-----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, DJ7rMyi7b5R1oYLK9g3Ns4S3oq/JKlIaZNwV16zvC1fWLbw/MULGLf1Zi9mW8ozt 6VoYEEvfoY7zR1u20MaRlQ== 0000015847-97-000004.txt : 19970804 0000015847-97-000004.hdr.sgml : 19970804 ACCESSION NUMBER: 0000015847-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970801 SROS: NASD 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: MN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-01678 FILM NUMBER: 97650046 BUSINESS ADDRESS: STREET 1: 1546 E SPRUCE RD CITY: OLATHE STATE: KS ZIP: 66061 BUSINESS PHONE: 9138888585 MAIL ADDRESS: STREET 1: 1546 E SPRUCE RD CITY: OLATHE STATE: KS ZIP: 66061 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL CONNECTOR CORP DATE OF NAME CHANGE: 19701009 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ FORM 10-K _________________ (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, 1997 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.) 1546 East Spruce Road, Olathe, Kansas 66061 (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 $9,041,668 at July 29, 1997, when the average bid and asked prices of such stock was $1.171875. The number of shares outstanding of the Registrant's Common Stock, $0.01 par value, as of July 29, 1997, was 8,876,757 shares. DOCUMENTS INCORPORATED BY REFERENCE: NONE This Form 10-K consists of 53 pages (including exhibits). The index to exhibits is set forth on pages 27 - 30 . PART I Item 1. BUSINESS Forward Looking Information: The information set forth above may include "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 the Company's October 31, 1996, Quarterly Report on Form 10-Q, 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 1546 East Spruce, Olathe, Kansas 66061. 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, conversion to air ambulance, addition of aerial photography capability, and stability enhancing modifications for Learjet, Beechcraft, Cessna, and Dassault aircraft along with other modifications. The Company provides these services through its subsidiary, Avcon Industries, Inc. ("Aircraft Modifications" or "Avcon"). (2)Avionics - principally includes the manufacture of airborne radio and instrument switching units used in DC-9, DC-10, DC- 9/80, MD-80, MD-90 and the KC-10 aircraft. The Company provides these services through its subsidiary, Woodson Avionics, Inc. ("Switching Units", "Avionics" or "WAI"). (3)Food Distribution Services - principally includes food distribution to the wholesale, food processing and retailing industries. The Company provides wholesale services through its subsidiary, R F, Inc. ("Food Distribution" or "RFI") and through its retail subsidiary, Valu Foods, Inc. ("VFI"). (4) Gaming - principally includes business management services to Indian tribes in connection with the Indian Gaming Regulatory Act of 1988. The Company provides these services through its subsidiary, Butler National Service Corporation ("Management Services", "Gaming" or "BNSC"). (5)SCADA Systems and Monitoring Services - principally includes the monitoring of water and wastewater remote pumping stations through electronic surveillance for municipalities and the private sector and related repair services. The Company provides these services through its subsidiary, Butler National Services, Inc. ("Monitoring Services" or "BNS"). (6)Temporary Services - provides temporary employee services for corporate clients. The Company provides these services through its subsidiary, Butler Temporary Services, Inc. ("Temporary Services" or "BTS"). Assets as of April 30, 1997 and Net Revenues for the year ended April 30, 1997. Industry Segment Assets Revenue Aircraft Modifications 51.8% 12.7% Avionics 3.1% 1.3% Food Distribution 23.8% 81.1% Gaming 13.9% 0.0% Monitoring Services 4.0% 4.9% Temporary Services 0.4% 0.0% Corporate Office 3.0% 0.0% Financial Information about Industry Segments Information with respect to the Company's industry segments are found at Note 11 of Notes to Consolidated Financial Statements for the year ended April 30, 1997, located herein at page 50. Narrative Description of Business Aircraft Modifications. The Company's subsidiary, Avcon, modifies business type aircraft at Newton, Kansas. The modifications include aircraft conversion from passenger to freighter configuration, conversion to air ambulance, 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, Raisbeck Engineering) in the industry in which the Aircraft Modifications Division participates. The Aircraft Modifications business derives its ability to modify aircraft from the authority granted to it by the Federal Aviation Administration ("FAA"). The FAA grants this authority by issuing a Supplemental Type Certificate ("STC") after a detailed review of the design, engineering and functional documentation, and demonstrated flight evaluation of the modified aircraft. The STC authorizes Avcon to build the required parts and assemblies and to perform the installations on applicable customer-owned aircraft. Avcon owns over 200 STC's. When the STC is applicable to a multiple number of aircraft it is categorized as Multiple-Use STC. These Multiple-Use STC's are considered a major asset of the Company. Some of the Multiple-Use STC's include the Beechcraft Extended Door, Learjet AVCON FINS, Learjet Extended Tip Fuel Tanks, Learjet Weight Increase Package and Dassault Falcon 20 Cargo Door. On May 3, 1996, Avcon received approval from the Federal Aviation Administration of a Supplemental Type Certificate ("STC") (no. ST00432WI) for its AVCON FIN Modification for installation on Learjet Model 35 and 36 Aircraft. FAA pilots thoroughly evaluated the test aircraft, and determined that the fins substantially increase the aerodynamic stability in all flight conditions. The AVCON FIN STC eliminates the operational requirement for Yaw Dampers which are otherwise required in both Learjet models to control adverse yaw tendencies in certain flight conditions, particularly during approach and landing. Learjets equipped with AVCON FINS exhibit the same aerodynamic stability and improved operating efficiency offered on newer Learjet models, while maintaining the outstanding range, speed and load-carrying capabilities that made the Learjet Models 35 and 36 among the most popular Business Jets ever produced. Mounted like the fins of an arrow on the rear of the aircraft, Learjets equipped with AVCON FINS have a new look much the same as the current production aircraft. This modification will give the Learjets produced in the 1970's and 1980's the look of the 21st century. Avionics - Switching Units. The Company has an agreement with McDonnell Douglas to manufacture and repair airborne switching systems for 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 McDonnell Douglas and FAA requirements. Most McDonnell Douglas commercial aircraft are equipped with one or more Butler National Switching Units. Marketing is accomplished directly between the Company and McDonnell Douglas. Competition is minimal. However, sales are directly related to McDonnell Douglas' production of DC-9, DC-10, DC9/80, MD-80, MD-90, MD-11 and KC-10 tanker aircraft. The current McDonnell Douglas contract has been extended through calendar year 1997. The Company sells to McDonnell Douglas on terms of 2% 10 days, net 30 days. All payments have been and continue to be within these terms. The Company has ordinary course of business purchase orders from the commercial division (Douglas Aircraft Company) for products with scheduled shipment dates into the year 1997. However, should McDonnell Douglas financially reorganize or for some other reason not accept shipment against these orders, the Company could suffer significant loss of revenue. Food Distribution. RFI is a specialty food distribution business with contract warehouses in St. Louis and Kansas City, Missouri. RFI serves a wide range of customers, nationwide, in the wholesale, food processing and retailing industries. RFI purchases from manufacturers product overruns, seconds, and merchandise approaching ideal quality date and sells these products to various wholesalers and retailers. Product items are "center of the plate items," ie. meat and poultry products. The acquisition of various products in this very competitive market is dependent upon successful bidding from a price standpoint. Most products are sold on a bid basis and such products compete with all other standard products sold under regulated methods of distribution. The Company competitively makes bids to various governmental agencies, school districts, prison systems and others to supply product to institutions. Purchases are immediate with ten day terms and sales terms are 30 days. The Company is planning a retail market test under its trade name, Valu Foods, of the products being distributed by RF, Inc. Two or more test stores are planned in small communities. The larger of the test stores will open in Olathe, Kansas, in August, 1997. Capital of approximately $500,000 may be required during fiscal 1998 to finance this test plan. See Liquidity and Capital Resources, page 16. Management Services. BNSC is engaged in the business of providing management services to Indian Tribes in connection with the Indian Gaming Regulatory Act of 1988. The Company has three management agreements in place; however, the performance of these agreements is contingent upon and subject to approval by the Secretary of Interior, Bureau of Indian Affairs, National Indian Gaming Commission and the appropriate State, if required. Also, the Company has signed consulting engagement letters with two tribes to study and develop plans for Indian gaming. See Liquidity and Capital Resources, page 16. During fiscal 1997, the Company received approval by the National Indian Gaming Commission of the management agreement between the Miami Tribe of Oklahoma, the Modoc Tribe of Oklahoma and its subsidiary, Butler National Service Corporation, to construct and manage a Class II (High Stakes Bingo) and Class III (Off-Track Betting) establishment. This project, known as the STABLES, is under construction. The services to be provided by the Company include consulting and construction management services for the development of the facilities and operational management for the Tribes. The Company will provide the necessary funds to construct the facilities and will be repaid the principal plus interest out of the profits of the operation. Additionally, the Company will receive a thirty percent (30%) share of the profits for its management services. SCADA Systems and Monitoring Services. BNS is engaged in the sale of monitoring and control equipment and the sale of monitoring services for water and wastewater remote pumping stations through electronic surveillance by radio or telephone. BNS contracts with government and private owners of water and wastewater pumping stations to provide both monitoring and preventive maintenance services for the customer. The Company expects a high percentage of BNS business to come from municipally owned pumping stations. Currently, BNS is soliciting business in Florida only. While the Company has exposure to competitive forces in the monitoring and preventive maintenance business, management believes the competition is limited. Temporary Services. BTS provides managed temporary personnel to corporate clients to cover personnel shortages on a short and/or long term basis. This service is being marketed in Kansas, Missouri and Oklahoma. Currently, this Company is inactive. Raw Materials. Raw materials used in the Company's products are currently available from several sources. Certain components, used in the manufacture of the Switching Units, are long lead time components and are single sourced. Patents. There are no patents, trademarks, licenses, franchises, or concessions held by the Company that need to be held to do business. However, the Company maintains certain airframe alteration certificates, commonly referred to as Supplemental Type Certificates ("STCs"), issued to it by the FAA, for its Aircraft Modification and Avionic businesses. Seasonality. The Company's business is generally not seasonal. Demand for the Falcon 20 cargo aircraft modifications is related to seasonal activity of the automotive industry in the United States.Many of these modified aircraft are used to carry automotive parts to automobile manufacturing facilities. The peak modification demand occurs in late spring and early summer. Peak usage of the modified aircraft is from June to December. Future changes in the automotive industry could result in the fluctuation of revenues at the Aircraft Modifications Division. Customer Arrangements. Most of the Company's products are custom-made. Except in isololated situations no special inventory- storage arrangements, merchandise return and allowance policies, or extended payment practices are involved in the Company's business. The Company is not dependent upon any single customer except Switching Units. Switching Units are sold to McDonnell Douglas and Douglas Aircraft Company customers. The Company has required deposits from its customers for aircraft production schedule dates. Backlog. The Company's backlog as of April 30, 1997, 1996, and 1995, was as follows: Industry Segment 1997 1996 1995 Aircraft Modifications 2,468,169 820,694 1,470,005 Avionics 316,558 390,066 206,393 Food Distribution 282,240 251,160 1,850,000 Monitoring Services 1,317,580 1,645,844 208,188 Temporary Services - - - $4,384,547 $3,107,764 $3,734,586 The Company's backlog as of July 29, 1997, totaled $3,701,940; consisting of $2,517,011, $208,854, $70,560, $905,574 and $0, respectively, for Aircraft Modifications, Avionics, Food Distribution, Monitoring Services, and Temporary Services. The backlog includes firm orders which may not be completed within the next twelve months. Backlog the Company expects to not be filled within the next year totals $588,691; consisting of $0, $84,427, $0, $504,264, and $0. The Company's backlog in Monitoring Services increased due to our annual contract with a major customer being extended to a five year contract. Four years remain on this contract. Backlog related to the Food Distribution segment is immaterial, compared to expected sales, since the nature of the business does not call for extended contracts. In prior years, this segment maintained a one year contract with one major customer. This has been converted to a renewable six month contract. Employees. The Company employed 65 people on April 30, 1997, compared to 62 people on April 30, 1996, and 54 people on April 30, 1995. As of July 29, 1997, the Company employed 63 people. None of the Company's employees are subject to any collective bargaining agreements. Financial Information about Foreign and Domestic Operations, and Export Sales. Information with respect to Domestic Operations may be found at Note 11 of Notes to Consolidated Financial Statements for the year ended April 30, 1997, located herein at page 50. There are no foreign operations. Item 2. PROPERTIES The corporate headquarters is located in a 7,500 square feet leased facility for office and storage space at 1546 East Spruce Road in Olathe, Kansas. The annual lease cost is $39,204 per year. The lease expires December 31, 1997. The facilities are adequate for current and anticipated operations. The Company's Aircraft Modifications Division is located at the municipal airport in Newton, Kansas in facilities occupied under a long-term lease extending to April 30, 2002, at an annual rental of $33,000. The lease is renewable for an additional seven-year term. In February 1989, the Company entered into a long-term capital lease with the City of Newton, Kansas for a second hangar. The lease extends to February 28, 2009, at an initial annual rental of $55,200. Commencing November 1, 1991, the annual rental declined to $50,400 for the remaining term of the lease. The Company entered into a letter of agreement with the landlord to reduce the lease payments to $33,000 per year on a month-to-month basis and to retain an option to reinstate the capital lease as originally contracted. These facilities are adequate for current and anticipated operations. The Company's wholly-owned subsidiary, Butler National Services, Inc. has its principal offices in Ft. Lauderdale, Florida in facilities occupied under a three-year lease ending March 31, 1999. The annual rental is approximately $25,903. The facilities are adequate for current and anticipated operations. The Company's wholly-owned subsidiary, Woodson Avionics, Inc., had its principal offices and manufacturing operations in Arkansas. During May 1996, the Company relocated to 5032 South Ash Avenue, Tempe, Arizona. As of June 1, 1996, the Company rents 3,865 square foot of space for $2,358 per month. The lease expires December 31, 1999. The facilities are adequate for current and anticipated operations. During fiscal 1997, the Company's wholly-owned subsidiary, RFI, had its principal offices in Wentzville, Missouri. The Company currently rents 4,700 square feet of space, for office and storage, for $4,000 per month. The lease expires April 30, 2000. As a part of the Eisenbath agreement, effective April 30, 1997, the lease in Wentzville, Missouri was terminated and the principal office of RFI relocated to 1325 South Fountain, Olathe, Kansas. The South Fountain facility is 2,439 square feet with a monthly lease payment of $2,033. The lease expires in December, 1997. The facilities are adequate for current and anticipated operations. See footnote 9. Subsequent Events, page 49. Valu Foods has a lease for a retail store located at 128 South Clairborne in Olathe, Kansas. The lease payment is $2,279 per month. The lease expires September 30, 1997. The facilities are adequate for current and anticipated operations. Item 3. LEGAL PROCEEDINGS The Company had an employment agreement with an individual who the Company terminated in April 1995. This individual filed a lawsuit against the Company, the President of the Company, and various corporate subsidiaries, alleging the Company wrongfully terminated the individual's employment in breach of the contract. The suit was filed in October, 1995, in State Court in Johnson County, Kansas. The Company and the individual reached an agreement to settle and release all claims and counterclaims on May 1, 1997. The individual dismissed the lawsuit with prejudice. The terms of the settlement include payments by the Company to the individual during fiscal 1998 and fiscal 1999. The Company acquired RF, Inc. on April 21, 1994. The Company exchanged 650,000 shares of the Company's common stock for 100% of the issued and outstanding shares of RF, Inc.. The individuals who sold RF, Inc. to the Company have sought for some time to reacquire from the Company the ownership of RF, Inc. The individual filed a lawsuit against the Company seeking to rescind the sale of RF, Inc. stock and for damages. The Company and the individual reached an agreement to settle and release all claims and counterclaims effective April 30, 1997, ("Eisenbath Agreement"). The individual dismissed the lawsuit with prejudice. In addition to the releases, under the terms of the agreement, the Company received on June 26, 1997, 600,000 shares of the Company's common stock and certain payments over the next three years. The Company released the individual from the terms of his employment contract and the April 24, 1994 Stock Purchase Agreement. These documents released the individual from his agreement not to compete with the Company in the food distribution industry. The Company will record a net gain (principally noncash) in the first quarter of 1998 for this transaction after consideration of $809,000 of costs associated with the claims, counter-claims and settlement. In addition the Company will recognize an additional gain as the guaranteed promissory note payments are received in cash. Although the effective date of the transaction as agreed to by both parties is April 30, 1997, the transfer of the stock and related proceeds was not completed until June 1997. As of July 29, 1997, there are no known legal proceedings pending against the Company. The Company considers all such unknown proceedings, if any, to be ordinary litigation incident to the character of the business. The Company believes that the resolution of those 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 1997. 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." The range of the high and low bid prices per share of the Company's common stock, for fiscal years 1997 and 1996, as reported by the over-the-counter market on the pink sheets and NASDAQ, is set forth below. Such market quotations reflect intra-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. Year Ended April 30, 1997 Year Ended April 30, 1996 High Low High Low First Quarter 3 3/16 2 1/16 4 7/8 3 1/4 Second Quarte 2 5/8 1 3/4 4 3/8 2 3/4 Third Quarter 3 3/16 1 7/8 3 1/8 2 Fourth Quarter 2 1/4 1 5/8 3 1/16 2 (b) Holders. The approximate number of holders of record of the Company's common stock, as of July 29, 1997, was 1,600. (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 data)
1997 1996 1995 1994 1993 Net Sales $21,540 $17,339 $13,155 $17,713 $16,854 Income (Loss) from Continuing Operations $ 258 $ 144 $ (825) $ 271 $ 800 Net Income (Loss) $ 258 $ 144 $ (825) $ 271 $ 800 Per Share Income (Loss) from Continuing Operations $ 0.03 $ 0.02 $ (0.10) $ 0.04 $ 0.12 Net Income (Loss) $ 0.03 $ 0.02 $ (0.10) $ 0.04 $ 0.12 Selected Balance Sheet Information Total Assets $11,124 $ 8,261 $ 4,263 $ 5,024 $ 2,645 Long-term Obligations $ 2,640 $ 57 $ 81 $ 108 $ 355 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 Fiscal 1997 compared to fiscal 1996 The Company's sales for fiscal 1997 were $21,540,315, an increase of 24.2% from fiscal 1996 sales of $17,338,966. Discussion of specific changes by operation follows. Food Distribution: Revenues from the Food Distribution business segment increased 27.7% from $13,685,871 in fiscal 1996 to $17,478,540 in fiscal 1997. Revenue increase is due to increased customer base and product sales. This increase was achieved primarily through the Company's continued commitment to customer service and top-quality products. Operating profit, before corporate allocations decreased from $809,416 in fiscal year 1996 to $470,065 in fiscal year 1997. This subsidiary was acquired by the Company on April 24, 1994. Prior to January 1, 1994, the business was organized as a sole proprietorship. During this time, all distributions to the business's shareholders were treated as capital transactions which had no impact on operating income. Beginning January 1, 1994, when the business began operations as a C corporation, officer distributions were treated as salary expense which caused an increase in selling, general and administrative expenses in fiscal year 1994. However, this only accounted for a portion of the officer's salary in 1994. In fiscal year 1995, a full year's salary was included in sales, general and administrative expense thereby reducing the operating income of the business in comparison to fiscal year 1994, when only four (4) months of the officer's salary was expensed through sales, general and administrative expense. The Company plans to continue increasing the customer base and product sales through the addition of the Valu Foods concept. This concept distributes products acquired by Redi-Foods, through Company owned warehouses and retail stores, direct to the retail consumers. The Company believes this division will continue to contribute a significant portion of the overall Company's growth. Aircraft Modification: Sales from the Aircraft Modifications business segment increased 7.6%, from $2,531,504 in fiscal 1996, to $2,724,217 in fiscal 1997. This segment earned an operating profit of $501,984 in 1997, compared to income of $356,916 in 1996. Primarily product sales increased due to the expanded business base related to the multiple-use Supplemental Type Certificates ("STC") developed by the Company. The increase in operating income is due to the increase in sales and margins related to the proprietary products. As previously noted on page 2, (Item 1. Business), on May 3, 1996 the Company's subsidiary, Avcon Industries, Inc., received approval from the Federal Aviation Administration of a Supplemental Type Certificate (no. ST00432WI) for its AVCON FIN Modification for installation on Learjet Model 35 and 36 Aircraft. The STC authorizes Avcon to build the required parts and assemblies and to perform the installations on applicable customer-owned Learjets. The Company believes the potential market for fin installations to be approximately 1,000 aircraft and that approximately 500 fin installations will be performed over the next several years. The Company plans to market the fin installation with related options. The installed package price for nine AVCON FIN packages installed in fiscal 1997 averaged approximately $150,000 per aircraft. In fiscal 1997, the Company invested $1,174,535 to design, engineer, build, and demonstrate to the FAA, flight characteristics; 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 6.7%, from $260,399 in fiscal 1996, to $277,513 in fiscal 1997. Sales to the major OEM customer increased 12.4%. Sales for aircraft repair and refurbishment declined 7.0%, from fiscal 1996 to fiscal 1997. Sales have remained relatively stable between years. Operating profits increased from $79,545 in fiscal 1996 to $123,571 in fiscal 1997. Management expects this business segment to continue to be stable in future years. SCADA Systems and Monitoring Services: Revenue from Monitoring Services increased from $861,192 in fiscal 1996 to $1,060,045 in fiscal 1997, an increase of 23.1%. During fiscal 1997, the Company to maintained a relatively level volume of long-term contracts with municipalities. Revenue increased due to the introduction of new products and services. The Company's contracts with its two largest customers have been renewed for fiscal 1998. An operating profit of $230,738 in Monitoring Services was recorded in fiscal 1997. compared to fiscal 1996 operating profit of $227,028. The increased profit resulted from special jobs completed, in addition to the long term contracts with the municipalities. The Company was able to secure performance bonds during the first quarter of fiscal 1995. This division has since bid on certain jobs requiring performance bonds, and completed two special jobs with revenue totaling approximately $100,000. The Company believes this segment will continue to grow at a moderate rate. This segment has experienced consistent increases over the past few years and the Company expects this trend to continue. Temporary Services: This operation provides temporary employee services for corporate clients. This segment was inactive during fiscal 1997. If and when the Company is able to open Indian gaming facilities, management expects that a majority of the personnel in the various Indian gaming enterprises will be staffed by Temporary Services personnel. Management Services: -General- In the current fiscal year the Company received no revenue and incurred $243,728 in general and administrative expenses associated with its continued efforts to explore opportunities related to the Indian Gaming Act of 1988. Additionally, the Company amortized $66,458 and $143,124 in fiscal years 1997 and 1996, respectively, related to shares issued for services rendered to the Company. The Company has invested $1,539,892 in land, land improvements, and professional design fees related to the development of Indian Gaming facilities. Included in this investment is 160 acres of land, located adjacent to the Linn Valley Lakes resort and residential development in Linn County, Kansas, and a group of selected lots within the resort development. The Company believes that this tract could be developed and sold for residential and commercial use, other than Indian gaming, if the gaming enterprise does not open. Additional improvements, including access roads, water and sewer services, etc. are planned for this land. After these improvements, the land may be sold in small tracts. This may allow the Company to recover the majority, if not all, of the $1,539,892 investment. -Princess Maria Casino- The Company has a management agreement with the Miami Tribe to provide management services to the Miami Tribe. The Miami Tribe requested a compact with the State of Kansas for Class III Indian gaming, on Indian land, known as the Maria Christiana Miami Reserve No. 35, located in Miami County, Kansas, on July 9, 1992. The Miami Tribe's 1992 compact was the subject of a lawsuit filed in February 1993, in the Federal District Court, by the Miami Tribe, alleging the failure to negotiate a compact in good faith by the State of Kansas. The United States District Court dismissed the Miami Tribe's suit against the State of Kansas, citing the United States Supreme Court's ruling in Seminole v. State of Florida. The Supreme Court ruled that the "failure to negotiate" provision of the IGRA did not allow an Indian tribe to compel a state by litigation to negotiate a compact. In February, 1993, former Kansas Governor Finney requested a determination of the suitability of the Miami Indian land for Indian Gaming, under the IGRA, from the Bureau of Indian Affairs (the "BIA"). In May, 1994, the NIGC again requested the same determination. Finally, in May, 1995, an Associate Solicitor within the BIA issued an opinion letter stating that the Miami Tribe has not established jurisdiction over the Miami land in Kansas. This was the first definitive statement received from the central office of the BIA in three years. The latest opinion is contrary to a September, 1994 opinion of the Tulsa Field Solicitor, in an Indian probate, stating that the Miami Tribe has jurisdiction over the Miami Indian land in Kansas. On July 11, 1995, the U.S. Department of Justice issued a letter to the Associate Solicitor expressing concern about the conclusions reached, based upon the analysis of the case. The Miami Tribe challenged this opinion in Federal Court. To prove and protect the sovereignty of the Miami Tribe, and other Indian tribes, relating to their lands, on April 11, 1996, the Court ruled that the Miami Tribe did not have jurisdiction because the BIA had not approved the Tribal membership of the Princess Maria heirs, at the time the management agreement was submitted; therefore, the Court ordered that the NIGC's determination (that Reserve No. 35 is not "Indian land", pursuant to IGRA) was affirmed. However, the Court noted in its ruling that nothing precludes the Tribe from resubmitting its management agreement to the NIGC, along with evidence of the current owners' consent, and newly adopted tribal amendments. On February 22, 1996, the BIA approved the Miami Tribe's constitution and the membership of the heirs. The Tribe resubmitted the management agreement. Although the Court noted that the Tribe could resubmit the management agreement, the Court did not pass on whether or not a new submission will obtain approval. The Tribe resubmitted the management agreement and land question to the NIGC in June, 1996. In July, 1996, the NIGC again requested an opinion from the BIA. On July 23, 1997, the Tribe and the Company were notified that the BIA had again determined that the land was not suitable for gaming, for political policy reasons, without consideration of the membership in the Miami Tribe or recent case law, and the NIGC had to again deny the management agreement. The Tribe plans to file suit in the Federal District Court in Kansas City, Kansas before the end of July, 1997. Therefore, even though the Company and the Tribe believe the Court will find the land to be "Indian land", in compliance with all laws and regulations, because of political reasons, there is no assurance that the management agreement will be approved. -Stables Bingo and Off-Track Betting- Additionally, the Company has a signed Management Agreement with the Miami and Modoc Tribes. A class III Indian Gaming Compact for a joint-venture by the Miami and Modoc Tribes, both of Oklahoma, has been approved by the State of Oklahoma and by the Assistant Secretary, Indian Affairs for the U.S. Department of the Interior. The Compact was published in the Federal Register on February 6, 1996, and is therefore, deemed effective. The Compact authorizes Class III (Off-Track Betting "OTB") along with Class II (high stakes bingo) at a site within the City of Miami, Oklahoma. The Company will provide consulting and construction management services in the development of the facility and plans to manage the joint-venture operation for the tribes. The STABLES facility is planned to be approximately 22,000 square-feet and to be located directly south of the Modoc Tribal Headquarters building in Miami. It is currently planned that the complex will contain off-track betting windows, a bingo hall, and a restaurant. The Company's Management Agreement was approved by the NIGC on January 14, 1997. The Management Agreement was filed in September, 1994 with the NIGC, and rejected, pending approval of this Compact. On January 25, 1996, the Management Agreement was resubmitted. Under the Management Agreement, as approved, the Company, as manager, is to receive a 30% share of the profits and reimbursement of development costs. Construction on the STABLES began with the ground breaking on March 27, 1997. Opening is expected in November, 1997. The estimated project cost is approximately $3,000,000. Initial funds have been provided from the Company's operations. Long-term financing for project completion is being arranged. -Shawnee Reserve No. 206- Since 1992, the Company has maintained a business relationship with approximately seventy Indian and non-Indian heirs (the "Owners") of the Newton McNeer Shawnee Reserve No. 206 ("Shawnee Reserve No. 206"). This relationship includes assistance in the defense of the property against adverse possession(by one family member) in exchange for being named the manager for any Indian gaming enterprises that may be established on the land. As a result of the Company's assistance, the Owners are in the process of becoming the undisputed beneficial owners of approximately 72 acres of the Shawnee Reserve No. 206, as ordered by the United States District Court for the District of Kansas. The Company has purchased options for an additional 17 acres contiguous to the Indian land. Shawnee Reserve No. 206 has been a part of the Shawnee Reservation in Kansas Territory since 1831 and was reserved as Indian land and not a part of the State of Kansas, when Kansas became a state in 1861. The Indian land is located on west 83rd Street, within the boundaries of Johnson County, Kansas and the Kansas City metro area, approximately 25 miles southwest from downtown Kansas City, Missouri. The Company maintains a relationship and agreement to manage the proposed establishment. As a part of the Owners' desire to work with 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 federal recognition of the Cherokee Nation of Oklahoma. The Indian Owners of Shawnee Reserve No. 206 have federal Indian membership cards showing them as Cherokee-Shawnee members of the Cherokee Nation of Oklahoma. The Shawnee and the Cherokee are currently working to reaffirm the Shawnee's jurisdiction over the Indian land and to obtain federal recognition for the Shawnee Tribe. The Company believes that there is a significant opportunity for Indian gaming on the Shawnee Reserve No. 206. However, none of the above agreements have been approved by the BIA, or the Cherokee Nation, or any other regulatory authority. There can be no assurance that these or future agreements will be approved nor that any Indian gaming will ever be established on the Shawnee Reserve, or that the Company will be the Management Company. -Modoc Bingo- The Company has a management agreement with the Modoc Tribe to construct and operate an Indian gaming facility on Modoc Reservation lands in Eastern Oklahoma. The Management Agreement was filed with the NIGC on June 7, 1994, for review and approved on July 11, 1997. The Tribe and the Company have not determined a schedule for this project. There is no assurance that further action will be taken until the Stables is in operation or if ever. -Other Gaming- The Company is currently reviewing other potential Indian gaming opportunities with other tribes. These discussions are in the early stages of negotiation and there can be no assurance that these gaming opportunities will be successful. The various management agreements have not yet been approved by the various governing agencies and therefore are not filed as exhibits to this document. Selling, general and administrative (SG&A) expenses increased $369,531 (12.5%) in fiscal year 1997. These expenses were $3,330,874, or 15.5% of revenue, in fiscal 1997, and $2,961,343, or 17.1% of revenue in fiscal 1996. SG&A expenses related to RFI, were $1,964,966 in fiscal 1997 and $1,162,216 in fiscal 1996. The increase in SG&A, related to RFI, between years, is due to the increase in sales personnel and increased sales commissions. SG&A expenses related to the Company, excluding RFI, were $1,365,908 in fiscal 1997 compared to $1,799,127 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. Fiscal 1996 compared to fiscal 1995 The Company's sales for fiscal 1996 were $17,338,966, an increase of 31.8% from fiscal 1995 sales of $13,155,982. Discussion of specific changes by operation follows. Food Distribution: Revenues from the Food Distribution business segment increased 44.2% from $9,487,964 in fiscal 1995 to $13,685,871 in fiscal 1996. Revenue increase is due to increased customer base and product sales. This increase was achieved primarily through the Company's continued commitment to customer service and top-quality products. The increase in sales resulted in a 81.2% increase in gross profit, to $1,971,632 in fiscal year 1996, from $1,087,891 in fiscal year 1995. Operating profit before corporate allocations increased from $461,200 in fiscal year 1995 to $809,416 in fiscal year 1996. This subsidiary was acquired by the Company on April 24, 1994. Prior to January 1, 1994, the business was organized as a sole proprietorship. During this time all distributions to the business's shareholders were treated as capital transactions which had no impact on operating income. Beginning January 1, 1994, when the business began operations as a C corporation, officer distributions were treated as salary expense which caused an increase in selling, general and administrative expenses in fiscal year 1994. However, this only accounted for a portion of the officer's salary in 1994. In fiscal year 1995 a full year's salary was included in sales, general and administrative expense, thereby reducing the operating income of the business in comparison to fiscal year 1994, when only four (4) months of the officer's salary was expensed through sales, general and administrative expense. The Company plans to continue increasing the customer base and product sales in this segment. The Company believes this division will continue to be a strong contributor to the overall growth of the Company. Aircraft Modification: Sales from the Aircraft Modifications business segment increased 37.2%, from $1,845,609 in fiscal 1995, to $2,531,504 in fiscal 1996. This segment earned an operating profit of $356,916 in 1996, compared to income of $133,924 in 1995. Product sales increased due primarily to one large job accounting for approximately $700,000 in sales. The increase in the operating income is due to the increase in sales. As previously noted on 2, (Item 1. Business), on May 3, 1996, the Company's subsidiary, Avcon Industries, Inc., received approval from the Federal Aviation Administration of a Supplemental Type Certificate ("STC") (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 to the user at an appropriate installed price of $110,000 per aircraft. The Company believes that it must continue to increase spending on research and engineering development activities in order to expand the aircraft modification market. The Company believes that the increased market for modification of Learjets 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 9.3%, from $238,162 in fiscal 1995, to $260,399 in fiscal 1996. Sales to the major OEM customer increased 31.8% and sales for aircraft repair and refurbishment declined 21.6% from fiscal 1995 to fiscal 1996. Sales have remained relatively stable between years. Operating profits increased from $4,443 in fiscal 1995 to $79,545 in fiscal 1996. Management expects this business segment to continue to be stable in future years. SCADA Systems and Monitoring Services: Revenue from Monitoring Services increased from $793,930 in fiscal 1995 to $861,192 in fiscal 1996, an increase of 8.5%. During fiscal 1996, the Company was able to maintain 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 largest customer has been renewed for fiscal 1999. An operating profit of $227,028 in Monitoring Services was recorded in fiscal 1996, compared to fiscal 1995 operating profit of $156,614. 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 seen consistent increases over the past few years and the Company expects this to continue. Temporary Services: This operation provides temporary employee services for corporate clients. This segment was inactive during fiscal 1996. 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- The Company received no revenue and incurred $525,000 in general and administrative expenses, in the current fiscal year, associated with its continued efforts to explore service opportunities related to the Indian Gaming Act of 1988. Additionally, the Company amortized $145,414 and $142,751 in fiscal years 1996 and 1995, respectively, related to shares issued for services rendered to the Company. The Company has invested $1,150,000 in land, land improvements, and professional design fees related to the development of Indian Gaming facilities. Included in this investment is 160 acres of land, located adjacent to the Linn Valley Lakes resort and residential development in Linn County, Kansas. The Company believes that this tract could be developed and sold for residential and commercial use other than Indian gaming, if the gaming enterprise does not open. Additional improvements, including access roads, water and sewer services, etc. are planned for this land. After these improvements, the land may be sold in small tracts. This may allow the Company to recover the majority, if not all, of the $1,150,000 investment. -Princess Maria Casino- The Company has a management agreement with the Miami Tribe to provide management services to the Miami Tribe. The Miami Tribe requested a compact with the State of Kansas for Class III Indian full-casino Indian gaming on Indian land known as the Maria Christiana Miami Reserve No. 35 located in Miami County, Kansas, on July 9, 1992. The Miami Tribe's 1992 compact was the subject of a lawsuit filed in February 1993, in the Federal District Court by the Miami Tribe alleging the failure to negotiate a compact in good faith by the State of Kansas. This case has been dismissed. The United States District Court dismissed the Miami Tribe's failure to negotiate a compact suit against the State of Kansas as a result of the United States Supreme Court's ruling in Seminole v. State of Florida. The Supreme Court ruled that the provision of the IGRA did not allow an Indian tribe to compel a state 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 the Miami Tribe has not established jurisdiction over the Miami land in Kansas. This is 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. The Miami Tribe has 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 is 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 the newly adopted tribal amendment. On February 22, 1996, the BIA approved the Miami Tribe's constitution and the membership of the heirs. Currently, the Tribe is in the process of resubmitting 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. Therefore, even though the Company and the Tribe believe the re-submission will be in compliance with all laws and regulations, there is no assurance that the management agreement will be approved. -Stables Bingo and Off-Track Betting- Additionally, the Company has a signed Management Agreement with the Miami and Modoc Tribes. A class III Indian Gaming Compact for a joint-venture by the Miami and Modoc Tribes, both of Oklahoma, has been approved by the State of Oklahoma and by the Assistant Secretary, Indian Affairs for the U.S. Department of the Interior. The Compact was published in the Federal Register on February 6, 1996, and is therefore, deemed effective. The Compact authorizes Class III (Off-Track Betting "OTB") along with Class II (high stakes bingo) at a site within the City of Miami, Oklahoma. The Company will consult with the development of and plans to manage the joint-venture for the tribes. The proposed facility is planned to be approximately 22,000 square-feet and to be located directly south of the Modoc Tribal Headquarters building in Miami. It is currently intended the complex will contain off-track betting windows, a bingo hall, and a restaurant. The Company's Management Agreement requires the approval of the NIGC. The Management Agreement was filed in September, 1994, with the NIGC and rejected pending approval of this Compact. On January 25, 1996, the Management Agreement was resubmitted and currently is being reviewed by the NIGC. Under the Management Agreement as submitted, the Company, as manager, is to receive a 30% share of the profits and reimbursement of the development costs. Therefore, even though the Company and the Tribes believe the re- submission will be in compliance with all laws and regulations, there is no assurance that the management agreement will be approved. -Shawnee Reserve No. 206- Since 1992, the Company has maintained a business relationship with approximately seventy Indian and Non-Indian heirs (the "Owners") of the Newton McNeer Shawnee Reserve No. 206 ("Shawnee Reserve No. 206"). This relationship includes assistance with the defense of the property against adverse possession by one family member in exchange for being named the manager for any Indian gaming enterprises that may be established on the land. As a result of the Company's assistance, the Owners are in the process of becoming the undisputed beneficial owners of approximately 72 acres of the Shawnee Reserve No. 206 as ordered by the United States District Court for the District of Kansas. The Company has purchased options for an additional 17 acres contiguous to the Indian land. Shawnee Reserve No. 206 has been a part of the Shawnee Reservation in Kansas Territory since 1831 and was reserved as Indian land and not a part of the State of Kansas when Kansas became a state in 1861. Within the boundaries of Johnson County, Kansas and the Kansas City metro area, the Indian land is located on west 83rd Street approximately 25 road miles southwest from downtown Kansas City, Missouri. In addition, the Company maintains a relationship and agreement to manage the proposed establishment as a part of the Owners' desire to work with 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 federal recognition of the Cherokee Nation of Oklahoma. The Indian Owners of Shawnee Reserve No. 206 have federal Indian membership cards showing them as Cherokee-Shawnee members of the Cherokee Nation of Oklahoma. The Shawnee and the Cherokee are currently working to reaffirm the Shawnee's jurisdiction over the Indian land. 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 and that any Indian gaming will ever be established on the Shawnee Reserve or that the Company will be the Management Company. -Modoc Bingo- The Company has a management agreement with the Modoc Tribe, to construct and operate an Indian gaming facility on Modoc Reservation lands in Eastern Oklahoma. The Management Agreement was filed with the NIGC on June 7, 1994, for review and approval. No approval has yet been received by the NIGC. -Other Gaming- The Company is currently reviewing other potential Indian gaming opportunities with other tribes. These discussions are in the early stages of negotiation and there can be no assurance that these gaming opportunities will be successful. The various management agreements have not yet been approved by the various governing agencies and therefore are not filed as exhibits to the document. Selling, general and administrative (SG&A) expenses increased $330,058 (12.5%) in fiscal year 1996. These expenses were $2,961,343 or 17.1% of revenue in fiscal 1996 and $2,631,285 or 20% of revenue in fiscal 1995. SG&A expenses related to the new subsidiary, RFI, were $1,162,216 in fiscal 1996 and $608,412 in fiscal 1995. The increase in SG&A related to RFI between years is due to the increase in sales personnel. SG&A expenses related to the Company, excluding RFI, were $1,799,127 in fiscal 1996 compared to $1,988,411 in fiscal 1995. Other income (expense) expenses decreased due to the writedown of the land and building in Overton, Nebraska in fiscal 1995. This facility became idle in 1994. The Company was unable to complete the negotiated sale of the land and building therefore the Company reduced the value of the asset by $157,200 in order to record the asset at its estimated net realizable value. The Company entered into an agreement on September 13, 1995, with the Village of Overton for the sale of the building in Overton, Nebraska. The Company received a cash payment of $30,000 at closing on September 18, 1995, and may receive an additional $70,000 if the Village of Overton is either able to sell or lease the building in the future. As of year-end, the Company has not received any additional monies. There can be no assurance that the Village of Overton will be able to sell or lease the building. Liquidity and Capital Resources Borrowed funds have been used primarily for working capital. Bank debt related to the company's operating line was $382,743 at April 30, 1997, $301,434 at April 30, 1996, and $362,495 at April 30, 1995. The Company's unused line of credit at April 30, 1997 was $367,257. As of June 27, 1996, the Company's unused line of credit was $198,566. The Company's line of credit is $750,000. The interest rate on the Company's line of credit is prime plus two, as of July 29, 1997, the interest rate is 10.50%. The Company plans to continue using the promissory notes-payable, due in August 1997, to fund working capital. The Company believes the extensions will continue and does not anticipate the repayment of these notes in fiscal 1998. 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. Prior to 1991, the Company incurred significant operating losses, which resulted in reduced working capital, cash flow problems, and a net capital deficiency. Accordingly, the Company began a process of voluntarily reorganizing and financially restructuring its financial position. As a result, the Company was successful in settling substantially all past due liabilities from vendors and governmental taxing authorities, on satisfactory terms. The Company recorded income from the favorable settlement of liabilities of $234,603 in fiscal 1992, $78,842 in fiscal 1993, and $71,230 in fiscal 1995. This income relates to the write off of vendor payables, which had been accrued in prior years, at amounts greater than the actual cost of settlement. During fiscal 1991, many of these vendors accepted a portion of the debt owed, in stock, and a portion to be paid off over a three year period. During fiscal 1993, many of these same vendors forgave the remaining payments due to the significant increase in the value of the stock received, and the fact that the Company was continuing to restructure and incurring cash flow problems. During fiscal 1995, the Company wrote off the rest of the vendor payables served to prior to 1989, which were not settled by the restructuring. In fiscal 1995, the Company issued stock at fair market value for various legal, marketing and consulting services, in lieu of cash payments. During fiscal 1995, the Company issued 95,000 shares of stock, at a value $219,668, for professional services to be provided in the future. The Company did not issue shares for professional services to be provided in the future in fiscal 1996. During fiscal 1997, the Company issued stock at fair market value for various legal, marketing and consulting services, in lieu of cash payments. In fiscal 1997, the Company issued 25,000 shares of common stock at a value of $53,125 for professional services to be provided in the future. The Company acquired RFI on April 21, 1994. The Company exchanged 650,000 shares of the Company's common stock for 100% of the issued and outstanding shares of RFI. At the date of acquisition, RFI's total assets were $565,605, consisting of cash of approximately $200,000, accounts receivable of approximately $280,000, and inventory of approximately $60,000. RFI's liabilities included approximately $260,000 of vendor payables, and $115,000 of accrued payroll and payroll taxes. The Company does not expect, nor has it incurred, any substantial costs associated with integrating RFI's operations. The Company expects that the majority of RFI's operations will continue to operate as it did under previous management. The Company does plan to expand the customer base of RFI by hiring additional sales personnel in various locations. The additional costs of personnel should be more than offset by the additional contribution margin recognized. The Company hired seven (7) additional sales personnel at various locations in fiscal 1995 and fiscal 1996. The individuals who sold RF, Inc. to the Company have sought for some time to reacquire from the Company the ownership of RF, Inc. The individual filed a lawsuit against the Company seeking to rescind the sale of RF, Inc. stock and for damages. The Company and the individual reached an agreement to settle and release all claims and counterclaims effective April 30, 1997, ("Eisenbath Agreement"). In addition to the releases, under the terms of the agreement, the Company received, on June 26, 1997, 600,000 shares of the Company's common stock and certain payments over the next three years.. The Company released the individual from the terms of his employment contract and the April 24, 1994 Stock Purchase Agreement. These documents released the individual from his agreement not to compete with the Company in the food distribution industry. The Company will record a net gain (principally noncash) in the first quarter of 1998 for this transaction after consideration of $809,000 of costs associated with the claims, counter-claims and settlement. In addition the Company will recognize an additional gain as the guaranteed promissory note payments are received in cash. Although the effective date of the transaction as agreed to by both parties is April 30, 1997, the transfer of the stock and related proceeds was not completed until June 1997. The Company is planning a retail market test under its registered trade name, Valu Foods , of the products being distributed by RFI. Two or more test stores are planned in smaller communities. Capital of approximately $500,000 to finance this planned test marketing, may be required during fiscal 1998. 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 3. 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, 1997, 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 the 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 these additional funds, for the start up and construction of gaming facilities. The Company anticipates initially obtaining these funds from two sources: internally generated working capital from non-gaming operations, and the proceeds from an anticipated private placement of the Company's common stock. After a few gaming facilities become operational, gaming operations will generate additional working capital for the start up and construction of other gaming facilities. The Company expects that its start up and construction financing of gaming facilities will be replaced by other financial lenders, long term financing through debt issue, or equity issues. The Stables Indian gaming project is planned to be under construction during fiscal 1998 and is estimated to require approximately $2,800,000, to complete, from the financing sources described above. Approximately $510,000 of this requirement has been funded at April 30, 1997, approximately $310,000 is included in the other asset, Deferred Cost of Indian Gaming. The full $510,000 is recoverable from the operation of the establishment per the terms of the approved Management Agreement. Analysis of Cash Flow During 1997, the Company's cash position decreased by $489,198. A majority of the positive cash flow from operations in fiscal 1997 is due to the proceeds from the issuances convertible debentures of approximately $1,250,000. A large portion of the cash flow from financing of activities was used in the Indian gaming segment and in the completion of Multiple-use STC's in the Modifications segment. Operating Activities: Modification's customer's deposits increased approximately $1,000,000 from the advanced payment of two projects. These funds will be fully earned upon completion of the projects. The majority of the decrease in accounts receivable relates to the Food Distribution segment. The accounts receivable related to the Food Distribution segment went from approximately $1,300,000 in fiscal 1996 to $1,100,000 in fiscal 1997 due to a slower growth of product sales. The majority of the approximately $260,000 increase in contracts-in-process relates to two large jobs at the aircraft modification facility. Inventories at the Modification segment decreased approximately $200,000 while inventories related to Distribution, Avionics and Services increased $315,000, $200,000 and $200,000 respectively. The majority of the increase at Services and Avionics relates to the purchase of the Woodson Electronics, Inc. assets. Total accounts payable decreased approximately $310,000. Investing Activities: The cash used in investing activities is due to the use of approximately $400,000 related to the development of Indian gaming; approximately $815,000 in the completion of new STC's at Modifications; approximately $625,000 to purchase tooling and equipment at Modifications and Services, and approximately $1,000,000 to complete the Eisenbath Agreement. See footnote 9. Subsequent Events, page 49. Financing Activities: During fiscal year 1997, the Company received proceeds from the exercise of employee stock options of approximately $25,000, issued debentures convertible into common stock for approximately $1,250,000, and reduced a note receivable from officer in exchange for $250,000 fair market value of the Company's common stock. Changing Prices and Inflation The Company did not experience any significant pressure from inflation in 1997. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements of the Registrant are set forth on pages 32 through 52 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 Age Since and Other Directorships Clark D. Stewart 1989 President of the Company from September 1, (57) 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 (45) 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 Wendy's (59) Hamburgers of Kansas City, Inc. 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 (50) 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, 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 45 Chairman of the Board of Directors Clark D. Stewart 57 President and Chief Executive Officer Jack L. Graham 73 Vice President, Aircraft Modifications Jon C. Fischrupp 57 President of Butler National Services, Inc., a wholly-owned subsidiary of the Company Edward J. Matukewicz 49 Treasurer William A. Griffith 50 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. 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 Vice President, Aircraft Modifications. Thomas E. Woodson retired May 1, 1996. 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.). Stephanie S. Ruskey, CPA, was a senior accountant with Arthur Andersen LLP from May 1987 until December 1990. Ms. Ruskey joined the Company in December, 1990, as controller and was promoted to Vice President - Chief Financial Officer in 1991. Ms. Ruskey terminated her employment and officer positions with the company and its subsidiaries effective June 13, 1997. Marvin J. Eisenbath was President of RFI from January 1988 to April 1994, at which time the Company acquired RFI and he continued as its President. Mr. Eisenbath was the Vice President of Purchasing of Sysco Corporation from 1981 to 1987. See footnote 9. Subsequent Events, page 49. Edward J. Matukewicz was Vice President of Master Fund Company from 1987 to 1990 and Vice President of First Trust of Mid America from 1990 to 1991. Mr. Matukewicz joined the Company in May, 1991, as Treasurer. William A. Griffith was Chief Executive Officer of Southwest Medical Center (hospital) from 1981 to 1984. Mr. Griffith was a management consultant for Health Pro from 1984 to 1986 and for Diversified Health Companies from 1986 to 1989. Mr. Griffith has been President of Griffith and Associates, management consulting, since 1984. Mr. Griffith became Secretary of the Company in 1992. Note: As of April 30, 1997, Ms. Stephanie S. Ruskey and Mr. Marvin J. Eisenbath are no longer employed by the company. 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 $100,000 (determined as of the end of the last fiscal year) for the fiscal years ended April 30, 1997, 1996 and 1995: SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards Payouts Restricted Securities LTIP All Name and Other Annual Stock Underlying Pay- Other Principal Salary Bonus Compensation Awards(s) Options outs Comp Position Year ($) ($) ($) ($) (#)(1) ($) ($) Clark D. 97 219,729 --- --- --- 50,000 --- --- Stewart, 96 212,075 --- --- --- 50,000 --- --- President 95 195,590 --- --- --- 100,000 --- --- and CEO, Director Marvin J. 97 325,692 --- --- --- --- --- --- Eisenbath, 96 331,791 --- --- --- --- --- --- President, 95 307,469 --- --- --- --- --- --- R.F.,Inc. (2) Brenda 97 -- --- --- --- --- --- --- Brainard 96 -- --- --- --- --- --- --- Shadwick, 95 133,709 N/A N/A 24,999 N/A N/A N/A Indian Affairs counsel(3)
(1) Represents options granted pursuant to the Company's 1989 Nonqualified Stock Option Plan (50,000) in 1996, 1995 and 1993 Nonqualified Stock Option Plan (20,000) and 1993 Nonqualified Stock Option Plan II (950,000) in 1994. (2) Mr. Eisenbath, was appointed president of RF, Inc. on April 22, 1994. See footnote 9. Subsequent Events, page 49. (3) Ms. Shadwick, Indian Affairs counsel, employed July 5, 1994 to April 17, 1995. Ms. Shadwick was issued 8,333 shares of common stock with a value of $24,999 on June 24, 1994. Ms. Shadwick received these shares on her termination date, April 17, 1995. OPTION GRANTS, EXERCISES AND HOLDINGS The following table provides further information concerning grants of stock options pursuant to the 1995 Nonqualified Stock Option Plan during the fiscal 1997 year to the named executive officers: OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable Number of % of Total Value at Assumed Securities Options Annual Rates of Underlying Granted to Exercise Stock Price Appreciation Options Employees or Base For Option Granted in Fiscal Price Expiration Term (#) Year ($/SH) Date 5%($) 10%($) Clark D. Stewart, CEO(1) 50,000 6.5% 1.8125 10/01/2006 56,875 144,375 Marvin J. Eisenbath -0- N/A N/A N/A N/A N/A Brenda Brainard Shadwick 50,000 N/A N/A N/A N/A N/A
(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 immediately. 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 50,000 shares of Common Stock was granted on October 1, 1996 from the 1995 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
Number of Value of Securities Unexercised Underlying In-the-Money Unexercised Options at Options at FY-End Shares FY-End (#) ($)(1) Acquired on Value Exercisable/ Exercisable/ Name Exercise(#) Realized($) /Unexercisable /Unexercisable Clark D.Stewart,CEO(2) 0 0 1,170,000 / 0 9,375 / 0 Marvin J. Eisenbath N/A N/A N/A N/A Brenda Brainard Shadwick N/A N/A N/A N/A
(1) Based on the price of the Company's common stock at the close of business on Tuesday, April 30, 1997 and the exercise price of the options. 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. Stewart is the President and Chief Executive Officer of the Company and Mr. Griffith is the Secretary of the Company. During fiscal 1997, the consulting firm of Griffith & Associates was paid for business consulting services rendered to the Company in the approximate amount of $47,000. 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 1997, the Company paid consulting fees of approximately $110,000 to Mr. Logan for business consulting services. It is anticipated that Mr. Logan will continue to provide services for the Company. During the 1995 fiscal year, sales to Wendy's Hamburgers of Kansas City, Inc. ("WH of KC, Inc.") accounted for approximately 6% of the net sales of the Company ($790,000). William E. Logan, who is a director for the Company, is Vice President and Treasurer of WH of KC, Inc. Mr. Logan sold the WH of KC, Inc. restaurants as of June 3, 1994. The Company no longer provided temporary services subsequent to June 3, 1994. During fiscal 1997, the consulting firm of Butler Financial Corporation was paid for business consulting services rendered to the Company in the approximate amount of $20,000. 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 1997, the Company paid rent payments totaling approximately $30,000 to Eisenbath Properties, Inc. for office space leased by RFI. Marvin J. Eisenbath, who is president of a subsidiary of the Company, owns Eisenbath Properties, Inc. The Company has terminated this lease from Eisenbath Properties, Inc. per the April 30, 1997, Eisenbath agreement. See footnote 9. Subsequent Events, page 49. 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 June 28, 1997.
Name and Address of Amount and Nature of Beneficial Owner Beneficial Ownership (1) Percent of Class Clark D. Stewart 1546 East Spruce Road Olathe, Kansas 66061 2,058,920(2) 16.46% Marvin J. Eisenbath 1546 East Spruce Road Olathe, Kansas 66061 0 0%
(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 1,170,000 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 June 28, 1997.
Name of Beneficial Owner Beneficial Ownership(1) Percent of Class Clark D. Stewart 2,058,920(2) 16.46% Marvin J. Eisenbath 650,000 5.20% William E. Logan 310,000(3) 2.48% R. Warren Wagoner 385,000(4) 3.08% William A. Griffith 172,000(5) 1.38% All Directors and Executive 4,390,900(6) 34.77% Officers as a Group (12 persons)
(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 1,170,000 shares which may be acquired by Mr. Stewart pursuant to the exercise of stock options which are exercisable. (3) Includes 260,000 shares which may be acquired by Mr. Logan pursuant to the exercise of stock options which are exercisable. (4) Includes 285,000 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 2,579,700 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 pages 22-24. 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 125,000 shares of common stock valued at $250,000 to the Company and made cash reductions, a total of $277,265, on the note. 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 29, 1997, is $81,762. Interest was charged on the outstanding balance at the prime rate during fiscal 1997. 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 33 Consolidated Balance Sheet as of April 30, 1997 and 1996 34 Consolidated Statements of Operations for the years ended April 30, 1997, 1996 and 1995 35 Consolidated Statements of Shareholders' Equity for the years ended April 30, 1997, 1996 and 1995 36-38 Consolidated Statements of Cash Flows for the years ended April 30, 1997, 1996 and 1995 39 Notes to Consolidated Financial Statements 40-52 (2) Financial Statement Schedules: Schedule Description Page No. II. Valuation and Qualifying Accounts and 52 Reserves for the years ended April 30, 1997, 1996 and 1995 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. 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. 54 Eisenbath and the Company dated April 30, 1997. 10.21 Settlement Agreement and Release - Brenda 58 Shadwick and the Company dated May 1, 1997. 21 List of Subsidiaries 53 99 Cautionary Statement for Purpose of the "Safe * Harbor" Provisions of the Private Securities Reform Act of 1995 is incorporated by reference to Exhibit 99 of the Company's Form 10-Q for the Period ended October 31, 1996. * Incorporated by reference ** Relates to executive officer employment compensation (b) Reports On Form 8-K. None (c) Exhibits. Reference is made to Item 14(a)(3). (d) Schedules. Reference is made to Item 14(a)(2). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. July 29, 1997 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, CEO July 29, 1997 Clark D. Stewart /s/ R. Warren Wagoner Chairman of the Board July 29, 1997 R. Warren Wagoner and Director /s/ William A. Griffith Director July 29, 1997 William A. Griffith /s/ William E. Logan Director July 29, 1997 William E. Logan /s/ David B. Hayden Director July 29, 1997 David B. Hayden /s/ Edward J. Matukewicz Treasurer July 29, 1997 Edward J. Matukewicz (Principal Financial and Accounting Officer) ANNUAL REPORT ON FORM 10-K ITEM 14(a) (1) AND (2) -- LIST OF FINANCIAL STATEMENT STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND ITEM 14(d) FINANCIAL STATEMENT SCHEDULES Years Ended April 30, 1997, 1996 and 1995 BUTLER NATIONAL CORPORATION Olathe, Kansas REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Butler National Corporation: We have audited the accompanying consolidated balance sheets of Butler National Corporation (a Delaware corporation) and Subsidiaries as of April 30, 1997 and 1996 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended April 30, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1997, 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, 1997, is presented for purposes of complying with the Securities and Exchange Commission rules and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all materials respects in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Kansas City, Missouri July 29, 1997 BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS as of April 30, 1997 and 1996 ASSETS (Notes 1 and 2) 1997 1996 Current Assets: Cash $ 256,449 $ 745,647 Accounts receivable, net of allowance for doubtful accounts of $178,736 in 1997 and $110,161 in 1996 1,289,571 1,473,854 Contracts in process 1,123,673 856,536 Inventories (Note 1): Raw materials 711,762 593,994 Work in process 121,687 131,792 Finished goods 596,158 209,070 1,429,607 934,856 Prepaid expenses and other current assets 122,409 59,825 Total current assets 4,221,709 4,070,718 Supplemental type certificates (Note 1) 1,364,901 550,427 Property, Plant and Equipment (Note 1): Building 138,809 150,240 Machinery and equipment 1,108,650 589,788 Office furniture and fixtures 498,830 384,928 Leasehold improvements 58,474 53,318 Total cost 1,804,763 1,178,274 Accumulated depreciation (938,058) (856,092) 866,705 322,182 Other Assets (Note 1) Deferred costs of Indian gaming 1,539,893 1,142,023 Aircraft and aircraft parts 2,056,281 2,064,549 Deferred costs: Eisenbath Agreement (Note 9) 808,994 - Other assets 265,525 111,184 Total other assets 4,670,693 3,317,756 Total assets $11,124,008 $8,261,083 LIABILITIES AND SHAREHOLDERS' EQUITY (Note 2) 1997 1996 Current Liabilities: Bank overdraft payable (Note 1) $ 150,306 $ 248,878 Promissory notes payable (Note 2) 382,743 301,434 Current maturities of long-term debt (Notes 2) 50,683 1,511,040 Accounts payable 904,559 1,211,760 Customer Deposits 1,520,035 526,407 Accrued liabilities - Compensation and compensated absences 312,812 258,519 Other 217,898 34,026 Total current liabilities 3,539,036 4,092,064 Long-Term Debt,net of current maturities (Note 2) 1,540,718 57,057 Convertible debentures (Note 3) 1,100,000 - Settlement agreement (Note 7) 72,000 - Total liabilities 6,251,754 4,149,121 Commitments and contingencies (Notes 6 and 7) Shareholders' equity (Notes 1, 4 and 9): Preferred stock, par value $5: Authorized, 200,000 shares, all classes $100 Class A, 9.8%, cumulative if earned, liquidation and redemption value $100, issued and outstanding, 20,000 shares 100,000 100,000 Capital contributed in excess of par 1,900,000 1,900,000 Common stock, par value $.01: Authorized, 40,000,000 shares Issued and outstanding 9,524,156 shares 95,242 92,809 in 1997 and 9,280,980 in 1996, Common stock warrants 8,807 8,707 Capital contributed in excess of par 5,725,618 5,266,731 Note receivable from officer arising from stock purchase agreement (81,762) (359,027) Unearned service contracts (263,438) (276,771) Treasury stock, at cost (20,000 preferred in 1997 and 1996 (2,337,240) (2,087,240) & 175,000 and 50,000 common in 1997 and 1996) Retained deficit (274,973) (533,247) (Deficit of $11,938,813 eliminated October 31, 1992) Total shareholders' equity 4,872,254 4,111,962 Total liabilities and shareholders' equity $11,124,008 $8,261,083 The accompanying notes are an integral part of these balance sheets. BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the years ended April 30, 1997, 1996 and 1995 1997 1996 1995 Net Sales: Nonaffiliates $21,540,315 $17,388,966 $12,365,666 WH of KC - - 790,316 21,540,315 17,388,966 13,155,982 Cost of Sales 17,394,668 14,182,782 11,254,310 4,145,647 3,156,184 1,901,672 Selling, general and administrative expenses 3,381,825 2,938,544 2,631,285 Operating income (loss) 763,822 217,640 (729,613) Other income (expense): Interest expense (282,534) (119,258) (49,967) Interest revenue 37,630 17,639 32,392 Favorable settlement of liabilities - - 71,230 Revaluation of building (Note 1) - 30,000 (157,200) Settlement loss and other (Note 7) (232,869) 21,181 (61,770) Other expense (477,773) (50,438) (165,315) Income (loss) before taxes 286,049 167,202 (894,928) Provision for income taxes 120,357 22,800 - Net income (loss) $ 165,692 $ 144,402 $ (894,928) Net income (loss) per share $ 0.02 $ 0.02 $ (0.11) Shares used in per share calculation 9,411,168 9,269,432 8,043,994 The accompanying notes are an integral part of these statements. BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the years ended April 30, 1997, 1996, and 1995
Common Stock Note Capital Receivable Capital Contributed Arising Contributed in Excess of From Stock Preferred in Excess Common Par and Purchase Stock of Par Stock Warrants Note Agreement Balance, April 30, 1994 $100,000 $1,900,000 $78,885 $2,989,235 $(26,388) Note Receivable arising from stock purchase agreement (Note 8) (60,000) Reduction in note receivable arising from stock purchase agreement (Note 8) 59,384 Issuance of stock - employee agreement 83 24,916 Exercise of stock options (Note 5) 1,695 241,735 Issuance of stock - construction agreements (Note 1) 697 179,425 Unearned service contracts 950 218,738 Amortization of unearned service contracts net loss Balance, April 30, 1995 $100,000 $1,900,000 $82,310 $3,654,049 $(27,004) Balance, April 30, 1995 $100,000 $1,900,000 $82,310 $3,654,046 $(27,004) Note Receivable arising from stock purchase agreement (340,000) Reduction in note receivable arising from stock purchase agreement 7,977 Exercise of stock options (Note 5) 4,437 447,595 Issuance of stock- other 10 3,990 Issuance of stock- private offering 6,052 1,169,804 Amortization of unearned service contracts Net Income Balance, April 30, 1996 $100,000 $1,900,000 $92,809 $5,275,438 $(359,027) Balance, April 30, 1996 $100,000 $1,900,000 $92,809 $5,275,438 $(359,027) Note Receivable arising from stock purchase agreement (Note 8) (43,416) Reduction in note receivable arising from stock purchase agreement (Note 8) 320,681 Exercise of stock options (Note 5) 120 23,645 Issuance of stock- other (Note 1) 100 Issuance of stock- private offering 2,313 435,242 Amortization of unearned service 66,458 contracts Net income Other Balance, April 30, 1997 $100,000 $1,900,000 $95,242 $5,734,425 $(81,762) 73)
Unearned Treasury Treasury Retained Total Service Stock Stock Earnings Shareholders' Contracts (Preferred) (Common) (deficit) Balance,April 30,1994 (320,250) (2,000,000) (37,240) 217,279 2,901,521 Note Receivable arising from stock purchase agreement (Note 8) 60,000 Reduction in note receivable arising from stock purchase agreement (Note 8) 59,384 Issuance of stock- employee agreement (24,999) - Exercise of options (Note 5) 243,430 Issuance of stock - contruction agreements 180,122 (Note 1) Unearned service contracts (219,688) - Amortization of unearned service contracts 142,752 142,752 Net Loss (894,928) (894,928) Balance,April 30,1995 (422,185) (2,000,000) (37,240) (677,649) 2,572,281 Balance,April 30,1995 (422,185) (2,000,000) (37,240) (677,649) 2,572,281 Note receivable arising from stock purchase agreement (note 8) (340,000) Reduction in note receivable arising from stock purchase agreement (Note 8) 7,977 Acquisition of treasury stock (Note 8) (50,000) (50,000) Exercise of stock options (Note 5) 452,032 Issuance of stock - other 4,000 Issuance of stock - private offering 1,175,856 Amortization of unearned service contracts 145,414 145,414 Net Income 144,402 144,402 Balance,April 30,1996 (276,771) (2,000,000) (87,240) (533,247) 4,111,962 Balance,April 30,1996 (276,771) (2,000,000) (87,240) (533,247) 4,111,962 Note receivable arising from stock purchase agreement (Note 8) 320,681 Reduction in note receivable arising from stock purchase agreement (Note 8) (43,416) Acquisition of treasury stock (Note 8) (250,000) (250,000) Exercise of stock options (Note 5) 23,765 Issuance of stock - other (Note 1) 100 Issuance of stock - Private offering 437,555 Unearned service contracts (53,125) (53,125) Amortization of unearned service contracts 66,458 66,458 Utilization of NOL (Note 4) 120,357 120,357 Net Income 165,692 165,692 Other (27,775) (27,775) Balance,April 30,1997 (263,438) (2,000,000) (337,240) (274,973) 4,872,254
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended April 30, 1997, 1996 and 1995
1997 1996 1995 Cash flows from operating activities: Net income (loss) $ 165,692 $ 144,402 $ (894,928) Adjustments to reconcile income to net cash used in operations: Deferred income taxes 92,582 - - Depreciation 81,966 46,241 68,082 Amortization of intangible assets 52,872 - - Gain on retirement of fixed assets - (30,000) (875) Provision for uncollectible accounts 68,575 - 56,518 Provision for obsolete inventories 12,491 (1,696) (5,121) Changes in assets and liabilities: Accounts receivable 115,708 (499,348) (20,079) Contracts in process (267,137) (716,444) 11,787 Inventories (507,242) (160,241) 158,807 Prepaid expenses and other current assets (62,584) 9,474 25,403 Supplemental Type Certificates (814,474) (550,427) - Deferred Costs: Eisenbath Agreement (808,994) - - Other assets (207,212) 343,031 122,224 Accounts payable (307,201) 573,019 28,247 Customer deposits 993,628 370,738 140,669 Accrued liabilities 116,165 59,841 (349,035) Total adjustments (1,440,857) (555,812) 379,379 Cash used in operations (1,275,165) (411,410) (515,549) Cash flows from investing activities: Capital expenditures, net (626,489) (83,794) (182,845) Deferred costs of Indian Gaming (397,870) (171,880) (265,305) Aircraft and aircraft parts 8,268 (219,622) (481,362) Proceeds from short term investments - - 300,000 Cash used in investing activities (1,016,091) (475,296) (629,512) Cash flows from financing activities: Net borrowings under promissory notes 81,309 (61,061) (42,857) Proceeds from long-term debt 1,411,466 12,734 12,618 Repayments oflong-term debt and lease obligations (94,162) (63,463) (344,400) Bank overdraft payable (98,572) 136,064 112,814 Repayment of officer note 27,265 - - Amortization ofservice contracts 13,333 145,414 142,752 Debenture conversion and other 261,119 1,249,866 183,431 Stock issuance for Woodson purchase 200,000 - - Cash provided by (used in) financing activities 1,802,058 1,419,554 (78,394) Net increase (decrease) in cash (489,198) 532,848 (1,223,455) Cash, beginning of period 745,647 212,799 1,436,254 Cash, end of period 256,449 745,647 212,799 Supplemental disclosures of cash flow information: Interest paid 215,867 114,821 47,970 Income taxes paid 27,775 22,800 6,650
The accompanying notes are an integral part of these statements. BUTLER NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997 1.Significant Accounting Policies: The following is a summary of significant accounting policies: a.Consolidation Policy: The accompanying consolidated financial statements includes the accounts of Butler National Corporation (" BNC") and its wholly-owned subsidiaries, Cansas International Corporation, Butler National Corporation Consulting Engineers, Inc., Butler National Services, Inc., Butler Temporary Services, Inc., Butler National Service Corporation, Woodson Avionics, Inc., Valu Foods, Inc. and RFI, (collectively "the Company"). Cansas International Corporation and Butler National Corporation Consulting Engineers, Inc., were inactive during the years ended April 30, 1997, 1996 and 1995. All significant intercompany transactions have been eliminated in consolidation. b. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. c. Inventories: Inventories are priced at the lower of cost, determined on a first-in, first-out basis, or market. Inventories include material, labor and factory overhead required in the production of the Company's products. d.Properties and Related Depreciation: Machinery and equipment are recorded at cost and depreciated over their estimated useful lives. Depreciation is provided on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the term of the lease. The lives used for the significant items within each property classification are as follows: Life in Years Building 23 years Machinery and equipment 5 to 17 years Office furniture and fixtures 5 to 17 years Leasehold improvements 3 to 20 years Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets retired are removed from the accounts and any resulting gains or losses are reflected as income or expense. e. Indian Gaming: The Company currently is deferring costs associated with the potential start-up of Indian gaming. The realization of these assets is predicated on the ability of the Company and their Indian gaming partners to successfully open and operate the proposed casinos. Currently there is no assurance that BNC will be successful. The inability of the Company to recover these deferred costs could have a material adverse effect on the Company's business and results of operations. The Company has capitalized approximately $1,540,000 and $1,150,000 at April 30, 1997 and April 30, 1996, respectively, of costs related to the development and anticipated construction of Indian gaming facilities. In the opinion of management, these costs will be recoverable through the gaming activities or, in the event the Company is unsuccessful in establishing such operations, these costs will be recovered through the liquidation of the associated assets. These costs include the following: A prepayment of $242,500 for construction services to be rendered. This prepayment was funded with 60,000 shares of the Company's common stock, issued in the fiscal year 1994, and an additional 40,000 shares in fiscal year 1995. Payments of $87,622 for architectural and engineering services. These payments were also funded with stock issuances of 29,715 shares in fiscal year 1995. Payments of $50,000 for equipment, funded with stock issuances of 20,000 shares in fiscal 1994. Cash payments of approximately $186,000, $172,000 and $65,000 in 1997, 1996, and 1995, respectively, for architectural, engineering and construction services. Cash advances to the Tribes of $190,000, in fiscal 1995, which the Tribes used for the acquisition of land. Acquisition of land and land improvements by the Company in the amount of $203,000 in fiscal 1997. f. Other Assets: Supplemental Type Certificates ("STC's") are authorization granted by the Federal Aviation Administration for the modification of a Type Certificated aircraft. The STC authorizes the Company to build the required parts and assemblies and to perform the installations on applicable customer-owned aircraft. The Company has acquired and is currently in the process of refurbishing an aircraft at their Aircraft Modification facility. The book value of this plane is $315,000 which includes the original cost of the plane plus parts, labor and overhead incurred during the refurbishment. The plane is currently being used in the support of the FAA approval of various Learjet Supplement Type Certificates. At this time, the Company has not determined if this plane will be retained for corporate use or sold and as such continues to classify the plane as other assets. During fiscal year 1995, the Company completed the refurbishment of another aircraft and exchanged that aircraft which had been classified in other assets in the prior year, for Lear inventory parts. The book value of this aircraft was approximately $250,000. The Lear parts have been classified as other assets in the current year. During fiscal year 1996, the Company acquired a Lear 35 valued at approximately $1,500,000 which is also recorded in other assets on the Balance Sheet. This aircraft is currently being used in the support of the FAA approval of various Learjet Supplemental Type Certificates. Recovery of these costs will be obtained through future modification orders on aircraft in which the asset will be amortized against the orders. The company expects these future orders to cover the current costs. However, uncertainty exists as to the ability of the company to gain future orders. Failure to gain these orders and subsequently recover the asset costs could have a materially adverse impact on the company's financial position and operations. g.Bank Overdraft Payable: The Company's cash management program results in checks outstanding in excess of bank balances in the general disbursement account. When checks are presented to the bank for payment, cash deposits in amounts sufficient to fund the checks are made from funds provided under the terms of the Company's revolving credit notes agreement (Note 2). h.Financial Instruments: The fair values of the Company's financial agreements generally approximate their fair market values. The fair value of the convertible debentures is not determinable. i.Revenue Recognition: The Company performs aircraft modifications under fixed-price contracts. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the direct labor costs incurred compared to total estimated direct labor costs. At April 30, 1997, there were two contracts in process. The Company recognizes revenue for its distribution company on product sales during the period in which title passes to the purchaser. j.Income Per Share: Income per (common and common equivalent) share is based on the weighted average number of common shares outstanding during the year. Stock options are included as common stock equivalents in 1996, since they are dilutive. Stock options are not included in 1997 and 1995, since they are not materially dilutive. Warrants are not included in any period as they are anti-dilutive. No preferred stock dividends have been included in the income per share calculation. Convertible debentures have been excluded as they are not materially dilutive. k. i.Quasi Reorganization: After completing a three year program of restructuring the Company's operation, on October 31, 1992, by using quasi reorganization accounting, the Company was able to adjust the accumulated deficit to a zero balance thereby affording the Company a "fresh start." No assets or liabilities required adjustment in this process. The amount of accumulated deficit and capital contributed in excess of par, removed as of October 31, 1992, was $11,938,813. l.Non-Cash Transactions: During the year ended April 30, 1997, the Company issued 231,266 shares of stock valued at $446,208 less $10,966 of issue costs in various non-cash transactions. Twenty five thousand shares valued at $53,125 were issued for services to be rendered in the future, 10,000 shares valued at $21,250 were issued for other assets, (a) 100,000 shares valued at $200,000 were issued in exchange for the assets of Woodson Electronics, Inc., an agreement not to compete, and an agreement to provide consulting services by Thomas E. Woodson; 84,034 shares were issued under the exchange provisions of the convertible debenture for $150,000 in face value, and 12,232 shares valued at $21,833 were issued to pay interest on the debentures. During the year ended April 30, 1996, the Company issued 1,000 shares of stock valued at $4,000 in a non-cash transaction. Additionally, the Company acquired a Lear 35 for debt of $1,500,000. During the year ended April 30, 1995, the Company issued 173,048 shares of stock valued at $424,809 in various non-cash transactions. As discussed in Note 1 (m), the Company issued a total of 69,715 shares of stock with a value of $180,122 in fiscal year 1995, for costs related to the Indian bingo facility. As discussed in Note 1, the Company issued a total of 95,000 shares of stock with a fair value of $219,688 in exchange for current and future professional services. Additionally, 8,333 shares were issued with a value of $24,999 as payment for services per an employment agreement. m.Unearned Service Contracts: In fiscal 1997, the Company issued 25,000 shares of common stock at a value of $53,125 for professional services to be provided in the future. During fiscal 1996, the Company did not issue any stock for services to be performed in the future. As discussed in Note 1, during fiscal year 1995, the Company issued 95,000 shares of stock at fair market value, ($219,688) to various professionals in exchange for services contracted to be provided in future periods. The unearned portion of these service contracts is being amortized over the service period, (generally 12-60 months) and is reflected as a reduction in equity until such time as the services are rendered. Future amortization of unearned service contracts is as follows: Year Ending April 30, Amount 1998 77,865 1999 76,562 2000 48,542 2001 29,271 2002 29,271 2003 1,927 Total 263,438 o. 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, 1997 and 1996, consist of the following: Promissory Notes: 1997 1996 Interest at prime plus 2% $ 154,000 $ 190,000 (10.50% at April 30,1997), due August 25, 1997, collateralized by a first or second position on all assets of the Company Interest at prime plus 2% 228,743 111,434 (10.50% at April 30, 1997), due August 25, 1997, collateralized by a first or second position on all assets of the Company Total Promissory Notes $ 382,743 $ 301,434 Other Notes Payable: Note Payable for Lear 35, Interest $1,497,124 $1,466,334 at prime plus 2%, (10.50% at April 30, 1997), due January, 1999, collateralized by Aircraft Security Agreement dated November 30, 1995. Note payable for land purchase, 33,000 66,000 annual installments of $33,000.00 through January 19, 1998, non interest bearing Other Notes Payable 61,277 35,763 1,591,401 1,568,097 Less: Current maturities 50,683 1,511,040 $1,540,718 $ 57,057 Maturities of long-term debt (excluding Promissory notes) over the next five years are as follows: Year Ending April 30, Amount 1998 $50,683 1999 1,512,348 2000 11,447 2001 8,507 2002 8,416 The Company has promissory notes in which it may borrow a maximum of $750,000. The notes mature August 25, 1997. At April 30, 1997, the Company had borrowed $382,743 on the notes. The weighted average interest rates were 10.25% and 10.25% for the years ended 1997 and 1996 respectively. 3.Stock Transactions: During the year ended April 30, 1996 the Company completed private placements of its securities. The Company sold a total of 605,175 shares of common stock resulting in gross proceeds to the Company of approximately $1,375,000, and net proceeds of approximately $1,200,000, after deducting the expenses of the offering. On May 1, 1995, the Company entered into a letter of intent to acquire certain assets of Woodson Electronics, Inc. (WEI). On May 1, 1996, this transaction was completed. The Company received a portion of WEI's operating rights and assets in exchange for 80,000 shares of stock with a fair market value of $160,000. The Company also entered into a Non-Exclusive Consulting, Non-Disclosure and Non-Compete Agreement with Thomas E. Woodson, which provides for the issuance of 20,000 shares of the Company's common stock and $36,000 to be paid out over 24 months. WEI is engaged in the business of designing, manufacturing, improving, marketing, maintaining, and providing, directly and with the assistance of others, data acquisition, alarm monitoring and reporting products and services related to such products. WEI supplies the monitoring products to Butler National Services, Inc. The Company completed a private placement on June 26, 1996 in which the Company issued a 8.0% cumulative convertible debenture due June 26, 1998 in the amount of $750,000. Net proceeds of the offering were $675,000, after deducting the expenses of the offering. The debenture is convertible only to common stock at 70% of the average closing price for the five days prior to conversion, unless the average closing price is $1.78 or lower. When the average closing price is below $1.78, the conversion is at the closing price without a discount. At the due date, the end of the two year term, the balance not yet converted must be converted to common stock. The 8% interest is payable in stock or cash at the option of the Company. The Company completed a private placement on November 1, 1996 in which the Company issued a 8.0% cumulative convertible debenture due November 1, 1998, in the amount of $500,000. Net proceeds of the offering were $450,000, after deducting the expenses of the offering. The debenture is convertible only to common stock at 70% of the average closing price for the five days prior to conversion, unless the average closing price is $2.07 or lower. When the average closing price is below $2.07, the conversion is at the closing price without a discount. At the due date, the end of the two year term, the balance not yet converted must be converted to common stock. The 8% interest is payable in stock or cash at the option of the Company. 4. Income Taxes: Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provision of the enacted tax laws. The Company has net operating loss carryforwards and cumulative temporary differences which would result in the recognition of net deferred tax assets. A valuation allowance has been provided which reduces the net deferred tax asset to zero. At April 30, 1997, the Company had the following net operating loss carryforwards: Year of Expiration Amount 2002 $ 401,298 2003 77,783 2004 1,886,484 2005 1,222,565 2006 72,769 2007 - 2008 - 2009 61,772 2010 22,025 2011 - 2012 597,531 Total $ 4,342,227 The tax benefit of net operating losses generated prior to the Quasi reorganization and utilized after the reorganization are reflected as additions to capital contributed in excess of par. The deferred taxes are comprised of the following components: Current Deferred Taxes 04/30/97 04/30/96 Current Assets $ 454,080 $ 393,892 Current Liabilities (281,600) - Total Current Deferred Taxes 172,480 393,892 Noncurrent Deferred Taxes Noncurrent Assets 2,370,690 1,995,017 Noncurrent Liabilities (424,224) (149,611) Total Noncurrent Deferred Taxes 1,946,466 1,845,406 Total Deferred Taxes 2,118,946 2,239,298 Less: Valuation Allowance (2,118,946) (2,239,298) Total Deferred Taxes, Net $ 0 $ 0 The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows: 4/30/97 4/30/96 Accounts Receivable Reserve $ 71,49 $ 44,064 Inventory Reserve 320,917 315,922 Net Operating Loss 1,737,513 1,498,501 Depreciation (404,011) (149,611) Gaming 526,463 429,263 Eisenbath Agreement Costs (281,600) - Other 148,170 101,163 Net Deferred Tax Items $ 2,118,946 $ 2,239,302 A reconciliation of the provision for income taxes to the statutory federal rate is as follows: 1997 1996 1995 Statutory Federal Income Tax Rate 34.0% 34.0% 34.0% Less: Impacts of net operating losses and changes in valuation allowances - (44.9) (30.9) Nondeductible expenses 1.7 10.9 (3.1) State taxes 6.3 15.8 - Effective Tax Rate 42.0% 15.8% 0.0% 5. Stock Options and Incentive Plans: The Company has established a number of nonqualified stock option plans to provide key employees with an opportunity to acquire a proprietary interest in the Company. Options are granted under these plans at exercise prices equal to fair market value at the date of the grant, and are generally exercisable immediately and expire in 10 years. Each of the plans automatically terminate after 10 years at which time no more options may be granted but all previously granted options remain exercisable until reaching their expiration date. The Company has five stock option plans, the 1981 Qualified Plan ("1981 Plan"), the 1989 Non Qualified Plan ("1989 Plan"), the First 1993 Non Qualified Plan ("1993-I Plan"), the Second 1993 Non Qualified Plan ("1993-II Plan") and the 1995 Non Qualified Plan ("1995 Plan"). The Company accounts for these plans under Accounting Principles Board Opinion No. 25 under which no compensation cost has been recognized. Had compensation cost been recognized in accordance with Financial Accounting Standards Board Statement No. 123, Accounting for Stock Based Compensation, the Company's operating income would be unchanged for the fiscal year 1997 because the estimated option value is less than the option exercise price per share. The 1981 Plan has 100,000 shares reserved by the Company and has never been used. The other plans permit grants of nonqualified and incentive stock options. The Company has reserved 2,000,000, 500,000, 1,500,000 and 1,500,000 shares of its common stock under the 1989 Plan, 1993-I Plan, 1993-II Plan and 1995 Plan, respectively. All plans vest at the date of grant and provide that the exercise price shall be equal to the fair market value at the date of grant as determined by the Board of Directors, and the term of the options shall not exceed ten years from grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for the fiscal 1997 grants: risk-free interest rate of 6.79% and an expected option life of 10 years. The following table summarizes the Option Plans. 4/30/97 4/30/96 4/30/95 1989 Nonqualified Option Plan Beginning Balance - options outstanding 100,000 500,000 500,000 Options granted - - 100,000 Canceled/Forfeited - - - Exercised - 400,000 100,000 Ending Balance - options outstanding 100,000 100,000 500,000 Exercise Price Ranges $2.3125 $2.3125 .70 to $2.3125 Shares available for grants - - - Price range of options exercised - .70 to 1.0 .60 1993 Nonqualified Option Plan I Beginning Balance - options outstanding 295,000 333,500 394,500 Options granted - - - Canceled/Forfeited 5,000 17,000 7,000 Exercised - 21,000 54,000 Ending Balance - options outstanding 290,500 295,500 333,500 Exercise Price Ranges $2.50 to 3.00 2.50 to 3.00 2.50 to 3.00 Shares available for grants 130,500 125,500 108,500 Price range of options exercised - 2.50 to 3.00 2.50 to 3.00 1993 Nonqualified Option Plan II Beginning Balance - options 1,457,564 1,484,264 1,427,064 outstanding Options granted - - 72,700 Canceled/Forfeited 13,164 5,000 - Exercised - 21,700 15,500 Ending Balance - options 1,444,400 1,457,564 1,484,264 outstanding Exercise Price Ranges 2.3125 to 3.00 2.3125 to 3.00 2.3125 to 3.00 Shares available for grants 18,400 5,236 236 Price range of options exercised - 2.50 to 3.00 3.00 1995 Nonqualified Option Plan Beginning Balance - options outstanding 696,000 - Options granted 772,000 700,000 Canceled/Forfeited 133,000 4,000 Exercised 12,000 - Ending Balance - options outstanding 1,323,000 696,000 Exercise Price Ranges $2.00 $2.00 Shares available for grants 165,000 804,000 Price range of options exercised $2.00 - 6. Commitments: a. Lease Commitments: The Company leases space under operating leases with initial terms ranging from three years to twenty years. Minimum lease commitments under operating leases for the next five years are as follows: For the year ending April 30, 1998 $173,810 1999 118,926 2000 84,062 2001 66,000 2002 66,000 And thereafter 231,000 Total rental expense incurred for the years ended April 30, 1997, 1996 and 1995 was $185,742, $164,993 and $144,719 respectively. b.Employment Agreements: The Company has employment contracts with two officers. The first contract calls for annual compensation of $198,000 increasing in various amounts to $241,000. This contract expires April 30, 1999. The Company also issued this officer options to purchase 500,000 shares of common stock at $.1875 per share and 600,000 shares of common stock at prices ranging from $.50 per share to $1.00 per share. During 1991, the Company issued this officer additional options to purchase 800,000 shares of common stock at $.05 per share. These options expire the earliest of ten years from date of grant, one year after death occurring while employed by the Company, or three months after ceasing to be a full-time employee of the Company for any reason other than death. This officer exercised options for 600,000 shares at prices ranging from $.1875 per share to $.50 per share during fiscal 1993 and 800,000 shares at $.05 per share during fiscal 1992. This officer exercised options for 100,000 shares at $.60 per share during fiscal 1995. The Company granted an additional options to purchase 100,000 shares at $2.3125 during fiscal 1995. This officer exercised options for 400,000 shares at prices ranging from $.70 to $1.00 per share during fiscal 1996. The Company granted options to purchase 50,000 shares at $2.00 during fiscal 1996. The Company granted options to purchase 50,000 shares at $1.8125 per share during fiscal 1997. At April 30, 1997, 100,000 options remain available to exercise at 2.3125 per share which expires September 1, 1999. A second contract calls for annual compensation of $300,000 and incentive compensation based on operating income. This contract was terminated by the Eisenbath agreement effective April 30, 1997. See Note 9. 7. 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 by the Company to the individual during fiscal 1998 and fiscal 1999. The Company is involved in various lawsuits incidental to its business. Management believes the ultimate liability, if any, will not have an adverse effect on the Company's financial position or results of operations. Due to the Company's financial condition, and the need to reduce expenses, the Board of Directors approved the elimination of product liability insurance in August, 1989. Management is not aware of any claims which individually or in the aggregate exceed the annual cost of the insurance. 8. Related Party Transactions: During fiscal 1997, the Company paid consulting fees of approximately $130,000 to a board member for business consulting services. A board member of the Company is also an officer of a major customer (WH of KC) which accounted for approximately 6% of the net sales of the Company during 1995. Subsequent to June 3, 1994, the Company no longer provides temporary services to this customer. As a result, the operating revenues, expenses, and income for the temporaries segment was significantly reduced in fiscal 1995. A board member of the Company is also a principal of a firm which provides business consulting services to the Company. Total payments in 1997 under this agreement were approximately $78,000. A board member of the Company is also a principal of a firm which provides business consulting services to the Company. Total payments in 1997 under this agreement were approximately $25,000. In 1992, a loan was made to an officer to purchase 10,000 shares of the Company's stock. These shares were purchased from the Company at $.60 per share and recorded at their fair market value with the difference recorded as compensation. This loan is shown as a reduction of stockholders' equity on the financial statements. This loan was paid during fiscal 1995. In 1993, a loan was made to an officer to purchase 600,000 shares of the Company's stock. These shares were purchased with options outstanding from the 1989 Nonqualified Stock Option Plan, at prices ranging from $.1875 to $.50 per share. This loan was paid during fiscal 1995. In 1995, an additional loan was made to this officer to purchase 100,000 shares of the Company's stock. These shares were also purchased with options outstanding from the 1989 Nonqualified Stock Option Plan, at $.60 per share. In 1996, additional loans were made to the officer to purchase 400,000 shares of the Company's stock. These shares were also purchased with options outstanding from the 1989 Nonqualified Stock Option Plan, at prices ranging from $.70 to $1.00 per share. This loan is shown as a reduction of stockholders' equity on the financial statements. These loans are non-interest bearing, due on demand, and collateralized by the stock purchased with the proceeds. In fiscal 1997, the officer reduced the loan balance by $277,264 through expense reimbursement and the transfer of 125,000 shares of common stock valued at $250,000. The loan balance is currently $81,763. During fiscal 1996, an officer of the Company sold 20,000 shares of the Company stock to the Company at fair market value. These shares are now held in treasury. 9. Subsequent Events: The Company acquired RF, Inc. on April 21, 1994. The Company exchanged 650,000 shares of the Company's common stock for 100% of the issued and outstanding shares of RF, Inc.. The individuals who sold RF, Inc. to the Company have sought for some time to reacquire from the Company the ownership of RF, Inc. The Company and the individual reached an agreement to settle and release all claims and counterclaims effective April 30, 1997, ("Eisenbath Agreement"). The individual dismissed the lawsuit with prejudice. In addition to the releases, under the terms of the agreement, the Company received on June 26, 1997, 600,000 shares of the Company's common stock and certain payments over the next three years. The Company released the individual from the terms of his employment contract and the April 24, 1994 Stock Purchase Agreement. These documents released the individual from his agreement not to compete with the Company in the food distribution industry. The Company will record a net gain (principally noncash) in the first quarter of 1998 for this transaction after consideration of $809,000 of costs associated with the claims, counter-claims and settlement. In addition the Company will recognize an additional gain as the guaranteed promissory note payments are received in cash. Although the effective date of the transaction as agreed to by both parties is April 30, 1997, the transfer of the stock and related proceeds was not completed until June 1997. 10. New Accounting Standards: The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings Per Share." This standard provides a change in the calculation and reporting requirements for earnings per share (EPS) information. The standard is required for fiscal year end 1998. The Company does not anticipate that the adoption of the standard will have a material effect on the EPS calculation. 11. Industry Segmentation and Sales by Major Customer: a. Industry Segmentation: The Company's operations have been classified into six segments in 1997, 1996 and 1995. 1.Gaming - principally includes the business management services to Indian tribes in connection with the Indian Gaming Act of 1988. (Beginning in fiscal 1994). 2.Avionics - principally includes the manufacture of airborne switching units used in DC-9, DC-10, DC- 9/80, MD-80, MD-90 and the KC-10 aircraft. 3.Aircraft Modifications - principally includes the modification of business type aircraft from passenger to freighter configuration, conversion to air ambulance, addition of aerial photography capability, stability enhancing modifications for Learjets, and other modifications. 4.Monitoring Services - principally includes the monitoring of water and wastewater remote pumping stations through electronic surveillance, for municipalities and the private sector. 5.Temporary Services - provides temporary employee services for corporate clients. 6.Food Distribution Services - principally includes food distribution to the wholesale, food processing, and retailing industries.
Year ended April 30, 1997 Gaming Avionics Modifications Services Temporaries Distribution Corporate Consolidation Net Sale $ - $ 277,513 $ 2,724,217 $1,060,045 $ - $17,478,540 $ - $21,540,315 Depreciation - 34,629 31,071 6,029 - 10,236 - 81,966 Operating profit (loss)(a) 243,728) 123,571 501,984 230,738 - 470,065 (318,807) 763,822 Capital expenditures 393,474 55,778 1,213,032 117,100 - 181,750 14,260 Interest,net (244,904) Other income (232,869) Income taxes (27,775) Net Income 258,274 Identifiable assets 1,543,786 595,556 5,765,537 311,694 43,945 2,605,634 257,856 11,124,008 Year ended April 30, 1996 Net Sale - 260,399 2,531,504 861,192 - 13,685,871 - 17,338,966 Depreciation 11,429 26,009 4,606 - 4,197 - 46,241 Operating profit (loss)(a) (668,239) 79,545 356,916 227,078 1,275 809,416 (581,151) 224,840 Capital Expenditures - - 52,681 21,458 - 9,002 5,554 - Interest, net (101,619) Other income 21,181 Net Income 144,402 Identifiable assets 1,150,312 208,342 4,679,582 223,590 3,445 1,861,513 134,301 8,261,085 Year ended April 30, 1995 Net Sales - 238,162 1,845,609 793,930 790,317 9,487,964 - 13,155,982 Depreciation - 17,113 25,867 15,405 - 2,629 - 61,014 Operating profit (loss)(a) (701,678) 4,443 133,924 156,614 (59,021) 461,200 (725,094) (729,612) Capital expenditures - - 136,931 - - 3,686 - Interest, net (17,575) (17,575) Other income (147,741) Net loss (894,928) Identifiable assets 978,432 177,538 1,571,643 140,493 2,874 1,097,033 225,516 4,193,529
(a) Operating expenses not specifically identifiable are allocated based upon sales, cost of sales, square footage or other factors as considered appropriate. b. Major Customers: Sales to major customers (10% or more of consolidated sales) were as follows: 1997 1996 1995 Temporary services - - 6% Food Distribution services 15% 13% 36% Total major customers 15% 13% 42% BUTLER NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES for the years ended April 30, 1997, 1996 and 1995 Year ended April 30, 1997 Balance Additions Charged Balance at Beginning to Costs and at End Description of Year Expenses Deductions of Year Allowance for doubtful accounts 110,161 68,575 178,736 Reserve for inventory obsolescenc 62,071 12,491 74,562 Reserve for loss on note receivable 35,729 8,402 27,327 Year ended April 30, 1996 Allowance for doubtful accounts 110,161 - - 110,161 Reserve for inventory obsolescence 63,767 - 1,696 62,071 Reserve for loss on note receivable 35,729 - - 35,729 Year ended April 30, 1995 Allowance for doubtful accounts 53,643 56,518 - $ 110,161 Reserve for inventory obsolescence 68,888 - 5,121 63,767 Reserve for loss on note receivable 35,729 - - 35,729 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-10 3 SETTLEMENT AGREEMENT AND RELEASE Marvin J. Eisenbath ("Marvin"), Donna Eisenbath, MJE, Inc. ("MJE") and Eisenbath Properties (collectively, Marvin, Donna, Eisenbath Properties and MJE are referred to herein as "Eisenbath") and Butler National Corporation ("Butler") and RF, Inc. ("RFI") enter into this Settlement Agreement and Release ("Agreement") as of April 30, 1997 under the terms and conditions recited below: I.Recitations A.On or about April 21, 1994, Eisenbath and Butler entered into a Stock Purchase Agreement (the "Purchase Agreement") whereby Eisenbath agreed to transfer stock owned by Marvin in RFI to Butler in exchange for 650,000 shares of Butler Common Stock (the "Stock"). B.On or about April 21, 1994, Marvin and RFI entered into an Employment Agreement (the "Employment Agreement"). C.On February 22, 1997 Marvin filed a petition in the United States District Court, Eastern District of Missouri styled Marvin J. Eisenbath v. Butler National Corporation, and bearing Case No. 97-CV-00279 GFG (the "Action"). D.Because the parties hereto desire to avoid the uncertainties and expense of further continued litigation including the incurring of additional attorneys' fees, they have agreed to resolve this matter on the terms and conditions recited below. II.Terms of the Settlement A.Butler and RFI agree to do the following: 1.Release and discharge Eisenbath, as is more fully set forth in paragraph IV below. 2.Execute a stipulation for the dismissal of the Action against all plaintiffs with prejudice, with each party to bear its own costs, with statutory attorneys' fees specifically waived. 3.Keep the terms of this settlement confidential, except Butler may make such disclosures as required by law. 4.Release without any conditions or contingencies the Persons on the list attached hereto as Exhibit A from any non-competition agreements they have with RFI upon employment by, and only for so long as they are employed by, Fair Market, Inc. 5.Deposit for delivery by a recognized carrier to Marvin, the desk chair that previously was located in Marvin's office in the Wentzville facility. 6.Will not make any disparaging or negative comments or statements of any type or nature (especially to customers, vendors or employees) regarding Eisenbath or any of their affiliates or any officers, Directors, employees or agents of any of them. B.Eisenbath agrees to do the following: 1.Release and discharge Butler and RFI and their present and former directors, officers, agents, successors, assigns, other employees and attorneys of Butler and RFI, as is more fully set forth in paragraph IV below. 2.Execute a stipulation for the dismissal of the Action, with prejudice, with each party to bear its own costs with statutory attorneys' fees specifically waived. 3.Eisenbath agrees to keep the terms of this settlement confidential. 4.Any and all leases for the facility at 1325 Mexico Road, Wentzville, Missouri 63385 are hereby terminated and canceled. 5.Eisenbath hereby transfers free and clear of all liens, claims and encumbrances all shares of Butler stock owned by Eisenbath (which is at least 600,000 shares) and hereby delivers the certificate evidencing said shares duly endorsed for transfer to Butler with signature guaranteed. 6.Marvin agrees to pay to Butler $311,533 payable $61,333 by wire transfer on or before June 25, 1997 and delivering with this Agreement the Note attached hereto as Exhibit A duly executed by Marvin and Fair Market, Inc.. The Note will be secured by a pledge of all of the shares of MJE, Fair Market, Inc. and any substitute, additional or successor corporations or other entity formed by Marvin in the future to engage in the same business as MJE and Fair Market, Inc. Upon formation of any such entity, Marvin will promptly pledge such stock to Butler and deliver the certificates representing the shares of said corporation(s) to the 7.Will not make any disparaging or negative comments or statements of any type or nature (especially to customers, vendors or employees) regarding Butler, RFI or their affiliates or any officers, directors, employees or agents of any of them. 8.Execute the letter attached hereto as Exhibit B to Pilgrim's Pride, Edward's Pies, Remington Foods and "To Whom It May Concern". 9.Until October 31, 1997, take any and all actions reasonably requested by RFI to assist RFI in collecting RFI's accounts receivable including without limitation, making a reasonable number of phone calls to customers. 10.Will not solicit or otherwise induce any employees who are employed by Butler or RFI to leave such employment. 11.Upon the request of RFI, Marvin will use his best efforts to sell any inventory now owned by RFI. RFI will bill Fair Market, Inc. upon pickup of any inventory so sold. RFI will not bill any such purchaser. Terms of sale between RFI and Fair Market, Inc. will be COD. 12.Upon request of Butler, RFI or Valu Foods, Marvin or Fair Market, Inc. will use reasonable efforts to arrange for purchase of products through Fair Market, Inc. The purchase price for product sold by Fair Market, Inc. or Marvin to Butler, RFI or Valu Foods will be the cost of the product to Fair Market, Inc. or Marvin, as the case may be, plus a mark-up of 5% of the cost of the product. III.Acknowledgments and Agreements 1.Eisenbath specifically acknowledges that by entering into this Agreement, Butler and RFI are not admitting any liability as to any claim which they have or might have against Butler and RFI or their present and former directors, officers, employees, agents and parties affiliated or related to them, specifically including the matters raised in the Action, and further acknowledges that Butler denies that any cause for liability has arisen. 2.The parties acknowledge that this Agreement represents a negotiation of the parties hereto and that all disputes which arise out of the enforcement of this Agreement shall be governed by the laws of the State of Missouri. 3.Marvin and Donna agree that for a period of ten (10) years from and after the date hereof neither Marvin nor Donna will directly or indirectly purchase any stock or other securities of Butler. IV.Release A.In consideration of the recitations and agreements listed above but except for claims, liabilities and obligations arising hereunder, Eisenbath, jointly and severally forever releases and discharges Butler, RFI, and their affiliated and related companies, and present and former directors, officers, employees, agents, representatives, successors, assigns and attorneys from any and all claims, liabilities and obligations, known or unknown, liquidated or otherwise that they or any of them may have against any and all of them including, but not limited to, any claim o 1.All claims made under or with respect to the Stock Purchase Agreement or the Employment Agreement, including any bonuses which may be due and owing; 2.All claims made with respect to the purchase and sale of the Stock, including federal and state law violations and common law fraud; 3.Any and all claims of any type which Marvin or Donna may have by virtue of their employment with RFI, or Butler or the termination of that employment including without limitation, any claims for wrongful termination, salaries, bonuses, vacation or other amounts due and owing and any type of discrimination or harassment; 4.All amounts payable from RFI to MJE. B.In consideration of the recitations and agreements listed above but except for claims, liabilities and obligations arising hereunder, Butler and RFI and their affiliated and related companies, present and former officers, directors, agents, successors and assigns forever release and discharge Eisenbath and their affiliated and related companies and present and former directors, officers, employees, agents, representatives, successors and assigns and attorneys from any and all claims, liabilities and obligations, known or unknown, liquidated or otherwise they may h V.Miscellaneous A.Marvin and Butler will mutually agree to any press releases and notices describing this transaction provided however, any requested consent will not be unreasonably withheld or delayed especially in connection with any releases which Butler deems necessary to comply with any governmental regulations. B.This Agreement cancels, merges and supersedes all prior and contemporaneous understandings and agreements relating to the subject matter of this Agreement, written or oral, between parties hereto and contains the entire agreement of the parties hereto, and the parties hereto have no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein and therein. Specifically, neither Butler nor RFI are making any representations or warranties regardi stock rise in value. The Agreement shall not be amended, modified or supplemented in any manner whatsoever except as otherwise provide herein or in writing signed by each of the parties hereto and may not be assigned by a party without the written consent of the other parties. C.The provisions of this Agreement were negotiated by the parties hereto and said agreement shall be deemed to have been drafted by all the parties hereto, notwithstanding any presumptions at law to the contrary. D.This Agreement may be executed in any number of counterparts each of which shall be an original and taken together shall constitute one and the same instrument. E.This Agreement and all rights and obligations of the parties shall be governed, construed and interpreted under and pursuant to the laws of the State of Missouri applicable to agreements made and to be performed entirely within such State. F.Any and all notices or other writings that are required or permitted under any of the provisions of this Agreement will be in writing and will be deemed sufficiently given if delivered personally, sent by documented overnight delivery service, mailed by certified mail, or to the extent that receipt is confirmed, telecopy, telefax or other electronic transmission service, addressed to the party concerned as follows: If addressed to Eisenbath: Fair Market, Inc. 1325 Mexico Road Wentzville, MO 63385 Attention: Marvin J. Eisenbath Telecopier: With a copy to: Donald Mehan, Jr., Esq. Moline and Shostak, L.L.C. 8015 Forsyth Boulevard St. Louis, Missouri 63105 Telecopier: (314) 725-3275 If addressed to Butler or RFI: Butler National Corporation 1546 East Spruce Road Olathe, Kansas 66061 Attention: President Telecopier: (913) 780-5088 With a copy to: James P. Pryde, Esq. Bryan Cave LLP 3500 One Kansas City Place 1200 Main Street Kansas City, Missouri 64105 Telecopier: (816) 374-3300 or any other addresses of which either party will notify the other in writing as provided herein EX-10 4 SETTLEMENT AGREEMENT AND RELEASE Brenda Shadwick ("Shadwick") and Butler National Corporation ("Butler"), Avcon Industries, Inc., Woodson Avionics, Inc., R F, Inc., Butler National Service Corporation, Butler National Services Inc., Butler Temporary Services, Inc., ("the Companies") and Clark Stewart ("Stewart") enter into this Settlement Agreement and Release ("Agreement") under the terms and conditions recited below: I.Recitations A On or about June 6, 1994, Shadwick and Butler entered into an agreement whereby Shadwick agreed to perform the duties of Associate General Counsel and vice President of Governmental Affairs at Butler in Olathe, Kansas. B.The agreement provided, in part, that as part of her compensation, Shadwick would receive stock options or stock having a fair market value as of the date of issuance of Twenty-Five Thousand ($25,000.00) per year. C.On or about June 24, 1994, Butler issued restricted stock to Shadwick having a fair market value of Twenty-five Thousand ($25,000.00). D.Shadwick was employed by Butler from July 5, 1994 until April 17, 1995, when she was terminated by Butler. E.On October 17, 1995, Shadwick filed a petition in the District Court of Johnson County, Kansas styled Brenda Shadwick vs. Butler National Corporation; Avcon Industries, Inc.; Woodson Avionics, Inc.; R F., Inc.; Butler National Service Corporation; Butler National Services Inc.; Butler Temporary Services, Inc. and Clark Stewart, and bearing Case No. 96-2333-EEO. In Count I of her petition, Shadwick alleged that her termination was in breach of the employment contract. In Count II of her petition, Shadwick upon the doctrine of promissory estoppel. In Count III of her petition Shadwick alleged tortious interference with prospective business relationship. In Count W of her petition, Shadwick alleged defamation or defamation by self-publication; and in Count V of the petition Shadwick alleged violations of the Wage Payment Act., K.S.A. 44-315, et seq. Shadwick sought actual compensatory and additional statutory damages authorized under K.S.A. 44-315, et seq. and certain equitable relief, including an award of F.In response to the assertion of Shadwick's claims, Butler initially asserted a counterclaim alleging fraudulent misrepresentation which was subsequently dismissed. Butler then asserted an amended counterclaim alleging professional negligence, for which it sought damages from Shadwick. G.On June 5 1996, the court heard argument on Shadwick's motion to dismiss her claims against defendants, and on July 12, 1996, Shadwick's petition was dismissed. Butler's claim against Shadwick remains pending in Johnson County District Court. H.On July 22, 1996, Shadwick caused to be filed in the United States District Court for the District of Kansas a complaint styled Brenda Shadwick V. Butler National Corporation; Avcon Industries, Inc.; Woodson Avionics, Inc.; R F' Inc.; Butler National Service Corporation; Butler National Services Inc., Butler Temporary Services, Inc. and Clark Stewart and bearing Case No. 96-2333-EEO. In Count I of her complaint, Shadwick alleged that Butler terminated her in breach of her employment contract; in Count II I.In response to the assertion of Shadwick's claims in her federal litigation, defendants asserted a counterclaim against Shadwick alleging professional negligence and for which damages were sought. J.Since the filing of the actions, the parties have engaged in extensive written and deposition discovery in both cases, and all parties acknowledge the anticipation of further extensive discovery and trial preparation. K.Because Shadwick and Butler, Companies, and Stewart desire to avoid the uncertainties and expense of further continued litigation including the incurring of additional attorneys' fees, they have agreed to resolve this matter on the terms and conditions recited below. IITermsof the Settlement A.Butler, the Companies and Stewart agree to do the following: 1.Release and discharge Shadwick, her successors, assigns and attorneys, as is more fully set forth in paragraph IV.B. below. 2.Pay to Shadwick and to Steven Sprenger, her attorney, the sum of Fifty Thousand and No/100 Dollars ($50,000.00), with delivery of this amount by check upon execution of this Agreement by Shadwick and delivery of the executed Agreement to counsel for Butler. 3.Pay to Shadwick and to Steven Sprenger, her attorney, the additional sum of One Hundred Forty-four Thousand and No/100 Dollars ($144,000.00) payable in equal monthly installments of Six Thousand and No/100 Dollars ($6,000.00) per month for a term of twenty-four (24) months, such term to commence on the first day of April, 1997. 4.Butler and Butler Temporary Services, Inc. agree to execute the promissory note in the full amount of One Hundred Forty-four Thousand and No/100 Dollars ($144,000.00), attached to this Agreement as Exhibit "A," and to deliver the note upon execution of this Agreement by Shadwick and delivery of the executed Agreement to counsel for Butler and the Companies. 5.Butler agrees to annually provide Shadwick documentation, with a copy to her attorney Steve Sprenger, in a form of a 1099 or other form acceptable to the Internal Revenue Service, to evidence payment made to Shadwick as earned under the note and pursuant to this Agreement. 6.Deliver to Shadwick letters signed by Stewart in the form acceptable to all parties and attached to this Agreement as Exhibit "B and "C." 7.Cause the issuance of all legal opinions (based on factual certificates to be provided by Shadwick as provided below) required pursuant to and in accordance with Rule 144 of the Securities Act of 1933, to Butler's transfer agent in a form sufficient to authorize the transfer of stock delivered to Shadwick by Butler, if required. 8.Execute a stipulation for the dismissal of Shadwick's federal complaint against all defendants with prejudice, with each party to bear its own costs, with statutory attorneys' fees specifically waived. 9.Execute a stipulation for the dismissal of Butler's federal counterclaim with prejudice, with each party to bear its own costs. 10.Execute a stipulation for the dismissal of Butler's remaining state court claim with prejudice, with each party to bear its own costs. 11.Keep the terms of this settlement confidential, except Butler and the Companies may make such disclosures as required by law. 12.Butler, the Companies, their officers and employees (excluding Marvin Eisenbath), and Stewart agree to refrain from making any disparaging comments to any person or entity about Shadwick, and further agree not to make any comments which reflect negatively on her legal abilities and\or her capabilities or suitability to be involved in any aspect of Indian gaming, to any person, company or legal entity involved in Indian gaming, the National Indian Gaming Commission, the Bureau of Indian Affairs, the Modo 13.Butler and Butler Temporary Services, Inc. further agree that subject to the procedures set forth in this paragraph, any breach of the immediately preceding paragraph may accelerate their obligation to make the periodic payments described in paragraph II.A.3. above and under the Promissory Note attached hereto as Exhibit "k" a.In the event Shadwick has a good faith belief that Butler, its officers or agents, has violated the provisions of the immediately preceding paragraph, notice of such violation shall be given in writing to Butler after which Butler will have 10 days to respond in writing. b.After the 10 day response period and consideration of any response by Butler, Shadwick may elect to institute legal proceedings in the District Court of Johnson County, Kansas or the United States District Court for the District of Kansas to seek a judicial determination of the breach by Butler. Butler specifically consents to the personal and subject matter jurisdiction of the State Courts of Kansas for the purpose of this Agreement. c.Butler's obligation to make periodic payments under this Agreement and the Promissory Note attached hereto will not be suspended during the pendency of the legal proceeding initiated under this paragraph or any appeal arising therefrom. d.The prevailing party to Litigation brought under this paragraph is entitled to its reasonable attorney's fees incurred in the prosecution or defense of such litigation, as such fees may be determined by the Court. e.If Shadwick is the prevailing party under this paragraph, Butler's obligations to make any remaining payments under this Agreement and the Promissory Note are accelerated and due 10 days after entry of a final, non-appealable judgment with interest at the rate of 10% per annum from the date of final judgment until paid in B.Shadwick agrees to do the following: 1.Release and discharge Butler and the Companies, their present and former officers, agents, successors, assigns, other employees and attorneys of Butler and the Companies, as is more fully set forth in paragraph IV.A. below; 2.Release and discharge Stewart, his successors and assigns and attorneys, as is more fully set forth in paragraph IV.A. below. 3.Execute a stipulation for the dismissal of Shadwick's federal complaint, with prejudice, with each party to bear its own costs with statutory attorneys' fees specifically waived. 4.Execute a stipulation for the dismissal of Butler's federal counterclaim, with prejudice, with each party to bear its own costs. 5.Execute a stipulation for the dismissal of Butler's remaining state court claim, with prejudice, each party to bear its own costs, with statutory attorneys' fees specifically waived. 6.Deliver to Butler appropriate certificates to facilitate and effectuate the sale of Butler stock in accordance with Rule 144 of the Securities Act of 1933, if required. 7.Provide written lien waivers in a form satisfactory to Butler, the Companies and Stewart from Paul C. Sprenger, Bradley S. Russell and the firm of Wallace, Saunders, Austin, Brown and Enochs, Chartered, the firm of Peterson and Sprenger, P.C. and David M. Peterson. 8.Shadwick shall not, at anytime or in any manner, directly or indirectly, use or disclose to any party any confidential information learned or obtained by her while an employee of Butler. As used herein, the term "confidential information" means information disclosed or known by Shadwick as a consequence of her employment with Butler, and not generally known in the Indian Gaming industry, and that relates to Butler's services or knowledge, research, marketing and strategy. Shadwick further agrees to deli 9.Shadwick agrees to keep the terms of this settlement confidential, except Shadwick may make such disclosures as required by law, and may disclose the letter marked as Exhibit C to this Agreement only to malpractice insurance carriers and bar authorities as she may be required for insurance and bar admission purposes. 10.Shadwick agrees to refrain from making any disparaging comments to any person or entity about Butler, the Companies or their officers, or employees, and further agrees to refrain from making any disparaging comments about Butler, the Companies, and their officers or employees which reflects negatively upon it or them, or upon their individual or collective abilities, capabilities, or suitability to be involved in any aspect of Indian gaming., to any person or entity, including without limitation, any c 11.Shadwick further agrees that subject to the procedures set forth in this paragraph, any breach of the immediately preceding paragraph terminates the Butler's obligation to make the periodic payments described in paragraph II.A.3. above and under the Promissory Note attached hereto as Exhibit "A." a.In the event Butler has a good faith belief that Shadwick has violated the provisions of the immediately preceding paragraph, notice of such violation shall be given in writing to Shadwick after which Shadwick will have 10 days to respond in writing. b.After the 10 day response period and consideration of any response by Shadwick, Butler may elect to institute legal proceedings in the District Court of Johnson County, Kansas to seek a judicial determination of Shadwick's breach. Shadwick specifically consents to the personal and subject matter jurisdiction of the District Court of Johnson County, Kansas for the purposes of this Agreement. Nothing in this sub-paragraph is intended to limit Shadwick's right under federal law to remove any such action to c.Butler's obligations to make the periodic payments under this Agreement and the Promissory Note attached hereto to Shadwick and her counsel are suspended during the pendency of any legal proceeding or appeal arising therefrom. However, Butler will be required to continue to make those periodic payments to an interest bearing escrow account in a federally insured institution under an escrow agreement which will cause those funds to be transmitted to the prevailing party in litigation brought under this pa d.If Butler is the prevailing party under this paragraph, the obligation of Butler and Butler Temporary Services, Inc.'s to make any remaining payments under this Agreement and the Promissory Note are terminated and the Note is discharged. e.The prevailing party in litigation brought under this paragraph is entitled to its reasonable attorney's fees incurred in the prosecution or defense of such litigation, as such fees may be determined by the Court. IIIAcknowledgments 1.Shadwick specifically acknowledges that by entering into this Agreement, Butler, the Companies, and Stewart are not admitting any liability as to any claim which she has or might have against Butler, the Companies, or Stewart, their present and former officers, agents and parties affiliated or related to them, specifically including the matters raised in her federal judicial complaint, and further acknowledges that Butler, the Companies and Stewart deny that any cause for liability has arisen. 2.Butler, the Companies and Stewart specifically acknowledge that by entering into this Agreement, Shadwick is not admitting any liability as to any claim which they have or might have against Shadwick, specifically including the matters raised in their federal counterclaim and remaining state court claim, and further acknowledge that Shadwick denies that any cause for liability has arisen. 3.Shadwick specifically acknowledges and agrees that she is responsible for any and all federal, state and local taxes on the amount of the settlement proceeds earned and paid to her under the provisions of this Agreement and Note, and that any taxes and penalties or interest which may apply to that amount do not constitute a diminution of the settlement proceeds in this matter. Shadwick further acknowledges and agrees that she releases and holds harmless Butler, the Companies and Stewart for any claim for 4.The parties acknowledge that this Agreement represents a negotiation of the parties hereto and that all disputes which arise out of the enforcement of this Agreement shall be governed by the laws of the State of Kansas. 5.Butler, the Companies and Stewart represent that the balance sheet attached to this Agreement as Exhibit D is an accurate statement of the unconsolidated assets, liabilities and shareholders' equity of Butler National Corporation (without subsidiaries) as of January 31, 1997. Iv.Release A.In consideration of the recitations and agreements listed above, Shadwick forever discharges Stewart, Butler, the Companies, and their affiliated and related companies, and present and former officers, agents, successors, assigns and attorneys from any and all claims that she may have against any and all of them including, but not limited to, any claim or demand for damages or attorneys fees which she may have or hereafter on account of the acts alleged in her complaint or which could have been alleged i 1.All claims made under the employment contract; 2.All claims made under the Kansas Wage Payment Act, K.S.A. 44-315, et seq. 3.Claims under the Civil Rights Act of 1991, as amended. 4.Claims under the Reconstruction Era Civil Rights Act, 42 U.S.C. 1981, 1982, 1983 and 1985. 5.Claims under the Age Discrimination and Employment Act of 1967, as amended. 6.Claims under the Americans with Disabilities Act. 7.Claims under the Family and Medical Leave Act and any applicable state family and medical leave statute. 8.Common law claims of intentional or negligent infliction of emotional distress. 9.Common law claims of breach of express or implied contract or wrongful termination, defamation, invasion of privacy, breach of the covenant of good faith and fair dealing, wrongful discharge in violation of public policy or promissory estoppel. 10.Claims of discrimination brought under any federal, state or local statute or ordinance prohibiting discrimination of any kind or type. 11.Any and all claims of any type which Shadwick may have made by virtue of her employment by Butler or the termination of that employment, and the prosecution and defense of the litigation referenced herein and pending in Johnson County District Court and the United States District Court for the District of Kansas. B.In consideration of the recitations and agreements listed above, Stewart, Butler, the Companies, and their affiliated and related companies, present and former officers, agents, successors and assigns forever discharge Shadwick from any and all claims they may have against her arising from her employment with Butler or termination therefrom, including without limitation its claim for professional negligence and any claim or demand for damage which they may have on account of the acts alleged. -----END PRIVACY-ENHANCED MESSAGE-----