REFERENCE TO EXHIBIT 99 OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
Statements made in this report, filed with the Securities and Exchange Commission, communications to stockholders, press releases, and oral statements made by representatives of the Company that are not historical in nature, or that state the Company or management intentions, hopes, beliefs, expectations or predictions of the future, may constitute "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," "guidance" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties, and assumptions. It is important to note that any such performance and actual resu lts, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the Cautionary Statements and Risk Factors, filed as Exhibit 99 and Item 1A. Risk Factors to the Company's Annual Report on Form 10-K for the year ended April 30, 2010 are incorporated herein by reference. Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.
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FIRST QUARTER FISCAL 2011 COMPARED TO FIRST QUARTER FISCAL 2010
Our revenue for the three months ended July 31, 2010 was $9,546,358, an increase of 57.3% from the three months ended July 31, 2009 with revenue of $6,068,539. Our operating loss for the three months ended July 31, 2010 was $63,818, compared to a profit of $1,197,758 for the three months ended July 31, 2009.Approximately $496,000 of the operating profit in 2009 can be attributed to the sale of land in Dodge City, Kansas.
Discussion of the specific changes by operation at each business segment follows (the results of operations are based on pre-corporate allocations):
Aircraft Modifications: Revenue from Aircraft Modifications segment for the three months ending July 31, 2010, was $2,166,722, a decrease of 5.0% from the three months ending July 31, 2009 with revenue of $2,280,538, and a decrease of 37.1% from the three months ending July 31, 2008 with revenue of $3,447,130. The modifications segment had an operating loss of $61,601 in the three months ended July 31, 2010, an operating profit of $48,319 in the three months ending July 31, 2009, and $774,867 in the three months ending July 31, 2008. The reallocation of aircraft to a long term asset resulted in additional depreciation expense of approximately $187,452, reducing our operating profit for the three months ending July 31, 2010.
During the past few years we have seen a significant increase in aircraft camera modification. As the economy grows aircraft owners may elect to update, modify, and purchase business aircraft. A shift to business aircraft ownership positively impacts our aircraft modification revenues. Although we cannot anticipate the future we must always consider the negative impact of items such as the September 11, 2001 event, increases in fuel prices, and general economic downturns.
Services - SCADA Systems and Monitoring Services: Revenue in the Monitoring Services Segment increased from $381,100 for the three months ended July 31, 2009 to $422,777 for the three months ended July 31, 2010. During the three months ended July 31, 2010, we maintained a relatively level volume of long-term contracts with municipalities. We anticipate increases in revenue from additional lift station rehabilitations over the next three to four years. Revenue fluctuates due to the introduction of new products and services and the related installations of these types of products. Our contracts with our two largest customers have been renewed through fiscal year 2011. An operating profit of $64,816 in Monitoring Services was recorded for the three months ended July 31, 2010, compared to a profit of $65,029 for the three months ended July 31, 2009, a decrease of 0.3%. We believe the service business has had revenue stability over the past few years and we expect this to continue.
Corporate / Professional Services: Services in this segment include the architectural services of BCS Design, Inc., activities related to gaming and other real estate development, on site contract management of gaming establishments, and engineering consulting services.
Revenues consisting of architectural services and revenues related to completed construction projects were $142,800 for the three months ended July 31, 2009 and none for the three months ended July 31, 2010. Projects related to architectural services decreased $123,338 for the three months to revenues of $165,860 at July 31, 2010. An operating loss of $33,945 for the three months ending July 31, 2010 was recorded compared to a profit of $68,128 for the three months ended July 31, 2009.
Revenues related to gaming and other real estate development, on site contract management of gaming establishments for the three months ended July 31, 2010 was $564,581 compared to $701,480 for the three months ended July 31, 2009, a decrease of 19.5%. Operating profits from management services related to gaming increased $184,801 from $104,310 for the three months ended July 31, 2009, to $289,111 for the three months ended July 31, 2010.
The Gaming Facility located in Dodge City, Kansas known as Boot Hill Casino and Resort opened for business on December 15, 2009. In the three months ended July 31, 2010 the Gaming Facility received gross revenues including funds for the State of Kansas of $10,059,750. Mandated fees, taxes and distributions reduced gross revenue by $4,814,843 leaving net revenue to us, as the manager, of $5,244,907. The net loss from the Gaming Facility for the three months ended July 31, 2010 was $292,359.
Selling, General and Administrative ("SG&A"): Expenses were $5,316,413, or 55.7% of revenue, for the three months ended July 31, 2010 compared to $1,685,832 or 27.7% of revenue for the three months ended July 31, 2009. Of these costs, $3,953,344 were directly related to Gaming Facility. Additional consulting and payroll expenses of approximately $267,000 were directly related to other gaming development. Selling, General and Administrative costs increased by $3,630,580 for the three months ending July 31, 2010 compared to the three months ended July 31, 2009.
As we grow, we anticipate that overhead expenses may increase. We continue to monitor and evaluate our overhead expenses in order to efficiently manage our operations. Other Income (Expense): Interest expense decreased from $120,602 in the three months ended July 31, 2009 to $91,329 for the three months ended July 31, 2010. The decrease in interest was a result of reducing our overall debt from the previous year by approximately $2,400,000.
Earnings: Our operating loss for the three months ended July 31, 2010 was $63,818, compared to a profit of $1,197,758 for the three months ended July 31, 2009. Approximately $496,000 of the operating profit in 2009 can be attributed to the sale of land in Dodge City, Kansas.
Consolidated Net Income: As a result of the factors described above, our net loss for the three months ended July 31, 2010 was $110,542 compared to a profit of $718,020 for the three months ended July 31, 2009, a decrease of $828,562. The loss of income before taxes and minority interest from July 31, 2010, was $194,702 of which casino operations contributed more than $292,000 as part of that loss.
Employees: We employed 94 full time and 2 part time employees on July 31, 2010 compared to 97 full time and 2 part time employees on July 31, 2009. As of September 3, 2010, our staffing is 94 full time and 2 part time employees. Our staffing at Boot Hill Casino & Resort on July 31, 2010 was 238 full time and 31 part time employees and at September 3, 2010 is 242 full time employees and 31 part time employees. None of our employees are subject to any collective bargaining agreements.
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LIQUIDITY AND CAPITAL RESOURCES
We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in 2011 and beyond.
Obligations related to the Gaming Facility in Dodge City, Kansas (the Boot Hill Casino and Resort) are the rent payments by our subsidiary BHCMC, L.L.C. ("BHCMC") for the agreement for the turn-key casino. Butler National Service Corporation ("BNSC") and BHC Investment Company, L.C. ("BHCI") jointly own BHCMC. BHCMC is currently owned 99.6% by BNSC and 0.4% by BHCI. BHCI has the option to purchase an additional 39.6% of BHCMC to complete the ownership at 60% BNSC and 40% BHCI. BHCI ownership is subject to background investigation by the Kansas Gaming and Racing Commission.
BHC Investment Company, L.C. (BHCI) is not a related party. We do not own nor do our officers or directors have ownership in BHCI. The Gaming Facility known as Boot Hill Casino and Resort was constructed and equipped by BHC Development, L.C., an unrelated real estate development company. BHC Development, L.C. rents the facility to BHCMC, LLC. The terms of the agreement between the Kansas Lottery and BNSC/BHCMC require the completion of an addition to the Boot Hill Casino and Resort that is planned to open in late 2012. We may need additional funding to complete this expansion.
Analysis and Discussion of Cash Flow
During the first three months of fiscal year 2011 our cash position decreased by $3,152,698. The decrease is attributed to the following. Cash used in operating activities was $2,453,191. We reported a net loss of $111,703 during the three months ended July 31, 2010. Non-cash charges to income for depreciation and amortization were $295,501, of which approximately $187,000 was aircraft depreciation. We sold an aircraft at a loss of $43,450. Other cash used in operating activities included an increase in accounts receivable of $437,763. The change in accounts receivable by segment were a decrease of 11% in Aircraft Modifications, an increase in Avionics of 15%, an increase in Gaming Facility of 122%, and a decrease in Management and Services of 28%. Customer deposits provided cash in operating activities of $711,029. We returned a deposit from BHC Development, LC (an unrelated development company) totaling $1,700,000 as part of the build-to-suit agreement in the initial Gaming Facility vault bank bal ance. A reduction in accounts payable and accrued liabilities resulted in the use of $277,477. The State of Kansas mandated expense accrual increase by approximately $680,000. We used cash to pay taxes of $605,000. An increase in prepaid expenses and other current assets resulted in the use of cash of $559,545. Inventory increase by approximately $492,000, a majority of this increase is related to work in process at our Aircraft Modification division in Newton, Kansas.
Cash used in investing activities was $266,457. We invested approximately $85,000 towards the purchase of 20 acres in Dodge City. We purchased used and new machinery and equipment of $115,155 for the Aircraft Modification facilities. We purchased a more efficient aircraft and sold a less efficient aircraft for the net use in cash of $8,000. Cash used in financing activities was $433,050. We reduced our debt by more than $538,000 and increased our line of credit by approximately $105,000.
Critical Accounting Policies and Estimates
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management judgments and estimates. These significant accounting policies relate to revenue recognition, bad debts, the use of estimates, long-lived assets, Supplemental Type Certificates, advances to Indian gaming developments, and advances to Gaming Facilities. These policies and our procedures related to these policies are described in detail below and under specific areas within this "Management Discussion and Analysis of Financial Condition and Results of Operations."
Revenue Recognition: Generally, we perform aircraft modifications under fixed-price contracts. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the direct labor and material costs incurred compared to total estimated direct labor costs. Each quarter our management reviews the progress and performance of our significant contracts. Based on this analysis, any adjustment to sales, cost of sales and/or profit is recognized as necessary in the period they are earned. Changes in estimates of contract sales, cost of sales and profits are recognized using a cumulative catch-up, which is recognized in the current period of the cumulative effect of the change on current or prior periods. Revenue for off-the-shelf items and aircraft sales is recognized on the date of sale.
Casino gaming revenue is the gross gaming win as reported by the Kansas Lottery casino reporting systems less the mandated distributions by and for the State of Kansas.
Revenue from Avionics products are recognized when shipped. Payment for these Avionics products is due within 30 days of the invoice date after shipment. Revenue for SCADA services, Gaming Management, and other Corporate/Professional Services is recognized as the service is rendered and invoiced. Payments for these service invoices are usually received within 30 days.
In regard to warranties and returns, our products are special order and are not suitable for return. Our products are unique upon installation and tested prior to their release to the customer and acceptance by the customer. In the rare event of a warranty claim, the claim is processed through the normal course of business and may include additional charges to the customer. In our opinion any future warranty work would not be material to the financial statements.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements.
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 our products.
Inventory obsolescence is examined on a regular basis. Inventory that has been inactive for a period of three years without use in normal and current productions are reserved as obsolete. The obsolete inventory generally consists of Falcon and Learjet parts and electrical components.
Property 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. The lives used for the significant items within each property classification range from 3 to 39 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.
Impairment of Goodwill, Other Intangible Assets and Long-lived Assets: The Company assesses our goodwill and other assets for impairment at least annually or whenever events or circumstances indicate the carrying value of that asset may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition.
Supplemental Type Certificates: Supplemental Type Certificates (STCs) are authorizations granted by the Federal Aviation Administration (FAA) for specific modification of a certain aircraft. The STC authorizes us to perform modifications, installations, and assemblies on applicable customer-owned aircraft. Costs incurred to obtain STCs are capitalized and subsequently amortized against revenues being generated from aircraft modifications associated with the STC. The costs are expensed as services are rendered on each aircraft through costs of sales using the units of production method. The legal life of an STC is indefinite. We believe we have enough future sales to fully amortize our STC development costs.
Advances for Gaming Developments: We are advancing funds for the establishment of gaming. These funds have been capitalized based on the cost associated with the acquisition, development, and construction of real estate and real estate-related projects to be capitalized as part of that project.
Our advances represent costs to be reimbursed upon approval of gaming in several locations. We have agreements in place which require payments to be made to us for the respective projects upon opening of Indian gaming facilities. Once gaming facilities have gained proper approvals, we plan to enter into a note receivable arrangement with the Tribe to secure reimbursement of advanced funds for that particular project.
We have advanced and invested a total of $4,718,991 at July 31, 2010 and at April 30, 2010 in gaming developments. We have reserves of $4,171,531, at July 31, 2010 and at April 30, 2010. We believe it is necessary to establish reserves against the advances because all of the proposed casinos involve legal and government approvals. The reserve amount is an estimate of the value we would receive if a casino was not opened and we were forced to liquidate the assets that we have acquired with our advances. These assets were intended to be used with casinos and consist of the purchase of land and land improvements related to the development of gaming facilities. We believe that these tracts could be developed and sold for residential and commercial use to recover our advances if the gaming enterprises do not open.
Bank Overdraft Payable: Our 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 our promissory notes agreement. Financial Instruments: The carrying value of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses, and accrued employee costs approximate fair value because of the short-term maturity of these instruments. Fair values are based on quoted market prices and assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of perceived risk. Based upon borrowing rates currently available, the carrying value of notes payable long-term debt and capital lease obligations approximate fair value.
Advanced Payments and Billings in Excess of Costs Incurred: We receive advances, performance-based payments and progress payment from customers which may exceed costs incurred on certain contracts. We classify advance payments and billings in excess of costs incurred, other than those reflected as a reduction of contracts in process, as current liabilities.
Income Taxes: Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expense items are recognized for financial reporting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes. Under this method, the computation of deferred tax assets and liabilities give recognition to enacted tax rates in effect in the year the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that we expect to realize.
Deferred taxes are determined based on the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provision of the enacted tax laws. Net deferred tax assets at April 30, 2010 was fully offset by a valuation allowance as management felt the Company may not realize any tax benefits, however a deferred tax asset was recorded at April 30, 2010 because management believes the Company may receive tax benefits.
Cash and Cash Equivalents: Cash and cash equivalents consist primarily of cash and investments in a money market fund. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We maintain cash in bank deposit accounts that, at times, may exceed federally insured limits. Concentration of Credit Risk: We extend credit to customers based on an evaluation of their financial condition and collateral is not required. We perform ongoing credit evaluations of our customers and maintain an allowance for doubtful accounts.
Accounts Receivable: Accounts receivable are carried on a gross basis, with no discounting, less the allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of the customers, and the amount and the age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after all collection attempts have been exhausted.
Allowance for Doubtful Accounts: Allowance for doubtful accounts are calculated on the historical write-off of doubtful accounts of the individual subsidiaries. Invoices are generally considered a doubtful account if no payment has been made in the past 90 days. We review these policies on a quarterly basis, and based on these reviews, we believe we maintain adequate reserves.
Fair Value Measurements: The Company adopted ASC Topic 820-10 at the beginning of 2009 to measure the fair value of certain of its financial assets required to be measured on a recurring basis. The adoption of ASC Topic 820-10 did not impact the Company's financial condition or results of operations. ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the ass et or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access. Level 2 - Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 3 - Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.
Changing Prices and Inflation
We experienced little pressure from inflation in 2010. From fiscal year 2009 to fiscal year 2010 a majority of the increases we experienced were in material costs. This additional cost may not be transferable to our customers resulting in lower income in the future. We anticipate fuel costs and possibly interest rates to rise in fiscal years 2011 and 2012.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please see Item 7(a) of our Form 10-K for the period ending April 30, 2010.
Item 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q and have determined that such disclosure controls and procedures are effective, based on criteria in Internal Control-Integrated Framework, issued by COSO.
Evaluation of disclosure controls and procedures:Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this Form 10-Q, our Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2010. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of July 31, 2010.
Limitations on Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by th e individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control Over Financial Reporting: In our opinion there were no material changes in the Company internal controls over financial reporting as of July 31, 2010 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. |
