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 results, 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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YEAR TO DATE JANUARY 31, 2011 COMPARED TO YEAR TO DATE JANUARY 31, 2010
Our revenue for the nine months ended January 31, 2011 was $33,422,225, an increase of 72% from the nine months ended January 31, 2010 with revenue of $19,403,210. Our operating profit for the nine months ended January 31, 2011 was $2,230,200, compared to a profit of $2,287,708 for the nine months ended January 31, 2010.Approximately $496,000 of the operating profit in 2010 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 nine months ended January 31, 2011, was $10,008,617, an increase of 20.9% from the nine months ended January 31, 2010 with revenue of $8,281,825, and an increase of 15% from the nine months ended January 31, 2009 with revenue of $8,707,767. The modifications segment had an operating profit of $2,708,199 in the nine months ended January 31, 2011, an operating profit of $578,491 in the nine months ended January 31, 2010, and $1,295,495 in the nine months ended January 31, 2009.
During the past few years we have seen a significant increase in aircraft camera modifications. 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 revenue. 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 $1,186,115 for the nine months ended January 31, 2010 to $1,187,236 for the nine months ended January 31, 2011, an increase of 0.1%. During the nine months ended January 31, 2011, 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 $207,197 in Monitoring Services was recorded for the nine months ended January 31, 2011, compared to a profit of $225,787 for the nine months ended January 31, 2010, a decrease of 8.2%. 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 activities related to gaming and other real estate development, administrative management services, and engineering consulting services.
Revenue consisting of architectural services and revenue related to completed construction projects were $1,609,027 for the nine months ended January 31, 2010 and $504,789 for the nine months ended January 31, 2011. Projects related to architectural services decreased $444,005 for the nine months to revenue of $492,289 at January 31, 2011. An operating loss of $194,158 for the nine months ended January 31, 2011 was recorded compared to a profit of $138,893 for the nine months ended January 31, 2010.
Revenue related to on-site gaming services and other real estate development for the nine months ended January 31, 2011 was $1,574,793 compared to $871,771 for the nine months ended January 31, 2010, an increase of 80.6%. Operating profits from management services related to gaming increased $334,310 from $401,074 for the nine months ended January 31, 2010, to $735,384 for the nine months ended January 31, 2011.
The Gaming Facility located in Dodge City, Kansas known as Boot Hill Casino and Resort opened for business on December 15, 2009. In the nine months ended January 31, 2011 the Gaming Facility received gross revenue including funds for the State of Kansas of $30,462,191. Mandated fees, taxes and distributions reduced gross revenue by $13,997,355 leaving net revenue to us, as the manager, of $16,464,836. The net loss from the Gaming Facility for the nine months ended January 31, 2011 was $454,708.
Selling, General and Administrative ("SG&A"): Expenses were $16,267,459, or 48.7% of revenue, for the nine months ended January 31, 2011 compared to $5,507,237 or 28.4% of revenue for the nine months ended January 31, 2010. Of these costs, $11,851,903 was directly related to the Gaming Facility. Additional consulting and payroll expenses of approximately $839,000 were directly related to gaming development. SG&A costs increased by $10,760,222 for the nine months ended January 31, 2011 compared to the nine months ended January 31, 2010.
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 $325,472 in the nine months ended January 31, 2010 to $266,789 for the nine months ended January 31, 2011.
Earnings: Our operating profit for the nine months ended January 31, 2011 was $2,230,200, compared to a profit of $2,287,708 for the nine months ended January 31, 2010. Approximately $496,000 of the operating profit in 2010 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 profit for the nine months ended January 31, 2011 was $1,225,716 compared to a profit of $1,380,191 for the nine months ended January 31, 2010, a decrease of $154,475. The income before taxes and minority interest and casino operations from January 31, 2011, was $1,927,786 of which casino operations reduced profits by $454,708.
Employees: Other than gaming through are subsidiaries there are 108 full time and 3 part time employees on January 31, 2011 compared to 96 full time and 1 part time employee on January 31, 2010. As of March 4, 2011, staffing is 106 full time and 3 part time employees. Our staffing at Boot Hill Casino & Resort on January 31, 2011 was 262 full time and 48 part time employees and at March 4, 2011 is 261full time employees and 48 part time employees. None of the employees are subject to any collective bargaining agreements.
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THIRD QUARTER FISCAL 2011 COMPARED TO THIRD QUARTER FISCAL 2010
Our revenue for the three months ended January 31, 2011 was $12,859,429, an increase of 44% from the three months ended January 31, 2010 with revenue of $8,924,063. Our operating profit for the three months ended January 31, 2011 was $1,513,580, compared to a profit of $977,316 for the three months ended January 31, 2010.
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 ended January 31, 2011, was $4,005,617, an increase of 10.8% from the three months ended January 31, 2010 with revenue of $3,616,414, and an increase of 27.5% from the three months ended January 31, 2009 with revenue of $3,009,718. The modifications segment had an operating profit of $1,519,891 in the three months ended January 31, 2011, an operating profit of $543,854 in the three months ended January 31, 2010, and an operating profit of $505,423 in the three months ended January 31, 2009.
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 revenue. 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 decreased from $432,262 for the three months ended January 31, 2010 to $379,347 for the three months ended January 31, 2011. During the three months ended January 31, 2011, 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 $76,596 in Monitoring Services was recorded for the three months ended January 31, 2011, compared to a profit of $107,035 for the three months ended January 31, 2010, a decrease of 28.4%. 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 activities related to gaming and other real estate development, administrative management services, and engineering consulting services.
Revenue consisting of architectural services and revenue related to completed construction projects were $623,107 for the three months ended January 31, 2010 and $175,851 for the three months ended January 31, 2011. Projects related to architectural services decreased $42,179 for the three months to revenue of $163,351 at January 31, 2011. An operating loss of $115,819 for the three months ended January 31, 2011 was recorded compared to a loss of $39,901 for the three months ended January 31, 2010.
Revenue related to gaming and other real estate development, on site contract management of gaming establishments for the three months ended January 31, 2011 was $511,355 compared to $240,167 for the three months ended January 31, 2010, an increase of 113%. Operating profits from management services related to gaming increased $111,627 from $110,096 for the three months ended January 31, 2010, to $221,723 for the three months ended January 31, 2011.
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 January 31, 2011 the Gaming Facility received gross revenue including funds for the State of Kansas of $10,496,030. Mandated fees, taxes and distributions reduced gross revenue by $4,462,631 leaving net revenue to us, as the manager, of $6,033,399. The net profit from the Gaming Facility for the three months ended January 31, 2011 was $72,952.
Selling, General and Administrative ("SG&A"): Expenses were $5,586,233, or 43.4% of revenue, for the three months ended January 31, 2011 compared to $2,757,020 or 31% of revenue for the three months ended January 31, 2010. Of these costs, $4,043,173 was directly related to Gaming Facility. Additional consulting and payroll expenses of approximately $290,000 were directly related to other gaming development. SG&A costs increased by $2,829,213 for the three months ended January 31, 2011 compared to the three months ended January 31, 2010.
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 $110,347 in the three months ended January 31, 2010 to $84,779 for the three months ended January 31, 2011.
Earnings: Our operating income for the three months ended January 31, 2011 was $1,513,580, compared to a profit of $977,317 for the three months ended January 31, 2010.
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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.
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. We may need additional funding to complete this expansion if not completed by a franchised vendor.
Analysis and Discussion of Cash Flow
During the first nine months of fiscal 2011 our cash position decreased by $2,161,562. The decrease is attributed to two major factors. 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 Boot Hill Casino vault bank balance. We increased inventory by approximately $585,000.
Cash used in investing activities was $1,451,577. We invested approximately $85,000 towards the purchase of 20 acres in Dodge City and approximately $17,000 towards building improvements. We purchased used machinery and equipment of approximately $985,569. We purchased a more efficient aircraft for the Aircraft Modifications and sold a less efficient aircraft for the net use of cash of $8,000. We purchased two engines for approximately $358,000. Cash provided by financing activities was $29,743. We reduced our debt by more than $1,264,000 and increased our line of credit by approximately $82,000. We incurred additional debt of approximately 1,212,000 for business development.
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.
Revenue Recognition: Generally, we perform aircraft modifications under fixed-price contracts. Revenue 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.
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 revenue 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 January 31, 2011 and at April 30, 2010 in gaming developments. We have reserves of $4,171,531, at January 31, 2011 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 could 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. 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.
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 ended 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 January 31, 2011. 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 January 31, 2011.
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 the 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 January 31, 2011 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. |
