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Edited Transcript of BUKS earnings conference call or presentation 23-Jul-19 2:00pm GMT

Q4 2019 Butler National Corp Earnings Call

Olathe Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Butler National Corp earnings conference call or presentation Tuesday, July 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aric Peters

Butler National Corporation - Director of Business Development

* Clark D. Stewart

Butler National Corporation - President, CEO & Director

* Craig D. Stewart

Butler National Corporation - VP & President of Aerospace

* Tad Mitchell McMahon

Butler National Corporation - CFO

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Conference Call Participants

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* David Drewitz

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Today is Tuesday, July 23, 2019, and welcome to the Butler National Corporation Fourth Quarter and Fiscal Year-End Sales Conference Call. (Operator Instructions) Your call leaders for today's call are David Drewitz, Creative Options Communications; Clark Stewart, President and CEO; Craig Stewart, President of Aerospace Group.

I'll now turn the call over to David Drewitz. Mr. Drewitz, you may begin.

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David Drewitz, [2]

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Thank you, and good morning, ladies and gentlemen. Before Mr. Stewart begins, I would like to draw your attention to, except for historical information contained herein, the statements in this conference call are forward-looking and made pursuant to the safe harbor provisions as outlined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Butler National's actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competitive technologies by other companies; new governmental safety, health and environmental regulations, which could require Butler to make significant capital expenditures.

The forward-looking statements included in this conference call are only made of the date of this call, and Butler National undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could cause actual results to differ materially from expectations reflected in the forward-looking statements include, but are not limited to, factors described under the caption Risk Factors in the company's annual report on Form 10-K filed with the Securities and Exchange Commission.

With that statement completed, I would like to turn the call over to Mr. Clark Stewart. Mr. Stewart?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [3]

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Thank you, Mr. Drewitz. Good morning, ladies and gentlemen. Thank you for taking the time to join us to talk about Butler National's 10-K. We filed the 10-K, and you'll notice the proxy information is not in the 10-K. Since our meeting schedule is on -- is close to on schedule, per the bylaws, we apparently do not have to file duplicates of each of that information in the proxy. So the proxy will be filed within the next what? 2 weeks, is it Craig? Or 3 weeks? Hello?

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Craig D. Stewart, Butler National Corporation - VP & President of Aerospace [4]

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It'll be by the -- we'll file the proxy probably the third week of August. It's somewhere in that time period.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [5]

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So what we're talking about -- thank you, Craig. What we're talking about this morning is the financial performance as it's reported in the 10-K. And I would call your attention to the risk factors that deal with the risk of renewal. There's 2 factors in there on Page 12 and 13, I believe, and those all deal with the renewal of the gaming contract with the state of Kansas. We're in the process of working that. As everyone has known that's -- listened to the call for the last couple of years, we actually started that project in 2016. We believe we are making project -- progress with that, and we are hopeful that we have something in the next couple months, and that's our biggest challenge I think as far as risk factors.

There's also on Page 40 under footnote Q, a description of the new -- a little bit of a description of the new accounting rules relative to leases with right to use. Essentially the land and building lease at Boot Hill runs for 25 years, and that's 10 years -- 15 years from now. Yes, 15 years from now.

So if we put the value of the lease -- present value of the lease on the asset side of the balance sheet and the present value of the payments on the liability side, you'll understand that the balance sheet will increase by almost twice. And we're working on how we're going to comply with that, but I think it's -- we're not the only ones facing that situation. But that's new accounting rules and you need to just ponder that. That's a risk of where everyone will really understand what we've done. So I think those 2 items are cautioned.

Next item is we've had a great year. As far as we're concerned, we're -- we made almost $4 million after tax, which is a real, real nice position to be in. [I mean why not notice it when I'm up here].

Give me just a minute. There we go. We -- like I say, we -- the net numbers on Page 1 of the press release here, all that table of numbers, I assume you've reviewed those. Page 2, items 1 through 4. Page 2, the segment analysis and highlights and the backlog, exciting information in there is that our revenue was up 9% for the quarter, $14.4 million to $15.7 million, and the revenue for the year is up 22% from $43 -- or $48.3 million to $58.7 million.

The quarter from last year, we showed $1,000 loss. And this year, we show $283,000 profit in the fourth quarter, which is definitely a good move since we all know that we're in a lumpy situation with the airplanes and the avionics and Gun Control Units and the casino were fairly smooth since the Gun Control Units are growing rather rapidly.

As far as the revenue is coming, 57% increase from Aerospace and 2% in the Professional Services side, which is the casino. The 57% is spread over Avcon and Butler Tempe and Butler Avionics. So all of those segments are doing well.

We've invested $1.9 million in R&D this year. Last year, we invested -- you maybe got to get that to stop for just a minute. Excuse me, I had an interruption of a phone call.

For the quarter, like I say, we've invested $1.9 million, $655,000 in the quarter. So it's been a good year. We're moving right along as far as that goes.

The backlog is probably the most exciting thing that we have to report. Backlog is currently setting in July here at $19.2 million, and at April 30, that backlog was setting at $16.2 million, which -- versus $13.2 million a year ago.

So our backlog continues to build. We -- as you can tell, we've increased the revenue 57% in the segments where that backlog is building up. And we've been able to increase the revenue like the shipments and still have the backlog continuing to build. So we're trying to deal with additional staffing, additional space to address some of that backlog that's building up. Most of that is related to special missions and related to Tempe and related to the regulations of the FAA requiring the RBS -- ADS-B, right? You have to write one on the radar identification of the airplanes. So I think that's a good thing, and I am pleased with how this is going.

Craig, would you like to make some comments on Aerospace? Or have I covered enough of it?

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Craig D. Stewart, Butler National Corporation - VP & President of Aerospace [6]

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No. I think you've covered it very well. I think we're excited about the growth that we're having in all the Aerospace segments. Yes, it's one of the few times that we can sit and talk about all 3 of them are growing and working almost at capacity to where we're having to figure out how to grow the capacity.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [7]

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That's correct. And staffing, as usual, is a problem, but we seem to be able to find the staff to get it done. We've added an additional hangar in Newton, and that'll help give us some more space. And so we -- the reason I was a little late here for the call is that we were out looking for more staff. So I think that's a good thing to do.

So having said all that, I think we are ready for questions, David. Unless, Tad, you want -- do you have any comments?

Thank you very much, and let's have some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from [Timothy McMillan].

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Unidentified Analyst, [2]

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Clark, you had a good revenue in the fourth quarter, and $283,000 is good, but it seemed like a little low for the number. What other contributions in there caused that not to be as high as you might expect?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [3]

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Go ahead, Tad. You can answer.

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Tad Mitchell McMahon, Butler National Corporation - CFO [4]

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Well, there's some tax effect in the fourth quarter that was probably larger than it had been through the first 3 quarters.

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Unidentified Analyst, [5]

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So you had to make up some tax payments from the first 3 quarters is what you're saying?

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Tad Mitchell McMahon, Butler National Corporation - CFO [6]

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Correct.

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Unidentified Analyst, [7]

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How much would that have been, do you think? Or what's your tax, gentlemen?

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Tad Mitchell McMahon, Butler National Corporation - CFO [8]

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Well, we have some deferred tax items that went back and forth on us, but...

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [9]

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Where are you looking? Tell him where you're looking.

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Tad Mitchell McMahon, Butler National Corporation - CFO [10]

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So our -- we ended up having almost $1.4 million in tax for the year-to-date. I don't know what the number is.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [11]

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The point is that the -- what we've done is we needed to buy an airplane for about $3 million that we're using to prove up the hard points on the King Airs, and we did that. We thought that would help us on the taxes. Facts are we aren't getting the benefit yet. So what we're setting here is with over $1 million in taxes that we thought we wouldn't have to pay, so that changed our view a little bit. But eventually, that will work out in the next year. So I mean it's all a matter of trying to manage. It's on a real short term, doesn't work very well in the airplane business. But at least we have the airplane, we have customers to buy it when we're done with it, and we're -- it was a good decision to do that. You'll notice that, that's about a $3 million liability and a $3 million asset we added to the balance sheet.

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Unidentified Analyst, [12]

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And your debt is under $4 million now. Is that what I saw?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [13]

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Probably. I'd have to look for that number.

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Tad Mitchell McMahon, Butler National Corporation - CFO [14]

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(inaudible)

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [15]

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No. The total debt.

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Tad Mitchell McMahon, Butler National Corporation - CFO [16]

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Total debt, $4 million.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [17]

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Yes, it's $4 million...

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Tad Mitchell McMahon, Butler National Corporation - CFO [18]

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Just under $4 million, $3.9 million.

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Unidentified Analyst, [19]

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You had several short-term maturities this year. Are those paid off now, Clark?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [20]

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Yes.

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Unidentified Analyst, [21]

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They're all -- and so you just mainly have the plane and a little bit left probably on that May 2020 on the BNSC assets and so forth.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [22]

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Yes.

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Unidentified Analyst, [23]

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The -- I guess the other thing that maybe catches my eye a little bit is we did $58.7 million, I think, in total revenue. Now we had a nonrecurring profit on that sales tax refund. Was that around $1.5 million?

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Tad Mitchell McMahon, Butler National Corporation - CFO [24]

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Just under $2 million.

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Unidentified Analyst, [25]

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It's a little under $2 million on -- and that's all taken out. That's nonrecurring.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [26]

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No. That's 100% of that. Our share is 60% of that.

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Unidentified Analyst, [27]

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Okay. So our -- we wound up about $1.2 million. Is that right?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [28]

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Yes. If you -- you got to be careful with that number, though, because, remember, that $1.2 million only surfaces when we take out the minority interest at the bottom of the income statement. So all the way down through the income statement, I think, the $2 million is there until you get to the end and then you take out the minority interest, which removes 40% of the $2 million, which is roughly $800,000.

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Unidentified Analyst, [29]

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So if you backed out -- yes, excuse me, go ahead.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [30]

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You got to do a lot of backing out to get back to the 60% that we own. They way we're doing it is the way the GAAP accounting requires us to do it, if that works.

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Unidentified Analyst, [31]

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Well, if I'm backing out $1.2 million, then you're really -- on continuing earnings, you made about $2.6 million. Would that be a reasonable assumption, around $2.6 million to $2.7 million?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [32]

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Go ahead, Tad. Tad's looking at the number.

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Tad Mitchell McMahon, Butler National Corporation - CFO [33]

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Yes. Well, their whole share is $1.8 million.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [34]

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Right. So I mean -- but of that share, $800,000 is their share of the $2 million.

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Unidentified Analyst, [35]

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Okay. I'm just trying to get to what our continuing earnings was on sales, is what I'm trying to get to. And...

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Craig D. Stewart, Butler National Corporation - VP & President of Aerospace [36]

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[Tim], you got to keep in mind that there's a -- we paid tax on that $1.2 million or so that we got. So you add some of that back in so you wouldn't have to pull that tax if we hadn't had that earnings.

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Unidentified Analyst, [37]

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Okay. Well, I just -- it looks like you're probably -- on your Aerospace, you normally talked about 20% margins. Would you say after tax, your net NAV is 7% or 8%? Is that a reasonable average guess? Or is that out of line?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [38]

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I don't know, Craig. I think it's higher than, but I'd have to look at it here.

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Craig D. Stewart, Butler National Corporation - VP & President of Aerospace [39]

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Well, if you just look at the Aerospace, well, our revenue's total in the Aerospace...

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [40]

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That's over here on the second...

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Tad Mitchell McMahon, Butler National Corporation - CFO [41]

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Just under $27 million.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [42]

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On the second page of the...

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Tad Mitchell McMahon, Butler National Corporation - CFO [43]

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$26.7 million.

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Unidentified Analyst, [44]

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$26.7 million. Well, so could you be around 10% after tax? So here's the things -- go ahead, Craig. I'm sorry.

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Craig D. Stewart, Butler National Corporation - VP & President of Aerospace [45]

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I think typically and what we've always talked about with the guys at Avcon is with -- if we can get 10% of the total revenue to the bottom line, we've done a pretty good job in the Aerospace segment. And I think that's pretty consistent with where we are right now. So I think that's -- the product mix right now is probably a pretty good product mix to get that 10%. I can see that moving forward if -- yes, if we keep that same product mix that we're looking at now.

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Unidentified Analyst, [46]

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Yes. Well, again, if I back that out, now your nongaming revenue at the casino, you don't have to share that. Is that all ours, $3.6 million or something like that, food, beverage, so forth?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [47]

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Yes, we share all of that. I mean...

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Unidentified Analyst, [48]

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You have to share that? I thought that was just yours.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [49]

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Yes. No, no, we share -- it's 60-40 for the whole deal, yes.

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Unidentified Analyst, [50]

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For the whole deal? Okay. Well, it's just as -- I think the gaming side kind of brings your profit margins down quite a bit obviously. And that's more reasons than ever we can get that financing down. Are you -- I guess you're working through Topeka now to try to get that extension. Is that a safe assumption?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [51]

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You bet. We make at least 1 trip a week to Topeka or sometimes 2.

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Unidentified Analyst, [52]

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And you think you've got their ear finally?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [53]

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Well, I don't know that. You never know with politicians, [Tim]. But yes, it's looking favorable this week. How's that? Next week, it might change.

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Unidentified Analyst, [54]

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I'm just trying to think if -- let's just assume you get that done, let's see what roughly the net effect to shareholders would be. You're paying, what, $4.2 million in a lease now. Is that correct? Right around that range?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [55]

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Yes. Just use between $4 million and $5 million.

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Unidentified Analyst, [56]

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Okay. And you probably can finance $40 million at 5%. It's that unreasonable or not?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [57]

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I don't know. The rate we're quoting is a little higher than that right now, like 5.6% or 5.5%, something like that. The problem is we can't get the rate set until we get the contract extended.

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Unidentified Analyst, [58]

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Well, I'm -- obviously, rates have dropped, so it looks like there's a potential of over $2 million with a 60-40 split. Is that unreasonable to say?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [59]

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Over $2 million with a 60, I don't know about that. I don't know that that's true. I think you got to remember, when you get all done with this lease versus the financing, you got to write -- you got depreciation going on in there, so that screws things up. You got 39.5 years on the building and land, and so you've got some equipment buried in that that's attached to the building. And then you got almost $2 million worth of capital investment we're going to have to make to upgrade the power distribution system. We're having trouble with brownouts from the utilities and we're going to have to increase that. We got about 11 seconds to get the power on if the voltage drops below, what is it, 106 volts, something like that. So going to have to change the way the generator system works and there's not much we can do about the quality. It costs us about $50,000 an hour to have the lights out on a busy evening. So we got a whole lot of variables in there, [Tim], when you say we get rid of the lease and refinance it, and you're going to have to add in a couple of million bucks worth of computer...

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Unidentified Analyst, [60]

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[When you think on] aviation now, Clark, you look pretty solid through this 2020 mandated project. Is that correct?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [61]

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Yes. Mr. Reedy would say that's true. Yes, that's fact. When are we scheduled? In next spring?

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Craig D. Stewart, Butler National Corporation - VP & President of Aerospace [62]

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February.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [63]

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We're scheduled in February now, I believe, yes. We can't get any more business in. Now we are selling some kits, which help, and that's good.

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Unidentified Analyst, [64]

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So it looks like there's some pretty strong aviation revenue for the next 12 months. That's not unreasonable to think?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [65]

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That's probably fair, yes.

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Unidentified Analyst, [66]

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There seems to be about $26 million a year. Is that number a reasonable number?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [67]

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I don't know about that. I would say that you need to look at the market buildup of airplanes out there, new airplanes from the manufacturers of the airplanes in our size. There's no real buildup at King Airs, but some of these people like Embraer and some of these others that slowed up production and not -- that kind of thing, which tells you that we may be looking at some downturn in the airplane business. And we aren't seeing it yet but that -- those are signs that things are not as strong as everybody would like to believe. So I'm not willing to commit to a number that's off the cuff like that. There's just too many variables.

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Operator [68]

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Our next question comes from [Dan West].

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Unidentified Analyst, [69]

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Can you talk about CapEx for this year? And I saw you sold another -- or an aircraft in May. Are there going to be other purchases and sales and retrofitting for customers? And what's the CapEx look like for this year?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [70]

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I told you the CapEx in the casino side of it is in excess of $2 million. And on the airplane side, I don't know that that's that high. It's probably about like -- all the R&D stuff we keep showing, most of that's CapEx in the STC world, so that's somewhere about $1 million to $2 million. And that'll continue because we have to keep updating the STCs and changing them to meet the changes in the airplanes and the changes in the needs of the customer. So I mean the ISR business, the intelligence business is changing every day, and that equipment that we're putting on there is different from last year. And so there's capital expense there that goes on, and that's represented by our expenditures that you're seeing in the 10-K. So I would say those are going to be about the same. As far as -- I think the big item is the additional expenditures in the casino side of it, and they are significant.

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Unidentified Analyst, [71]

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And is that ongoing? Or is that for this year only?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [72]

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No. The average expenditure in the casino is about $1 million to $1.5 million a year, and that's primarily machine updates, keep the floor fresh. Those we really -- we don't -- we report those just as normal operating expenses. And I think -- where actually they're not. They're written off over, what, 22 months.

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Tad Mitchell McMahon, Butler National Corporation - CFO [73]

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Yes, 2 years.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [74]

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Two years. So those are -- that's what those are. Now this business to the electrical side, which is an extra $2 million, that's going to be over a longer period on the write-off of that. But that is true CapEx. The other is kind of a quasi-CapEx because, remember, the machines are owned by the state of Kansas, and we're buying -- we're purchasing machines for our partner, the Kansas Lottery. Those machines are written off because we have the right to use over 22 months, which we've proved up. And that's a nonstandard transaction, if you will, but that's the way it's been for 10 years, so I think it'll continue.

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Unidentified Analyst, [75]

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So what are we looking at? Like $5 million to $6 million total on the CapEx line for this year, way up?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [76]

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That's probably a safe number, yes.

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Unidentified Analyst, [77]

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Okay. And then back down to the $3 million, $4 million range moving forward?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [78]

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Yes. We'll probably get a $2 million bump, yes.

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Unidentified Analyst, [79]

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Okay. That's significant. All right. So can you discuss dilution? It looks like in April, you granted 2.5 million restricted shares, and I say this tongue in cheek. But how much more incentive do you need to work there? And has the company thought about putting a cap on this damaging shareholder activity? This is really harmful to the shareholders when shares rise at this rate. So have you thought about adjusting that or capping it or stopping the damage to us?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [80]

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Well, let's see, we have -- we repurchased stock of 1 million -- almost 1.3 million, and we're trying to buy as much stock as we can get our hands on to keep that dilution from being there. We have -- as you know, we have the incentive in the 401(k) match all as a package for the 401(k). The contributions to the 401(k) by the employees, of course, have increased as the match gets bigger. And our total increase in shares outstanding is about 1.5 million shares for the full year after you net out the buyout. So we're trying to buy out as much as we would grant, and it's just hard for us to do it with all the regulations we have.

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Unidentified Analyst, [81]

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Well, it would be much easier if you stopped granting so many shares.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [82]

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Well, that's true but our outside consultants tell us we're way behind.

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Unidentified Analyst, [83]

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The outside consultants, I don't know where -- if you should find some new ones maybe. Have you looked into that? Because I don't believe that's a standard procedure or an appropriate recommendation possibly. And again, you're not able to buy enough stock to offset this extreme dilution that's really harmful to your shareholders who are not working at the company, like us. So I'm just wondering if the company has considered other routes besides buying back shares, which is not offsetting this dilution. In other words, can you cap these grants to yourselves of large amounts of shares? I mean stock went -- shares outstanding went from 60 million to 68 million over the last few years.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [84]

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And the grants that we are then working on have been approved by the shareholders a couple -- 3 years ago. So that's I think -- that is somewhat a limiting factor in that the shareholders said no, you can't grant any more than that, so we're sitting here. We're trying to [end this] concern at one time. We're going to add -- want to grant all the 12 million, but we didn't do that. So I think our Board is responsive to the fact that we're not going to do it in a big hurry.

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Unidentified Analyst, [85]

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All right. I think maybe the Board should ask itself if it should be not just -- not in a big hurry but not in full.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [86]

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I don't know. This -- our purpose here today is discuss the numbers in the 10-K. When the proxy call comes, then we can deal with that part of it. That is in the proxy stuff.

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Unidentified Analyst, [87]

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Is -- are the operating costs going to be rising at the same rate moving forward, G&A and things like that?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [88]

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Probably, especially as the revenue increases and the capacity is toward the heavy side, why, we're going to have additional costs. I mean that's all there's to it. We entered into the long-term lease on the hangar out here. We are in a position we're going to have to build another $2 million, $3 million hangar sooner or later. Maybe not in this fiscal year but next one for sure, and it's about a $3 million deal. And we're going to have to do that to take care of Butler Avionics and the engineering support here, and that cost is going to go up. There's no question about it. And that goes up in the form of rent, which ends up down there in the general expenses, so yes.

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Unidentified Analyst, [89]

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Okay. You mentioned in your comments that you believe something might happen in the next couple of months regarding the gaming license extension. And then in the Q&A, you said things change a lot. Is there any reason to believe that we're moving towards a resolution there or in other words, an extension that's different than your past opinion?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [90]

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We're not moving backwards. Before, we were moving backwards half the time. At least we seem to be moving forward all the time, so I guess that's a positive answer.

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Unidentified Analyst, [91]

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Okay. And we didn't hear much about the spinoff or anything today. Is that still a goal? Or is that just a dream of -- in the future?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [92]

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As we've discussed in the past, we need to get the contract extended, so we got 20 years to deal with. Then you've got something to spin off. Otherwise, you've got 5 years and you've got a $54 million debt at the end of the 5 years.

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Unidentified Analyst, [93]

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Has the company considered alternative spin-off routes using private equity or nontraditional bank loans of other kinds in order to get this spun off? It doesn't seem like these business make sense together nor does it seem to be efficient to wait for political change to come about.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [94]

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Let's talk about this in real simple terms. Contract we're on now expires in 5 years and 3 months. When that contract expires, you owe $54 million. Now who is going to come in and spin that off without having a contract?

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Unidentified Analyst, [95]

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So you can't do it without discussing.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [96]

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That's right. That's exactly what it is.

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Operator [97]

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Our next question comes from [Stan Bobowski].

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Unidentified Analyst, [98]

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You seem to cover a lot with both [Timothy] and [Dan]. But as far as the refinancing, so we're not as friendly with the people controlling -- the political nature controlling the 40%. Is that -- what do we need to do to sort of -- I mean they have 40%, and you would think there's some -- to increase the value of the whole thing if they could do a deal to get a financing done, wouldn't it benefit the government of Kansas?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [99]

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It would. But the key is, though, remember, we're talking about 5 years and 3 months. And the fact that if you look at the literature in Kansas, you've got the lottery working on various kinds of sports betting, iLottery, various things like that, which the banks get a little nervous looking at that. But anyway that's out there as potential competition. And we had another casino from the Indian side going in, in Oklahoma, in the Panhandle, which will lead into our Texas market if the -- if our marketing is not as strong as we think it's going to have to be. And we are spending money in that market at this point to combat that situation. That opens in the fall. And -- so those 2 things are hanging out there, and we need the extension so that people know we're going to be there more than 5 years. And the way it sits right now, if you read all the paperwork and didn't do anything else, that's where we are. The other casinos are faced with the same problem except they're 7 years away. So I mean it's a tough situation from that standpoint. But we are...

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Unidentified Analyst, [100]

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But it would appear -- yes, but Clark, it would appear that the government, to the extent they help you get the financing do whatever it makes, I don't know what they need to do, but they need to do something that they could increase the value of this casino that if you spun it out, it has a greater value. Shareholders would have 60%. The government would still have 40%, which they could -- depend on the valuation, subsequently, they could be a winner-winner. They could reduce it to -- from 40% to another and have more money. So I mean is that an approach you're taking or you're telling them? Or what are you telling them to sort of get them to make a decision to help you get to the bank? I don't...

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [101]

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Let's talk about that a little further. We are -- we changed administrations last January?

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Tad Mitchell McMahon, Butler National Corporation - CFO [102]

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Yes.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [103]

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We changed to a new governor. So we have a new governor and he's a Democrat. The previous one was a Republican and of course, all these agencies are going through a change in management, if you will, as that rolls over. And so we're probably -- we should have probably expected to take 9 months before we got somebody new in charge and got him in a position where they're favorable -- the governor is favorable to the casinos. It's not a negative situation at all. It's one of these administrative situations where we got to get the right person in charge to take the action that we need to have done. And that's why I'm saying we're not moving backwards. We're at least holding our ground and making some progress at this point.

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Unidentified Analyst, [104]

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So it sounds like it's an education process with the new administration.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [105]

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Yes, yes. It's a change in administration really, yes.

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Unidentified Analyst, [106]

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Okay. Okay. Now let's see. On the -- your avionics section, your backlog went up to $19.9 million. Are there -- would you say you're bidding for more business similar to the previous quarter? Or are there less bids out going forward?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [107]

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What would you say, Aric?

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Aric Peters, Butler National Corporation - Director of Business Development [108]

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More going forward.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [109]

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There's more going forward. I think that would've been my comment, but since Mr. Peters is in here and he's in charge of that, I thought I'd ask him the question. But I think the demand is growing. The only caution I -- like I mentioned earlier, is the fact that some of the airplane manufacturers in the small business jet and turbine engine type airplanes seem to having little slow up in their manufacturing, which tells you the demand might be a little weaker than what we see. So that tells us that if we were just doing just normal business airplanes, we might be real cautious.

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Aric Peters, Butler National Corporation - Director of Business Development [110]

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We're scheduling real actual slots into January right now, which is the longest since I've been here in 20 years.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [111]

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So yes...

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Unidentified Analyst, [112]

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Are you working 1 shift or 2 shifts? Or what are you...

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [113]

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Yes. We're working as many shifts as we can find people to work. So we had a breakfast meeting with the contract employed people this morning and they're helping and they use -- we use them because they can kind of steal them away from the big guys off and on and that's the real challenge of the whole thing is special mission and the state of war in the world I guess is probably increasing instead of decreasing, and therefore, our business is going up. And we're in the gun control business. We're in the ISR, the surveillance reconnaissance type world. And then we're in the compliance with the FAA regulations, which is also a safety factor. So we have 3 things going on here all at the same time. I hate to be pessimistic in the airplane production being kind of slowed up. But that's the only negative we see out there to tell you the truth.

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Unidentified Analyst, [114]

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Is the profitability of the contracts the same, improving, decreasing?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [115]

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We think that's going up. Aric's saying thumbs up, not decreasing.

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Unidentified Analyst, [116]

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Pardon?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [117]

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I say it is not decreasing, no.

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Aric Peters, Butler National Corporation - Director of Business Development [118]

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We've got less labor-intensive products coming out the door.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [119]

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Yes.

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Unidentified Analyst, [120]

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Okay. And the plane that was sold in the first quarter of the next year with the $0.5 million profit, is that the same plane -- similar -- used for the same purpose as this $3 million plane that you put into production that you're utilizing now?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [121]

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Yes. The answers is, yes, it's accepted. So Learjet version and the one we're working on is King Air. That one -- yes, definitely that one is special mission all over the place, the one that went to Australia.

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Unidentified Analyst, [122]

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Do we have any more unusual transactions like the sale of a plane or -- I mean the sales tax, which produced almost $2 million before the 40% reduction or -- we're going forward with everything the same versus any unusual transactions in the new year?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [123]

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I'd say the only unusual is probably more CapEx, but that's -- we just got to kind of do that to keep some place for people to work. But that's -- the other thing that's going to be questioned is how do you deal with these capital leases as we put them on the balance sheet. They're going to look funny and they're going to look funny on everybody else's balance sheets. But bottom line is if you're leasing something, you're going to capitalize the lease payments, and you're going to set up the liability. When you get to the end of the lease, you will depreciate the lease, so you got a distortion in the expenses and the profitability of the thing. And when you're all done at the end, you don't own anything and you don't owe anybody. But the lease screwed up the financial statements in the 10 years of lease, 15, whatever the term is. So that's something we're going to deal with as -- to get to the first quarter and have that transaction. But overall, we're profitable. I think the discussion of the ownership in the 40%, 60%, we need to look at the 10-K actually. What we have is we own 60% of the casino and our partner has 40%, and what that amounts to is we split those -- the tax 60-40 because of the distribution of the ownership. (inaudible)

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Unidentified Analyst, [124]

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Okay. And for -- yes, and I'm sorry for interrupting, Craig. Go ahead.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [125]

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It's not the state of Kansas that owns 40%. It's the -- it's our business partner, BHC Investment.

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Unidentified Analyst, [126]

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I see. I see.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [127]

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If you look in your 10-K, it'll show you. Got a whole bunch of discussion on that but that's the easy answer right there, that 40% partner.

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Unidentified Analyst, [128]

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And during this period of time, have you been looking for any acquisitions or -- I know you'd because of -- with the casino, you'd like to get this financing done. As other people come around making any offers to you, any the larger casino operators saying, "Look, we'd like to acquire your casino or merge it or whatever," and with a certain valuation that would be higher than -- more appropriate at this point in time?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [129]

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No. We haven't had any inquiries as to the purchaser participation in the casino. And I think that there is not going to be any in the state of Kansas till we resolve whether they're going to extend the contracts or not.

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Unidentified Analyst, [130]

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Okay. And as far as looking at acquisitions for the avionics or something that you would fit into or would acquire your piece, have you done anything in that area?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [131]

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No. We haven't had any activity. We're flying here. I think everybody else is busy and they don't have time to do it either is basically what's happening. And we have -- the answer's we don't have any.

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Operator [132]

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Our next question comes from [Abigail Bannermen].

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Unidentified Analyst, [133]

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Would you consider a Dutch auction tender to buy back a large amount of shares like 20% or more given your depressed valuation?

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [134]

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I don't know what a Dutch auction does. I haven't studied that. That's a Board question, and we will have to take that up to the Board.

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Unidentified Analyst, [135]

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Okay. And who is the best point of contact if we do have follow-up questions after digesting this? We reached out a couple of times. Just want to know who the best person is to reach out to if we have follow-up questions.

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Aric Peters, Butler National Corporation - Director of Business Development [136]

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The best answer is put something in writing and send it to the Corporate Secretary, Chris Reedy.

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Unidentified Analyst, [137]

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Chris Reedy. Okay.

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Aric Peters, Butler National Corporation - Director of Business Development [138]

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Yes, that's headquarters-- at the headquarters.

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Unidentified Analyst, [139]

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Okay. So put it in writing, that's the best way?

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Aric Peters, Butler National Corporation - Director of Business Development [140]

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Yes. Send it via mail to the headquarters.

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Operator [141]

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(Operator Instructions) At this time, we have no further questions.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [142]

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Thank you. David, are you back on...

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David Drewitz, [143]

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I'm sorry. I was going to say do you have any closing statements.

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Clark D. Stewart, Butler National Corporation - President, CEO & Director [144]

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No. I'd just thank everybody for spending the 45 minutes talking about the 10-K. We appreciate your interest in Butler National Corporation. Thank you very much. That's all, David.

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David Drewitz, [145]

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Thank you, everyone.

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Operator [146]

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This concludes today's call. Thank you for attending.