BUTLER NATIONAL CORP - Quarter Report: 2007 October (Form 10-Q)

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENT

SIX MONTHS ENDED

October 31,

2007

2006

(unaudited)

(unaudited)

REVENUES

Aircraft / Modifications

$

4,399,214

$

4,144,814

Avionics / Defense

2,601,091

1,375,654

Management / Professional Services

1,941,056

1,910,701

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

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

Net Revenues

8,941,361

7,431,169

COST OF SALES

Aircraft / Modifications

3,604,725

3,237,405

Avionics / Defense

1,294,767

981,260

Management / Professional Services

925,016

747,741

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

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

Total Cost of Sales

5,824,508

4,966,406

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

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

GROSS PROFIT

3,116,853

2,464,763

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

2,371,442

1,868,285

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

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

OPERATING INCOME

745,411

596,478

OTHER INCOME (EXPENSE)

Interest expense

(256,790)

(261,504)

Other

3,500

34,783

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

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

Other expense

(253,290)

(226,721)

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES

492,121

369,757

PROVISION FOR INCOME TAXES

(72,997)

(59,824)

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

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

NET INCOME

$

419,124

$

309,933

========

========

BASIC EARNINGS PER COMMON SHARE

$

.01

$

.01

========

========

Shares used in per share calculation

53,812,469

53,051,837

========

========

DILUTED EARNINGS PER COMMON SHARE

$

.01

$

.01

========

========

Shares used in per share calculation

53,812,469

53,146,665

========

========

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

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED

October 31,

2007

2006

(unaudited)

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net income (loss)

$

419,124

$

309,933

Adjustments to reconcile net income (loss) to net cash provided by

(used in) operations -

Depreciation

80,099

78,072

Impairment of assets

90,290

-

Supplemental type certificates amortization

113,483

-

Gain - Loss on disposal of fixed assets

70,220

-

Changes in assets and liabilities:

Accounts receivable

(141,085)

(263,629)

Contracts in process

(980,898)

(400,103)

Inventories

687,613

257,804

Prepaid expenses and other current assets

(6,264)

(302)

Accounts payable

80,646

(199,184)

Customer deposits

248,115

-

Accrued liabilities

110,111

(33,175)

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

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

Cash provided by (used in) operating activities

771,454

(250,584)

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

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

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures

(47,173)

(17,053)

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

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

Cash provided by (used in) investing activities

(47,173)

(17,053)

CASH FLOWS FROM FINANCING ACTIVITIES

Borrowings under promissory notes, net

(523,948)

44,013

Borrowings of long-term debt

2,280,696

229,406

Repayments of long-term debt

(2,204,472)

-

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

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

Cash provided by (used in) financing activities

(447,724)

273,419

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

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

NET INCREASE (DECREASE) IN CASH

276,557

5,782

CASH, beginning of period

1,789,169

925,577

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

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

CASH, end of period

$

2,065,726

$

931,359

========

========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Interest paid

$

256,790

$

261,504

Income taxes paid

72,997

39,824

The accompanying notes are an integral part of these 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, 2007. In our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the six months ended October 31, 2007 are not indicative of the results of operations that may be expected for the year ending April 30, 2008.

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

2. Advances for Indian Gaming Developments: 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 plan to 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 October 31, 2007 and April 30, 2007. 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. The assets are 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. Gaming Developments: We capitalized a total of $254,868 for the development of Kansas gaming during the six months ending October 31, 2007. In addition, we expensed approximately $418,000 for the development of gaming in Kansas.

4. Earnings Per Share: Earnings per common share are 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.

5. Research and Development: We charge to operations research and development costs. The amount charged in the six months ended October 31, 2007 and 2006 was approximately $1,373,000 and $1,034,000 respectively.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

RISK FACTORS

The information set forth below includes "forward-looking" information and is subject to Risk Factors as outlined in the Private Securities Litigation Reform Act of 1995. The Risk Factors listed under Item 1A of our Form 10-K and the Cautionary Statements, filed by us as Exhibit 99 to our Form 10-K, are incorporated herein by reference and you are specifically referred to such Risk Factors and Cautionary Statements for a discussion of factors which could affect our operations and forward-looking statements contained herein.

RESULTS OF OPERATIONS

YEAR TO DATE OCTOBER 31, 2007 COMPARED TO YEAR TO DATE OCTOBER 31, 2006

Our sales for the six months ended October 31, 2007 were $8,941,361, an increase of 20% from the six months ended October 31, 2006 with sales of $7,431,169. Our operating profit for the six months ended October 31, 2007 was $745,411, compared to $596,478 for the six months ended October 31, 2006, an increase of 25%.

Discussion of the specific changes by operation at each business segment follows:

Aircraft Modifications: Sales from Aircraft Modifications including modified aircraft increased 6.1% from $4,144,814 in the first six months of fiscal year 2007 to $4,399,214 in the current six months of fiscal 2008. The modifications segment had an operating profit of $148,865 in the six months ended October 31, 2007, compared to a profit of $224,171 in the six months ended October 31, 2006. Avcon RVSM sales increased by approximately $352,468. Revenues generated from other modification services decreased $98,068 in the six months ended October 31, 2007.

We believe we will sell and install approximately an additional 25 to 50 Lear 20 & 30 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 positively 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, increases in fuel prices and general economic downturns.

Aircraft Acquisitions and Sales: There was no activity in the six months ended October 31, 2006 or in the six months ended October 31, 2007. We acquired no aircraft during the six months ended October 31, 2007. Management expects this business segment to have increased sales in the next year. FAA required modifications to the business aircraft fleet may increase customer demand for company owned aircraft.

Avionics: Sales from Avionics increased 89%, from $1,375,654 in the six months ended October 31, 2006, to $2,601,091 in the six months ended October 31, 2007. This increase is directly related to both new sales and recertification of TSD products. Operating profits increased from a loss of $21,646 for the six months ended October 31, 2006 to a profit of $488,540 for the six months ended October 31, 2007. The increase in operating profit is related to an increase in sales of TSD products. Management expects this business segment to significantly increase in future years due to the addition of new fuel system protection devices like the TSD, GFI, and other classic aviation defense products.

Services - SCADA Systems and Monitoring Services: Revenue decreased from $1,060,728 for the six months ended October 31, 2006 to $848,412 for the six months ended October 31, 2007, a decrease of 20%. During the six months ended October 31, 2007 we maintained a relatively level volume of long-term contracts with municipalities. We had decreases in revenue due to a slow down in the rehabilitation of city lift stations. We anticipate the revenues from additional lift station rehabilitations to continue for the next few years. Revenue fluctuates due to the introduction of new products and services and the related installations of these types of products. Our contracts with our two largest customers have been renewed through fiscal 2008.


Gaming: Revenues from management services related to gaming increased 4.5% from $684,594 for the six months ended October 31, 2006 compared to $715,597 for the six months ended October 31, 2007. Sales continue to have a steady climb due to the addition of Class III casino gaming in Oklahoma.

LIQUIDITY AND CAPITAL RESOURCES

We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in fiscal 2008 and beyond.

As of October 31, 2007, we had a material commitment to purchase property in Dodge City, Kansas for approximately $1,700,000. We closed on this property November 15, 2007. Total borrowings for this acquisition are $1,376,000.

We have other material commitments for other capital expenditures related to the terms of the Indian Gaming Management Agreements should any additional casinos materialize. We will need additional funds to complete our 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.

Analysis and Discussion of Cash Flow

During the first six months of fiscal year 2008 our cash position increased by $276,557, this increase can be attributed to the following. Cash provided by operating activities improved by $771,454. Net income for the six months ending October 31, 2007 was $419,124. Customer deposits increased by $248,115. Construction projects in Junction City, Kansas used $681,839 and approximately $210,000 was capitalized towards the development of property in Dodge City, Kansas. Inventories decreased by approximately $687,000 of which approximately 80% is a reduction in the RVSM inventory. We have continued to reduce our inventory related to RVSM and Defense components.

We used net borrowings for real-estate projects under construction in Junction City, Kansas in the amount of $626,177. Our financing activities not related to Junction City, Kansas were reduced by $1,073,300 resulting in an overall net reduction in financing activities of $447,724.

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 off-the-shelf items and aircraft sales is recognized on the date of sale.

Revenue from Avionics is recognized when shipped and payment for materials are due within 30 days of invoicing. Revenue for SCADA services, Gaming Management, and other Corporate/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.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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 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 as of the end of the period covered by this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective.

PART II.
OTHER INFORMATION

Item 1

Legal Proceedings
On November 30, 2007 an Arbitrator awarded a judgment against BCS Design, Inc. in the net amount of $186,041 as a result of disputes related to the construction of an office building. We believe that part of this award will be covered by our insurance.

Item 1A.

Risk Factors
There are no material changes to the risk factors disclosed under Item 1A of our Form 10-K.

Item 2

Unregistered Shares of Equity Securities and Use of Proceeds
None

Item 3

Defaults Upon Senior Securities
None

Item 4

Submission of Matters to Vote of Security Holders
None

Item 5

Other Information
None

Item 6

Exhibits

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.

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

31.1

Certificate of Chief Executive Officer

31.2

Certificate of Chief Financial Officer

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.

32.2

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, 2007.