BUTLER NATIONAL CORP - Quarter Report: 2005 July (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

----------------------------------
FORM 10-Q
-----------------------------------

(Mark One)
X

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required)

For the quarter ended July 31, 2005

Transition Report Pursuant to Section 13 or 15(d) of the Security Exchange Act of 1934 (No Fee Required)

For the quarter ended July 31, 2005

Commission File Number 0-1678

BUTLER NATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)

Kansas
(State of Incorporation)

41-0834293
(I.R.S. Employer Identification No.)

19920 West 161st Street, Olathe, Kansas 66062
(Address of Principal Executive Office)(Zip Code)

Registrant's telephone number, including area code: (913) 780-9595

Former name, former address and former fiscal year if changed since last report:
Not Applicable

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 ____

The number of shares outstanding of the Registrant's Common Stock, $0.01 par value, as of September 14, 2005was 52,576,044 shares.

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

INDEX

PART I.

FINANCIAL INFORMATION:

PAGE NO.

Condensed Consolidated Balance Sheets - July 31, 2005 and April 30, 2005

3

Condensed Consolidated Statements of Income - Three Months ended July 31, 2005 and 2004

4

Condensed Consolidated Statements of Cash Flows - Three Months ended July 31, 2005 and 2004

5

Notes to Condensed Consolidated Financial Statements

6

Management's Discussion and Analysis Financial Condition and Results of Operations

7-10

Item 3 Quantitative & Qualitative

10

Item 4 Controls and Procedures

10

Part_II.

Other Information

11

Signatures

12

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENT

THREE MONTHS ENDED

July 31,

2005

2004

(unaudited)

(unaudited)

REVENUES

Aircraft / Modifications

$

2,604,794

$

3,088,964

Avionics / Defense

797,524

637,389

Management / Professional Services

709,848

1,445,405

--------------

--------------

Net Revenues

4,112,166

5,171,758

COST OF SALES

Aircraft / Modifications

1,562,092

2,397,290

Avionics / Defense

427,201

439,974

Management / Professional Services

256,869

1,061,474

--------------

--------------

Total Cost of Sales

2,246,162

3,898,738

--------------

--------------

GROSS PROFIT

1,866,004

1,273,020

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

1,557,143

772,577

--------------

--------------

OPERATING INCOME

308,861

500,443

OTHER INCOME (EXPENSE)

Interest expense

(93,252)

(70,158)

Interest income

-

4,014

Other

-

3,644

--------------

--------------

Other expense

215,609

(66,514)

INCOME BEFORE PROVISION FOR INCOME TAXES

215,609

433,929

PROVISION FOR INCOME TAXES

10,000

10,000

--------------

--------------

NET INCOME

$

205,609

$

423,929

========

========

BASIC EARNINGS PER COMMON SHARE

$

.01

$

.01

========

========

Shares used in per share calculation

55,576,044

39,256,436

========

========

DILUTED EARNINGS PER COMMON SHARE

$

.01

$

.01

========

========

Shares used in per share calculation

52,722,056

47,957,535

========

========

The accompanying notes are an integral part of these financial statements.

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

THREE MONTHS ENDED

July 31,

2005

2004

(unaudited)

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$

215,609

$

439,929

Adjustments to reconcile net income (loss) to net cash

provided by (used in) operations -

Depreciation

32,150

24,534

Amortization

-

-

Reserve for Indian Gaming developments

-

-

Provision for obsolete inventories

-

-

Stock issued for benefit plan

-

-

Changes in assets and liabilities -

Accounts receivable

(177,532)

(469,075)

Inventories

(931,098)

(1,088,016)

Prepaid expenses and other current assets

(30,215)

85,798

Accounts payable

14,654

314,441

Customer deposits

-

(134,985)

Accrued liabilities

(16,129)

93,861

--------------

--------------

Cash provided by (used in) operating activities

(892,561)

(749,513)

--------------

--------------

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures, net

-

(31,783)

Advances for Indian Gaming Developments, net

-

-

Payments received on Indian Gaming note receivable

-

-

Supplemental Type Certificates

-

-

--------------

--------------

Cash provided by (used in) investing activities

-

(31,783)

--------------

--------------

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from stock option exercises

-

36,500

Borrowings under promissory notes, net

1,296,709

635,194

Borrowings under long-term debt and capital lease obligations

-

-

Repayments of long-term debt and capital lease obligations

(96,066)

(112,426)

--------------

--------------

Cash provided by (used in) financing activities

1,200,643

559,268

--------------

--------------

NET INCREASE (DECREASE) IN CASH

308,083

(222,028)

CASH, beginning of period

1,066,955

1,160,914

--------------

--------------

CASH, end of period

$

1,375,038

$

938,886

========

========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Interest paid

$

93,252

$

70,158

Income taxes paid

50,000

10,000

The accompanying notes are an integral part of these financial statements.

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the annual report on Form 10-K dated April 30, 2005. In our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three months ended July 31, 2005 are not indicative of the results of operations that may be expected for the year ending April 30, 2006.

Certain reclassifications within the condensed financial statement captions have been made to maintain consistency in presentation between years.

2. Advances for Indian Gaming Development: We are advancing funds for the establishment of Indian gaming. These funds have been capitalized in accordance with Statements of Financial Accounting Standards (SFAS) 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects." Such standard requires costs associated with the acquisition, development, and construction of real estate and real estate related projects to be capitalized as part of that project.

Our advances to the tribes for gaming developments are capitalized. These advances represent costs to be reimbursed upon approval of Indian gaming in several locations. We have agreements in place which require payments of advances to be made to us upon opening of Indian gaming facilities. Once gaming facilities have gained proper approvals, we will enter into a note receivable arrangement with the Tribe to secure reimbursement of advanced funds for that particular project. Reserves have been recorded for advances for the Indian gaming development costs when we are unable to determine whether reimbursement from the tribes will occur.

We have advanced and invested a total of $4,718,991 in Indian gaming developments. We have reserves of $2,912,440, at July 31, 2005 and $2,912,440 at April 30, 2005. Based on the information available to us we believe that our advances for Indian gaming developments will be totally reimbursed as casinos are opened. Due to the fact that all of the proposed casinos are involved in legal and governmental actions whose outcome is not certain nor is there any time frame for resolution we believe it is necessary to establish reserves against the advances. The reserve amount is an estimate of the value we would receive if a Tribal casino was not opened and we were forced to liquidate the assets that we have acquired with our advances. These assets were intended to be used with Tribal casinos and consist of the purchase of land, land improvements, professional design fees and other consulting and legal costs related to the development of Indian Gaming facilities. The land purchases are located adjacent to residential developments. We believe that these tracts could be developed and sold for residential and commercial use to recover advances if the gaming enterprises do not open.

3. Earnings Per Share: Earnings per common share is based on the weighted average number of common shares outstanding during the year. Stock options have been considered in the dilutive earnings per share calculation.

4. Research and Development: We charge to operations research and development costs. The amount charged in the quarters ended July 31, 2005 and 2004 were approximately $421,524 and $328,127 respectively.

5. A fixed rate (7.75%) loan was entered into on July 11, 2005, and is collateralized by a Learjet 25 and a Learjet 35. The loan is due with interest in five (5) quarterly payments beginning October 11, 2005 and ending January 11, 2007.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

First quarter fiscal 2006 compared to first quarter fiscal 2005
Our sales for the three months ended July 31, 2005 were $4,112,166, a decrease of 20.5% from the three months ended July 31, 2004 sales of $5,171,758. Our operating profit for the three months ended July 31, 2005 was $308,861, compared to $500,443 for the three months ended July 31, 2004.

Discussion of specific operations are as follows:

Aircraft Modifications: Sales from the Aircraft Modifications business segment including modified aircraft decreased 15.7% from $3,088,964 for the three months ended July 31, 2004, to $2,604,794 for the three months ended July 31, 2005. Revenues for the Aircraft Modification for Reduced Vertical Separation Minimums (RVSM) decreased by 46%. Considerable time was spent on additions to the RVSM STC and certification of special mission STC's for modification customers. These events used capacity and reduced RVSM completions. Revenues generated from other modification services increased 105%. The modifications segment had an operating profit of $69,712 for the three months ended July 31, 2005 compared to income of $528,622 for the three months ended July 31, 2004.

Looking forward to fiscal 2006 we anticipate continued revenues relating to RVSM installation. We have projected the installation and sales of approximately 50 to 100 Lear 20 series and Falcon 20 series RVSM kits during the next two years. In addition to the RVSM sales, we expect to experience some increase in our base modification sales. As the economy grows aircraft owners may elect to update, modify, and purchase business aircraft. A shift to business aircraft ownership directly impacts our aircraft modification revenues. Although we cannot anticipate the future we must always consider the negative impact of items such as the 9-11 event, hurricane Katrina, rapid raise in fuel prices or economic downturns.

Aircraft Acquisitions and Sales: There was no activity for the three months ended July 31, 2005 or July 31, 2004. Management expects this business segment to increase in future years due to increased aircraft acquisitions, modifications and resale's. FAA required modifications to the business aircraft fleet may increase customer demand for company owned aircraft.

Avionics: Sales from the Avionics business segment increased 20.9%, from $637,389 for the three months ended July 31, 2004, to $770,435 for the period ended July 31, 2005. This increase is directly related to sales of defense products. Operating profits increased from $51,964 in the three months ended July 31, 2004 to $219,629 for the period ended July 31, 2005. Management expects this business segment to significantly increase in future years due to the addition of new fuel system protection devices like the TSD and classic aviation defense products.

Services - SCADA Systems and Monitoring Services: Revenue from Monitoring Services increased from $284,745 for the three months ended July 31, 2004 to $338,111 for the three months ended July 31, 2005, an increase of 18.7%. During the three months ended July 31, 2005, we maintained a relatively level volume of long-term contracts with municipalities. We had increased revenue due to significant hurricane activity during fiscal 2005. Revenue fluctuates due to the introduction of new products and services and the related installations of these products. Our contracts with our two largest customers have been renewed for fiscal 2006. An operating profit of $25,157 in Monitoring Services was recorded for the three months ended July 31, 2005, compared to a loss of $1,318 for the three months ended July 31, 2004.

Gaming: Revenues from management services related to gaming declined 11.5% from $290,977 for the three months ended July 31, 2004, to $257,505 for the three months ended July 31, 2005. This decrease is related to the costs of changing from Class II to Class III operations.

Corporate / Professional Services: These services include the architectural services of BCS Design, Inc., arrangements for financing, and on site contract management of establishments for Indian tribes and others. Flight and engineering services are also provided. Management consulting and professional fees were $141,332 for the three months ended July 31, 2005 and $869,684 for the three months ended July 31, 2004. Sales recorded from the development programs related to these services for pass-thru costs were zero for the three months ended July 31, 2005.

Selling, General and Administrative (SG&A): Expenses were $1,557,142, or 37% of revenues for the three months ended July 31, 2005 and $772,577, or 15% of revenue for the three months ended July 31, 2004. Business insurance in 2004 was $94,000. We experienced a substantial increase of over 124% to approximately $211,000 for the three months ended July 31, 2005. In fiscal 2005 we increased both the sales, engineering and administrative staff to support the growth of the business. This increase in staffing accounted for over $320,000 in additional salaries. The sales per employee for the three months ended ending July 31, 2005 was $46,204 compared to $69,888 for the three months ended July 31, 2004. Additional rent and hangar space accounted for approximately $20,000 of the increase in general expenses. Fuel and aircraft maintenance increased by more than $55,000 during the first quarter of this fiscal year. In an effort to increase our sales in Mexico and the United States additional travel and marketing expense accounted for approximately $50,000. Outside professional services related to new STC applications in process were approximately $210,000.

Other Income (Expense): Other expense increased from $76,513 in the three months ended July 31, 2004 to $93,252 for the three months ended July 31, 2005. This interest expense was a result of financing additional inventory and asset purchases.

We employed 89 at July 31, 2005, and 74 at July 31, 2004.

EARNINGS

Income for the three months ended July 31, 2005 was $215,609. This is comparable to income of $423,929 in the three months ended July 31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

Borrowed funds have been used primarily for working capital. Our first bank line of credit is $500,000. Our unused line of credit at July 31, 2005 was $339,838. Bank debt related to the Company's operating line was $160,162 at July 31, 2005, and $309,934 at July 31, 2004. The interest rate is prime plus two (with a floor of 7.0%). As of July 31, 2005, the interest rate was 8.6%. This note is collateralized by a first and second position on all assets of the Company.

We opened a second bank line of credit on February 10, 2004 of $1,500,000. This line of credit is used to support the additional inventory requirements of the RVSM product line. Debt relating to this line of credit at July 31, 2005 was $1,100,000. The interest rate is prime plus two (with a floor of 7.0%) As of July 31, 2005, the interest rate was 8.6%. This note is collateralized by a first and second position on all assets of the Company.

We believe both lines of credit will be extended when they are due and do not anticipate the repayment of these notes in fiscal 2006. Our first line of credit has been extended to February 2006 with no changes in the conditions of the terms. The second line of credit has been extended to September 2005 with principal payments of $200,000 per month. If the Bank were to demand repayment of all notes-payable we currently do not have enough cash to pay off the notes without materially adversely affecting the financial condition of the Company.

A note payable to a bank in the amount of $850,000 was entered into in December 2003, with interest of prime plus 2% (with a floor of 6 %). At July 31, 2005 and July 31, 2004 the balance was $830,000 and $850,000 respectively. The note is collateralized by an Aircraft and Engine Security Agreement. Until June 2005, we had made interest payments only. Thereafter the note was extended for one year with monthly principal payments of $10,000 plus interest.

A note payable to a bank in the amount of $650,000 was entered into in December 2003, with interest at prime. At April 30, 2005 and 2004 we had borrowed $650,000 and $55,000 respectively on this note. The note is collateralized by an Aircraft and Engine Security Agreement.

We have unsecured demand notes to individuals totaling $108,500. Interest ranges from 12% to 14% on these notes.

We are not in default of any of our notes as of July 31, 2005.

We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in 2006 and beyond.

We do not, as of July 31, 2005 have any material commitments for other capital expenditures other than the terms of the Indian gaming Management Agreements. Depending upon the development schedules, we will need additional funds to complete its currently planned Indian gaming opportunities. We will use current cash available as well as additional funds, for the start up and construction of gaming facilities. We anticipate initially obtaining these funds from internally generated working capital and borrowings. After a few gaming facilities become operational, gaming operations will generate additional working capital for the start up and construction of other gaming facilities. We expect that our start up and construction financing of gaming facilities will be replaced by other financial lenders, long term financing through debt issue, or equity issues.

Analysis and Discussion of Cash Flow

During the quarter our cash position increased by $308,083. The increase in the cash flow was attributed to an Aircraft loan of $1,660,000 of which $1,127,000 was used in the purchase of two (2) aircraft. RVSM inventory decreased by approximately $300,000.

The increase in inventory is expected to cover less than four months of aircraft modifications. We believe all our inventory will be realized in the normal course of business. Lead-time for the components is dictated by the market place resulting in a build up of inventory to support sales and to avoid halting production because of material shortages.

Revenue Recognition: We perform aircraft modifications under fixed-price contracts. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the direct labor costs incurred compared to total estimated direct labor costs.

Revenue for SCADA services, Gaming Management, and other Professional Services are recognized on a monthly basis as services are rendered. Payments for these services are received within 30 days of invoicing.

In regard to warranties and returns our products are special order and are not suitable for return. Our products are unique upon installation and tested prior to their release and have been accepted by the customers. In the rare event of a warranty claim, the claim is processed through the normal course of business; this may include additional charges to the customer. In our opinion any future warranty work would not be material to the financial statements.

Critical Accounting Policies:

Our accounting estimates include bad debt of the accounts receivable and amortization of the Supplemental Type Certificates (STC). Bad debt is calculated on the historical write-off of bad debt of the individual subsidiaries. In addition to the historical value, invoices are considered a bad debt if no payment has been made in the past 90 days. Based on these estimates we believe we maintain adequate reserves. Although we review these policies on quarterly basis, we do not anticipate substantial changes to these estimates in the future. Over 99% of the aircraft modifications are sold based on cash on delivery terms, and the remaining subsidiaries customer base is stable business and repeat sales. These factors are presented in the financial statements.

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.

Long-lived assets: Long-lived assets and identifiable intangibles to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is measured by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from use of the assets and their eventual disposition. We determined that as of July 31, 2005, there had been no impairment in the carrying value of long-lived assets.

Supplemental Type Certificates: Supplemental Type Certificates (STCs) are authorizations granted by the Federal Aviation Administration (FAA) for specific modification of a certain aircraft. The STC authorizes us to perform modifications, installations and assemblies on applicable customer-owned aircraft. Costs incurred to obtain STCs are capitalized and subsequently amortized against revenues being generated from aircraft modifications associated with the STC. The costs are expensed as services are rendered on each aircraft through costs of sales using the units of production method. The legal life of an STC is indefinite.

Changing Prices and Inflation

From fiscal year 2004 to fiscal year 2005 we have experienced an increase in airplane and truck operating costs of approximately 100%. This is mainly related to increases in fuel costs. We anticipate fuel costs to continue to rise in fiscal year 2006.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

FORWARD LOOKING INFORMATION

The information set forth below includes "forward-looking" information as outlined in the Private Securities Litigation Reform Act of 1995. The Cautionary Statements, filed by us as Exhibit 99 to its Form 10-K, are incorporated herein by reference and you are specifically referred to such Cautionary Statements for a discussion of factors which could affect our operations and forward-looking statements contained herein

Part I Item 3:

Quantitative and Qualitative Disclosures about Market Risk
None

Part I Item 4

Controls and Procedures
We maintain a set of disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective.

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PART II.
OTHER INFORMATION

Responses to items 1, 3, and 5 are omitted since these items are either inapplicable or the response thereto would be negative.

Item 2

Unregistered Shares of Equity Securities and Use of Proceeds
During the quarter ended July 31, 2004, we issued 370,000 shares in connection with the exercise of employee stock options granted through our Non Qualified Stock Option Plans as amended on Form S8 on February 24, 1998.

Item 4

Submission of Matters to Vote of Security Holders
None

Item 6

Exhibits and reports on Form 8-K.
(A) Exhibits.

3.1 Articles of Incorporation, as amended and restated are incorporated by reference to Exhibit 3.1 of our Form DEF 14A filed on December 26, 2001.

3.2 Bylaws, as amended, are incorporated by reference to Exhibit A of our Form DEF 14A filed on December 15, 2003.

31.1 Certificate of Chief Executive Officer

31.2 Certificate of Chief Financial Officer

32.1 Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002

32.1 Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002

99 Exhibit Number 99.

Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, are incorporated by reference to Exhibit 99 of the Form 10-K for the fiscal year ended April 30, 2005.

27.1 Financial Data Schedule (EDGAR version only). Filed herewith.

We agree to file with the Commission any agreement or instrument not filed as an exhibit upon the request of the Commission.

2. Reports on Form 8-K.
   We reported June 22, 2005 on Form 8-K under Item 8 and Item 9 that we issued a press release regarding the announcement that Avcon Industries, a wholly owned subsidiary has experienced a great deal of success in sales and delivery of Reduced Vertical Separation Minimums (RVSM) for the Learjet 20 Series airplanes in the Latin American market.
   
   We reported July 28, 2005 on Form 8-K under Item 2, Item 8 and Item 9 that we issued a press release regarding the announcement of fourth quarter and fiscal year end financial results and conference call
   

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BUTLER NATIONAL CORPORATION
(Registrant)

September 14, 2005
Date

/S/ Clark D. Stewart
Clark D. Stewart
(President and Chief Executive Officer)

September 14, 2005
Date

/S/ Angela D. Seba
Angela D. Seba
(Chief Financial Officer)