SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the
X Securities Exchange Act of 1934
For the quarter ended July 31, 1999
Transition Report Pursuant to Section 13 or 15 (d) of the
Security Exchange Act of 1934
For the quarter ended July 31, 1999
Commission File Number 0-1678
BUTLER NATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 41-0834293
(State of incorporation) (I.R.S. Employer Identification No.)
19920 West 161st Street, Olathe, Kansas 66062
(Address of Principal Executive Office)(Zip Code)
Registrant's telephone number, including area code: (913) 780-9595
Former name, former address and former fiscal year if changed since last
report:
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such
filing requirements for the past ninety days: Yes X No ______
The number of shares outstanding of the Registrant's Common Stock, $0.01
par value, as of August 23, 1999, was 16,726,657 shares.
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION:
Page No.
Consolidated Balance Sheets - July 31, 1999
and April 30, 1999...............................................3
Consolidated Statements of Income - Three
Months ended July 31, 1999 and 1998..............................4
Consolidated Statements of Cash Flows - Three
Months ended July 31, 1999 and 1998..............................5
Notes to Consolidated Financial
Statements.......................................................6-9
Management's Discussion and Analysis
Financial Condition and Results of Operations....................9-14
PART II.
OTHER INFORMATION........................................................15-17
SIGNATURES...............................................................18
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS 7/31/99 4/30/99
(unaudited) (unaudited)
Current Assets:
Cash $ 183,633 $ 164,923
Accounts receivable, net of allowance for
doubtful accounts of $68,886 at July 31, 434,945 451,334
and $68,886 at April 30, 1999
Note receivable - current 647,285 647,285
Contracts in process - 405,937
Inventories:
Raw materials 1,225,834 1,216,098
Work in process 377,040 333,399
Finished goods 59,418 68,310
----------- ----------
1,662,292 1,617,807
Prepaid expenses and other assets 20,558 72,634
----------- ----------
Total current assets 2,948,713 3,359,920
Note receivable 2,613,958 2,730,708
Supplemental Type Certificates 1,355,364 1,392,611
Property, Plant and Equipment:
Land & building 673,878 673,878
Machinery and equipment 1,198,551 1,198,541
Office furniture and fixtures 607,736 585,968
Leasehold improvements 33,959 33,959
----------- ----------
Total cost 2,514,124 2,492,346
Accumulated depreciation (1,329,606) (1,275,145)
----------- ----------
1,184,518 1,217,201
Other Assets (Note 1):
Advances under Indian Gaming Agreements 2,186,500 2,162,120
Aircraft and aircraft parts 460,281 460,281
Other assets 68,641 91,910
----------- ----------
Total other assets 2,715,422 2,714,311
Total assets $10,817,975 $11,414,751
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY 7/31/99 4/30/99
(unaudited) (unaudited)
Current Liabilities:
Bank overdraft payable $ 116,394 $ 119,942
Promissory notes payable 400,734 471,575
Current maturities of long-term debt 625,904 571,345
Accounts payable 602,033 715,840
Customer Deposits 228,454 582,314
Accrued liabilities -
Compensation and compensated absences 87,252 99,190
Other 89,078 199,851
Total current liabilities 2,149,849 2,760,057
Long-term debt, net of current maturities 3,020,027 2,105,596
Convertible debentures 618,000 650,000
Other liabilities - 769,319
Total liabilities 5,787,876 6,284,972
Commitments and contingencies:
Liabilities of discontinued operations - -
Shareholders' equity:
Preferred stock, par value $5:
Authorized, 200,000 shares, all classes
$1,000 Class B, 6%, cumulative if earned,
liquidation and redemption value $1,000,
issued and outstanding, 1,500 shares in 1998, - -
$1,000 Class B, 6%, cumulative if earned
liquidation and redemption value $1,000,
issued and outstanding, 693 shares at 4/30/99
and 551 at 7/31/99 294,344 313,603
Common stock, par value $.01:
Authorized, 40,000,000 shares
Issued and outstanding 15,387,087 shares 167,267 153,871
in 1999 and 16,726,657 at July 31, 1999,
Common stock warrants 8,807 8,807
Capital contributed in excess of par 8,367,995 8,282,731
Unearned service contracts (390,599) (434,376)
Treasury stock, at cost (No preferred at 7/31
& no preferred at 4/30 (1,537,240) (1,537,240)
common 775,000 at 7/31 & 775,000 at 4/30)
Retained earnings (1,835,475) (1,657,617)
(Deficit of $11,938,813 eliminated
October 31, 1992)
------------ ----------
Total shareholders' equity 5,030,099 5,129,779
------------ ----------
Total liabilities and
shareholders' equity $10,817,975 $11,414,751
========== ==========
The accompanying notes are an integral part of these balance sheets.
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
July 31,
1999 1998
(unaudited) (unaudited)
Net sales $1,549,381 $3,096,562
Cost of sales 962,534 2,485,488
---------- ----------
Gross profit 586,847 611,074
Selling, general and administrative expenses 584,843 536,891
---------- ----------
Operating income 2,004 74,183
Other income (expense):
Interest expense (74,923) (41,990)
Interest income 83,205 82
Net gain - Settlement Agreement - -
Other 1,580 753
---------- ----------
Other income 9,862 (41,155)
---------- ----------
Income (loss) from continuing operations
before taxes 11,866 33,028
Provision for income tax 4,984 13,871
---------- ----------
Income (loss) from continuing operations 6,882 19,157
Discontinued Operations
Income (loss) from discontinued
operations, net of taxes (189,723) -
Loss on discontinued operations, net
of taxes - -
Net income $ (182,841) $ 19,157
========= =========
Basic earnings (loss) per common share
Continuing operations $ 0.00 $ 0.01
Discontinued operations (0.01) 0.00
========= =========
(0.01) 0.01
========= =========
Shares used in basic per share
calculation 12,960,519 10,022,282
Diluted earnings (loss) per common share
Continuing operations 0.00 0.01
Discontinued operations (0.01) 0.00
========== ==========
(0.01) 0.01
Shares used in diluted per share
calculation 21,672,186 11,123,926
The accompanying notes are an integral part of these statements.
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended July 31,
1999 1998
(unaudited) (unaudited)
Cash flows from operating
activities:
Net income $ (182,841) $ 19,157
Adjustments to reconcile income to
net cash used in operations:
Deferred income taxes 4,984 13,871
Depreciation 54,461 50,364
Amortization of intangible assets 37,217 44,311
Provision for uncollectible accounts - -
Provision for obsolete inventories - -
Amortization of service contracts 43,775 26,133
Changes in assets and liabilities:
Accounts receivable 16,388 (123,876)
Contracts in process (Increase) 405,937 (82,690)
Inventories (Increase) (44,485) (171,575)
Supplemental type certificates (Increase) 37,247 24,065
Prepaid expenses and other current assets 52,076 703
Other assets 23,269 98,423
Accounts payable (decrease) (113,807) 73,497
Customer deposits (353,860) 53,050
Accrued liabilities (decrease) (122,711) (64,240)
Settlement agreement (decrease) - (18,000)
Note receivable 116,750 835,229
Note payable 199,671 -
---------- --------
Total adjustments 356,912 (564,499)
---------- --------
Cash provided by (used in) operations 174,071 718,334
---------- --------
Cash flows from investing activities:
Capital expenditures, net (21,778) (20,501)
Advances under Indian Gaming Agreements (24,380) -
Aircraft and aircraft parts - -
Proceeds from short term investments - -
---------- ---------
Cash used in investing activities (46,158) (20,501)
---------- ---------
Cash flows from financing activities:
Net borrowings under promissory note (70,841) 53,041
Proceeds from long-term debt - 814,379
Repayments of long-term debt and lease
obligations (154,756) (1,405,120)
Bank overdraft payable 116,394 -
Stock issuance for conversions and other - -
Note receivable & redemption of common stock - -
--------- ---------
Cash provided by (used in)
financing activities (109,203) (643,782)
--------- ---------
Net increase (decrease) in cash 18,710 69,759
Cash, beginning of period 164,923 160,598
--------- ---------
Cash, end of period $ 183,633 $ 230,357
Supplemental disclosures of cash flow
information:
Interest paid $ 74,923 $ 41,990
Income taxes - -
The accompanying notes are an integral part of these statements.
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited Consolidated Financial Statements have been
prepared in accordance with the instructions to Form 10-Q of Regulation S-X
and do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of the management of the Company, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the three months ended July 31, 1999 are not
indicative of the results of operations that may be expected for the year
ending April 30, 2000.
For further information, refer to the Consolidated Financial Statements
and Footnotes included in the Registrant's Annual Report on Form 10-K
(unaudited) for the year ended April 30, 1999.
2. On June 26, 1996, the Company completed a private placement in which the
Company issued a 8.0% cumulative convertible debenture due June 26, 1998 in
the amount of $750,000. Interest to be paid at time of conversion either in
cash or kind at the option of the Company. Net proceeds of the offering were
$675,000, after deducting the expenses of the offering. The proceeds of the
offering was utilized for relocation of the Avionics segment and additional
aircraft product development.
3. Indian Gaming: The Company has received a net receivable associated with
advances to the Indian tribes under various consulting and management
agreements related to the potential start-up of Indian gaming. These
represent advances for land, land improvements, engineering and architectural
fees associated with the improvements and are as such actual hard costs for
fixed assets, land and roads and buildings. The realization of these
receivables is predicated on the ability of the Company and their Indian
gaming clients to successfully open and operate the proposed casinos. As
these establishments are opened, the advances are repaid or converted to notes
receivable. Currently there is no assurance that the Tribes and the Company
will be successful. The inability of the Company to recover these advances
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 replace the advances receivable under
the consulting agreement with a loan to the Tribes $3,500,000 at 2% over
prime, to be repaid over five years, for the repayments of prior advances, and
for the construction and operation of the Stables gaming establishment. At
April 30, 1999, the Company had advanced $3,500,000 to the Tribes under the
contract and reported $647,285 current note receivable and $2,730,708
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 $5,447,743 and $5,540,113
at July 31, 1999 and April 30, 1999, respectively, of advances under
consulting and management agreements with five Indian tribes. These advances
are included in on the Balance Sheet at July 31, 1999 as Notes
Receivable-Current $647,285, Notes Receivable $2,613,958 and Advanced Costs of
Indian Gaming $2,186,500. The Notes Receivable classifications represent
advances to the Stables under the Management Agreement. The cost reported as
Other Assets represent the advances to the tribes and under management
consulting agreements for investments in land, buildings, and improvements
including construction, engineering and architecture fees for the Princess
Maria, Shawnee 206 and other properties. In the opinion of management, these
advances will be recoverable through the gaming activities or, in event the
Company is unsuccessful in establishing such operations, these advances will
be recovered through the liquidation of the associated assets. These costs
include the following:
An advance for the prepayment for the Tribes 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.
Advances for the Tribes of $87,622 for architectural and engineering
services. These advances were also funded with stock issuances of
29,715 shares in fiscal year 1995. Advances of $50,000 for equipment, funded
with stock issuances of 20,000 shares in fiscal 1994.
Cash advances for the Tribes 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.
Advances for acquisition of land and land improvements in the amount of
$203,000 in fiscal 1997.
Advances for acquisition of land in the amount of $53,000 in fiscal year 1998.
Net construction advances to the Tribes of $884,396 during fiscal 1999 and
$1,813,106 during fiscal 1998.
4. 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 term of the
Settlement Agreement include payments by the Company to the individual during
fiscal 1998 and fiscal 1999 respectively.
5. On May 1, 1996, the Company acquired certain assets of Woodson
Electronics, Inc. (WEI). 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. During the first
quarter of fiscal 1997, the Company relocated its Woodson Avionics business
segment, along with the newly acquired operating rights and assets of WEI to
Phoenix, Arizona.
6. 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. The shares were purchased at prices ranging from $.70 to $1.00 per
share. The largest aggregate amount of indebtedness outstanding was $367,000
during fiscal 1996. The amount outstanding at July 31, 1996, was $338,634.
Interest is charged at the applicable federal rate and the loan is being
amortized over five years. In fiscal 1997, the officer reduced the loan
balance by $277,264 through expense reimbursement and the transfer of 125,000
shares of common stock valued at $250,000. The loan balance is currently $0.
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 the treasury.
7. 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.
8. Income per common and common equivalent share are based on the weighted
average number of common shares outstanding during the quarters ended July 31,
1999 and 1998. Stock options are included in 1999 and 1998 as common stock
equivalents to the extent that they are dilutive. The Convertible debenture
is included in fiscal 1998 and fiscal 1999 as a common stock equivalent since
the debenture is dilutive. The convertible preferred stock is included in
1999 since the convertible preferred stock is dilutive. Shares used in the
diluted per share computations are as follows:
THREE MONTHS ENDED
July 31,
1999 1998
Common shares outstanding beginning of period 17,217,875 10,436,549
Cumulative increase in weighted average
due to Common Stock Equivalent net of treasury stock 797,556 603,953
Cumulative increase in weighted average
due to Convertible Debenture 1,520,000 -
Cumulative increase in weighted average
due to issues per acquisition and consulting
agreements - -
Cumulative increase in weighted average
due to Convertible Preferred 2,136,755 83,424
Cumulative increase in weighted average
due to issues per Nonqualified Stock Option
Plans - -
---------- ---------
Weighted average shares, end of period 21,672,186 11,123,926
The convertible debentures ($618,000) and the convertible preferred stock
($673,000) are dilutive on a percentage basis of the common stock price. For
purposes of the weighted average shares calculation, a $1.00 price has been
assumed for the dilution calculations for future conversions.
9. On May 4, 1999, the Board of Directors determined that the interests of
the shareholders would be best served by distributing the common stock of its
Indian Gaming Subsidiary ("IGS") to the shareholders. As discussed at the
Annual Meeting of the Shareholders and as reported from time-to-time over the
past few years in its Annual Reports on Form 10-K, the Company has planned to
separate the business segments for a number of business reasons including:
Allow the management of each business to focus solely on that
business segment.
Provide future incentives to the employees directly related to the
profitable operation of the business segment.
Enhance the access to financing by allowing the financial community to
focus on the business activities and opportunities of the business segment.
SEC Rule 10b-17 information:
The Company plans to distribute the IGS common stock to the shareholders
of record owning Butler National Corporation $0.01 Common Stock at the close
of business on May 24, 1999 (the "Shareholders").
The shares of the IGS are planned to be distributed to the Shareholders
at a ratio of one share of common stock of the IGS for each share of Butler
National Corporation owned at the close of business on May 24, 1999.
An Information Statement and the shares of the IGS are expected to be
distributed to the Shareholders after the review and approval of the Form 10
by the SEC.
The Company has owned the IGS for over five years, has reported the
operations as a separate business segment for over five years in its Annual
Report of Form 10-K and expects the distributed shares to be unrestricted and
tradeable upon filing of the Information Statement, a Form 10 with the SEC and
distribution of the shares.
The Company believes the distribution will be tax-free but the Company
will not seek an Internal Revenue Service ruling on the matter.
The distribution of revenue and expense between the gaming and non-gaming
segments is shown below. Gaming revenue is the management fees due Butler
National Service Corporation under the terms of the Management Agreement with
the Indian tribes. Interest revenue exceeds interest expense because the note
receivable to the Company from the Stables exceeds the Company's debt to
Miller & Schroeder. The Stables is amortizing the note over the five year
contract term. These amounts are presented without an audit of the Company
or the Stables. The segment revenue and/or the distribution of costs between
the segments are subject to change as the individual segments are audited.
For the quarter ended July 31, 1999
Non-gaming Gaming
Segments Segment Consolidated
Net sales 1,461,759 87,622 1,549,381
Cost of sales 962,534 - 962,534
___________________________________________
499,225 87,622 586,847
Selling, general and
administrative expenses 458,492 126,351 584,843
___________________________________________
Operating income 40,733 (38,729) 2,004
Other income (expense):
Interest expense (35,882) (39,042) (74,923)
Interest revenue 4 83,200 83,205
Other income (expense) 368 1,213 1,580
___________________________________________
Other expense (35,510) 45,372 9,861
Income (loss) continuing operations
before taxes 5,223 6,643 11,866
=======================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview: First quarter consolidated sales were $1,549,380 for the three
months ended July 31, 1999, compared to $3,096,562 for the three months
ended July 31, 1998, a decrease of 55.5%. Sales increased in the Avionics
segment (14.8%), and in the Monitoring Services segments (69.1%) and decreased
in the Aircraft Modifications segment (64.5%). Modification sales at Avcon
Industries, Inc. increased $300,859 (43.6%) from $689,370 to $990,229 for the
respective quarters ending July 31, 1998 and 1999. Modified aircraft sales
declined from $2,100,000 for the quarter ending July 31, 1998 to zero for the
quarter ending July 31, 1999.
Aircraft Modifications (Avcon Industries, Inc.): Modification sales at Avcon
Industries, Inc. decreased $1,799,141 (64.5%) from $2,789,370 in the first
quarter of the prior year to $990,229 in the quarter ending July 31, 1999.
Gross profit decreased from $483,190 in the quarter ending July 31, 1998 to
$281,184 in the quarter ending July 31, 1999. Both the decrease in gross
profit and sales percentages can be directly attributable to the sale of the
modified Lear 35 in last years first quarter of operations. This segment is
experiencing increased sales volume from the sale of AVCON FINS, fin related
modifications, Beechcraft extended doors and Falcon 20 cargo doors. Avcon
plans to continue to purchase aircraft for modification and resale. However,
the rising aircraft prices have not allowed a purchase since the Lear 35.
Avionics (Woodson Avionics, Inc.): Avionics unit sales were $116,671 in the
three months ended July 31, 1999 compared to $114,170 in the comparable period
of the preceding year, an increase of 14.8%. Operating earnings for the three
months ended July 31, 1999, were $(4,933) compared to $26,973 for the three
months ended July 31, 1998. The Company believes the sales volume will remain
relatively stable with steady growth for the next few years.
The Avionics and Modification segments are working together on the development
of two new airborne products for sale directly to the airline industry. The
Company expensed approximately $80,000 during the quarter on the research and
experimental design of these products. The Company expects to expense an
additional $70,000 before the designs are perfected and ready for
demonstration to the FAA. When the products are ready for demonstration, the
Company will apply to the FAA for the appropriate STC approvals.
SCADA Systems and Monitoring Services (Butler National Services, Inc.): Sales
for the three months ended July 31, 1999 were $367,181 compared to sales of
$217,132 for the comparable period of the prior year an increase of 69.1%.
Gross profit for the three months ended July 31, 1999 was $138,172 compared to
$81,700 for the three months ended July 31, 1998.
Temporary Services (Butler Temporary Services, Inc.): This segment did not
recognize any revenue in the first quarter of fiscal 1999 and fiscal 2000.
When the Company and the Tribes open the Kansas Indian gaming facilities,
management expects that a majority of the personnel in the various Indian
gaming enterprises will be staffed by Temporary Services.
Indian Gaming Management: This segment earned interest income of $83,200
during the first quarter of fiscal 2000. (See comments under the Stables).
Management Services (Butler National Services Corporation):
-General-
The Company received approximately $83,200 of interest income, reduced its
debt by approximately $78,289 and incurred $6,000 in expenses in the first 3
months of fiscal 2000 and $19,804 in the first quarter fiscal 1999 for general
and administrative expenses associated with its continued efforts to explore
service opportunities related to the Indian Gaming Act of 1988. Additionally,
the Company amortized $16,614 and $19,804 in the first quarter of 2000 and 1999,
respectively, related to shares issued for services rendered to the Company
in that regard.
The Company has advanced $6,485,972 under the management consulting agreements
with the Indian Tribes. Funds advanced for the tribes were used to purchase
land, land improvements, and professional design fees related to the
development of Indian Gaming facilities. Included in this receivable 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 has a net receivable value of
$2,162,120 on the balance sheet as deferred advances under Indian Gaming
agreements related to projects other than the Stables. The Company believes
that in the event that the Indian tribes were unable to repay the advances,
that this tract could be developed and sold for residential and commercial
use, other than Indian gaming. 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. In the event of default,
this may allow the Company to recover the majority, if not all, of the
$2,162,120 advancement.
-Princess Maria Casino-
The Company entered into a consulting agreement with the Miami Tribe on
June 11, 1992. As a part of this agreement 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 the 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.
In the fall of 1998, the United States District Court for the District of
Kansas ruled that the Princess Maria Miami Reserve No. 35 was suitable for
Indian gaming under the IGRA. As a result of this determination, the reserve
for collectibility of the advances to the Miami Tribe of Oklahoma under the
consulting agreement and management agreement was reduced $650,846. Increases
and decreases to a reserve for each Indian gaming consulting engagement are
reported as expenses or income of the gaming segment. The total advances to
the engagements less the balance of the reserves are reported as net on the
consolidated financial statements. This adjustment to the reserves less
expenses of $132,118 resulted in a gaming segment operating profit of
$518,728.
-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 provides consulting and construction management services in
the development of the facility and manages 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 contains 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, receives a 30% share of the profits and reimbursement of advances.
Construction on the STABLES began with the ground breaking on March 27,
1997 and opened September 21, 1998. The project cost was approximately
$3,500,000. Funds have been provided from the Company's operations and
long-term financing for the project was arranged through Miller & Schroeder
Investments Corporation. The loan is in the amount of $1,850,000 at a rate of
Prime plus 2%. Commencing on September 1, 1998 through August 1, 2003
monthly installments of principal and interest are being made to amortize the
note.
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, 1999, the Company had advanced a
total of $3,500,000 to the Tribes under the contract and reported $647,285
current note receivable and $2,730,708 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
Stables grand opening was October 1, 1998. Since opening, the Company has
received payments from the Stables to reduce the Company's loan from Miller &
Schroeder by approximately $226,961 and interest income of $284,841. During
the first quarter of fiscal 2000 $87,622 of undistributed revenue was
recognized.
-Shawnee Reserve No. 206-
In 1992, the Company signed a consulting agreement and 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 advances for 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
advanced funds to purchase 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 has a consulting agreement to
assist with the proposed establishment. This agreement is signed by 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 signed a consulting agreement with the Modoc Tribe on April
21, 1993. As a part of this project 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 and well established or if ever. A total of $548,048
has been advanced under this engagement, $399,713 has been reserved leaving a
net receivable of $148,335. The receivable is secured by 68 acres of land in
Eastern Oklahoma and Western Missouri.
-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.
COSTS AND EXPENSES
The consolidated gross profit percentage was 37.9% for the three months ended
July 31, 1999, compared to 19.73% for the three months ended July 31, 1998.
Operating expenses (selling, general and administrative) in the three months
ended July 31, 1999, were $584,842 or 40% of sales compared to $536,891 or
17.3% of sales for the three months ended July 31, 1998, an increase of
$47,951 or 8.9%.
Interest expense for the three months ended July 31, 1999, increased $32,303
from $41,990 in the first quarter of the prior year to $74,923. The Company
continues to use its line of credit to maintain operations. The increase in
interest expense from the previous years quarter of operations is primarily
due to the Miller & Schroeder loan for the Stables facility.
Other income(expense) is income of $1,580 in the quarter ended July 31, 1999,
versus income of $16,460 in the quarter ended July 31, 1998.
The Company employed 59 at July 31, 1999, and 69 at July 31, 1998.
EARNINGS
The Company recorded an after tax profit of $6,882 from continuing operations
and a loss of $189,723 from discontinued operations in the three months ended
July 31, 1999. This is comparable to a profit of $19,157 in the three months
ended July 31, 1998. Income per share is $(0.01) and income per share is
$0.01 for the three months ending July 31, 1999, and July 31, 1998,
respectively.
CAPITAL RESOURCES
The Company does not, as of April 30, 1999, have any material commitments for
other capital expenditures other than the advance requirements under the terms
of the Indian gaming Consulting and Management Agreements. These requirements
are further described in this section.
Depending upon the progress of the engagements, 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, to fund advances to the tribes 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, repayment of
the advances by the tribes from the gaming operations will generate additional
working capital for the start up and construction of other gaming facilities.
The Company expects that its advances for 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 was completed during fiscal 1999 and
required a total of $3,500,000 to complete, from the financing sources
described above. At April 30, 1999, $3,377,993 was receivable from the
Stables. The full $3,377,933 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
$3,500,000 to the Tribes under the contract and reported $647,285 current note
receivable and $2,730,708 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, advances under the Stables Management Contract were
further funded by a loan to the Company from Miller & Schroeder Investment
Corporation 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. The balance payable to Miller &
Schroeder at April 30, 1999, was $1,627,662. The remainder of net cash
advances to be repaid is $1,750,331.
The Company had no material commitment for capital expenditures as of
July 31, 1999, except for the advances to the Miami Tribe and Modoc Tribe for
the construction of the Miami County, Kansas gaming establishment.
LIQUIDITY
Borrowed funds have been used primarily for working capital. Bank debt is
$400,733 at July 31, 1999, and was $642,677 at July 31, 1998. The Company's
unused line of credit was approximately $99,267 as of July 31, 1999 and
approximately $107,323 as of July 31, 1998. The interest rate on the
Company's line of credit is prime plus two, as of September 13, 1999, the
interest rate is 10.25%.
The Company plans to continue using the promissory notes payable due in
November, 1999, as working capital. The Company believes the extensions will
continue and does not anticipate the repayment of these notes in fiscal 2000.
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.
The Company has issued stock at fair market value for various legal, marketing
and consulting services, in lieu of cash payments. During fiscal 1995, the
Company issued 95,000 share of stock at a value of $219,668 for professional
services to be provided in the future.
The Company did not issue shares for professional services to be provided in
the future in fiscal 1996. The Company issued 20,000 shares for consulting
services related to the acquisition of the operating rights and assets of WEI
in fiscal 1997. The Company issued 742,452 shares of convertible preferred
stock, and 140,225 shares of common stock related to discontinued operations.
During fiscal 1998, the Company issued 460,722 shares for consulting,
professional services and expenses in lieu of cash payments. To reduce the
$380,000 of convertible debt, 860,647 shares as a result of conversion were
issued. Convertible debt was reduced by $450,000 in exchange for the issue of
641,726 shares.
During fiscal 1999, the Company issued 1,949,261 shares for consulting,
professional services and expenses in lieu of cash payments. During the first
three months of fiscal 2000, 1,163,130 shares were issued to reduce the
convertible preferred stock by $142,000. Convertible debt was reduced by
$32,000 with the issuance of 166,840 shares of common stock.
The Company's common stock is registered with the NASDAQ market system under
the symbol BUKS. The stock was listed as a small cap stock until January 20,
1999. The stock was delisted from the small cap category and now is listed in
the over-the-counter (OTC) category. Since the delisting, the stock continues
to trade and to be offered by twelve (12) market makers. The Company has not
experienced a change in liquidity as a result of the delisting. However, the
Company's depressed stock price, resulting from the constant selling pressure
of the conversion shares may reduce the liquidity of the Company's stock in
the market and therefore, the ability to raise capital through the issue of
equity securities.
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.
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PART II.
OTHER INFORMATION
Responses to items 1, 3, 4, and 5 are omitted since these items are either
inapplicable or the response thereto would be negative.
Item 1.Legal Proceedings
The Company had an employment agreement with an individual (Brenda
Shadwick) 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 required, monthly
payments by the Company to the individual in the amount of $6,000 per month
during fiscal 1998 and fiscal 1999. The final payment was made in April 1999.
The Company acquired RF, Inc. from Marvin and Donna Eisenbath 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 Eisenbath's
sought for some time to reacquire the ownership of RF, Inc. The Eisenbath's
filed a lawsuit against Butler National seeking to rescind the sale of RF,
Inc. stock and for damages.
Butler National and the Eisenbath's reached an agreement to settle and
release all claims and counterclaims effective April 30, 1997, ("Release
Agreement"). The Eisenbath's dismissed the lawsuit with prejudice. In
addition to the releases, under the terms of the agreement, Butler National
received on June 26, 1997, 600,000 shares of the Company's common stock and
certain payments over the next three years. Butler National released the
Eisenbath's from the terms of the employment contract and the April 24, 1994
Stock Purchase Agreement. These documents released the Eisenbath's from the
agreement not to compete with the Company in the food distribution industry.
Butler National 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
Butler National recognized 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 3, regarding the bankruptcy of RF, Inc.
On September 20, 1998, the RFI bankruptcy trustee filed an action alleging
a number of claims against Butler National and its officers including a claim
for repayment of preferential payments to the bankruptcy estate. Butler
National settled the lawsuit on July 26, 1999, by the payment of $250,000 to
the court. See Item 1, General, Discontinued Operations, page 3, regarding
the details of the bankruptcy of RFI.
In December of 1997, the Butler National 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 for what Butler National
believed the holders of the Convertible Preferred Stock and the Convertible
Debentures engaged in inappropriate actions and representations of being long
term investors and yet actually began converting within 45 days after the
initial agreement, we announced plans to stop conversions on July 7, 1998 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 (Austost Anstalt Schaan and Balmore Funds, SA) filed a lawsuit
(the "Action") against Butler National 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 sought
an injunction to force Butler National to convert the Convertible Preferred
Stock in accordance with its terms and for unspecified monetary damages.
On January 25, 1999 Butler National announced that an agreement had been
reached with the Holders of the Class B Convertible Preferred Stock to settle
the lawsuit against the Company. Under the agreement, the Holders of the
Preferred are allowed to convert up to ten percent (10%) of the face value of
the Preferred into common stock in any month until the entire issue is
converted. The face value at the time of settlement was $785,000 allowing
$78,500 per month to be converted under the plan. However, if the bid price
is above $1.45 for three trading days, the Holders will be allowed to convert
up to a total of 30% per month or $235,500 of face value of the Preferred.
The conversion amount will increase five percent (5%) for each $.20 increase
in market price. The agreed conversion price is seventy percent of the
average bid price for the previous five trading days.
With the exception of 30,000 common shares owned at settlement by the
Holders, sales of the previous converted common shares, 148,849 shares, plus
any newly converted common shares, will be limited to the greater of $30,000
or twenty-five percent (25%) of the previous weeks trading volume.
Additionally, accrued dividends ($58,875) on the Preferred Stock will be paid
in shares of common stock at $.57 per share. The holders agreed to waive all
future dividends. All transactions are being handled through one broker and
all activity is reported on a weekly basis. The Holders also received 770,000
three-year warrants to purchase restricted common stock at $1.45 per share.
On April 30, 1999 Butler National entered into an agreement with the
Holders of the Convertible Debentures similar to the agreements with the
Holders of the Convertible Preferred. The face value at the time of this
agreement was $650,000 allowing $65,000 per month to be converted under the
plan at a conversion price equal to 80% of the five (5) day average closing
bid for the five (5) trading days prior to the conversion, provided, however,
that if the closing price increases to $1.45 per share or more for three (3)
consecutive trading days, the Holder will have the option to convert an
additional 20% or $130,000 of outstanding principal amount of Debentures. All
transactions are being handled through one broker and all activity is reported
on a weekly basis. The Holders also received 325,000 three-year warrants to
purchase restricted common stock at $1.45 per share.
Avcon and Butler National 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. In fiscal 1999 the Company settled the lawsuit and made final
payment to the engineer and the engineering work product was delivered as
required by the contract. The Company had 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 September 14, 1999, 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 2. Changes in Securities
The Company issued 1,163,130 shares of common stock related to the
convertible preferred stock, and 166,840 shares of common stock related to the
convertible debenture.
Item 4. Submission of Matters to Vote of Security Holders
None
Item 6. Exhibits and reports on Form 8-K.
(A) Exhibits.
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 Statement dated August 16, 1996.
99 Exhibit Number 99.
Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995, are incorporated by reference to Exhibit 99 of
the Form 10-K for the fiscal year ended April 30, 1998.
27.1Financial Data Schedule (EDGAR version only). Filed herewith.
The Company agrees to file with the Commission any agreement or
instrument not filed as an exhibit upon the request of the Commission.
(B) Reports on Form 8-K.
The Company filed a Form 8-K dated May 14, 1999, reporting under Item 5,
the distribution of common stock of its Indian Gaming Subsidiary; and Item 7,
press release regarding distribution of common stock of Indian Gaming
Subsidiary.
The Company filed a Form 8-K dated May 17, 1999, reporting under Item 9,
sales of equity securities pursuant to Regulation S.
The Company filed a Form 8-K dated July 27, 1999, reporting under Item 5,
press release regarding the settlement of affairs of discontinued food
distribution subsidiary, RF, Inc.; and Item 9, sales of equity securities
pursuant to Regulation S.
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SIGNATURES
Pursuant to the requirements 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.
BUTLER NATIONAL CORPORATION
(Registrant)
September 14, 1999 /S/ Clark D. Stewart
Date Clark D. Stewart, (President
and Chief Executive Officer)
September 14, 1999 /S/ Robert E. Leisure
Date Robert E. Leisure,
(Chief Financial Officer)