gaming will ever be established on the Shawnee Reserve, or that the Company will be the Management Company.
-Modoc Bingo- The Company has a management agreement with the Modoc Tribe to construct and operate an Indian gaming facility on Modoc Reservation lands in Eastern Oklahoma. The Management Agreement was filed with the NIGC on June 7, 1994, for review and approved on July 11, 1997. The Tribe and the Company have not determined a schedule for this project. There is no assurance that further action will be taken until the Stables is in operation or if ever.
-Other Gaming- The Company is currently reviewing other potential Indian gaming opportunities with other tribes. These discussions are in the early stages of negotiation and there can be no assurance that these gaming opportunities will be successful.
The various management agreements have not yet been approved by the various governing agencies and therefore are not filed as exhibits to this document.
Selling, general and administrative (SG&A): Expenses decreased $352,270 (24.9%) in fiscal year 1997. These expenses were $1,416,858, or 34.9% of revenue, in fiscal 1997, and $1,769,128, or 48.4% of revenue in fiscal 1996.
Other income (expense): Expenses decreased due to the writedown of the land and building in Overton, Nebraska in fiscal 1995. This facility became idle in 1994. The Company was unable to complete the negotiated sale of the land and building. Therefore, the Company reduced the value of the asset by $157,200 in order to record the asset at its estimated net realizable value. The Company entered into an agreement, on September 13, 1995, with the Village of Overton, for the sale of the building in Overton, Nebraska. The Company received a cash payment of $30,000 at closing on September 18, 1995, and may receive an additional $70,000 if the Village of Overton is either able to sell or lease the building in the future. As of year-end, the Company has not received any additional monies. There can be no assurance that the Village of Overton will be able to sell or lease the building.
Liquidity and Capital Resources
Borrowed funds have been used primarily for working capital. Bank debt related to the Company's operating line was $695,718 at April 30, 1998, $382,743 at April 30, 1997, and $301,434 at April 30, 1996.
The Company's unused line of credit at April 30, 1998 was $54,282. As of July 29, 1997, the Company's unused line of credit was $367,257. The Company's line of credit is $750,000. The interest rate on the Company's line of credit is prime plus two, as of July 17, 1998, the interest rate is 10.50%.
The Company plans to continue using the promissory notes-payable, due in August 1998, to fund working capital. The Company believes the extensions will continue and does not anticipate the repayment of these notes in fiscal 1999. The extensions of the promissory notes-payable is consistent with prior years. If the Bank were to demand repayment of the notes-payable the Company currently does not have enough cash to pay off the notes without materially adversely affecting the financial condition of the Company.
In fiscal 1996, the Company issued stock at fair market value for various legal, marketing and consulting services, in lieu of cash payments. During fiscal 1996, the Company issued 1,000 shares of stock, at a value $3,875, for professional services to be provided in the future.
In fiscal 1997, the Company issued stock at fair market value for various legal, marketing and consulting services, in lieu of cash payments. During fiscal 1997, the Company issued 45,000 shares of stock, at a value $97,545, for professional services to be provided in the future.
During fiscal 1998, the Company issued stock at fair market value for various legal, marketing and consulting services, in lieu of cash payments. In fiscal 1998, the Company issued 135,000 shares of common stock at a value of $101,250 for professional services to be provided in the future.
The Company completed the purchase of operating rights and assets of Woodson Electronics, Inc. The transaction, as consummated, required the Company to issue as the purchase price 100,000 shares of the Company's common stock, $.01 par value, and cash payments totaling approximately $34,000, over a period of two (2) years. This transaction was completed May 1, 1996. See Note 4.
The Company relocated and consolidated the Avionics manufacturing operations and assets, acquired from Woodson Electronics, Inc., and SCADA manufacturing operations to a new location in the Phoenix, Arizona area. This relocation places Avionics closer to its primary customer and provides a more skilled labor force for the expansion of the consolidated manufacturing operation. Capital to finance this relocation of approximately $60,000 was required during fiscal 1997.
The Company does not, as of April 30, 1998, have any material commitments for other capital expenditures other than the Management segment's requirements under the terms of the Indian gaming Management Agreements. These requirements are further described in this section.
Depending upon the development schedules, the Company, through BNSC, will need additional funds to complete its currently planned Indian gaming opportunities. The Company will use current cash available, and additional funds, for the start up and construction of gaming facilities. The Company anticipates 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. The Company expects that its start up and construction financing of gaming facilities will be replaced by other financial lenders, long term financing through debt issue, or equity issues.
The Stables Indian gaming project is planned to be under construction and completed during fiscal 1999 and is estimated to require a total of approximately $3,500,000 to complete, from the financing sources described above. Approximately $1,800,000 of this requirement has been funded at April 30, 1998, approximately $2,074,797 is included in the other asset, Deferred Cost of Indian Gaming. The full $2,074,797 is believed to be recoverable from the operation of the establishment per the terms of the approved Management Agreement.
As a part of the Management Contract approved by the NIGC on January 14, 1997, between the Company's wholly owned subsidiary, Butler National Service Corporation, and the Miami Tribe of Oklahoma and the Modoc Tribe of Oklahoma (the "Tribes"); the Company agreed to loan the Tribes $3,500,000 at 2% over prime, to be repaid over five years, for the construction and operation of the Stables gaming establishment. At April 30, 1998, the Company had advanced $2,074,797 to the Tribes under the contract and reported $408,333 current note receivable and $1,666,464 long-term note receivable. Security under the contract includes the Tribes' profits from all tribal gaming enterprises and all assets of the Stables except the land and building.
On May 29, 1998, the Stables Management Contract was further funded by a loan to the Company from a financial institution in the amount of $1,850,000 at 2% over prime, to be repaid over five years. As security for the $1,850,000 loan, the Company pledged its contract rights to the repayment of the $3,500,000 loan and its Manager's share (30%) of the profits from the Stables.
Analysis of Cash Flow
During 1998, the Company's cash position decreased by $48,163. A majority of the positive cash flow from operations in fiscal 1998 is due to the proceeds from the issuances of Class B convertible preferred stock of approximately $1,315,000. A large portion of the cash flow from financing activities was used in the Indian gaming segment.
Operating Activities: Modification customer's deposits decreased approximately $1,000,000 from the completion of two projects. These funds were fully earned upon completion of the projects.
The majority of the approximately $570,000 decrease in contracts-in-process relates to the completion of one large job at the aircraft modification facility. Inventories at the Modification segment increased approximately $190,000, Avionics increased $92,000, and Services decreased $44,327 respectively. The majority of the increase at Services and Avionics relates to the purchase of the Woodson Electronics, Inc. assets. Total accounts payable decreased approximately $25,000.
Investing Activities: The cash used in investing activities is due to the use of approximately $1,812,000 related to the development of Indian gaming; approximately $500,000 in the completion of new STC's at Modifications; approximately $181,000 to purchase tooling and equipment at Modifications and Services, and approximately $500,000 to purchase a building.
Financing Activities: During fiscal year 1998, the Company received proceeds from the issue of Class B preferred stock convertible into common stock for approximately $1,315,000, and assumed approximately $500,000 of long term debt on the purchase of the building.
Changing Prices and Inflation
The Company did not experience any significant pressure from inflation in 1998.
Item 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity: The table below provides information about the Company's other financial instruments that are sensitive to changes in interest rates including debt obligations.
For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on implied forward rates based upon the rate at the reporting date.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Registrant are set forth on pages 32 through 54 of this report.
Item 9.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with their current accountants.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The names and ages of the directors, their principal occupations for at least the past five years are set forth below, based on information furnished to the Company by the directors.
The executive officers of the Company are elected each year at the annual meeting of the Board of Directors held in conjunction with the annual meeting of shareholders and at special meetings held during the year. The executive officers are as follows:
R. Warren Wagoner was General Manager, Am-Tech Metal Fabrications, Inc. from 1982 to 1987. From 1987 to 1989, Mr. Wagoner was President of Stelco, Inc. Mr. Wagoner was Sales Manager for Yamazen Machine Tool, Inc. from March 1992 to March 1994. Mr. Wagoner was President of the Company from July 26, 1989, to September 1, 1989. He became Chairman of the Board of the Company on August 30, 1989.
Clark D. Stewart was President of Tradewind Industries, Inc., a manufacturing company, from 1979 to 1985. From 1986 to 1989, Mr. Stewart was Executive Vice President of RO Corporation. In 1980, Mr. Stewart became President of Tradewind Systems, Inc. He became President of the Company in September 1989.
Larry W. Franke was Vice President and General Manager of Kansas City Aviation Center from 1984 to 1992. From 1993 to 1994 he was Vice President of Operations and Sales for Marketlink, an aircraft marketing company. Mr. Franke joined the Company in July 1994 as Director of Marketing and was promoted in August 1995 to Vice President of Operations and Sales. Mr. Franke is currently Vice President of Aircraft Modifications at Avcon.
Jack L. Graham was President of Avcon Industries for 19 years and joined the Company in December 1983, at the time of the acquisition of Avcon Industries by the Company. Mr. Graham is President of Avcon Industries, Inc.
Jon C. Fischrupp was President of Lauderdale Services, Inc. ("LSI") from June 14, 1978, until May 1, 1986, at which time the Company acquired LSI and he became President of LSI (now known as Butler National Services, Inc.).
Edward J. Matukewicz was Vice President of Master Fund Company from 1987 to 1990 and Vice President of First Trust of Mid America from 1990 to 1991. Mr. Matukewicz joined the Company in May, 1991, as Treasurer.
William A. Griffith was Chief Executive Officer of Southwest Medical Center (hospital) from 1981 to 1984. Mr. Griffith was a management consultant for Health Pro from 1984 to 1986 and for Diversified Health Companies from 1986 to 1989. Mr. Griffith has been President of Griffith and Associates, management consulting, since 1984. Mr. Griffith became Secretary of the Company in 1992.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16(a) - 3(e) during the most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to the most recent fiscal year, the Company believes that no person who at any time during the fiscal year was a director, officer, beneficial owner of more than 10% of any class of equity securities registered pursuant to Section 12 of the Exchange act failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years.
Item 11.
Item 11. EXECUTIVE COMPENSATION
SUMMARY
The following table provides certain summary information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer and each of the other most highly compensated executive officers of the Company whose salary and bonus exceeded $100,000 (determined as of the end of the last fiscal year) for the fiscal years ended April 30, 1998, 1997 and 1996:
(1) Represents options granted pursuant to the Company's 1989 Nonqualified Stock Option Plan (1,050,000) in 1998 and (50,000) in 1997 and 1996.
OPTION GRANTS, EXERCISES AND HOLDINGS
The following table provides further information concerning grants of stock options pursuant to the 1989 Nonqualified Stock Option Plan during the fiscal 1998 year to the named executive officers:
(1) Except in the event of death or retirement for disability, if Mr. Stewart ceases to be employed by the Company, his option shall terminate. Upon death or retirement for disability, Mr. Stewart (or his representative) shall have three months or one year, respectively, following the date of death or retirement, as the case may be, in which to exercise such options. The option granted for 1,050,000 shares of Common Stock was granted on November 1, 1997 from the 1989 Stock Option Plan. All such options are immediately exercisable.
The following table provides information with respect to the named executive officers concerning options exercised and unexercised options held as of the end of the Company's last fiscal year:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
Name: Clark D. Stewart, Chief Executive Officer Shares Acquired on Exercise(#): 0 Value Realized($): 0
Number of Securities Underlying Unexercised Options at FY-End (#):
Exercisable/Unexercisable: 2,220,000 / 0
Value of Unexercised In-the-Money Options at FY-End ($):
Exercisable/Unexercisable: 0 / 0
COMPENSATION OF DIRECTORS
Each non-officer director is entitled to a director's fee of $100 for meetings of the Board of Directors which he attends. Officer-directors are not entitled to receive fees for attendance at meetings.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS.
On May 6, 1997, the Company extended the March 17, 1994, employment agreement with Clark D. Stewart under the terms of which Mr. Stewart was employed as the President and Chief Executive Officer of the Company at an initial minimum annual salary of $198,000 and a minimum salary of $208,000, $218,500, $229,500 and $241,000, respectively, in years two through five. The extended contract provides a minimum annual salary of $253,100, $265,700, $278,900, $292,900, $307,600, respectively in years six through ten. In the event Mr. Stewart is terminated from employment with the Company other than "for cause," Mr. Stewart shall receive as severance pay an amount equal to the unpaid salary for the remainder of the term of the employment agreement. Mr. Stewart was also granted an automobile allowance of $600 per month.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of Mr. Wagoner, Mr. Stewart, Mr. Griffith and Mr. Logan. Mr. Wagoner is the Chairman, Mr. Stewart is the President and Chief Executive Officer of the Company and Mr. Griffith is the Secretary of the Company.
During fiscal 1998, the consulting firm of Griffith & Associates was paid for business consulting services rendered to the Company in the approximate amount of $12,143. William A. Griffith, who is a director for the Company, is a principal at Griffith & Associates. It is anticipated that Griffith & Associates will continue to provide services for the Company.
During fiscal 1998, the Company paid consulting fees of approximately $133,175 to Mr. Logan for business consulting services. It is anticipated that Mr. Logan will continue to provide services for the Company. During the 1995 fiscal year, sales to Wendy's Hamburgers of Kansas City, Inc. ("WH of KC, Inc.") accounted for approximately 6% of the net sales of the Company ($790,000). William E. Logan, who is a director for the Company, is Vice President and Treasurer of WH of KC, Inc. Mr. Logan sold the WH of KC, Inc. restaurants as of June 3, 1994. The Company no longer provided temporary services subsequent to June 3, 1994.
During fiscal 1998, the consulting firm of Butler Financial Corporation was paid for business consulting services rendered to the Company in the approximate amount of $56,000. R. Warren Wagoner, who is a director for the Company, is a principal at Butler Financial Corporation. It is anticipated that Butler Financial Corporation will continue to provide services for the Company.
During fiscal 1998, the Company filed Form-8 registration statements concerning the 1989, 1993-I, 1993-II, and 1995 Non-Qualified Stock Option Plans. The plans were amended to increase the number of shares authorized by 8,000,000; 4,500,000; 3,500,000; and 3,500,000 respectively. The expiration dates were also amended to reflect December 31, 2010 as the expiration date for all four plans. As a part of the amendment process all eligible outstanding options were canceled and reissued at the current market price of $0.90.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, with respect to the Company's common stock (the only class of voting securities), the only persons known to be beneficial owners of more than five percent (5%) of any class of the Company's voting securities as of July 17, 1998.
(1) Unless otherwise indicated by footnote, nature of beneficial ownership of securities is direct, and beneficial ownership as shown in the table arises from sole voting power and sole investment power. (2) Includes 2,220,000 shares which may be acquired by Mr. Stewart pursuant to the exercise of stock options which are exercisable.
The following table sets forth, with respect to the Company's common stock (the only class of voting securities), (i) shares beneficially owned by all directors and named executive officers of the Company, and (ii) total shares beneficially owned by directors and officers as a group, as of July 17, 1998.
(1) Unless otherwise indicated by footnote, nature of beneficial ownership of securities is direct, and beneficial ownership as shown in the table arises from sole voting power and sole investment power. (2) Includes 2,220,000 shares which may be acquired by Mr. Stewart pursuant to the exercise of stock options which are exercisable. (3) Includes 310,000 shares which may be acquired by Mr. Logan pursuant to the exercise of stock options which are exercisable. (4) Includes 1,335,000 shares which may be acquired by Mr. Wagoner pursuant to the exercise of stock options which are exercisable. (5) Includes 92,000 shares which may be acquired by Mr. Griffith pursuant to the exercise of stock options which are exercisable. (6) Includes 170,600 shares which may be acquired by Mr. Franke pursuant to the exercise of stock options which are exercisable. (7) Includes 150,000 shares which may be acquired by Mr. Hayden pursuant to the exercise of stock options which are exercisable. (8) Includes 4,277,600 shares for all directors and executive officers as a group, which may be acquired pursuant to the exercise of stock options which are exercisable.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 11, Executive Compensation 22-23. During fiscal 1996, the President and CEO, Clark D. Stewart, exercised his option to purchase 400,000 shares of the Company's common stock under the terms of the 1989 Nonqualified Stock Option Plan through a loan by the Company. During fiscal 1997, Mr. Stewart delivered to the Company 125,000 shares of common stock valued at $250,000 to the Company and made cash reductions, a total of $277,265, on the loan. The shares were purchased at prices ranging from $.70 to $1.00 per share. The largest aggregate amount of indebtedness outstanding was $359,027 during fiscal 1996. The amount outstanding at July 17, 1998, is $37,647. Interest was charged on the outstanding balance at the prime rate during fiscal 1998.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed As Part of Form 10-K Report.
(1) Financial Statements:
Description Page No.
Report of Independent Accountants 33
Consolidated Balance Sheet as of April 30, 1998 and 1997 34
Consolidated Statements of Operations for the years ended April 30, 1998, 1997 and 1996 35
Consolidated Statements of Shareholders' Equity for the years ended April 30, 1998, 1997 and 1996 36-38
Consolidated Statements of Cash Flows for the years ended April 30, 1998, 1997 and 1996 39
Notes to Consolidated Financial Statements 40-54
(2) Financial Statement Schedules:
Schedule Description Page No.
II. Valuation and Qualifying Accounts and Reserves 54 for the years ended April 30, 1998, 1997 and
All other financial statements and schedules not listed have been omitted because the required information is inapplicable or the information is presented in the financial statements or related notes.
(3)Exhibits Index Page No.
3.1 Articles of Incorporation, as amended, are * incorporated by reference to Exhibit 3.1 of the Company's Form 10-K for the year ended April 30, 1988
3.2 Bylaws, as amended, are incorporated by * reference to exhibit 3.2 of the Company's Form 10-K for the year ended April 30, 1989
4.1 Certificate of Rights and Preferences of $100 * Class A Preferred Shares of the Company, are incorporated by reference to Exhibit 4.1 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.
4.2 Certificate to Set Forth Designations, Voting * Powers, Preferences, Limitations, Restrictions, and Relative Rights of Series B 6% Cumulative Preferred Stock, $5.00 Par Value Per Share, is incorporated by reference to Exhibit 4.1 of the Company's Form 10Q/A, as amended, for the quarter ending January 31, 1998.
4.3 Private Placement of Common Stock, as afforded * by Reg S, dated November 27, 1996, is incorporated by reference to the Company's Form 8-K filed on December 12, 1996.
10.1 1989 Nonqualified Stock Option Plan is * incorporated by reference to the Company's Form 8-K filed on September 1, 1989
10.2 Nonqualified Stock Option Agreement dated * September 8, 1989 between the Company and Clark D. Stewart is incorporated by reference to the Company's Form 8-K filed on September 1, 1989
10.3 Agreement dated March 10, 1989 between * the Company and Woodson Electronics, Inc. is incorporated by reference to the Company's Form 10-K for the fiscal year ended April 30, 1989
10.4 Agreement of Stockholder to Sell Stock dated * January 1, 1992, is incorporated by reference to the Company's Form 8-K filed on January 15, 1992
10.5 Private Placement of Common Stock pursuant * to Regulation D, dated December 15, 1993, is incorporated by reference to the Company's Form 8-K filed on January 24, 1994
10.6 Stock Acquisition Agreement of RFI dated * April 21, 1994, is incorporated by reference to the Company's Form 8-K filed on July 21, 1994
10.7 Employment Agreement between the Company * and Brenda Lee Shadwick dated July 6, 1994, are incorporated by reference to Exhibit 10.7 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.**
10.8 Employment Agreement between the Company * and Clark D. Stewart dated March 17, 1994, are incorporated by reference to Exhibit 10.8 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.**
10.9 Employment Agreement among the Company, * R.F., Inc. and Marvin J. Eisenbath dated April 22, 1994, are incorporated by reference to Exhibit 10.9 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.**
10.10 Real Estate Contract for Deed and Escrow * Agreement between Wade Farms, Inc. and the Company, are incorporated by reference to Exhibit 10.10 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.
10.11 1993 Nonqualified Stock Option Plan, are * incorporated by reference to Exhibit 10.11 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.
10.12 1993 Nonqualified Stock Option Plan II, are * incorporated by reference to Exhibit 10.12 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.
10.13 Industrial State Bank principal amount of * $500,000 revolving credit line, as amended, are incorporated by reference to Exhibit 10.13 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.
10.14 Bank IV guaranty for $250,000 dated * October 14, 1994, are incorporated by reference to Exhibit 10.14 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.
10.15 Bank IV loan in principal amount of $300,000 * dated December 30, 1993, are incorporated by reference to Exhibit 10.15 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.
10.16 Letter of Intent to acquire certain assets of * Woodson Electronics, Inc., is incorporated by reference to Exhibit 10.16 of the Company's Form 10-K, as amended for the year ended April 30, 1995.
10.17 Asset Purchase Agreement between the Company * and Woodson Electronics, Inc. dated May 1, 1996, is incorporated by reference to Exhibit 10.17 of the Company's Form 10-K, as amended for the year ended April 30, 1996.
10.18 Non-Exclusive Consulting, Non-Disclosure and * Non-Compete agreement with Thomas E. Woodson dated May 1, 1996, is incorporated by reference to Exhibit 10.18 of the Company's Form 10-K, as amended for the year ended April 30, 1996.
10.19 1995 Nonqualified Stock Option Plan dated * December 1, 1995, is incorporated by reference to Exhibit 10.19 of the Company's Form 10-K, as amended for the year ended April 30, 1996.
10.20 Settlement Agreement and Release - Marvin J. * Eisenbath and the Company dated April 30, 1997, is incorporated by reference to Exhibit 10.20 of the Company's Form 10-K, as amended for the year ended April 30, 1997.
10.21 Settlement Agreement and Release - Brenda * Shadwick and the Company dated May 1, 1997, is incorporated by reference to Exhibit 10.21 of the Company's Form 10-K, as amended for the year ended April 30, 1997.
21 List of Subsidiaries 55
23.1 Consent of Independent Public Accountants 56
27.1 Financial Data Schedule (EDGAR version only). * Filed herewith.
99 Cautionary Statement for Purpose of the "Safe 57 Harbor" Provisions of the Private Securities Reform Act of 1995.
* Incorporated by reference ** Relates to executive officer employment compensation
(b) Reports On Form 8-K. None
(c) Exhibits. Reference is made to Item 14(a)(3).
(d) Schedules. Reference is made to Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
July 17, 1998 BUTLER NATIONAL CORPORATION
/s/ Clark D. Stewart
Clark D. Stewart, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
Signature Title Date
/s/ Clark D. Stewart President, Chief July 17, 1998 Clark D. Stewart Executive Officer and Director (Principal Executive Officer)
/s/ R. Warren Wagoner Chairman of the Board July 17, 1998 R. Warren Wagoner and Director
/s/ William A. Griffith Director July 17, 1998 William A. Griffith
/s/ William E. Logan Director July 17, 1998 William E. Logan
/s/ David B. Hayden Director July 17, 1998 David B. Hayden
/s/ Edward J. Matukewicz Treasurer July 17, 1998 Edward J. Matukewicz (Principal Financial and Accounting Officer)
ANNUAL REPORT ON FORM 10-K
ITEM 14(a) (1) AND (2) -- LIST OF FINANCIAL STATEMENT STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND ITEM 14(d) FINANCIAL STATEMENT SCHEDULES
Years Ended April 30, 1998, 1997 and 1996
BUTLER NATIONAL CORPORATION
Olathe, Kansas
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Butler National Corporation:
We have audited the accompanying consolidated balance sheets of Butler National Corporation (a Delaware corporation) and Subsidiaries as of April 30, 1998 and 1997 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended April 30, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and ignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Butler National Corporation and Subsidiaries as of April 30, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II for each of the three years in the period ended April 30, 1998, is presented for purposes of complying with the Securities and Exchange Commission rules and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all materials respects in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Kansas City, Missouri July 17, 1998
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of April 30, 1998 and 1997
ASSETS (Notes 1 and 3) 1998 1997
Current Assets:
Cash $ 160,598 $ 208,761 Accounts receivable, net of allowance for doubtful accounts of $78,736 in 1998 and $78,736 in 1997 482,888 241,446 Note receivable 491,733 - Contracts in process 551,610 1,123,673 Inventories (Note 1): Raw materials 1,039,324 711,762 Work in process 76,073 121,687 Finished goods 55,939 100,266 1,171,336 933,715
Prepaid expenses and other current assets 37,880 121,032 Total current assets 2,896,045 2,628,627
Note receivable 1,770,714 - Supplemental type certificates (Note 1) 1,456,249 1,364,901
Property, Plant and Equipment (Note 1):
Land and Building 639,130 138,809 Machinery and equipment 973,504 962,330 Office furniture and fixtures 632,617 462,776 Leasehold improvements 33,958 33,958 Total cost 2,279,209 1,597,873
Accumulated depreciation (1,060,705) (913,476) 1,218,504 684,397
Noncurrent assets of discontinued operations (Note 3) - 2,605,634
Other Assets (Note 1) Deferred costs of Indian gaming 1,277,724 1,539,893 Aircraft and aircraft parts (Note 1) 2,056,281 2,056,281 Other assets 124,139 244,275 Total other assets 3,458,144 3,840,449
Total assets $10,799,656 $11,124,008
LIABILITIES AND SHAREHOLDERS' EQUITY (Note 2) 1998 1997
Current Liabilities: Bank overdraft payable (Note 1) $ 193,205 $ 150,306 Promissory notes payable (Note 2) 695,718 382,743 Current maturities of long-term debt (Notes 2) 17,968 50,683 Accounts payable 477,098 452,516 Customer Deposits 530,275 1,520,035 Accrued liabilities - Compensation and compensated absences 134,343 293,675 Other 227,896 137,672 Total current liabilities 2,276,503 2,987,630
Long-Term Debt, net of current maturities (Note 2) 1,972,293 1,540,718 Convertible debentures (Note 4) 650,000 1,100,000 Settlement agreement (Note 8) - 72,000 Total liabilities 4,898,796 5,700,348 Commitments and contingencies (Notes 7 and 8)
Liabilities of discontinued operations (Note 3) 39,000 551,406 Shareholders' equity (Notes 1, 3, and 4): Preferred stock, par value $5: Authorized, 200,000 shares, all classes $100 Class A, 9.8%, cumulative if earned, liquidation and redemption value $100, issued and outstanding, 20,000 shares in 1997, - 2,000,000 $1,000 Class B, 6%, cumulative if earned, liquidation and redemption value $1,000, issued and outstanding, 1,500 shares in 1998 506,834 - Common stock, par value $.01: Authorized, 40,000,000 shares Issued and outstanding 11,673,069 shares 116,730 95,242 in 1998 and 9,524,156 in 1997, Common stock warrants 8,807 8,807 Capital contributed in excess of par 7,232,155 5,725,618 Note receivable from officer arising from stock purchase agreement (37,647) (81,762) Unearned service contracts (286,823) (263,438) Treasury stock, at cost (No preferred in (1,537,240) (2,337,240) 1998 and 20,000 in 1997 & 775,000 and 175,000 common in 1998 and 1997) Retained deficit (140,956) (274,973) (Deficit of $11,938,813 eliminated October 31, 1992) Total shareholders' equity 5,861,860 4,872,254
Total liabilities and shareholders' equity $10,799,656 $11,124,008
The accompanying notes are an integral part of these balance sheets.
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the years ended April 30, 1998, 1997 and 1996
1998 1997 1996
Net Sales $5,456,106 $4,061,775 $3,653,095
Cost of Sales 3,157,656 2,351,159 2,468,543 2,298,450 1,710,616 1,184,552
Selling, general and administrative expenses 1,648,178 1,416,858 1,769,128
Operating income (loss) 650,272 293,758 (584,576)
Other income (expense):
Interest expense (255,004) (282,534) (119,258)
Interest revenue 3,584 25,428 17,639
Settlement loss and other (Note 8) 15,540 (232,869) 51,181
Other expense (235,880) (489,975) (50,438)
Income (loss) from continuing operations before taxes 414,392 (196,217) (635,014)
Provision for income taxes 164,380 3,416 22,800
Income (loss) from continuing operations 250,012 (199,633) (657,814)
Discontinued Operations:
Income (loss) from discontinued (148,316) 365,325 802,216 net of taxes
Loss on discontinued (23,965) - - operations, net of taxes
Net income (loss) $ 77,731 $ 165,692 $ 144,402
Basic earnings (loss) per common share (Note 1)
Continuing operations $ 0.03 $ (0.02) $ (0.07)
Discontinued operations (0.02) 0.04 0.09
$ 0.01 $ 0.02 $ 0.02
Shares used in per share calculation 9,418,330 9,411,168 9,269,432
Diluted earnings (loss) per common share (Note 1)
Continuing operations $ 0.02 $ (0.02) $ (0.07)
Discontinued operations (0.01) 0.04 0.08
$ 0.01 $ 0.02 $ 0.01
Shares used in per share calculation 10,436,549 9,411,168 9,629,730
The accompanying notes are an integral part of these statements.
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended April 30, 1998, 1997, and 1996
The accompanying notes are an integral part of these statements.
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended April 30, 1998, 1997 and 1996
The accompanying notes are an integral part of these statements.
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1998
1.Significant Accounting Policies:
The following is a summary of significant accounting policies:
a. Consolidation Policy: The accompanying consolidated financial statements includes the accounts of Butler National Corporation ("BNC") and its wholly-owned subsidiaries, Cansas International Corporation, Butler National Engineers, Inc., Butler National Services, Inc., Butler Temporary Services, Inc., Butler National Service Corporation, Woodson Avionics, Inc.(collectively, "The Company"). Cansas International Corporation and Butler National Corporation Consulting Engineers, Inc., were inactive during the years ended April 30, 1998, 1997 and 1996. All significant intercompany transactions have been eliminated in consolidation.
b. 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.
c. Inventories: Inventories are priced at the lower of cost, determined on a first-in, first-out basis, or market. Inventories include material, labor and factory overhead required in the production of the Company's products.
d. Properties and Related Depreciation: Machinery and equipment are recorded at cost and depreciated over their estimated useful lives. Depreciation is provided on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the term of the lease. The lives used for the significant items within each property classification are as follows:
Life in Years Building 23-39 years Machinery and equipment 5 to 17 years Office furniture and fixtures 5 to 17 years Leasehold improvements 3 to 20 years
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets retired are removed from the accounts and any resulting gains or losses are reflected as income or expense.
e. Indian Gaming: The Company currently is deferring costs associated with the potential start-up of Indian gaming. The realization of these assets is predicated on the ability of the Company and their Indian gaming partners to successfully open and operate the proposed casinos. Currently there is no assurance that BNC will be successful. The inability of the Company to recover these deferred costs could have a material adverse effect on the Company's business and results of operations.
As a part of the Management Contract approved by the NIGC on January 14, 1997, between the Company's wholly owned subsidiary, Butler National Service Corporation, and the Miami Tribe of Oklahoma and the Modoc Tribe of Oklahoma (the "Tribes"); the Company agreed to loan the Tribes $3,500,000 at 2% over prime, to be repaid over five years, for the construction and operation of the Stables gaming establishment. At April 30, 1998, the Company had advanced $2,074,797 to the Tribes under the contract and reported $408,333 current note receivable and $1,666,464 long-term note receivable. Security under the contract includes the Tribes' profits from all tribal gaming enterprises and all assets of the Stables except the land and building.
The Company has capitalized approximately $3,353,000 and $1,540,000 at April 30, 1998 and April 30, 1997, respectively, of costs related to the development and anticipated construction of Indian gaming facilities. In the opinion of management, these costs will be recoverable through the gaming activities or, in the event the Company is unsuccessful in establishing such operations, these costs will be recovered through the liquidation of the associated assets. These costs include the following:
- A prepayment of $242,500 for construction services to be rendered. This prepayment was funded with 60,000 shares of the Company's common stock, issued in the fiscal year 1994, and an additional 40,000 shares in fiscal year 1995.
- Payments of $87,622 for architectural and engineering services. These payments were also funded with stock issuances of 29,715 shares in fiscal year 1995. Payments of $50,000 for equipment, funded with stock issuances of 20,000 shares in fiscal 1994.
- Cash payments of approximately $1,813,000, $186,000 and $172,000 in 1998, 1997, and 1996, respectively, for architectural, engineering and construction services.
- Cash advances to the Tribes of $190,000, in fiscal 1995, which the Tribes used for the acquisition of land.
- Acquisition of land and land improvements by the Company in the amount of $203,000 in fiscal 1997.
f. Other Assets: Supplemental Type Certificates ("STC's") are authorization granted by the Federal Aviation Administration for the modification of a Type Certificated aircraft. The STC authorizes the Company to build the required parts and assemblies and to perform the installations on applicable customer-owned aircraft. The Company has acquired and is currently in the process of refurbishing an aircraft at their Aircraft Modification facility. The book value of this plane is $315,000 which includes the original cost of the plane plus parts, labor and overhead incurred during the refurbishment. The plane is currently being used in the support of the FAA approval of various Learjet Supplement Type Certificates. At this time, the Company has not determined if this plane will be retained for corporate use or sold and as such continues to classify the plane as other assets.
During fiscal year 1995, the Company completed the refurbishment of another aircraft and exchanged that aircraft which had been classified in other assets in the prior year, for Lear inventory parts. The book value of this aircraft was approximately $240,000. The Lear parts have been classified as other assets in the current year.
During fiscal year 1996, the Company acquired a Lear 35 valued at approximately $1,500,000 which is also recorded in other assets on the Balance Sheet. This aircraft is currently being used in the support of the FAA approval of various Learjet Supplemental Type Certificates. Recovery of these costs will be obtained through future modification orders on aircraft in which the asset will be amortized against the orders. The amortization expense for the STC's was approximately $408,000 and $124,000 for 1998 and 1997 respectively. The Company expects these future orders to cover the current costs. However, uncertainty exists as to the ability of the Company to gain future orders. Failure to gain these orders and subsequently recover the asset costs could have a materially adverse impact on the Company's financial position and operations.
g. Bank Overdraft Payable: The Company's cash management program results in checks outstanding in excess of bank balances in the general disbursement account. When checks are presented to the bank for payment, cash deposits in amounts sufficient to fund the checks are made from funds provided under the terms of the Company's revolving credit notes agreement (Note 2).
h. Financial Instruments: The fair values of the Company's financial agreements generally approximate their fair market values. The fair value of the convertible debentures and convertible preferred stock is not determinable.
i. Revenue Recognition: The Company performs 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. At April 30, 1998, there were six contracts in process. The Company recognizes revenue for its distribution company on product sales during the period in which title passes to the purchaser.
j. Income Per Share: Income per (common and common equivalent) share is based on the weighted average number of common shares outstanding during the year. Stock options are included as common stock equivalents in 1996, since they are dilutive. Stock options, convertible preferred, and convertible debentures have been considered in the dilutive earnings per share calculation (Note 10).
k. Quasi Reorganization: After completing a three year program of restructuring the Company's operation, on October 31, 1992, by using quasi reorganization accounting, the Company was able to adjust the accumulated deficit to a zero balance thereby affording the Company a "fresh start." No assets or liabilities required adjustment in this process. The amount of accumulated deficit and capital contributed in excess of par, removed as of October 31, 1992, was $11,938,813.
l. Non-Cash Transactions:
During the year ended April 30, 1998, the Company issued 2,148,913 shares of stock valued at $1,528,026 in various non-cash transactions. One hundred ninety three thousand shares valued at $101,250 were issued for services to be rendered in the future; 91,318 shares valued at $79,903 were issued as the Company match to the employee 401-K plan; 196,722 shares valued at $157,100 were issued for services rendered; and 1,738,413 shares were issued under the exchange provisions of the convertible and preferred debentures for $1,259,125 in face value plus interest.
During the year ended April 30, 1997, the Company issued 231,266 shares of stock valued at $446,208 less $10,966 of issue costs in various non-cash transactions. Twenty five thousand shares valued at $53,125 were issued for services to be rendered in the future; 10,000 shares valued at $21,250 were issued for other assets; (a) 100,000 shares valued at $200,000 were issued in exchange for the assets of Woodson Electronics, Inc., an agreement not to compete, and an agreement to provide consulting services by Thomas E. Woodson; 84,034 shares were issued under the exchange provisions of the convertible debenture for $150,000 in face value; and 12,232 shares valued at $21,833 were issued to pay interest on the debentures.
During the year ended April 30, 1996, the Company issued 1,000 shares of stock valued at $4,000 in a non-cash transaction. Additionally, the Company acquired a Lear 35 for debt of $1,500,000. During the year ended April 30, 1995, the Company issued 173,048 shares of stock valued at $424,809 in various non-cash transactions. As discussed in Note 1 (m), the Company issued a total of 69,715 shares of stock with a value of $180,122 in fiscal year 1995, for costs related to the Indian bingo facility. As discussed in Note 1, the Company issued a total of 95,000 shares of stock with a fair value of $219,688 in exchange for current and future professional services. Additionally, 8,333 shares were issued with a value of $24,999 as payment for services per an employment agreement.
m. Unearned Service Contracts: In fiscal 1998 and 1997, the Company issued 193,000 and 250,000 shares of common stock respectively at a value of $101,250 amd $53.125 respectively for professional services to be provided in the future.
During fiscal 1996, the Company did not issue any stock for services to be performed in the future. As discussed in Note 1, during fiscal year 1995, the Company issued 95,000 shares of stock at fair market value, ($219,688) to various professionals in exchange for services contracted to be provided in future periods. The unearned portion of these service contracts is being amortized over the service period, (generally 12-60 months) and is reflected as a reduction in equity until such time as the services are rendered.
Future amortization of unearned service contracts is as follows:
Year Ending April 30, Amount
1999 104,532 2000 66,771 2001 47,501 2002 47,500 2003 12,551 2004 7,968 Total 286,823
n. Reclassifications: Certain reclassifications within the financial statement captions have been made to maintain consistency in presentation between years.
2. Debt: Principal amounts of debt at April 30, 1998 and 1997, consist of the following:
Promissory Notes: 1998 1997 Interest at prime plus 2% $ 118,000 $ 154,000 (10.50% at April 30, 1998), due August 25, 1998, collateralized by a first or second position on all assets of the Company
Interest at prime plus 2% 577,718 228,743 (10.50% at April 30, 1998), due August 25, 1998, collateralized by a first or second position on all assets of the Company
Total Promissory Notes $695,718 $382,743
Other Notes Payable: Note Payable for Lear 35, Interest $1,412,723 $1,497,124 at prime plus 2%, (10.50% at April 30, 1998), due June 30, 1999 collateralized by Aircraft Security Agreement dated November 30, 1995.
Note payable for land purchase, - 33,000 annual installments of $33,000 through January 19, 1998, non interest bearing
Note payable for building, interest 398,813 - at prime plus 1%, 9.5% at April 30, 1998, due March 1, 2001 collateralized by real estate.
Other Notes Payable 178,725 61,277 1,990,261 1,591,401 Less: Current maturities 17,968 50,683 $1,972,293 $ 1,540,718
Maturities of long-term debt (excluding Promissory notes) over the next four years are as follows: Year Ending April 30, Amount 1999 $ 63,849 2000 1,477,093 2001 440,330 2002 8,988
The Company has promissory notes in which it may borrow a maximum of $750,000. The notes mature August 25, 1998. At April 30, 1998, the Company had borrowed $695,718 on the notes. The weighted average interest rates were 10.25% for the years ended 1998 and 1997 respectively.
3. Discontinued Operations: RF, Inc., dba Redi-Foods: On April 14, 1998, the Company discontinued the operation of its wholesale food Distribution segment, a wholly owned subsidiary , RF, Inc., a Missouri corporation. This segment is being liquidated and the Company does not plan any future operations in the wholesale food distribution industry.
The Company acquired RF, Inc. on April 21, 1994. The Company exchanged 650,000 shares of the Company's common stock for 100% of the issued and outstanding shares of RF, Inc. At the date of acquisition, RF, Inc.'s total assets were $565,605, consisting of cash of approximately $200,000, accounts receivable of approximately $280,000, and inventory of approximately $60,000. RF, Inc.'s liabilities included approximately $260,000 of vendor payables, and $115,000 of accrued payroll and payroll taxes.
The individuals who sold RF, Inc. to the Company had sought for some time to reacquire from the Company the ownership of RF, Inc. The individual (the "Employee") filed a lawsuit against the Company seeking to rescind the sale of RF, Inc. stock and for damages. The Company and the Employee reached an agreement to settle and release all claims and counterclaims effective April 30, 1997, ("Release Agreement"). The Employee dismissed the lawsuit with prejudice. In addition to the releases, under the terms of the agreement, the Company received, on June 26, 1997, 600,000 shares of the Company's common stock and a commitment for certain payments over the next three years. The Company released the Employee from the terms of his employment contract and the April 24, 1994 Stock Purchase Agreement, including his agreement not to compete with the Company in the food distribution industry. The Company recorded a net gain of $432,989 (principally noncash) in the first quarter of 1998 for this transaction after consideration of $1,078,544 of costs associated with the claims, counter-claims and settlement.
RF, Inc. continued operations with transition management after the release of the Employee by the Company. However, product sales slowed and product selection and availability was restricted because of the industry knowledge associated with the Employee and the loss of sales personnel to the Employee. A bank credit line of $1,200,000 arranged in 1996, was used to purchase approximately $600,000 of inventory. Without providing samples as requested, a major chicken products supplier shipped approximately $250,000 of product in the summer of 1997 against an order scheduled for delivery in February 1997.
Sales at RF, Inc. declined in the fall 1997 compared to the previous year. The decline was accelerated more than expected due to the level of market confusion and the non acceptance of RF, Inc. without the Employee. A part of the unrest was a result of the growing dispute with a chicken supplier over the product shipped late. In December 1997, the pressure from the chicken supplier for complete payment of the late shipment was building, the product inventory was high, bank interest was using available funds, and payments on accounts receivable had slowed.
On January 7, 1998, the chicken supplier filed suit to collect approximately $44,000 remaining unpaid for the late shipment. An attachment order was issued which stopped shipment of all RF, Inc. products. The attachment order effectively eliminated the ability of RF, Inc. to respond to the needs of its customers. By February 1, 1998, because it was slow, expensive, and sometimes not possible to have product released to fill orders and because the actions of the chicken supplier had created a feeling of doom in the industry regarding RF, Inc., all the personnel at RF, Inc. were terminated. Some personnel were called back to assist with liquidation of the inventory under the current conditions.
On March 27, 1998, the chicken supplier and two transportation companies filed a petition for involuntary bankruptcy against RF, Inc. On May 12, 1998, the court determined that RF, Inc. was bankrupt and a trustee was appointed on June 11, 1998. All the assets of RF, Inc. were pledged as security for the bank line of credit.
After the bank obtains control of all the assets of RF, Inc., the Company plans to cooperate in the collection of accounts receivable through a law firm, the liquidation of the inventory and to purchase the fixed assets, primarily office equipment, from the bank. The RF, Inc. bank debt is approximately $637,000, plus interest and legal collection costs. The Company believes that an orderly liquidation of the assets at retail and the purchase of the fixed assets should allow the bank to recover substantially the amount due on the bank line of credit. Unsecured creditor claims, less the claims of the three unsecured creditors filing the involuntary bankruptcy petition, the bank claims and the Company claims, are expected to be approximately $200,000.
As of April 30, 1998, the operations of RF, Inc. have been deconsolidated due to the Chapter 7 involuntary bankruptcy liquidation of the wholly owned subsidiary. The entire investment in RF, Inc. was written-off through the current year loss from discontinued operations. The assets and
liabilities of RF, Inc. at April 30, 1998, were comprised of accounts receivable $716,478, inventory $359,103, other assets $44,423, bank liabilities $637,947 and other accrued liabilities $397,903. The revenues associated with RF, Inc. for the years ended 1998, 1997, and 1996 were $3,783,132, $17,478,540, and $13,685,871 respectively.
Valu Foods, Inc., dba Valu Foods®: On April 14, 1998, the Company discontinued the operation of its retail food store, a wholly owned subsidiary , Valu Foods, Inc., a Kansas corporation. This retail operation is being liquidated and the Company does not plan any future operations in the retail food industry.
The Company formed Valu Foods, Inc. to market test the concept of selling frozen food overruns, seconds, and other discounted products to the rural market. A retail store owned by an individual in a rural Kansas community had been operating since September 1996 market testing these lines of products. In August 1997, the Company opened a retail store in the Kansas City area to market test products packaged under the registered trade name, Valu Foods and other products. Store sales were as expected at the opening and continued to grow through the fall of 1997. The test project was discontinued when the Company discontinued the operation of the wholesale food Distribution segment. The Company plans to liquidate the Valu Foods, Inc. assets in the ordinary course of business and the store will close the sooner of the completion of the inventory liquidation or on January 31, 1999, when the lease expires. The loss on discontinued operations is approximately $23,965(net of tax). The loss includes anticipated legal costs, rental costs and payroll.
As of April 30, 1998, the operations of Valu Foods, Inc. have been discontinued due to the planned closing of the wholly owned subsidiary. The entire investment in Valu Foods, Inc. was written-off through the current year loss from discontinued operations. The assets and liabilities of Valu Foods, Inc. at April 30, 1998, were comprised of property, plant and equipment including leasehold improvements of $332,953 and inventory $24,779. The revenues associated with Valu Foods, Inc. for the year ended 1998 was $143,550.
4. Stock Transactions: During the year ended April 30, 1996 the Company completed private placements of its securities. The Company sold a total of 605,175 shares of common stock resulting in gross proceeds to the Company of approximately $1,375,000, and net proceeds of approximately $1,200,000, after deducting the expenses of the offering.
On May 1, 1995, the Company entered into a letter of intent to acquire certain assets of Woodson Electronics, Inc.(WEI). On May 1, 1996, this transaction was completed. The Company received a portion of WEI's operating rights and assets in exchange for 80,000 shares of stock with a fair market value of $160,000. The Company also entered into a Non- Exclusive Consulting, Non-Disclosure and Non-Compete Agreement with Thomas E. Woodson, which provides for the issuance of 20,000 shares of the Company's common stock and $36,000 to be paid out over 24 months. WEI is engaged in the business of designing, manufacturing, improving, marketing, maintaining, and providing, directly and with the assistance of others, data acquisition, alarm monitoring and reporting products and services related to such products. WEI supplies the monitoring products to Butler National Services, Inc.
On December 16, 1997, the Company completed a private placement which was executed in reliance upon the exemption from registration afforded by Regulation S as promulgated by the Securities and Exchange Commission, under the Securities Act of 1933, as amended. The Company issued Series B 6% Convertible Preferred Stock in the amount of $1,500,000. The securities were not publicly offered. The securities were sold to accredited investors. The investors were not U.S. persons. Net proceeds of the offering were $1,315,959, after deducting legal, accounting, wire transfer and consulting expenses of the offering. The terms of conversion allow the holder, at its option, at any time commencing 45 days after issue to convert the preferred stock into shares of the Company's Common Stock, $0.01 par value per share, at a conversion price for each share of common stock equal to 70% of the 5 day average closing bid for the five days prior to closing. The shares are subject to a mandatory, 24 month conversion feature at the end of which all shares outstanding will be automatically converted.
The Company completed a private placement on June 26, 1996 in which the Company issued a 8.0% cumulative convertible debenture due June 26, 1998 in the amount of $750,000. Net proceeds of the offering were $675,000, after deducting the expenses of the offering. The debenture is convertible only to common stock at 70% of the average closing price for the five days prior to conversion, unless the average closing price is $1.78 or lower. When the average closing price is below $1.78, the conversion is at the closing price without a discount. At the due date, the end of the two year term, the balance not yet converted must be converted to common stock. The 8% interest is payable in stock or cash at the option of the Company.
The Company completed a private placement on November 1, 1996 in which the Company issued a 8.0% cumulative convertible debenture due November 1, 1998, in the amount of $500,000. Net proceeds of the offering were $450,000, after deducting the expenses of the offering. The debenture is convertible only to common stock at 70% of the average closing price for the five days prior to conversion, unless the average closing price is $2.07 or lower. When the average closing price is below $2.07, the conversion is at the closing price without a discount. At the due date, the end of the two year term, the balance not yet converted must be converted to common stock. The 8% interest is payable in stock or cash at the option of the Company.
5. Income Taxes: Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provision of the enacted tax laws. The Company has net operating loss carryforwards and cumulative temporary differences which would result in the recognition of net deferred tax assets. A valuation allowance has been provided which reduces the net deferred tax asset to zero. At April 30, 1998, the Company had approximately $4.6 million of net operating losses which expire in 2002 to 2013.
The tax benefit of net operating losses generated prior to the Quasi reorganization and utilized after the reorganization are reflected as additions to capital contributed in excess of par.
The deferred taxes are comprised of the following components:
Current Deferred Taxes 04/30/98 04/30/97 Current Assets $ 416,843 $ 454,080 Current Liabilities (463,210) (281,600) Total Current Deferred Taxes 46,367 172,480
Noncurrent Deferred Taxes Noncurrent Assets 2,349,958 2,370,690 Noncurrent Liabilities (297,012) (424,224) Total Noncurrent Deferred Taxes 2,052,946 1,946,466
Total Deferred Taxes 2,006,579 2,118,946 Less: Valuation Allowance (2,006,579) (2,118,946) Total Deferred Taxes, Net $ 0 $ 0
The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows:
4/30/98 4/30/97
Accounts Receivable Reserve $ 30,352 $ 71,494
Inventory Reserve 309,285 320,917
Net Operating Loss 1,793,073 1,737,513
Depreciation (283,314) (404,011)
Gaming 519,934 526,463
Release Agreement Costs (462,600) (281,600)
Other 99,849 148,170
Net Deferred Tax Items $2,006,579 $2,118,946
A reconciliation of the provision for income taxes to the statutory federal rate is as follows:
1998 1997 1996
Statutory Federal Income Tax Rate 34.0% 34.0% 34.0% Less: Impacts of net operating losses and changes in valuation allowances - - (44.9) Nondeductible expenses 7.5 1.7 10.9 State taxes 0.5 6.3 15.8 Effective Tax Rate 42.0% 42.0% 15.8%
6. Stock Options and Incentive Plans:
The Company has established a number of nonqualified stock option plans to provide key employees with an opportunity to acquire a proprietary interest in the Company. Options are granted under these plans at exercise prices equal to fair market value at the date of the grant, and are generally exercisable immediately and expire in 10 years. Each of the plans automatically terminate after 10 years at which time no more options may be granted but all previously granted options remain exercisable until reaching their expiration date.
The Company has five stock option plans, the 1981 Qualified Plan ("1981 Plan"), the 1989 Non Qualified Plan ("1989 Plan"), the First 1993 Non Qualified Plan ("1993-I Plan"), the Second 1993 Non Qualified Plan ("1993-II Plan") and the 1995 Non Qualified Plan ("1995 Plan"). The Company accounts for these plans under Accounting Principles Board Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost been recognized in accordance with Financial Accounting Standards Board Statement No. 123, Accounting for Stock Based Compensation, the Company's operating income would have been effected as follows:
1998 1997 1996
Dividend Yield 0% 0% 0% Expected Stock Volatility 98% 101% 101% Risk Free Interest Rate 6.07% 6.79% 5.86% Expected Option Lives 10 years 10 years 10 years Fair Value of Options $ 1.06 $ 1.67 $ 1.84 Pro Forma Expense $565,000 $ - $ - Basic EPS effect $ 0.06 $ - $ -
The 1981 Plan has 100,000 shares reserved by the Company and has never been used. The other plans permit grants of nonqualified and incentive stock options. The Company has reserved 10,000,000, 5,000,000, 5,000,000 and 5,000,000 shares of its common stock under the 1989 Plan, 1993-I Plan, 1993-II Plan and 1995 Plan, respectively. All plans vest at the date of grant and provide that the exercise price shall be equal to the fair market value at the date of grant as determined by the Board of Directors, and the term of the options shall not exceed ten years from grant date.
The following table summarizes the Option Plans.
4/30/98 4/30/97 4/30/96 1989 Nonqualified Option Plan
Beginning Balance - options 100,000 100,000 500,000 outstanding Options granted 100,000 - - Canceled/Forfeited 100,000 - - Exercised - - 400,000 Ending Balance - options outstanding 100,000 100,000 100,000 Exercise Price Ranges $ 0.90 $ 2.3125 $ 2.3125 Shares available for grants 8,000,000 - - Price range of options exercised - - .70 to 1.00
1993 Nonqualified Option Plan I 4/30/98 4/30/97 4/30/96
Beginning Balance - options outstanding 290,500 295,500 333,500 Options granted 247,500 - - Canceled/Forfeited 280,500 5,000 17,000 Exercised - - 21,000 Ending Balance - options outstanding 257,500 290,500 295,500 Exercise Price Ranges $0.90 to 2.50 $2.50 to 3.00 $2.50 to 3.00 Shares available for grants 4,725,500 130,500 125,500 Price range of options exercised - - $2.50 to 3.00
1993 Nonqualified Option Plan II 4/30/98 4/30/97 4/30/96
Beginning Balance - options outstanding 1,444,400 1,457,564 1,484,264 Options granted 1,275,300 - - Canceled/Forfeited 1,302,400 13,164 5,000 Exercised - - 21,700 Ending Balance - options outstanding 1,417,300 1,444,400 1,457,564 Exercise Price Rang $0.90 to 2.50 $2.3125 to 3.00 $2.3125 to 3.00 Shares available for grants 3,573,600 18,400 5,236 Price range of options exercised - - $2.50 to 3.00
1995 Nonqualified Option Plan 4/30/98 4/30/97 4/30/96
Beginning Balance - options outstanding 1,323,000 696,000 - Options granted 4,601,000 772,000 700,000 Canceled/Forfeited 1,323,000 133,000 4,000 Exercised - 12,000 - Ending Balance - options outstanding 4,601,000 1,323,000 696,000 Exercise Price Ranges $0.90 $2.00 $2.00 Shares available for grants 3,824,000 165,000 804,000 Price range of options exercised - $2.00
7. Commitments:
a. Lease Commitments: The Company leases space under operating leases with initial terms ranging from three years to twenty years. Minimum lease commitments under operating leases for the next five years are as follows:
For the year ending April 30, 1999 $145,912 2000 85,745 2001 66,000 2002 66,000 2003 33,000 And thereafter 198,000
Total rental expense incurred for the years ended April 30, 1998, 1997 and 1996 was $187,905, $185,742 and $164,993 respectively.
b. Employment Agreements: The Company has employment contracts with two officers.
The first contract calls for annual compensation of $198,000 increasing in various amounts to $241,000. This contract expires April 30, 1999. The Company also issued this officer options to purchase 500,000 shares of common stock at $.1875 per share and 600,000 shares of common stock at prices ranging from $.50 per share to $1.00 per share. During 1991, the Company issued this officer additional options to purchase 800,000 shares of common stock at $.05 per share. These options expire the earliest of ten years from date of grant, one year after death occurring while employed by the Company, or three months after ceasing to be a full-time employee of the Company for any reason other than death. This officer exercised options for 600,000 shares at prices ranging from $.1875 per share to $.50 per share during fiscal 1993 and 800,000 shares at $.05 per share during fiscal 1992. This officer exercised options for 100,000 shares at $.60 per share during fiscal 1995. The Company granted additional options to purchase 100,000 shares at $2.3125 during fiscal 1995. This officer exercised options for 400,000 shares at prices ranging from $.70 to $1.00 per share during fiscal 1996. The Company granted options to purchase 50,000 shares at $2.00 during fiscal 1996. The Company granted options to purchase 50,000 shares at $1.8125 per share during fiscal 1997. At April 30, 1997, 100,000 options remain available to exercise at 2.3125 per share which expires September 1, 1999.
A second contract calls for annual compensation of $300,000 and incentive compensation based on operating income. This contract was terminated by the Release agreement effective April 30, 1997. See Note 3.
8. Contingencies:
The Company had an employment agreement with an individual which the Company terminated in April 1995. This individual filed a lawsuit against the Company, the President of the Company, and various corporate subsidiaries alleging the Company wrongfully terminated the individual's employment in breach of the contract. The suit was filed in October, 1995, in State Court in Johnson County, Kansas. The Company and the individual reached an agreement to settle and release all claims and counterclaims on May 1, 1997. The individual dismissed the lawsuit with prejudice. The terms of the settlement include payments of $122,000 and $72,000 by the Company to the individual during fiscal 1998 and fiscal 1999 respectively.
The Company is involved in various lawsuits incidental to its business. Management believes the ultimate liability, if any, will not have an adverse effect on the Company's financial position or results of operations.
Due to the Company's financial condition, and the need to reduce expenses, the Board of Directors approved the elimination of product liability insurance in August, 1989. Management is not aware of any claims which individually or in the aggregate exceed the annual cost of the insurance.
9. Related Party Transactions:
During fiscal 1998, the Company paid consulting fees of approximately $132,676 to a board member for business consulting services.
A board member of the Company is also a principal of a firm which provides business consulting services to the Company. Total payments in 1998 under this agreement were approximately $42,739.
A board member of the Company is also a principal of a firm which provides business consulting services to the Company. Total payments and accruals in 1998 under this agreement were approximately $40,000, and $56,000, respectively.
In 1993, a loan was made to an officer to purchase 600,000 shares of the Company's stock. These shares were purchased with options outstanding from the 1989 Nonqualified Stock Option Plan, at prices ranging from $.1875 to $.50 per share. This loan was paid during fiscal 1995. In 1995, an additional loan was made to this officer to purchase 100,000 shares of the Company's stock. These shares were also purchased with options outstanding from the 1989 Nonqualified Stock Option Plan, at $.60 per share. In 1996, additional loans were made to the officer to purchase 400,000 shares of the Company's stock. These shares were also purchased with options outstanding from the 1989 Nonqualified Stock Option Plan, at prices ranging from $.70 to $1.00 per share. This loan is shown as a reduction of stockholders' equity on the financial statements. These loans are non-interest bearing, due on demand, and collateralized by the stock purchased with the proceeds.
In fiscal 1998, the officer reduced the loan balance by $44,116 through expense reimbursement. The loan balance is currently $37,647.
During fiscal 1996, an officer of the Company sold 20,000 shares of the Company stock to the Company at fair market value. These shares are now held in treasury.
10. Common Shares Used in Per Share Calculations:
The following table shows the amounts used in computing earnings per share and the effect on income and weighted average number of shares of dilutive potential common stock.
1998 1997 1996 Earnings available for common shares 77,731 165,692 144,402
Convertible debentures (interest expense, net of tax) 31,954 43,100 -
Earnings available for common shares after assumed conversion of dilutive securities 109,685 208,792 144,402
Earnings per share: Basic: Earnings from continuing operations 0.03 (0.02) (0.07) Income (loss) from/on discontinued operations (0.02) 0.04 0.09 Earnings available for common shares 0.01 0.02 0.02
Earnings per share: Diluted: Earnings from continuing operations 0.02 (0.02) (0.07) Income (loss) on discontinued operations (0.01) 0.04 0.08 Earnings available for common shares 0.01 0.02 0.01
Weighted average number of common shares used in basic EPS 9,418,330 9,411,168 9,269,432 Per share effect of dilutive securities: Convertible Preferred Stock 368,219 - - Convertible debentures 650,000 47,474 360,298 Options - 8,108 617,104
Weighted number of common shares and dilutive potential common shares used in diluted EPS 10,436,549 9,411,168 9,629,730
11. Subsequent Events:
In November 1995, the Aircraft Modification business segment purchased a Learjet model 35 aircraft to use for the demonstration and flight testing of the Avcon Fins and related model 35 STC products to the FAA. Upon approval, the products were shown and demonstrated to the aviation market to determine the product marketability and to determine the market for Learjets modified with the Avcon R/X Mod. The Company will record a net gain in the first quarter of fiscal 1999 from the sale of this aircraft during July 1998. The Company has made an offer and expects to purchase a Learjet model 25 for demonstration of the Avcon model 25 products to the FAA. The Company expects that the products will be approved by the FAA for use on both the Learjet models 25 and 35. Further, the Company is planning to purchase, modify and resell four to six aircraft per year and has established an inventory floor plan arrangement to finance this activity.
12. New Accounting Standards:
The American Institute of Certified Public Accountants has issued SOP 98-5, "Reporting on the costs of start-up activities." This standard provides a change in the capitalization policy for start up costs. The standard is required for fiscal year end 1999. The Company is currently evaluating the adoption of this standard.
13. Industry Segmentation and Sales by Major Customer:
a. Industry Segmentation: The Company's operations have been classified into five segments in 1998, 1997 and 1996.
1. Gaming - principally includes the business management services to Indian tribes in connection with the Indian Gaming Act of 1988. (Beginning in fiscal 1994).
2. Avionics - principally includes the manufacture of airborne switching units used in DC-9, DC-10, DC- 9/80, MD-80, MD-90 and the KC-10 aircraft.
3. Aircraft Modifications - principally includes the modification of business type aircraft from passenger to freighter configuration, addition of aerial photography capability, stability enhancing modifications for Learjets, and other modifications.
4. Monitoring Services - principally includes the monitoring of water and wastewater remote pumping stations through electronic surveillance, for municipalities and the private sector.
5. Temporary Services - provides temporary employee services for corporate clients.
(a) Operating expenses not specifically identifiable are allocated based upon sales, cost of sales, square footage or other factors as considered appropriate.
b. Major Customers: Sales to major customers (10% or more of consolidated sales) were as follows:
1998 1997 1996 Aircraft Modification 16% 21% 11% Monitoring Services 12% 16% 17% Total Major Customers 28% 37% 28%
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES for the years ended April 30, 1998, 1997 and 1996