SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the
X Securities Exchange Act of 1934
For the quarter ended January 31, 1998
Transition Report Pursuant to Section 13 or 15 (d) of the
Security Exchange Act of 1934
For the quarter ended January 31, 1998
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
Former Name, former address and former fiscal year if changed since last
report: Not Applicable.
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 January 31, 1998, was 9,504,470 shares.
<PAGE>
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION:
Page No.
Consolidated Balance Sheets - January 31, 1998
and April 30, 1997............................ 3
Consolidated Statements of Income - Three
Months ended January 31, 1998 and 1997........ 4
Consolidated Statements of Income - Nine
Months ended January 31, 1998 and 1997........ 5
Consolidated Statements of Cash Flows - Nine
Months ended January 31, 1998 and 1997........ 6
Notes to Consolidated Financial Statements....... 7-8
Management's Discussion and Analysis
Financial Condition and Results of Operations. 9-13
PART II.
OTHER INFORMATION................................ 14-15
SIGNATURES....................................... 16
<PAGE>
<TABLE>
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS 01/31/98 4/30/97
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 261,417 $ 256,449
Accounts receivable, net of allowance
for doubtful accounts of $360,709 at
January 31, and $178,736 at
April 30, 1997 964,942 1,289,571
Note receivable - current 83,400 -
Contracts in process 261,000 1,123,673
Inventories:
Raw materials 1,088,234 711,762
Work in process 124,785 121,687
Finished goods 830,735 596,158
-------------- --------------
2,043,754 1,429,607
Prepaid expenses and other assets 131,320 122,409
-------------- --------------
Total current assets 3,745,833 4,221,709
Note receivable 125,100 -
Supplemental Type Certificates 1,302,101 1,364,901
Property, Plant and Equipment:
Building 150,240 138,809
Machinery and equipment 1,158,745 1,108,650
Office furniture and fixtures 543,307 498,830
Leasehold improvements 94,423 58,474
-------------- --------------
Total cost 1,946,715 1,804,763
Accumulated depreciation (1,084,816) (938,058)
--------------- ---------------
861,899 866,705
Other Assets (Note 1):
Deferred costs of Indian Gaming 3,081,848 1,539,893
Aircraft and aircraft parts 2,056,281 2,056,281
Deferred costs: Eisenbath Agreement - 808,994
Other assets 269,813 265,525
-------------- --------------
Total Other Assets 5,407,942 4,670,693
Total assets $11,442,875 $11,124,008
========= ========
The accompanying notes are an integral part of these balance sheets.
LIABILITIES AND SHAREHOLDERS' EQUITY 1/31/98 4/30/97
(unaudited)
Current Liabilities:
Bank overdraft payable $ - $ 150,306
Promissory notes payable 1,412,386 382,743
Current maturities of long-term debt 5,668 50,683
Accounts payable 734,688 904,559
Customer Deposits 335,735 1,520,035
Accrued liabilities -
Compensation and compensated
absences 117,402 312,812
Other 280,671 217,898
-------------- --------------
Total current liabilities 2,886,550 3,539,036
Long-Term Debt, net of current maturities 1,491,242 1,540,718
Convertible debenture 750,000 1,100,000
Settlement agreement 61,150 72,000
-------------- --------------
Total liabilities 5,188,942 6,251,754
Commitments and contingencies:
Shareholders' equity:
Preferred stock, par value $5:
Authorized, 200,000 shares, all classes
$1,000 Class B, 6%, cumulative if earned,
liquidation and redemption value $1,000,
issued and outstanding, 1,500 shares 7,500 100,000
Capital contributed in excess of par 1,082,459 1,900,000
Common stock, par value $.01:
Authorized, 40,000,000 shares
Issued 9,524,156 April 30, 1997 &
10,277,470 at January 31, 1998, 102,775 95,242
Common stock warrants 8,807 8,707
Capital contributed in excess of par 6,319,776 5,725,618
Note receivable arising from stock
purchase agreement (63,012) (81,762)
Unearned service contracts (187,761) (263,438)
Treasury stock, at cost (common
775,000 at 1/31/98 (1,537,240) (2,337,240)
and 175,000 at 4/30/97)
Retained earnings 520,629 (274,973)
(Deficit of $11,938,813 eliminated
October 31, 1992)
-------------- --------------
Total shareholders' equity 6,253,933 4,872,254
--------------- ---------------
Total liabilities and
shareholders' equity $11,442,875 $11,124,008
========= ========
</TABLE>
<PAGE>
<TABLE>
BUTLER NATIONAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
THREE MONTHS ENDED
January 31,
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Net sales $2,269,607 $4,946,796
Cost of sales 1,693,132 4,107,262
---------------- ----------------
Gross profit 576,475 839,534
Selling, general and
administrative expenses 439,861 1,199,889
---------------- ----------------
Operating income 136,614 (360,355)
Other income (expense):
Interest expense (72,747) (66,766)
Interest income 794 7,357
Net gain - Eisenbath Agreement - -
Other 61,061 (11,722)
---------------- ----------------
Other income (10,892) (71,131)
---------------- ----------------
Income before taxes 125,722 (431,486)
Provision for income tax 52,803 -
---------------- ----------------
Net income $ 72,919 $ (431,486)
========= ========
Net income per share $ .01 $ (0.05)
========= ========
Shares used in per share
calculation 10,329,192 9,495,631
========= ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED
January 31,
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Net sales $7,449,966 $16,371,584
Cost of sales 5,124,159 13,473,798
---------------- ----------------
Gross profit 2,325,807 2,897,786
Selling, general and
administrative expenses 1,852,557 3,071,922
---------------- ----------------
Operating income 473,250 (174,136)
Other income (expense):
Interest expense (199,853) (189,863)
Interest income 3,230 27,631
Net gain - Eisenbath Agreement - -
Other 518,976 (25,746)
---------------- ----------------
Other income 322,353 (187,978)
---------------- ----------------
Income before taxes 795,603 (362,114)
Provision for income tax 334,153 -
---------------- ----------------
Net income $ 461,450 $ (362,114)
======== =========
Net income per share $ .05 $ (0.04)
========= =========
Shares used in per share
calculation 10,329,192 9,441,311
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended January 31,
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 461,449 $ (362,114)
Adjustments to reconcile income to
net cash used in operations:
Deferred income taxes 334,153 -
Depreciation 146,758 63,743
Application of Supplemental Type
Certificates 198,478 -
Provision for uncollectible accounts 181,971 -
Provision for obsolete inventories 15,940 -
Changes in assets and liabilities:
Accounts receivable 142,656 (371,518)
Contracts in process 862,673 (59,138)
Inventories (Increase) (630,087) (553,729)
Supplemental Type Certificates
(Increase) (135,678) -
Prepaid expenses and other current
assets (Increase) (8,911) (92,457)
Eisenbath Note 41,700 -
Other assets (4,288) (608,873)
Accounts payable (decrease) (169,871) (95,588)
Customer deposits (decrease) (1,184,300) 175,683
Accrued liabilities (decrease) (89,486) (120,321)
Settlement agreement (decrease) (54,000) -
----------------- ----------------
Total adjustments (352,292) (1,662,198)
------------------ ----------------
Cash provided by (used in) operations 109,157 (2,024,312)
----------------- ----------------
Cash flows from investing activities:
Capital expenditures, net (141,951) (71,905)
Deferred costs of Indian Gaming (1,541,955) -
----------------- ----------------
Cash provided by (used in)
investing activities (1,683,906) (71,905)
----------------- ----------------
Cash flows from financing
activities:
Net borrowing under promissory
notes 1,029,643 171,900
Proceeds from increase in
line-of-credit - 250,000
Retirement of convertible debentures (350,000) -
Repayments of long-term debt and
lease obligations (94,491) (98,596)
Proceeds from borrowings of debt - 100,000
Bank overdraft payable (150,306) (147,139)
Amortization of service contracts 75,677 56,788
Debenture conversion and other common
stock issues 620,441 1,324,582
Class B preferred issues 1,089,959 -
Note receivable & redemption of
common stock - Eisenbath Agreement (641,206) -
----------------- -----------------
Cash provided by (used in)
financing activities 1,579,717 1,657,535
----------------- -----------------
Net increase (decrease) in
cash (4,968) (438,682)
Cash, beginning of period 256,449 745,647
---------------- -----------------
Cash, end of period $ 261,417 $ 306,965
================ =================
Supplemental disclosures of cash
flow information:
Interest paid $ 199,853 $ 157,928
Income taxes 10,000 22,430
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
BUTLER NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited 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. In the
opinion of the management of the Company, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the three months and nine months ended
January 31, 1998 are not indicative of the results of operations that may be
expected for the year ending April 30, 1998.
For further information, refer to the Consolidated Financial Statements
and Footnotes included in the Registrant's Annual Report on Form 10-K for the
year ended April 30, 1997.
2. On June 26, 1996, the Company completed a private placement in which
the Company issued a 8.0% cumulative convertible debenture due June 26, 1998
in the amount of $750,000. Interest to be paid at time of conversion either
in cash or kind at the option of the Company. Net proceeds of the offering
were $675,000, after deducting the expenses of the offering. The proceeds of
the offering was utilized for relocation of the Avionics segment and
additional aircraft product development.
3. The Company has capitalized approximately $3,081,848 and $1,539,893 at
January 31, 1998 and April 30, 1997, respectively, of costs related to the
anticipated construction of three Indian gaming facilities. These costs are
included in other assets in the accompanying balance sheet. 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. These payments were funded with
stock issuances of 20,000 shares in fiscal year 1994.
Cash payments of approximately $82,000, $172,000, $65,000 and $57,000 in
1997, 1996, 1995, and 1994, 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 by the Company in the amount of $82,000 in fiscal year
1997 and $225,000 in fiscal 1994.
Advances to the Indian Tribes for construction costs under an approved
Management Contract during fiscal 1998 of $1,541,955.
4. 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 Agreement include payments by the Company to the individual during
fiscal 1998 and fiscal 1999.
5. On May 1, 1996, the Company acquired certain assets of Woodson
Electronics, Inc. (WEI). 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. During the first
quarter of fiscal 1997, the Company relocated its Woodson Avionics business
segment, along with the newly acquired operating rights and assets of WEI to
Phoenix, Arizona.
<PAGE>
6. 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. The shares were purchased at prices ranging from $.70 to $1.00 per
share. The largest aggregate amount of indebtedness outstanding was $367,000
during fiscal 1996. The amount outstanding at October 31, 1996, was
$338,634. Interest is charged at the applicable federal rate and the loan is
being amortized over five years. In fiscal 1997, the officer reduced the loan
balance by $277,264 through expense reimbursement and the loan of 125,000
shares of common stock valued at $250,000. The loan balance is currently
$63,012.
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 the treasury.
7. 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.
8. Income per common and common equivalent share are based on the weighted
average number of common shares outstanding during the quarters ended January
31, 1998 and 1997. Stock options are included in 1998 and 1997 as common
stock equivalents to the extent that they are dilutive. The Convertible
debenture is included in fiscal 1997 and fiscal 1998 as a common stock
equivalent since the debenture is dilutive. Shares used in the per share
computations are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
January 31, January 31,
1998 1997 1998 1997
<C> <C>
Common shares outstanding
beginning of period 9,739,160 9,400,412 9,524,156 9,280,890
Cumulative increase in weighted
average due to Common Stock
Equivalent net of treasury stock 412,449 - 389,627 -
Cumulative increase in weighted
average due to Convertible
Debenture 173,342 95,219 411,168 31,740
Cumulative increase in weighted
average due to issues per
acquisition and consulting
agreements 4,241 - 4,241 121,830
Cumulative increase in weighted
average due to issues per
Nonqualified Stock Option Plans - - - 6,851
----------- ----------- ---------- -----------
Weighted average shares,
end of period 10,329,192 9,495,631 10,329,192 9,441,311
</TABLE>
9. 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 recorded a net gain (principally noncash) during the first quarter
of 1998 per the terms of the April 30, 1997, agreement. 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 fully completed
until June 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview: Consolidated sales were $7,449,966 for the nine months ended January
31, 1998, compared to $16,371,584 for the nine months ended January 31, 1997,
a decrease of 55%. Sales for the third fiscal quarter were $2,269,606
compared to $4,946,796 for the three months ended January 31, 1997. Sales
for the nine month period increased in the Avionics segment (100%), the
Aircraft Modifications segment (41%) and the Monitoring Services segments
(14%). Sales decreased in the Food Distribution segment (73%).
The Company recorded a net income of $461,449 for the first nine months of
fiscal 1998 compared to a loss of $362,114 in the same period of fiscal 1997.
Income was $72,919 in the current quarter compared to a loss of $431,486 in
the comparable period of fiscal 1997.
Aircraft Modifications (Avcon Industries, Inc.): Sales at Avcon Industries,
Inc. increased $726,224 (41%) from $1,765,320 in the first nine months of the
prior year to $2,491,544 in the first nine months ending January 31, 1998.
Gross profit increased from $510,859 in the nine months ending January 31,
1997 to $1,055,075 in the nine months ending January 31, 1998. Third quarter
fiscal 1998 sales were $887,145 compared to $725,551 in fiscal 1997. Third
quarter gross profit was $304,913 and $217,854, respectively. This segment is
experiencing increased sales volume from the sale of Falcon 20 Cargo Doors,
AVCON FINS and fin related modifications. This segment is continuing to work
on the development of new products and expects to see an increase in sales and
gross margin in the coming quarters of fiscal 1998.
Avionics (Woodson Avionics, Inc.): Avionics sales were $444,624 for the nine
months ended January 31, 1998 compared to $221,648 in the comparable period of
the preceding year, an increase of 100%. Operating earnings for the nine
months ended January 31, 1998, were $66,061 compared to a loss of $61,069 for
the nine months ended January 31, 1997. A portion of the loss relates to
expenses incurred due to the relocation of the facility to Phoenix, Arizona.
The increase in revenue is due to a closer location to major customers like
Boeing (McDonnell Douglas) and the increased marketability of the new
location. The Company believes the sales volume will remain relatively
stable with steady growth for the next few years and hopes the relocation will
allow this segment to expand and serve additional customers.
SCADA Systems and Monitoring Services (Butler National Services, Inc.): Sales
for the nine months ended January 31, 1998 were $901,581 compared to sales of
$794,108 for the comparable period of the prior year an increase of 14%.
Gross profit for the nine months ended January 31, 1998, was $334,264 compared
to $303,540 for the nine months ended January 31, 1997. Sales for the third
quarter of fiscal 1998 were $210,053, a decrease of $1,920 from the same
quarter of fiscal 1997. This segment was awarded the contracts with three
additional municipalities to provide, install and maintain Telemetry Systems
to be performed totaling $500,000 during fiscal 1997 and 1998. Additionally,
each of the contracts allow for the continued maintenance of the systems which
could be renewed on an annual basis. This work is in addition to the sales to
its current customers. The Company believes with the acquisition of Woodson
Electronics, Inc. operating rights and assets, this segment will continue to
develop and expand its customer base.
Food Distribution R F, Inc.): Revenues from the Food Distribution business
segment decreased 73% from $13,589,037 in the first nine months of fiscal
1997 to $3,631,051 in the first nine months of fiscal 1998. The third quarter
revenues were $3,872,099 and $999,639 respectively. As a result of the
redirection of the business toward the VALU FOODS® concept and the
Eisenbath Agreement, RFI is being changed to emphasize the brand name concept
in the distribution of seconds, overruns, etc. Gross profit decreased from
$1,608,942 in the nine months ending January 31, 1997, to $693,669 in the nine
months ending January 31, 1998. These changes have not yet been successful
and the segment operated with no net income contribution for the nine months
and a loss of $11,579 for the third quarter.
The Company has evaluated the operations of this segment over the past twelve
months and has attempted to implement policies and procedures to return the
segment to an acceptable level of profitability. At the end of the current
quarter, the Company determined that the wholesale part of this segment, R F,
Inc.(Redi-Foods), should liquidate the inventories not related to the brand
name concept and discontinue operations in the wholesale market. The Company
is not able to determine if adequate reserves have been provided to cover the
cost of the inventory liquidations and possible inability to collect
receivables during the fourth quarter of fiscal 1998.
<PAGE>
Temporary Services (Butler Temporary Services, Inc.): This segment did not
recognize any revenue in the third quarter of fiscal 1997 and fiscal 1998.
When the Company and the Tribes open the Indian gaming facilities, management
expects that a majority of the personnel in the various Indian gaming
enterprises will be staffed by Temporary Services.
Management Services (Butler National Services Corporation):
-General-
The Company received no revenue and incurred $29,569 in expenses in the first
nine months of fiscal 1998 and $345,000 in the first nine months of fiscal
1997 for general and administrative expenses associated with its continued
efforts to explore service opportunities related to the Indian Gaming Act of
1988. Additionally, the Company amortized $75,677 and $56,788 in the first
nine months of 1998 and 1997, respectively, related to shares issued for
services rendered to the Company in that regard.
The Company has invested $3,081,848 in land, land improvements, professional
design fees and construction costs 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 house on four acres of land in Johnson County, Kansas.
The Company believes that these tracts 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. These development
opportunities and the NIGC approved Management Contract for construction and
operation of the STABLES may allow the Company to recover the majority, if not
all, of the $3,081,848 investment.
-Princess Maria Casino-
In 1992, the Company signed 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, by the Miami Tribe in the Federal District Court, 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 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 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 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 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. The
Tribe has resubmitted the management agreement, no approval has yet been
received by the NIGC. 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. In July 1997, the NIGC, again, found the
land not suitable for gaming, based upon the BIA's determination that Reserve
No. 35 is not "Indian land" pursuant to IGRA. On August 11, 1997, the Miami
Tribe filed another action to define the Indian land in the Federal District
Court. The Company and the Tribe believe the land is in compliance with all
laws and regulations. There can be no assurance that the Tribe will win in
court.
<PAGE>
-Stables Bingo and Off-Track Betting-
In 1994, the Company signed a 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 NIGC approved management contract between the Company and the Tribes to
direct the development, the construction and to manage the joint-venture
gaming enterprise (the STABLES) for the Tribes. The proposed facility is
planned to be approximately 28,000 square-feet and to be located directly
south of the Modoc Tribal Headquarters building in Miami. As currently
designed and under construction, the complex will contain off-track betting
windows, a bingo hall, and a restaurant. Under the Management Agreement as
approved, the Company, as manager, is to receive a 30% share of the profits
and reimbursement of the development costs.
-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 and purchased a four acre tract 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 and to open a high stakes Indian Bingo enterprise.
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 an NIGC approved management contract with the Modoc Tribe, to
construct and operate a Class II Indian gaming facility on Modoc Reservation
lands in Eastern Oklahoma. The Tribe is working to acquire additional Indian
land before this project can be started.
<PAGE>
-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.
COSTS AND EXPENSES
The consolidated gross profit percentage improved to 31.2% for the nine months
and 25.4% for the three months ended January 31, 1998, from 18% for the nine
months and 17% for the three months ended January 31, 1997. This increase is
related to the relative mix of sales volume between the higher profit business
segments and the lower profit food distribution segment.
Operating expenses (selling, general and administrative) in the nine months
ended January 31, 1998, were $1,852,557 or 24.9% of sales compared to
$3,071,922 or 18.8% of sales for the nine months ended January 31, 1997, a
decrease of $1,219,365 or 39.6%. Costs for the three month period were
$439,861 in fiscal 1998 and $1,199,899 in fiscal 1997. The majority of the
decreased expenses directly relate to the decreased activity at the Food
Distribution segment.
Interest expense for the nine months ended January 31, 1998, was $199,853
compared to the first nine months of the prior year of $157,928. The Company
continues to use its line of credit to maintain operations. The Company
acquired a Lear 35 during fiscal 1996 for debt on an inventory floor plan of
$1,500,000, the majority of the increase in interest expense relates to this
acquisition and the related debt and the increased borrowing on the credit
line to finance inventory levels at the Food Distribution segment..
Other income(expense) is income of $333,244, primarily from the Eisenbath
deal, in the nine months ended January 31, 1998, versus expense of $25,746 for
the nine months ended January 31, 1997.
The Company employed 73 people at January 31, 1998, and 79 people at January
31, 1997.
EARNINGS
The Company recorded a profit of $461,449 after a provision for income taxes
of $334,153 in the nine months ended January 31, 1998. This is comparable to
a loss of $362,114 in the nine months ended January 31, 1997. Income per
share is $.05 and a loss per share of $.04 for the nine months ending January
31, 1998, and January 31, 1997, respectively. Third quarter earnings were
$72,919 ($0.01 per share) in fiscal 1998 and a loss of $431,486 ($0.05 per
share) in fiscal 1997.
CAPITAL RESOURCES
The Company had no material commitment for capital expenditures as of January
31, 1998, except for the advances to the Miami Tribe and Modoc Tribe for the
construction of the gaming establishment. The Company has advanced
approximately $1,750,000 under the approved management contract. Funds were
provided from Company operations and the sale of Class B Preferred Stock. The
Company is working with investment bankers and potential investors to fund the
remaining $1,750,000 to complete the opening.
LIQUIDITY
Borrowed funds have been used primarily for working capital. Bank debt is
$1,412,386 at January 31, 1998, and was $723,334 at January 31, 1997. The
Company's unused line of credit was approximately $537,614 as of January 31,
1998, and approximately $26,666 as of January 31, 1997. The interest rate on
the Company's line of credit is prime plus two, as of March 13, 1997, the
interest rate is 10.50%.
The Company plans to continue using the promissory notes payable due in May,
1998, as 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.
<PAGE>
The Company has 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 share of stock at a value of $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. The Company issued 135,000 shares for consulting
services related to the acquisition of the operating rights and assets of WEI
in fiscal 1997 and 12,722 shares have been issued for consulting services
during the first nine months of fiscal 1998.
The Company is operating 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 to finance this planned
test marketing of approximately $500,000 may be required during fiscal 1999.
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.
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 Company is working with an
investment banking firm to finance the remainder of the construction and
opening costs for the STABLES through an issue of debt secured by the cash
generation of the establishment. This financing is planned to be completed
during the fourth quarter of fiscal 1998.
FORWARD LOOKING INFORMATION
The information set forth above may include "forward-looking" information as
outlined in the recently enacted Private Securities Litigation Reform Act of
1995. The Cautionary Statements filed by the Company as Exhibit 99 to this
filing are incorporated herein by reference and investors 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.
<PAGE>
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. Changes in Securities
On November 30, 1997, the Company issued 127,569 shares of common stock,
$.01 par value, for the convertible debenture in the amount of $100,000 face
value plus interest. The shares were issued to an accredited investor. The
transaction was executed in reliance upon the exemption from registration
afforded by Regulation S as promulgated by the Securities and Exchange
Commission, under the Securities Act of 1933, as amended.
On December 1, 1997, the Company issued 12,722 shares of restricted
common stock, $.01 par value, to two individuals for consulting services
valued at $11,450.
On December 16, 1997, the Company issued 200,000 shares of restricted
common stock, $.01 par value, to allow the retirement of the unregistered $100
Class A, 9.8% convertible preferred stock in the amount of $226,000 face
value. The shares were issued to an accredited investor with potential
conversion rights under the class A preferred.
On December 16, 1997, the Company issued 1,500 shares of unregistered,
$1,000 Class B, 6% Preferred Stock $5 par value to five investors in the
amount of $1,500,000 face value with conversion rights into common stock, $.01
par value. Net proceeds to the Company were $1,089,959 after expenses, fees,
and the retirement of the class A preferred described above. The transaction
was executed in reliance upon the exemption from registration afforded by
Regulation S as promulgated by the Securities and Exchange Commission, under
the Securities Act of 1933, as amended.
On December 16, 1997, the Company completed the issue of unregistered
Class AA Warrants to purchase 150,000 shares of restricted common stock, $.01
par value, at a purchase price of $1.13 per share, expiring December 5, 2000.
On December 16, 1997, the Company entered into an agreement with a
Financial Consulting Company to issue a potential 750,000 shares of common
stock, $.01 par value, for services to be rendered and as options to be
exercised at purchase prices from $1.00 to $1.75 per share.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 6. Exhibits and reports on Form 8-K.
(A) Exhibits.
Exhibit 1(a). Pursuant to Rule 601 4v. Attached is the Certificate To Set
Forth Designations, Voting Powers, Preferences, Limitations, Restrictions,
and Relative Rights of Series B 6% Cumulative Convertible Preferred Stock,
$5.00 Par Value Per Share.
Articles of Incorporation, as amended are incorporated by reference to
Exhibit B of the Company's Proxy Statement dated August 16, 1996.
Bylaws, as amended, are incorporated by reference to Exhibit C of the
Company's Proxy Statement dated August 16, 1996.
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-Q for the quarter ended January 31,
1997.
The Company agrees to file with the Commission any agreement or instrument
not filed as an exhibit upon the request of the Commission.
<PAGE>
(B) Reports on Form 8-K.
The Company filed a Form 8-K dated November 30, 1997, reporting under Item 9.
Sales of Equity Securities pursuant to Regulation S.
The Company filed a Form 8-K dated December 16, 1997, reporting under
Item 9. Sales of Equity Securities pursuant to Regulation S.
<PAGE>
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)
March 13, 1998 /S/ Clark D. Stewart
Date Clark D. Stewart, (President
and Chief Executive Officer)
March 13, 1998 /S/ Edward J. Matukewicz
Date Edward J. Matukewicz,
(Treasurer and Chief
Financial Officer)
<PAGE>
Exhibit 1(a)
Pursuant to Rule 601 4.v attached is the following Certificate to set forth
designations, voting powers, preferences, limitations, restrictions, and
relative rights of Series B 6% cumulative convertible preferred stock, $5.00
par value per share.
EXHIBIT 1(a) to Form 10-Q Filed March 13, 1998
- ----------------------------------------------
CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS,
PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE
RIGHTS OF SERIES B 6% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, $5.00 PAR VALUE PER SHARE
It is hereby certified that:
I. The name of the corporation is Butler National Corporation (the
"Corporation"),a Delaware corporation.
II. Set forth hereinafter is a statement of the voting powers,
preferences, limitations, restrictions, and relative rights of shares of
Series B 6% Cumulative Convertible Preferred Stock hereinafter designated as
contained in a resolution of the Board of Directors of the Corporation
pursuant to a provision of the Articles of Incorporation of the Corporation
permitting the issuance of said Series B 6% Cumulative Convertible Preferred
Stock by resolution of the Board of Directors:
Series B 6% Cumulative Convertible Preferred Stock, $5.00 par value
1. Designation: Number of Shares The Corporation shall have 3,000
shares designated as Series B 6% Cumulative Convertible Preferred Stock, $5.00
par value, as part of the authorized class of preferred shares (the "Series B
Preferred Stock"). Each share of Series B Preferred Stock shall have a stated
value equal to $1,000 (as adjusted for any stock dividends combinations or
splits with respect to such shares)(the"Stated Value").
2. Dividends.
(a) The holders of outstanding shares of Series B Preferred
Stock shall be entitled to receive preferential dividends in cash out of any
funds of the Corporation legally available at the time for declaration of
dividends before any dividend or other distribution will be paid or declared
and set apart for payment on any shares of any Common Stock or other class of
stock junior to the Series B Preferred Stock, including Series A Preferred
Stock (the Common Stock and such junior stock being hereinafter collectively
the "Junior Stock") at the rate of 6% simple interest per annum on the Stated
Value per share payable quarterly when as and if declared; provided however
that dividend payments may be made in the sole discretion of the Board of
Directors of the Corporation in additional fully paid and non-assessable
shares of Series B Preferred Stock at a rate of one share of Series B
Preferred Stock for each $1,000 of such dividend not paid in cash, and the
issuance of such additional shares shall constitute full payment of such
dividend.
(b) The dividends on the Series B Preferred Stock at the rates
provided above shall be cumulative whether or not earned so that if at any
time full cumulative dividends at the rate aforesaid on all shares of the
Series B Preferred Stock then outstanding from the date from and after which
dividends thereon are cumulative to the end of the quarterly dividend period
next preceding such time shall not have been paid or declared and set apart
for payment, or if the full dividend on all such outstanding Series B
Preferred Stock for the then current dividend period shall not have been paid
or declared and set apartment for payment, the amount of the deficiency shall
be paid or declared and set apart for payment (but without interest thereon)
before any sum shall be set apart for or applied by the Corporation or a
subsidiary of the Corporation to the purchase redemption or other acquisition
of the Stock ("Parity Stock") and before any dividend or other distribution
shall be paid or declared and set apart for payment on any Junior Stock and
before any sum shall be set aside for or applied to the purchase, redemption
or other acquisition of Junior Stock.
(c) Dividends on all shares of the Series B Preferred Stock
shall begin to accrue and be cumulative from and after the date of issuance
thereof A dividend period shall be deemed to commence on the day following a
quarterly dividend payment date herein specified and to end of the next
succeeding quarterly dividend payment date herein specified.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the holders of the Series B
Preferred Stock shall be entitled to receive before any payment or
distribution shall be made on the Junior Stock, out of the assets of the
Corporation available for distribution to stockholders, the Stated Value per
share of Series B Preferred Stock and all accrued and unpaid dividends to and
including the date of payment thereof. Upon the payment in full of all amounts
due to holders of the Series B Preferred Stock of the holders of the Common
Stock of the Corporation and any other class of Junior Stock shall receive all
remaining assets of the Corporation legally available for distribution. If the
assets of the Corporation available for distribution to the holders of the
Series B Preferred Stock shall be insufficient to permit payment in full of
the amounts payable as aforesaid to the holders of Series B Preferred Stock
upon such liquidation, dissolution or winding-up, whether voluntary or
involuntary, then all such assets of the Corporation shall be distributed to
the exclusion of the holders of shares of Junior Stock ratably among the
holders of Series B Preferred Stock.
(b) Neither purchase nor the redemption by the Corporation of
shares of any class of stock nor the merger nor consolidation of the
Corporation with or into any other corporation or corporations nor the sale or
transfer by the Corporation of all or any part of its assets shall be deemed
to be a liquidation, dissolution or winding-up of the Corporation for the
purposes of this paragraph 3.
4. Conversion into Common Stock. Shares of Series B Preferred Stock
shall have the following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 4, each
holder of shares of Series B Preferred Stock shall have the right at any time
and from time to time after forty (40) days' from the date on which a share of
Series B Preferred Stock was issued, to convert some or all such shares into
fully paid and non-assessable shares of Common Stock of the Corporation (as
defined in paragraph 4(i) below) determined in accordance with the Conversion
Rate. provided in paragraph 4(b) below (the "Conversion Rate"); provided, that
the aggregate Stated Value to be converted shall be at least $25,000 (unless
if at the time of such conversion the aggregate Stated Value of all shares of
Series B Preferred Stock registered to the Holder is less than $25,000, then
the whole amount may be converted).
(b) The number of shares of Common Stock issuable upon
conversion of each share' of Series B Preferred Stock shall equal (I) the sum
of (A) the Stated Value per share and (B) accrued and unpaid dividends on such
share, divided by (ii) the Conversion Price. The Conversion Price shall be
equal to the lesser of- (i) the average of the Closing Bid Price (as
hereinafter defined) of the Corporation's Common Stock for the five (5)
trading days immediately preceding the date of issuance of the Series B
Preferred Stock; or (ii) seventy percent (70%) of the 'average of the Closing
Bid Price for the five trading days immediately preceding conversion of the
Series B Preferred Stock. The Closing Bid Price shall mean the closing bid
price of the Corporation's Common Stock as reported from the NASDAQ SmallCap
Market (or if not reported by NASDAQ as reported by such other exchange or
market where traded).
(c) The bolder of any certificate for shares of Series B
Preferred Stock desiring to e9nvert any of such shares may give notice of its
decision to convert the shares into common stock by telecopying an executed
and completed notice of conversion to the
Corporation and delivering within three business days thereafter, the original
notice of conversion and the certificate for the Preferred Stock properly
endorsed for or accompanied by duly executed instruments of transfer (and such
other transfer papers as said Transfer Agent may reasonably require) to the
Corporation. Each date on which a notice of conversion is telecopied to and
received by the Corporation in accordance with the provisions hereof shall be
deemed a Conversion Date. The Corporation will transmit the certificates
representing the shares of common stock issuable upon conversion of any
Preferred Stock (together with the Preferred Stock representing the shares not
converted) to the Holder via express courier, or otherwise, for receipt by the
holder within three business days after receipt by the Corporation of the
original notice of conversion and the Preferred Stock representing the shares
to be converted. The holder of the shares so surrendered for conversion shall
be entitled to receive (except as otherwise provided herein) a certificate or
certificates which shall be expressed to be fully paid and non-assessable for
the number of shares of Common Stock to which such stockholder shall be
entitled upon such conversion registered in the name of such holder or in such
other name or as such stockholder in writing may specify. In the case of any
Series B Preferred Stock which is converted in part only the holder of shares
of Series B Preferred Stock shall upon delivery of the certificate or
certificates representing Common Stock also receive a new share certificate
representing the unconverted portion of the shares of Series B Preferred
Stock. 'Nothing herein shall be construed to give any holder of Series B
Preferred Stock surrendering the same for conversion the right to receive any
additional shares of Common Stock or other property which results from an
adjustment in conversion rights under the provision of paragraph (d) or (e) of
this paragraph 4 until holders of Common Stock are entitled to receive the
shares or other property giving rise to tile adjustment.
In the case of the exercise of the conversion rights set forth in
paragraph 4(a) the conversion privilege shall be deemed to have been exercised
and the shares of Common Stock issuable upon such conversion shall be deemed
to have been issued upon the date of receipt by such Transfer Agent for
conversion of the certificate for such shares of Series B Preferred Stock. The
person or entity entitled to receive Common Stock issuable upon such
conversion shall, on the "date such conversion privilege is deemed to have
been exercised and thereafter, be treated for all purposes as the record
holder of such Common Stock and shall on the same date cease to be treated for
any purpose as the record holder of such shares of Series B Preferred St6ck to
be converted.
Notwithstanding the foregoing, if the stock transfer books are closed on
the date such shares are received by the Transfer Agent, the conversion
privilege shall be deemed to have been exercised and the person or entity
shall be treated as a record holder of shares 6f Common Stock on the next
succeeding date on which the transfer books are open, but the Conversion Rate
shall be that in effect on the date such conversion privilege was exercised.
The Corporation shall not be required to deliver certificates for shares of
its Common Stock or new certificates for unconverted shares of its Series B
Preferred Stock while the stock transfer books for such respective classes of
stock are duly closed for any purpose; but the right of surrendering shares of
Series B Preferred Stock for conversion shall not be suspended during any
period that the stock transfer books of either of such classes of stock are
closed.
Upon the conversion of any shares of Series B Preferred Stock no
adjustment or payment shall be made with respect to such convened shares on
account of any dividend on shares of such stock or on account of any dividend
on the Common Stock, except that the holder of such converted shares shall be
entitled to be paid any dividends declared on shares of Common Stock after
conversion thereof.
The Corporation shall not be required in connection with any conversion
of Series B Preferred Stock to issue a fraction of a share of its Common Stock
nor to deliver any stock certificate representing a fraction thereof For
administrative efficiency and simplicity, in the event the number of shares
issuable to a shareholder results in a fractional share, said number shall be
rounded up to the next higher whole number of shares. No cash shall be paid
for any fractional share.
(d) The Conversion Rate shall be subject to adjustment from time
to time as follows:
(i) In case the Corporation shall at any time (A)
declare any dividend or distribution on its Common Stock or other securities
of the Corporation other than the Series B Preferred Stock, (B) split or
subdivide the outstanding Common Stock, (C) combine the outstanding Common
Stock into a smaller number of shares, or (I)) issue by reclassification of
its Common Stock any shares or other securities of the Corporation, then in
each such event the Conversion Rate shall be adjusted proportionately so that
the holders of Series B Preferred Stock shall be entitled to receive the kind
and number of shares or other securities of the Corporation which such holders
would have owned or have been entitled to receive after the happening of any
of the events described above had such shares of Series B Preferred Stock been
converted immediately prior to the happening of such event (or any record date
with respect thereto). Such adjustment shall be made whenever any of the
events listed above shall occur. An adjustment made to the Conversion pursuant
to this paragraph 4(d)(i) shall become effective immediately after the
effective date of the event retroactive to the record date, if any, for the
event.
(e) The Conversion Rate shall also be subject to adjustment from
time to time as follows:
(i) In case of any merger of the Corporation with or into
any other corporation (other than a merger in which the Corporation is the
surviving or continuing corporation and which does not result in any
reclassification, conversion, or change of the outstanding shares of Common
Stock) then as part of such merger lawful provision shall be made so that
holders of Series B Preferred Stock shall thereafter have the right to convert
each share of Series B Preferred Stock into the kind and amount of shares of
stock and/or other securities or property receivable upon such merger by a
holder of the number of shares of Common Stock into which such shares of
Series B Preferred Stock might have been converted immediately prior to such
consolidation or merger. Such provision shall also provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in paragraph (d) of this paragraph 4. The foregoing provisions of
this paragraph 4(e) shall similarly apply to successive mergers.
(ii) In case of any sale or conveyance to another person or
entity of the property of the Corporation as an entirety, or substantially as
an entirety, in connection with which shares or other securities or cash or
other property shall be issuable, distributable, payable, or deliverable for
outstanding shares of Common Stock; then, unless the right to convert such
shares shall have terminated, lawful provision shall be made so that the
holders of Series B Preferred Stock shall thereafter have the right to convert
each share of the Series B Preferred Stock into the kind and amount of shares
of stock or other securities or property that shall be issuable,
distributable, payable, or deliverable upon such sale or conveyance with
respect to each share of Common Stock immediately prior to such conveyance.
(f) : Subject to the provisions of this section, if the Corporation
at any time shall issue any shares of Common Stock prior to the conversion of
the entire Stated Value of the Series B Preferred Stock (otherwise than as:
(i) provided in paragraphs (d) and (e) of this paragraph 4; or (ii) pursuant
to options, warrants, or other obligations to issue shares, outstanding on the
date hereof as described in public filings made by the Corporation prior to
the date hereof with the Securities and Exchange Commission and a warrant to
be issued to European Equity Partners, Inc. or its designees, 9ptions to
Michael Markow, and other than the recent increase in the number of options
available for issuance under the Corporation's option plans; [(i) and (ii)
above, are hereinafter referred to as the "Existing Option Obligations"] for a
consideration less than the Conversion Price that would be in effect at the
time of such issue, then, and thereafter successively upon each such issue,
the Conversion Price shall be reduced as follows (i) the number of shares of
Common Stock outstanding immediately prior to such issue shall be multiplied
by the Conversion Price in effect at the time of such issue and the product
shall be added to the aggregate consideration, if any, received by the
Corporation upon such issue of additional shares of Common Stock; and (ii) the
sum so obtained shall be divided by the number of shares of Common Stock
outstanding immediately after such issue. Except for the Existing Option
Obligations and options that may be issued under any employee incentive stock
option and/or any qualified stock option plan adopted by the Company, for
purposes of this adjustment, the issuance of any security of the Corporation
carrying the right to convert such seurity into shares of Common Stock or of
any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Conversion Price upon the issuance of shares of Common Stock
upon exercise of such conversion or purchase rights.
(g) Whenever the number of shares to be issued upon conversion
of the Series B Preferred Stock is required to be adjusted as provided in this
paragraph 4, the Corporation shall forthwith compute the adjusted number of
shares to be so issued and prepare a certificate setting forth such adjusted
conversion amount and the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the Transfer Agent for the Series B
Preferred Stock and the Common Stock; and the Corporation shall mail to each
holder of record of Series B Preferred Stock notice of such adjusted
conversion price.
(h) In case at any time the Corporation shall propose:
(i) To pay any dividend or distribution payable in shares
upon its Common Stock or to make any distribution (other than cash dividends)
to the holders of its Common Stock; or
(ii) To offer for subscription to the holders of in Common
Stock any additional shares of any class or any other rights; or
(iii) Any capital reorganization or reclassification of its
shares or the merger of the Corporation with another corporation (other than a
merger in which the Corporation is the surviving or continuing corporation and
which does not result in any reclassification, conversion, or change of the
outstanding shares of Common Stock);or
(iv) The voluntary dissolution, liquidation or winding-up
of the Corporation;
then, and in any one of more of said cases, the Corporation shall cause at
least fifteen (15) days prior, notice of the date on which (A) the books of
the Corporation shall close or a record be taken for such stock dividend,
distribution, or subscription rights, or (B) such capital reorganization,
reclassification, merger, dissolution, liquidation or winding-up shall take
place, as the case may be, to be mailed to the Transfer Agent for the Series B
Prefwed Stock and for the Common Stock and to the holders of record of the
Series B Preferred Stock.
(i) So long as any shares of Series B Preferred Stock shall
remain outstanding and the holders thereof shall have the right to convert the
same in accordance with provisions of this paragraph 4 the Corporation shall
at all times reserve from the authorized and unissued shares of its Common
Stock a sufficient number of shares to provide for such conversions.
(j) The term Common Stock as used in this paragraph 4 shall mean
Common Stock of the Corporation as such stock is constituted at the date of
issuance thereof or as it may from time to time be changed or shares of stock
of any class of other securities and/or property into which the shares of
Series B Preferred Stock shall at any time become convertible pursuant to the,
provisions of this paragraph 4.
(k) The Corporation shall pay the amount of any and all
issue taxes (but not income taxes) which may be imposed in respect of any
issue or delivery of stock upon the conversion of any shares of Series B
Preferred Stock, but all transfer taxes and income taxes that may-be payable
in respect of any change or ownership of Series B Preferred Stock or any
rights represented thereby or of stock receivable upon conversion thereof
shall be paid by the person or persons surrendering such stock for conversion.
5. Mandatory Conversion.
(a) Subject to the provisions of paragraph 5(e) below, the
shares of Series B Preferred Stock not previously convened into shares of
Common Stock shall be converted into share's of Common Stock without further
action of the Holder on the date that is two years from the date of issuance
thereof; at the Conversion Price and on the conversion terms specified in
paragraph 4(b).
(b) Notice of conversion of Series U Preferred Stock by the
Corporation pursuant to this paragraphs shall be given by mail or in such
other manner as may be' prescribed by resolution of the Board not less than
thirty (30) days prior to the applicable date of mandatory conversion (the
"Mandatory Conversion Date"). As applicable, the notice shall specify the
number of shares to be converted, the date fixed for conversion, and the
conversion price per share.
(c) The holder of any certificate for shares of Series B
Preferred Stock that is converted pursuant to this Section 5 shall surrender
such certificate at the principal office of any transfer agent for said stock
(the "Transfer Agent") properly endorsed for or accompanied by duly executed
instruments of transfer (and such other transfer papers as said Transfer Agent
may reasonably require). The holder of the shares so surrendered for
conversion shall be entitled to receive (except as otherwise provided herein)
a certificate or certificates which shall be expressed to be fully paid and
non-assessable for the number of shares of Common Stock to which such
stockholder shall be entitled upon such conversion registered in the name of
such holder or in such other name or names as such stockholder in writing may
specify.
(d) On and after the applicable Mandatory Conversion Date
(subject to paragraph 5(e) below), and notwithstanding that any certificate
for shares of Series B Preferred Stock so called for conversion shall not have
been surrendered for cancellation, all dividends on the Series B Preferred
Stock called for conversion shall cease to accrue and the shares represented
thereby shall no longer be deemed outstanding and all rights of the holders
thereof as stockholders of the Corporation shall cease and terminate, except
the right to receive the shares of Common Stock upon conversion as provided
herein.
(e) In no event shall a Mandatory Conversion occur at any
time unless the Common Stock to be delivered upon conversion will be
unlegended, freely tradable, and freely transferable on the transfer books of
the Corporation.
6. Event of Default. The occurrence of any of the following
events of default ("Event of Default") including a Material Adverse Event, as
defined in section 5(g), shall cause the dividend rate of 6% described in
paragraph 4 hereof to become 16% from and after ten (10) days after the
occurrence of such event and at the option of the Holder, the Series B'
Preferred Stock shall be redeemed by the Corporation at its Stated Value and
accrued dividends.
(a) The Corporation fails to pay any dividend payment required
to be paid pursuant to the terms of paragraph 2 hereof and such failure
continues for a period of ten (10) days after written notice to the
Corporation from the holder.
(b) The Corporation breaches any covenant or other term or
condition of the Subscription Agreement entered into between the Corporation
and holder relating to Series B Preferred Stock (the "Subscription Agreement")
and such breach continues for a period of seven (7) days after written notice
to the Corporation from the holder.
(c) Any representation or warranty of the Corporation
made in the Subscription Agreement, or in any agreement, statement or
certificate given in writing pursuant thereto shall be false or misleading.
(d) The Corporation shall make an assignment for the
benefit of creditors, or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business; or
such a receiver or trustee shall otherwise be appointed.
(e) Any money judgment, writ or similar process shall be
entered or filed against the Corporation or any of its property or other
assets for more than $100,000, and shall remain unvacated, unbonded or
unstayed for a period of forty-five (45) days.
(f) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation.
(g) The occurrence of a Material Adverse Event involving
the Corporation shall mean (i) delisting of the Common Stock from the NASDAQ
SmallCap Market; (ii) a concession by the Company of a default under any one
or more obligations in an aggregate monetary amount in excess of $100,000; and
(iii) an SEC stop trade order or NASDA,Q trading suspension, if either applies
for a period of ten days or longer.
(h) The Corporation's failure to timely deliver Common Stock
to the holder pursuant to paragraph 4 hereof and section 9 of the Subscription
Agreement in the form of free-trading, unlegended shares of Common Stock
freely transferable on the books and records of the Corporation, and with such
opinions and approvals so that the Common Stock will be immediately
transferable by Corporation's transfer agent.
7. Voting Rights. The shares of Series B Preferred Stock
shall not have voting rights.
8. Status of Converted Stock. In case any shares of Series B
Preferred Stock shall be converted to paragraph 4 hereof or otherwise
repurchased or reacquired, the shares so converted, or reacquired shall resume
the status of authorized but unissued shares of Preferred Stock and shall no
longer be designated as Series B Preferred Stock.
9. Additional Restrictions. For as long as any shares of the
Series B Preferred Stock are outstanding, the Corporation will not issue any
preferred stock that is senior to the Series B Preferred Stock, and will not
amend the terms of the Series B Preferred Stock without the consent of the
holders of the Series B Preferred Stock.
Signed on this _________day of December, 1997.
BUTLER NATIONAL CORPORATION
/s/ Clark D. Stewart
By:________________________
Clark D. Stewart
President and CEO
ATTEST:
/s/ Edward J. Matukewicz
___________________________
Assistant Secretary
<PAGE>
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