BUTLER NATIONAL CORP - Quarter Report: 2009 January (Form 10-Q)

6. Borrowings: The two promissory notes were entered into during the quarter ended July 31, 2008 were paid and are no longer reflected in our debt.

A line of credit in the amount of $1,224,285 was entered into on July 7, 2006. An additional line of credit in the amount of $1,508,000 was entered into on October 25, 2006. Both lines of credit are to be used for the BCS Design, Inc. construction projects in Junction City, Kansas. As of January 31, 2009 our borrowings are $668,691 and $761,686 respectively. These notes have been renewed bi-annually during the past 12 months.

A note was entered into for the purchase of a CNC machine at our Avcon location in the amount of $160,000.

YEAR TO DATE JANUARY 31, 2009 COMPARED TO YEAR TO DATE JANUARY 31, 2008

Our sales for the nine months ended January 31, 2009 were $13,805,448, an increase of 4.6% from the nine months ended January 31, 2008 with sales of $13,200,363. Our operating profit for the nine months ended January 31, 2009 was $1,153,812, compared to $1,187,723 for the nine months ended January 31, 2008, a decrease of 2.9%.

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

Aircraft Modifications: Sales from Aircraft Modifications including modified aircraft increased 34.9% from $6,453,348 in the first nine months of fiscal year 2008 to $8,707,767 in the current nine months of fiscal 2009. The modifications segment had an operating profit of $1,295,495 in the nine months ended January 31, 2009, compared to a profit of $743,070 in the nine months ended January 31, 2008.

During the past few years we have seen a significant increase in aircraft camera modification. Several custom engineering projects and aircraft modifications have also attributed to our increase in 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 September 11, 2001 event, increases in fuel prices, and general economic downturns.

Aircraft Acquisitions and Sales: There was no activity in the nine months ended January 31, 2008 or in the nine months ended January 31, 2009. 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 decreased 50%, from $3,774,502 in the nine months ended January 31, 2008, to $1,891,454 in the nine months ended January 31, 2008. Operating profits decreased from $1,097,930 for the nine months ended January 31, 2008 to $52,827 for the nine months ended January 31, 2009. The decrease in operating profit is directly related to the significant decreases in sales, material obsolescence, and rework labor costs. Due to changes in the current global economy we are unable to accurately forecast future revenue for the defense product lines. Our current backlog is approximately $1,600,000.

Services - SCADA Systems and Monitoring Services: Revenue increased from $1,175,662 for the nine months ended January 31, 2008 to $1,376,970 for the nine months ended January 31, 2009, an increase of 17%. During the nine months ended January 31, 2009 we maintained a relatively level volume of long-term contracts with municipalities. 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 2009.


Gaming: Revenues from management services related to gaming decreased 10.6% from $1,039,439 for the nine months ended January 31, 2008 compared to $929,441 for the nine months ended January 31, 2009. Sales continue to remain relatively stable due to the addition of Class III casino gaming in Oklahoma.

Corporate / Professional Services: These services include the architectural services of BCS Design, Inc., arrangements for financing, on site contract management of gaming establishments, flight, and engineering services. Management consulting and professional fees were $332,796 for the nine months ended January 31, 2009 and $418,701 for the nine months ended January 31, 2008, a decrease of 20.5%. Sales related to construction projects were $567,020 for the nine months ending January 31, 2009 and $331,000 for the nine months ending January 31, 2008.

Selling, General and Administrative (SG&A): Expenses were $3,006,539, 21.8% of revenues, for the nine months ended January 31, 2009 compared to 25.5% of revenues for the nine months ending January 31, 2008. Business overhead expenses were decreased overall due to the Kansas entertainment endeavors. During the nine months ended January 31, 2009 we expensed approximately $121,000 for the development of Gaming in Kansas compared to approximately $534,000 for the nine months ended January 31, 2008.

Avionics: Sales were $585,488 for the three months ended January 31, 2009 compared to $1,173,411 in the comparable period of the preceding year, a decrease of 50%. Operating profit for the three months ended January 31, 2009 was $139,201 compared to $237,889 for the three months ended January 31, 2008. The decrease in operating profit is directly related to the significant decreases in sales, material obsolescence, and rework labor costs. Due to changes in the current global economy we are unable to accurately forecast future revenue for the defense product lines. Our current backlog is $1,600,000.

Services - SCADA Systems and Monitoring Services: Revenue increased from $327,250 for the three months ended January 31, 2008 to $436,902 for the three months ended January 31, 2009, an increase of 33.5%. During the three months ended January 31, 2009 we maintained a relatively level volume of long-term contracts with municipalities. Revenue fluctuates due to the introduction of new products and services and the related installations of these products. Our contract with one of our largest customers has been renewed through fiscal 2009. We had an operating profit of $64,371 in Monitoring Services for the three months ended January 31, 2009, compared to $50,339 for the three months ended January 31, 2008.

Gaming: Revenues from management services related to gaming decreased for the three months ended January 31, 2009. We expect fluctuations in revenues due to economic conditions and additional competition.

Corporate / Professional Services: These services include the architectural services of BCS Design, Inc., arrangements for financing, and on site contract management of gaming establishments and engineering services. Flight and engineering services are also provided. Management consulting and professional fees were approximately $115,000 for the three months ended January 31, 2009 and $210,000 for the three months ended January 31, 2008, a decrease of 45%. Sales related to construction projects were approximately $135,000 for the quarter ending January 31, 2009 and $163,000 for the quarter ended January 31, 2009.

Other Income (Expense): Interest expense decreased from $193,859 in the three months ended January 31, 2008 to $118,563 for the three months ended January 31, 2009. Corporate tax expense increased by approximately $55,000 in the three months ended January 31, 2009.

Earnings: Our net income for the prior three months period ended January 31, 2008 was $193,040. Our net income for the current three months ended January 31, 2009 was $277,618.

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 2009 and beyond.

Other than obligations related to the potential management of a gaming facility in Dodge City, Kansas and the purchase of the JET product line we do not, as of January 31, 2009, have any material commitments for other capital expenditures other than the terms of the Indian Management Agreements should any additional casinos be authorized. 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. During the quarter ended January 31, 2009 two short term promissory notes were paid in full.

Analysis and Discussion of Cash Flow

During the first nine months of fiscal year 2009 our cash position decreased by $1,839,500 and can be attributed to the following. Cash provided by operation activities was $52,317. During the first nine months of fiscal 2009 we reported net income of $549,801. Other cash provided by operating activities included an increase in accounts receivable of $242,195 and a decrease in customer deposits of $671,509. Inventory and prepaid gaming expenses increased by approximately $530,000, while depreciation and STC amortization contributed approximately $258,000. Accounts payable and accrued liabilities resulted in a net contribution of approximately $203,000.

Cash used in financing activities were a net of $1,198,760. We increased our line of credit by $223,810 and reduced all other borrowings by $1,371,283. Of the reduction in borrowing approximately $548,000 can be attributed to the sale of homes in Junction City.

Critical Accounting Policies

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 is 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 usually 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.

Allowance for Doubtful Accounts: Allowance for doubtful accounts are calculated on the historical write-off of doubtful accounts of the individual subsidiaries. Invoices are generally considered a doubtful account if no payment has been made in the past 90 days. We review these policies on a quarterly basis, and based on these reviews, we believe we maintain adequate reserves.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) 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. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements.

Impairment of Goodwill, Other Intangible Assets and Long-lived Assets: We comply with the provisions of Statement of Financial Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), which requires that we evaluate our goodwill and other assets for impairment at least annually or whenever events or circumstances indicate the carrying value of that asset 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 the use of the assets and their eventual disposition. We determined that as of April 30, 2008 an impairment of $302,537 was necessary.

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. We believe we have enough future sales to fully amortize our STC development costs.

Advances for Gaming Developments: We are advancing funds for the establishment of 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 represent costs to be reimbursed upon approval of gaming in several locations. We have agreements in place which require payments to be made to us for the respective projects 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.

We have advanced and invested a total of $5,153,174 at January 31, 2009 and $5,153,174 at April 30, 2008 in gaming developments. We have reserves of $3,346,623, at January 31, 2009 and $3,346,623 at April 30, 2008. We believe that our advances for gaming developments will be totally reimbursed as casinos are opened. We believe it is necessary to establish reserves against the advances because 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. The net amount is an estimate of the value we would receive if a 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 casinos and consist of the purchase of land and land improvements related to the development of Gaming facilities. We believe that these tracts could be developed and sold for residential and commercial use to recover our advances if the gaming enterprises do not open.

In fiscal year 2008 we added a reserve of approximately $434,000 for the proposed Dodge City gaming developments. We determine annually the amount of any increase in reserves based on our determination of the fair value of assets acquired by our advances for gaming developments.

Changing Prices and Inflation

We did experience some pressure from inflation in fiscal 2009. These include increases in airplane travel, fuel, material, and transportation costs. This additional cost may not be transferable to our customers resulting in lower income. We anticipate long-term fuel costs and possibly interest rates to rise in fiscal 2009 and 2010.

Legal Proceedings
On May 12, 2008, Butler National Corporation and its wholly-owned subsidiary Butler National, Inc., filed a Complaint against General Electric subsidiaries GE Infrastructure, Inc. and GE-Aviation Division formerly known as GE Aircraft Engines, Best Jet Engines, Inc., Global Turbine Support, L.L.C. and others in the United States District Court for the Eastern District of Texas related to the design and parts for the jet engines that were overhauled for a company airplane and are not working properly.   The Companies have pled damages in excess of one million dollars.  The company is not able to reliably predict the outcome of the litigation at this time.

Avcon Industries, Inc, a wholly-owned subsidiary of Butler National Corporation was served with a lawsuit by two plaintiffs who have descendants who allegedly died in an airplane. The Complaint alleges that Avcon is in the failed to perform maintenance, failed to warn, and failed to remedy defects in the airplane. The plaintiffs alleged an amount in controversy exceeding $75,000. Avcon denies the allegations and is aggressively defending against the allegations.

Submission of Matters to Vote of Security Holders.
(a)   On February 24, 2009 Butler National Corporation held its Annual Meeting of Shareholders.
 
(b)   The following director was elected for a three-year term with the indicated number of votes set forth below:   

David B. Hayden: For: 44,190,699 Against: 447,649 Abstain: 96,986 

The continuing directors, who were not up for election at the Annual Meeting of Shareholders, are Clark D. Stewart and R. Warren Wagoner.

(c)   The proposal for the ratification of the appointment of Weaver & Martin, LLC as Independent Auditors for the fiscal year ending April 30, 2009 was voted on and approved at the meeting by the following vote: For: 43,294,139 Against: 1,318,396 Abstain: 40,644