-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IfwWjgZKQo6plQjHpTS5VYsvsrFNy+IY2+1eV4PQnL5Kg2h35yDW+R1YjNolHpBy FIkQI+ydKMwgGsyPuBIMtQ== 0000015847-00-000004.txt : 20000327 0000015847-00-000004.hdr.sgml : 20000327 ACCESSION NUMBER: 0000015847-00-000004 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BUTLER NATIONAL CORP CENTRAL INDEX KEY: 0000015847 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 410834293 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-01678 FILM NUMBER: 578459 BUSINESS ADDRESS: STREET 1: 19920 W 161ST ST CITY: OLATHE STATE: KS ZIP: 66062 BUSINESS PHONE: 8167809595 MAIL ADDRESS: STREET 1: 19920 W 161ST ST CITY: OLATHE STATE: KS ZIP: 66062 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL CONNECTOR CORP DATE OF NAME CHANGE: 19701009 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark One) Annual Report Pursuant to Section 13 or 15(d) of the X Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended April 30, 1998 Transition Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934 (No Fee Required) For the Transition Period from __________ to __________. 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of Class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $5,960,442 at July 17, 1998, when the average bid and asked prices of such stock was $0.59375. The number of shares outstanding of the Registrant's Common Stock, $0.01 par value, as of July 17, 1998, was 11,640,521 shares. DOCUMENTS INCORPORATED BY REFERENCE: NONE This Form 10-K consists of 68 pages (including exhibits). The index to exhibits is set forth on pages 30-34. PART I Item 1. BUSINESS Forward Looking Information: The information set forth below includes "forward-looking" information as outlined in the Private Securities Litigation Reform Act of 1995. The Cautionary Statements, filed by the Company as Exhibit 99 to this Form 10-K, are incorporated herein by reference and you are specifically referred to such Cautionary Statements for a discussion of factors which could affect the Company's operations and forward-looking statements contained herein. General Butler National Corporation (the "Company" or "BNC") is a Delaware corporation formed in 1960, with corporate headquarters at 19920 West 161st Street, Olathe, Kansas 66062. Current Activities: The Company's current product lines and services include: (1) Aircraft Modifications - principally includes the modification of business-size aircraft from passenger to freighter configuration, addition of aerial photography capability, and stability enhancing modifications for Learjet, Beechcraft, Cessna, and Dasault Falcon aircraft along with other modifications. We provide these services through our subsidiary, Avcon Industries, Inc. ("Aircraft Modifications" or "Avcon"). (2) Avionics - principally includes the manufacture of airborne radio and instrument switching units used in DC-9, DC-10, DC-9/80, MD-80, MD-90 and the KC-10 aircraft. We provide these services through our subsidiary, Woodson Avionics, Inc. ("Switching Units", "Avionics" or "WAI"). (3) Gaming - principally includes business management services and advances to Indian tribes in connection with the Indian Gaming Regulatory Act of 1988. We provide these services through our subsidiary, Butler National Service Corporation ("Management Services", "Gaming" or "BNSC"). (4) SCADA Systems and Monitoring Services - principally includes the monitoring of water and wastewater remote pumping stations through electronic surveillance for municipalities and the private sector and related repair services. We provide these services through our subsidiary, Butler National Services, Inc. ("Monitoring Services" or "BNS"). (5) Temporary Services - provides temporary employee services for corporate clients. We provide these services through our subsidiary, Butler Temporary Services, Inc. ("Temporary Services" or "BTS"). Assets as of April 30, 1998 and Net Revenues for the year ended April 30, 1998. Industry Segment Assets Revenue Aircraft Modifications 53.1% 71.0% Avionics 6.6% 8.9% Gaming 31.3% 0.0% Monitoring Services 1.2% 20.1% Temporary Services 0.2% 0.0% Corporate Office 7.6% 0.0%
REGULATIONS Regulation under Federal Aviation Authority. The Company's Avionics and Modifications segments are subject to regulation by the Federal Aviation Authority (the "FAA"). The Company manufactures products and parts under FAA Parts Manufacturing Authority (PMA) requiring qualification and traceability of all materials and vendors used by the Company. The Company makes aircraft modifications pursuant to the authority granted by Supplemental Type Certificates issued by the FAA. The Company repairs aircraft parts pursuant to the authority granted by its FAA Authorized Repair Station. Violation of the FAA regulations could be detrimental to the Company's operation in these business segments. Licensing and Regulation under Indian Law. Before commencing gaming operations (Class II or Class III) on Indian Land, the Company must obtain the approval of various regulatory entities. Gaming on Indian Land is extensively regulated by Federal, State and Tribal governments and authorities. Regulatory changes could limit or otherwise materially affect the types of gaming that may be conducted on Indian Land. All aspects of the Company's proposed business operations on Indian Lands are subject to approval, regulation and oversight by the BIA, the Secretary of the United States Department of the Interior (the "Secretary") and the National Indian Gaming Commission. The Company's proposed management of Class III gaming operations in Kansas and Oklahoma are also subject to approval of a Class III Gaming Compact between the Indian Tribe and the States of Kansas and/or Oklahoma. Failure of the Company to comply with applicable laws or regulations, whether Federal, State or Tribal, could result in, among other things, the termination of any management agreements which would have a material adverse effect on the Company. Management agreement terms are also regulated by the IGRA, which restricts initial terms to five years and management fees to 30% of the net profits of the casino, except in certain circumstances where the term may be extended to seven years and the management fee increased to 40%. Management agreements with Indian Tribes will not be approved by the Commission unless, among other things, background checks of the directors and officers of the manager and its ten largest holders of capital stock have been satisfactorily completed. The Company will also be required to comply with background checks as specified in Tribal-State Compacts before it can manage gaming operations on Indian Land. Background checks by the Commission may take up to 180 days, and may be extended to 270 days by written notice to the Miami Tribe. There can be no assurance that the Company would be successful in obtaining the necessary regulatory approvals for its proposed gaming operations on a timely basis, or at all. Licensing and Regulation under Kansas Law. Present and future shareholders of the Company are and will continue to be subject to review by regulatory agencies. In connection with the Company's proposed operation of a Class III Shawnee Tribe casino or a Class III Miami Tribe casino in Kansas, the Company, the appropriate Indian Tribe and the key personnel of all entities may be required to hold Class III licenses approved in the respective state prior to conducting operations. The failure of the Company or the key personnel to obtain or retain a license in these states could have a material adverse effect on the Company or on its ability to obtain or retain Class III licenses in other jurisdictions. Each such State Gaming Agency has broad discretion in granting, renewing and revoking licenses. Obtaining such licenses and approvals will be time consuming and cannot be assured. The State of Kansas has approved pari-mutuel dog and/or horse racing for non-Indian organizations. The State of Kansas operates lottery and keno games for the benefit of the State. There is no assurance that a Tribal/State Compact between the Tribes and the State of Kansas can be completed. If the Compact is not approved, there could be a material adverse effect on the Company's plans for Class III gaming in Kansas. As a condition to obtaining and maintaining a Class III license, the Company must submit detailed financial and other reports to the Indian Tribe and the Agency. Any person owning or acquiring 5% or more of the Common Stock of the Company must be found suitable by the Agency, and the Agency has the authority to require a finding of suitability with respect to any shareholder regardless of the percentage of ownership. If found unsuitable by the Agency or the Indian Tribe, the shareholder must offer all of the Units held by such shareholder to the Company for cash at the Offering price less a fifteen percent (15%) administrative charge and the Company must purchase such Units within ten days of the offer. The shareholder is required to pay all costs of investigation with respect to a determination of his/her suitability. In addition, each member of the board of directors and certain officers of the Company are subject to a finding of suitability by the Agency and the Indian Tribe. Discontinued Operations: On April 14, 1998, the Company discontinued the operation of its food distribution operations conducted by RF, Inc., and Valu Foods, Inc., wholly owned subsidiaries of the Company. These operations are being liquidated and we do not plan any future operations in the food distribution industry. The Company acquired RF, Inc., on April 21, 1994. The individuals (Marvin J. Eisenbath, "MJE") who sold RF, Inc. to us had sought for some time to reacquire the ownership of RF, Inc. MJE (the Employee) filed a lawsuit against us seeking to rescind the sale of RF, Inc. stock and for damages. We reached an agreement with MJE to settle and release all claims and counterclaims effective April 30, 1997, (Release Agreement). MJE dismissed the lawsuit with prejudice. In addition to the releases, under the terms of the agreement, we received, on June 26, 1997, 600,000 shares of the Company's common stock and a commitment for certain payments over the next three years. On June 21, 1997, we released MJE from the terms of his employment contract and the April 24, 1994 Stock Purchase Agreement, including his agreement not to compete with us in the food distribution industry. Costs associated with this transaction totaled $1,054,000 and were expensed in fiscal year 1997. As a result of resolving the dispute and the ultimate release from the employment agreement, we received compensation and recorded a gain of $1,043,000, restated herein, (principally noncash) in the first quarter of 1998. See Footnote 1 of Annual Report for further discussion. On March 27, 1998, three companies filed a petition for involuntary bankruptcy against RF, Inc. On May 12, 1998, the court determined that RF, Inc. was bankrupt and a trustee was appointed on June 11, 1998. All the assets of RF, Inc. were pledged as security for the bank line of credit. The bank was to obtain control of all the assets of RF, Inc. and we planned to cooperate in the collection of accounts receivable through a law firm, the liquidation of the inventory and to purchase the fixed assets, primarily office equipment, from the bank. The RF, Inc. bank debt was approximately $638,000, plus interest and legal collection costs. We believed that an orderly liquidation of the assets and the sale of the fixed assets would allow the bank to recover the amount due on the bank line of credit. As of April 30, 1998, the operations of RF, Inc. have been deconsolidated because of the Chapter 7 involuntary bankruptcy liquidation. The entire investment in RF, Inc. was written-off through the 1998 loss from discontinued operations. The assets and liabilities of RF, Inc. at April 30, 1998, were comprised of accounts receivable $716,478, inventory $359,103, other assets $44,423, bank liabilities $637,947 and other accrued liabilities $397,903. The revenues associated with RF, Inc. for the years ended 1998, 1997, and 1996 were $3,783,132, $17,478,540, and $13,685,871 respectively. We also discontinued the operation of its retail food store, Valu Foods, Inc. We planned to liquidate the Valu Foods, Inc. assets in the ordinary course of business and the store will close the sooner of the completion of the inventory liquidation or on January 31, 1999, when the lease expires. The loss on discontinued operations is approximately $23,965 (net of tax). The loss includes anticipated legal costs, rental costs and payroll. As of April 30, 1998, the operations of Valu Foods, Inc. have been discontinued due to the planned closing of the wholly owned subsidiary. The entire investment in Valu Foods, Inc. was written-off through the 1998 loss from discontinued operations. The assets and liabilities of Valu Foods, Inc. at April 30, 1998, were comprised of property, plant and equipment including leasehold improvements of $175,446 and inventory $24,779. The revenues associated with Valu Foods, Inc., for the year ended 1998 were $143,550. Subsequent to the initial issuance of the April 30, 1998, fiscal year financial statements, the bankruptcy court ruled July 20, 1999, on the bankruptcy filing of the Company. Subsequent to April 30, 1998, the bank was not allowed to immediately assume control of the collateralized assets for liquidation and as such, required us to pay the bank the amount due and the court costs in total, including interest, aggregating $700,000. A charge to Profit and Loss for this payment was recorded in fiscal year 1999 based upon the final court action. Financial Information about Industry Segments Information with respect to the Company's industry segments are found at Note 13 of Notes to Consolidated Financial Statements for the year ended April 30, 1998, located herein at page 62. Narrative Description of Business Aircraft Modifications: Our subsidiary, Avcon, modifies business type aircraft at Newton, Kansas. The modifications include aircraft conversion from passenger to freighter configuration, addition of aerial photography capability, stability enhancing modifications for Learjets, and other special mission modifications. Avcon offers aerodynamic and stability improvement products for selected business jet aircraft. Sales of the Aircraft Modifications product line are handled directly through Avcon. Specialty modifications are quoted individually by job. The Company is geographically located in the marketplace for Aircraft Modifications products. The Company believes there are four primary competitors (AAR of Oklahoma, AVTEC, Dee Howard Company, and Raisbeck Engineering) in the industry in which the Aircraft Modifications division participates. The Aircraft Modifications business derives its ability to modify aircraft from the authority granted to it by the Federal Aviation Administration ("FAA"). The FAA grants this authority by issuing a Supplemental Type Certificate ("STC") after a detailed review of the design, engineering and functional documentation, and demonstrated flight evaluation of the modified aircraft. The STC authorizes Avcon to build the required parts and assemblies and to perform the installations on applicable customer-owned aircraft. Avcon owns over 200 STC's. When the STC is applicable to a multiple number of aircraft it is categorized as Multiple-Use STC. These Multiple- Use STC's are considered a major asset of the Company. Some of the Multiple-Use STC's include the Beechcraft Extended Door, Learjet AVCON FINS, Learjet Extended Tip Fuel Tanks, Learjet Weight Increase Package and Dasault Falcon 20 Cargo Door. On May 3, 1996, Avcon received approval from the Federal Aviation Administration of a Supplemental Type Certificate ("STC") (no. ST00432WI) for its AVCON FIN Modification for installation on Learjet Model 35 and 36 Aircraft. FAA pilots thoroughly evaluated the test aircraft, and determined that the fins substantially increase the aerodynamic stability in all flight conditions. The AVCON FIN STC eliminates the operational requirement for Yaw Dampers which are otherwise required in both Learjet models to control adverse yaw tendencies in certain flight conditions, particularly during approach and landing. Learjets equipped with AVCON FINS exhibit the same aerodynamic stability and improved operating efficiency offered on newer Learjet models, while maintaining the outstanding range, speed and load-carrying capabilities that made the Learjet Models 35 and 36 among the most popular Business Jets ever produced. Mounted like the fins of an arrow on the rear of the aircraft, Learjets equipped with AVCON FINS have a new look much the same as the current production aircraft. This modification will give the Learjets produced in the 1970's and 1980's the look of the 21st century. Avionics - Switching Units: The Company has an agreement with Boeing McDonnell Douglas to manufacture and repair airborne switching systems for Boeing McDonnell Douglas and its customers. The Company subcontracts with its wholly owned subsidiary, Woodson Avionics, Inc., for the manufacture and repair of Switching Units. Switching Units are used to switch the presentation to the flight crew from one radio system to another, from one navigational system to another and to switch instruments in the aircraft from one set to another. The Switching Units are designed and manufactured to meet Boeing McDonnell Douglas and FAA requirements. Most Boeing McDonnell Douglas commercial aircraft are equipped with one or more Butler National Switching Units. Marketing is accomplished directly between the Company and Boeing McDonnell Douglas. Competition is minimal. However, sales are directly related to Boeing McDonnell Douglas' production of DC-9, DC-10, DC9/80, MD-80, MD-90, MD-11 and KC-10 tanker aircraft. The current Boeing McDonnell Douglas contract has been extended through fiscal year 1999. However, the customer plans to stop aircraft production in the year 2000. The impact on our business of stopping production will be minimal due to planning on this issue for many years. The Company has received additional contracts for these products which has sustained our business. Avionics provides new replacement units and overhaul service directly to the major airlines using the aircraft manufactured by McDonnell Douglas. This part of the Avionics business segment is growing to offset the loss of sales from the original equipment units. The Company sells to Boeing McDonnell Douglas on terms of 2% 10 days, net 30 days. This means that the terms offered to this customer represent that if the entire invoice is paid within 10 days then there will be a 2% discount. If not, then the total amount due is payable within 30 days. Most payments have been and continue to be within those terms. The Company has ordinary course of business purchase orders from the commercial division (Douglas Aircraft Company) for products with scheduled shipment dates into the fiscal year 1999. However, should Boeing McDonnell Douglas financial reorganize or for some other reason not accept shipment against these orders, the Company could suffer significant loss of revenue. BMD accounts for 23.7% of our avionics revenue. Management Services: BNSC is engaged in the business of providing management services to Indian tribes in connection with the Indian Gaming Regulatory Act of 1988. The Company has three management agreements in place; however, the performance of these agreements is contingent upon and subject to approval by the Secretary of Interior, Bureau of Indian Affairs, National Indian Gaming Commission and the appropriate state, if required. Also, the Company has signed consulting engagement letters with two tribes to study and develop plans for Indian gaming. See Liquidity and Capital Resources, Page 20. The Management Agreement between the Indian tribe (the owner and operator) and Butler National Service Corporation (the manager) is the final approval document issued by the National Indian Gaming Commission ("NIGC") before Indian gaming is authorized. The Management Agreement or Contract is authorized and approved by the NIGC pursuant to the Indian Gaming Regulatory Act of 1988, PL 100-497, 102 Stat. 2467,25 U.S.C. 2701-2721 (sometimes referred to as "IGRA"). Before the Management Agreement is approved by the NIGC, all required contacts with other parties must be approved; including, (a) the compact with the state for class III gaming, if applicable, (b) com- pliance with the requirements of the National Environmental Protection Agency ("NEPA"), (c) a Tribal Gaming Ordinance approved by the NIGC, and (d) Indian land leases, if applicable approved by the Bureau of Indian Affairs ("BIA"). The management consulting engagement letters provide for advances of funds to the Indian tribes by BNSC for professional services, fees, licenses, travel, administrative costs, documentation, procedure manuals, purchases of property and equipment and other costs related to the approval and opening of an establishment. These advances are considered to be a receivable from the tribe and to be repaid by the Tribe from the funding to open the enterprise. The ability to collect the funds related to these advances depends upon the opening of the establishment or in the alternative the liquidation of the inventory and receivable accumlated in the event the establishment is not opened. However, if the collection and/or liquidation efforts are not successful, BNSC would suffer a signficant loss of asset value. See Liquidity and Capital Resources, page 21. Butler National Service Corporation is in the process of obtaining needed licenses as they are required necessary for the opening of any future gaming establishments. BNSC follows the law and regulations of the Indian Gaming Regulatory Act of 1988 and the state laws as they may apply. At this time, BNSC does not foresee any substantial risks associated with obtaining any required licenses needed to assist the Indian tribes. During fiscal 1997, the Company received approval by the National Indian Gaming Commission of the management agreement between the Miami Tribe of Oklahoma, the Modoc Tribe of Oklahoma and its subsidiary, Butler National Service Corporation, to construct and manage a Class II (High Stakes Bingo) and Class III (Off-Track Betting) establishment. Construction of this project, known as the STABLES, was completed and opened in September 1998. The services to be provided by the Company include consulting and construction management for the Tribes. The Company provided the necessary funds to construct the facilities and is being repaid the principal plus interest out of the profits of the operation. The principal amount of $3.5 million carries an interest rate of prime plus 2%. Additionally, the Company is receiving a 30% share of the profits for its management services. The Company has obtained construction and operating financing of the establishment. The Princess Maria Casino, an Indian gaming establishment, is under construction and is expected to open for business in July 2000. The Management Agreement between the Miami Tribe (the owner and operator) and Butler National Service Corporation (the Manager) originally filed in 1992, was approved January 7, 2000. The Shawnee 206 Casino, an Indian gaming establishment, is in the land clearing and approval phase under the terms of a 1992 consulting agreement between the Shawnee Tribe, the land owner members of the Shawnee Tribe and Butler National Service Corporation. The Princess Maria Casino was used as the prototype project for the eventual approval of the Shawnee 206 Management Agreement. Approval of this Agreement is expected in early 2001. The Company has other consulting agreements with other tribes and an NIGC approved Management Agreement with the Modoc Tribe for casino construction and openings scheduled after the opening of the Princess Maria and the Shawnee 206. The risk associated with advances of funds for assets and services on behalf of the tribes under the consulting agreements is that a Management Agreement will not be approved and the liquidation of the assets and related services does not recover enough funds to cover the advances. The Company has been involved in this business segment since 1991 and has not experienced any project stopping determinations by the federal courts or the regulatory agencies. All Management Agreements submitted for approval have been approved by the NIGC. There can be no assurance that future management agreements will be approved and that Congress will not outlaw Indian gaming. Should any of these events occur, the Company would choose alternative uses of the Indian land in cooperation with the Tribes to recover the advances to the Tribes. SCADA Systems and Monitoring Services: BNS is engaged in the sale of monitoring and control equipment and the sale of monitoring services for water and wastewater remote pumping stations through electronic surveillance by radio or telephone. BNS contracts with government and private owners of water and wastewater pumping stations to provide both monitoring and preventive maintenance services for the customer. We expect a high percentage of BNS business to come from municipally owned pumping stations. Currently, BNS is soliciting business in Florida only. While the Company has exposure to competitive forces in the monitoring and preventive maintenance business, management believes the competition is limited. Temporary Services: BTS provides managed temporary personnel to corporate clients to cover personnel shortages on a short and/or long term basis. This service is being marketed in Kansas, Missouri and Oklahoma. Currently, this Company is inactive. BTS plans to provide contract staffing for the STABLES establishment opening in September 1998. Raw Materials: Raw materials used in the Company's products are currently available from several sources. Certain components, used in the manufacture of the Switching Units, are long lead time components and are single sourced. Patents: There are no patents, trademarks, licenses, franchises, or concessions held by us that need to be held to do business other than the FAA, PMA and Repair Station licenses. However, we maintain certain airframe alteration certificates, commonly referred to as Supplemental Type Certificates ("STCs"), issued to us by the FAA, for the Aircraft Modification and Avionic businesses. The STC, PMA and Repair Station licenses are not patents or trademarks. The FAA will issue an STC to anyone, provided that the person or entity documents and demonstrates to the FAA that a change to an aircraft configuration does not endanger the safety of flight. The PMA and Repair Station licenses are available to any person or entity, provided that the person or entity maintains the appropriate documentation and follows the appropriate manufacturing, repair and/or service procedures. The FAA requires the aircraft owner to have the STC document in the aircraft log after each modification is complete. Seasonality: Our business is generally not seasonal. Demand for the Falcon 20 cargo aircraft modifications is related to seasonal activity of the automotive industry in the United States. Many of these modified aircraft are used to carry automotive parts to automobile manufacturing facilities. The peak modification demand occurs in late spring and early summer. Peak usage of the modified aircraft is from June to December. Future changes in the automotive industry could result in the fluctuation of revenues at the Aircraft Modifications Division. Customer Arrangements: Most of the our products are custom-made. Except in isolated situations no special inventory-storage arrangements, merchandise return and allowance policies, or extended payment practices are involved in the Company's business. We are not dependent upon any single customer except for Switching Units. Switching Units are sold to Boeing McDonnell Douglas and Douglas Aircraft Company customers. We have required deposits from its customers for aircraft production schedule dates. Backlog. Our backlog as of April 30, 1998, 1997, and 1996, was as follows: Industry Segment 1998 1997 1996 Aircraft Modifications 5,747,505 2,468,169 820,694 Avionics 173,174 316,558 390,066 Monitoring Services 1,124,191 1,317,580 1,645,844 $7,044,870 $4,102,307 $2,856,604
Our backlog as of July 17, 1998, totaled $5,226,191; consisting of $4,213,334, $84,674, $928,183 and $0, respectively, for Aircraft Modifications, Avionics, Monitoring Services, and Temporary Services. The backlog includes firm orders which may not be completed within the next twelve months. Backlog that we expect not to be filled within the next year totals $1,272,000; consisting of $1,065,000, $0, $207,000, and $0. These numbers represent firm orders that may not be completed within the year. This is standard for the industry in which modifications and related contracts may take several months or years to complete. Such actions force backlog as additional customers request modifications, but must wait for other projects to be completed. Our backlog in Monitoring Services increased due to our annual contract with a customer (City of Plantation) being extended to a five-year contract. Four years remain on this contract. Employees. We employed 66 people on April 30, 1998, compared to 54 people on April 30, 1997, and 53 people on April 30, 1996. As of July 17, 1998, we employed 67 people. None of our employees are subject to any collective bargaining agreements. "Year 2000". Historically, certain computerized systems have had two digits rather than four digits to define the applicable year, which could result in recognizing a date using "00" as the year 1900 rather than the year 2000. This could result in major failures or miscalculations and is generally referred to as the "Year 2000 issue." We recognized that the impact of the Year 2000 issue extended beyond traditional computer hardware and software to automated plant systems and instrumentation, as well as to third parties. The Year 2000 issue was addressed within our company by its individual business units, with no material issues noted. We committed resources to conduct risk assessments and have taken corrective action, where required, within each of the following areas: information technology, plant systems and external parties. Information technology includes telecommunications as well as traditional computer software and hardware in the mainframe, midrange and desktop environments. Plant systems include all automation and embedded chips used in plant operations. External parties include any third party with whom we interact. In all three areas no material issues have arisen. The remaining costs of the Year 2000 activities were not expected to be material to our operations, liquidity or capital resources. Costs are being managed within each business unit. We purchased and replaced our central computer system and all operating and application software with Year 2000 compatible products in the summer of 1998. The cost of this replacement was approximately $200,000. Financial Information about Foreign and Domestic Operations, and Export Sales. Information with respect to Domestic Operations may be found at Note 13 of Notes to Consolidated Financial Statements for the year ended April 30, 1998, located herein at page 62. There are no foreign operations. Item 2. PROPERTIES Our corporate headquarters are located in a 9,000 square foot owned facility for office and storage space at 19920 West 161st Street, in Olathe, Kansas. The facilities are adequate for current and anticipated operations. Our Company's Aircraft Modifications Division is located at the municipal airport in Newton, Kansas, in facilities occupied under a long- term lease extending to April 30, 2001, at an annual rent of $33,000. The lease is renewable for an additional seven-year term. In February 1989, the Company entered into a long-term capital lease with the City of Newton, Kansas, for a second hangar. The lease extends to February 28, 2009, at an initial annual rental of $55,200. Commencing November 1, 1991, the annual rental declined to $50,400 for the remaining term of the lease. The Company entered into a letter of agreement with the landlord to reduce the lease payments to reinstate the capital lease as originally contracted. These facilities are adequate for current and anticipated operations. Our wholly owned subsidiary, Butler National Services, Inc. has its principal offices in Ft. Lauderdale, Florida, in facilities occupied under a three-year lease ending March 31, 1999. The annual rental is approximately $25,903. The facilities are adequate for current and anticipated operations. Our wholly owned subsidiary, Woodson Avionics, Inc., had its principal offices and manufacturing operations in Arkansas. During May 1996, the Company relocated to 5032 South Ash Avenue, Tempe, Arizona. As of June 1, 1996, the Company rents 3,865 square foot of space for $2,358 per month. The lease expires December 31, 1999. The facilities are adequate for current and anticipated operations. Item 3. LEGAL PROCEEDINGS We had an employment agreement with an individual (Brenda Shadwick "BBS"), who the Company terminated in April 1995. BBS filed a lawsuit against the Company, the President of the Company, and various corporate subsidiaries, alleging the Company wrongfully terminated BBS's employment in breach of the contract. The suit was filed in October 1995 in State Court in Johnson County, Kansas. We reached an agreement with BBS to settle and release all claims and counterclaims on May 1, 1997. BBS dismissed the lawsuit with prejudice. The terms of the settlement required monthly payments by us to BBS in the amount of $6,000 per month during fiscal 1998 and fiscal 1999, which were made. We acquired RF, Inc. from Marvin and Donna Eisenbath (MJE) on April 21, 1994. We exchanged 650,000 shares of the Company's common stock for 100% of the issued and outstanding shares of RF, Inc. The Eisenbaths sought for some time to reacquire from us the ownership of RF, Inc. MJE filed a lawsuit against us seeking to rescind the sale of RF, Inc. stock and for damages. We reached an agreement with MJE to settle and release all claims and counterclaims effective April 30, 1997, ("Release Agreement"). MJE dismissed the lawsuit with prejudice. In addition to the releases, under the terms of the agreement, we received on June 26, 1997, 600,000 shares of the Company's common stock and certain payments over the next three years. We released MJE from the terms of his employment contract and the April 24, 1994, Stock Purchase Agreement. These documents released MJE from his agreement not to compete with us in the food distribution industry. We recorded a gain (principally noncash) of approximately $1,043,000 in the first quarter of 1998 for this transaction. Although the effective date of the transaction as agreed to by both parties is April 30, 1997, the transfer of the stock and related proceeds was not completed until June 1997, see also Item 1, General, Discontinued Operations, page 2, regarding the bankruptcy of RF, Inc. 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. In December 1997, we sold Convertible Preferred Stock to certain offshore investors. Beginning in February 1998, these investors began converting the Preferred Stock into Common Stock and the price of the our stock declined. As reported earlier, we 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 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. We considered a number of alternative actions including a reverse stock split, a repurchase of common shares on the open market and/or the repurchase of the convertibles at a premium to increase the price of the Common Stock. After evaluation of various alternatives and as a result of what we believed were inappropriate actions and representations by the holders of the Convertible Preferred Stock and the Convertible Debentures, we announced plans to stop conversions of the Convertible Preferred Stock and Convertible Debentures at prices below $2.75 per share. On July 17, 1998, two of the holders of the Convertible Preferred Stock filed a lawsuit (the "Action") against us in Chancery Court in Delaware alleging among other things, breach of contract, violation of Delaware law and violation of the terms of the Convertible Preferred Stock. The Action seeks an injunction to force us 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 (70%) 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. We used an outside engineering firm to assist with the Aircraft Modification Avcon Fin project and the related STC's. The individual filed suit against us for final payment under the contract. However, we did not feel that all work products had been delivered. We are in the process of making final settlement with this engineer to be paid upon delivery of the engineering work product as required by the contract. We have an account payable to the individual equal to the agreed-upon settlement to be paid upon delivery of the complete engineer work product. On October 19, 1998, the case was settled when we made final payment and the work products were delivered. A lawsuit was filed in the United States District Court for the District of Kansas by the State of Kansas against us, the United States, the Business Committee members of the Miami Tribe and others on October 14, 1999, challenging the determination by the Department of the Interior and the United States District Court for the District of Kansas that the Miami Princess Maria Reserve No. 35 was Indian Land. The State of Kansas requested an order by the Court preventing further development on the Indian land by us and further discussions about the Indian land by us or Mr. Stewart, our President. All of the defendants have asked the Court to dismiss the case because they believe the determination of Indian land is a power reserved for the United States by the constitution of the United States. A ruling by the court is expected in February 2000. As of January 28, 2000, there are no other known legal proceedings pending against the Company. The Company considered all such unknown proceedings, if any, to be ordinary litigation incident to the character of the business. The Company believes that the resolution of those unknown claims will not, individually or in the aggregate, have a material adverse effect on the financial position, results of operations, or liquidity of the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of its security holders during the fourth quarter of fiscal 1998. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) Market Information: The Company was initially listed in the national over-the-counter market in 1969, under the symbol "BUTL." Effective June 8, 1992, the symbol was changed to 'BLNL.' On February 24, 1994, the Company was and is listed on the NASDAQ Small Cap Market under the symbol "BUKS." Since the initial filing of the report on Form 10-K for the period ending April 30, 1998, the Company's common stock has been delisted from the small cap category effective January 1, 1999 and is now listed in the over the counter (OTCBB) category. The range of the high and low bid prices per share of the Company's common stock, for fiscal years 1998 and 1997, as reported by NASDAQ, is set forth below. Such market quotations reflect intra-dealer prices, without retail mark-up, markdown or commissions, and may not necessarily represent actual transactions. Year Ended April 30, 1998 Year Ended April 30, 1997 High Low High Low First Quarter 1 15/16 15/16 3 3/16 2 1/16 Second Quarter 1 3/32 15/16 2 5/8 1 3/4 Third Quarter 1 1/16 13/16 3 3/16 1 7/8 Fourth Quarter 1 5/8 2 1/4 1 5/8
(b) Holders: The approximate number of holders of record of the Company's common stock, as of July 17, 1998, was 3,105. (c) Dividends: The Company has not paid any cash dividends on its common stock, and the Board of Directors does not intend to declare any cash dividends in the foreseeable future. Item 6. SELECTED FINANCIAL DATA The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and with the Consolidated Financial Statements and related Notes included elsewhere in the report. Year Ended April 30 (In thousands except per share date) 1998 1997 1996 1995 1994 (Restated)(Restated) Net Sales $5,456 $4,062 $3,653 $ 3,668 $11,102 Income (Loss) from Continuing Operations $ 399 $ (575) $ (658) $(1,286) $ (200) Income (Loss) from/on Discontinued Operations $ 269 $ (689) $ 802 $ 461 $ 471 Net Income (Loss) $ 668 $(1,263) $ 144 $ (825) $ 271 Basic per Share Income (Loss) from Continuing Operations $ 0.03 $ (0.06) $(0.07) $ (0.16) $(0.02) Income (Loss) from/on Discontinued Operations $(0.03) $ 0.07 $ 0.09 $ 0.06 $ 0.06 Net Income (Loss) $ 0.00 $(0.13) $ 0.02 $ (0.10) $ 0.04 Year Ended April 30 (In thousands except per share date) 1998 1997 1996 1995 1994 (Restated) (Restated) Selected Balance Sheet Information Total Assets $10,870 $10,070 $8,261 $4,263 $5,024 Long-Term Obligations (excluding current maturities) $ 1,926 $ 1,541 $ 57 $ 81 $ 108 Cash dividends declared per Common share None None None None None
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company has restated its financial statements for April 30, 1998 and 1997. These financial statements were restated primarily as a result of two errors as follows: Beneficial Conversion Features: The Company issued convertible debentures in June and November of 1996 that contained beneficial conversion features which allowed the investor to convert at 70% of the average common stock closing bid price for the five days prior to issuance of the debt security. The conversion period on the notes was for limited periods. The financial statements for the year ended April 30, 1997, have been restated to reflect the accounting recognition of the value attributable to the beneficial conversion feature ($375,000) as a noncash charge to interest expense and an increase to the paid-in capital. The Company also issued convertible preferred stock on December 16, 1997, which contained beneficial conversion features. Those features allow the holder of the security to convert the preferred stock into the Company's common stock at 70% of the common stock bid price (the average of the ending common stock price bid five days prior to issuance of the preferred stock or the ending common stock bid price 45 days after issuance of the preferred stock). The financial statements for the period ended April 30, 1998, have been restated to reflect accounting recognition of the value attributable to this beneficial conversion feature as a deemed dividend and an increase to capital contributed in excess of par of $650,000. The accounting above is consistent with the accounting requirements in Topic D-60 of the Emerging Issues Task Force (EITF), issued in March 1997, and what was agreed to by the EITF in the final deliberations for Issue 98-5 on May 20, 1999. RF, Inc. Gain: As further discussed in Note 3, the Company settled a dispute with a former employee in June 1997, effective April 30, 1997. The Company initially recorded a net gain on the settlement of approximately $433,000 in June 1998. Costs aggregating approximately $1,054,000 that had been deferred as of April 30, 1997, more appropriately should have been recognized as period costs. The financial statements have been restated to expense these costs as part of loss from discontinued operations in fiscal 1997. In addition, the value assigned to the 600,000 shares of company stock received as part of the consideration of the settlement was reduced from $2 per share (stock price at April 30, 1997) to $1.22 per share (stock price on June 26, 1997 - the date the shares were received). The net effect of this transaction on the fiscal 1998 financial statements is to change the previously reported loss from discontinued operations of $172,281 to income from discontinued operations of $269,219. Restated fiscal 1998 compared to restated fiscal 1997 The Company's sales for fiscal 1998 were $5,456,106, an increase of 34.3% from fiscal 1997 sales of $4,061,775. Discussion of specific changes by operation follows. Aircraft Modification: Sales from the Aircraft Modifications business segment increased 42.2%, from $2,724,217 in fiscal 1997, to $3,874,490 in 1998. This segment earned an operating profit of $1,274,320 in 1998, compared to $501,984 in 1997. Primarily product sales increased due to the expanded business base related to the multiple-use Supplemental Type Certificates ("STC") developed by the Company. The increase in operating income is due to the increase in sales and margins related to the proprietary products. As previously noted on page 4, (Item 1. Business), on May 3, 1996 the Company subsidiary, Avcon Industries, Inc., received approval from the Federal Aviation Administration of a Supplemental Type Certificate (no. ST00432WI) for its AVCON FIN Modification for installation on Learjet Model 35 and 36 Aircraft. The STC authorizes Avcon to build the required parts and assemblies and to perform the installations on applicable customer-owned Learjets. The Company believes the potential market for fin installations to be approximately 1,000 aircraft and that approximately 500 fin installations will be performed over the next several years. The Company plans to market the fin installation with related options. The installed package price for seventeen AVCON FIN packages installed in fiscal 1998 averaged approximately $150,000 per aircraft. In fiscal 1998, the Company invested $499,454 to design, engineer, build, and demonstrate to the FAA, flight characteristics of Avcon products; thereby adding to its ownership of multiple-use STC's. The Company's direction is to continue to invest in activities that expand the aircraft modification market. The Company believes that the increased modification-market, through STC's for the Learjet and the Beechcraft KingAir, will enable this segment to be an even greater contributor to the overall growth of the Company. Switching Units: Sales from the Avionics Switching Unit business segment increased 74.6%, from $277,513 in fiscal 1997, to $484,518 in fiscal 1998. Sales to the major OEM customer decreased 18.3% due to the phase out of this type of aircraft. Sales for aircraft repair and refurbishment increased 4.8 times, from fiscal 1997 to fiscal 1998. Operating profits increased from $123,571 in fiscal 1997 to $146,744 in fiscal 1998. Management expects this business segment to continue to be stable in future years due to the additional orders the Company has received. SCADA Systems and Monitoring Services: Revenue from Monitoring Services increased from $1,060,045 in fiscal 1997 to $1,097,098 in fiscal 1998, an increase of 3.5%. During fiscal 1998, the Company maintained a relatively level volume of long-term contracts with municipalities. Revenue increased due to the introduction of new products and services. The Company's contracts with its two largest customers have been renewed for fiscal 1999. An operating profit of $228,488 in Monitoring Services was recorded in fiscal 1998, compared to fiscal 1997 operating profit of $230,738. The Company was able to secure performance bonds during the first quarter of fiscal 1995. This division has since bid on certain jobs requiring performance bonds, and completed two special jobs with revenue totaling approximately $100,000. The Company believes the service business of this segment will continue to grow at a moderate rate. This segment has experienced consistent increases over the past few years and the Company expects this trend to continue. Temporary Services: BTS provides managed temporary personnel to corporate clients to cover personnel shortages on a short and/or long term basis. This service is being marketed in Kansas, Missouri and Oklahoma. Currently, this Company is inactive. BTS plans to provide contract staffing for the STABLES establishment opening in September 1998. Management Services: -General- In the current fiscal year the Company received no revenue and incurred $32,569 in general and administrative expenses associated with its continued efforts to explore opportunities related to the Indian Gaming Act of 1988. Additionally, the Company amortized $77,864 and $66,458 in fiscal years 1998 and 1997, respectively, related to shares issued for services rendered to the Company. The Company has advanced and invested a total of $6,071,449 in land, land improvements, professional design fees and other consulting and legal costs related to the development of Indian Gaming facilities. Included in these advances and investments are lands and other areas located adjacent to residential developments. The Company believes that these tracts could be developed and sold for residential and commercial use, other than Indian gaming, if the gaming enterprises do not open. Additional improvements, including access roads, water and sewer services, etc. are planned for these lands. After these improvements, these lands may be sold in small tracts. This would allow the Company to recover the majority, if not all, of the land investments and other gaming costs. -Princess Maria Casino- The Company has a management agreement with the Miami Tribe to provide management services to the Miami Tribe. On July 9, 1992, 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. The Miami Tribe's 1992 compact was the subject of a lawsuit filed in February 1993, in the Federal District Court, by Miami Tribe, alleging the failure to negotiate a compact in good faith by the State of Kansas. The United States District Court dismissed the Miami Tribe's suit against the State of Kansas, citing the United States Supreme Court's ruling in Seminole v. State of Florida. The Supreme Court ruled that the "failure to negotiate" provision of the IGRA did not allow an Indian tribe to compel a state by litigation to negotiate a compact. In February 1993, former Kansas Governor Finney requested a determination of the suitability of the Miami Indian land for Indian Gaming, under the IGRA, from the Bureau of Indian Affairs (the "BIA"). In May 1994, the NIGC again requested the same determination. Finally in May 1995, an Associate Solicitor within the BIA issued an opinion letter stating that the Miami Tribe has not established jurisdiction over the Miami land in Kansas. This was the first definitive statement received from the central office of the BIA in three years. The latest opinion is contrary to a September 1994 opinion of the Tulsa Field Solicitor, in an Indian probate, stating that the Miami Tribe has jurisdiction over the Miami Indian land in Kansas. On July 11, 1995, the U.S. Department of Justice issued a letter to the Associate Solicitor expressing concern about the conclusions reached, based upon the analysis of the case. The Miami Tribe challenged this opinion in Federal Court. To prove and protect the sovereignty of the Miami Tribe, and other Indian tribes, relating to their lands, on April 11, 1996, the Court ruled that the Miami Tribe did not have jurisdiction because the BIA had not approved the Tribal membership of the Princess Maria heirs, at the time the management agreement was submitted; therefore, the Court ordered that the NIGC'S determination (that Reserve No. 35 is not "Indian land", pursuant to IGRA) was affirmed. However, the Court noted in its ruling that nothing precludes the Tribe from resubmitting its management agreement to the NIGC, along with evidence of the current owners' consent, and newly adopted tribal amendments. On February 22, 1996, the BIA approved the Miami Tribe's constitution and the membership of the heirs. The Tribe resubmitted the management agreement. Although the Court noted that the Tribe could resubmit the management agreement, the Court did not pass on whether or not a new submission will obtain approval. The Tribe resubmitted the management agreement and land question to the NIGC in June 1996. In July 1996, the NIGC again requested an opinion from the BIA. On July 23, 1997, the Tribe and the Company were notified that the BIA had again determined that the land was not suitable for gaming, for political policy reasons, without consideration of the membership in the Miami Tribe or recent case law, and the NIGC had to again deny the management agreement. The Tribe filed a suit in the Federal District Court in Kansas City, Kansas. On May 15, 1998, the Court determined that the land was suitable for gaming and remanded the case to the BIA for the documentation. Therefore, even though the Company and the Tribe believe the BIA will agree with the Court that the land is "Indian land", and in compliance with all laws and regulations, for a variety of reasons, there is no assurance that the Management Agreement will be approved. Subsequent to April 30, 1998, the NIGC approved the management agreement on January 7, 2000. Under the Management Agreement, as approved, the Company, as manager, is to receive a 30% share of the profits and reimbursement of development costs. The total advances and investment related to the Princess Maria at April 30, 1998, was $503,641. This amount is net of a reserve of $1,413,511, which represents the current net realizable value of the advanced receivable. A lawsuit was filed in the United States District Court for the District of Kansas by the State of Kansas against us, the United States, the Business Committee members of the Miami Tribe and others on October 14, 1999, challenging the determination by the Department of the Interior and the United States District Court for the District of Kansas that the Miami Princess Maria Reserve No. 35 was Indian Land. The State of Kansas requested an order by the Court preventing further development on the Indian land by us and further discussions about the Indian land by us or Mr. Stewart, our President. All of the defendants have asked the Court to dismiss the case because they believe the determination of Indian land is a power reserved for the United States by the constitution of the United States. A ruling by the court is expected in February 2000. -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, Bureau of Indian Affairs for the U.S. Department of the Interior. The Compact was published in the Federal Register on February 6, 1996, and is, therefore, deemed effective. The Compact authorizes Class III (Off-Track Betting "OTB") along with Class II (high stakes bingo) at a site within the City of Miami, Oklahoma. The Company is providing consulting and construction management services in the development of the facility and will manage the joint- venture operation for the tribes. The STABLES facility is approximately 22,000 square feet and located directly south of the Modoc Tribal Headquarters building in Miami. The complex will contain off-track betting windows, a bingo hall, sports bar, and a restaurant. The Company's Management Agreement was approved by the NIGC on January 14, 1997. Under the Management Agreement, as approved, the Company, as manager, is to receive a 30% share of the profits and reimbursement of development costs. Construction on the STABLES began with the ground breaking on March 27, 1997. The STABLES opened in September 1998. The estimated project cost is approximately $3,500,000. Funds have been provided from the Company's operations and long-term financing for project completion was arranged. Long-term financing was provided by Miller & Schroeder Investments Corporation. The loan was dated May 29, 1998, in the amount of $1,850,000 at a rate of prime plus 2% and was funded as needed during the phases of construction with interest only being payable up to August 1, 1998. Commencing on September 1, 1998, through August 1, 2003, monthly installments of principal and interest to sufficiently fully amortize the principle balance will be due. As a part of the Management Contract approved by the NIGC on January 14, 1997, between the Company's wholly owned subsidiary, Butler National Service Corporation, and the Miami Tribe of Oklahoma and the Modoc Tribe of Oklahoma (the "Tribes"), the Company agreed to loan the Tribes $3,500,000 at 2% over prime, to be repaid over five years, for the construction and operation of the Stables gaming establishment. At April 30, 1998, the Company had advanced $2,135,232 under the contract and reported $408,333 current note receivable, $1,376,884 long-term note receivable and $350,015 reserve for Indian gaming development. Security under the contract includes the Tribes' profits from all tribal gaming enterprises and all assets of the Stables except the land and building. -Shawnee Reserve No. 206- 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 of 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 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 jurisdication 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. The total advances and investment related to Shawnee Reserve No. 206 at April 30, 1998, was $557,301. This amount is net of a reserve of $849,222, which represents the current net realizable value of the advanced receivable. -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. The total advances and investment related to Modoc Tribe at April 30, 1998, was $210,613. This amount is net of a reserve of $337,436, which represents the current net realizable value of the advanced receivable. -General- 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. The total advances and investment related to Other Gaming at April 30, 1998, was $6,169. This amount is net of a reserve of $58,324 which represents the current net realizable value of the advanced receivable. Selling, general and administrative (SG&A): Expenses increased $656,898 (46.4%) in fiscal year 1998. These expenses were $2,073,756, or 38% of revenue, in fiscal 1998, and $1,416,858, or 34.9% of revenue in fiscal 1997. Other income (Expense): Expenses decreased due to the writedown of the land and building in Overton, Nebraska, in fiscal 1995. This facility became idle in 1994. The Company was unable to complete the negotiated sale of the land and building. Therefore, the Company reduced the value of the asset by $157,200 in order to record the asset at its estimated net realizable value. The Company entered into an agreement, on September 13, 1995, with the Village of Overton, for the sale of the building in Overton, Nebraska. The Company received a cash payment of $30,000 at closing on September 18, 1995, and may receive an additional $70,000 if the Village of Overton is either able to sell or lease the building in the future. During fiscal year 1998 this building was sold for $45,000. Restated fiscal 1997 compared to fiscal 1996 The Company's sales for fiscal 1997 were $4,061,775, an increase of 11.2% from fiscal 1996 sales of $3,653,095. Discussion of specific changes by operation follows. Aircraft Modification: Sales from the Aircraft Modifications business segment increased 7.6%, from $2,531,504 in fiscal 1996, to $2,724,217 in fiscal 1997. This segment earned an operating profit of $501,984 in 1997, compared to income of $356,916 in 1996. Primarily product sales increased due to the expanded business base related to the multiple-use Supplemental Type Certificates ("STC") developed by the Company. The increase in operating income is due to the increase in sales and margins related to the proprietary products. As previously noted on page 4, (Item 1. Business), on May 3,1996 the Company's subsidiariy, Avcon Industries, Inc., received approval from the Federal Aviation Administration of a Supplemental Type Certificate (no. ST00432WI) for its AVCON FIN Modification for installation on Learjet Model 35 and 36 Aircraft. The STC authorizes Avcon to build the required parts and assemblies and to perform the installations on applicable customer-owned Learjets. The Company believes the potential market for fin installations to be approximately 1,000 aircraft and that approximately 500 fin installations will be performed over the next several years. The Company plans to market the fin installation with related options. The installed package price for nine AVCON FIN packages installed in fiscal 1997 averaged approximately $150,000 per aircraft. In fiscal 1997, the Company invested $1,174,535 to design, engineer, build, and demonstrate to the FAA, flight charactertistics of Avcon products; thereby adding to its ownership of multiple-use STC's. The Company's direction is to continue to invest in activities that should expand the aircraft modification market. The Company believes that the increased modification-market, through STC's for the Learjet and the Beechcraft KingAir, will enable this segment to be an even greater contributor to the overall growth of the Company. Switching Units: Sales from the Avionics Switching Unit business segment increased 6.6%, from $260,399 in fiscal 1996, to $277,513 in fiscal 1997. Sales to the major OEM customer incresed 12.4%. Sales for aircraft repair and refurbishment declined 7.0%, from fiscal 1996 to fiscal 1997. Sales have remained relatively stable between years. Operating profits increased from $79,545 in fiscal 1996 to $123,571 in fiscal 1997. Management expects this business segment to continue to be stable in future years. SCADA Systems and Monitoring Services: Revenue from Monitoring Services increased from $861,192 in fiscal 1996 to $1,060,045 in fiscal 1997, an increase of 23.1%. During fiscal 1997, the Company maintained a relatively level volume of long-term contracts with municipalities. Revenue inreased due to the introduction of new products and services. The Company's contracts with its two largest customers have been renewed for fiscal 1998. An operating profit of $230,738 in Monitoring Services was recorded in fiscal 1997, compared to fiscal 1996 operating profit of $227,028. The increased profit resulted from special jobs completed, in addition to the long-term contracts with the municipalities. The Company was able to secure performance bonds during the first quarter of fiscal 1995. This division has since bid on certain jobs requiring performance bonds, and completed two special jobs with revenue totaling approximately $100,000. The Company believes this segment will continue to grow at a moderate rate. This segment has experienced consistent increases over the past few yers and the Company expects this trend to continue. Temporary Services: This operation provides temporary employee services for corporate clients. This segment was inactive during fiscal 1997. If and when the Company is able to open Indian gaming facilities, management expects that a majority of the personnel in the various Indian gaming enterprises will be staffed by Temporary Services personnel. Management Services: -General- In the current fiscal year the Company received no revenue and incurred $243,728 in general and administrative expenses associated with its continued efforts to explore opportunities related to the Indian Gaming Act of 1988. Additionally, the Company amortized $66,458 and $143,124 in fiscal years 1997 and 1996, respectively, related to shares issued for services rendered to the Company. The Company has advanced and invested a total of $4,385,522 in land, land improvements, professional design, and other consulting and legal costs related to the development of Indian Gaming facilities. Included in these advances are resorts and other areas located adjacent to residential developments. The Company believes that these tracts could be developed and sold for residential and commercial use, other than Indian gaming, if the gaming enterprises do not open. Additional improvements, including access roads, water and sewer services, etc. are planned for these lands. After these improvements, these lands may be sold in small tracts. This would allow the Company to recover the majority, if not all, of the land investments and other gaming costs. For detailed discussion of Indian Gaming developments, see pages 15 to 18. The Company is currently reviewing other potential Indian gaming opportunities with other tribes. These discussions are in the early stages of negotiation and there can be no assurance that these gaming opportunities will be successful. The various management agreements have not yet been approved by the various governing agencies and therefore are not filed as exhibits to this document. Selling, General and Administrative (SG&A): Expenses decreased $352,270 (24.9%) in fiscal year 1997. These expenses were $1,416,858, or 34.9% of revenue, in fiscal 1997, and $1,769,128, or 48.4% of revenue in fiscal 1996. Other income (expense): Expenses decreased due to the writedown of the land and building in Overton, Nebraska in fiscal 1995. This facility became idle in 1994. The Company was unable to complete the negotiated sale of the land and building. Therefore, the Company reduced the value of the asset by $157,200 in order to record the asset at its estimated net realizable value. The Company entered into an agreement, on September 13, 1995, with the Village of Overton, for the sale of the building in Overton, Nebraska. The Company received a cash payment of $30,000 at closing on September 18, 1995, and may receive an additional $70,000 if the Village of Overton is either able to sell or lease the building in the future. As of year-end, the Company has not received any additional monies. There can be no assurance that the Village of Overton will be able to sell or lease the building. Liquidity and Capital Resources Borrowed funds have been used primarily for working capital. Bank (Industrial State Bank) debt related to the Company's operating line was $695,718 at April 30, 1998, and $382,743 at April 30, 1997. The Company's unused line of credit at April 30, 1998 was $54,282. As of July 29, 1997, the Company's unused line of credit was $367,257. The Company's line of credit is $750,000. The interest rate on the Company's line of credit is prime plus two. The Company plans to continue using the promissory notes-payable to fund 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. During fiscal 1997, the Company issued stock at fair market value for various legal, marketing and consulting services, in lieu of cash payments. During fiscal 1997, the Company issued 45,000 shares of stock, at a value of $97,545 for professional services to be provided in the future. During fiscal 1998, the Company issued stock at fair market value for various legal, marketing and consulting services, in lieu of cash payments. In fiscal 1998, the Company issued 135,000 shares of common stock at a value of $101,250 for professional services to be provided in the future. The Company completed the purchase of operating rights and assets of Woodson Electronics, Inc. The transaction, as consummated, required the Company to issue as the purchase price 100,000 shares of the Company's common stock, $.01 par value, and cash payments totaling approximately $34,000, over a period of two (2) years. This transaction was completed May 1, 1996. See Note 4. The Company relocated and consolidated the Avionics manufacturing operations and assets, acquired from Woodson Electronics, Inc., and SCADA manufacturing operations to a new location in the Phoenix, Arizona area. This relocation places Avionics closer to its primary customer and provides a more skilled labor force for the expansion of the consolidated manufacturing operation. Capital to finance this relocation of approximately $60,000 was required during fiscal 1997. The Company does not, as of April 30, 1998, have any material commitments for other capital expenditures other than the Management segment's requirements under the terms of the Indian gaming Management Agreements. These requirements are further described in this section. Depending upon the development schedules, the Company, through BNSC, will need additional funds to complete its currently planned Indian gaming opportunities. The Company will use current cash available, and additional funds, for the start up and construction of gaming facilities. The Company anticipates initially obtaining these funds from: internally generated working capital and borrowings. After a few gaming facilities become operational, gaming operations will generate additional working capital for the start up and construction of other gaming facilities. The Company expects that its start up and construction financing of gaming facilities will be replaced by other financial lenders, long term financing through debt issue, or equity issues. As a part of the Management Contract approved by the NIGC on January 14, 1997, between the Company's wholly owned subsidiary, Butler National Service Corporation, and the Miami Tribe of Oklahoma and the Modoc Tribe of Oklahoma (the "Tribes"): the Company agreed to loan the Tribes $3,500,000 at 2% over prime, to be repaid over five years, for the construction and operation of the Stables gaming establishment. At April 30, 1998, the Company had advanced $2,074,797 to the Tribes under the contract and reported $408,333 current note receivable and $1,666,464 long-term note receivable. Security under the contract includes the Tribes' profits from all tribal gaming enterprises and all assets of the Stables except the land and building. On May 29, 1998, the Stables Management Contract was further funded by a loan to the Company from a financial institution in the amount of $1,850,000 at 2% over prime, to be repaid over five years. As security for the $1,850,000 loan, the Company pledged its contract rights to the repayment of the $3,500,000 loan and its Manager's share (30%) of the profits from the Stables. Analysis of Cash Flow During 1998, the Company's cash position decreased by $95,851. A majority of the positive cash flow in fiscal 1998 is due to the proceeds from the issuances of Class B convertible preferred stock of approximately $1,315,000. A large portion of the cash flow from financing activities was used in the Indian gaming segment. Operating Activities: Modification customer's deposits decreased approximately $1,000,000 from the completion of two projects. These funds were fully earned upon completion of the projects. Approximately $500,000 was used in the completion of new STC's at Modifications. The majority of the approximately $570,000 decrease in contracts-in- process relates to the completion of one large job at the aircraft modification facility. Inventories at the Modification segment increased approximately $190,000, Avionics increased $92,000, and Services decreased $44,327 respectively. The majority of the increase at Services and Avionics relates to the purchase of the Woodson Electronics, Inc. assets. Investing Activities: The cash used in investing activities is due to the use of approximately $2,062,828 related to the development of Indian gaming; approximately $181,000 to purchase tooling and equipment at Modifications and Services, and approximately $500,000 to purchase a building at the corporate headquarters. Financing Activities: During fiscal year 1998, the Company received proceeds from the issue of Class B preferred stock convertible into common stock for approximately $1,315,000, and assumed approximately $500,000 of long term debt on the purchase of the building. Changing Prices and Inflation The Company did not experience any significant pressure from inflation in 1998. Item 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity: The table below provides information about the Company's other financial instruments that are sensitive to changes in interest rates including debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on implied forward rates based upon the rate at the reporting date. Expected Maturity Date (dollars in thousands) 1999 2000 2001 2002 2003 Total Fair Value Assets Note receivable: Variable rate $408 $417 $417 $417 $417 $2,075 $2,075 Average interest rate 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% Liabilities long-term debt: Variable rate $18 1,477 $440 $55 - $1,926 $1,990 Average interest rate 10.5% 10.5% 10.5% 10.5%
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements of the Registrant are set forth on pages 32 through 54 of this report. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has had no disagreements with their current accountants. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The names and ages of the directors, their principal occupations for at least the past five years are set forth below, based on information furnished to the Company by the directors.
Name of Nominee and Director and Served Principal Occupation for Last Five Years and Age Since Other Directorships Clark D. Stewart 1989 President of the Company from September 1, (58) 1989 to present. President of Tradewind Systems, Inc. (consulting and computer sales) 1980 to present; Executive Vice President of RO Corporation (manufacturing) 1986 to 1989; President of Tradewind Industries, Inc. (manufacturing) 1979 to 1985. R. Warren Wagoner 1986 Chairman of the Board of Directors of the (46) Company since August 30, 1989 and President of the Company from July 26, 1989 to September 1, 1989. Sales Manager of Yamazen Machine Tool, Inc. from March, 1992 to March, 1994; President of Stelco, Inc. (manufacturing) 1987 to 1989; General Manager, AmTech Metal Fabrications, Inc., Grandview, MO 1982 to 1987. William E. Logan 1990 Vice President and Treasurer of WH of KC, Inc. (60) (Wendy's franchisee) June, 1984 to present. Vice President and Treasurer of Valley Foods Services, Inc. (wholesale food distributor) June, 1988 to April, 1993. Professional practice as a Certified Public Accountant 1965 to 1984. William A. Griffith 1990 Secretary of the Company, President of (51) Griffith and Associates (management consulting) since 1984. Management consultant for Diversified Health Companies (management consulting) from 1986 to 1989 and for Health Pro (health care) from 1984 to 1986. Chief Executive Officer of Southwest Medical Center (hospital) from 1981 to 1984. David B. Hayden 1996 Co-owner and President of Kings Avionics, (52) Inc. since 1974 (avionics sales and service). Co-owner of Kings Aviation LLP (aircraft fixed base operation and maintenance) since 1994. Field Engineer for King Radio Corporation (avionics manufacturing) 1966 to 1974.
The executive officers of the Company are elected each year at the annual meeting of the Board of Directors held in conjunction with the annual meeting of shareholders and at special meetings held during the year. The executive officers are as follows:
Name Age Position R. Warren Wagoner 46 Chairman of the Board of Directors Clark D. Stewart 58 President and Chief Executive Officer Larry W. Franke 54 Vice President, Aircraft Modifications Jack L. Graham 74 President of Avcon Industries, Inc., a wholly-owned subsidiary of the Company Jon C. Fischrupp 58 President of Butler National Services, Inc., a wholly-owned subsidiary of the Company Edward J. Matukewicz 50 Treasurer and Chief Financial Officer William A. Griffith 51 Secretary
R. Warren Wagoner was General Manager, Am-Tech Metal Fabrications, Inc. from 1982 to 1987. From 1987 to 1989, Mr. Wagoner was President of Stelco, Inc. Mr. Wagoner was Sales Manager for Yamazen Machine Tool, Inc. from March 1992 to March 1994. Mr. Wagoner was President of the Company from July 26, 1989, to September 1, 1989. He became Chairman of the Board of the Company on August 30, 1989. Clark D. Stewart was President of Tradewind Industries, Inc., a manufacturing company, from 1979 to 1985. From 1986 to 1989, Mr. Stewart was Executive Vice President of RO Corporation. In 1980, Mr. Stewart became President of Tradewind Systems, Inc. He became President of the Company in September 1989. Larry W. Franke was Vice President and General Manager of Kansas City Aviation Center from 1984 to 1992. From 1993 to 1994 he was Vice President of Operations and Sales for Marketlink, an aircraft marketing company. Mr. Franke joined the Company in July 1994 as Director of Marketing and was promoted in August 1995 to Vice President of Operations and Sales. Mr. Franke is currently Vice President of Aircraft Modifications at Avcon. Jack L. Graham was President of Avcon Industries for 19 years and joined the Company in December 1983, at the time of the acquisition of Avcon Industries by the Company. Mr. Graham is President of Avcon Industries, Inc. Jon C. Fischrupp was President of Lauderdale Services, Inc. ("LSI") from June 14, 1978, until May 1, 1986, at which time the Company acquired LSI and he became President of LSI (now known as Butler National Services, Inc.). Edward J. Matukewicz was Vice President of Master Fund Company from 1987 to 1990 and Vice President of First Trust of Mid America from 1990 to 1991. Mr. Matukewicz joined the Company in May, 1991, as Treasurer. Mr. Matukewicz resigned as an officer of the Company in February 1999 and remains as a consultant to the Company. William A. Griffith was Chief Executive Officer of Southwest Medical Center (hospital) from 1981 to 1984. Mr. Griffith was a management consultant for Health Pro from 1984 to 1986 and for Diversified Health Companies from 1986 to 1989. Mr. Griffith has been President of Griffith and Associates, management consulting, since 1984. Mr. Griffith became Secretary of the Company in 1992. Section 16(a) Beneficial Ownership Reporting Compliance Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16(a) - 3(e) during the most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to the most recent fiscal year, the Company believes that no person who at any time during the fiscal year was a director, officer, beneficial owner of more than 10% of any class of equity securities registered pursuant to Section 12 of the Exchange act failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. Item 11. EXECUTIVE COMPENSATION SUMMARY The following table provides certain summary information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer and each of the other most highly compensated executive officers of the Company whose salary and bonus exceeded $100,000 (determined as of the end of the last fiscal year) for the fiscal years ended April 30, 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE Name and Principal Position: Clark D. Stewart, President and CEO, Director Annual Compensation: Year Salary($) Bonus($) Other Annual Compensation($) 98 226,997 -- - 97 212,729 -- - 96 212,075 -- - Long Term Compensation: Awards: Year Restricted Securities LTIP Stock Awards Underlying Payouts($) Options (#)(1) 98 -- 1,050,000 -- 97 -- 50,000 -- 96 -- 50,000 -- All Other Compensation($) Year 98 -- 97 -- 96 --
(1) Represents options granted pursuant to the Company's 1989 Nonqualified Stock Option Plan (1,050,000) in 1998 and (50,000) in 1997 and 1996. OPTION GRANTS, EXERCISES AND HOLDINGS The following table provides further information concerning grants of stock options pursuant to the 1989 Nonqualified Stock Option Plan during the fiscal 1998 year to the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants Name: Clark D. Stewart Chief Executive Officer(1) Number of Securities Underlying Options Granted(#): 1,050,000 Percent of Total Options Granted to Employees in Fiscal Year: 16.5% Exercise or Base Price ($/Sh): 0.90 Expiration Date: 10/31/2007 Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term: Name: Clark D. Stewart Chief Executive Officer(1) 5%($): 0 10%($): 420,000
(1) Except in the event of death or retirement for disability, if Mr. Stewart ceases to be employed by the Company, his option shall terminate. Upon death or retirement for disability, Mr. Stewart (or his representative) shall have three months or one year, respectively, following the date of death or retirement, as the case may be, in which to exercise such options. The option granted for 1,050,000 shares of Common Stock was granted on November 1, 1997 from the 1989 Stock Option Plan. All such options are immediately exercisable. The following table provides information with respect to the named executive officers concerning options exercised and unexercised options held as of the end of the Company's last fiscal year: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES Name: Clark D. Stewart, Chief Executive Officer Shares Acquired on Exercise(#): 0 Value Realized($): 0 Number of Securities Underlying Unexercised Options at FY-End (#): Exercisable/Unexercisable: 2,220,000 / 0 Value of Unexercised In-the-Money Options at FY-End ($): Exercisable/Unexercisable: 0 / 0 COMPENSATION OF DIRECTORS Each non-officer director is entitled to a director's fee of $100 for meetings of the Board of Directors which he attends. Officer-directors are not entitled to receive fees for attendance at meetings. EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS. On May 6, 1997, the Company extended the March 17, 1994, employment agreement with Clark D. Stewart under the terms of which Mr. Stewart was employed as the President and Chief Executive Officer of the Company at an initial minimum annual salary of $198,000 and a minimum salary of $208,000, $218,500, $229,500 and $241,000, respectively, in years two through five. The extended contract provides a minimum annual salary of $253,100, $265,700, $278,900, $292,900, $307,600, respectively in years six through ten. In the event Mr. Stewart is terminated from employment with the Company other than "for cause," Mr. Stewart shall receive as severance pay an amount equal to the unpaid salary for the remainder of the term of the employment agreement. Mr. Stewart was also granted an automobile allowance of $600 per month. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors is comprised of Mr. Wagoner, Mr. Stewart, Mr. Griffith and Mr. Logan. Mr. Wagoner is the Chairman, Mr. Stewart is the President and Chief Executive Officer of the Company and Mr. Griffith is the Secretary of the Company. During fiscal 1998, the consulting firm of Griffith & Associates was paid for business consulting services rendered to the Company in the approximate amount of $12,143. William A. Griffith, who is a director for the Company, is a principal at Griffith & Associates. It is anticipated that Griffith & Associates will continue to provide services for the Company. During fiscal 1998, the Company paid consulting fees of approximately $133,175 to Mr. Logan for business consulting services. It is anticipated that Mr. Logan will continue to provide services for the Company. During the 1995 fiscal year, sales to WH of KC, Inc. (Wendy's franchisee) accounted for approximately 6% of the net sales of the Company ($790,000). William E. Logan, who is a director for the Company, is Vice President and Treasurer of WH of KC, Inc. Mr. Logan sold WH of KC, Inc. as of June 3, 1994. The Company no longer provided temporary services subsequent to June 3, 1994. During fiscal 1998, the consulting firm of Butler Financial Corporation was paid for business consulting services rendered to the Company in the approximate amount of $56,000. R. Warren Wagoner, who is a director for the Company, is a principal at Butler Financial Corporation. It is anticipated that Butler Financial Corporation will continue to provide services for the Company. During fiscal 1998, the Company filed Form-8 registration statements concerning the 1989, 1993-I, 1993-II, and 1995 Non-Qualified Stock Option Plans. The plans were amended to increase the number of shares authorized by 8,000,000; 4,500,000; 3,500,000; and 3,500,000 respectively. The expiration dates were also amended to reflect December 31, 2010 as the expiration date for all four plans. As a part of the amendment process all eligible outstanding options were canceled and reissued at the current market price of $0.90. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, with respect to the Company's common stock (the only class of voting securities), the only persons known to be beneficial owners of more than five percent (5%) of any class of the Company's voting securities as of July 17, 1998.
Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Ownership(1) of Class Clark D. Stewart 3,058,920(2) 16.1% 19920 West 161st Street Olathe, Kansas 66062
(1) Unless otherwise indicated by footnote, nature of beneficial ownership of securities is direct, and beneficial ownership as shown in the table arises from sole voting power and sole investment power. (2) Includes 2,220,000 shares which may be acquired by Mr. Stewart pursuant to the exercise of stock options which are exercisable. The following table sets forth, with respect to the Company's common stock (the only class of voting securities), (i) shares beneficially owned by all directors and named executive officers of the Company, and (ii) total shares beneficially owned by directors and officers as a group, as of July 17, 1998.
Name of Amount and Nature of Percent Beneficial Owner Beneficial Ownership(1) of Class Larry B. Franke 170,600(6) 0.9% William A. Griffith 149,000(5) 0.8% David B. Hayden 172,500(7) 0.9% William E. Logan 360,000(3) 1.9% Clark D. Stewart 3,058,920(2) 16.1% R. Warren Wagoner 1,435,000(4) 7.5% All Directors and Executive Officers as a Group (12 persons) 5,879,482(8) 30.9%
(1) Unless otherwise indicated by footnote, nature of beneficial ownership of securities is direct, and beneficial ownership as shown in the table arises from sole voting power and sole investment power. (2) Includes 2,220,000 shares which may be acquired by Mr. Stewart pursuant to the exercise of stock options which are exercisable. (3) Includes 310,000 shares which may be acquired by Mr. Logan pursuant to the exercise of stock options which are exercisable. (4) Includes 1,335,000 shares which may be acquired by Mr. Wagoner pursuant to the exercise of stock options which are exercisable. (5) Includes 92,000 shares which may be acquired by Mr. Griffith pursuant to the exercise of stock options which are exercisable. (6) Includes 170,600 shares which may be acquired by Mr. Franke pursuant to the exercise of stock options which are exercisable. (7) Includes 150,000 shares which may be acquired by Mr. Hayden pursuant to the exercise of stock options which are exercisable. (8) Includes 4,277,600 shares for all directors and executive officers as a group, which may be acquired pursuant to the exercise of stock options which are exercisable. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 11, Executive Compensation 22-23. During fiscal 1996, the President and CEO, Clark D. Stewart, exercised his option to purchase 400,000 shares of the Company's common stock under the terms of the 1989 Nonqualified Stock Option Plan through a loan by the Company. During fiscal 1997, Mr. Stewart delivered to the Company 125,000 shares of common stock valued at $250,000 to the Company and made cash reductions, a total of $277,265, on the loan. The shares were purchased at prices ranging from $.70 to $1.00 per share. The largest aggregate amount of indebtedness outstanding was $359,027 during fiscal 1996. The amount outstanding at July 17, 1998, is $37,647. Interest was charged on the outstanding balance at the prime rate during fiscal 1998. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed As Part of Form 10-K Report. (1) Financial Statements: Description Page No. Report of Independent Accountants 35 Restated Consolidated Balance Sheet as of April 30, 1998 and 1997 36-38 Restated Consolidated Statements of Operations for the years ended April 30, 1998, 1997 and 1996 39 Restated Consolidated Statements of Shareholders' Equity for the years ended April 30, 1998, 1997 and 1996 40-46 Restated Consolidated Statements of Cash Flows for the years ended April 30, 1998, 1997 and 1996 47 Restated Notes to Consolidated Financial Statements 48-65 (2) Financial Statement Schedules: Schedule Description Page No. II. Restated Valuation and Qualifying Accounts and Reserves 65 for the years ended April 30, 1998, 1997 and 1996 All other financial statements and schedules not listed have been omitted because the required information is inapplicable or the information is presented in the financial statements or related notes. (3)Exhibits Index Page No. 3.1 Articles of Incorporation, as amended, are * incorporated by reference to Exhibit 3.1 of the Company's Form 10-K for the year ended April 30, 1988 3.2 Bylaws, as amended, are incorporated by * reference to exhibit 3.2 of the Company's Form 10-K for the year ended April 30, 1989 4.1 Certificate of Rights and Preferences of $100 * Class A Preferred Shares of the Company, are incorporated by reference to Exhibit 4.1 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994. 4.2 Certificate to Set Forth Designations, Voting * Powers, Preferences, Limitations, Restrictions, and Relative Rights of Series B 6% Cumulative Preferred Stock, $5.00 Par Value Per Share, is incorporated by reference to Exhibit 4.1 of the Company's Form 10Q/A, as amended, for the quarter ending January 31, 1998. 4.3 Private Placement of Common Stock, as afforded * by Reg S, dated November 27, 1996, is incorporated by reference to the Company's Form 8-K filed on December 12, 1996. 10.1 1989 Nonqualified Stock Option Plan is * incorporated by reference to the Company's Form 8-K filed on September 1, 1989 10.2 Nonqualified Stock Option Agreement dated * September 8, 1989 between the Company and Clark D. Stewart is incorporated by reference to the Company's Form 8-K filed on September 1, 1989 10.3 Agreement dated March 10, 1989 between * the Company and Woodson Electronics, Inc. is incorporated by reference to the Company's Form 10-K for the fiscal year ended April 30, 1989 10.4 Agreement of Stockholder to Sell Stock dated * January 1, 1992, is incorporated by reference to the Company's Form 8-K filed on January 15, 1992 10.5 Private Placement of Common Stock pursuant * to Regulation D, dated December 15, 1993, is incorporated by reference to the Company's Form 8-K filed on January 24, 1994 10.6 Stock Acquisition Agreement of RFI dated * April 21, 1994, is incorporated by reference to the Company's Form 8-K filed on July 21, 1994 10.7 Employment Agreement between the Company * and Brenda Lee Shadwick dated July 6, 1994, are incorporated by reference to Exhibit 10.7 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.** 10.8 Employment Agreement between the Company * and Clark D. Stewart dated March 17, 1994, are incorporated by reference to Exhibit 10.8 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.** 10.9 Employment Agreement among the Company, * R.F., Inc. and Marvin J. Eisenbath dated April 22, 1994, are incorporated by reference to Exhibit 10.9 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994.** 10.10 Real Estate Contract for Deed and Escrow * Agreement between Wade Farms, Inc. and the Company, are incorporated by reference to Exhibit 10.10 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994. 10.11 1993 Nonqualified Stock Option Plan, are * incorporated by reference to Exhibit 10.11 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994. 10.12 1993 Nonqualified Stock Option Plan II, are * incorporated by reference to Exhibit 10.12 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994. 10.13 Industrial State Bank principal amount of * $500,000 revolving credit line, as amended, are incorporated by reference to Exhibit 10.13 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994. 10.14 Bank IV guaranty for $250,000 dated * October 14, 1994, are incorporated by reference to Exhibit 10.14 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994. 10.15 Bank IV loan in principal amount of $300,000 * dated December 30, 1993, are incorporated by reference to Exhibit 10.15 of the Company's Form 10-K/A, as amended, for the year ended April 30, 1994. 10.16 Letter of Intent to acquire certain assets of * Woodson Electronics, Inc., is incorporated by reference to Exhibit 10.16 of the Company's Form 10-K, as amended for the year ended April 30, 1995. 10.17 Asset Purchase Agreement between the Company * and Woodson Electronics, Inc. dated May 1, 1996, is incorporated by reference to Exhibit 10.17 of the Company's Form 10-K, as amended for the year ended April 30, 1996. 10.18 Non-Exclusive Consulting, Non-Disclosure and * Non-Compete agreement with Thomas E. Woodson dated May 1, 1996, is incorporated by reference to Exhibit 10.18 of the Company's Form 10-K, as amended for the year ended April 30, 1996. 10.19 1995 Nonqualified Stock Option Plan dated * December 1, 1995, is incorporated by reference to Exhibit 10.19 of the Company's Form 10-K, as amended for the year ended April 30, 1996. 10.20 Settlement Agreement and Release - Marvin J. * Eisenbath and the Company dated April 30, 1997, is incorporated by reference to Exhibit 10.20 of the Company's Form 10-K, as amended for the year ended April 30, 1997. 10.21 Settlement Agreement and Release - Brenda * Shadwick and the Company dated May 1, 1997, is incorporated by reference to Exhibit 10.21 of the Company's Form 10-K, as amended for the year ended April 30, 1997. 21 List of Subsidiaries 66 23.1 Consent of Independent Public Accountants 67 27.1 Financial Data Schedule (EDGAR version only). * Filed herewith. 99 Cautionary Statement for Purpose of the "Safe 67 Harbor" Provisions of the Private Securities Reform Act of 1995. * Incorporated by reference ** Relates to executive officer employment compensation (b) Reports On Form 8-K. None (c) Exhibits. Reference is made to Item 14(a)(3). (d) Schedules. Reference is made to Item 14(a)(2). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. February 11, 2000 BUTLER NATIONAL CORPORATION /s/ Clark D. Stewart Clark D. Stewart, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: Signature Title Date /s/ Clark D. Stewart President, Chief February 11, 2000 Clark D. Stewart Executive Officer and Director (Principal Executive Officer) /s/ R. Warren Wagoner Chairman of the Board February 11, 2000 R. Warren Wagoner and Director /s/ William A. Griffith Director February 11, 2000 William A. Griffith /s/ William E. Logan Director February 11, 2000 William E. Logan /s/ David B. Hayden Director February 11, 2000 David B. Hayden /s/ Edward J. Matukewicz Treasurer February 11, 2000 Edward J. Matukewicz (a) (Principal Financial and Accounting Officer) (a) Mr. Matukewicz resigned as an officer of the Company in February 1999 and remains as a consultant to the Company. BUTLER NATIONAL CORPORATION AND SUBSIDIARIES RESTATED FINANCIAL STATEMENTS AS OF APRIL 30, 1998 AND 1997 TOGETHER WITH AUDITORS' REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Butler National Corporation: We have audited the accompanying consolidated balance sheets of Butler National Corporation (a Delaware corporation) and Subsidiaries as of April 30, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended April 30, 1998 (1998 and 1997 restated - See Note 1). These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Butler National Corporation and Subsidiaries as of April 30, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II for each of the three years in the period ended April 30, 1998 (restated), is presented for purposes of complying with the Securities and Exchange Commission rules and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all materials respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Kansas City, Missouri, February 11, 2000 BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 1998 AND 1997 ASSETS 1998 1997 (As Restated (As Restated See Note 1) See Note 1) CURRENT ASSETS: Cash $160,598 $256,449 Accounts receivable, net of allowance for doubtful accounts of $78,736 in 1998 and 1997 413,257 241,446 Note receivable from Indian Gaming developments 408,333 - Contracts in process 551,610 1,123,673 Inventories- Raw materials 1,469,324 711,762 Work in process 76,073 121,687 Finished goods 55,939 100,266 1,601,336 933,715 Prepaid expenses and other current assets 121,280 121,032 Total current assets 3,256,414 2,676,315 PROPERTY, PLANT AND EQUIPMENT: Land and building 639,130 138,809 Machinery and equipment 973,504 962,330 Office furniture and fixtures 632,617 462,776 Leasehold improvements 33,958 33,958 Total cost 2,279,209 1,597,873 Accumulated depreciation (1,060,705) (913,476) Net property, plant and equipment 1,218,504 684,397 SUPPLEMENTAL TYPE CERTIFICATES 1,456,249 1,364,901 INDIAN GAMING: Note receivable from Indian Gaming developments 1,376,884 - Advances for Indian Gaming Developments (net of reserves of $3,008,508 and $2,845,629 in 1998 and 1997, respectively) 1,277,724 1,539,893 Total Indian gaming 2,654,608 1,539,893 NONCURRENT ASSETS OF DISCONTINUED OPERATIONS - 1,503,946 OTHER ASSETS: Aircraft and aircraft parts 2,056,281 2,056,281 Other assets 228,389 244,275 Total other assets 2,284,670 2,300,556 Total assets $10,870,445 $10,070,008 (continued) BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 1998 AND 1997 LIABILITIES AND SHAREHOLDERS' EQUITY (continued) 1998 1997 (As Restated (As Restated See Note 1) See Note 1) CURRENT LIABILITIES: Bank overdraft payable $193,205 $150,306 Promissory notes payable 695,718 382,743 Current maturities of long-term debt 63,849 50,683 Accounts payable 507,698 452,516 Customer deposits 530,275 1,520,035 Accrued liabilities- Compensation and compensated absences 170,110 293,675 Other 227,896 137,672 Total current liabilities 2,388,751 2,987,630 LONG-TERM DEBT, net of current maturities 1,926,412 1,540,718 CONVERTIBLE DEBENTURES 650,000 1,100,000 OTHER LIABILITIES - 72,000 COMMITMENTS AND CONTINGENCIES LIABILITIES OF DISCONTINUED OPERATIONS 39,000 551,406 Total liabilities 5,004,163 6,251,754 SHAREHOLDERS' EQUITY: Preferred stock, par value $5- Authorized, 20,000 shares, all classes, $100 Class A, 9.8%, cumulative if earned, liquidation and redemption value $100, issued and outstanding, 20,000 shares in 1997 - 2,000,000 $1,000 Class B, 6%, convertible cumulative, liquidation and redemption value $1,000, issued and outstanding, 1,500 shares in 1998 506,834 - Common stock, par value $.01- Authorized, 40,000,000 shares; issued and outstanding 11,673,069 shares in 1998 and 9,524,156 in 1997 116,730 95,242 Common stock warrants 8,807 8,807 Capital contributed in excess of par 8,257,155 6,100,618 Note receivable from officer arising from stock purchase agreement (37,647) (81,762) Shares issued for future services (286,824) (263,438) Treasury stock, at cost (20,000 preferred stock in 1997 and 775,000 and 175,000 common in 1998 and 1997) (1,069,240) (2,337,240) Retained deficit (deficit of $11,938,813 eliminated October 31, 1992) (1,629,533) (1,703,973) Total shareholders' equity 5,866,282 3,818,254 Total liabilities and shareholders' equity $10,870,445 $10,070,008
The accompanying notes are an integral part of these balance sheets. BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996 1998 1997 1996 (As Restated (As Restated See Note 1) See Note 1) NET SALES $ 5,456,106 $ 4,061,775 $ 3,653,095 COST OF SALES 2,727,656 2,351,159 2,468,543 2,728,450 1,710,616 1,184,552 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,073,756 1,416,858 1,769,128 Operating income (loss) 654,694 293,758 (584,576) OTHER INCOME (EXPENSE): Interest expense (255,004) (657,534) (119,258) Interest revenue 3,584 25,428 17,639 Settlement loss and other 15,540 (232,869) 51,181 Other expense (235,880) (864,975) (50,438) INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES 418,814 (571,217) (635,014) PROVISION FOR INCOME TAXES FOR CONTINUING OPERATIONS 19,880 3,416 22,800 INCOME (LOSS) FROM CONTINUING OPERATIONS 398,934 (574,633) (657,814) DISCONTINUED OPERATIONS: Income (loss) from discontinued operations, net of taxes 293,184 (688,675) 802,216 Loss on discontinued operations, net of taxes (23,965) - - Total discontinued operations 269,219 (688,675) 802,216 Net income (loss) 668,153 (1,263,308) 144,402 DEEMED DIVIDEND ASSOCIATED WITH BENEFICIAL CONVERSION FEATURE OF PREFERRED STOCK 650,000 - - Net income (loss) available to common shareholders $ 18,153 $ (1,263,308) $ 144,402 BASIC EARNINGS (LOSS) PER COMMON SHARE: Continuing operations $(0.03) $(0.06) $(0.07) Discontinued operations 0.03 (0.07) 0.09 $0.00 $(0.13) $0.02 Shares used in per share calculation 9,418,330 9,411,168 9,269,432 DILUTED EARNINGS (LOSS) PER COMMON SHARE SHARE: Continuing operations $(0.03) $ (0.06) $(0.07) Discontinued operations 0.03 (0.07) 0.08 $0.00 $(0.13) $0.01 Shares used in per share calculation 9,418,330 9,419,276 10,246,834 The accompanying notes are an integral part of these financial statements. BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996 Preferred Common Stock Stock BALANCE, April 30, 1995 $ 2,000,000 $ 82,310 Note receivables arising from stock purchase agreement - - Reduction in note receivable arising from stock purchase agreement - - Acquisition of treasury stock - - Exercise of stock options - 4,437 Issuance of stock- Other - 10 Issuance of stock- Private offering - 6,052 Amortization of service contracts - - Net income - - BALANCE, April 30, 1996 2,000,000 92,809 Note receivable arising from stock purchase agreement - - Reduction in note receivable arising from stock purchase agreement - - Acquisition of treasury stock - - Exercise of stock options - 120 Issuance of stock- Other - - Issuance of stock- Private offering - 2,313 Conversion to common stock - - Value associated with beneficial conversion features of convertible debt - - Amortization of service contracts - - Utilization of net operating losses - - Net loss - - Other - - BALANCE, April 30, 1997 2,000,000 95,242 Reduction in note receivable arising from stock purchase agreement - - Acquisition of treasury stock - - Retirement of $100 Class A preferred treasury stock (2,000,000) - Exercise of stock warrants - 1,135 Issuance of stock- Other - 2,970 Issuance of $1,000 Class B preferred stock- Private offering 1,315,959 6,416 (809,125) 10,967 Conversions to common stock Value associated with beneficial conversion features of preferred stock - - Amortization of service contracts - - Utilization of net operating losses - - Net income - - Deemed dividend associated with beneficial conversion feature of preferred stock - - BALANCE, April 30, 1998 $ 506,834 $ 116,730 (continued) Note Capital Contributed Receivable In Excess Arising From of Par Stock Purchase and Warrants Agreement BALANCE, April 30, 1995 $ 3,654,049 $ (27,004) Note receivables arising from stock purchase agreement - (340,000) Reduction in note receivable arising from stock purchase agreement - 7,977 Acquisition of treasury stock - - Exercise of stock options 447,595 - Issuance of stock- Other 3,990 - Issuance of stock- Private offering 1,169,804 - Amortization of service contracts - - Net income - - BALANCE, April 30, 1996 5,275,438 (359,027) Note receivable arising from stock purchase agreement - (43,416) Reduction in note receivable arising from stock purchase agreement - 320,681 Acquisition of treasury stock - - Exercise of stock options 23,645 - Issuance of stock- Other 100 - Issuance of stock- Private offering 435,242 - Conversion to common stock - - Value associated with beneficial conversion features of convertible debt 375,000 - Amortization of service contracts - - Utilization of net operating losses - - Net loss - - Other - - BALANCE, April 30, 1997 6,109,425 (81,762) Reduction in note receivable arising from stock purchase agreement - 44,115 Acquisition of treasury stock - - Retirement of $100 Class A preferred treasury stock - - Exercise of stock warrants 89,765 - Issuance of stock- Other 233,133 - Issuance of $1,000 Class B preferred stock- Private offering 385,481 - 798,158 - Conversions to common stock Value associated with beneficial conversion features of preferred stock 650,000 - Amortization of service contracts - - Utilization of net operating losses - - Net income - - Deemed dividend associated with beneficial conversion feature of preferred stock - - BALANCE, April 30, 1998 $ 8,265,962 $ (37,647) Shares Issued for Treasury Treasury Future Stock Stock Services (Preferred) (Common) BALANCE, April 30, 1995 $ (422,185) $(2,000,000) (37,240) Note receivables arising from stock purchase agreement - - - Reduction in note receivable arising from stock purchase - - - agreement Acquisition of treasury stock - - (50,000) Exercise of stock options - - - Issuance of stock- Other - - - Issuance of stock- Private offering - - - Amortization of service contracts 145,414 - - Net income - - - (276,771) (2,000,000) (87,240) BALANCE, April 30, 1996 Note receivable arising from stock purchase agreement - - - Reduction in note receivable arising from stock purchase agreement - - - Acquisition of treasury stock - - (250,000) Exercise of stock options - - - Issuance of stock- Other - - - Issuance of stock- Private offering - - - Deferred service contracts (53,125) - - Conversion to common stock - - - Value associated with beneficial conversion features of convertible debt - - - Amortization of service contracts 66,458 - - Utilization of net operating losses - - - Net loss - - - Other - - - BALANCE, April 30, 1997 (263,438) (2,000,000) (337,240) Reduction in note receivable arising from stock purchase - - - agreement Acquisition of treasury stock - - (732,000) Retirement of $100 Class A preferred treasury stock - 2,000,000 - Exercise of stock warrants - - - Issuance of stock- Other - - - Issuance of $1,000 Class B preferred stock- Private offering - - - Conversions to common stock - - - Value associated with beneficial conversion features of preferred stock - - - Deferred service contracts (101,250) - - Amortization of service contracts 77,864 - - Utilization of net operating losses - - - Net income - - - Deemed dividend associated with beneficial conversion feature of preferred stock - - - BALANCE, April 30, 1998 $ (286,824) $ - $(1,069,240) Returned Total Earnings Shareholders' (deficit) Equity BALANCE, April 30, 1995 $ (677,649) 2,572,281 Note receivables arising from stock purchase agreement - (340,000) Reduction in note receivable arising from stock purchase - 7,977 agreement Acquisition of treasury stock - (50,000) Exercise of stock options - 452,032 Issuance of stock- Other - 4,000 Issuance of stock- Private offering - 1,175,856 Amortization of service contracts - 145,414 Net income 144,402 144,402 (533,247) 4,111,962 BALANCE, April 30, 1996 Note receivable arising from stock purchase agreement - (43,416) Reduction in note receivable arising from stock purchase agreement - 320,681 Acquisition of treasury stock - (250,000) Exercise of stock options - 23,765 Issuance of stock- Other - 100 Issuance of stock- Private offering - 437,555 Deferred service contracts - (53,125) Conversion to common stock - - Value associated with beneficial conversion features of convertible debt - 375,000 Amortization of service contracts - 66,458 Utilization of net operating losses 120,357 120,357 Net loss (1,263,308) (1,263,308) Other (27,775) (27,775) BALANCE, April 30, 1997 (1,703,973) 3,818,254 Reduction in note receivable arising from stock purchase - 44,115 agreement Acquisition of treasury stock - (732,000) Retirement of $100 Class A preferred treasury stock - - Exercise of stock warrants - 90,900 Issuance of stock- Other - 236,103 Issuance of $1,000 Class B preferred stock- Private offering - 1,707,856 Conversions to common stock - - Value associated with beneficial conversion features of preferred stock - 650,000 Deferred service contracts - (101,250) Amortization of service contracts - 77,864 Utilization of net operating losses 56,287 56,287 Net income 668,153 668,153 Deemed dividend associated with beneficial conversion feature of preferred stock (650,000) (650,000) BALANCE, April 30, 1998 $(1,629,533) $ 5,866,282
The accompanying notes are an integral part of these financial statements. BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996 1998 1997 1996 (As Restated (As Restated See Note 1) See Note 1) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 668,153 $(1,263,308) $ 144,402 Income (loss) from discontinued operations 269,219 (688,675) 802,216 Income from continuing operations 398,934 (574,633) (657,814) Adjustments to reconcile net income (loss) to net cash provided by (used in) operations- Depreciation 147,228 71,731 46,942 Amortization 408,106 52,872 - Gain on retirement of fixed assets - - 30,000 Provision for uncollectible accounts - (13,416) - Provision for obsolete inventories - 12,761 (1,696) Amortization of shares issued for future services 77,864 66,458 145,414 Noncash services and benefit plan contributions 91,353 - - Convertible debt beneficial conversion feature - 375,000 - Other noncash expenses 56,287 74,025 - Changes in assets and liabilities- Accounts receivable (171,811) (39,020) (55,301) Contracts in process 572,063 (267,137) (716,444) Inventories (667,621) (180,174) (155,869) Prepaid expenses and other current assets 83,152 (22,584) 9,474 Other assets and other 178,497 (130,216) (17,097) Accounts payable 98,081 (308,723) 534,383 Customer deposits (989,760) 993,628 370,738 Settlement agreement (72,000) - - Accrued liabilities (33,341) 138,209 (29,381) Cash provided by (used in) continuing operations 177,032 248,781 (496,651) Cash provided by (used in) discontinued operations 518,345 (789,915) 991,404 Cash provided by (used in) operations 695,377 (541,134) 494,753 CASH FLOWS FOR INVESTING ACTIVITIES: Capital expenditures, net (681,335) (340,738) (79,692) Advances for Indian Gaming Developments (1,773,248) (397,870) (171,880) Supplemental Type Certificates (499,454) (814,474) (550,427) Aircraft and aircraft parts - 8,268 (1,719,622) Cash used in investing activities (2,954,037) (1,544,814) (2,521,621) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under promissory notes 312,975 1,181,309 (61,061) Proceeds from long-term debt 502,603 1,582,338 1,512,734 Repayments of long-term debt and lease obligations (103,743) (1,194,162) (63,490) Repayment of officer note 44,115 27,265 - Issuance of Class B convertible preferred stock 1,315,959 - - Issuance of warrants/stock 90,900 - 1,258,572 Cash provided by financing activities 2,162,809 1,596,750 2,646,755 NET INCREASE (DECREASE) IN CASH (95,851) (489,198) 619,887 CASH, beginning of year 256,449 745,647 125,760 CASH, end of year $ 160,598 $ 256,449 $ 745,647 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 254,202 $ 215,867 $ 114,821 Income taxes paid 16,741 27,775 22,800
The accompanying notes are an integral part of these financial statements. BUTLER NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 1998 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES: The accompanying consolidated financial statements include the accounts of Butler National Corporation (BNC) and its wholly-owned subsidiaries, Avcon Industries, Inc., Cansas International Corporation, Butler National Engineers, Inc., Butler National Services, Inc., Butler Temporary Services, Inc., Butler National Service Corporation, Woodson Avionics, Inc., Butler National, Inc. and RF, Inc., (collectively, The Company). Cansas International Corporation and Butler National Corporation Consulting Engineers, Inc., were inactive during the years ended April 30, 1998, 1997 and 1996. The operations of RF, Inc., a wholesale food distribution company were discontinued in April 1998. All significant intercompany transactions have been eliminated in consolidation. Avcon Industries, Inc. modifies business category aircraft at its Newton, Kansas, facility. Modifications can include passenger-to-freighter configuration, addition of aerial photography capability, and stability enhancing modifications. Woodson Avionics, Inc. is primarily engaged in the manufacture of airborne switching units used in Boeing McDonnell Douglas aircraft. Butler National Services is principally engaged in monitoring remote water and wastewater pumping stations through electronic surveillance. Butler National Service Corporation is a management consulting and administrative services firm providing business planning and financial coordination to Indian tribes interested in owning and operating casinos under the terms of the Indian Gaming Regulatory Act of 1988. Restatement Subsequent to the issuance of the Company's consolidated financial statements for the fiscal years ended April 30, 1998 and 1997, it was determined that the reported results for 1998 and 1997 were in error, primarily as follows: Beneficial Conversion Features: The Company issued convertible debentures in June and November of 1996 that contained beneficial conversion features which allowed the investor to convert at 70 percent of the average common stock closing bid price for the five days prior to issuance of the debt security. The conversion period on the notes were for limited periods. The financial statements for the year ended April 30, 1997, have been restated to reflect the accounting recognition of the value attributable to the beneficial conversion feature ($375,000) as a noncash charge to interest expense and an increase to the paid-in capital. The Company also issued convertible preferred stock on December 16, 1997 which contained beneficial conversion features. Those features allow the holder of the security to convert the preferred stock into the Company's common stock at 70 percent of the common stock bid price (the average of the ending common stock price bid five days prior to issuance of the preferred stock or the ending common stock bid price 45 days after issuance of the preferred stock). The financial statements for the period ended April 30, 1998, have been restated to reflect the accounting recognition of the value attributable to this beneficial conversion feature as a deemed dividend and an increase to capital contributed in excess of par of $650,000. The accounting above is consistent with the accounting requirements outlined in Topic D-60 of the Emerging Issues Task Force (EITF), issued in March 1997, and what was agreed to by the EITF in their final deliberations for Issue 98-5 on May 20, 1999. RF, Inc. Gain: As further discussed in Note 3, the Company settled a dispute with a former employee in June 1997, effective April 30, 1997. The Company initially recorded a net gain on the settlement of approximately $433,000 in June 1998. Costs aggregating approximately $1,054,000 that had been deferred as of April 30, 1997, more appropriately should have been recognized as period costs. The financial statements have been restated to expense these costs as part of loss from discontinued operations in fiscal 1997. In addition, the value assigned to the 600,000 shares of company stock received as part of the consideration of the settlement was reduced from $2 per share (stock price at April 30, 1997) to $1.22 per share (stock price on June 26, 1997- the date the shares were received). The net effect of this transaction on the fiscal 1998 financial statements is to change the previously reported loss from discontinued operations of $172,281 to income from discontinued operations of $269,219. The following reflects selected financial information and the effects of the aforementioned restatements: 1998 1997 As previously As As previously As reported restated reported restated Total assets $10,799,656 $10,870,445 $11,124,008 $10,070,008 Total shareholder's equity 5,861,860 5,866,282 4,872,254 3,818,254 Total net sales 5,546,106 5,456,106 4,061,775 4,061,775 Income (loss) from operations 250,012 398,934 (199,633) (574,633) Discontinued operations (172,281) 269,219 365,325 (688,675) Net income (loss) 77,731 668,153 165,692 (1,263,308) Net income (loss) available for common shareholders 77,731 18,153 165,692 (1,263,308) Basic EPS .01 .00 .02 (.13) Fully divided EPS .01 .00 .02 (.13)
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories are priced at the lower of cost, determined on a first-in, first-out basis, or market. Inventories include material, labor and factory overhead required in the production of the Company's products. 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. Leasehold improvements are amortized on a straight-line basis over the term of the lease. The lives used for the significant items within each property classification are as follows: Life in Years Building 23 to 39 years Machinery and equipment 5 to 17 years Office furniture and fixtures 5 to 17 years Leasehold improvements 3 to 20 years
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets retired are removed from the accounts and any resulting gains or losses are reflected as income or expense. Long-Lived Assets Long-lived assets and identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount 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 use of the assets and their eventual disposition. The Company determined that as of April 30, 1998, there had been no impairment in the carrying value of long-lived assets. Indian Gaming The Company is advancing funds for the establishment of Indian gaming. These funds have been capitalized in accordance with Statements of Financial Accounting Standards (SFAS) 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects." Such standard requires costs associated with the acquisition, development, and construction of real estate and real estate-related projects to be capitalized as part of that project. The realization of these advances is predicated on the ability of the Company and their Indian gaming clients to successfully open and operate the proposed casinos. There is no assurance that the Company will be successful. The inability of the Company to recover these advances could have a material adverse effect on the Company's financial position and results of operations. Advances to the tribes and for gaming developments are capitalized and recorded as receivables from the tribes. These receivables, shown as Advances for Indian Gaming Development on the balance sheet, represent costs to be reimbursed to the Company pending approval of Indian gaming in several locations. The Company has agreements in place which require payments to be made to the Company for the respective projects upon opening of Indian gaming facilities. Once gaming facilities have gained proper approvals, the Company will enter into note receivable arrangements with the tribe to secure reimbursement of advanced funds to the Company for the particular project. The Company currently has one note receivable shown as Note Receivable From Indian Gaming Development on the balance sheet. We record reserves for Indian Gaming Development costs that cannot be determined whether reimbursement from the Tribes will occur. We have agreements with the Tribes to be reimbursed for all costs incurred by us to develop gaming when the facilities are constructed and opened. Because the Stables represents the only operations opened, there is uncertainty as to whether reimbursement on all remaining costs that have been reserved will occur. It is our policy therefore, to reduce the respective reserves as reimbursement from the Tribes is collected. We have Company has capitalized approximately $3,062,941 and $1,539,893 at April 30, 1998 and April 30, 1997, respectively, related to the development of Indian gaming facilities. These amounts are net of reserves of $3,008,508 and $2,845,629 in 1998 and 1997, respectively, which were established to reserve for potentially unreimburseable costs. In the opinion of management, the net advances will be recoverable through the gaming activities. Current economic projections for the gaming activities indicate adequate future cash flows to recover the advances. In the event the Company and its Indian clients are unsuccessful in establishing such operations, these net recorded advances will be recovered through the liquidation of the associated assets. The Company has title to land purchased for Indian gaming. These tracts, currently owned by the Company, could be sold to recover costs in the projects. As a part of a Management Contract approved by the National Indian Gaming Commission (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 convert their current unsecured receivable from the Tribes to a secured note receivable with the Tribes of $3,500,000 at 2 percent over prime, to be repaid over five years, for the construction of the Stables gaming establishment and reimbursement for previously advanced funds. At April 30, 1998, the Company had advanced $1,785,217 to the Tribes under the contract and has reported $408,333 as a current note receivable and $1,376,884 as a 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 is currently receiving payments on the note and its management fee on the Stables' operation. 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 the Company to perform modifications, installations and assemblies on applicable customer-owned aircraft. Costs associated with obtaining these STCs from the FAA 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. Current company estimates of future orders indicate the life for these costs to be approximately five years. The legal life of these STCs is indefinite. Consultant costs, as shown below, include costs of engineering, legal and aircraft specialists. Components of the capitalized costs are as follows: 1998 1997 Direct labor $ 206,752 $ 151,816 Direct materials 187,129 162,193 Consultant costs 1,267,742 934,960 Labor overhead 326,669 239,870 Subtotal 1,988,292 1,488,839 Less- Amortized costs 532,043 123,938 Net STC balance $1,456,249 $1,364,901
The recoverability of these costs are dependent upon the Company's ability to obtain to sustain future orders. Failure to gain these orders and subsequently recover these costs could have a material adverse impact on the Company's financial position and results of operations. Other Assets The Company owned a Lear 35 aircraft, carried at approximately $1,500,000 which is recorded in other assets on the Balance Sheet at April 30, 1998 and 1997. In July 1998, the Company sold the Lear 35 for approximately $2.1 million less disposition costs. Bank Overdraft Payable The Company's cash management program results in checks outstanding in excess of bank balances in the general disbursement account. When checks are presented to the bank for payment, cash deposits in amounts sufficient to fund the checks are made from funds provided under the terms of the Company's promissory notes agreement. Financial Instruments The carrying amounts of the Company's financial instruments approximate their fair market values. Revenue Recognition The Company performs aircraft modifications under fixed-price contracts. Revenues from fixed-price contracts are recognized on the percentage-of- completion method, measured by the direct labor costs incurred compared to total estimated direct labor costs. At April 30, 1998, there were six contracts in process. Earnings Per Share Earnings per common share is based on the weighted average number of common shares outstanding during the year. Stock options, convertible preferred, and convertible debentures have been considered in the dilutive earnings per share calculation, but not used in 1998 and 1997 because they are anti-dilutive. Reclassifications Certain reclassifications within the financial statement captions have been made to maintain consistency in presentation between years. 2. DEBT: Principal amounts of debt at April 30, 1998 and 1997, consist of the following: 1998 1997 Promissory notes- Interest at prime plus 2% $ 695,718 $382,743 (10.50% at April 30, 1998), due August 25, 1998, collateralized by a first or second position on all assets of the Company Total promissory notes $ 695,718 $382,743 Other notes payable- Note payable for Lear 35, interest $ 1,412,723 $1,497,124 at prime plus 2%, (10.50% at April 30, 1998), due June 30, 1999 collateralized by Aircraft Security Agreement dated November 30, 1995. Note payable at prime plus 1%, 398,813 - 9.5% at April 30, 1998, due March 1, 2001, collateralized by real estate. Other notes payable 178,725 94,277 1,990,261 1,591,401 Less- Current maturities 63,849 50,683 $1,926,412 $1,540,718
Maturities of long-term debt (excluding Promissory notes) are as follows: Year Ending April 30 Amount 1999 $ 63,849 2000 1,477,093 2001 440,330 2002 8,989 $1,990,261
The Company has promissory notes in which it may borrow a maximum of $750,000. The notes matured on August 25, 1998, and were renewed under similar terms each quarter. At April 30, 1998, the Company had borrowed $695,718 on the notes. The weighted-average interest rates were 10.25 percent for the years ended 1998 and 1997 respectively. 3. DISCONTINUED OPERATIONS: On April 14, 1998, the Company discontinued the operation of its food distribution operations conducted by RF, Inc., and Valu Foods, Inc., wholly owned subsidiaries of the Company. These operations are being liquidated and the Company does not plan any future operations in the food distribution industry. The Company acquired RF, Inc., on April 21, 1994. The individuals who sold RF, Inc. to the Company had sought for some time to reacquire the ownership of RF, Inc. The individual (the Employee) filed a lawsuit against the Company seeking to rescind the sale of RF, Inc. stock and for damages. The Company and the Employee reached an agreement to settle and release all claims and counterclaims effective April 30, 1997, (Release Agreement). The Employee dismissed the lawsuit with prejudice. In addition to the releases, under the terms of the agreement, the Company received, on June 26, 1997, 600,000 shares of the Company's common stock and a commitment for certain payments over the next three years. On June 21, 1997, the Company released the Employee from the terms of his employment contract and the April 24, 1994 Stock Purchase Agreement, including his agreement not to compete with the Company in the food distribution industry. Costs associated with this transaction totaled $1,054,000 and were expensed in fiscal year 1997. As a result of resolving the dispute and the ultimate release from the employment agreement, the Company received compensation and recorded a gain of $1,043,000, restated herein, (principally noncash) in the first quarter of 1998. On March 27, 1998, three companies filed a petition for involuntary bankruptcy against RF, Inc. On May 12, 1998, the court determined that RF, Inc. was bankrupt and a trustee was appointed on June 11, 1998. All the assets of RF, Inc. were pledged as security for the bank line of credit. The bank was to obtain control of all the assets of RF, Inc. and the Company planned to cooperate in the collection of accounts receivable through a law firm, the liquidation of the inventory and to purchase the fixed assets, primarily office equipment, from the bank. The RF, Inc. bank debt was approximately $638,000, plus interest and legal collection costs. The Company believed that an orderly liquidation of the assets and the sale of the fixed assets would allow the bank to recover the amount due on the bank line of credit. As of April 30, 1998, the operations of RF, Inc. have been deconsolidated because of the Chapter 7 involuntary bankruptcy liquidation. The entire investment in RF, Inc. was written-off through the 1998 loss from discontinued operations. The assets and liabilities of RF, Inc. at April 30, 1998, were comprised of accounts receivable $716,478, inventory $359,103, other assets $44,423, bank liabilities $637,947 and other accrued liabilities $397,903. The revenues associated with RF, Inc. for the years ended 1998, 1997, and 1996 were $3,783,132, $17,478,540, and $13,685,871 respectively. The Company also discontinued the operation of its retail food store, Valu Foods, Inc. The Company planned to liquidate the Valu Foods, Inc. assets in the ordinary course of business and the store will close the sooner of the completion of the inventory liquidation or on January 31, 1999, when the lease expires. The loss on discontinued operations is approximately $23,965 (net of tax). The loss includes anticipated legal costs, rental costs and payroll. As of April 30, 1998, the operations of Valu Foods, Inc. have been discontinued due to the planned closing of the wholly owned subsidiary. The entire investment in Valu Foods, Inc. was written-off through the 1998 loss from discontinued operations. The assets and liabilities of Valu Foods, Inc. at April 30, 1998, were comprised of property, plant and equipment including leasehold improvements of $175,446 and inventory $24,779. The revenues associated with Valu Foods, Inc., for the year ended 1998 were $143,550. Subsequent to the initial issuance of the April 30, 1998, fiscal year financial statements, the bankruptcy court ruled July 20, 1999, on the bankruptcy filing of the Company. Subsequent to April 30, 1998, the bank was not allowed to immediately assume control of the collateralized assets for liquidation and as such, required the Company to pay the bank the amount due and the court costs in total, including interest, aggregating $700,000. An additional charge for this payment was recorded in fiscal year 1999 based upon the final court action. 4. CONVERTIBLE DEBENTURES: The Company completed a private placement on June 26, 1996, in which the Company issued an 8.0 percent cumulative convertible debenture due June 26, 1998, in the amount of $750,000. Net proceeds of the offering were $675,000. The debenture is convertible only to common stock at 70 percent of the average closing price of the common stock for the five days prior to issuance of the debenture. At June 26, 1998, the end of the two-year term, the balance not yet converted must be converted to common stock. The 8 percent interest is payable in stock or cash at the option of the Company. The Company completed a private placement on November 1, 1996, in which the Company issued an 8.0 percent cumulative convertible debenture due November 1, 1998, in the amount of $500,000. Net proceeds of the offering were $450,000. The debenture is convertible only to common stock at 70 percent of the average closing bid price of the common stock for the five days prior to issuance of the debenture. At November 1, 1998, the end of the two-year term, the balance not yet converted must be converted to common stock. The 8 percent interest is payable in stock or cash at the option of the Company. The two aforementioned securities include nondetachable conversion features that are "in the money" at the dates of issuance. These features, known as beneficial conversion features, allow for securities to be convertible into common stock at a fixed discount to the common stock's market price at the date of conversion. These features are recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of these features to additional paid-in capital. These amounts are calculated as the difference between the conversion price and the fair value of the common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible. The allocation of the proceeds is considered to be analogous to additional interest to the security holder and is recognized over the minimum period in which the security holders can realize that return. The beneficial conversion features included in the two convertible debt issuances have a value of $375,000. Because the conversion period and thus the minimum realized return period is very limited, the entire amount was amortized and recorded in fiscal year 1997. See footnote 1 for further discussion. On January 25, 1999, a change was made to the issuance documents changing the conditions of the conversions. 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 percent 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 percent 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. 5. INCOME TAXES: Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provision of the enacted tax laws. The Company has net operating loss carryforwards and cumulative temporary differences, which would result in the recognition of net deferred tax assets. A valuation allowance has been provided which reduces the net deferred tax asset to zero. At April 30, 1998, the Company had approximately $5.2 million of net operating losses, which expire in 2002 to 2013. The tax benefit of net operating losses generated prior to the quasi reorganization in 1992 and utilized after the reorganization are reflected as additions to capital contributed in excess of par (See Note 6). The deferred taxes are comprised of the following components: April 30, as Restated 1998 1997 Current deferred taxes- Current assets $ 416,843 $ 454,080 Current liabilities (610) - Total current deferred taxes 416,233 454,080 Noncurrent deferred taxes- Noncurrent assets 2,580,599 2,488,415 Noncurrent liabilities (297,070) (424,224) Total noncurrent deferred taxes 2,283,529 2,064,191 Total deferred taxes 2,699,762 2,518,271 Less- Valuation allowance (2,699,762) (2,518,271) Total deferred taxes, net $ - $ -
The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows: April 30, as Restated 1998 1997 Accounts receivable reserves $ 30,352 $ 71,494 Inventory reserve 309,285 320,917 Net operating loss 2,023,656 1,855,232 Depreciation (283,314) (404,011) Indian Gaming Development 519,934 526,463 Other 99,849 148,176 Net deferred tax items $2,699,762 $2,518,271
A reconciliation of the provision for income taxes to the statutory federal rate for continuing operations is as follows: 1998 1997 1996 Statutory federal income tax rate 34.0% (34.0)% (34.0)% Changes in valuation allowances (36.7) 6.8 31.5 Beneficial conversion feature - 22.3 - Nondeductible expenses 2.2 1.6 2.5 State taxes 5.3 3.9 3.6 Effective tax rate 4.8% 0.6% 3.6%
6. SHAREHOLDER'S EQUITY: Quasi Reorganization After completing a three-year program of restructuring the Company's operation, on October 31, 1992, the Company adjusted the accumulated deficit (earned surplus benefit) to a zero balance thereby affording the Company a "fresh start." No assets or liabilities required adjustment in this process as they had been recorded at fair value. The amount of accumulated deficit eliminated as of October 31, 1992, was $11,938,813. Upon consummation of the reorganization, all deficits in the surplus accounts were eliminated against paid-in capital. Common Stock Transactions During the year ended April 30, 1998, the Company issued 2,148,913 shares of stock valued at $1,437,126 in various non-cash transactions: 193,000 shares valued at $144,750 were issued for services to be rendered in the future; 91,318 shares valued at $79,903 were issued as the Company match to the employee 401-K plan; 12,722 shares valued at $11,450 were issued for services rendered; and 1,738,413 shares were issued under the exchange provisions of the convertible and preferred debentures for $1,201,023 in face value plus interest. During the year ended April 30, 1997, the Company issued 231,266 shares of stock valued at $446,208 less $10,966 of issue costs in various non-cash transactions: 25,000 shares valued at $53,125 were issued for services to be rendered in the future; 10,000 shares valued at $21,250 were issued for other assets; 100,000 shares valued at $200,000 were issued in connection with the assets acquisition of Woodson Electronics, Inc.: 84,034 shares were issued under the exchange provisions of the convertible debenture for $150,000 in face value; and 12,232 shares valued at $21,833 were issued to pay interest on the debentures. Shares Issued for Future Services In fiscal 1998 and 1997, the Company issued 193,000 and 25,000 shares of common stock, respectively, at a value of $144,750 and $53,125, respectively, for professional services to be received in the future. The deferred portion of these service contracts is being recognized over the service period, (generally 24-60 months) and is reflected as a reduction in equity until such time as the services are received. Convertible Preferred Stock The Company completed a private placement on December 16, 1997, to issue Series B, 6 percent Convertible Preferred Stock in the amount of $1,500,000. Dividends when declared, are payable quarterly at 6 percent of stated value per share. Net proceeds of the offering were $1,315,959. The terms of conversion allow the holder, at its option, at any time commencing 45 days after issuance of the preferred stock to convert the preferred stock into shares of the Company's Common Stock, at a conversion price equal to 70 percent of the common stock bid price (the average of the ending common stock bid price five days prior to issuance of the preferred stock or the ending bid price of the common stock 45 days after issuance of the preferred stock. The shares are subject to a mandatory, 24-month conversion feature at the end of which all shares outstanding will be automatically converted. Liquidation rights upon dissolution are equal to the stated value per share and all unpaid dividends. The preferred shareholders have no voting rights. The aforementioned security includes a nondetachable conversion feature that is "in the money" at the date of issuance. This feature, known as beneficial conversion features, allows for securities to be convertible into common stock at a fixed discount to the common stock's market price at the date of conversion. This feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of this feature to additional paid-in capital. This amount is calculated as the difference between the conversion price and the fair value of the common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible. The allocation of the proceeds is considered to be analogous to a dividend to the preferred security holder and is recognized over the minimum period in which the security holders can realize that return. The beneficial conversion feature included in the convertible preferred stock debt issuances has a value of $650,000. Because the conversion period and thus the minimum realized return period is very limited, the entire amount was amortized and recorded in fiscal year 1998. See footnote 1 for further discussion. On January 25, 1999, Butler National announced that an agreement had been reached with the Holders of the Class B Convertible Preferred Stock to change the conversion conditions of the preferred stock. 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 percent 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 70 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 week's trading volume. Additionally, accrued dividends ($58,875) on the Preferred Stock will be paid in shares of common stock at $.57 per share during 1999. 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. 7. STOCK OPTIONS AND INCENTIVE PLANS: The Company has established nonqualified stock option plans to provide key employees an opportunity to acquire ownership in the Company. Options are granted under these plans at exercise prices equal to fair market value at the date of the grant, generally exercisable immediately and expire in 10 years. The Company accounts for these plans under Accounting Principles Board Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost been recognized in accordance with Financial Accounting Standards Board Statement No. 123, Accounting for Stock Based Compensation, the Company's operating income would have been effected as follows: April 30, 1998 1997 1996 Dividend yield 0% 0% 0% Expected stock volatility 98.00% 101.00% 101.00% Risk free interest rate 6.07% 6.79% 5.86% Expected option lives 10 years 10 years 10 years Fair value per option $1.06 $1.67 $1.84 Pro forma expense $565,000 $ - $ - Pro forma net income (loss) $(551,269) $ - $ - Basic EPS effect $(0.06) $ ( - ) $ ( - ) Fully diluted EPS effect $(0.06) $ ( - ) $ ( - )
The following table summarizes the Option Plans. April 30, 1998 1997 1996 Beginning balance- Options outstanding 3,157,900 2,549,064 2,317,764 Options granted 6,223,800 772,000 700,000 Options canceled/forfeited (3,005,900) (151,164) (26,000) Options exercised - (12,000) (442,700) Ending balance - Options outstanding 6,375,800 3,157,000 2,549,064 Exercise price ranges $.90 to $2.50 $2.00 to $3.00 $2.00 to $3.00 Shares available for grants 20,123,100 379,000 934,736 Price range of options exercised None $2.00 $.70 to $3.00
8. COMMITMENTS: Lease Commitments The Company leases space under operating leases with initial terms ranging from three years to twenty years. Minimum lease commitments under noncancelable operating leases for the next five years are as follows: Year Ending April 30 Amount 1999 $145,912 2000 85,745 2001 66,000 2002 66,000 2003 33,000 Thereafter 198,000
Total rental expense incurred for the years ended April 30, 1998, 1997 and 1996, was $187,905, $185,742 and $164,993, respectively. 9. CONTINGENCIES: The Company had an employment agreement with an individual which the Company terminated in April 1995. This individual filed a lawsuit against the Company, the President of the Company, and various corporate subsidiaries alleging the Company wrongfully terminated the individual's employment in breach of the contract. The suit was filed in October, 1995, in State Court in Johnson County, Kansas. The Company and the individual reached an agreement to settle and release all claims and counterclaims on May 1, 1997. The individual dismissed the lawsuit with prejudice. The terms of the settlement include payments of $122,000 and $72,000 by the Company to the individual during fiscal 1998 and fiscal 1999, respectively. The entire $194,000 was accrued in fiscal 1998. The Company is involved in various lawsuits incidental to its business. Management believes the ultimate liability, if any, will not have an adverse effect on the Company's financial position or results of operations. Due to the Company's financial condition, and the need to reduce expenses, the board of directors approved the elimination of product liability insurance in August, 1989. 10. RELATED-PARTY TRANSACTIONS: During fiscal 1998, the Company paid consulting fees of approximately $231,055 to board members and board member's consulting companies for business consulting services. An outstanding current loan to an officer of the Company is $37,647. 11. COMMON SHARES USED IN EARNINGS PER SHARE CALCULATIONS: The following table shows the amounts used in computing earnings per share and the effect on income and weighted average number of shares of potential dilutive common stock. 1998 1997 1996 (As Restated (As Restated See Note 1) See Note 1) Earnings (losses) available for common shares $18,153 $(1,263,308) $144,402 Convertible debentures - - - Preferred dividend - - - Earnings (losses) available for common shares after assumed conversion of dilutive securities $18,153 $(1,263,308) $144,402 1998 1997 1996 (As Restated (As Restated See Note 1) See Note 1) Earnings (loss) per share- Basic- Earnings from continuing operations $(0.03) $(0.06) $(0.07) Income (loss) from/on discontinued operations 0.03 (0.07) 0.09 Earnings (loss) available for common shares $0.00 $(0.13) $0.02 Earnings (loss) per share- Diluted- Earnings from continuing operations $(0.03) $(0.06) $(0.07) Income (loss) on discontinued operations 0.03 (0.07) 0.08 Earnings (loss) available for common shares $0.00 $(0.13) $0.01 Weighted average number of common shares used in basic EPS 9,418,330 9,411,168 9,269,432 Per share effect of dilutive securities- Convertible debentures - - 360,298 Convertible preferred securities - - - Options - 8,108 617,104 Weighted number of common shares and dilutive potential common shares used in diluted EPS 9,418,330 9,419,276 10,246,834
12. NEW ACCOUNTING STANDARDS: The American Institute of Certified Public Accountants has issued SOP 98- 5, "Reporting on the costs of start-up activities." This standard provides a change in the capitalization policy for start up costs. The standard is required for the Company's fiscal year-end 1999. The Company has evaluated this standard and concluded its adoption will have no material effect to the financial statements. 13. INDUSTRY SEGMENTATION AND SALES BY MAJOR CUSTOMER: Industry Segmentation The Company's operations have been classified into five segments in 1998, 1997 and 1996. 1. Avionics - principally includes the manufacture of airborne switching units used in DC-9, DC-10, DC- 9/80, MD-80, MD-90 and the KC-10 aircraft. 2. Aircraft Modifications - principally includes the modification of business type aircraft from passenger to freighter configuration, addition of aerial photography capability, stability enhancing modifications for Learjets, and other modifications. 3. Gaming - Business management services to Indian tribes in connection with the Indian Gaming Act of 1988. (Beginning in fiscal 1994). 4. Monitoring Services - principally includes the monitoring of water and wastewater remote pumping stations through electronic surveillance, for municipalities and the private sector. 5. Temporary Services - provides temporary employee services for corporate clients. Year ended April 30, 1998 (Restated) Gaming Avionics Modifications Services Net sales $ - $484,518 $3,874,490 $1,098,098 Depreciation - 12,870 91,075 10,831 Operating profit (loss) (a) (322,129) 146,744 1,274,320 228,488 Capital expenditures 1,773,248 - 8,871 23,904 Interest, net Other income Income or (loss) from continuing operations Income taxes Income or (loss) from discontinued operations Net income Identifiable assets $3,062,941 $1,068,999 $5,691,256 $ 135,629
Year ended April 30, 1998 (Restated) Temporaries Corporate Consolidation Net sales $ - $ - $ 5,456,106 Depreciation - 32,453 147,229 Operating profit (loss) (a) - (672,729) 654,694 Capital expenditures - 648,560 2,454,583 Interest, net (251,420) Other income 15,540 Income or (loss) from continuing operations 418,814 Income taxes for continuing operations 19,880 Income or (loss) from discontinued operations (net of tax) 269,219 Net income 668,153 Identifiable assets $ 16,428 $895,192 $10,870,445
Year ended April 30, 1997 (Restated) Gaming Avionics Modifications Services Net sales $ - $ 277,513 $2,724,217 $1,060,045 Depreciation - 34,629 31,071 6,031 Operating profit (loss) (a) (243,728) 123,571 501,984 230,738 Capital expenditures 397,870 (8,268) - - Interest, net Other income Income or (loss) from continuing operations Income taxes Income or (loss) from discontinued operations Net income Identifiable assets $1,543,786 $1,015,001 $5,765,537 $ 313,374
Year ended April 30, 1997 (Restated) Temporaries Corporate Consolidation Net sales $ - $ - $ 4,061,775 Depreciation - - 71,731 Operating profit (loss) (a) - (318,807) 293,758 Capital expenditures - 340,738 730,340 Interest, net (632,106) Other income (232,869) Income or (loss) from continuing operations (571,217) Income taxes for continuing operations 3,416 Income or (loss) from discontinued operations (net of tax) (688,675) Net income (1,263,308) Identifiable assets $ 43,945 $1,388,365 $10,070,008
Year ended April 30, 1996 Gaming Avionics Modifications Services Net sales $ - $260,399 $2,531,504 $861,192 Depreciation - 11,429 30,907 4,606 Operating profit (loss) (a) (668,239) 79,545 356,916 227,078 Capital expenditures 171,880 - 1,772,303 21,548 Interest, net Other income Income or (loss) from continuing operations Income taxes Income or (loss) from discontinued operations Net income Identifiable assets $1,150,312 $208,342 $4,679,582 $223,590
Year ended April 30, 1996 Temporaries Corporate Consolidation Net sales $ - $ - $3,653,095 Depreciation - - 46,942 Operating profit (loss) (a) 1,275 (581,151) (584,576) Capital expenditures - 5,463 1,971,194 Interest, net (101,619) Other income 51,181 Income or (loss) from continuing operations (635,014) Income taxes 22,800 Income or (loss) from discontinued operations (net of tax) 802,216 Net income 144,402 Identifiable assets $ 3,445 $1,995,812 $8,261,083
(a) Operating expenses not specifically identifiable are allocated based upon sales, cost of sales, square footage or other factors as considered appropriate. Major Customers Sales to major customers (10 percent or more of consolidated sales) were as follows: 1998 1997 1996 Aircraft modification (GFD) 16% 21% 11% Monitoring services (Plantation) 12 16 17 Total major customers 28% 37% 28%
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED APRIL 30, 1998, 1997 AND 1996 (1998 AND 1997 RESTATED) Additions Balance at Charged to Beginning Costs and Balance at Description of Year Expenses Deductions End of Year Year Ended April 30, 1998- Allowance for doubtful accounts $ 78,736 $ - $ - $ 78,736 Reserve for inventory obsolescence 74,562 - - 74,562 Reserve for loss on note receivable 27,327 - - 27,327 Reserve for Indian Gaming Development 2,845,629 162,879 - 3,008,508 Income tax valuation allowance 2,518,271 237,778 56,287 2,699,762 Year ended April 30, 1997- Allowance for doubtful accounts 91,882 - 13,146 78,736 Reserve for inventory obsolescence 62,071 12,491 - 74,562 Reserve for loss on note receivable 35,729 - 8,402 27,327 Reserve for Indian Gaming Development 2,601,901 243,728 - 2,845,629 Income tax valuation allowance 2,239,298 278,973 - 2,518,271 Year ended April 30, 1996- Allowance for doubtful accounts 91,882 - - 91,882 Reserve for inventory obsolescence 63,767 - 1,696 62,071 Reserve for loss on note receivable 35,729 - - 35,729 Reserve for advances for Indian Gaming Development 1,933,662 668,239 - 2,601,901 Income tax valuation allowance 2,177,315 61,983 - 2,239,298
EX-21 2 Exhibit 21 Subsidiaries Avcon Industries, Inc., a Kansas Corporation Butler National Services, Inc., a Florida Corporation, formerly Lauderdale Services, Inc. Butler National Corporation Consulting Engineers, Inc., a Kansas Corporation, formerly HSD, Inc. Butler National Service Corporation, a Delaware Corporation Butler National, Inc., a Nevada Corporation Butler Temporary Services, Inc., a Missouri Corporation Woodson Avionics, Inc., a Nebraska Corporation Cansas International Corporation, a Delaware Corporation R F, Inc., a Missouri Corporation Valu Foods, Inc., a Kansas Corporation EX-23 3 Exhibit 23.1 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K/A, into the company's previously filed Form S-8 Registration Statements, File Numbers, 033-65256, 033-65254, 033-65890, 333-07735, 333-46791, 333-46795, 333-46797, 333-46809, and 333-46811. It should be noted that we have not audited any financial statements of the Company subsequent to April 30, 1998 or performed any audit procedures on any financial statements of the Company subsequent to the April 30, 1998 financial statements and subsequent to the date of our report. ARTHUR ANDERSEN LLP Kansas City, Missouri, February 11, 2000 EX-99 4 Exhibit 99 CAUTIONARY STATEMENTS FOR PURPOSE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is filing this exhibit in order to do so. The following important factors, among others, could effect the Company's actual results and could cause such results to differ materially from those expressed in the Company's forward-looking statements: - -The General Governmental Regulation of Gaming Operations - The Company's approved and proposed gaming management operations will be subject to extensive gaming laws and regulations, many of which were recently adopted and have not been the subject of definitive interpretations and are still subject to proposed amendments and regulation. The political and regulatory environment in which the Company is and will be operating, with respect to gaming activities on both non-Indian and Indian land, is dynamic and rapidly changing. Adoption and/or changes in gaming laws and regulations could have a materially adverse effect on the Company. - -Key Personnel - The Company's inability to retain key personnel may be critical to the Company's ability to achieve its objectives. Key personnel are particularly important in maintaining relationships with Indian Tribes and with the operations licensed by the FAA. Loss of any such personnel could have a materially adverse effect on the Company. - -Competition - Increased competition, including the entry of new competitors, the introduction of new products by new and existing competitors, or price competition, could have a materially adverse effect on the Company. Additionally, because of the rapid rate at which the gaming industry has expanded and continues to expand, the gaming industry may be at risk of market saturation, both as to specific areas and generally. Overbuilding of gaming facilities at particular sites chosen by the Company may have a material adverse effect on the Company's ability to compete and on the Company's operations. - -Major Customers - The termination of contracts with major customers or renegotiation of these contracts at less cost-effective terms, could have a materially adverse effect on the Company. - -Product Development - Difficulties or delays in the development, production, testing and marketing of products, could have a materially adverse effect on the Company. The Company's aviation business is subject, in part, to regulatory procedures and administration enacted by and/or administered by the FAA. Accordingly, the Company's business may be adversely affected in the event the Company is unable to comply with such regulations and/or if any new products and/or services to be offered by the Company can or may not be formally approved by such agency. Moreover, the Company's proposed new aviation modification products will depend upon the issuance by the FAA of a supplemental type certificate with related parts manufacturing authority and repair station license, the issuance of which no assurances can be given. - -Administrative Expenditures - Higher service, administrative or general expenses occasioned by the need for additional legal, consulting, advertising, marketing, or administrative expenditures may decrease income to be recognized by the Company. EX-27 5 ARTICLE 5 FIN DATA SCHEDULE FOR 4TH QTR
5 1 12-MOS APR-30-1998 APR-30-1998 160,598 0 491,993 78,736 1,601,336 3,256,414 2,279,209 1,060,705 10,870,445 2,388,751 2,576,412 116,730 0 506,834 5,359,448 10,870,445 5,456,106 5,456,106 2,727,656 4,801,412 15,540 0 255,004 418,814 19,880 398,934 269,219 0 0 668,153 0.00 0.00
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