SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD OF ________ TO ________.
Commission File Number 0-20757
TRAVIS BOATS & MOTORS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2024798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 [ ] No [ X]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock $.01 par value - 4,309,727 shares as of May 14, 2003.
INDEX
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets:
March 31, 2003 and September 30, 2002......................1
Condensed Consolidated Statements of Operations:
Three and Six Months Ended March 31, 2003 and 2002.........2
Unaudited Condensed Consolidated Statements of Cash Flows:
Six Months Ended March 31, 2003 and 2002...................3
Notes to Condensed Financial Statements....................4
Item 2: Management's Discussion and Analysis of Financial
Conditions and Results of Operations.......................7
Item 3: Quantitative and Qualitative Disclosures About Market Risk...........13
PART II - OTHER INFORMATION
Items 1 - 6..................................................................13
Signatures...................................................................14
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Travis Boats & Motors, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share data )
March 31, September 30,
2003 2002
------------- ---------------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $2,647 $4,253
Accounts receivable, net 11,484 9,681
Inventories, net 61,611 56,957
Income Taxes Recoverable/Deferred tax asset 3,019 611
Prepaid expenses and other 1,243 1,009
------------- ----------------
Total current assets 80,004 72,511
Property and equipment:
Land 5,982 5,982
Buildings and improvements 15,951 15,899
Furniture, fixtures and equipment 9,391 9,327
------------- ----------------
31,324 31,208
Less accumulated depreciation (10,819) (9,820)
------------- ----------------
20,505 21,388
Intangibles and other assets:
Non-compete agreements, net 940 1,149
Other assets 355 384
------------- ----------------
Total assets $101,804 $95,432
============= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,635 $4,122
Accrued liabilities 2,395 1,439
Floor plan and revolving line of
credit 59,839 50,949
Current portion of notes payable and other short-term 8,105 1,025
obligations
Notes payable in default, classified as short-term 0 6,436
obligations
------------- ----------------
Total current liabilities 75,974 63,971
Notes payable, less current portion 3,142 3,225
Convertible Subordinated Notes 1,300 1,300
Stockholders' equity
Serial Preferred stock, $100 par value, 1,000,000
shares authorized, 80,000 shares outstanding 8,000 8,000
Common Stock, $.01 par value, 50,000,000 authorized,
4,329,727 and 4,329,727 issued and outstanding at
March 31, 2003 and September 30, 2002, respectively 43 43
Paid-in capital 15,105 15,109
Retained earnings (1,760) 3,784
------------- ----------------
Total stockholders' equity 21,388 26,936
------------- ----------------
Total liabilities and stockholders' equity $101,804 $95,432
============= ================
See notes to unaudited condensed consolidated financial statements
Travis Boats & Motors, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share data and store count)
Three Months ended Six Months ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales ..................................... $ 38,132 $ 47,388 $ 56,019 $ 68,054
Cost of goods sold ............................ 30,543 36,919 44,913 53,520
Gross profit................................... 7,589 10,469 11,106 14,534
Selling, general and administrative............ 8,497 9,010 15,833 16,325
Financing and board restructure expenses ...... -- -- 145 --
Depreciation and amortization.................. 608 616 1,265 1,242
---------- ---------- ---------- ---------
9,105 9,626 17,243 17,567
Operating income/(loss)........................ (1,516) 843 (6,137) (3,033)
Interest expense............................... (931) (1,116) (1,743) (2,154)
Other income................................... 22 20 43 37
Loss before income tax benefit and
cumulative effect of accounting change...... (2,425) (253) (7,837) (5,150)
Income tax benefit............................. 704 93 2,533 1,887
---------- ---------- ---------- ---------
Net loss before cumulative effect of accounting
change ..................................... (1,721) (160) (5,304) (3,263)
Cumulative effect of accounting change, net
of taxes of $2,281 ......................... -- -- -- (6,528)
---------- ---------- ---------- ---------
Net loss ...................................... $(1,721) $ (160) $ (5,304) $ (9,791)
Preferred Stock Dividends ..................... 120 -- 240 --
---------- ---------- --------- ---------
Net loss attributable to common shareholders .. $(1,841) (160) (5,544) (9,791)
========== ========== ========= =========
Loss per share:
Basic and diluted loss per share before
dividends and cumulative effect of
accounting change, net ..................... (0.40) (0.04) (1.22) (0.75)
Preferred stock dividends................... (0.03) -- (0.06) --
Cumulative effect of accounting change, net. -- -- -- (1.50)
---------- ---------- ---------- ---------
Basic and diluted loss per share .............. $ (0.43) $ (0.04) $ (1.28) $ (2.25)
========== ========== ========== =========
Weighted average Basic and
Dilutive common shares outstanding ......... 4,329,727 4,348,416 4,329,727 4,351,785
Stores open at end of period .................. 34 35 34 35
2
Travis Boats & Motors, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six months ended
March 31,
2003 2002
----------------------------------
Operating activities:
Net Loss ($5,304) ($9,791)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation ......................................................... 999 1,012
Amortization ......................................................... 215 230
Cumulative effect of accounting change, net .......................... 0 6,528
Changes in operating assets and liabilities
Accounts receivable ............................................. (1,803) (5,529)
Prepaid expenses ................................................ (235) (806)
Inventories ..................................................... (4,654) (10,251)
Other assets .................................................... 28 10
Accounts payable ................................................ 1,513 53
Accrued liabilities ............................................. 956 150
Income tax recoverable .......................................... (2,408) (1,540)
-------------- ---------------
Net Cash used in operating activities ................................ (10,693) (19,934)
Investing Activities:
Purchase of property and equipment ................................... (124) (320)
-------------- ---------------
Net cash used in investing activities ................................ (124) (320)
Financing activities:
Proceeds from issuance of convertible subordinated notes ............. 0 4,300
Net increase in notes payable and other short term obligations ....... 9,451 16,290
Net proceeds from issuance of Series A preferred stock ............... 0 2,139
Preferred stock dividends ............................................ (240) 0
Net proceeds (payments) from issuance
(repurchase) of common stock ...................................... 0 (18)
-------------- ---------------
Net cash provided by financing activities ............................ 9,211 22,711
Change in cash and cash equivalents .................................. (1,606) 2,457
Cash and cash equivalents, beginning of period ....................... 4,253 1,388
-------------- ---------------
Cash and cash equivalents, end of period ............................. $ 2,647 $ 3,845
============== ===============
See notes to unaudited condensed consolidated financial statements
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of Travis Boats & Motors, Inc. and subsidiaries
(collectively, the Company) without audit. In the opinion of management, such
financial statements include all adjustments (consisting of only recurring
accruals) necessary to present fairly the financial position at March 31, 2003;
and the interim results of operations and cash flows for the three and six month
periods ended March 31, 2003 and 2002. The condensed consolidated balance sheet
at September 30, 2002, presented herein, has been prepared from the audited
consolidated financial statements of the Company for the fiscal year then ended.
Accounting policies followed by the Company are described in Note 2 to the
audited consolidated financial statements for the fiscal year ended September
30, 2002. Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted for purposes of the
condensed consolidated interim financial statements. The condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements, including the notes thereto, for the fiscal year ended
September 30, 2002 included in the Company's annual Report on Form 10-K.
The results of operations for the three and six month period ended March 31,
2003 are not necessarily indicative of the results to be expected for the full
fiscal year.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123 ("Statement 148"). This amendment provides
two additional methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. Additionally,
more prominent disclosures in both annual and interim financial statements are
required for stock-based employee compensation. The transition guidance and
annual disclosure provisions of Statement 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. The adoption of Statement 148 did not have a
material impact on the Company's consolidated financial statements.
NOTE 3 - BASIC/DILUTED OUTSTANDING SHARE CALCULATION
Financial Accounting Standards Board Statement No. 128 requires the calculation
of earnings per share to exclude common stock equivalents when the inclusion of
such would be anti-dilutive. In the three and six month periods ended March 31,
2003 and 2002, the inclusion of common stock equivalents would have been
anti-dilutive based upon the net loss posted by the Company. As such, all common
stock equivalents were excluded.
Effective as of January 7, 2003 the Company cancelled 237,198 outstanding
incentive stock options with a weighted average remaining life of 5.37 years and
a weighted average strike price of $4.78 per share. The incentive stock options
were previously held by executive management and one independent board member.
The cancellation of the incentive stock options was a requirement of the terms
for a $1.5 million short term financing agreement entered into effective as of
December 2002.
The Company had issued and outstanding incentive stock options to certain
officers, directors and employees totaling 74,100 shares which had a strike
price equal to or exceeding the closing price of the Company's common stock on
such date. The 74,100 option shares have a weighted average strike price of
$5.14 and a weighted average outstanding remaining life of 5.8 years.
4
The Company also has excluded the inclusion 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 80,000 shares of Series A Preferred Stock. For the three and
six-month period ended March 31, 2003, the conversion price of approximately
$2.46 per share of both issuances exceeds the Company's average market price of
its common stock.
NOTE 4 - STOCKHOLDERS' EQUITY
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.
Repurchases of shares of common stock during the six months ended March 31, 2003
and 2002 consisted of the following:
6 mos ended 6 mos ended
March 31, 2003 March 31, 2002
-------------------------------------
Shares Repurchased (000's) -- 12
Total Purchase Price (000's) -- $25.9
Average Price per Share -- $2.16
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement 123 to
stock-based compensation for all periods presented (in thousands except per
share data):
Net Loss
Three Months Ended March 31, Six Months Ended March 31,
2003 2002 2003 2002
Reported net loss (1,841) (160) (5,544) (9,791)
Add: Total stock based employee compensation - - - -
expense included in the determination of net loss
as reported, net of related tax effects
Less: Total stock based employee compensation (35) (80) (93) (159)
expense determined under the fair value method
for all awards, net of related tax effects
----------------- ---------------- --------------- ---------------
Pro forma net loss (1,876) (240) (5,637) (9,950)
Reported Basic and Diluted Loss per Share
Reported Basic and Diluted net loss per share (0.43) (0.04) (1.28) (2.25)
Pro forma Basic and Diluted net loss per share (0.43) (0.06) (1.30) (2.29)
5
NOTE 5 - CONVERTIBLE SUBORDINATED NOTES
The Company has outstanding Convertible Subordinated Notes (the "Notes") in an
aggregate amount of $1.3 million originally issued in December 2001. The Notes
are unsecured with a term of 36 months and accrue interest at 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.
NOTE 6 - SERIES A PREFERRED STOCK
The Company has issued 80,000 shares of 6% Series A Cumulative Convertible
Preferred Stock (the "Preferred Stock") pursuant to an agreement with TMRC,
L.L.P. ("Tracker"), a wholly-owned subsidiary of Tracker Marine, L.L.C. The
issue price of the Preferred Stock is $100 per share. Each share may be
converted into the Company's common stock at a conversion price of approximately
$2.46 per share. The Preferred Stock is governed by a comprehensive agreement
that provides, among other components, the right to name certain directors and
re-pricing options in the event of the issuance of other equity securities or
debt with more favorable conversion prices or terms.
NOTE 7 - SHORT TERM BORROWINGS
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 matured on
April 30, 2003 (see Management's Discussion and Analysis - "Liquidity"), contain
substantially similar terms and financial ratio based covenant requirements. The
maximum aggregate borrowing availability as of March 31, 2003 was limited to a
maximum credit limit of approximately $70 million at various prime based or
LIBOR based interest rates (varying from 4.75% to 4.82% at March 31, 2003).
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 Company also has approximately $6.4 million in real estate loans with a
single lender which have been re-classified as current. The Company and Lender
entered into revised loan agreement effective March 20, 2003 and the Company is
in compliance with the revised agreement. Terms of the revised agreement require
the Company to repay each loan on or prior to specific dates prior to October
30, 2003. (See Management's Discussion and Analysis - "Liquidity.").
NOTE 8 - GOODWILL
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. Accordingly, with the adoption of the Statement,
the Company ceased amortization of goodwill as of October 1, 2001.
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.
NOTE 9 - COMPREHENSIVE INCOME/LOSS
For the three and six months ended March 31, 2003 and 2002, the Company recorded
no comprehensive income or loss items, other than the net income or net loss.
NOTE 10 - CONTINGENCIES
From time to time, our Company is involved in litigation relating to claims
arising from its normal business operations. Currently, our Company is a
defendant in several lawsuits. Some of these lawsuits involve claims for
substantial amounts.
In January 2003, the Company received notice of a lawsuit filed in the U.S.
Bankruptcy Court for the Northern District of Illinois on behalf of the
bankruptcy estate for Outboard Marine Corporation ("OMC"). The Company has
denied the allegations in this lawsuit and finds them without merit. OMC was a
primary supplier of outboard engines to our Company prior to OMC's bankruptcy in
December of 2000. The suit alleges that we received approximately $700,000 in
cash payments from OMC that were are deemed to be preferential payments under
applicable bankruptcy law, and hence demands the repayment thereof. The Company
believes that the lawsuit is without merit and that the cash payments were
received in the ordinary course of business pursuant to the Company's contract
with OMC.
There is no guarantee that our Company will prevail in defense of lawsuits filed
against it. Lawsuits resulting in an unfavorable verdict or settlement for the
Company could have a material adverse affect on the results of operations.
6
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
Some of the information in this Report on Form 10-Q 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 information
that we describe in this section, as well as any other cautionary language in
this Report on Form 10-Q, 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 and therefore result in a material
adverse effect on our business, operating results and financial condition. For a
more comprehensive discussion of these and the numerous other Risk Factors
affecting our business and operations see the Company's Report on Form 10-K
filed for the fiscal year ended September 30, 2002 and other documents filed of
record with the Securities and Exchange Commission.
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. By
letter dated as of February 14, 2003 we were notified by the NASDAQ that the
closing price for our common stock for the 30 days prior thereto was below the
minimum $1.00 bid price required by the Nasdaq Small Cap Market. The NASDAQ
notified the Company that it can regain compliance if the Company's common stock
closes at $1.00 per share or more for a minimum of 10 consecutive trading days
prior to August 13, 2003. Otherwise, the NASDAQ will provide written
notification that the Company's common stock will be delisted; subject to the
Company's right to appeal the determination. 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.
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, operated 34 stores on March 31, 2003 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). Subsequent to March
31, 2003, the Company closed the store locations in Knoxville and Lake Pickwick,
Tennessee. The assets of the two locations were consolidated into other Travis
Boats locations in proximity to the closed stores.
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.
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."
7
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 our 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
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.
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.
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 receivable 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.
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 year 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.
Results of Operations
Quarter Ended, March 31, 2003 Compared to the Quarter Ended, March 31, 2002 and
Six Months Ended, March 31, 2003 Compared to the Six Months Ended, March 31,
2002.
Net sales. Net sales in the second quarter of fiscal 2003 decreased to $38.1
million, compared to net sales of $47.4 for the second quarter of fiscal 2002.
For the six months ended, March 31, 2003, net sales decreased to $56.0 million,
compared to $68.1 million during the same period of the prior fiscal year.
Comparable store sales decreased by 18.7% and 15.7% (34 stores in base) for the
quarter and six months ended March 31, 2003. The decreases in net sales during
the quarter and six months ended March 31, 2003 resulted from the decrease in
comparable store sales, reduced sales as a result of the impact of fewer stores
(34 versus 35) in operation and a decline in average retail prices based on our
aggressive sell-through of non-current inventory. Our strategy is to accelerate
the sale of certain aged and discontinued product to improve inventory turns and
to reduce the days on hand of inventory. Management believes that the
sell-through of additional inventory will have a negative impact on retail sales
prices and impact gross profit margins (in a range consistent with the quarter
ended March 31, 2003) through the remainder of the Company's 2003 fiscal year;
but offset by an improvement in working capital from its inventory borrowing
base loan requirements. Management believes additional factors contributing to
the decline in net sales and the decrease in comparable store sales include, but
were not limited to, prolonged erratic levels of consumer confidence and
employment uncertainty, combined with persistent weak economic and industry
conditions.
Gross profit. Gross profit decreased by 27.6% to approximately $7.6 million in
the second quarter of fiscal 2003 from $10.5 million in the same quarter of
fiscal 2002. Gross profit, as a percent of net sales, decreased to 19.9% from
22.1% during the same periods. For the six months ended, March 31, 2003, gross
profit decreased 23.6% to $11.1 million from $14.5 million in the same period of
the prior year. Gross profit, as a percent of sales, decreased to 19.8% from
21.4% during the same period.
The decrease in total gross profit was primarily related to the issues
discussed above in Net Sales. We believe that we may continue to experience
erratic levels of overall gross profit margins during the remainder of the 2003
fiscal year resulting, in part, to (i) the aggressive sell-through of
non-current inventory and (ii) a continued weak and uncertain economic
environment.
8
F&I Products. 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 arranged by us, we earn commissions based upon our total volume of
sales or the amount of mark-up we charge over the cost of the products sold.
Net sales of these products contributed approximately $1.3 million, or
17.6%, and $1.7 million, or 15.6% of total gross profit for the quarter and six
months ended March 31, 2003, as compared to $1.4 million or 13.0%, and $1.9
million or 13.2% of total gross profit for the same periods of the prior fiscal
year. Net sales attributable to F&I Products are reported on a net basis,
therefore, all of such sales contribute directly to the Company's gross profit.
The costs associated with the sale of F&I Products are included in selling,
general and administrative expenses. Management attributes the reduced sales of
F&I Products primarily to the reduction in overall net sales and lower overall
yields paid by lenders for originating customer finance contracts and
competitive pressures on finance rates (which resulted in lower net spreads
achieved in the placement of customer financing). 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.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $8.5 million in second quarter of fiscal
2003 from $9.0 million for the second quarter of fiscal 2002. As a percent of
net sales, selling, general and administrative expenses increased to 22.3% in
the second quarter of fiscal 2003 from 19.0% for the second quarter of fiscal
2002. For the six months ended March 31, 2003, selling, general and
administrative expenses were $16.0 million, or 28.5% as a percentage of net
sales, versus $16.3 million, or 24.0% as a percentage of net sales in the same
period of the prior fiscal year
The decrease in selling, general and administrative expenses, in actual
dollars, for the quarter and six months ended March 31, 2003 versus the same
periods of the prior year was primarily attributable to improved expense
controls; operating fewer stores and a significant reduction in labor costs as a
result of headcount reductions and the reduction in sales. The reduction in
expenses have been somewhat offset by increases in certain expenses, primarily
insurance expense and promotion and advertising expenses. The Company has also
experienced significant increases in premiums related to both its
property/casualty and its employee health insurance coverages.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
decreased to $608,000 in the second quarter of fiscal 2003 from $616,000 for the
second quarter of fiscal 2002. Depreciation and amortization expenses, as a
percentage of net sales, were 1.6% and 1.3% for the quarter ended March 31, 2003
and 2002, respectively.
Interest expense. Interest expense decreased to $931,000 in the second quarter
of fiscal 2003 from $1.1 million in the second quarter of fiscal 2002. Interest
expense was approximately 2.4% of net sales in the each period.
The decreased interest expense, in actual dollars, was primarily the result
of significantly lower balances on the Company's inventory based lines of credit
due to the significant reductions in the levels of inventory held by the
Company. The Company has successfully reduced inventory levels to reflect sales
trends; in conjunction with the accelerated sell-though of certain inventory
discussed in Net Sales; and as a result of its prior implementation of a Master
Business Plan that requires pre-approved purchase orders for all inventory
purchases. Interest expense also benefited from the decrease in the Company's
variable borrowing rates relative to the same periods of the prior year.
Net loss. The Company, prior to preferred stock dividends of $120,000, reported
a net loss, of $1.7 million ($.40 per basic and diluted share) for the quarter
ended March 31, 2003, versus a net loss of $160,000 in the quarter ended March
31, 2002.
The Company, prior to preferred stock dividends of $240,000, reported a net
loss attributable to common shareholders of $5.3 million ($1.22 per basic and
diluted share) for the six months ended March 31, 2003. The Company reported a
net loss of $3.3 million ($.75 per basic and diluted share), prior to the impact
of cumulative accounting change for the six months ended March 31, 2002.
Inclusive of the impact of the cumulative effect of accounting change, the
Company reported a net loss, of $9.8 million ($2.25 per basic and diluted share)
for the six month period ended March 31, 2002.
9
As previously reported, the net loss from the cumulative effect of
accounting change is from the Company's adoption of SFAS 142, "Goodwill and
Other Intangible Assets" as of October 1, 2001. The application of the
transition provisions of SFAS 142 required the Company to take a non-cash,
non-recurring, after-tax charge of approximately $6.5 million effective as of
October 2001. The charge eliminated the Company's goodwill accounts.
Liquidity and Capital Resources
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").
On March 31, 2003, we had approximately $2.6 million in cash, $11.5 million
in accounts receivable (primarily contracts in transit from sales, manufacturer
rebates receivable and other amounts due from manufacturers) and $61.6 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 $8.0 million of accounts
payable and accrued liabilities, $59.8 million outstanding under our borrowing
agreements and approximately $8.1 million in short-term indebtedness including
(i) current maturities of notes payable and short term loans of approximately
$1.7 million; and (ii) six real estate loans with a single lender in the
aggregate amount of approximately $6.4 million.
The six real estate loans mature in the following amounts and dates:
$100,000 - May 31, 2003; $490,000 - June 30, 2003; $263,000 - July 31, 2003;
$469,000 - August 31, 2003; $935,000 - September 30, 2003 and $4,109,000 on
October 31, 2003. The Company is negotiating a potential refinance or
sale/leaseback process on the properties. Management believes that the favorable
loan amount of approximately $6.4 million versus the appraised amount on the
properties of approximately $12.0 million will enable the Company to refinance
the loans within the applicable maturity dates.
As of March 31, 2003, the aggregate maximum borrowing limit under our
borrowing agreements is approximately $70.0 million.
On March 31, 2003, we had working capital of approximately $4.0 million.
Working capital, as of that date, was negatively impacted by our net loss and
the aforementioned $8.1 million in short term indebtedness.
For the six months ended March 31, 2003, operating activities used cash
flows of $10.7 million due primarily to the pre-season and boat shows increase
of $4.6 million in inventories and the increase of the income taxes recoverable
due to the net loss related to the 2002 calendar year tax return. Cash flows
were also impacted by an increase in accounts receivable of $1.8 million related
to the increase in net sales occurring during the March quarter as a result of
the beginning of the boating season.
For the six months ended March 31, 2003, investing activities utilized cash
flows of $124,000. These activities were primarily funded through our borrowing
agreements and internal cash flows.
For the six months ended March 31, 2003, financing activities provided cash
flows of $9.2 million primarily from the net proceeds of funds borrowed under
our inventory borrowing agreements for the purchase of our off-season and boat
show inventories. 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 matured on April 2003, have been amended numerous times. The
agreements contain substantially similar terms and financial ratio based
covenant requirements. The maximum aggregate borrowing availability as of March
31, 2003 was limited to a maximum credit limit of $70 million at various prime
based or LIBOR based interest rates (varying from 4.75% to 8.75% at December 31,
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.
10
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.
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),
provides the Company up to an additional $500,000 from each lender of
conditional working capital financing (collectively $1.5 million).
The $1.5 million short term loan was repayable on the earlier of the date
the Company received its federal income tax refund for the calendar 2002
year, or (ii) April 30, 2003. As of the date of this Report on Form 10-Q,
the Company has received a federal income tax refund in the amount of
approximately $3.0 million and has repaid the $1.5 million loan in full.
The Company has met with its senior inventory lenders and has discussed a
comprehensive business strategy with the lenders that provides a basis strategy
by which the Company intends to improve cash flow by aggressively accelerating
the selling of non-current and discontinued inventories; substantially reducing
overhead and labor costs and on increasing certain components of profitable
sales such as service labor; parts; and finance/insurance products.
Based upon this strategy and operating plan, the Company and its senior
lenders are currently negotiating the terms of the renewal of its borrowing
agreements. Management believes the strategy and operating plan will allow the
negotiations to result in renewed borrowing agreements that provide terms
similar to those previously in place and provide the Company with the necessary
flexibility to execute its strategy of substantially accelerating the
sell-through of certain inventory. However there is no guarantee the renewal
terms, if any, will be in amounts, or have terms and conditions acceptable to
the Company. Also any material shortfalls or variances from anticipated
performance or the timing of certain expenses or revenues could require us to
seek further amendment to our borrowing agreements or alternate sources of
financing.
11
Contractual Commitments and Commercial Commitments
The following table sets forth a summary of our material contractual
obligations and commercial commitments as of March 31, 2003:
Year Ended September 30, Line of Long-Term Convertible Operating Total
(000's) Credit Debt Notes Leases
- ------------------------------------ -------------- ------------- -------------- ------------ ------------
2003 $ 59,839 (1) $ 8,106 (2) $ 2,259 $ 70,204
2004 1,247 2,353 3,600
2005 301 $ 1,300 1,663 3,264
2006 227 1,232 1,459
2007 482 343 825
Thereafter 884 277 1,161
-------------- ------------- -------------- ------------ ------------
Total $ 59,839 $ 11,247 $ 1,300 $ 8,127 $ 80,513
============== ============= ============== ============ ============
(1) Our inventory borrowing agreements, which originated in January 2000,
matured in April 2003.
(2) Approximately $6.4 million of real estate loans with a single lender
maturing on dates prior to October 31, 2003. (See Management's
Discussion and Analysis - "Liquidity").
Seasonality
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 packages and related
products and accessories.
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.
Cautionary Statement for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995.
Other than statements of historical fact, all statements contained in this
Report on Form 10-Q, including statements in "Item 1. Business", and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", are forward-looking statements as that term is defined in Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements involve a number of
uncertainties. The actual results of the future events described in the
forward-looking statements in this Report on Form 10-Q could differ materially
from those stated in such forward-looking statements. Among the factors that
could cause actual results to differ materially are: the impact of seasonality
and weather, general economic conditions, competition and government
regulations, the level of discretionary consumer spending, national or local
catastrophic events, as well as the risks and uncertainties discussed in this
Report on Form 10-Q, including without limitation, the matters discussed in
"Risk Factors" and the uncertainties set forth from time to time in the
Company's other public reports, filings and public statements, including the
Company's Report on Form 10-K for the Fiscal Year ended September 30, 2002. All
11
forward-looking statements in this Report on Form 10-Q are expressly qualified
in their entirety by the cautionary statements in this paragraph.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Changes in short-term interest rates on loans from financial institutions could
materially affect the Company's earnings because the interest rates charged on
certain underlying obligations are variable.
At March 31, 2003, a hypothetical 100 basis point increase in interest rates on
the Company's Floor Plan and Revolving Line of Credit obligations would result
in an increase of approximately $598,000 in annual pre-tax expenses of the
Company. The estimated increase in expenses is based upon the increased interest
expense of the Company's variable rate Floor Plan and Revolving Line of Credit
obligations and assumes no change in the volume or composition of such debt at
March 31, 2003.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, our Company is involved in litigation relating to claims
arising from its normal business operations. Currently, our Company is a
defendant in several lawsuits. Some of these lawsuits involve claims for
substantial amounts.
In January 2003, the Company received notice of a lawsuit filed in the U.S.
Bankruptcy Court for the Northern District of Illinois on behalf of the
bankruptcy estate for Outboard Marine Corporation ("OMC"). The Company has
denied the allegations in this lawsuit and finds them without merit. OMC was a
primary supplier of outboard engines to our Company prior to OMC's bankruptcy in
December of 2000. The suit alleges that we received approximately $700,000 in
cash payments from OMC that were are deemed to be preferential payments under
applicable bankruptcy law, and hence demands the repayment thereof. The Company
believes that the lawsuit is without merit and that the cash payments were
received in the ordinary course of business pursuant to the Company's contract
with OMC.
There is no guarantee that our Company will prevail in defense of lawsuits
filed against it. Lawsuits resulting in an unfavorable verdict or settlement for
the Company could have a material adverse affect on the results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description Incorporated by Reference to:
10.93 Forbearance Agreement Not applicable.
99.1 Certification Pursuant to Not applicable.
Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to Not applicable.
Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereto duly authorized.
Date: May 15, 2003 Travis Boats & Motors, Inc.
By: /s/
--------------------------------------------------
Michael B. Perrine
Chief Financial Officer, Treasurer and Secretary
(Principal Accounting and Financial Officer)
14