Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year Ended September 30, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-20757
TRAVIS BOATS & MOTORS, INC.
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of
incorporation or organization)
74-2024798
(I.R.S. Employer
Identification Number)
12116 Jekel Circle, Suite 102, Austin, Texas 78727
(Address of principal executive offices)
Registrant's telephone number, including area code: (512) 347-8787
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Report on Form 10-K or
any amendment to this Report on Form 10-K.
------
The aggregate market value of the voting stock (which consists solely
of shares of Common Stock) held by non-affiliates of the Registrant as of
January 17, 2003, (based upon the last reported price of $.55 per share) was
approximately $1,584,467 on such date.
The number of shares of the issuer's Common Stock, par value $.01 per
share, outstanding as of January 17, 2003 was 4,329,727, of which 2,880,849
shares were held by non-affiliates.
Documents Incorporated by Reference: Portions of Registrant's Proxy
Statement relating to the 2003 Annual Meeting of Shareholders, have been
incorporated by reference herein (Part III).
TRAVIS BOATS & MOTORS, INC. AND SUBSIDIARIES
REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
RISK FACTORS......................................................................................................1
PART I ...........................................................................................................7
Item 1. Business ............................................................................................7
Item 2. Properties ..........................................................................................18
Item 3. Legal Proceedings ...................................................................................19
Item 4. Submission of Matters to a Vote of Security Holders .................................................19
PART II .......................................................................................................19
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ................................19
Item 6. Selected Financial Data .............................................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...............21
Item 7A Quantitative and Qualitative Disclosures About Market Risk ..........................................35
Item 8. Financial Statements ................................................................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................36
PART III .......................................................................................................36
Item 10. Directors and Executive Officers ...................................................................36
Item 11. Executive Compensation .............................................................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management .....................................36
Item 13. Certain Relationships and Related Transactions .....................................................36
PART IV ........................................................................................................36
Item 14. Controls and Procedures.............................................................................36
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................................37
Consolidated Financial Statements .................................................................F-1
Report of Independent Auditors ...................................................................F-2
Consolidated Balance Sheets ......................................................................F-3
Consolidated Statements of Operations ............................................................F-5
Consolidated Statements of Stockholders' Equity ..................................................F-6
Consolidated Statements of Cash Flows ............................................................F-7
Notes to Consolidated Financial Statements ........................................................F-8
ii
Risk Factors
Some of the information in this Report on Form 10-K contains
forward-looking statements that involve substantial risks and uncertainties. You
can identify these statements by forward-looking words such as "may", "will",
"expect", "anticipate", "believe", "estimate", and "continue" or similar words.
You should read statements that contain these words carefully because they (1)
discuss our future expectations; (2) contain projections of our future results
of operations or of our future financial condition; or (3) state other
"forward-looking" information. We believe it is important to communicate our
expectations to people that may be interested. However, unexpected events may
arise in the future that we are not able to predict or control. The risk factors
that we describe in this section, as well as any other cautionary language in
this Report on Form 10-K, give examples of the types of uncertainties that may
cause our actual performance to differ materially from the expectations we
describe in our forward-looking statements. You should know that if the events
described in this section and elsewhere in this Report on Form 10-K occur, they
could have a material adverse effect on our business, operating results and
financial condition.
Execution of Restructure Plans. The Company anticipates that it will
require additional working capital or financing to fund operations for certain
periods during at least the first two quarters of its fiscal 2003 year. We
believe that our anticipated cash needs exceed amounts otherwise available under
current inventory borrowing agreements, our cash balances and under the recent
agreements relative to the Note (as defined herein). (See Risk Factors -
"Operating Losses and Reduced Financing have Jeopardized our Cash Flow") This
projected cash flow shortfall is influenced in part by our seasonal trends,
which include historically low sales levels during the October through December
periods. Also, the seasonal lull normally experienced at the end of a calendar
year was compounded at the end of 2002 by continued economic uncertainty, weak
industry sales trends, and certain revised borrowing terms on our inventory
borrowing agreements which have had the effect of reducing our cash balances and
borrowing availability.
In recognition of this issue, we have (i) negotiated interim financing
as discussed below, (ii) developed management plans to significantly reduce
expense levels, (iii) entered into various agreements with a major shareholder
as discussed below, and (iv) formed a special Operating Committee of our Board
of Directors as discussed below. The Operating Committee will have authority to
oversee the overall financial operations of the Company (including all store
level and management operating expenses, employee headcount, inventory reduction
measures and other relevant expenses or initiatives) and to review weekly cash
flows.
We took these actions to create a plan to (i) stop, or in the
alternative, materially reduce the operating losses experienced during the past
two fiscal years, and (ii) to allow the Company to work towards building cash
reserves during the 2003 fiscal year that will potentially be sufficient to
alleviate, or alternatively reduce, similar off-season working capital
shortages. Key components of this plan include interaction with management, the
Operating Committee, our lenders and our key vendors to reach plans that provide
for a collaborative effort to reach attainable ratio levels in our debt
agreements and to enhance cash flow. We plan to enhance cash flow by, among
other initiatives, carefully reducing (i) variable expenses, including those
expenses related to payroll and benefits; (ii) reviewing additional store
locations for closure that are not expected to contribute to cash flows or are
in markets that can reasonably be served by other nearby Travis Boating Center
locations and (iii) improve sales management to speed the pace of reductions in
both new and used aged inventories which have historically tied up our cash flow
as a result of our inability to borrow funds against those products.
The restructure plans, along with detailed plans for our ongoing
borrowing needs, are to be approved by our Operating Committee and submitted to
our various lenders prior to April 30, 2003. Accordingly, the restructure plan
is an integral component in improving our cash flows and in negotiating new
borrowing agreements, however there is no assurance that our plans will succeed,
or in the event that they do succeed, that they will be sufficient to offset our
net losses, improve our cash flow or provide a basis for the continuation of our
financing. (See Risk Factors - "Operating Losses and Reduced Financing have
Jeopardized our Cash Flow").
Operating Losses and Reduced Financing have Jeopardized our Cash Flow.
As a part of our search for additional financing to reduce our anticipated
shortfalls in cash flow prior to the impact of positive cash flows historically
beginning in March of each selling season, we entered into a short term
financing agreement (the "Note") with TMRC, L.L.P ("TMRC" or "Tracker") and our
current senior inventory finance lenders to provide our Company with up to an
1
additional $1.5 million in financing through April 30, 2003. The initial advance
under the Note was $600,000. A second advance of $645,000 was requested and
received on January 16, 2003, but there is no guarantee of any additional
funding since the financing pursuant to the Note is subject to discontinuance at
any time by any of the lenders. Each of the lenders under the Note has the sole
discretion regarding any future advancement of additional funds under the Note.
Further, there is no guarantee that our cash requirements will not exceed the
amount which otherwise could be borrowed under the Note. As security for the
Note, we have pledged our federal income tax returns towards the repayment of
any amounts outstanding under the Note. (See Risk Factors - "Financing
Arrangements" and "Income Tax Refunds Pledged as Security").
As a condition to the Note, we reached an agreement with our senior
inventory finance lenders to amend our inventory borrowing agreements to (i)
waive various current defaults, (ii) modify certain covenants and terms, and
(iii) to extend the maturity date under those agreements from the original
expiration date of January 31, 2003 to a new expiration date of April 30, 2003,
unless otherwise terminated earlier in accordance with the terms of the
agreements. Due to the Company's need for ongoing inventory financing to support
working capital and operations, we will continue to work towards a long-term
extension of the inventory borrowing agreements beyond the maturity date of
April 30, 2003. However, there is no assurance that negotiations with our senior
inventory finance lenders will result in an extension of the current inventory
borrowing agreements or in new financing arrangements. There is also no
assurance that these or alternative inventory borrowing agreements will be
available to the Company or that such financing, if available, will be in
amounts or have terms and conditions sufficient to provide necessary working
capital to the Company. (See Risk factors - "Execution of Restructure Plan").
Failure by the Company to reach an agreement with its senior inventory finance
lenders to extend the inventory borrowing agreements could have the effect of
requiring the Company to (i) seek additional capital; (ii) only purchase
inventory from manufacturers willing to execute repurchase agreements with our
lenders; (iii) reduce our inventory purchase commitments to a level consistent
with financial accommodations available to us, (iv) sell or liquidate additional
assets to raise cash balances, or (v) secure alternative financing. Our failure
or inability to renew or complete alternative financing arrangements with terms
and conditions at least as favorable as currently in place for the Company could
jeopardize our financial stability and force us to further restructure our
operations, or possibly to suspend operations until a plan of alternative
financing is achieved. Accordingly, the lack of sufficient financing or
suspension of our operations could result in our inability to continue as a
going concern or result in our seeking bankruptcy protection while we further
restructure our operations. (See Note 14 - "Subsequent Events" in the
consolidated audited financial statements of the Company and notes thereto
included elsewhere in this Report on Form 10-K).
We are Out of Compliance on Certain Loan Agreements and Have Been Out
of Compliance on Others. We have completed the last two fiscal years with net
losses. As a result of these net losses, we have been out of compliance, at
various times, on certain loan agreement requirements of our inventory borrowing
agreements and real estate loans. These have occurred because we did not have
the amount of net earnings or cash flow required under our loan agreements. We
have negotiated short term waivers discussed above on terms of our inventory
borrowing agreements; however we are also currently not in compliance with
financial covenants of a loan agreement on certain real estate loans with
Hibernia National Bank ("Hibernia") requiring (i) minimum cash flow and (ii)
minimum tangible net worth.
Our inability to continue to (i) negotiate waivers, (ii) to restructure
these loans, or (iii) operate without being in compliance would result in a
significant and severe financial impact on our business, operating results and
financial condition. It would also result in a concurrent default on our
inventory borrowing agreements. Accordingly, the Company is seeking to (i)
refinance these loans with other lenders based upon the favorable loan amount
(approximately $7.0 million as of September 30, 2002) to appraised valuation
(approximately $12.3 million as of September 30, 2002) based on the lender's
third party appraisals of the real estate securing the loan; (ii) sell the real
estate in a sale/leaseback transaction, or (iii) sell the real estate and
relocate the effected store locations to alternative leased locations. There is
no guarantee that the Company will be able to renegotiate these loans, to
refinance the loans or to sell the real estate, and, even if the Company is
successful, that the terms of any re-negotiation, refinance or sale will be
acceptable to the Company or result in proceeds sufficient to repay the
indebtedness. This could jeopardize our financial stability and force us to
further restructure our operations, or possibly to suspend operations until a
plan of alternative financing is achieved. Such an action could result in our
2
Company being unable to continue as a going concern. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources"; and Note 1 - "Basis of Presentation" and Note
14 - "Subsequent Events" in the consolidated audited financial statements of the
Company and notes thereto included elsewhere in this Report on Form 10-K).
Change of Control. As of January 7, 2003, as a result of a series of
agreements (the "Agreements") with our senior inventory finance lenders (the
"Senior Lenders") and Tracker, Tracker has assumed effective control of the
Company. The Agreements give Tracker the right to designate four of the seven
members of the Board of Directors of the Company, the right to acquire shares
from certain insiders of the Company, voting control of a majority of the voting
power of the outstanding securities of the Company through a voting trust, and,
together with the Senior Lenders, provide short-term advance-type financing to
address the current operating needs of the Company. (See Risk Factors -
"Operating Losses and Reduced Financing have Jeopardized our Cash Flow".)
Under the terms of the Agreements, Tracker now has the right to
designate four of seven members of the Company's Board of Directors. Tracker
currently has two representatives on the Board of Directors pursuant to
Tracker's ownership of 80,000 shares of the Company's Series A Preferred Stock,
and has not yet designated two additional representatives. The Agreements also
call for the formation of a three-member Operating Committee of the Company's
Board, to be made up of a majority of members designated by Tracker. The initial
members of the Operating Committee, as designated by Tracker, are Kenneth N.
Burroughs, Richard Birnbaum, and Robert Ring (each of whom is a current director
of our Company). The Operating Committee will have authority to oversee the
overall financial operations of the Company (including all store level and
management operating expenses, employee headcount, inventory reduction measures
and other relevant expenses or initiatives) and to review weekly cash flows to
determine whether additional borrowings are necessary under the Note. The
composition of a majority of the Board of Directors and the entire Operating
Committee, effective as of January 7, 2003, is to be determined by Tracker.
There is no assurance that Tracker will continue to make management decisions
similar to the current Board of Directors, nor is there any assurance that it
will direct the Operating Committee to request additional funding for the
Company. A decision by the Operating Committee not to request additional
funding, lender refusal to grant requests that are submitted or our inability to
increase the amount of financing to cover unanticipated or additional cash
shortfalls could result in financial instability for the Company. This financial
instability could result in our Company being unable to continue as a going
concern.
Prior to the Agreements, pursuant to its holding 80,000 shares of
Series A Preferred Stock, Tracker beneficially owned approximately 43% or
3,252,825 shares of the Company's common stock on a fully-diluted, as-converted
basis. As a result of the Agreements, Tracker now has voting control of
approximately 53% or 4,082,534 shares on a fully-diluted, as-converted basis.
This voting control was obtained through a proxy granted by an insider covering
202,643 shares of common stock and through the creation of a newly-formed voting
trust, to be controlled by a trustee designated by Tracker (the "Voting Trust").
Deposited in the Voting Trust are all of the securities held by Tracker and
insider shareholders Robert Siddons (director), owner of 292,866 shares, and
Mark Walton (President and Chairman), owner of 334,200 shares. The term of the
Voting Trust is five years, but is subject to earlier termination if Tracker
otherwise becomes the holder of 55% or more of the common stock of our Company
on a fully-diluted, as-converted basis. The existence or expiration of the
Voting Trust does not restrict Tracker's ability to acquire additional shares of
the Company from third parties nor of the insiders to sell such shares subject
to terms of the Voting Trust. This change in the voting control of our Company
could result in changes in (i) the management, operations or direction of our
Company, (ii) the type of inventory products stocked or the presentation of the
product, or (iii) numerous other aspects of our operation or Travis Edition
product line. Such changes could produce financial instability in our Company.
This financial instability could result in our Company being unable to continue
as a going concern.
In order to ensure that Tracker maintains its voting control position,
each Company insider who purchased Convertible Notes from our Company in the
aggregate amount of $1,300,000 on or about December 14, 2001 (at a conversion
price of $2.4594 per share of common stock) also has agreed not to convert such
notes at any time prior to November 15, 2004, and that any shares that may be
acquired upon conversion after such date shall be deposited into and governed by
the Voting Trust. Further, various insiders of our Company cancelled stock
options covering, in the aggregate, 237,198 shares of the Company's common
stock.
3
Tracker has also acquired, for a period of 90 days, the right to
purchase Voting Trust certificates (representing certain of the shares deposited
into the Voting Trust) at a purchase price of $1.20 per share from Messrs.
Walton and Siddons. During this option period, Tracker has the right to purchase
the lesser of (a) the number of shares (pro rata among Messrs. Walton and
Siddons) required to give Tracker effective control of 51% or more of the common
stock of the Company on a fully-diluted, as if converted, basis, or (b) 30% of
Messrs. Walton's and Siddons' respective holdings of our common stock. (See Note
14 - "Subsequent Events" in the consolidated audited financial statements of the
Company and notes thereto included elsewhere in this Report on Form 10-K).
Financing Arrangements. Under the terms of the Agreements, Travis
secured from Tracker and its Senior Lenders an aggregate amount of $1,245,000 as
advances under the Note described above in Risk Factors - "Operating Losses and
Reduced Financing have Jeopardized our Cash Flow." Total potential availability
under the Note is $1.5 million, and the Note was based upon advancing the
Company a portion of the refund amount expected to be received pursuant to the
filing of its calendar year 2002 federal tax return. The Note matures
concurrently with our inventory borrowing agreements on April 30, 2003. There is
no assurance that the Company will receive additional financing under the Note,
nor is there any assurance that the Senior Lenders will extend the current
inventory borrowing agreements beyond the maturity date of April 30, 2003.
The Note will be administered by the newly-formed Operating Committee
of the Company's Board of Directors (described above, and controlled by
Tracker). This Committee will have the authority to request additional funds,
pursuant to the Note, from the lenders. Upon a request for funding, Tracker and
the Senior Lenders may, in their individual sole and absolute discretion,
advance the additional funds requested. There is no assurance that the Operating
Committee will request additional funds, or that Tracker or the Senior Lenders
will agree to advance the additional funds requested. A failure by the Operating
Committee to request funds, or by Tracker or the Senior Lenders to advance
additional funds, could have the effect of jeopardizing the Company's financial
stability. This financial instability could result in our Company being unable
to continue as a going concern.
The Company believes that it will be able to repay any outstanding
balance remaining under the Note with the amounts expected to be received from
its 2002 federal tax return. Failure to achieve additional financing from other
sources, failure to negotiate the extension of its inventory borrowing
agreements, or the receipt of funds from the Company's 2002 federal tax return
(i) after the Note's maturity date of April 30, 2003 or (ii) in an amount
insufficient to pay the balance of the Note could result in the default on the
Note and of our inventory borrowing agreements. This default may result in the
demand for immediate or accelerated payment in full of all debts, which could
cause financial instability in our Company. This financial instability could
result in our Company being unable to continue as a going concern.
Income Tax Refunds Pledged as Security. Borrowings under the Note are
secured by all of the Company's claims to any monies currently due or to become
due to the Company from the federal government arising from any application for
an income tax refund for the 2002 calendar or any tax year. Consequently, any
refund(s) received by the Company must be applied against any amounts
outstanding under the Note. Based upon the Company's tax estimates, it believes
that a refund of approximately $1.8 million will be received during the second
calendar quarter of 2003. There is no guarantee that the amount of the tax
refund received by the Company will be sufficient to pay off the balance of the
Note. Receipt of substantially less than the expected amount could have the
effect of jeopardizing the Company's financial stability. This financial
instability could result in our Company being unable to continue as a going
concern.
Our Income Tax Refunds Could Become Limited. We have received, and for
the calendar year 2002 tax return expect to receive, income tax refunds because
of our net losses. However, we are only eligible to receive refunds up to the
amounts of taxes we have paid during certain prior years. Because of our
significant net losses during the years 2002 and 2001, once we file our annual
2002 federal income tax return we will no longer be able to claim refunds since
we may exhaust the federal income taxes we paid in prior years (we have a tax
year end of December 31). Also, under current federal income tax law we are
limited to two years of carryback of any net operating losses incurred after our
2002 tax year and there were no federal income taxes paid, or expected to be
4
paid, during this two year carryback period. Consequently, if we have net
operating losses for the year ended December 31, 2003 or thereafter, our refund
claims may exceed the amount of income taxes we have paid in during the prior
period available for the carry-back of taxes and our tax refund could be reduced
in part or in full. Since we rely on the tax refunds for operating cash flow,
our inability to continue to receive tax refunds could have a material adverse
effect on our business, financial condition and results of operations and
prospects resulting in financial instability and our inability to continue as a
going concern. (See Risk Factors - "Income Tax Refunds Pledged as Security" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."; and Note 1 - "Basis of
Presentation" in the consolidated audited financial statements of the Company
and notes thereto included elsewhere in this Report on Form 10-K).
Our Auditors Have Audited our Financial Statements and Express Doubt as
to our Ability to Continue to Operate as a Going Concern. Our financial
statements are audited by the accounting firm, Ernst & Young LLP. Ernst & Young
LLP has included a "going concern" explanatory paragraph in its opinion on our
financial statements for the fiscal year ended September 30, 2002, which cites
uncertainty as to our Company's ability to continue to operate as a going
concern without additional capital or the successful refinancing of our
indebtedness, is the result of our Company's operating losses; inventory
borrowing agreements expiring in April 2003 and our non-compliance with certain
covenants of loan agreements. Since our current and prospective lenders, certain
investors and vendors rely on our audited financial statements, our inability to
continue to borrow money at terms and conditions as currently available to us
or, in the alternative, to refinance our loans at as favorable terms and
conditions, could have a material adverse effect on our business, financial
condition and results of operations and prospects. This financial instability
could result in our Company being unable to continue as a going concern. (See
Risk Factors - "Our Substantial Indebtedness Could Restrict Our Operations and
Make Us More Vulnerable to Adverse Economic Conditions" , "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and Note 1 - "Basis of Presentation" in the
consolidated audited financial statements of the Company and notes thereto
included elsewhere in this Report on Form 10-K).
We Must Comply With Listing Requirements for the NASDAQ Stock Market.
We transferred our common stock to the Nasdaq Small Cap Market effective as of
October 25, 2002. We requested the transfer because our Company did not comply
with all of the requirements for trading on the Nasdaq National Market. We
believe that the closing price of $.55 per share for our common stock on January
17, 2003 is below the compliance standard of the minimum $1.00 bid price
required by the Nasdaq Small Cap Market. Our continued inability to maintain the
required share price range or other requirements for trading on the Nasdaq Small
Cap Market could result in our common stock being delisted and not eligible for
trading on the Nasdaq Stock Market. Since we rely on the Nasdaq Stock Market to
offer trading of our common stock, our inability to continue on the Nasdaq Stock
Market could have a material adverse effect on our business, financial
condition, the price of our common stock and the ability of investors to
purchase or sell our common stock. (See Risk Factors - "Our Stock Price May be
Volatile").
General Economic Conditions in the United States and in the Areas Where
We Have Stores Affect Our Sales. Our industry, like many other retail
industries, depends on the local, regional and national economy. High interest
rates, high fuel prices, unfavorable economic developments, volatility or
declines in the stock market or consumer confidence levels, fears over terrorism
or possible military deployments, changes to the tax law such as the imposition
of a luxury tax or (with respect to a specific region) a major employer's
decision to reduce its workforce can all significantly decrease the amount of
money consumers are willing to spend on discretionary activities. When these
situations arise, consumers often decide not to purchase relatively expensive,
"luxury" items like recreational boats. For example, our Company's sales levels
declined and our Company recorded significant net losses during both the 2002
and 2001 fiscal years due, in part, to the United States experiencing weak
economic conditions (such as rising unemployment levels, reduced consumer
confidence and volatile stock markets). From 1988 to 1990, our business also
suffered dramatically because of the declines in the financial, oil and gas and
real estate markets in Texas. If the current economic downturn continues or if
similar downturns in the national or in local economies arise in the future, we
may suffer significant additional operating losses. (See Note 1 - "Basis of
Presentation" in the consolidated audited financial statements of the Company
and notes thereto included elsewhere in this Report on Form 10-K).
5
Changes in federal and state tax laws, such as the imposition of luxury
or excise taxes on new boat purchases also could influence consumers' decisions
to purchase products we sell and could have a negative effect on our sales. For
example, during 1991 and 1992 the federal government imposed a luxury tax on new
recreational boats with sales prices in excess of $100,000. This luxury tax
coincided with a sharp decline in boating industry sales during the 1991 and
1992 periods. Any of these experiences would likely result in a material adverse
effect on our business, our operating results and our financial condition. This
financial instability could result in our Company being unable to continue as a
going concern.
We Depend on Strong Sales in the First Half of the Year. Our business,
and the recreational boating industry in general, is very seasonal. Our
strongest sales period has historically begun in January, because many boat and
recreation shows are held in that month. In the past, strong sales demand has
continued from January through the summer months. Of our average annual net
sales over the last three fiscal years, over 27% occurred in the quarter ending
March 31 and over 37% occurred in the quarter ending June 30. With the exception
of our store locations in Florida, our sales are generally significantly lower
in the quarter ending December 31. Because the overall sales levels (in most
stores) in the December quarter are much less than in the months with warmer
weather, we generally have a substantial operating loss in the quarter ending
December 31. Because of the historical difference in sales levels in the warm
spring and summer months, versus the cold fall and winter months, if our sales
in the months of January through June are weak as a result of lackluster
consumer demand, timing of boat shows, bad weather or lack of inventory we will
likely suffer significant operating losses. This experience would likely result
in a material adverse effect on our business, our operating results and our
financial condition. (See Risk Factors - "Our Sales Depend on Good Weather" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
Our Sales Depend on Good Weather. Our business also depends on
favorable weather conditions. For example, too much or too little rain, either
of which may result in dangerous or inconvenient boating conditions, can force
lakes, rivers or other boating areas to close for safety issues and severely
limit our sales. A long winter can also shorten our selling season. Hurricanes
and other storms could result in the disruption of our operations or result in
damage to our inventories and facilities. Bad weather conditions in the future
may decrease customer demand for our boats, which may decrease our sales and
could significantly lower the trading price of our common stock.
Our Insurance May Not Reimburse Us for Certain Damage or Disasters. We
purchase insurance for storm damage and other risk events, but (i) the amount of
insurance purchased, and (ii) the coverage we purchase or are eligible to
purchase, may not repay us for all weather related damages or disruptions to our
sales levels or store operations. Also, deductible levels available to us may
result in large out of pocket expenses prior to us obtaining any available
insurance coverages. Our store locations in FEMA Flood Zones do not have
insurance coverage on inventory damages resulting from floods or rising water
since FEMA policies do not provide coverage for inventory that is stored or
located outdoors. Consequently, we must relocate inventory from these locations
in the event of hurricanes or other storms. In the event that we are not able to
secure adequate insurance coverage or if we suffer losses that are not covered
by our insurance policies it may lead to a material adverse effect on our
business, our operating results and our financial condition.
We have not opened New Stores Recently and Much of our Past Growth has
been the result of Acquiring and Opening New Stores. We have grown primarily
through the acquisition of recreational boat dealerships. We began with one
store in Texas in 1979 and, from that date through March 2000 we opened or
acquired new stores in Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi, Oklahoma, Tennessee and Texas. However, we have not opened or
acquired any new store locations since March 2000. (See Risk Factors - "We Have
Reduced our Store Count by Closing Store Locations".)
Our comparable store sales (which are sales in stores that are open in
the same location for at least two consecutive years) decreased by 11.6% and
6.1% in fiscal 2001 and 2002, respectively. We expect our comparable store sales
to continue to fluctuate from the unstable market conditions which impacted the
United States and the marine industry during our 2002 fiscal year. (See Risk
Factors - "General Economic Conditions in the United States and in the Areas
Where We Have Stores Affect Our Sales.")
6
Our borrowing and certain other agreements require us to receive
approvals prior to opening or acquiring new store locations. Therefore, we may
only make acquisitions depending upon, among other things, our financial
strength at the time of a proposed acquisition and our ability to finance these
transactions within the terms of our borrowing agreements. In the event that we
complete acquisitions or open new store locations, our success will depend on
our financial strength, our ability to hire and retain qualified employees and
our ability to identify markets in which we can successfully sell our products.
Our success will also depend on our ability to liquidate the acquired store's
remaining inventory, to convert the store facility to a Travis Boating Center
superstore and to attract new customers to the store after the conversion. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.")
Besides acquiring existing stores and converting them into Travis
Boating Centers, we may build new stores in cities or towns that do not have
other boat retailers that we can purchase or would like to purchase. Our success
in building and operating new facilities will depend on whether we obtain
reliable information about each potential market, such as how many and what type
of boats have previously been sold in the market. We must then be certain that
the prices of our boats are competitive with other boat dealers that sell boats
in the market so that we can sell enough boats to operate our store profitably.
We cannot promise or be certain we when will open or close new stores. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.")
We Have Reduced our Store Count by Closing Store Locations. We have
closed three store locations in fiscal 2002 and two store locations in fiscal
2001 because the store locations had low sales volumes and were not profitable
to operate. We may close additional store locations that are not profitable,
(ii) that are not able to reach our desired level of sales or profits, or (iii)
to reduce our cash expenditures. Inventory from closed store locations is
transferred to other nearby stores that we operate. The expenses of transferring
and disposing of the inventory and other assets from closed store locations is
an additional expense to us and may lead to a material adverse effect on our
business, our operating results and our financial condition.
Our Substantial Indebtedness Could Restrict Our Operations and Make Us
More Vulnerable to Adverse Economic Conditions. We have had and will continue to
have a significant amount of indebtedness. Our general working capital needs and
borrowing agreement covenants (such as maximum debt/worth ratios and minimum net
worth levels) may require us to secure significant additional capital. Any
borrowings to finance future working capital requirements, capital expenditures
or acquisitions could make us more vulnerable to a sustained downturn in our
operating results, a sustained downturn in economic conditions or increases in
interest rates on portions of our debt that have variable interest rates.
Our ability to make payments on our indebtedness depends on our ability
to generate cash flow in the future. If our cash flow from operations is
insufficient to meet our debt service or working capital requirements, we could
be required to sell additional equity or debt securities, refinance our
obligations or dispose of assets in order to meet our debt service requirements.
Adequate financing may not be available if and when we need it or may not be
available on terms acceptable to us. Our failure to achieve required financial
and other covenants in our borrowing agreements or to obtain sufficient
financing on favorable terms and conditions could have a material adverse effect
on our business, financial condition and results of operations and prospects.
Also, our inventory borrowing agreements expire in April of 2003. The inability
of our Company to renew these agreements or to secure alternative financing with
similar terms would have a material adverse effect on our business, financial
condition and results of operations and prospects. This financial instability
could result in our Company being unable to continue as a going concern. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 1 - "Basis of
Presentation" and Note 14 - "Subsequent Events" in the consolidated audited
financial statements of the Company and notes thereto included elsewhere in this
Report on Form 10-K).
We May Issue Securities That Will Dilute Our Current Shareholders and
Impact our Earnings Per Share. On December 14, 2001, we entered into
Subordinated Convertible loan transactions totaling $4.3 million. The loans are
unsecured with a term of 36 months and accrue interest at 10.75%, fixed. The
principal and interest amounts payable on the loans is subordinated, in most
circumstances, to our borrowing agreements with certain of our lenders. The
7
loans may be repaid by the Company, and if we do not redeem the loans, they can
be converted by the holders into shares of our common stock, subject to the
terms of the Voting Trust, at a conversion price of approximately $2.46 per
share. (See Risk Factors - "Change of Control.")
On March 13, 2002, we entered into an agreement whereby Tracker
purchased 80,000 shares of newly created 6% Series A Cumulative Convertible
Preferred Stock (the "Preferred Stock") in the Company. The issue price of the
Preferred Stock was $100 per share. Each share can be converted into our common
stock at a conversion price of approximately $2.46 per share. Tracker paid us
$8.0 million in the aggregate to purchase 80,000 shares of the Preferred Stock.
We used $5.0 million for general working capital purposes and we used $3.0
million to prepay portions of the subordinated convertible loans as required by
Tracker. If we raise additional equity capital or finance future working capital
requirements, in whole or in part, through the issuance of additional common
stock or debt instruments convertible into our common stock, our existing
shareholders would experience dilution and our earnings per share would also be
impacted by the issuance of additional shares of capital stock. Also, certain
provisions in our (i) Preferred Stock agreements and (ii) Subordinated
Convertible loans require us to issue additional shares or reduce the conversion
price of the shares to be issued in the event that we offer shares in another
transaction at a lower price or with more favorable terms. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and "Subsequent Events" in the consolidated
audited financial statements of the Company and notes thereto included elsewhere
in this Report on Form 10-K).
If We Issue More Stock, Our Stock Price May Decline. The sale of a
large number of shares of our common stock in the public market could have a
material adverse effect on the market price of our common stock. As of January
17, 2003, we own or control, together with our officers and directors,
approximately 862,778 shares, or approximately 20%, of our issued and
outstanding common stock.
As of January 17, 2003, Tracker owns or controls approximately 80,000
shares of our Series A preferred Stock and controls the voting rights to
approximately an additional 829,708 shares of common stock. The shares of
Preferred Stock owned by Tracker may be converted into 3,252,826 shares of our
common stock. In this event, Tracker would have voting control over
approximately 53% of our issued and outstanding common shares (excluding the
effect of options outstanding or other contingently issuable shares).
The sale of a large portion of these shares may decrease the price of
our common stock. (See Risk Factors - "We May Issue Additional Securities That
Will Dilute Our Current Shareholders and Impact our Earnings Per Share" and
"Change of Control").
Our Suppliers Could Increase the Prices They Charge Us or Could Decide
Not Sell to Us. We have entered into dealer agreements with our key
manufacturers. Most of these agreements are renewable each year, are
non-exclusive and contain other conditions that are standard in the industry.
Because of our relationship with these manufacturers and the significant amount
of product we purchase, we receive volume price discounts and other favorable
terms; however, the manufacturers may change the prices they charge us for any
reason at any time or could decide not to sell their products to us. Also, since
we have closed store locations and have experienced declines in sales we have
purchased less inventory from most suppliers. This may result in price
increases, reduced availability of product or reductions in volume discounts. A
change in manufacturer's prices, their decisions not to sell to us or changes in
industry regulations could have a material adverse effect on our business,
financial conditions and results of operations. (See Risk Factors - "We Have
Reduced our Store Count by Closing Store Locations and Risk Factors - We Rely on
a Few Manufacturers for Almost All of our Boat Purchases.)
We Rely on a Few Manufacturers for Almost All of our Boat Purchases.
Our success depends to a significant extent on the continued quality and
popularity of the products we sell. We also buy much of our boat inventory from
Genmar Industries, Inc., or "Genmar". For example, in fiscal year 2001 we
purchased 41.6%, and in fiscal year 2002 we purchased 35.6% of our total
inventory from Genmar. The purchases of boats from this supplier are based on
the volume price discounts and other terms of various, primarily annual,
agreements. In addition, we purchase a large percentage of the annual production
of several other boat manufacturers.
8
If our sales increase, our key manufacturers may need to increase their
production or we may need to locate other sources to purchase boats or other
products we sell. If our suppliers are unable to produce more inventory, decide
not to renew their contracts with us or decide to stop production and we cannot
find alternative inventory suppliers at similar quality and prices, we would
experience inventory shortfalls which, if severe enough, could cause significant
disruptions and delays in our sales and, therefore, harm our financial
condition. In addition the timing, structure, and amount of manufacturer sales
incentives could impact the timing and profitability of our sales.
We have Inventory from Defunct Manufacturers and Discontinued
Inventory. Several of the manufacturers represented by our Company have gone out
of business, have discontinued operations or have had their products
discontinued from being represented by our Company. Inventory remaining in stock
from these manufacturers is subject to risk for lack of customer demand,
unavailability of a manufacturer warranty and other limiting factors potentially
diminishing its market value. Inventories are carried at the lower of cost or
market. Cost for boats, motors and trailers is determined using the specific
identification method. If the carrying amount of our inventory exceeds its fair
value, we write down our inventory to its fair value. We utilize our historical
experience and current sales trends as the basis for valuing our inventory.
Changes in market conditions, lower than expected customer demand, closing of
additional store locations and changing technology or features could result in
additional obsolete inventory that is unsaleable or only saleable at reduced
prices, which could require additional inventory reserve provisions.
Such events and market conditions include but are not limited to the
following: 1) deteriorating financial condition of the manufacturer resulting in
discontinuance and lack of manufacturer's warranty for certain boats, motors or
other products, 2) introduction of new models or product lines by manufacturers
resulting in less demand for previous models or product lines, 3) Company
initiatives to promote unit sales and reduce inventory levels for new and/or
used inventory by reducing sales prices, and 4) Competing boat retailers in
various markets in which the Company operates may offer sales incentives such as
price reductions.
Our Success Will Depend on How Well We Manage Our Inventory and Product
Growth. We have substantially reduced our inventory levels. We have developed
consolidated purchase orders and a business plan for inventory that we call our
Master Business Plan. These procedures were designed to closely regulate and
coordinate our inventory levels, increase inventory turns and improve our
liquidity. Although we believe that our systems, procedures and controls are
adequate to continue to support this process, we cannot assure that this is the
case. Our inability to manage our inventory would result in a significant and
severe financial impact on our business, operating results and financial
condition.
As a result of the Change of Control effective January 7, 2003,
outlined above, Tracker has assumed effective control of the Company. This
change in the control of our Company could result in changes (i) in the
management style or direction of our Company, (ii) the type of inventory
products stocked or the presentation of the product, or (iii) numerous other
aspects of our operation or Travis Edition product line. Such changes could
produce financial instability in our Company.
If Our Products are Defective, We Could be Sued. Because we sell,
service and custom package boats, motors and other boating equipment, we may be
exposed to lawsuits for personal injury and property damage if any of our
products are defective, cause personal injuries or result in property damage.
Manufacturers that we purchase products from generally maintain product and
general liability insurance and we carry third party product liability
insurance. We have avoided any significant liability for these risks in the
past. However, if a situation arises in which a claim is not covered under our
insurance policy or is covered under our policy but exceeds the policy limits,
it could have a significant and material adverse effect on our business,
operating results and financial condition. (see Risk Factors - "We have
Inventory from Defunct Manufacturers and Discontinued Inventory".)
Certain Laws and Contracts May Keep Us From Entering New Markets or
Selling New Products. We may be required to obtain the permission of
manufacturers to sell their product before we enter new markets or before we
sell new or competitive products in our existing markets. If our manufacturers
do not give us permission to sell their products in markets where we operate or
9
plan to operate, we may be forced to find alternative supply sources or to
abandon our plan. Besides these manufacturers' restrictions, there are also
legal restrictions on our business. For example, the state of Oklahoma has
adopted laws that restrict the locations of competing boat dealers. While these
types of laws are not common, they could have a significant effect on our
industry if other states pass similar restrictions.
We May Not Be Able To Respond Effectively To The Significant
Competition We Face. We operate in very competitive conditions. We must compete
generally with other businesses trying to sell discretionary consumer products
and also face intense competition from other recreational boat dealers for
customers, quality products, store locations and boat show space. We rely
heavily on boat shows to generate sales. If we are limited in or prevented from
participating in boat shows, it could have a negative effect on our business,
financial condition and results of operations.
Within our industry, our competitors include many single location boat
dealers and several large dealer groups. We compete based on the quality of
available products, the price and value of the products we sell and our customer
service. To a lesser extent, we also compete with national specialty marine
stores, catalog retailers, sporting good stores and mass merchants, especially
with respect to parts and accessories. We face significant competition in the
markets where we currently operate and the areas surrounding those markets. We
believe that the trend in the boating industry is for manufacturers to include
more features as standard equipment on boats, to offer greater rebates or
subsidies and for other dealers to offer packages comparable to our Travis
Edition boat packages. Some of our competitors, especially those that sell
yachts or boating accessories, are large national or regional chains that may
have substantially greater financial, marketing and other resources than we do.
We cannot give any assurances that we will be able to effectively compete in the
retail boating industry in the future.
Much Of Our Income Is from Financing, Insurance and Extended Service
Contracts, Which Is Dependent On Third Party Lenders and Insurance Companies. We
receive a substantial amount of our income from the fees we receive from banks,
other lending companies, insurance companies and vendors providing extended
service contracts. We call this type of income Finance and Insurance income, or
F&I income. If our customers desire to borrow money to finance the purchase of
their boat, we help the customers obtain the financing by referring them to
certain banks that have offered to provide financing for boat purchases. The
lender pays a fee to our company for each loan that they are able to provide as
a result of our customer referral.
When we sell boats we also offer our customers the opportunity to
purchase (i) a Service Contract that generally provides up to four years of
additional warranty coverage on their boat's motor after the manufacturer's
original warranty expires, and (ii) various types of insurance policies that
will provide money to pay a customer's boat loan if the customer dies or is
physically disabled. We sell these products as a broker for unrelated companies
that specialize in these types of issues, and we are paid a fee for each product
that we sell. Since we only broker these products on behalf of unrelated third
parties, our responsibility and financial risk for paying claims or expenses
that are eligible to be insured by these Service Contracts or other insurance
policies is limited.
F&I income was 2.9% and 3.3% of our net sales in fiscal years 2002 and
2001, respectively. This arrangement carries several potential risks. For
example, the lenders we arrange financing through may decide to lend to our
customers directly rather than to work through us. If the customer goes directly
to the bank to apply for a loan to purchase their boat we would not receive a
fee for referral. Second, the lenders we currently refer customers to may change
the amount of fees paid or the criteria they use to make loan decisions, which
could reduce the number of customers that we can refer. Also, our customers may
use the Internet or other electronic methods to find financing alternatives. If
either of these events occur, we would lose a significant portion of our income
and profit. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our Management Team or Direction of Operations may Change. As a result
of the Change of Control effective January 7, 2003, outlined above, Tracker has
assumed effective control of the Company. There is no assurance that Tracker
will retain the current management or officers of the Company. A change in the
management or officers of our Company could result in changes (i) in the
10
management style or direction of our Company, (ii) the type of inventory
products stocked or the presentation of the product, or (iii) numerous other
aspects of our operation or Travis Edition product line. Such changes could
produce financial instability in our Company. This financial instability could
result in our Company being unable to continue as a going concern. (See Risk
Factors - "Change of Control").
We have purchased and are the beneficiary of key-man life insurance
policies on our President, Mr. Walton, and our Chief Financial Officer, Mr.
Perrine in the amount of $1,000,000, each, and on our Executive Vice President,
Mr. Spradling in the amount of $500,000. However, if any of these employees or
other key employees died, became disabled or left Travis Boats for other reasons
and were not replaced with individuals of similar or greater experience levels,
their loss could have a significant negative effect on our operations and our
financial performance.
Our Stock Price May be Volatile. The price of our common stock may be
highly volatile for several reasons. First, a limited number of shares of our
stock are owned by the public. This may effect trading patterns which generally
occur when a greater number of shares are traded. Second, the quarterly
variations in our operating results, as discussed previously, may result in the
increase or decrease of our stock price. Third, independent parties may release
information regarding pending legislation, analysts' estimates or general
economic or market conditions that effect the price of our stock. Also, our
stock price may be effected by the demand and the overall market performance of
small capitalization stocks. Any of these situations may have a significant
effect on the price of our common stock or our ability to raise additional
equity. (See Risk Factors - "If We Issue More Stock, Our Stock Price May
Decline."; Risk Factors - "We May Issue Securities That Will Dilute Our Current
Shareholders and Impact our Earnings Per Share."; Risk Factors - "We Must Comply
With Listing Requirements for the NASDAQ Stock Market." and "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Our Corporate Documents May Prevent or Inhibit a Takeover of the
Company. Our Articles of Incorporation permit us to issue up to 1,000,000 shares
of preferred stock, either all at once or in a series of issuances. Our Board of
Directors has the power to set the terms of this preferred stock. We recently
issued 80,000 shares of Series A preferred stock. If we issue additional
preferred stock, it could delay or prevent a change in control of the company.
Also, our Articles of Incorporation permit the Board of Directors to determine
the number of directors and do not specify a maximum or minimum number. Our
Bylaws currently provide that the Board of Directors is divided into three
classes with staggered terms, however one class is currently set at two (2)
individuals and these board positions have been granted to the holders of the
Series A preferred stock (Tracker) for so long as at least 25,000 shares of
preferred stock remain outstanding. Additionally, under the terms of the
Agreements, Tracker now has the right to designate four of seven members of the
Company's Board of Directors. Tracker, as holder of the Series A Preferred
Stock, currently has two representatives on the Board of Directors, and has not
yet designated two additional representatives. (See Risk Factors - "If We Issue
More Stock, Our Stock Price May Decline" and "We May Issue Securities That Will
Dilute Our Current Shareholders and Impact our Earnings Per Share.")
PART I
Some of the information in this Report on Form 10-K, including statements in
"Item 1. Business", and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements that
involve substantial risks and uncertainties. You can identify these statements
by forward-looking words such as "may", "will", "expect", "anticipate",
"believe", "estimate", and "continue" or similar words. You should read
statements that contain these words carefully because they (1) discuss our
future expectations; (2) contain projections of our future results of operations
or of our future financial condition; (3) state other "forward-looking"
information. We believe it is important to communicate our expectations to
people that may be interested. However, unexpected events may arise in the
future that we are not able to predict or control. Among the factors that could
cause actual results to differ materially are: general economic conditions,
competition and government regulations, as well as the risks and uncertainties
discussed in this Report on Form 10-K, and the uncertainties set forth from time
to time in the Company's other public reports, filings and public statements.
11
All forward-looking statements in this Report on Form 10-K are expressly
qualified in their entirety by the cautionary statements in this paragraph.
Item 1. Business
General - Travis Boats & Motors, Inc. ("Travis Boats", the "Company" or
"we") is a leading multi-state superstore retailer of recreational boats,
motors, trailers and related marine accessories in the southern United States.
Our Company, currently operates 34 stores under the name Travis Boating Center
in Texas (8), Arkansas (3), Louisiana (4), Alabama (1), Tennessee (5),
Mississippi (1), Florida (10), Georgia (1) and Oklahoma (1).
We seek to differentiate ourselves from competitors by providing
customers a unique superstore shopping experience that showcases a broad
selection of high quality boats, motors, trailers and related marine accessories
at firm, clearly posted low prices. Each superstore also offers complete
customer service and support, including in-house financing programs and
full-service repair facilities staffed by factory-trained mechanics.
History -Travis Boats was incorporated as a Texas corporation in 1979.
As used herein and unless otherwise required by the context, the terms "Travis
Boats", the "Company" and "we" shall mean Travis Boats & Motors, Inc. and its
direct and indirect subsidiaries.
Since our founding in 1979 as a single retail store in Austin, Texas,
we have grown both through acquisitions and the opening of new "start-up" store
locations. During the 1980s, we expanded into San Antonio, Texas, purchased land
and built a new store facility. After this, we purchased additional boat
retailers that operated stores in the Texas markets of Midland, Dallas and
Abilene. It was during this early period of store growth that we began
developing the systems necessary to manage a multi-store operation and
maximizing our inventory purchases to obtain increased volume discounts. Our
success in operating numerous stores and maximizing volume discounts on
inventory purchases led to the introduction of our own proprietary Travis
Edition packaging concept and our philosophy of clearly posting price signs on
each of our Travis Edition boats held for sale.
We sell approximately 75 different types of Travis Edition models of
brand-name fishing, water-skiing and general recreational boats, such as family
ski boats, off-shore fishing boats, personal watercraft, cabin cruisers and
yachts up to approximately 50 feet in length. We also sell motors, trailers,
accessories and related equipment. Although we sell pleasure boats at many
different retail prices, we attempt to price our product to maintain a
consistent gross profit percentage for each of our Travis Edition models. See
"Business Strategy - Travis Edition Concept."
We study sales trends from the cities and states where we operate store
locations. We use the information from this data to custom design and
pre-package combinations of popular brand-name boats, such as Larson, Wellcraft,
Scarab, Bayliner, Fisher, ProCraft, Fishmaster, Ranger and Starcraft with
outboard motors generally manufactured by Suzuki or Brunswick Corporation, along
with trailers and numerous accessories, under our own proprietary Travis Edition
label. These signature Travis Edition packages, which account for the vast
majority of total new boat sales, have been designed and developed in
coordination with the manufacturers and often include distinguishing features
and accessories that have historically been unavailable to, or listed as
optional, by many of our competitors. We also sell yachts, such as Carver,
Crownline and Martinique that range in length from 25 feet to over 50 feet. By
providing many different types of boats with many types of standard features, we
attempt to offer the customer an exceptional boat at a competitive price that is
ready for immediate use and enjoyment.
We believe that our Company offers a selection of boat, motor and
trailer packages that fall within the price range of the majority of all boats,
motors and trailers sold in the United States. Our Travis Edition product line
generally consists of boat packages priced from $7,500 to $75,000 with
approximate even distribution within this price range. Our yachts can have
prices above $500,000. While most of our sales have historically been
concentrated on boats with retail sales prices from $7,500 to $75,000, we
12
believe that as the Company continues to operate in Florida and enters other
markets along the Gulf of Mexico or other new coastal areas, that the number of
off-shore fishing boats, cabin cruisers and yachts will continue to increase as
a percentage of our net sales. Our management believes that by combining
flexible financing arrangements with many types of boats having broad price
ranges, that we are able to offer boat packages to customers with different
purchasing budgets and varying income levels.
Execution of Restructure Plans - The Company anticipates that it will
require additional working capital or financing to fund operations for certain
periods during at least the first two quarters of its fiscal 2003 year. We
believe that our anticipated cash needs exceed amounts otherwise available under
current inventory borrowing agreements or our cash balances. This projected cash
flow shortfall is influenced in part by our seasonal trends, which include
historically low sales levels during the October through December periods. Also,
the seasonal lull normally experienced at the end of a calendar year was
compounded at the end of 2002 by continued economic uncertainty, weak industry
sales trends, and certain revised borrowing terms on our inventory borrowing
agreements which have had the effect of reducing our cash balances and borrowing
availability.
In recognition of this issue, we have (i) negotiated interim financing,
(ii) developed management plans to significantly reduce expense levels, (iii)
entered into various agreements with a major shareholder, and (iv) formed a
special Operating Committee of our Board of Directors. The Operating Committee
will have authority to oversee the overall financial operations of the Company
(including all store level and management operating expenses, employee
headcount, inventory reduction measures and other relevant expenses or
initiatives) and to review weekly cash flows. (See Risk Factors - "Execution of
Restructure Plans").
We took these actions to create a plan to (i) stop, or in the
alternative, materially reduce the operating losses experienced during the past
two fiscal years, and (ii) to allow the Company to work towards building cash
reserves during the 2003 fiscal year that will potentially be sufficient to
alleviate, or alternatively reduce, similar off-season working capital
shortages. Key components of this plan include interaction with management, the
Operating Committee, our lenders and our key vendors to reach plans that provide
for a collaborative effort to reach attainable ratio levels in our debt
agreements and to enhance cash flow. We plan to enhance cash flow by, among
other initiatives, carefully reducing (i) variable expenses, including those
expenses related to payroll and benefits; (ii) reviewing additional store
locations for closure that are not expected to contribute to cash flows or are
in markets that can reasonably be served by other nearby Travis Boating Center
locations and (iii) improve sales management to speed the pace of reductions in
both new and used aged inventories which have historically tied up our cash flow
as a result of our inability to borrow funds against those products.
The restructure plans, along with detailed plans for our ongoing
borrowing needs, are to be approved by our Operating Committee and submitted to
our various lenders prior to April 30, 2003. Accordingly, the restructure plan
is an integral component in improving our cash flows and in negotiating new
borrowing agreements, however there is no assurance that our plans will succeed,
or in the event that they do succeed, that they will be sufficient to offset our
net losses, improve our cash flow or provide a basis for the continuation of our
financing. (See Risk Factors - "Operating Losses and Reduced Financing have
Jeopardized our Cash Flow").
Business Strategy - We have developed a multi-state, superstore
strategy to offer for sale a wide selection of recreational boats and
accessories . Our objective is to establish our Company as one of the dominant
retailers of recreational boats, motors, trailers and marine accessories in the
southern United States. Therefore, our strategy includes increasing customer
service levels, market share penetration and sales at existing store locations
and possibly further expansion of the number and size of our store locations in
the southern United States while also maintaining a focus on possible cities in
other regions. Our merchandising strategy is based on offering customers a
comprehensive selection of quality, brand name boats and boating products in a
comfortable superstore environment. We intend to continue to build brand
identity by placing our Travis Edition name on the many types of boating
packages that we sell. We also use advertising, open houses, our web site and
other types of marketing events to increase our name recognition and our market
share. See Risk Factors - "We have not opened New Stores Recently and Much of
our Past Growth has been the result of Acquiring and Opening New Stores".
13
Our business operations emphasize the following key elements of our
business strategy:
Travis Boating Center superstore. Travis Boating Center superstores
generally have a distinctive and stylish trade dress accented with deep blue
awnings, a nautical neon building decoration, expansive glass storefronts and
brightly lit interiors. Management estimates the average store size at
approximately 21,000 square feet and located on 3 - 5 acres of land. The
superstore locations present customers with a broad array of boats and often
over 9,000 parts and accessories in a clean, well-stocked, air-conditioned
shopping environment. All boats are typically displayed fully rigged with motor,
trailer and a complete accessory package allowing for the customer's immediate
purchase and enjoyment. Professionally-trained mechanics operate service bays,
providing customers with complete maintenance and repair services.
Travis Edition concept. We gather and use extensive market research,
combined with the design resources of our manufacturers, to develop our custom
Travis Edition boating packages. Our significant purchasing power and consequent
ability to coordinate designs with our manufacturers has enabled us to obtain
products directly from the factory at low prices, along with favorable delivery
schedules and with distinguishing features and accessories that have
historically been unavailable to, or listed as optional by many competitors. At
our store locations we often also add certain additional features after receipt
of the product to enhance our Travis Edition packages. Each Travis Edition is a
complete, full-feature package, including the boat, motor, trailer and numerous
additional accessories and design features often not found on competitors'
products, thus providing our customers with superior value. These features often
may include enhanced styling such as additional exterior colors, complete
instrumentation in dashboards, transoms warrantied for life, canopy tops,
trolling motors, upgraded interiors with stereos, wood grain dashboards, in-dash
depth finders, stainless steel motor propellers and enhanced hull design not
available on other models. Our Travis Edition boats are often identified by the
Company's attractive private label logo, as well as the respective
manufacturer's logo.
Unlike most recreational boat dealers, we place firm sales prices on
each of our Travis Edition packages and generally maintain that same price for
the entire model year. These prices are advertised and clearly posted on each of
our boats so that the customer receives the same price at any Travis Boating
Center. We believe this selling philosophy reduces customer anxiety associated
with bargaining or negotiation and offers our customer's prices at or below
prices that they generally might receive from our competitors. We also believe
this pricing strategy and low-pressure sales style provides the customer with
the comfort and confidence of having received a better boat with more features
at a lower price than may have been obtained through negotiations at competitive
stores. Our management believes, this approach has promoted good customer
relationships and enhanced our reputation in the industry as a leading provider
of quality and value.
Acquisitions. We did not complete any acquisitions in fiscal years
2002, 2001 or 2000.
Boat Show Participation. We also participate in numerous boat shows,
typically held in January through March, in each of the markets in which we
operate and in certain other markets near our stores. These shows are normally
held at convention centers or at on-the-water locations, with all area dealers
purchasing space to display their respective product offerings. We believe that
boat shows and other offsite promotions generate a significant amount of
interest in our Travis Edition products and often have an immediate impact on
sales at a nominal incremental cost. Although total boat show sales are
difficult to assess, management attributes a significant portion of the second
fiscal quarter's net sales to such shows.
F&I Products. In addition to our Travis Edition boat packages, we offer
our customers the ability to purchase extended service contracts and insurance
coverages, including credit life and accident/disability coverages (collectively
"F&I Products"). The extended service contracts provide customers with coverage
for mechanical engine breakdown for a period (usually 36 or 48 months) beginning
after the stated warranty term of the original manufacturer expires. The
insurance coverages provide the customer with funds to repay a portion or all of
their boat loan in the event of death, disability or other covered event.
Since we have business relationships with numerous financial lenders we
also offer to assist our customers in obtaining financing for their boat
purchase. If the customer purchases F&I Products or utilizes financing we have
14
helped arrange, we earn commissions based upon our total volume of sales or the
amount of mark-up we charge over the cost of the products. F&I Products account
for a substantial portion of the our income, the most significant component of
which is the income resulting from fees earned assisting our customers in
obtaining financing for their purchases. Each of the F&I Products and the
financial assistance is done on behalf of unrelated third parties which
generally include large financial institutions and insurance companies.
Operations
Purchasing. We are also among the largest domestic volume buyer of
boats from many of the boat manufacturers that we represent. As a result, we
have built close relationships with many of our manufacturers. These
relationships have allowed us to have substantial input into the design process
for the new boats that are introduced in our markets each year by these
manufacturers. This design input and coordination with our manufacturers is a
primary factor in the pricing, selection and types of the Travis Edition boating
packages that we offer for sale in our store locations.
We typically deal with each of our manufacturers pursuant to a
non-exclusive dealer agreement. These dealer agreements are usually for one (1)
year in term and they typically do not contain any contractual provisions
concerning product pricing or purchasing levels. The wholesale prices charged to
us by our manufacturers are generally set each year for the entire model year
(usually summer to summer), but may be changed at the manufacturer's sole
discretion. However, historically we have had multi-year agreements to purchase
boats with Genmar Industries, Inc. Currently, most of the Genmar agreements
expire in the 2003 fiscal year or have moved to annual expirations.
Approximately 35.6% and 41.6% of our net purchases in fiscal years 2002
and 2001, respectively, were products manufactured by boat manufacturers owned
by Genmar. The significant amount of purchases from Genmar is primarily related
to the store locations that we operate in Florida which sell Genmar's Wellcraft
and Carver products. Other Genmar boat lines that we purchase include the brands
Larson, AquaSport, Scarab and Ranger.
We also entered into a multi-year agreement with a subsidiary of
Tracker Marine during fiscal 2002 to purchase certain types of boats. During
fiscal 2002, we purchased approximately 3.6% of our net inventory purchases from
Tracker.
The agreements with each manufacturer generally include volume
discounts from the then prevailing dealer base price over the entire term of
each respective agreement. Although these dealer agreements have varying
expiration dates, each agreement generally may be canceled by either party for
various reasons including our failure to purchase a certain amount of product or
the failure by the manufacturer to provide a certain amount of product that we
desire to purchase.
The Company's right to display, advertise or sell some product lines in
certain markets, including the Internet, may be restricted by arrangements with
certain manufacturers. (See Risk Factors - "We Rely on a Few Manufacturers for
Almost All of our Boat Purchases").
Floor plan financing. We purchase most of our inventory by borrowing
money on our floor plan and other borrowing agreements. The seasonal nature of
the recreational boating industry impacts the production schedules of the
manufacturers that produce marine products. During the fall and winter months,
retail sales of recreational boats diminish significantly as compared to sales
during the warm spring and summer months. To provide recreational boating
retailers, such as Travis Boats, extra incentive to purchase boating products in
the "off-season," manufacturers typically offer product for sale at a price that
includes an interest subsidy or other discount. Since retail boat dealers
typically utilize floor plan financing to provide the working capital funds
needed to purchase inventory, the interest subsidy is intended to assist the
retail dealer in stocking the product until the selling season. The terms of the
interest subsidy or assistance vary by manufacturer, with virtually all
15
manufacturers in the marine industry offering such programs. Management believes
that the types of financing arrangements we utilize are standard within the
industry. As of September 30, 2002, the Company and its subsidiaries owed an
aggregate of approximately $50.9 million to our lenders under our floor plan
financing agreements.
Competition. We operate in a highly competitive environment. In
addition to facing competition generally from many other businesses seeking to
attract discretionary spending dollars, the recreational boat industry itself is
highly fragmented, resulting in intense competition for customers, access to
quality products, access to boat show space in new markets and access to
suitable store locations. Our Company relies heavily on boat shows to generate
sales. If, for any reason, we were unable to participate in boat shows in our
existing or targeted markets, it could have a material adverse effect on our
business, financial condition and results of operations.
Our primary competition is from boat dealers operating a single
location or several locations in a single state and, to a lesser degree, with
national specialty marine stores, catalog retailers, sporting goods stores and
mass merchants, particularly with respect to parts and accessories. Dealer
competition, which includes one other publicly traded multi-state retailer of
recreational boats, continues to increase based on the quality of available
products, the price and value of the products and heightened attention levels to
customer service. There is significant competition both within markets we
currently serve and in surrounding markets. While we generally compete in each
of our markets with retailers of brands of boats not sold by the Company in that
market, it is common for other competitive retailers to sell the same brands of
outboard motors. Management believes that a trend in the industry is for
independent dealers to attempt to form alliances or buyer's groups, for
manufacturers to include more features as standard equipment on boats and
consequently, and for competitive dealers to offer packages comparable in
features and price to those that we offer as our Travis Edition lines. In
addition, several of our competitors, especially those selling yachts or boating
accessories, are large national or regional chains that may have substantially
greater financial, marketing and other resources than we may deploy. Private
sales of used boats also represent a source of competition. There can be no
assurance that we will be able to compete successfully in the retail marine
industry in the future. See Risk Factors - "We May Not Be Able To Respond
Effectively To The Significant Competition We Face".
Impact of Environmental and Other Regulatory Issues. Our operations are
subject to regulation, reporting and licensing by various federal, state and
local governmental agencies and we are subject to their respective statutes,
ordinances and regulations. The failure to satisfy these requirements could have
a material adverse effect on our business, financial condition and results of
operations.
On October 31, 1994, the U.S. Environmental Protection Agency ("EPA")
announced proposed emissions regulations for outboard marine motors. The
proposed regulations would require a 75% average reduction in hydrocarbon
emissions for outboard motors and set standards for carbon monoxide and nitrogen
oxide emissions as well. Under the proposed regulations, manufacturers began
phasing in low emission models in 1998 and had approximately nine years to
achieve full compliance. Certain states, such as California, are proposing and
adopting legislation that would require low emission outboards and other engines
on certain bodies of water or more aggressive phase-in schedules than the EPA.
Based on these regulations and public demand for cleaner burning motors,
outboard motor manufacturers, such as Suzuki and Brunswick, have begun
distribution for the new EPA compliant outboard motors. The boat models we sold
with the new EPA compliant outboards in fiscal 2002 and 2001 generally were
priced approximately $2,000 higher than those with traditional outboard motors.
Management anticipates retail prices to generally be from $500 to $1,500 higher
for the new EPA compliant outboards depending on the motor's horsepower.
Management believes that the higher retail costs will be somewhat offset by
enhanced fuel efficiency and acceleration speed, as well as possible reductions
of maintenance costs of the new EPA compliant outboard motors. Costs of
comparable new models, if materially more expensive than previous models, or the
manufacturer's inability to deliver responsive, fuel efficient outboard motors
that comply with EPA requirements, could have a material adverse effect on our
business, financial condition and results of operations.
16
In the ordinary course of our business, we are required to dispose of
certain waste products that are regulated by state or federal agencies. These
products include waste motor oil, tires, batteries and certain paints. It is our
policy to use appropriately licensed waste disposal firms to handle this refuse.
If there were improper disposal of these products, it could result in us facing
potential liability, fees, fines or other penalties. Although we do not own or
operate any underground petroleum storage tanks, we currently lease several
properties containing above-ground tanks, which are subject to registration,
testing and governmental regulation.
Additionally, certain states have required or are considering requiring
a license in order to operate a recreational boat or personal watercraft. While
such licensing requirements are not expected to be unduly restrictive,
regulations may discourage potential first-time buyers, thereby limiting future
sales, which could have a material adverse effect on our business, financial
condition and results of operations.
Trademarks and service marks. We have received a registered federal
trademark for our corporate logo, which includes the name Travis Boating Center.
We also have trademark applications pending with the U.S. Patent and Trademark
Office for the names "Travis Edition" and for the overall appearance and trade
dress of our Travis Boating Center superstore. There can be no assurance that
any of these applications will be granted. However, based on a number of years
of use, we believe that we have certain common law rights to these marks at
least in our current market areas. Notwithstanding the foregoing, we have
entered into an agreement with a marine dealership operating in Knoxville,
Tennessee not to use the names "Travis," "Travis Boating Center" or "Travis
Edition" in certain types of uses or situations within Knoxville, Tennessee and
a 50 mile radius therefrom.
Web site. We operate a Web site under the name
"travisboatingcenter.com" and own the URL for this name, the name
"boatorder.com" and numerous derivations of these names.
Employees. As of September 30, 2002, our staff consisted of 553
employees, 534 of whom are full time. The full-time employees include 34 in
store level management and 46 in corporate administration and management. The
Company is not a party to any collective bargaining agreements and is not aware
of any efforts to unionize its employees. We consider the relations with our
employees to be good.
As of December 30, 2002, our staff consisted of 512 employees, 498 of
whom are full time. The full-time employees include 34 in store level management
and 44 in corporate administration and management. The Company has, and expects
to continue, to reduce headcount by lay-off's, attrition and job consolidation
in an effort to reduce operating expenses.
17
Item 2. Properties
We lease our corporate offices which are located at 12116 Jekel Circle,
Suite 102, Austin, Texas. We also own numerous other Travis Boating Center
locations. The remaining facilities are leased under leases with original lease
terms generally ranging from five to ten years with additional multi-year
renewal options. Our leases typically call for payment of a fixed rent and in
most of the leases we are also responsible for the payment of real estate taxes,
insurance, repairs and maintenance.
The chart below reflects the status and approximate size of the various
Travis Boating Center locations operated as of January 17, 2003.
Building Land Owned or Year of Market
Location Square Footage* Acreage* Leased Entry
Austin, Texas(1).................... 20,000 3.5 Owned 1979
San Antonio, Texas(1)............... 34,500 6.5 Owned 1982
Midland, Texas(1)................... 18,750 3.8 Owned 1982
Dallas, Texas(1).................... 20,000 4.2 Owned 1983
Abilene, Texas(2)................... 24,250 3.7 Owned 1989
Houston, Texas(2)................... 15,100 3.0 Leased 1991
Baton Rouge, Louisiana(2)........... 33,200 7.5 Owned 1992
Beaumont, Texas(2).................. 25,500 6.5 Owned 1994
Arlington, Texas(2)................. 31,000 6.0 Leased 1995
Heber Springs, Arkansas(2).......... 26,000 9.0 Leased 1995
Hot Springs, Arkansas(2)............ 20,510 3.0 Owned 1995
New Iberia, Louisiana(3)............ 24,000 3.3 Leased 1995
Florence, Alabama(2)................ 22,500 6.0 Leased 1996
Winchester, Tennessee(2)............ 28,000 3.5 Leased 1996
St. Rose, Louisiana(2).............. 30,000 3.5 Leased 1997
Pascagoula, Mississippi(2).......... 28,000 4.1 Owned 1997
Key Largo, Florida(3)............... 3,000 4.2 Owned 1997
Key Largo, Florida(3)(4)............ 3,000 2.4 Owned 1999
Ft. Walton Beach Fl. - Sales(3)..... 7,000 2.9 Leased 1997
Ft. Walton Beach Fl.- Service(3)(4). 7,500 2.0 Leased 1997
Hendersonville, Tennessee(2)........ 31,320 3.6 Leased 1997
Gwinnett, Georgia(1)................ 25,000 5.0 Owned 1997
Claremore, Oklahoma(3).............. 15,000 2.0 Owned 1998
Bossier City, Louisiana(2).......... 30,000 8.6 Owned 1998
Knoxville, Tennessee(2)............. 30,000 6.5 Leased 1998
Little Rock, Arkansas(3)............ 16,400 3.0 Owned 1999
Longwood, Florida(3)................ 10,000 3.1 Leased 1999
Clearwater, Florida(2).............. 21,000 5.0 Owned 1999
Jacksonville, Florida(3)............ 8,000 1.5 Leased 1999
Bradenton, Florida(3)............... 20,000 5.0 Leased 1999
Englewood, Florida(3)............... 3,000 4.5 Leased 1999
Memphis, Tennessee(2)............... 24,000 4.3 Leased 1999
Pickwick Dam, Tennessee(2).......... 48,000 5.0 Leased 1999
Ft. Myers, Florida(3)............... 6,000 4.0 Leased 1999
Stuart, Florida(2).................. 29,000 4.0 Leased 2000
Pompano, Florida(3)................. 6,000 1.0 Leased 2000
- --------------------------
* Square footage and acreage are approximate.
(1) Newly constructed superstore.
(2) Facility acquired/leased and converted to superstore.
(3) Acquired/leased facility
(4) Locations in Key Largo, Florida and Ft. Walton, Florida operate service
facilities at separate locations in close proximity to the main sales
location.
18
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings. We are,
however, involved in various legal proceedings arising out of our operations in
the ordinary course of business. We believe that the outcome of all such
proceedings, even if determined adversely, would not have a material adverse
effect on our business, financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2002 Annual Meeting of Stockholders was held on September
27, 2002. The following nominees were re-elected to the Company's Board of
Directors to serve as Class "B" directors for a three year term expiring in
2005, or until their successors are elected and qualified, or until their
earlier resignation or removal.
Nominee Votes in Favor Opposed Abstain Broker Non-Vote
- ------- -------------- ------- ------- ---------------
Mark T. Walton 7,008,354 (1) -0- 387,935 -0-
Robert C. Siddons 7,376,054 (1) -0- 20,235 -0-
The following directors' terms of office continued after the 2002
Annual Meeting of Stockholders: Ronnie L. Spradling, Richard Birnbaum and James
Karides. Additionally, director's Kenneth Burroughs and Robert Ring, remained
directors pursuant to the terms of the Series A Preferred Stock issued by the
Company in March 2002. Pursuant to the Agreements described in this report,
Tracker has the right to designate two additional directors to the Board of
Directors (Kenneth Burroughs and Robert Ring are current designees representing
Tracker on the Board of Directors). (See also Risk Factors - "Change in
Control").
The following issue was also voted upon by the Company stockholders:
To ratify Ernst & Young, LLP as the independent certified public accountants of
the Company for the fiscal year ended September 30, 2002.
Votes in Favor Opposed Abstained Broker Non-Vote
-------------- -------- --------- ---------------
7,383,829 (1) 12,400 -0- 500
(1) Shares voted included 4,259,289 of the Company's common shares and
80,000 shares of Series A preferred stock with voting rights of
3,137,000 common shares. Total shares voted were therefore 7,396,289.
There was no additional business conducted at the meeting.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock trades on the Nasdaq Stock Market under the symbol:
TRVS. As of January 17, 2003, we believe our shares are beneficially owned by
more than 400 shareholders. On January 17, 2003, the last reported sales price
of the common stock on the NASDAQ SmallCap Stock Market System was $.55 per
share.
The following table sets forth for the period indicated, on a per share
basis, the range of high and low sales prices for our common stock during fiscal
years 2002 and 2001 as quoted by the NASDAQ. These price quotations reflect
inter-dealer prices, without adjustment for retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions:
Fiscal 2002 Sales Price Fiscal 2001 Sales Price
----------------------- -----------------------
Quarter Ended High Low Ending High Low Ending
------------- ------ ----- ------- ----- ---- ------
December 31.................... $2.50 $1.75 $1.94 $3.75 $2.50 $2.75
March 31....................... $3.02 $1.75 $2.50 $4.125 $2.375 $3.375
June 30........................ $2.95 $1.40 $1.90 $3.50 $2.16 $2.70
September 30................... $1.94 $1.05 $1.18 $2.90 $1.96 $2.20
19
We have never declared or paid cash dividends on our Common Stock and
presently have no plans to do so. However, we are obligated to pay a 6%
cumulative dividend on the 80,000 shares of $100 par value, Series A Preferred
Stock issued by us during fiscal 2002. The Preferred dividend is payable
quarterly in arrears and all payments of the preferred dividends are subject to
approval of our senior inventory lenders. As of the date of this report on Form
10-K, we have not paid the dividends due for the quarters ended September 30 and
December 31, 2002. The holder of our Series A Preferred Stock has agreed to
waive the penalties for late payment on such dividends as of the date of this
report on Form 10-K, however there can be no assurance that the holder will not
impose late fees or other default remedies at a future date (see Risk Factors -
"Operating Losses and Reduced Financing have Jeopardized our Cash Flow" ). Any
change in our dividend policy on our Common Stock will be at the sole discretion
of our Board of Directors and will depend on our profitability, financial
condition, capital needs, future loan covenants, general economic conditions,
future prospects and other factors deemed relevant by the Board of Directors. We
currently intend to retain earnings for use in the operation and expansion of
our business and do not anticipate paying cash dividends on our Common Stock in
the foreseeable future. Certain covenants contained in our loan and preferred
stock agreements also effectively restrict the payment of any dividends without
prior consent.
Item 6. Selected Financial Data
The following selected consolidated financial information should be
read in conjunction with and is qualified in its entirety by reference to the
consolidated financial statements of the Company and the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this Report on Form 10-K:
FISCAL YEAR ENDED SEPTEMBER 30,
1998(1)(7) 1999(1)(7) 2000(1)(7) 2001(1)(7) 2002(1)(7)
---------- ---------- ---------- ---------- ----------
(in thousands, except store, per store and per share data)
Consolidated Statement of Operations Data:
Net sales.......................................... $ 131,740 $ 182,259 $ 217,718 $ 198,539 $ 176,523
Gross profit....................................... 34,901 46,634 53,309 46,379 37,072
Selling, general and administrative expense........ 22,630 30,978 42,326 41,492 38,979
Store closing costs................................ -- -- -- 321 --
Operating income................................... 11,011 13,689 8,338 1,660 (4,386)
Interest expense .................................. 2,310 3,808 6,848 6,533 4,018
Income/(loss) before cumulative effect of
accounting change and extraordinary loss on
extinguishment of debt............................. 5,563 6,573 897 (3,281) (10,134)
Preferred stock dividends.......................... -- -- -- -- 187
Cumulative effect of accounting change, net........ -- -- -- -- 6,528
Extraordinary loss on extinguishment of debt, net.. -- -- -- -- 130
Net income/(loss) attributable to common
shareholders....................................... 5,563 6,573 897 (3,281) (16,792)
Basic earnings/(loss) per share before cumulative
effect of accounting change and extraordinary
item............................................... $ 1.31 $ 1.53 $ .20 $ (.75) $ (2.33)
Diluted earnings/(loss) per share before cumulative
effect of accounting change and extraordinary
item............................................... $ 1.26 $ 1.49 $ .20 $ (.75) $ (2.33)
Preferred stock dividends.......................... -- -- -- -- (.05)
Cumulative effect of accounting change............. -- -- -- -- (1.50)
Extraordinary loss on extinguishment of debt....... -- -- -- -- (.03)
Basic earnings/(loss) per share.................... $ 1.31 $ 1.53 $ .20 $ (.75) $ (3.91)
Diluted earnings/(loss) per share.................. $ 1.26 $ 1.49 $ .20 $ (.75) $ (3.91)
Weighted avg. common shares outstanding - basic.... 4,250 4,291 4,403 4,375 4,345
Weighted avg. common shares outstanding -diluted... 4,417 4,409 4,446 4,375 4,345
Store Data:
Stores open at period end........................ 24 38 39 37 34
Average sales per store(2)....................... $ 6,383 $ 6,055 $ 5,630 $ 5,252 $ 5,117
Percentage increase (decrease) in comparable store
sales(3) ....................................... 6.6% 1.9% (1.1%) (11.6%) (6.1%)
20
FISCAL YEAR ENDED SEPTEMBER 30,
1998 1999 2000(4) 2001 (5) 2002 (6)
---- ---- ------- -------- --------
(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents............ $ 4,618 $ 4,125 $ 2,971 $ 1,388 $ 4,253
Working capital...................... 16,392 12,117 10,948 11,958 8,540
Total assets......................... 69,116 125,931 129,647 113,680 95,432
Short-term debt, including current
maturities of notes payable........ 26,105 69,547 77,895 61,078 58,410
Notes payable less current maturities. 4,980 6,897 6,015 9,375 4,525
Stockholders' equity................. 30,433 37,592 39,552 36,149 26,936
19
(1) The Consolidated Statement of Operations Data and the Consolidated Balance
Sheet Data for the fiscal years ended September 30, 1998, 1999, 2000, 2001
and 2002 has been derived from the audited consolidated financial
statements of the Company. Store data has been derived from the Company's
unaudited internal operating statements.
(2) Includes only those stores open for the entire preceding 12-month period.
(3) New stores or upgraded facilities are included in the comparable store base
at the beginning of the store's thirteenth complete month of operations.
(4) Included in the current liabilities, which reduce working capital, are
balloon payments due pursuant to the terms of two real estate loans, with
one payment of approximately $3.0 million due in November, 2000 and one
payment of $597,000 due in June, 2001. These loans were refinanced during
fiscal 2001.
(5) Included in the current liabilities, which reduce working capital, are
balloon payments due pursuant to the terms of two real estate loans, with
one payment of approximately $577,000 due in December, 2001 and one payment
of $584,000 due in January, 2002. These loans were refinanced during fiscal
2002.
(6) Included in the current liabilities, which reduce working capital, are
balloon payments due pursuant to the terms of a real estate loan, with a
payment of approximately $529,000 due in January, 2003 and approximately
$6.4 million in real estate loans with a single lender that are currently
in default of certain financial covenants.
(7) Includes the operations of acquired store locations from each respective
date of acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Application of Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations when such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates
and assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ
significantly from those estimates under different assumptions and conditions.
We believe that the following discussion addresses our most critical accounting
policies, which are those that are most important to the portrayal of our
financial condition and results of operations and require our most difficult,
subjective, and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
21
Revenue Recognition
We record revenue on sales of boats, motors, trailers, and related
watersport parts and accessories upon delivery to or acceptance by the customer
at the closing of the transaction. We record revenues from service operations at
the time repair or service work is completed.
We refer customers to various financial institutions to assist the
customers in obtaining financing for their boat purchase. For each loan the
financial institutions are able to fund as a result of the referral, we receive
a fee. Revenue that we earn for financing referrals is recognized when the
related boat sale is recognized. The fee amount is generally based on the loan
amount and the term. Generally, we must return a portion of the fee amount
received if the customer repays the loan or defaults on the loan within a period
of up to 180 days from the initial loan date. We record such refunds, which are
not significant, in the month in which they occur.
Revenues from insurance and extended service agreements are recorded at
the time such agreements are executed which generally coincides with the date
the boat, motor and trailer is delivered. Such revenues are not deferred and
amortized over the life of the insurance or extended service agreement policies,
because we sell such policies on behalf of third party vendors or
administrators. At the time of sale, we record income for insurance and extended
service agreements net of the related fee that is paid to the third-party
vendors or administrators. Since our Company's inception, we have incurred no
additional costs related to insurance or extended service agreements beyond the
fees paid to the third party vendors at the time of sale.
Allowance for Doubtful Accounts.
Accounts receivables consist primarily of amounts due from financial
institutions upon sales contract funding, amounts due from manufacturers or
vendors under rebate programs, amounts due from manufacturers or vendors under
warranty programs and amounts due from customers for services. The Company
routinely evaluates the collectibility of accounts receivable focusing on
amounts due from manufacturers, vendors and customers. If events occur and
market conditions change, causing collectibility of outstanding accounts
receivable to become unlikely, the Company records an increase to its allowance
for doubtful accounts. The Company evaluates the probability of collection of
outstanding accounts receivable based several factors which include but are not
limited to the following: 1) age of the outstanding accounts receivable, 2)
financial condition of the manufacturer, vendor or customer, and 3) discussions
or correspondence with the manufacturer, vendor or customer. The Company
determines the allowance for doubtful accounts based upon both specific
identification and a general allowance for accounts outstanding for a specified
period of time.
Inventory Valuation
Our inventories consist of boats, motors, trailers and related
watersport parts and accessories. Inventories are carried at the lower of cost
or market. Cost for boats, motors and trailers is determined using the specific
identification method. Cost for parts and accessories is determined using the
first-in, first-out method. If the carrying amount of our inventory exceeds its
fair value, we write down our inventory to its fair value. We utilize our
historical experience and current sales trends as the basis for our lower of
cost or market analysis. Changes in market conditions, lower than expected
customer demand, closing of additional store locations and changing technology
or features could result in additional obsolete inventory that is unsaleable or
only saleable at reduced prices, which could require additional inventory
reserve provisions.
Such events and market conditions include but are not limited to the
following: 1) deteriorating financial condition of the manufacturer resulting in
discontinuance and lack of manufacturer's warranty for certain boats, motors or
other products, 2) introduction of new models or product lines by manufacturers
resulting in less demand for previous models or product lines, 3) Company
initiatives to promote unit sales and reduce inventory levels for new and/or
used inventory by reducing sales prices, and 4) Competing boat retailers in
various markets in which the Company operates may offer sales incentives such as
price reductions.
22
Goodwill and Other Intangibles
We adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS
142") effective October 1, 2001. SFAS 142 provides that separable intangible
assets that have finite lives will continue to be amortized over their useful
lives and that goodwill and indefinite-lived intangible assets will no longer be
amortized but will be reviewed for impairment annually, or more frequently if
impairment indicators arise. With the adoption of the Statement, we ceased
amortization of goodwill as of October 1, 2001. The Company operates as one
reporting unit for goodwill impairment testing.
In accordance with SFAS 142, we completed goodwill impairment tests as
required. The tests involved the use of estimates related to the fair market
value of the business with which the goodwill is associated. As a result of the
transitional impairment test, which considered factors including the significant
negative industry and economic trends impacting current operations and our
market capitalization relative to our net book value, the Company recorded a
non-cash, after tax charge of $6.5 million as a cumulative effect of accounting
change as of October 1, 2001. The non-cash, after tax charge resulted in the
elimination of the entire goodwill balance from our balance sheet.
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, deferred income taxes are provided for temporary
differences between the basis of assets and liabilities for financial reporting
purposes and for income tax return purposes. The Company routinely evaluates its
recorded deferred tax assets to determine whether it is more likely than not
that such deferred tax assets will be realized. During the quarter ended
September 30, 2002, the Company determined that for deferred tax assets that
could not be realized by carryback to prior tax years it was more likely than
not that such deferred tax assets would not be realized and accordingly a full
valuation allowance was necessary for these deferred tax assets.
Other
For a more comprehensive list of our accounting policies, including
those which involve varying degrees of judgment, see Note 2 - "Summary of
Significant Accounting Policies" in the consolidated audited financial
statements of the Company and notes thereto included elsewhere in this Report on
Form 10-K.
Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements of our Company and the notes thereto included
elsewhere in this Report on Form 10-K. The discussion in this section of this
Report on Form 10-K contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in this section, those discussed in "Risk
Factors" and those discussed elsewhere in this Report on Form 10-K.
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales:
FISCAL YEAR ENDED SEPTEMBER 30,
2000 2001 2002
------ ---- ----
Net sales............................................. 100.0% 100.0% 100.0%
Costs of goods sold................................... 75.5 76.6 79.0
----------------------------------------------
Gross profit.......................................... 24.5 23.4 21.0
Selling, general and administrative expenses.......... 19.4 20.9 22.1
Operating income/(loss)............................... 3.8 0.8 (2.5)
23
Interest expense...................................... 3.1 3.3 2.3
Other income/ (expense)............................... 0.0 0.0 0.0
----------------------------------------------
Income/(loss) before income taxes, cumulative effect of
accounting change and extraordinary item.............. 0.7 (2.4) (4.7)
Income tax (expense)/benefit.......................... (0.3) 0.8 (1.0)
----------------------------------------------
Income/(loss) before cumulative effect of accounting
change and extraordinary item......................... 0.4% (1.7%) (5.7%)
==============================================
Cumulative effect of accounting change, net........... 0.0 0.0 (3.7)
Extraordinary loss on extinguishment of debt, net...... 0.0 0.0 (.10)
Preferred stock dividends.............................. 0.0 0.0 (.10)
Net income/(loss) attributable to common shareholders.. 0.4% (1.7%) (9.6%)
==============================================
24
Fiscal Year Ended September 30, 2002 Compared to the Fiscal Year Ended September
30, 2001
Net sales. Net sales for the fiscal year ended September 30, 2002 were $176.5
million, a decrease of approximately $22.0 million or 11.1% from the net sales
of $198.5 million for the fiscal year ended September 30, 2001.
Comparable store sales declined by 6.1% (33 stores in base) for the
fiscal year ended September 30, 2002 compared to a decrease of 11.6% (32 stores
in base) during the prior fiscal year. Management believes the decline in net
sales and the decrease in comparable store sales was related to various factors
including, but not limited to, fewer stores in operation, erratic levels of
consumer confidence and employment uncertainty, combined with persistent weak
economic and industry conditions. The decrease in net sales for the year ended
September 30, 2002 included $14.4 million in reduced sales as a result of the
impact of fewer stores in operation (34 versus 37).
Included within net sales is revenue that we earn related to F&I
Products. The Company, through relationships with various national and local
lenders, is able to place financing for its customers' boating purchases. These
lenders allow us to "sell" the loan at a rate higher than a minimum rate
established by each such lender, and the we earn fees based on the percentage
increase in the loan rate over the lender's minimum rate (the rate "spread"). We
sell these loans without recourse, except that in certain instances we must
return the fees earned if the customer repays the loan or defaults in the first
120-180 days. We also sell, as a broker, certain types of insurance
(property/casualty, credit life, disability) and extended service contracts. We
may also sell these products at amounts over a minimum established cost and earn
income based upon the profit over the minimum established cost.
Net sales attributable to F&I Products decreased by 22.7% to
approximately $5.1 million in fiscal 2001 from $6.6 million in fiscal 2002. In
fiscal 2002, F&I income as a percentage of net sales also decreased to 2.9% from
3.3% in fiscal 2001 due primarily to (i) lower overall net sales, (ii)
reductions in overall yields paid by lenders for originating customer finance
contracts, (iii) competitive pressures on finance rates (which resulted in lower
net spreads achieved in the placement of customer financing) and (iv) with
regard to our store locations in Arkansas, certain "caps" or limits on interest
rates allowed to be charged by lenders in Arkansas. Decreases in the percentage
of customers buying these products (which is referred to as "sell-through"),
particularly by purchasers of the larger, more expensive boats and reduced
customer demand for certain insurance products have also been limiting factors.
Based on these circumstances and recent attempts by certain manufacturers to
enhance certain manufacturer warranty products, we believe that net sales of F&I
products may continue to decline somewhat for an indefinite period, although we
believe that they will ultimately stabilize.
Gross profit. For the fiscal year ended, September 30, 2002, gross
profit decreased 20.1% to $37.1 million from $46.4 million in the prior fiscal
year. Gross profit, as a percent of sales, decreased to 21.0% from 23.4% during
the same period.
The decrease in total gross profit, both in actual dollars and as a
percent of net sales, was primarily related to (i) the decline in net sales
during the periods and (ii) the inventory valuation allowance required to reduce
the basis in certain aged or discontinued inventories to reflect obsolescence
and current market values. The increase in inventory valuation allowance was
approximately $956,000 of which a substantial portion was recorded during the
quarter ended September 30, 2002 as we focused on initiatives to reduce both
levels of inventory and outstanding indebtedness. Inventory values have been
impacted by the declines in sales and the overall softness of sales in the
marine industry. Also, in an effort to stimulate sales, we offered certain sales
incentives and participated in manufacturer sponsored rebate programs in an
effort (i) to reduce certain non-current inventory levels and (ii) to stimulate
sales in response to weak economic and industry conditions. We believe that we
may continue to experience erratic levels of overall gross profit margins during
the 2003 fiscal year resulting, in part, to (i) introductions of certain new
Travis Edition product lines and (ii) continued emphasis on incentives and
marketing promotions to stimulate sales of both current and
non-current/discontinued inventory models. While these programs have impacted
gross profit, we have been successful in reducing overall inventory levels. Our
inventory levels were approximately $57.0 million as of September 30, 2002
versus $65.2 million as of September 30, 2001. (See "Liquidity and Capital
Resources" and Risk Factors - "We have Inventory from Defunct Manufacturers and
Discontinued Inventory".)
25
The decline in net sales attributable to F&I Products has also impacted
the gross profit margin. Net sales of these F&I Products, which have a
significant impact on the gross profit margin, contributed $5.1 million, or
13.7%, of total gross profit in fiscal 2002, as compared to $6.6 million, or
14.2%, of total gross profit for fiscal 2001. Net sales attributable to F&I
Products are reported on a net basis and therefore all of such sales contribute
directly to our gross profit. The costs associated with the sale of F&I Products
are included in selling, general and administrative expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $39.0 million in fiscal 2002 from $41.5
million in the prior fiscal year. During the prior 2001 fiscal year, we also had
expenses of approximately $321,000 related to closing of the store locations in
Miami, Florida and Huntsville, Alabama. Selling, general and administrative
expenses, as a percent of net sales, were 22.1% in fiscal 2002, compared to
20.9% in fiscal 2001.
The decrease in selling, general and administrative expenses, in actual dollars,
for the fiscal year ended September 30, 2002 versus the prior fiscal year was
primarily attributable to the reduction in wages, commissions,
travel/entertainment expenses and the overall decline in net sales. We have
managed headcount primarily through attrition and selective position
consolidation. The reduction in overall expenses was offset by increases in
certain expenses, primarily insurance expense and a substantial increase in bad
debt expense related to reserves on certain accounts receivable. The decrease in
selling, general and administrative expenses for the fiscal year ended September
30, 2002 versus the prior year was partially offset by an increase bad debt
expense of approximately $1.5 million of which a substantial portion was
recorded during the quarter ended September 30, 2002. Despite our enhanced
collection efforts, we continue to experience delays in collections from
manufacturers, vendors and customers due to both deteriorating financial
condition of these parties and a general economic downturn in the marine
industry. Although we continue to pursue collection of these outstanding
accounts receivable, we believed an increase in the allowance for doubtful
accounts was warranted to reflect our most recent assessment of the probability
of collection.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses decreased to $2.5 million in fiscal 2002 from $2.9 million for the
prior fiscal year. Depreciation and amortization expenses, as a percent of net
sales, decreased to 1.4% in fiscal 2002 from 1.5% for the prior fiscal year.
The decrease in depreciation and amortization expenses, both in actual
dollars and as a percent of net sales, was primarily attributable to our
adoption of SFAS 142 effective on October 1, 2001. Pursuant to the adoption, we
discontinued the amortization of goodwill. Accordingly, our amortization expense
was $458,000 and $887,000 in fiscal year 2002 and 2001, respectively.
Interest expense. Interest expense decreased to $4.0 million in fiscal
2002 from $6.5 million in the prior fiscal year. Interest expense decreased to
2.3% from 3.3% of net sales in fiscal years 2002 and fiscal 2001, respectively.
The decreased interest expense, both in actual dollars and as a percent
of net sales, was primarily the result of significantly lower balances on our
inventory based lines of credit due to the significant reductions in the levels
of inventory held. We have successfully reduced inventory levels to reflect
sales trends and as a result of our prior implementation of a Master Business
Plan that requires pre-approved purchase orders for all inventory purchases.
Interest expense also benefited from the decreases in our variable borrowing
rates relative to the same period of the prior year resulting from the numerous
reductions in the prime rate during the 2002 calendar year.
We anticipate continuing to utilize significant amounts of third party
financing sources to support our inventories and other assets. Accordingly, we
are subject to the impact of increases in interest expenses and other costs
associated with such borrowings. See "Risk Factors--Our Substantial Indebtedness
26
Could Restrict Our Operations and Make Us More Vulnerable to Adverse Economic
Conditions" and "Quantitative and Qualitative Disclosures About Market Risk."
Income Taxes. Our effective income tax benefit rate for the year ended
September 30, 2002 applicable to the operating loss, was reduced by the creation
of a valuation allowance in the approximate amount of $3.5 million, that was
recorded against our deferred income tax assets during the fourth quarter of
fiscal 2002. The valuation allowances were recorded due to uncertainties
surrounding the recovery of income tax assets against taxable income in future
periods. Beginning with the quarter ending March 31, 2003, we do not anticipate
recognizing income tax benefits on our books from future losses, due to
uncertainties associated with the utilization of the operating loss
carry-forwards in future periods. We have pledged, as collateral, the amount
expected to be received from our 2002 federal tax return against a $1.5 million
advance type note we entered into during January 2003. Accordingly, amounts
received from the projected tax return will be used by the Company for repayment
of this loan. (See Risk Factors - "Financing Arrangements" and "Income Tax
Refunds Pledged as Security").
Net loss. For the fiscal year ended September 30, 2002, the Company,
after preferred stock dividends of $187,000, reported a net loss (prior to the
effect of the cumulative accounting change and the extraordinary loss on
extinguishment of debt) of $10.3 million ($2.38 per basic and diluted share)
compared to a net loss of $3.3 million ($.75 per basic and diluted share) for
the prior 2001 fiscal year. (See Note 1 - "Basis of Presentation" in the
consolidated audited financial statements of the Company and notes thereto
included elsewhere in this Report on Form 10-K).
Inclusive of the impact of the cumulative effect of accounting change
and the extraordinary loss on extinguishment of debt, we reported a net loss of
approximately $17.0 million ($3.91 per basic and diluted share) for the 2002
fiscal year. The net loss from the cumulative effect of accounting change is
from our adoption of SFAS 142, "Goodwill and Other Intangible Assets" as of
October 1, 2001. The application of the transition provisions of this new
accounting standard required us to take a non-cash, non-recurring, after-tax
charge of approximately $6.5 million effective as of October 2001. The charge
eliminated our goodwill accounts.
Fiscal Year Ended September 30, 2001 Compared to the Fiscal Year Ended September
30, 2000
Net sales. Net sales for the fiscal year ended September 30, 2001 were
$198.5 million, a decrease of approximately $19.2 million or 8.8% from the net
sales of $217.7 million for the fiscal year ended September 30, 2000.
Comparable store sales declined by 11.6% (32 stores in base) for the
fiscal year ended September 30, 2001 compared to a decrease of 1.1% (18 stores
in base) during the prior fiscal year. Management believes the decline in net
sales and the decrease in comparable store sales was related to various factors
including, but not limited to, erratic levels of consumer confidence, persistent
weak economic and industry conditions and high fuel prices. In certain markets
these factors have been exaggerated by weather conditions related to the severe
impact of tropical storm Allison along the Texas and Louisiana coastlines. Net
sales were also impacted by (i) a significant percentage decline in net sales
specifically during the month of September 2001 and (ii) the closing of store
locations in Miami, Florida and Huntsville, Alabama during our fourth quarter of
fiscal 2001. Prior to their closing, the Miami and Huntsville store locations
had combined sales of approximately $4.2 million during fiscal 2001 compared to
net sales of $7.5 million in the prior fiscal year. In reviewing these store
locations, we determined that each store had a sales overlap with certain other
Travis Boating Center locations and that we could likely more cost effectively
serve our customers through such alternate store locations.
Included within net sales is revenue that we earn related to F&I
Products. The Company, through relationships with various national and local
lenders, is able to place financing for its customers' boating purchases. These
lenders allow us to "sell" the loan at a rate higher than a minimum rate
established by each such lender, and we earn fees based on the percentage
increase in the loan rate over the lender's minimum rate (the rate "spread"). We
sell these loans without recourse, except that in certain instances we must
return the fees earned if the customer repays the loan or defaults in the first
120-180 days. We also sell as a broker, certain types of insurance
27
(property/casualty, credit life, disability) and extended service contracts. We
also sell these products at amounts over a minimum established cost and earn
income based upon the profit over the minimum established cost.
Net sales attributable to F&I Products decreased by 20.5% to
approximately $6.6 million in fiscal 2001 from $8.3 million in fiscal 2000. In
fiscal 2001, F&I income as a percentage of net sales also decreased to 3.3% from
3.8% in fiscal 2000 due primarily to (i) lower overall net sales, (ii)
reductions in overall yields paid by lenders for originating customer finance
contracts, (iii) competitive pressures on finance rates (which resulted in lower
net spreads achieved in the placement of customer financing) and (iv) with
regard to our store locations in Arkansas, certain "caps" or limits on interest
rates allowed to be charged by lenders in Arkansas. Decreases in the percentage
of customers buying these products (which is referred to as "sell-through"),
particularly by purchasers of the larger, more expensive boats and reduced
customer demand for certain insurance products have also been limiting factors.
Based on these circumstances and recent attempts by certain manufacturers to
enhance certain manufacturer warranty products, we believe that net sales of F&I
products may continue to decline prior to ultimately stabilizing.
Gross profit. For the fiscal year ended, September 30, 2001, gross
profit decreased 13.0% to $46.4 million from $53.3 million in the prior fiscal
year. Gross profit, as a percent of sales, decreased to 24.5% from 23.4% during
the same period.
The decrease in gross profit, both in actual dollars and as a percent
of net sales, was primarily related to the Company and certain of our
manufacturers offering additional incentives and rebates on various models of
boats and outboard engines. The manufacturer incentives and rebates were
developed by the manufacturers as part of an effort to stimulate sales due to
overall weak industry sales performance. Additionally, we developed other
incentives as part of its ongoing inventory reduction plan implemented
previously during the summer of the prior 2000 fiscal year. While these programs
have impacted gross profit, we were successful in reducing overall inventory
levels. Our inventory levels were approximately $65.2 million as of September
30, 2001 versus $78.1 million as of September 30, 2000. See "Liquidity and
Capital Resources."
The decline in net sales attributable to F&I Products has also impacted
the gross profit margin. Net sales of these F&I Products, which have a
significant impact on the gross profit margin, contributed $6.6 million, or
14.2%, of total gross profit in fiscal 2001, as compared to $8.3 million, or
15.6%, of total gross profit for fiscal 2000. Net sales attributable to F&I
Products are reported on a net basis and therefore all of such sales contribute
directly to our gross profit. The costs associated with the sale of F&I Products
are included in selling, general and administrative expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $41.5 million in fiscal 2001 from $42.3
million in the prior fiscal year. During fiscal 2001 we also had expenses of
approximately $321,000 related to closing of the store locations in Miami,
Florida and Huntsville, Alabama. Selling, general and administrative expenses,
as a percent of net sales, were 20.9% in fiscal 2001, compared to 19.4% in
fiscal 2000.
The decrease in selling, general and administrative expenses in actual dollars
for the fiscal year ended September 30, 2001 versus the prior fiscal year was
primarily attributable to the reduction in wages, commissions and
travel/entertainment expenses. We have reduced headcount primarily through
attrition and selective position consolidation. The reduction in overall
expenses was offset by increases in certain expenses such as utilities,
insurance, fuel costs, rent/lease expense and bad debt expense related to
reserves on certain accounts receivable.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased to $2.9 million in fiscal 2001 from $2.6 million for the
prior fiscal year. Depreciation and amortization expenses, as a percent of net
sales, increased to 1.5% in fiscal 2001 from 1.2% for prior fiscal year.
The increase in depreciation and amortization expenses, both in actual
dollars and as a percent of net sales, was primarily attributable to the
depreciation expenses of our recently completed superstore location in San
Antonio, Texas, substantial renovations to the Clearwater, Florida store
location and other improvements to our asset infrastructure.
28
Interest expense. Interest expense decreased to $6.5 million in fiscal
2001 from $6.8 million in the prior fiscal year. However, interest expense
increased to 3.3% from 3.1% of net sales in fiscal years 2001 and fiscal 2000,
respectively, primarily as a result of the overall decline in net sales for the
2001 fiscal year.
Interest expense in actual dollars, was positively impacted by
decreases in our short term borrowing rates and inventory debt levels relative
to the prior fiscal year. The decrease in interest expense was somewhat offset
by the incremental interest expense incurred on the additional long term debt
related to our new superstore in San Antonio, Texas and other real estate
holdings.
We anticipate continuing to utilize significant amounts of third party
financing sources to support our inventories and other assets. Accordingly, we
are subject to the impact of increases in interest expenses and other costs
associated with such borrowings. See "Risk Factors--Our Substantial Indebtedness
Could Restrict Our Operations and Make Us More Vulnerable to Adverse Economic
Conditions" and "Quantitative and Qualitative Disclosures About Market Risk."
Net income/(loss). The Company posted a net loss of approximately $3.3
million for fiscal 2001 versus a net income of approximately $897,000 in fiscal
2000 primarily due to the above described declines in net sales and total gross
profit margins. See - "Quarterly Data and Seasonality".
The following table sets forth certain unaudited quarterly financial
data for each of our last eight quarters and such data expressed as a percentage
of our net sales for the respective quarters. The information has been derived
from unaudited financial statements that, in the opinion of management, reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such quarterly information. The operating results for any
quarter are not necessarily indicative of the results to be expected for any
future period.
29
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 2001 Fiscal Year 2002
---------------- ----------------
For the Three Months Ended For the Three Months Ended
Dec 31 Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30
- -------------------------------------------------------------------------------------------------------------------------------
Net sales.................................... $ 24,084 $ 57,521 $73,455 $ 43,480 $ 20,666 $ 47,388 $ 67,825 $ 40,644
Gross profit................................. 5,778 13,998 17,620 8,984 4,065 10,469 15,211 7,327
Selling, general and administrative expense.. 8,379 10,264 11,984 10,866 7,314 9,010 10,850 11,805
Store Closing Costs.......................... -- -- -- 321 -- -- -- --
Operating income/(loss)...................... (3,301) 3,010 4,916 (2,964) (3,876) 843 3,736 (5,089)
Interest expense............................. 1,847 1,926 1,619 1,141 1,039 1,116 1,054 809
Income/(loss) before cumulative effect of
accounting change and extraordinary loss on
extinguishment of debt....................... (3,256) 790 2,096 (2,911) (3,104) (160) 1,707 (8,577)
Preferred stock dividends.................... -- -- -- -- -- -- (67) (120)
Cumulative effect of accounting change, net.. -- -- -- -- (6,528) -- -- --
Extraordinary loss on extinguishment of debt,
net.......................................... -- -- -- -- -- -- (130) --
Net income/(loss) attributable to
shareholders................................. (3,256) 790 2,096 (2,911) (9,632) (160) 1,577 (8,697)
Basic earnings/(loss) per share before
cumulative effect of accounting change and
extraordinary item........................... (.74) .18 .48 (.67) (.71) (.04) .38 (1.98)
Diluted earnings/(loss) per share before
cumulative effect of accounting change and
extraordinary item........................... (.74) .18 .48 (.67) (.71) (.04) .27 (1.98)
Preferred stock dividends.................... -- -- -- -- -- -- -- (.03)
Cumulative effect of accounting change, net.. -- -- -- -- (1.50) -- -- --
Extraordinary loss on extinguishment of debt,
net.......................................... -- -- -- -- -- -- (.02) --
Basic earnings/(loss) per share attributable
to common shareholders....................... (.74) .18 .48 (.67) (2.21) (.04) .35 (2.01)
Diluted earnings/(loss) per share............ (.74) .18 .48 (.67) (2.21) (.04) .25 (2.01)
Weighted avg. common shares outstanding -
basic........................................ 4,387 4,378 4,371 4,363 4,355 4,348 4,344 4,334
Weighted avg. common shares outstanding
- -diluted..................................... 4,387 4,378 4,373 4,363 4,355 4,348 6,522 4,334
- -----------------------------------------------------------------------------------------------------------------
As a Percentage of Net Sales
- -----------------------------------------------------------------------------------------------------------------
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.................................. 24.0 24.3 24.0 20.7 19.7 22.1 22.4 18.0
Selling, general and administrative expense... 34.8 17.8 16.3 25.0 35.4 19.0 16.0 29.0
Operating income/(loss)....................... (13.7) 5.2 6.7 (6.8) (18.8) 1.8 5.5 (12.5)
Interest expense.............................. 7.7 3.3 2.2 2.6 5.0 2.4 1.6 2.0
Income/(loss) before cumulative effect of
accounting change and extraordinary loss on
extinguishment of debt........................ (13.5) 1.4 2.9 (6.7) (15.0) 0.3 2.4 (21.4)
Cumulative effect of accounting change, net... -- -- -- -- (31.6) -- -- --
Extraordinary loss on extinguishment of
debt,net...................................... -- -- -- -- -- -- 0.1 --
Income/(loss) attributable to common
shareholders.................................. (13.5) 1.4 2.9 (6.7) (46.6) 0.3 2.3 (21.4)
Our business, as well as the sales demand for various types of boats,
tends to be highly seasonal. Our strongest sales period begins in January,
because many boat and recreation shows are held in that month. Strong sales
demand continues from January through the summer months. Of our average annual
net sales over the last three fiscal years, over 27% occurred in the quarter
ending March 31 and over 37% occurred in the quarter ending June 30. With the
exception of our store locations in Florida, our sales are generally
significantly lower in the quarter ending December 31. Because the overall sales
levels (in most stores) in the December quarter are much less than in the months
with warmer weather, we generally have a substantial operating loss in the
quarter ending December 31. Because of the difference in sales levels in the
warm spring and summer months, versus the cold fall and winter months, if our
sales in the months of January through June are weak as a result of lackluster
consumer demand, timing of boat shows, bad weather or lack of inventory we will
likely suffer significant operating losses.
Our business is also significantly affected by weather patterns.
Weather conditions that are unseasonable or unusual may adversely affect our
results of operations. For example, drought conditions or merely reduced
rainfall levels, as well as excessive rain, may affect our sale of boating
30
packages and related products and accessories. See "Risk Factors -We Depend on
Strong Sales in the First Half of the Year" and "Our Sales Depend on Good
Weather."
Quarterly results may fluctuate due to many factors. Some of these
factors include, weather conditions, timing of special events such as boat
shows, availability of product and the opening or closing of store locations.
Accordingly, the results for any quarterly period may not be indicative of the
expected results for any other quarterly period.
The results for the quarters ended September 30, 2002 and 2001 were
negatively impacted by certain events including the expenses related to
establishment of reserve allowances on certain inventories, deferred tax assets
and accounts receivable.
Liquidity and Capital Resources
Contractual Commitments and Commercial Commitments
The following table sets forth a summary of our material contractual
obligations and commercial commitments as of September 30, 2002:
Year Ended September 30, Line of Long-Term Convertible Operating Total
(000's) Credit Debt Notes Leases
- ----------------------------------------------------------------------------------------------------------
2003 $ 50,949 (1) $ 7,460 (2) $ 3,009 $ 61,418
2004 1,332 2,353 3,685
2005 301 $ 1,300 1,663 3,264
2006 227 1,232 1,459
2007 482 343 825
Thereafter 884 277 1,161
-------------- ------------- -------------- ------------ ------------
Total $ 50,949 $10,686 $ 1,300 $ 8,877 $ 71,812
============== ============= ============== ============ ============
(1) Our inventory borrowing agreements, which originated in January
2000, mature in April 2003.
(2) Includes $6.4 million in real estate loans with a single lender
which have been re-classified as current for financial reporting
since we are out of compliance with certain financial loan
covenants and the loans are subject to demand for repayment prior
to their originally scheduled dates of maturity.
Our short-term cash needs are primarily for working capital to support
operations, including inventory requirements, off-season liquidity and store
infrastructure. These short-term cash needs have historically been financed with
cash from operations and further supplemented by borrowings under our floor plan
and revolving credit lines (collectively the "borrowing agreements"). During the
fiscal year ended September 30, 2002, we also increased working capital by the
issuance of $4.3 million in subordinated convertible notes (of which $3.0
million was repaid in June of 2002) and $8.0 million from the issuance of 80,000
shares of Series A preferred stock.
At September 30, 2002, we had approximately $4.3 million in cash, $9.7
million in accounts receivable (primarily contracts in transit from sales,
manufacturer rebates receivable and other amounts due from manufacturers) and
$57.0 million in inventories. Contracts in transit are amounts receivable from a
customer or a customer's financial institution related to that customer's
purchase of a boat. These asset balances were offset by approximately $5.5
million of accounts payable and accrued liabilities, $50.9 million outstanding
under our borrowing agreements and $7.5 million in short-term indebtedness
including (i) current maturities of notes payable of $496,000; (ii) a real
estate loan in the amount of $529,000 with a balloon payment due at maturity in
January 2003 and (iii) $6.4 million in real estate loans with a single lender
which have been re-classified as current for financial reporting since we are
31
out of compliance with certain financial loan covenants and the loans are
subject to demand for repayment prior to their originally scheduled dates of
maturity. (See Risk Factors - "We are Out of Compliance on Certain Loan
Agreements and have Been Out of Compliance on Others").
As of September 30, 2002, the aggregate maximum borrowing limits under
our borrowing agreements was $70.0 million, respectively (see Note 14 -
"Subsequent Events" in the consolidated audited financial statements of the
Company and notes thereto included elsewhere in this Report on Form 10-K).
At September 30, 2002, we had working capital of approximately $8.5
million. Working capital, as of that date, was reduced by our net loss and the
aforementioned $7.5 million, in short term indebtedness classified as a current
liability.
In fiscal 2002, operating activities provided cash flows of $3.9
million due primarily to the decrease of $8.2 million in inventories (as a
result of our continued emphasis on inventory reduction strategies) and the
collection of the income taxes recoverable. These amounts were offset partially
by the net loss of $17.0 million, the cumulative effect of accounting change and
a $1.8 million decrease in accounts payable.
In fiscal 2001, operating activities provided cash flows of $13.5
million due primarily to the decrease of $12.9 million in inventories (as a
result of our inventory reduction strategies) and net increases in accounts
payable and the collection of the income taxes recoverable. These amounts were
offset partially by the net loss of $3.3 million, decreases in accrued
liabilities and prepaid expenses.
Investing activities in fiscal 2002 utilized cash flows of $1.2 million
due primarily to the purchase and replacement of assets used in operations of
the store locations. These activities were primarily funded through our
borrowing agreements and internal cash flows.
Financing activities in fiscal 2002 provided cash flows of $61,000
primarily from the net proceeds of the issuance of Series A preferred stock and
convertible subordinated notes, offset by the repayment of amounts outstanding
under our borrowing agreements and under a $3.0 million convertible subordinated
note. The repayments under the borrowing agreements were generally from the
proceeds of our net reduction in overall inventory levels during the period. We
finance substantially all of our inventory and working capital requirements
pursuant to borrowing agreements entered into in January 2000 with two
commercial finance companies -- Transamerica Commercial Finance Corporation
("TCFC") and GE Commercial Distribution Finance Corporation ("GE") (formerly
known as Deutsche Financial Services Corporation ("DFS")). The agreements, which
currently have maturity dates of April 2003, have been amended numerous times
(See Note 14 - "Subsequent Events" in the consolidated audited financial
statements of the Company and notes thereto included elsewhere in this Report on
Form 10-K). The agreements contain substantially similar terms and financial
ratio based covenant requirements. The maximum aggregate borrowing availability
as of September 30, 2002 was limited to a maximum credit limit of $70 million at
various prime based or LIBOR based interest rates (varying from 4.75% to 4.8% at
September 30, 2002). Borrowings under the agreements are pursuant to a borrowing
base, or specific floor plan, advancing formula and are used primarily to
finance inventory purchases and for general working capital requirements.
Substantially all inventory, accounts receivable, furniture, fixtures,
equipment, real estate (junior liens) and intangible assets collateralize these
borrowing agreements. The terms of the borrowing agreements also provide for:
(i) fees for administrative monitoring, (ii) fees for unused portions of
available credit, and (iii) pre-payment fees in the event of our termination of
such floor plans prior to their stated original maturity dates. The borrowing
agreements also include restrictive loan agreements containing various loan
covenants and borrowing restrictions, including minimum financial ratios
(governing net worth, current assets, debt to worth percentages and cash flow
coverage requirements based upon interest expense and monthly principal and
interest payments on debts). Acquisitions, the payment of common stock dividends
or repurchases of our common stock are also substantially limited without prior
consent. Effective with the results of operations for the three and twelve
months ended September 30, 2002, we were in violation of several financial ratio
covenants and, subsequent to such time, became in violation of payment
requirements for sold and matured inventory.
32
Effective on December 30th and 31st, 2002, we entered into Amended and
Restated borrowing agreements (the "Amended Agreements") with our senior
inventory lenders, TCFC and GE, (formerly "DFS").
The Amended Agreements included, but were not limited to, the following
components:
1. Extension of the maturity date of the respective borrowing agreements
from January 31, 2003 to April 30, 2003.
2. Waiver of certain financial, reporting and payment defaults as of the
date of the Amended Agreements. The financial default waivers included
the re-establishment and modification of new financial ratio levels
based upon our current and anticipated financial performance through
the maturity date of April 30, 2003. The waived reporting requirements
provided us time to finalize our audit report and report on Form 10-K
for the fiscal year ended September 30, 2002. The waived payment
defaults were the result of our failure to repay certain amounts
scheduled to be paid according to the terms of the borrowing
agreements, including the timely payment of amounts for sold inventory
and scheduled amounts for certain matured inventory. The waivers of the
payment defaults were accommodated by the lenders revising the terms
under the Amended Agreements to temporarily advance certain funds to us
on inventory assets (primarily certain new and used aged inventories)
that previously were not eligible assets upon which we could borrow
funds. Repayment of the amounts resulting from the payment default is
required upon the earlier of, (i) the sale of such inventory providing
the basis for the temporary advance, (ii) the receipt by the Company of
its projected calendar year 2002 federal income tax refund, or (iii)
April 30, 2003.
3. An "Intercreditor Agreement" by and among TCFC, GE and TMRC, L.L.P.
(the owner of the Company's outstanding shares of Series A Preferred
Stock) to each, individually, provide the Company up to an additional
$500,000 of conditional funding (collectively $1.5 million). The
requirement of any party to advance funds under this agreement is at
each participant's sole and individual discretion. Accordingly, the
Company is not guaranteed any advances; or to the extent advances are
made; any future or additional advances. Funds may only be used for the
general working capital expenses of the Company. As of January 17,
2003, the Company has received $415,000 from each of TCFC, GE and TMRC,
L.L.P. (collectively $1,245,000) as advances pursuant to this
agreement. (See Risk Factors "Operating Losses and Reduced Financing
have Jeopardized our Cash Flow" and Note 14 - "Subsequent Events" in
the consolidated audited financial statements of the Company and notes
thereto included elsewhere in this Report on Form 10-K).
We pursued this transaction and financing because of our belief that
current and anticipated cash needs through April, 2003 exceed amounts otherwise
available to be borrowed under our current credit facilities with TCFC and GE.
This projected shortfall is influenced in part by our seasonal trends which
include historically low sales levels during the October through December
periods. The seasonal lull normally experienced at the end of a calendar year
was compounded at the end of 2002 by continued economic uncertainty, weak
industry sales trends, and certain revised borrowing terms which have had the
effect of reducing our borrowing base during this period.
Based upon management's initial Fiscal 2003 operating plan, including
the (i) sale/leaseback or refinancing of certain assets, (ii) closing additional
store locations, (iii) further reducing staff levels and, if necessary,
benefits, (iv) reducing expenses or renegotiating fixed payments plus the
availability under its borrowing agreements and the additional $1.5 million in
conditional funding, management believes that there is potential liquidity to
fund our operations and to make required principal payments under the two
borrowing agreements and other outstanding debt through the maturity date of
April 30, 2003. However, material shortfalls or variances from anticipated
performance or the timing of certain expenses or revenues could require us to
seek further amendment to the amended borrowing agreements or alternate sources
of financing. (See Risk Factors "Operating Losses and Reduced Financing have
Jeopardized our Cash Flow"; Risk Factors "Change of Control"; Risk Factors
"Financing Arrangements" and Note 1 - "Basis of Presentation" in the
consolidated audited financial statements of the Company and notes thereto
included elsewhere in this Report on Form 10-K).
During the period prior to the expiration of our inventory borrowing
agreements on April 30, 2003, we will be revising our business plan to support
our required financing arrangements for the remainder of fiscal 2003 and beyond
either with our current lenders or from other sources. There is no assurance
that renewal of the borrowing agreements will be possible, that further
amendments are available to the Company or that we will be successful in
obtaining adequate financing arrangements from these or alternate sources.
33
As of the date of this report on Form 10-K, management believes the
Company to be in compliance with all other terms and conditions of its borrowing
agreements and all proposed terms and conditions established pursuant to the
aforementioned waivers except as follows:
We are currently not in compliance with financial covenants of a loan
agreement on certain real estate loans with Hibernia National Bank ("Hibernia")
requiring (i) minimum cash flow and (ii) minimum tangible net worth. The loan
agreement requires:
Minimum Cash Flow (as defined in the agreement) must exceed 1.5 to 1.0.
Based upon the Company's financial results as of September 30, 2002 the
Company's ratio is .01 to 1.0 and as such is not in compliance.
Minimum Tangible Net Worth (as defined in the agreement) must exceed
$27.5 million. Based upon the Company's financial results as of September 30,
2002 the Company's tangible net worth is $25.8 million and as such is not in
compliance.
Our inability to continue to (i) negotiate waivers, (ii) to restructure
these loans, or (iii) operate without being in compliance would result in a
significant and severe financial impact on our business, operating results and
financial condition. Also, continued defaults or future defaults under the
Hibernia loan agreement would result in a default under our inventory borrowing
agreements. The default on this or other debt of the Company could result in
financial instability as a result of changes in borrowing terms, demand for
immediate repayment or repossession of collateral. This financial instability
could result in our Company being unable to continue as a going concern and
suspend operations, with one alternative being to seek protection under the
appropriate Federal Bankruptcy procedures. If our Company declares for
bankruptcy protection under Chapter 11, existing shareholder investments may be
diluted substantially or be completely lost through satisfaction of creditor
claims. If a Chapter 11 reorganization is not successful, our Company may be
forced into Chapter 7, in which case shareholders may lose their investment
completely. (See Note 1 - "Basis of Presentation" and Note 14 - "Subsequent
Events" in the consolidated audited financial statements of the Company and
notes thereto included elsewhere in this Report on Form 10-K).
As of September 30, 2002, $50.9 million was drawn on the borrowing
agreements and we could borrow (i) zero for general working capital purposes,
and (ii) an additional $19.1 million solely for the purchase of additional
inventories. As we purchase inventory, the amount purchased increases the
borrowing base availability and typically the Company makes a determination to
borrow. Various manufacturers provide us or our lenders with interest expense
assistance under the inventory borrowing agreements in order to subsidize the
carrying cost of inventory. Accordingly, no interest expense is recorded during
portions of the year (generally August through May) for certain borrowings under
these agreements. Discontinuance of these agreements could result in an increase
to interest expense.
Merchandise inventories were $57.0 million and $65.2 million as of
September 30, 2002 and 2001, respectively. Accounts receivable, on a net basis,
decreased by approximately $1.7 million to $9.7 million at the end of fiscal
2002 from the same time one year earlier due to collection of receivables and an
increase in the allowance. Noncompete agreements decreased by approximately
$450,000 to $1.2 million in fiscal 2002 due to the scheduled amortization of
this asset, pursuant to the adoption of SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142") effective as of October 1, 2002. In accordance
with SFAS 142, we completed goodwill impairment tests as required. The tests
involved the use of estimates related to the fair market value of the business
with which the goodwill is associated. As a result of the transitional
impairment test, which considered factors including the significant negative
industry and economic trends impacting current operations and our market
capitalization relative to our net book value, we recorded a non-cash, after tax
charge of $6.5 million as a cumulative effect of accounting change as of October
1, 2001. The non-cash, after tax charge resulted in the elimination of the
entire goodwill balance from our balance sheet.
We had capital expenditures of approximately $1.1 million in fiscal
2002 and approximately $1.5 million in fiscal 2001. Capital expenditures during
fiscal 2002 and 2001 were primarily used for the purchase and replacement of
34
assets used in operations of the store locations. These capital expenditures
were funded through our borrowing agreements and internal cash flows.
New Accounting Standards
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 is effective for
financial statements relating to fiscal years beginning after June 15, 2002.
There was no material impact from adoption of this statement on October 1, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
financial accounting and reporting for the impairment of long-lived assets. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. There was no material impact from adoption of this
statement on October 1, 2002.
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145, Rescission of SFAS 4,
"Reporting Gains and Losses from Extinguishment of Debt", Rescission of SFAS 44,
"Accounting for Intangible Assets of Motor Carriers", Rescission of SFAS 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements", Amendment of
SFAS 13, "Accounting for Leases", and Technical Corrections (SFAS 145). SFAS 145
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. We do not expect SFAS 145 to have a material effect on our
financial statements except for the reclassification of the extraordinary items
recorded in fiscal 2002 to operating expenses.
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses the financial
accounting and reporting for the costs associated with exit or disposal
activities. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. We do not expect SFAS 146 to have a material
effect on our financial statements.
In November 2002, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a consensus on issue No. 02-16,
"Accounting by a Reseller for Cash Consideration Received from a Vendor". EITF
02-16 establishes the accounting standards for the recognition and measurement
of cash consideration paid by a vendor to a reseller. EITF 02-16 is effective
for interim period financial statements beginning after December 15, 2002, with
early adoption permitted. We have not yet determined the impact, if any, EITF
02-16 will have on our financial statements.
Inflation
The Company believes that inflation generally has not had a material
impact on its operations or liquidity to date.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
At September 30, 2002, approximately 89.6% of the Company's notes
payable and other short term obligations bear interest at variable rates,
generally tied to a reference rate such as the LIBOR rate or the prime rate of
interest of certain banks. During the fiscal year ended September 30, 2002, the
average rate of interest of such variable rates was 5.10%. Increases in the
variable interest rates would result in increased interest expense and decreased
earnings and cashflow. Assuming the same level of borrowings for the year ended
September 30, 2002, which averaged approximately $69.0 million, an increase of
2% in the average rate of interest would result in an increase in fiscal 2002
interest expense of approximately $1.4 million and an increase in the fiscal
35
2002 net loss. After-tax cashflow would have decreased by approximately
$896,000. Conversely, a decrease in the average rate of interest would result in
decreased interest expense and a decrease in net loss and improved after-tax
cashflow.
Item 8. Financial Statements
For the financial statements and supplementary data required by this
Item 8, see the Index to Consolidated Financial Statements and Schedules.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers
There is incorporated herein by reference that portion of the Company's
proxy statement for the 2003 Annual Meeting of Shareholders which appears
therein under the captions "Item 1: Election of Directors" and "Information
Concerning Directors."
Item 11. Executive Compensation
There is incorporated in this Item 11 by reference that portion of the
Company's definitive proxy statement for the 2003 Annual Meeting of Shareholders
which appears under the caption "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
There is incorporated in this Item 12 by reference that portion of the
Company's definitive proxy statement for the 2003 Annual Meeting of Shareholders
which appears under the caption "Securities Holdings of Principal Shareholders,
Directors, Nominees and Officers."
Item 13. Certain Relationships and Related Transactions
During the fiscal year ended September 30, 2002 the Company purchased
approximately $3.8 million , or 3.6% of its inventory purchases from affiliates
of Tracker. There is incorporated in this Item 13 by reference that portion of
the Company's definitive proxy statement for the 2003 Annual Meeting of
Shareholders which appears under the captions "Certain Relationships and Related
Transactions" and "Compensation Committee Interlocks and Insider Participation."
PART IV
Item 14. Controls and Procedures
Within the 90 days prior to the date of filing this Form 10-K, the
Company performed an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Company's Chief Executive
Officer and the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic SEC filings.
36
There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements - The following consolidated financial statements of
the Company are included following the Index to Consolidated Financial
Statements and Schedules on page F-1 of this Report.
Report of Independent Auditors................ F-2
Consolidated Balance Sheets................... F-3
Consolidated Statements of Operations......... F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows......... F-7
Notes to Consolidated Financial Statements.... F-9
(a) 2. Financial Statement Schedules - All schedules have been omitted because
they are not applicable, not required under the instructions, or the information
requested is set forth in the consolidated financial statements or related notes
thereto.
(a) 3. Exhibits - The following Exhibits are incorporated by reference to the
filing or are included following the Index to Exhibits.
INDEX TO EXHIBITS
(a) Exhibits:
3.1 --Restated Articles of Incorporation of the Registrant, as amended.(1)
3.2 --Restated Bylaws of the Registrant, as amended.(1)
4.1 --A copy of the Travis Boats & Motors, Inc. Statement of Designations of 6% Series A
Cumulative Convertible Preferred Stock dated March 12, 2002. (9)
4.2 --Warrant to Purchase Series A Preferred Stock of Travis Boats & Motors, Inc. (9)
4.3 Travis Boats & Motors, Inc. Amended and Restated Statement of Designations of 6%
Series A Cumulative Convertible Preferred Stock dated April 8, 2002. (10)
9.1 --Voting Trust Agreement, dated as of January 7, 2003, by and between Travis Boats & Motors,
Inc., and TMRC, L.L.P. (11)
10.2(a) --[Intentionally left blank]
10.2(b) --Dealer Agreement dated as of October 13, 1995, between the Company and Outboard
Marine Corporation.(1)
10.3 , 10.4 --[Intentionally left blank]
10.5(a,b) --[Intentionally left blank]
10.6(a,b) --[Intentionally left blank]
10.7(a,b) --[Intentionally left blank]
10.8(a - i) --[Intentionally left blank]
10.9(a,b,c) --[Intentionally left blank]
10.10(a,b) --[Intentionally left blank]
10.11 - 10.14 --[Intentionally left blank]
10.15 --Asset Purchase Agreement dated as of September 20, 1995, by and among Red River
Marine, Inc., Red River Marine, Inc. #2, and TBC Arkansas, Inc.(1)
10.16 --Promissory Note dated September 20, 1995, in the original principal amount of $800,000,
Payable by TBC Arkansas, Inc. to Benny Hargrove.(1)
10.17(a) --Promissory Note dated as of September 20, 1995, in the
original principal amount of $462,145.53, payable by TBC
Arkansas, Inc. to Red River Marine, Inc. #2.(1)
37
10.17(b) --Mortgage With Power of Sale (Realty) dated September 20, 1995, from TBC Arkansas, Inc.
to Red River Marine, Inc. #2.(1)
10.18 --Promissory Note dated September 20, 1995, in the original principal amount of
$230,177.16, payable by TBC Arkansas, Inc. to Red River Marine, Inc. and Red River
Marine, Inc. #2.(1)
10.19 --Promissory Note dated September 20, 1995, in the original principal amount of $108,750,
Payable by TBC Arkansas, Inc. to Red River Marine, Inc. and Red River Marine, Inc. #2.(1)
10.20 --Travis Boats and Motors, Inc. 1995 Incentive Plan.(1)
10.21 --[Intentionally left blank]
10.22 --Form of Option Agreement dated May 17, 1995, between the Company and Michael B.
Perrine, Ronnie L. Spradling and Mark T. Walton.(1)
10.23 --Form of Indemnification Agreement for Directors and Officers of the
Company.(1)
10.24 --Management Agreement dated December 14, 1995, by and among TBC Management, Ltd.,
the Company and its subsidiaries.(1)
10.25 --[Intentionally left blank]
10.26(a,c) --[Intentionally left blank]
10.27(a) --Second Modification and Extension Agreement dated April 26, 1994, between the Company
and NationsBank of Texas, N.A.(1)
10.27(b) --"504" Note dated April 28, 1994, in the original principal amount of $454,000, payable by
the Company to Cen-Tex Certified Development Corporation.(1)
10.27(c) --[Intentionally left blank]
10.27(d) --Deed of Trust dated April 28, 1994, from the Company to Wm. H. Harrison, Jr., Trustee.(1)
10.28 --[Intentionally left blank]
10.29(a - d) --[Intentionally left blank]
10.30 --Asset Purchase Agreement dated as of November 1, 1996 between Travis Boating Center
Tennessee, Inc. and Tri-Lakes Marine, Inc.(2)
10.31 --Asset Purchase Agreement dated as of November 1, 1996 between Travis Boating Center
Alabama, Inc. and Tri-Lakes Marine, Inc.(2)
10.32 --Asset Purchase Agreement dated as of February 19, 1997 between Travis Boating Center
Louisiana, Inc. and Bent's Marine, Inc.(3)
10.33 --Asset Purchase Agreement dated as of August 1, 1997 between Travis Boating Center
Mississippi, Inc. and McLeod Marine, Inc.(4)
10.34 --Stock Purchase Agreement dated as of September 30, 1997 among Travis Boating Center
Florida, Inc. and Frederic D. Pace and John W. Reinhold providing for the purchase of
100% of the common stock of Adventure Boat Brokerage, Inc. (4)
10.35 --Stock Purchase Agreement dated as of September 30, 1997 among Travis Boating Center
Florida, Inc. and John W. Reinhold providing for the purchase of 100% of the common
stock of Adventure Marine & Outdoors, Inc.(4)
10.36 --Stock Purchase Agreement dated as of September 30, 1997 among Travis Boating Center
Florida, Inc. and Frederic D. Pace and John W. Reinhold providing for the purchase of
100% of the common stock of Adventure Marine South, Inc.(4)
10.37 --[Intentionally left blank]
10.38 --Asset Purchase Agreement dated as of November 20, 1997 between Travis Boating
Center Tennessee, Inc. and Southeastern Marine Group, Inc.(4)
10.39 --Travis Boats & Motors, Inc. 1995 Incentive Plan.(5)
10.40 --Employment Agreement dated November 16, 1999 between TBC Management, Ltd. and
Mark T. Walton.(7)
10.41 --Employment Agreement dated November 16, 1999 between TBC Management, Ltd. and
Michael B. Perrine.(7)
10.42 --Employment Agreement dated November 16, 1999 between TBC Management, Ltd. and
Ronald L. Spradling.(7)
10.43 --Wellcraft Master Dealer Agreement effective September 29. 1998 between the Company
and Wellcraft Marine Corp. (7)
38
10.44 --Aquasport Master Dealer Agreement effective September 29, 1998 between the Company
and Aquasport, a division of Wellcraft Marine Corp. (7)
10.45 --Outboard Marine Corporation Private Label/Retail Store Agreement dated November 13,
1998 between the Company and Outboard Marine Corporation.(7)
10.46 --Product Supply Agreement dated June 29, 1999 between the Company, its subsidiaries
and Mercury Marine, a division of Brunswick Corporation. (7)
10.47 --Larson Master Dealer Agreement effective September 29, 1999 between the Company and
Larson/Glastron Boats, Inc. (7)
10.48 --Loan and Security Agreement, dated as of January 31, 2000, between Travis Boats &
Motors, Inc., along with certain of its subsidiaries, and Deutsche Financial Services
corporation related to a Credit Facility of up to $60,000,000.00. (6)
10.49 --Loan and Security Agreement dated as of January 31, 2000,
by and between Transamerica Commercial Finance Corporation
along with certain of its subsidiaries, and Transamerica
Commercial Finance Corporation related to a line of credit
with a maximum credit amount of $50,000,000.00 (6)
10.50 --First Amendment to Loan and Security Agreement, dated January 31, 2000, by and between
Deutsche Financial Services Corporation and Travis Boats & Motors, Inc., along with
certain of its subsidiaries. (6)
10.51 --Letter, dated December 29, 2000, to TBC Management, Inc. from Transamerica Commercial
Finance Corporation. (6)
10.52 --TBC Management Ltd. Part I Amendment to Employment Agreement with Mark T. Walton.(8)
10.53 --TBC Management Ltd. Part I Amendment to Employment Agreement with Ronnie L. Spradling.(8)
10.54 --TBC Management Ltd. Part I Amendment to Employment Agreement with Michael B. Perrine.(8)
10.55 --Consent and Waiver by and between Travis Boats & Motors, Inc. and Brunswick Corporation
(Re: Deutsche Financial Services Corporation), dated as of December 14, 2001.
10.56 --Consent and Waiver by and between Travis Boats & Motors, Inc. and Brunswick Corporation
(Re: Transamerica Commercial Finance Corporation), dated as of December 14, 2001.
10.57 --Amended and Restated Loan and Security Agreement between Travis Boats & Motors, Inc. and
Deutsche Financial Services Corporation, dated as of December 10, 2001.
10.58 --Amendment No. 2 to Travis Boats & Motors, Inc. Loan and Security Agreement by and
between the Company and Transamerica Commercial Finance
Corporation, dated as of December 14, 2001.
10.59 --Subordination Agreement - Travis Boats & Motors, Inc. Indebtedness to Brunswick
Corporation by and between those parties (Re: Transamerica Commercial Finance
Corporation), dated as of December 14, 2001.
10.60 --Subordination Agreement - Travis Boats & Motors, Inc. Indebtedness to Brunswick
Corporation by and between those parties (Re: Deutsche
Financial Corporation), dated as of December 14, 2001.
10.61 --Subordination Agreement - Travis Boats & Motors, Inc. Indebtedness to Shareholder
Purchasers by and between those parties (Re: Brunswick
Corporation), dated as of December 14, 2001.
10.62 --Subordination Agreement - Travis Boats & Motors, Inc. Indebtedness to Shareholder
Purchasers by and between those parties (Re: Transamerica Commercial Finance
Corporation), dated as of December 14, 2001.
10.63 --Subordination Agreement - Travis Boats & Motors, Inc. Indebtedness to Shareholder
Purchasers by and between those parties (Re: Deutsche Financial Services Corporation),
dated as of December 14, 2001.
10.64 --Convertible Subordinated Promissory Note by and between those parties (Travis Boats &
Motors, Inc. to Brunswick Corporation), dated as of December 14, 2001.
39
10.65 --Travis Boats & Motors, Inc. Subordinated Note Purchase Agreement between Travis Boats &
Motors, Inc. and Brunswick Corporation, dated as of December 14, 2001.
10.66 --Travis Boats & Motors, Inc. Subordinated Note Purchase Agreement between Travis Boats &
Motors, Inc. and Shareholder Purchasers, dated as of December 14, 2001.
10.67 --Form of Convertible Subordinated Promissory Note (Travis Boats & Motors, Inc. to
Shareholder Purchaser), dated as of December 14, 2001.
10.68 --Preferred Stock and Warrant Purchase Agreement, by and between Travis Boats &
Motors, Inc., and TMRC, L.L.P., dated March 13, 2002. (9)
10.69 --Tracker/Travis Master Dealer Agreement (Master Dealer Supply Agreement), by and
between Travis Boats & Motors, Inc., and Tracker Marine, L.L.C., dated March 13, 2002.
(12)
10.70 --TBC Management, Ltd. Amendment No. 2 to Employment Agreement with Mark T. Walton, dated
March 13, 2002. (9)
10.71 -- TBC Management, Ltd. Amendment No. 2 to Employment Agreement with Michael B. Perrine,
dated March 13, 2002. (9)
10.72 -- TBC Management, Ltd. Amendment No. 2 to Employment Agreement with Ronald L. Spradling,
dated March 13, 2002. (9)
10.73 -- Amendment No. 3 to Travis Boats & Motors, Inc. Loan and Security Agreement by and
between Travis Boats & Motors, Inc. and Transamerica Commercial Finance Corporation,
dated March 13, 2002. (9)
10.74 -- Consent and Waiver by and between Travis Boats & Motors, Inc. and Transamerica
Commercial Finance Corporation (Re: Tracker Marine L.L.C.), dated as of March 7, 2002.
(9)
10.75 -- Consent and Waiver by and between Travis Boats & Motors, Inc. and Deutsche Financial
Services Corporation (Re: Tracker Marine L.L.C.), dated as of March 7, 2002. (9)
10.76 -- Consent and Waiver by and between Travis Boats & Motors, Inc. and Hibernia National Bank
(Re: Tracker Marine L.L.C.), dated as of March 12, 2002. (9)
10.77 -- Term Sheet, dated January 7, 2003, by and between Travis Boats & Motors, Inc., and TMRC,
L.L.P.(11)
10.78 -- Loan and Security Agreement, dated as of January 7, 2003, by and between Travis Boats &
Motors, Inc., and TMRC, L.L.P. (11)
10.79 -- Amendment Regarding Amended and Restated Loan and Security Agreement by and among Travis
Boats & Motors, Inc., certain of its subsidiaries, and GE Commercial Distribution
Finance Corporation, formerly known as Deutsche Financial Services Corporation ("CDF").
(11)
10.80 -- Amendment No. 4 to Travis Boats & Motors, Inc., Loan and Security Agreement, by and
between Travis Boats & Motors, Inc., and Transamerica Commercial Finance Corporation.
(11)
10.81 -- Security Agreement - Tax Refund, by and between Travis Boats & Motors, Inc., and
Transamerica Commercial Finance Corporation, as agent for Transamerica Commercial
Finance Corporation, GE Commercial Distribution Finance Corporation and TMRC, L.L.P. (11)
10.82 -- Assignment of Tax Claim, given by Travis Boats & Motors, Inc., to Transamerica
Commercial Finance Corporation, as agent for Transamerica Commercial Finance
Corporation, GE Commercial Distribution Finance Corporation and TMRC, L.L.P. (11)
10.83 -- Option Agreement dated January 7, 2003, by and between Mark T. Walton and TMRC, L.L.P.
(11)
10.84 -- Option Agreement dated January 7, 2003, by and between Robert C. Siddons and TMRC,
L.L.P. (11)
10.85 -- Intercreditor Agreement (Travis Tax Refund), by and among Transamerica Commercial
Finance Corporation, TMRC, L.L.P., GE Commercial Distribution Finance Corporation and
Transamerica Commercial Finance Corporation as tax refund agent. (11)
40
10.86 -- Stock Option Cancellation Agreement dated January 7, 2003, by and between Travis Boats &
Motors, Inc., and Michael B. Perrine. (11)
10.87 -- Stock Option Cancellation Agreement dated January 7, 2003, by and between Travis Boats &
Motors, Inc., and Mark T. Walton. (11)
10.88 -- Stock Option Cancellation Agreement dated January 7, 2003, by and between Travis Boats &
Motors, Inc., and Ronnie L. Spradling. (11)
10.89 -- Stock Option Cancellation Agreement dated January 7, 2003, by and between Travis Boats &
Motors, Inc., and Richard Birnbaum. (11)
10.90 -- Amendment No. 3 to Employment Agreement, by and between Ronald L. Spradling and TBC
Management, Ltd., a Texas limited partnership, and agreed to and accepted by Travis
Boats & Motors, Inc., a Texas corporation. (11)
10.91 -- Amendment No. 3 to Employment Agreement, by and between Mark T. Walton and TBC
Management, Ltd., a Texas limited partnership, and agreed to and accepted by Travis
Boats & Motors, Inc., a Texas corporation. (11)
10.92 -- Amendment No. 3 to Employment Agreement, by and between Michael B. Perrine and TBC
Management, Ltd., a Texas limited partnership, and agreed to and accepted by Travis
Boats & Motors, Inc., a Texas corporation. (11)
11.1 -- Travis Boats & Motors, Inc., Earnings Press Release dated December 31, 2002. (11)
21.1 -- List of Subsidiaries of Registrant.(7)
23.1 -- Consent of Independent Auditors.
99.4 -- Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Mark T.
Walton.
99.5 -- Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Michael B.
Perrine.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 effective June 26, 1996 (File No. 333-03283).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on December 31, 1996 (File No. 000-20757).
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed May 15, 1997 (File No. 000-20757).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K filed
December 29, 1997 (File No. 000-20757).
(5) Incorporated by reference to the Company Registration Statement on Form S-8
(File No. 333-41981).
(6) Portions of this exhibit have been omitted and are subject to an
application for confidential treatment filed separately with the
Commission.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K/A
filed with the Commission on January 13, 2000 (File No. 600-20757).
(8) Incorporated by reference to the Company's Annual Report on Form 10-Q filed
with the Commission on August 14, 2001 (File No. 000-20757).
(9) Incorporated by reference to the Company's Periodic Report on Form 8-K
filed with the Commission on March 13, 2002.
(10) Incorporated by reference to the Company's Periodic Report on Form 8-K/A
filed with the Commission on April 17, 2002.
(11) Incorporated by reference to the Company's Periodic Report on Form 8-K
filed with the Commission on January 15, 2003.
(12) Incorporated by reference to the Company's Periodic Report on Form 8-K/A
filed with the Commission on July 12, 2002.
41
No annual report or proxy material has been sent to security holders as
of the date of this Report on Form 10-K; however, the Company anticipates
sending the annual report and proxy materials on or before any applicable
deadlines. When such a report and proxy materials are furnished, the Registrant
will furnish copies of such materials to the Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Travis Boats & Motors, Inc.
Date: January 20, 2003 By: /s/ MARK T. WALTON
----------------------------------
Mark T. Walton
Chairman of the Board and President
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint Mark T. Walton his true and lawful
attorney-in-fact and agent for him and in his name, place and stead, in any and
all capacities, to sign any or all amendments to the Travis Boats & Motors, Inc.
Annual Report on Form 10-K for the year ending September 30, 2002, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully, to all intents and purposes, as they
or he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, or any of them, may lawfully do or cause to be done
by virtue hereof. This Power of Attorney has been signed below by the following
persons in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date Signed
- ---- ----- -----------
/S/ MARK T. WALTON Chairman of the Board, President and
- --------------------------- Director (Principal Executive Officer) January 20, 2003
Mark T. Walton
/S/ MICHAEL B. PERRINE Chief Financial Officer, Secretary and
- --------------------------- Treasurer (Principal Financial and January 20, 2003
Michael B. Perrine Accounting Officer)
/S/ RONNIE L. SPRADLING Executive Vice President-New Store
- --------------------------- Development, Director January 20, 2003
Ronnie L. Spradling
/S/ RICHARD BIRNBAUM
- ---------------------------
Richard Birnbaum Director January 20, 2003
/S/ KENNETH BURROUGHS
- ---------------------------
Kenneth Burroughs Director January 20, 2003
/s/ JAMES P. KARIDES, CPA
- ---------------------------
James P. Karides, CPA Director January 20, 2003
/S/ ROBERT L. RING
- ---------------------------
Robert L. Ring Director January 20, 2003
/S/ ROBERT C. SIDDONS
- ---------------------------
Robert C. Siddons Director January 20, 2003
42
CERTIFICATION
I, Mark T. Walton certify that:
1. I have reviewed this annual report on Form 10-K of Travis Boats & Motors,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a)
Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared; b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and c) Presented in
this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions): a) All significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize, and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Mark T. Walton
-------------------------------------
Mark T. Walton, President and Chairman
Date: January 20, 2003
39
CERTIFICATION
I, Michael B. Perrine certify that:
1. I have reviewed this annual report on Form 10-K of Travis Boats & Motors,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a)
Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared; b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and c) Presented in
this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions): a) All significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize, and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Michael B. Perrine
---------------------------------------
Michael B. Perrine, Chief Financial
Officer, Secretary and Treasurer
Date: January 20, 2003
40
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended September 30, 2002, 2001 and 2000
Contents
Report of Independent Auditors............................................F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets...............................................F-3
Consolidated Statements of Operations.....................................F-5
Consolidated Statements of Stockholders' Equity...........................F-6
Consolidated Statements of Cash Flows.....................................F-7
Notes to Consolidated Financial Statements................................F-8
F-1
Report of Independent Auditors
The Board of Directors
Travis Boats & Motors, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Travis Boats &
Motors, Inc. and Subsidiaries as of September 30, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Travis Boats &
Motors, Inc. and Subsidiaries as of September 30, 2002 and 2001 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2002, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Travis
Boats & Motors, Inc. will continue as a going concern. The Company has incurred
recurring operating losses and has expressed concerns that current working
capital demands may exceed cash resources. In addition, the Company has not
complied with certain covenants of loan agreements with its lenders. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described in
Note 1. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the outcome
of this uncertainty.
/s/ Ernst & Young LLP
Austin, Texas
November 22, 2002,
except for Notes 1, 4, 5 and 14, as to which the date is January 7, 2003
F-2
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
September 30,
2002 2001
--------------- -------------
Assets
Current assets:
Cash and cash equivalents $4,253 $1,388
Accounts receivable, net of allowance for doubtful accounts
of $2,058 in 2002 and $527 in 2001 9,681 11,351
Prepaid expenses 1,009 779
Income taxes recoverable and deferred tax asset 611 1,432
Inventories 56,957 65,164
--------------- -------------
Total current assets 72,511 80,114
Property and equipment:
Land 5,982 5,982
Buildings and improvements 15,899 15,485
Furniture, fixtures and equipment 9,327 8,762
--------------- -------------
31,208 30,229
Less accumulated depreciation (9,820) (7,887)
--------------- -------------
21,388 22,342
Deferred tax asset -- 488
Goodwill, net of accumulated amortization of $1,396 in 2001 -- 8,809
Noncompete agreements, net of accumulated amortization of $2,061 in 2002 1,149 1,607
and $1,603 in 2001
Other assets 384 320
--------------- -------------
Total assets $95,432 $113,680
=============== =============
See accompanying notes.
F-3
September 30,
2002 2001
------------- -------------
Liabilities
Current liabilities:
Accounts payable $4,122 $5,875
Accrued liabilities 1,439 1,203
Floor plan and revolving lines of credit payable 50,949 58,874
Current portion of notes payable and other short term obligations 1,025 2,204
Notes payable in default, classified as short term obligations 6,436 ---
Total current liabilities 63,971 68,156
Notes payable, less current option 3,225 9,375
Convertible notes 1,300 ---
Stockholders' equity:
Series A Preferred stock, $100 par value, 1,000,000 shares authorized, 8,000 __
80,000 shares and 0 shares issued and outstanding at September 30,
2002 and 2001, respectively
Common stock, $.01 par value, 50,000,000 shares authorized, 4,329,727 43 44
and 4,359,027 shares issued and outstanding at September 30, 2002 and
2001, respectively
Paid-in capital 15,109 15,342
Retained earnings 3,784 20,763
------------- -------------
Total stockholders' equity 26,936 36,149
------------- -------------
Total liabilities and stockholders' equity $95,432 $113,680
============= =============
See accompanying notes.
F-4
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except share data)
Year ended September 30,
2002 2001 2000
--------------------------------------
Net sales................................................................. $176,523 $198,539 $217,718
Cost of sales............................................................. $139,451 $152,160 164,409
--------------------------------------
Gross profit.............................................................. 37,072 46,379 53,309
Selling, general and administrative expenses.............................. 38,984 41,492 42,326
Store closing costs....................................................... --- 321 ---
Depreciation and amortization............................................. 2,474 2,906 2,645
--------------------------------------
41,458 44,719 44,971
Operating income/(loss)................................................... (4,386) 1,660 8,338
Interest expense.......................................................... (4,018) (6,533) (6,848)
Other income/(expense).................................................... 39 43 (26)
--------------------------------------
Income/(loss) before income taxes, cumulative effect of accounting
change and extraordinary item...................................... (8,365) (4,830) 1,464
Income tax (expense)/benefit.............................................. (1,769) 1,549 (567)
--------------------------------------
Income/(loss) before cumulative effect of accounting change
and extraordinary item............................................ $(10,134) $(3,281) $897
======================================
Cumulative effect of accounting change, net of taxes of $2,281............ (6,528) --- ---
Extraordinary loss on extinguishment of debt, net of taxes of $76......... (130) --- ---
--------------------------------------
Net income/(loss).................................................... $(16,792) $(3,281) $897
======================================
Preferred stock dividends................................................. (187) --- ---
--------------------------------------
Net income/(loss) attributable to common shareholders................ $(16,979) $(3,281) $897
======================================
Basic/Diluted Earnings/(Loss) per share:
Income/(loss) before cumulative effect of accounting change
And extraordinary item............................................ $(2.33) $(.75) $.20
Preferred stock dividends................................................. (.05)
Cumulative effect of accounting change.................................... (1.50) --- ---
Extraordinary loss on extinguishment of debt.............................. (.03) --- ---
--------------------------------------
Net income/(loss).................................................... $(3.91) $(.75) $.20
======================================
See accompanying notes.
F-5
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
Common Paid-in Retained
Capital Earnings Total
Preferred
Shares Amount Shares Amount
------------------------------------------------------------------------------------
Balance at September 30, 1999 4,326 $ 43 ----- $ ---- $14,402 23,147 37,592
------------------------------------------------------------------------------------
Issuance of common stock 2 ----- ----- ----- 22 ----- 22
Issuance of common stock in
purchase of business 86 1 1,099 ----- 1,100
Repurchase and cancellation of
common stock (15) ----- ----- ----- (59) ----- (59)
Net income ----- ----- ----- ----- ----- 897 897
------------------------------------------------------------------------------------
Balance at September 30, 2000 4,399 44 ----- ----- 15,464 24,044 39,552
------------------------------------------------------------------------------------
Repurchase and cancellation of
common stock (40) ----- ----- ----- (122) ----- (122)
Net loss ----- ----- ----- ----- ----- (3,281) (3,281)
------------------------------------------------------------------------------------
Balance at September 30, 2001 4,359 $44 ----- ----- $15,342 $20,763 $36,149
------------------------------------------------------------------------------------
Repurchase and cancellation of
common stock (29) (1) ----- ----- (55) ----- (56)
Issuance of Series A preferred
stock ----- ----- 80 8,000 (178) ----- 7,822
Preferred stock dividends ----- ----- ----- ----- ----- (187) (187)
Net loss ----- ----- ----- ----- ----- (16,792) (16,792)
------------------------------------------------------------------------------------
Balance at September 30, 2002 4,330 $43 80 $8,000 $15,109 $ 3,784 $26,936
------------------------------------------------------------------------------------
See accompanying notes.
F-6
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year Ended September 30,
2002 2001 2000
------------------------------------
Operating activities
Net income/(loss) $(16,792) $ (3,281) $897
Adjustments to reconcile net income/(loss) to net cash
provided by (used in) operating activities:
Depreciation 2,016 2,018 1,791
Amortization 458 888 854
Cumulative effect of accounting change, net 6,528 -- --
Deferred income taxes 595 (320) (18)
Changes in operating assets and liabilities:
Accounts receivable 1,670 265 805
Prepaid expenses (230) 144 254
Inventories 8,208 12,915 (2,379)
Other assets (64) (74) (47)
Accounts payable (1,753) 1,516 746
Accrued liabilities 236 (623) (1,502)
Income taxes recoverable/income tax payable 2,995 43 (4,188)
------------------------------------
Net cash provided by (used in) operating activities 3,867 13,491 (2,787)
Investing activities
Purchase of businesses --- --- (1,034)
Purchase of property and equipment (1,063) (1,495) (4,762)
------------------------------------
Net cash used in investing activities (1,063) (1,495) (5,796)
Financing activities
Net increase (decrease) in notes payable and other short-term obligations $ (8,818) $ (13,457) $7,466
Proceeds from issuance of convertible subordinated notes 4,300
Repayments of convertible subordinated notes (3,000) -- --
Net proceeds from issuance of preferred stock 7,822 -- --
Net proceeds (payments) from issuance (repurchase) of common stock (56) (122) (37)
Preferred stock dividends (187) -- --
-------------------------------------
Net cash provided by (used in) financing activities 61 (13,579) 7,429
Change in cash and cash equivalents 2,865 (1,583) (1,154)
Cash and cash equivalents, beginning of year 1,388 2,971 4,125
-------------------------------------
-------------------------------------
Cash and cash equivalents, end of year $4,253 $1,388 $2,971
=====================================
Supplemental Disclosure of Debt and Stock Issued in Purchase of Business
- -----------------------------------------------------------------------------
Year Ended September 30,
2002 2001 2000
-------------------------------------
Debt issued in purchase of businesses $ --- $ --- $ ---
Stock issued in purchase of businesses $ --- $ --- $1,100
See accompanying notes.
F-7
Travis Boats & Motors, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
The Company finances substantially all of its inventory and working
capital requirements pursuant to inventory borrowing agreements entered into in
January 2000 with two commercial finance companies. The agreements have maturity
dates of April 30, 2003 (see Note 14 - "Subsequent Events"). As of September 30,
2002, the Company was in violation of certain financial, reporting and payment
covenants pursuant to such agreements primarily as a result of recurring
operating losses. Management has also expressed concerns that current working
capital demands may exceed cash resources. These conditions raise substantial
doubt as to the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the outcome of this
uncertainty.
Effective December 30 and 31, 2002, the Company entered into amended
and restated inventory borrowing agreements with these two commercial finance
companies which extended the maturity date of the respective borrowing
agreements to April 30, 2003 (see Note 14). The amended and restated inventory
borrowing agreements also waived financial, reporting and payment defaults
through the date of the agreement and established new financial covenant ratio
levels based upon the Company's current and anticipated performance through
April 30, 2003. In connection with the amended and restated borrowing
agreements, the Company also entered into an agreement with these two commercial
finance companies and the Company's major shareholder which would provide up to
an additional $1.5 million of conditional funding. Management believes that the
Company will be able to meet financial covenants established in the amended and
restated borrowing agreements based upon the Company's current and anticipated
performance through April 30, 2003. Upon maturity of the borrowing agreements on
April 30, 2003, the Company plans to negotiate either an extension of the
existing borrowing agreements or new borrowing agreements that will provide
financing terms similar to the current agreements. However, the successful
achievement of these objectives is uncertain, and the failure to meet financial
covenants or to extend or renew borrowing agreements upon maturity would
significantly impact the Company's ability to purchase inventory and conduct
operations at its intended level.
2. Summary of Significant Accounting Policies
Description of Business
Travis Boats & Motors, Inc. (the "Company") based in Austin, Texas, is a
retailer of boats, motors, trailers and related watersport accessories. The
Company operates, in one reportable segment, at locations in the southern region
of the United States.
Description of Consolidation
Travis Boats & Motors, Inc. (the "Company") based in Austin, Texas, is a
retailer of boats, motors, trailers and related watersport accessories. The
Company operates, in one reportable segment, at locations in the southern region
of the United States.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
F-8
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company records revenue on sales of boats, motors, trailers, and
related watersport parts and accessories upon delivery to or acceptance by the
customer at the closing of the transaction. The Company records revenues from
service operations at the time repair or service work is completed.
The Company refers customers to various financial institutions to
assist the customers in obtaining financing for their boat purchase. For each
loan the financial institutions are able to fund as a result of the referral,
the Company receives a fee. Revenue earned by the Company for financing
referrals is recognized when the related boat sale is recognized. The fee amount
is generally based on the loan amount and the term. Generally, the Company must
return a portion of the fee amount received if the customer repays the loan or
defaults on the loan within a period of up to 180 days from the initial loan
date. The Company records such refunds, which are not significant, in the month
in which they occur.
Revenues from insurance and extended service agreements are recorded at
the time such agreements are executed which generally coincides with the date
the boat, motor and trailer is delivered. Such revenues are not deferred and
amortized over the life of the insurance or extended service agreement policies,
because the Company sells such policies on behalf of third party vendors or
administrators. At the time of sale, the Company records a fee for insurance and
extended service agreements net of the related fee that is paid to the
third-party vendors or administrators. Since its inception, the Company has
incurred no additional costs related to insurance or extended service agreements
beyond the fees paid to the third party vendors at the time of sale.
Cash and Cash Equivalents
The Company considers all investments with maturities of ninety days or
less when purchased to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and notes
payable approximates fair value due to either their short-term nature or their
variable interest rate.
Accounts Receivable
Accounts receivable potentially expose the Company to concentrations of
credit risk, as defined by the Statement of Financial Accounting Standards No.
105, Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentrations of Credit Risk.
Accounts receivable consist primarily of amounts due from financial institutions
upon sales contract funding, amounts due from vendors under rebate programs and
amounts due from vendors for services provided under warranty programs.
F-9
2. Summary of Significant Accounting Policies (continued)
Allowance for Doubtful Accounts
Accounts receivables consist primarily of amounts due from financial
institutions upon sales contract funding, amounts due from manufacturers or
vendors under rebate programs, amounts due from manufacturers or vendors under
warranty programs and amounts due from customers for services. The Company
routinely evaluates the collectibility of accounts receivable focusing on
amounts due from manufacturers, vendors and customers. If events occur and
market conditions change, causing collectibility of outstanding accounts
receivable to become unlikely, the Company records an increase to its allowance
for doubtful accounts. The Company evaluates the probability of collection of
outstanding accounts receivable based several factors which include but are not
limited to the following: 1) age of the outstanding accounts receivable, 2)
financial condition of the manufacturer, vendor or customer, and 3) discussions
or correspondence with the manufacturer, vendor or customer. The Company
determines the allowance for doubtful accounts based upon both specific
identification and a general allowance for accounts outstanding for a specified
period of time.
The accounts receivable balances consisted of the following (in
thousands):
September 30,
2002 2001
-----------------------------
Trade receivables $ 4,712 $ 4,584
Amounts due from manufacturers 6,377 6,691
Other receivables 650 603
Allowance for doubtful accounts (2,058) (527)
-----------------------------
$9,681 $11,351
=============================
Activity in the Company's allowance for doubtful accounts is as follows (in
thousands):
Balance at September 30, 1999 $247
-------------
Additions charged to costs and expenses 187
Write-offs of uncollectible accounts (156)
- --------------------------------------------------------------------------------
Balance at September 30, 2000 $278
-------------
Additions charged to costs and expenses 479
Write-offs of uncollectible accounts (230)
- --------------------------------------------------------------------------------
Balance at September 30, 2001 $527
-------------
Additions charged to costs and expenses 2,030
Write-offs of uncollectible accounts (499)
-------------
Balance at September 30, 2002 $2,058
=============
F-10
2. Summary of Significant Accounting Policies (continued)
Inventories
Inventories consist of boats, motors, trailers and related watersport
parts and accessories. Inventories are carried at the lower of cost or market.
Cost for boats, motors and trailers is determined using the specific
identification method. Cost for parts and accessories is determined using the
first-in, first-out method. If the carrying amount of our inventory exceeds its
fair value, we write down our inventory to its fair value. We utilize our
historical experience and current sales trends as the basis for our lower of
cost or market analysis. Changes in market conditions, lower than expected
customer demand, closing of additional store locations and changing technology
or features could result in additional obsolete inventory that is unsaleable or
only saleable at reduced prices, which could require additional inventory
reserve provisions.
Such events and market conditions include but are not limited to the
following: 1) deteriorating financial condition of the manufacturer resulting in
discontinuance and lack of manufacturer's warranty for certain boats, motors or
other products, 2) introduction of new models or product lines by manufacturers
resulting in less demand for previous models or product lines, 3) Company
initiatives to promote unit sales and reduce inventory levels for new and/or
used inventory by reducing sales prices, and 4) Competing boat retailers in
various markets in which the Company operates may offer sales incentives such as
price reductions.
Inventories consisted of the following (in thousands):
September 30,
2002 2001
------------- ---------------
New boats, motors and trailers $47,120 $53,596
Used boats, motors and trailers 5,071 5,330
Parts, accessories and other 6,179 6,722
Valuation allowance (1,413) (484)
------------- ---------------
$56,957 $65,164
============= ===============
F-11
2. Summary of Significant Accounting Policies (continued)
Inventories (continued ):
Activity in the Company's inventory valuation allowance is as follows (in
thousands):
Balance at September 30, 1999 $379
-------------
Additions charged to costs and expenses 38
Inventory write-offs -0-
Balance at September 30, 2000 417
-------------
Additions charged to costs and expenses 155
Inventory write-offs (88)
Balance at September 30, 2001 484
-------------
Additions charged to costs and expenses 956
Inventory write-offs (27)
-------------
Balance at September 30, 2002 $1,413
=============
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation
are determined using the double-declining balance and straight-line methods. The
Company uses estimated useful lives of 5 - 20 years for buildings and
improvements and 5 - 10 years for furniture, fixtures and equipment.
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, deferred income taxes are provided for temporary
differences between the basis of assets and liabilities for financial reporting
purposes and for income tax return purposes. The Company routinely evaluates its
recorded deferred tax assets to determine whether it is more likely than not
that such deferred tax assets will be realized. During the quarter ended
September 30, 2002, the Company determined that for deferred tax assets that
could not be realized by carryback to prior tax years it was more likely than
not that such deferred tax assets would not be realized and accordingly a full
valuation allowance was necessary for these deferred tax assets.
Intangible Assets
Amounts assigned to intangible assets are amortized over the respective
estimated useful lives using the straight-line method as follows:
Noncompete agreements -- 7 years Goodwill -- 25 years (prior to fiscal 2002)
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,"
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The Company groups long-lived assets by store
location for purposes of assessing the recoverability of carrying value and
measuring potential impairment.
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets
("SFAS 142") effective October 1, 2001. SFAS 142 provides that separable
intangible assets that have finite lives will continue to be amortized over
their useful lives and that goodwill and indefinite-lived intangible assets will
no longer be amortized but will be reviewed for impairment annually, or more
frequently if impairment indicators arise. The Company operates as one reporting
unit for goodwill impairment testing.
F-12
2. Summary of Significant Accounting Policies (continued)
Pre-opening Costs
Pre-opening costs related to new store locations are expensed as
incurred.
Significant Suppliers
The Company has historically purchased substantially all of its new
outboard motors for use on its Travis Edition boat packages from a limited group
of manufacturers. During the 2002, 2001 and 2000 fiscal years this included
outboard motors purchased from American Suzuki Motor Corporation (fiscal 2002),
Brunswick Corporation (fiscal 2000-2002) and Outboard Marine Corporation (fiscal
2000).
Approximately 36%, 42% and 33% of the Company's net purchases
(including product purchased in acquisitions) in fiscal 2002, 2001 and 2000,
respectively, were manufactured by boat suppliers owned by Genmar Holdings.
Advertising Costs
Advertising costs are expensed as incurred and were approximately
$1,435,000, $2,295,000 and $2,618,000 during the fiscal years ended September
30, 2002, 2001 and 2000, respectively.
Reclassifications
Certain amounts in the 2001 and 2000 financial statements have been
reclassified to conform with the classifications in the 2002 financial
statements with no effect on previously reported net income/(loss) or
stockholders' equity.
F-13
3. Earnings/(Loss) Per Share
Year Ended September 30,
2002 2001 2000
------------------------------------
(in thousands, except per share data)
Numerator:
Net income/(loss) before cumulative effect of accounting
change and extraordinary item $(10,134) $ (3,281) $ 897
Cumulative effect of accounting change, net of tax (6,528) -- --
Extraordinary loss on extinguishment of debt, net of tax (130) -- --
------------ ----------- -----------
Net income/(loss) $(16,792) $ (3,281) $ 897
============ =========== ===========
Preferred stock dividends (187) -- --
------------ ----------- -----------
Net income/(loss) attributable to common shareholders $(16,979) $ (3,281) $ 897
============ =========== ===========
Denominator:
Denominator - basic earnings/(loss) per share - weighted
average shares $ 4,345 $ 4,375 $4,403
Effect of dilutive securities:
Employee stock options -- -- 43
Denominator for diluted earnings/(loss) per share - adjusted
------------ ----------- -----------
weighted average shares and assumed conversions 4,345 4,375 4,446
Basic and Diluted earnings/(loss) per share before cumulative effect
of accounting change and extraordinary item $ (2.33) $ (.75) $ .20
Cumulative effect of accounting change, net of tax (1.50) -- --
Extraordinary loss on extinguishment of debt, net of tax (.03) -- --
Preferred stock dividends (.05) -- --
----------- ----------- -----------
Basic and Diluted earnings/(loss) per share attributable to
Common shareholders $ (3.91) $ (.75) $ .20
=========== =========== ===========
Options to purchase the following shares of common stock were excluded
from the computation of diluted EPS for the years ended September 30, 2002, 2001
and 2000 as such shares would be anti-dilutive since the exercise price of the
options was greater than the average market price of the Company's common stock
during the respective fiscal year.
Fiscal Year Excluded Options Weighted Average Weighted Average Contractual
Exercises Prices Life in Years
- -------------------------- ------------------------ ------------------------ -------------------------------
2002 311,298 $ 5.14 6.09
2001 404,964 $ 6.80 6.67
2000 164,766 $ 14.40 6.93
The chart above also excludes the impact of 528,584 shares of common
stock subject to issuance pursuant to $1.3 million in outstanding convertible
subordinated notes and 3,252,826 shares of common stock subject to issuance
pursuant to the 80,000 shares of Series A preferred stock as the conversion
price exceeds the Company's average market price of its common stock.
F-14
4. Goodwill and Other Intangibles
The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets
("SFAS 142") effective October 1, 2001. SFAS 142 provides that separable
intangible assets that have finite lives will continue to be amortized over
their useful lives and that goodwill and indefinite-lived intangible assets will
no longer be amortized but will be reviewed for impairment annually, or more
frequently if impairment indicators arise. The Company operates as one reporting
unit for goodwill impairment testing.
In accordance with SFAS 142, the Company completed goodwill impairment
tests as required. The tests involved the use of estimates related to the fair
market value of the business with which the goodwill is associated. As a result
of the transitional impairment test, which considered factors including the
significant negative industry and economic trends impacting current operations
and our market capitalization relative to our net book value, the Company
recorded a non-cash, after tax charge of $6.5 million (charge of $8.8 million
less tax effect of $2.3 million) as a cumulative effect of accounting change as
of October 1, 2001. The non-cash, after tax charge resulted in the elimination
of the entire goodwill balance from the Company's balance sheet.
Net income/(loss) and earnings/(loss) per share for the fiscal years
ended September 30, 2002, 2001 and 2000 adjusted to exclude amortization expense
(net of income taxes) is as follows (in thousands):
Fiscal Year Ended
September 30,
2002 2001 2000
----------- ---------- ----------
Net income/(loss)...................................... $ (16,792) $ (3,281) $ 897
Cumulative effect of accounting change................. 6,528 -- --
Goodwill amortization, net of tax...................... -- 259 242
----------- ---------- ----------
Adjusted net income/(loss)............................. $ (10,264) $ (3,022) $ 1,139
=========== ========== ==========
Net income/(loss) before extraordinary item as
reported............................................... $ (16,922) $ (3,281) $ 897
Cumulative effect of accounting change................. 6,528 -- --
Goodwill amortization, net of tax...................... -- 259 242
----------- ---------- ----------
Adjusted net income/(loss)............................. $ (10,394) $ (3,022) $ 1,139
=========== ========== ==========
Earnings/(loss) per share Basic and Diluted:
Reported net income/(loss) attributable to common..... $ (3.91) $ (0.75) $ 0.20
Cumulative effect of accounting change........... 1.50 -- --
Goodwill amortization, net of tax................ -- 0.06 0.05
----------- ---------- ----------
Adjusted net income/(loss) attributable to common
shareholders before cumulative effect of accounting
change and extraordinary item.......................... $ (2.41) $ (0.69) $ 0.25
=========== ========== ==========
In addition, the intangible asset established for non-compete
agreements remains subject to amortization in accordance with SFAS 141. The
gross carrying amount related to non-compete agreements was $3,229,000 while the
associated accumulated amortization balance at September 30, 2002, 2001 and
2000, respectively, was $2,061,000, $1,603,000 and $1,162,000, respectively. The
aggregate amortization expense was $464,000, $410,000 and $395,000 for the
fiscal years ended September 30, 2002, 2001 and 2000, respectively. Estimated
amortization expense for the next five fiscal years is approximately $415,000 in
2003; $385,000 in 2004; $235,000 in 2005, $118,000 in 2006 and $0 in 2007.
F-15
5. Notes Payable and Other Short-Term Obligations
The Company finances substantially all of its inventory and working
capital requirements pursuant to inventory borrowing agreements entered into in
January 2000 with two commercial finance companies. The agreements, which have
maturity dates of April 30, 2003 (see Note 14 - "Subsequent Events"), contain
substantially similar terms and financial ratio based covenant requirements. The
maximum aggregate borrowing availability as of September 30, 2002 was limited to
a maximum credit limit of $70 million at various prime based or LIBOR based
interest rates (varying from 4.75% to 4.82% at September 30, 2002). Borrowings
under the agreements are pursuant to a borrowing base, or specific floor plan,
advancing formula and are used primarily to finance inventory purchases and for
general working capital requirements. Substantially all inventory, accounts
receivable, furniture, fixtures, equipment and intangible assets collateralize
these agreements. Pursuant to certain waivers and restructuring of covenants
under these inventory borrowing agreements during the 2002 fiscal year, the
Company also granted junior liens on its real estate holdings as collateral.
The terms of the inventory borrowing agreements also provide for: (i)
fees for administrative monitoring, (ii) fees for unused portions of available
credit, and (iii) pre-payment fees in the event of the Company's termination of
these agreements prior to their stated maturity dates. The borrowing agreements
also contain various loan covenants and borrowing restrictions, including
minimum ratios and a substantial limitation as to acquisitions, payment of
common stock dividends or significant repurchases of the Company's common stock
without prior consent.
Various manufacturers provide the Company interest expense assistance
under the borrowing agreements in order to subsidize the carrying cost of
inventory. Accordingly, no interest expense is recorded during portions of the
year (August through May) for certain borrowings under these arrangements.
As of September 30, 2002, the Company was in violation of certain
financial, reporting and payment covenants pursuant to the inventory borrowing
agreements. Effective December 30 and 31, 2002, the Company entered into amended
and restated inventory borrowing agreements with these two commercial finance
companies which extended the maturity date of the respective agreements to April
30, 2003 (see Note 14 - "Subsequent Events"). The amended and restated inventory
borrowing agreements also waived financial, reporting and payment defaults
through the date of the agreement and established new financial covenant ratio
levels based upon the Company's current and anticipated performance through
April 30, 2003. In connection with the amended and restated inventory borrowing
agreements, the Company also entered into an agreement with these two commercial
finance companies and a significant shareholder which would provide up to an
additional $1.5 million of conditional funding. Management believes that the
financial covenants established in the amended and restated inventory borrowing
agreements will be achieved based upon the Company's current and anticipated
performance through April 30, 2003. Due to the Company's need for ongoing
inventory financing to support working capital and operations, management will
continue to work towards a long-term extension of the inventory borrowing
agreements beyond the maturity date of April 30, 2003. However, there is no
assurance that negotiations with these two commercial finance companies will
result in an extension of the current inventory borrowing agreements or in new
financing arrangements.
The Company was also out of compliance with certain provisions of its
real estate loan agreements as of September 30, 2002. The provisions included
violation of a minimum cash flow ratio and a minimum tangible net worth
agreement. The inability of the Company to (i) meet financial covenants, (ii) to
extend or renew these borrowing agreements or real estate loans upon maturity,
or (iii) to obtain acceptable alternative financing would significantly impact
the Company's ability to purchase inventory and conduct operations at its
current or intended level.
F-16
5. Notes Payable and Other Short-Term Obligations (continued)
The weighted average interest rate on the borrowing arrangements and the floor
plan payables outstanding as of September 30, 2002 and 2001 was 4.9% and 6.8%,
respectively.
Notes payable and other short-term obligations consist of the following
(in thousands):
September 30,
2002 2001
----------- -----------
Notes payable to commercial finance companies under revolving
and floor plan line of credit agreements with interest ranging
from 0% to the rate of 4.82% with a stated maturity date
of April 30, 2003. $ 50,949 $ 58,874
Notes payable (see summary data below) 11,986 11,579
----------- -----------
Total notes payable and other short-term obligations $ 62,935 $ 70,453
----------- -----------
Less revolving and floor plan credit agreements (50,949) (58,874)
Less real estate notes with balloon payments (529) (1,161)
Less real estate notes classified as current (6,436) ---
Less current portion of notes payable (496) (1,043)
----------- -----------
(58,410) (61,078)
----------- -----------
Total notes payable, less current portion $ 4,525 $ 9,375
=========== ===========
Notes Payable Summary Data
Mortgage notes payable to various banks, organizations and individuals
secured by deeds of trust with interest ranging from 6.0% to 8.85%,
due in monthly principal and interest installments ranging from
$1,899 to $39,745, maturing beginning in January 2003. $ 10,160 $ 10,691
Notes payable to various banks, finance companies and a corporation
secured by certain vehicles, equipment and leasehold improvements
with interest ranging from 3.99% to 11.0%, due in monthly principal and
interest installments ranging from $209 to $3,106, maturing beginning
in June 2004. 304 196
Acquisition related notes payable to individuals and corporations with
interest ranging from 7.5% to 8.75%, due in monthly principal and interest
installments ranging from $2,587 to $12,770, maturing beginning in November
2002. These notes are unsecured. 222 692
Convertible notes payable in varying amounts to certain officers,
directors and other individuals with interest rates of 10.75%, fixed.
Payments are interest only until maturity in December 2004. The
notes are subordinated in substantially all respects to the commercial
finance companies providing the Company's revolving and floor plan financing.
At any time prior to maturity, the notes may be converted into the Company's
common stock at a conversion price of $2.4594 per share. 1,300 ---
----------- -----------
Total notes payable $ 11,986 $ 11,579
=========== ===========
F-17
5. Notes Payable and Other Short-Term Obligations (continued)
At September 30, 2002 and 2001, approximately 89.6% and 91.4%
respectively of the Company's notes payable and other short-term obligations
bear interest at variable rates, generally tied to a reference rate such as the
prime rate of interest of certain banks. Accordingly, the Company believes that
the carrying amount of the notes payables and other short term obligations
approximates their fair value.
Interest paid approximates interest expense during 2002, 2001 and 2000.
Aggregate annual maturities required on notes payable at September 30,
2002 are as follows (in thousands):
Year Ending September 30
- ---------------------------------------
2003 $7,460 (1)
2004 1,332
2005 1,601
2006 227
2007 482
Thereafter 884
-------------------
$11,986
===================
(1)Includes $6.4 million in real estate loans with a single lender which have
been re-classified as current for financial reporting since the Company is out
of compliance with financial loan covenants and the loans are subject to demand
for repayment prior to their originally scheduled dates of maturity.
6. Extinguishment of Debt
The Company recorded an extraordinary loss of $130,000, net of taxes of
$76,000 on the June 10, 2002 repayment of the $3.0 million convertible
subordinated promissory note originally issued on December 14, 2001 (see Note
9). The extraordinary loss was the result of a 5% prepayment fee paid on the
outstanding principal balance of $3.0 million, plus the expensing of the legal
and consulting fees that were attributable to the $3.0 million note.
7. Leases
The Company leases various retail facilities, dock space, vehicles, and
computer software under third party operating leases. Rent expense was
$3,441,000 in 2002, $3,841,000 in 2001 and $3,524,000 in 2000.
Future minimum payments under non-cancelable operating leases at
September 30, 2002 are as follows for each of the years ending September 30 (in
thousands):
Year Ending September 30
-------------------------------
2003 $3,009
2004 2,353
2005 1,663
2006 1,232
2007 343
Thereafter 277
F-18
Generally, the leases for facilities provide for renewals for various
periods at stipulated rates. Additionally, leases on retail facilities generally
are "triple-net" with the Company being responsible for payment of taxes,
insurance and repair expenses.
8. Income Taxes
Significant components of the Company's provision (benefit) for income taxes are
as follows (in thousands):
Year Ended December 31
----------------------------------
2002 2001 2000
----------------------------------
Current expense/(benefit):
Federal $ (1,087) $ (1,100) $ 507
State (96) (129) 79
----------------------------------
Total current expense/(benefit) (1,183) (1,229) 586
----------------------------------
Deferred expense/(benefit)
Federal 547 (320) (19)
State 48 - -
----------------------------------
Total deferred expense/(benefit) 595 (320) (19)
----------------------------------
Total provision/(benefit) for income taxes $ (588) $ (1,549) $ 567
==================================
The Company's provision for income taxes differs from the expected tax expense
(benefit) amount computed by applying the statutory federal income tax rate of
34% to income before taxes due to the following:
Year Ended September 30,
-------------------------------
2002 2001 2000
---------------------------------
Federal statutory rate $ (5,909) $(1,642) $ 498
State taxes, net of federal benefit (454) (129) 79
Other 1,176 222 (10)
Valuation allowance 4,599 - -
----------------------------------
$ (588) $(1,549) $ 567
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred taxes are as follows (in thousands):
September 30,
2002 2001
---------------------------
Deferred tax assets:
Book over tax depreciation/amortization $ 3,582 $ 488
Reserves and allowances 1,017 107
---------------------------
Net deferred tax assets 4,599 595
Valuation allowance for net deferred tax assets (4,599) -
---------------------------
Net deferred taxes $ - $ 595
===========================
The Company has established a valuation allowance equal to the net deferred tax
asset due to uncertainties regarding the realization of deferred tax assets
against future taxable income. The valuation allowance increased by
approximately $4.6 million during the year ended September 30, 2002.
Income taxes paid/(received) were approximately ($1,500,000), ($1,200,000), and
$1,850,000 in the fiscal years ended September 30, 2002, 2001, and 2000,
respectively. The Company believes that the current income tax benefit component
of its 2002 provision is recoverable from the carryback of net operating losses
against federal taxable income in prior years.
F-19
9. Stockholders' Equity
CONVERTIBLE SUBORDINATED NOTES
Effective December 14, 2001, the Company issued Convertible
Subordinated Notes (the "Notes") in an aggregate amount of $4,300,000 issued in
the form of a $3.0 million Note plus other Notes in the aggregate amount of $1.3
million. The Notes are unsecured with a term of 36 months and have rates ranging
from prime + 2%, adjusted quarterly to 10.75%, fixed. The principal and interest
amounts payable pursuant to the Notes are subordinated, in substantially all
respects, to the Company's borrowing agreements with the commercial finance
companies providing inventory and working capital financing for the Company. The
Notes are redeemable by the Company, and if not redeemed the principal amount of
the Notes may be converted by the holders into the Company's common stock at a
conversion price of approximately $2.46 per share.
On June 10, 2002, the Company, prepaid in full, the principal balance,
accrued interest and the required 5% prepayment fee to the holder of the $3.0
million Note. The proceeds for repayment of the $3.0 million Note were received
pursuant to the preferred stock transaction described below.
SERIES A PREFERRED STOCK
On June 13, 2002, the Company entered into an agreement with TMRC,
L.L.P. ("Tracker"), a wholly-owned subsidiary of Tracker Marine, L.L.C., to
issue Tracker 50,000 shares of newly created 6% Series A Cumulative Convertible
Preferred Stock (the "Preferred Stock") in the Company. The Company also granted
Tracker a warrant (the "Warrant") to acquire 30,000 additional shares of the
Preferred Stock. The issue price of the Preferred Stock was $100 per share. Each
share may be converted into the Company's common stock at a conversion price of
approximately $2.46 per share.
Prior to June 30, 2002, Tracker funded $5,000,000 to purchase 50,000
shares of the Preferred Stock. Tracker also exercised the Warrant and purchased
30,000 shares issued thereto for an additional $3,000,000. Pursuant to the
requirements of the Warrant, the proceeds from the exercise ($3.0 million) were
used to pay off the $3.0 million Note described above.
INCENTIVE STOCK OPTION PLAN
The Company has an Incentive Stock Option Plan (the "Plan") which
originally provided for the issuance of up to 200,000 shares of the Company's
common stock. The Plan provides for the granting of options (incentive stock
options or non-statutory), stock appreciation rights and restricted shares to
officers, key employees, non-employee directors and consultants to purchase
shares of the Company's common stock. No stock appreciation rights or restricted
shares have been issued under the Plan. Options vest generally over a five year
period and expire in ten years from the date of grant.
In March 1998, the Company amended the Plan to provide that the
aggregate number of shares of common stock that may be issued or transferred
pursuant to awards under the Plan shall increase automatically effective on
April 1 of each calendar year for the duration of the Plan so that the aggregate
number of shares of common stock that may be issued or transferred pursuant to
awards under the Plan is equal to 10% of the total number of shares of common
stock issued and outstanding on April 1 of that year.
Notwithstanding this provision, the amendment provides that (i) the
aggregate number of shares of common stock that may be issued or transferred
pursuant to awards under the Plan shall not be reduced in the event the total
number of shares issued and outstanding decreases in any year, or (ii) the
aggregate number of shares of common stock that may be issued or transferred
pursuant to awards under the Plan shall not exceed 1,000,000 shares of common
stock over the life of the Plan.
F-20
9. Stockholders' Equity (continued)
Total option activity for the years ended September 30, 2002, 2001 and 2000:
Number of Shares Range of Exercise Prices Wtd Avg Exercise Price
-------------------- -------------------------- ---------------------------
Outstanding at September 30, 1999 319,281 $5.25 - $22.50 $11.84
--------------------
Granted 161,900 $3.1825-$9.375 $6.22
Exercised (2,000) $9.00 $9.00
Forfeited (88,050) $4.00 - $22.50 $13.19
Outstanding at September 30, 2000 391,131 $3.8125 - $22.50 $9.20
--------------------
Granted 82,333 $2.70 - $4.00 $3.07
Exercised --- --- ---
Forfeited (68,500) $4.00 - $22.50 $16.00
Outstanding at September 30, 2001 404,964 $2.70 - $22.375 $6.80
--------------------
Granted 40,000 $2.45 - $2.50 $2.49
Exercised --- --- ---
Forfeited (133,666) $2.70 - $20.00 $9.38
--------------------
Outstanding at September 30, 2002 311,298 $2.45 - $22.375 $5.14
====================
--------------------
Exercisable at September 30, 2002 252,698 $2.50 - $22.375 $4.16
====================
Options available for grant at
September 30, 2002 123,355
-------------------
Common stock reserved for issuance
At September 30, 2002 434,653
-------------------
The weighted-average remaining contractual life of options at September
30, 2002 and 2001 is approximately 6.09 years and 6.67 years, respectively.
F-21
9. Stockholders' Equity (continued)
Options outstanding at September 30, 2002, are comprised of the following:
Outstanding Exercisable
- ------------------------------------------------------------------------- -----------------------------------
Weighted
Weighted Weighted Average
Range of Exercise Average Average Contractual Weighted
Prices Options Exercise Prices Life in Years Average Options Exercise Price
- ------------------------------------------------------------------------- -----------------------------------
$2.45 - $4.00 91,333 $2.82 8.94 72,333 $2.77
$5.25 - $5.75 195,865 $5.47 4.81 159,865 $5.41
$8.875 - $10.50 19,600 $9.44 5.75 16,600 $9.54
$15.00 - $22.375 4,500 $19.10 5.52 3,900 $18.78
- ------------------------------------------------------------------------- -----------------------------------
$2.45 - $22.375 311,298 $5.14 6.09 252,698 $4.16
The Company has elected to follow Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (Statement 123), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The assumptions used by the Company to determine the pro forma
information regarding net income/(loss) and earnings/(loss) per share required
by Statement No. 123 are as follows using the Black-Scholes model:
Year Ended September 30,
2002 2001 2000
--------------------------------------------
Risk-free interest rate 3.00% 3.00% 6.50%
Dividend yield 0% 0% 0%
Expected life 5 years 5 years 5 years
Volatility 67.7% 65.2% 64.5%
F-22
9. Stockholders' Equity (continued)
The pro forma amounts under Statement No. 123 are as follows:
Year Ended September 30,
2002 2001 2000
-------------------------------------
Net income/(loss) attributable to common shareholders as
Reported (000's) $ (16,979) $ (3,281) $ 897
Pro forma net income/loss attributable to common
Shareholders (000's) $ (17,294) $ (3,460) $ 738
Diluted EPS - as reported $ (3.91) $ (0.75) $ 0.20
Pro forma - Diluted EPS $ (3.98) $ (0.79) $ 0.17
The compensation expense associated with the fair value of the options
calculated in 2002, 2001 and 2000 is not necessarily representative of the
potential effects on reported net income/(loss) in future years.
10. Common Stock Repurchase Program
During fiscal 2000, the Company established a program to repurchase
outstanding shares of its common stock in the open market from time to time. The
Company has made purchases of its common stock pursuant to this program and has
retired all such common shares repurchased. Repurchased shares of common stock
consisted of the following:
Year Ended September 30,
2002 2001 2000
---------------------------------------
Shares Repurchased (000's) 29 40 15
Total Purchase Price (000's) $56 $123 $59
---------------------------------------
Average Price per Share $1.90 $3.07 $3.92
=======================================
11. Commitments and Contingencies
The Company is currently involved in several matters regarding pending
or threatened litigation in the normal course of business. Management does not
expect the ultimate resolution of these matters to have a material adverse
effect on the Company's consolidated financial statements.
12. Benefit Plan
The Company has a 401(k) retirement plan which is available to all
full-time employees. The Company may, in its discretion, make matching
contributions into the plan. The Company did not make matching contributions to
the plan in the years ended September 30, 2002, 2001 and 2000 and plan expenses
during the same period were not significant.
F-23
13. New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. SFAS No. 143 is effective for
financial statements relating to fiscal years beginning after June 15, 2002.
There was no material impact from adoption of this statement on October 1, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses the
financial accounting and reporting for the impairment of long-lived assets. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. There was no material impact from adoption of this
statement on October 1, 2002.
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145, Rescission of SFAS 4,
"Reporting Gains and Losses from Extinguishment of Debt", Rescission of SFAS 44,
"Accounting for Intangible Assets of Motor Carriers", Rescission of SFAS 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements", Amendment of
SFAS 13, "Accounting for Leases", and Technical Corrections (SFAS 145). SFAS 145
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. We do not expect SFAS 145 to have a material effect on our
financial statements except for the reclassification of the extraordinary items
recorded in fiscal 2002 to operating expenses.
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses the financial
accounting and reporting for the costs associated with exit or disposal
activities. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. We do not expect SFAS 146 to have a material
effect on our financial statements.
In November 2002, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a consensus on issue No. 02-16,
"Accounting by a Reseller for Cash Consideration Received from a Vendor". EITF
02-16 establishes the accounting standards for the recognition and measurement
of cash consideration paid by a vendor to a reseller. EITF 02-16 is effective
for interim period financial statements beginning after December 15, 2002, with
early adoption permitted. We have not yet determined the impact, if any, EITF
02-16 will have on our financial statements.
14. Subsequent Events
Effective on December 30 and 31, 2002, the Company entered into Amended and
Restated borrowing agreements (the "Amended Agreements") with its senior
inventory lenders, Transamerica Commercial Finance Corporation ("TCFC") and
General Electric Commercial Distribution Finance Corporation ("GE"), (formerly
known as Deutsche Financial Services Corporation).
The Amended Agreements included, but were not limited to, the following
components:
1. Extended the maturity date of the respective borrowing agreements from
January 31, 2003 to April 30, 2003.
2. Waived certain financial, reporting and payment defaults as of the date of
the Amended Agreements. The financial default waivers included the
re-establishment and modification of new financial ratio levels based upon
the Company's current and anticipated financial performance through the
maturity date of April 30, 2003. The waived reporting requirements provided
the Company time to finalize its audit report and report on Form 10-K for
the fiscal year ended September 30, 2002. The waived payment defaults were
the result of the Company's failure to repay certain amounts scheduled to
be paid according to the terms of the borrowing agreements, including the
timely payment of amounts for sold inventory and scheduled amounts for
certain
F-24
14. Subsequent Events (continued)
matured inventory. The waivers of the payment defaults were accommodated by
the lenders revising the terms under the Amended Agreements to temporarily
advance certain funds to the Company on inventory assets (primarily certain
new and used aged inventories) that previously were not eligible assets
upon which the Company could borrow funds. Repayment of the amounts
resulting from the payment default is required upon the earlier of, (i) the
sale of such inventory providing the basis for the temporary advance, (ii)
the receipt by the Company of its projected calendar year 2002 federal
income tax refund, or (iii) April 30, 2003.
3. An "Intercreditor Agreement" by and among TCFC, GE and TMRC, L.L.P. (the
owner of the Company's outstanding shares of Series A Preferred Stock) to
each, individually, provide the Company up to an additional $500,000 of
conditional funding (collectively $1.5 million). The requirement of any
party to advance funds under this agreement is at each participant's sole
and individual discretion. Accordingly, the Company is not guaranteed any
advances; or to the extent advances are made; any future or additional
advances. Funds may only be used for the general working capital expenses
of the Company. As of January 17, 2003, the Company has received $415,000
from each of TCFC, GE and TMRC, L.L.P. (collectively $1,245,000) as
advances pursuant to this agreement.
Effective as of January 7, 2003, pursuant to the Agreement discussed below
with TMRC, L.L.P. the Company cancelled stock options previously held by the
following individuals: Mark T. Walton, President and Chairman -- 50,267 shares
Ronnie L. Spradling, Executive Vice President -- 76,933 shares Michael B.
Perrine, Chief Financial Officer, Secretary and Treasurer -- 76,665 shares
Richard Birnbaum, Director - 33,333 shares The total of these shares would
reduce those shares reflected in Note 9 "Stockholders' Equity" above.
Effective as of January 7, 2003 the Company; certain of its management and
certain shareholders or other "insiders" entered into various agreements with
TMRC, L.L.P. The agreements were a requirement of, and an integral component of,
TCFC and GE granting the Amended and Restated Borrowing Agreements as discussed
above and the Intercreditor Agreement allowing for the Company to conditionally
receive the $1.5 million in additional funding subject to each lender's sole and
individual discretion. The agreements entered into include, but were not limited
to, the following:
1. Loan and Security Agreement, dated as of January 7, 2003, by and between
Travis Boats & Motors, Inc., and TMRC, L.L.P.
2. Term Sheet, dated as of January 7, 2003 by and between Travis Boats &
Motors, Inc., and TMRC, L.L.P. granting among other items, the following:
(i) TMRC, L.L.P. the right to form an Operating Committee comprised of
members designated by TMRC, L.L.P. to oversee the overall financial
operations of the Company and to review weekly cash flows to determine
whether additional borrowings are necessary under the agreements to
provide up to the $1.5 million in conditional fundings as discussed
above.
(ii) TMRC, L.L.P. the right to designate a total of four of seven members
of the Company's Board of Directors. Pursuant to the terms of the
Series A Preferred Stock held by TMRC, L.L.P., they currently have two
representatives on the Board of Directors and as of the date of this
report have not yet designated two additional representatives.
3. Various agreements with certain (i) "inside" shareholders and (ii) holders
of the Company's subordinated convertible notes. These agreements, combined
with the cancellation of stock options as discussed above, gives TMRC,
L.L.P. voting control of the Company by providing them the ability to vote
approximately 53% or the equivalent of 4,082,534 shares on a fully-diluted,
as-converted basis. Prior to these agreements, TMRC, L.L.P beneficially
owned approximately 43% or the equivalent of 3,252,825 shares of the
Company's common stock on a fully-diluted, as-converted basis. As such,
subsequent to January 7, 2003, TMRC, L.L.P. effectively controls the
Company.
F-25