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, 2003
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. _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
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 March 31,
2003, (based upon the last reported price of $0.29 per share) was approximately
$999,325.21 on such date.
The number of shares of the issuer's Common Stock, par value $.01 per
share, outstanding as of December 31, 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 or
Information Statement relating to the 2004 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 ......................................................12
Item 3. Legal Proceedings ...............................................13
Item 4. Submission of Matters to a Vote of Security Holders .............13
PART II ...................................................................14
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters, and Issuer Purchases of Equity Securities .......................14
Item 6. Selected Financial Data .........................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................16
Item 7A Quantitative and Qualitative Disclosures About Market Risk ......27
Item 8. Financial Statements ............................................27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .....................................................27
PART III ...................................................................27
Item 10. Directors and Executive Officers ...............................27
Item 11. Executive Compensation .........................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management .28
Item 13. Certain Relationships and Related Transactions .................28
PART IV ....................................................................28
Item 14. Controls and Procedures.........................................28
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 28
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
i
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 Business Plans. During fiscal 2003, we developed and
implemented plans to (i) eliminate, or in the alternative, materially reduce the
operating losses experienced during the past several fiscal years, and (ii) to
allow the Company to generate additional cash reserves. A key component of this
plan has been substantial collaberative interaction between management, our
lenders and our key vendors to understand and develop business processes to
enhance operations, improve inventory quality and assortments and generate
additional cash flows from operations. The plan strategy included an aggressive
acceleration of the sell-through of prior year and discontinued inventory with
the expected result being a short-term adverse effect on average retail prices
and gross profits, offset by a significant improvement in working capital under
our inventory borrowing base requirements.
A second major component of the plan strategy included a detailed review
and assessment of labor requirements and operating policies and procedures.
Based upon this review, we implemented initiatives to significantly reduce
operating expenses for corporate and store overhead. The strategy also contains
initiatives in merchandising and several revenue enhancement opportunities. The
merchandising strategy identifies initiatives focusing on inventory turn
improvement, product mix refinement and seasonal sales velocity by product
category. Revenue opportunities include the review and benchmarking of all
stores in the areas of parts, service and finance to leverage the best practices
and achievements of our top producing stores.
Accordingly, the plan is an integral component in eliminating our net
losses and in negotiating favorable 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 flows or
assist in securing favorable financing agreements.
Our Success Will Depend on How Well We Manage Our Inventory and Product
Growth. We have substantially reduced our inventory levels and consolidated
purchases from select manufacturers. We have developed trend analysis models and
utilize centralized purchase orders to assist our store management in ordering
new products and in maintaining appropriate stocking levels and product turns.
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 could result in a material adverse impact on our business,
financial condition and results of operations.
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
1
Company recorded significant net losses during the 2001-2003 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.
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.
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")
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 would
likely result in a material adverse effect on our business, our operating
results and our financial condition.
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 have certain limits
on 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 Reduced our Store Count by Closing Store Locations. We have closed
a total of 7 store locations in fiscal 2003 and 2002 because the store locations
had low sales volumes and were not profitable to operate. We may close
additional store locations (i) 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.
2
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.
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. 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 have also historically purchased much of our boat
inventory from a few select manufacturers. For example, in fiscal year 2003 we
purchased 25.0%, and in fiscal year 2002 we purchased 35.6% of our total
inventory from Genmar Industries, Inc., or "Genmar". We have elected to purchase
a significant amount of product from an affiliate of our largest shareholder,
TMRC, LLP ("Tracker"). In fiscal 2003 we purchased approximately $10.9 million
or 15.6% of our inventory from Tracker. Beginning with fiscal 2004, we have
consolidated purchases from certain vendors to Tracker and anticipate purchasing
approximately 30% to 40% of our fiscal 2004 inventory supply from Tracker. The
purchases of boats from this supplier are based on the volume price discounts
and other terms of various, primarily annual, agreements. In addition to our
purchases from GenMar and Tracker, we also purchase a large amount of product
from several smaller manufacturers and believe that our purchase quantities from
these vendors represent a significant percentage of their respective annual
production.
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.
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 Rely on a few Manufacturers for Almost All of
our Boat Purchases".)
3
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 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.
Our Income from Financing, Insurance and Extended Service Contracts, 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 3.4% and 2.9% of our net sales in fiscal years 2003 and
2002, 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 Income Tax Refunds are Currently Limited. Our federal income tax return
for the 12 months ended December 30, 2002 fully exhausted all available refunds
4
of federal income taxes previously paid by our Company. Accordingly, beginning
with the quarter ending March 31, 2003, we did not recognize income tax benefits
on our books from operating losses, due to uncertainties associated with the
utilization of the operating loss carry-forwards in future periods. Since we
utilized prior tax refunds for operating capital, our inability to continue to
receive tax refunds could have a material adverse effect on our business,
financial condition and results of operations.
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
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 at a conversion
price of approximately $2.46 per share.
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.
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 December 31, 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, the ownership of Tracker would represent
approximately 53% of our issued and outstanding common shares (excluding the
effect of options outstanding or other contingently issuable shares).
The sale by the Company or Tracker 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").
We Must Comply With Listing Requirements for the NASDAQ Stock Market. We
transferred our common stock from the Nasdaq National Market to the Nasdaq Small
Cap Market effective 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. The Nasdaq Small Cap Market requires that we maintain a minimum
$1.00 bid price on our common shares. During fiscal 2003 the bid price on our
common stock ranged from $.18 to $1.46. Our 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").
Change of Control. As of January 7, 2003, Tracker, pursuant to certain
agreements for assistance in financing and other matters (the "Agreements") has
assumed effective control of the Company. Tracker has the right to designate
5
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.
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 57%
or 4,611,119 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 (former director), owner of 292,866 shares, and Mark
Walton (President), 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 (although Tracker currently controls over 55% the Voting
Trust has not been modified). 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 (i) in 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.
In order to ensure that Tracker maintains its voting control position, each
Company insider who purchased Convertible Notes from our Company on or about
December 14, 2001 (at a conversion price of approximately $2.46 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
prior to such date shall be deposited into and governed by the Voting Trust.
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
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. (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. 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 to Tracker. If we issue
6
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.
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 30 stores under the name Travis Boating Center in
Texas (8), Arkansas (2), Louisiana (4), Alabama (1), Tennessee (3), Mississippi
(1), Florida (9), 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.
7
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 Mako, Cobalt,
Ranger, Caravelle, Bayliner, Fisher, ProCraft, Fishmaster, Sea Pro 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 small cruisers, such as
Crownline, that range in length to over 25 feet in length. 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 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.
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.
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'
8
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 2003,
2002 or 2001.
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
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
9
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. most of which expired without renewal by the
Company or GenMar in the 2003 fiscal year.
Approximately 25.0% and 35.6% of our net purchases in fiscal years 2003 and
2002, respectively, were products manufactured by boat manufacturers owned by
Genmar. The significant amount of purchases from Genmar was 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 have purchased include the
brands Larson, AquaSport, Scarab and Ranger.
We also entered into a multi-year agreement with a subsidiary of Tracker
during fiscal 2002 to purchase certain types of boats. During fiscal 2002 and
2003, we purchased approximately 3.6% and 15.6% of our annual net inventory
purchases from Tracker. Beginning with fiscal 2004, we have consolidated
purchases from certain vendors to Tracker and anticipate purchasing up
approximately 30% to 40% of our fiscal 2004 inventory supply 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
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, 2003, the Company owed an aggregate of
approximately $28.7 million to our lenders under our floor plan financing
agreements. At September 30, 2003 and 2002, the Company had non-interest bearing
borrowings of approximately $2,520,000 and $5,370,000 under these arrangements.
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
10
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. 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.
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. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
11
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available
free of charge on our web site as soon as reasonably practicable after
electronically filing such reports with the SEC.
Employees. As of September 30, 2003, our staff consisted of 403 employees,
381 of whom are full time. The full-time employees include 30 in store level
management and 34 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.
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 9, 2004.
Building Land Owned or Year of Market
Location Square Footage* Acreage* Leased Entry
Austin, Texas(1)................ 20,000 3.5 Leased 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 Leased 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
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
Memphis, Tennessee(2)........... 24,000 4.3 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.
12
Item 3. 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.
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 the Company received payments from OMC
that were are deemed to be preferential payments under applicable bankruptcy
law, and demands the repayment thereof.
The Company, based upon review of the case and discussions with legal
counsel, believes the lawsuit to be similar to numerous filed against former OMC
dealers and that it is without merit. There is no guarantee that our Company
will prevail in defense of this or other lawsuits. If any lawsuit were to result
in a substantial unfavorable verdict or resolution for the Company it could have
a material adverse impact on the results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2003 Annual Meeting of Stockholders was held on September 29,
2003. The following nominee was re-elected to the Company's Board of Directors
to serve as a Class "A" director for a three year term expiring in 2006, or
until his successor is elected and qualified, or until his earlier resignation
or removal.
Nominee Votes in Favor Opposed Abstained Broker Non-Vote
Richard S. Birnbaum 4,611,119(1) N/A N/A N/A
(Chairman)
The following directors' terms of office continued after the 2003 Annual
Meeting of Stockholders: Mark T. Walton, Kenneth N. Burroughs, Robert L. Ring
and James P. Karides, CPA. Pursuant to the Agreements described in this report,
Tracker has the right to designate a majority of directors to the Board of
Directors (Messrs. Burroughs and Ring are current designees representing Tracker
on the Board of Directors). See also Risk Factors - "Change of Control".
The following issue was also voted upon:
To ratify Ernst & Young, LLP as the independent certified public
accountants of the Company for the fiscal year ended September 30, 2003.
Votes in Favor Opposed Abstained Broker Non-Vote
4,611,119(1) N/A N/A N/A
(1) TMRC, LLP controls approximately 57%, or 4,611,119 shares of the
Company's common shares on a fully-diluted, as-converted basis and voted all of
its shares in favor of each proposal. Therefore, the Company did not solicit
proxies for the 2003 Annual Meeting, nor did it receive any votes other than
those submitted by Tracker. See also Risk Factors - "Change of Control".
There was no additional business conducted at the meeting.
13
PART II
Item 5. Market for Registrant's Common Stock, Related Stockholder Matters, and
Issuer Purchases of Equity Securities.
Our common stock trades on the Nasdaq Stock Market under the symbol: TRVS.
As of December 31, 2003, we believe our shares are beneficially owned by more
than 400 shareholders. On December 31, 2003, the last reported sales price of
the common stock on the NASDAQ National Market System was $ .66 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 2003 and 2002 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 2003 Sales Price Fiscal 2002 Sales Price
Quarter Ended High Low Ending High Low Ending
December 31.................... $1.46 $1.00 $1.00 $2.50 $1.75 $1.94
March 31....................... $ .76 $ .29 $ .29 $3.02 $1.75 $2.50
June 30........................ $ .88 $ .20 $ .81 $2.95 $1.40 $1.90
September 30................... $1.05 $ .61 $ .75 $1.94 $1.05 $1.18
ISSUER PURCHASES OF EQUITY SECURITIES
(b)
(a) Total Average
Number of Price (c) Total Number of Shares (d) Maximum Number (or Approximate
Shares (or Paid per (or Units) Purchased as Dollar Value) of Shares (or Units)
Units) Share (or Part of Publicly Announced that May Yet Be Purchased Under the
Period (1) Purchased Unit) Plans or Programs Plans or Programs
4/1/03 - 20,000(2) $ 0.27 104,300 $757,000
6/30/03
7/1/03 - 10,000(2) $0.72 114,300 $750,000
9/30/03
(1) The chart reflects repurchases of common stock during fiscal 2003.
Prior to fiscal 2003 the Company had repurchased 84,300 shares for approximately
$237,500 pursuant to its repurchase program.
(2) The common shares were repurchased pursuant to the Company's announced
repurchase program of up to $1,000,000 of common stock. The repurchase program
was announced on July 26, 2000 and had no terminated date.
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 we issued during fiscal 2002. The Preferred dividend is payable quarterly
in arrears and all payments of the preferred dividends are subject to the
approval of our senior inventory lenders. 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.
14
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,
1999(1) 2000(1) 2001(1) 2002(1) 2003(1)
(in thousands, except store, per store and per share data)
Consolidated Statement of Operations Data:
Net sales............................................ $ 182,259 $ 217,718 $ 198,539 $ 176,523 $ 140,715
Gross profit......................................... 46,634 53,309 46,379 37,072 27,656
Selling, general and administrative expense.......... 30,978 42,326 41,813 38,984 33,469
Operating income/(loss).............................. 13,689 8,338 1,660 (4,386) (8,254)
Interest expense..................................... 3,808 6,848 6,533 4,018 3,281
Income/(loss) before cumulative effect of accounting
change............................................ 6,573 897 (3,281) (10,264) (8,899)
Preferred stock dividends............................ -- -- -- 187 480
Cumulative effect of accounting change, net.......... -- -- -- 6,528 --
Net income/(loss) attributable to common
shareholders...................................... 6,573 897 (3,281) (16,979) (9,379)
Basic earnings/(loss) per share before cumulative
effect of accounting change....................... $ 1.53 $ .20 $ (.75) $ (2.33) $ (2.05)
Diluted earnings/(loss) per share before cumulative
effect of accounting change.......................... $ 1.49 $ .20 $ (.75) $ (2.36) $ (2.05)
Preferred stock dividends............................ -- -- -- (.05) (0.12)
Cumulative effect of accounting change............... -- -- -- (1.50) --
Basic earnings/(loss) per share...................... $ 1.53 $ .20 $ (.75) $ (3.91) $ (2.17)
Diluted earnings/(loss) per share.................... $ 1.49 $ .20 $ (.75) $ (3.91) $ (2.17)
Weighted avg. common shares outstanding - basic...... 4,291 4,403 4,375 4,345 4,320
Weighted avg. common shares outstanding - diluted.... 4,409 4,446 4,375 4,345 4,320
Store Data:
Stores open at period end.......................... 38 39 37 34 30
Average sales per store(2)......................... $ 6,055 $ 5,630 $ 5,252 $ 5,117 $ 4,560
Percentage increase (decrease) in comparable store
sales(3)....................................... 1.9% (1.1%) (11.6%) (6.1%) (15.7%)
FISCAL YEAR ENDED SEPTEMBER 30,
1999 2000(4) 2001(5) 2002(6) 2003(7)
(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents............. $ 4,125 $ 2,971 $ 1,388 $ 4,253 $ 3,414
Working capital....................... 12,117 10,948 11,958 8,540 3,226
Total assets.......................... 125,931 129,647 113,680 95,432 59,122
Short-term debt, including current
maturities of notes payable....... 69,547 77,895 61,078 58,410 33,381
Notes payable less current maturities. 6,897 6,015 9,375 4,525 2,891
Stockholders' equity.................. 37,592 39,552 36,149 26,936 17,541
(1) The Consolidated Statement of Operations Data and the Consolidated Balance
Sheet Data for the fiscal years ended September 30, 1999, 2000, 2001, 2002
and 2003 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.
15
(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 in December
2002 were in default of certain financial covenants.
(7) 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 $3.7 million due in December, 2003 (see Note
13 - "Subsequent Events" in the consolidated audited financial statements
of the Company and notes thereto included elsewhere in this Report on Form
10-K) and one payment of $698,000 due in June, 2004.
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.
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 a fee for insurance and extended
service agreements net of the related fee that is paid to the third-party
vendors or administrators. Since our 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.
16
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 on 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.
Additional 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 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 has been recorded for these deferred tax assets since that
time.
Impairment of Long-lived Assets
Long-lived assets consist primarily of property and equipment and
intangible assets. Property and equipment and other intangible assets are
carried on the Company's financial statements based on their cost less
accumulated depreciation or amortization. The Company evaluates property and
equipment and other intangible assets held and used by the Company for
impairment whenever events or changes in circumstances indicate that their net
book value may not be recoverable. When such factors and circumstances exist,
the Company compares the projected undiscounted future cash flows associated
with the future use and disposal of the related asset or group of assets to
their respective carrying amounts. Impairment, if any, is measured as the excess
of the carrying amount over the fair value, based on market value when
available, or discounted expected cash flows of those assets and is recorded in
the period in which the determination is made.
17
Other
For a more comprehensive list of our accounting policies, including those
which involve varying degrees of judgment, see Note 1. "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,
2001 2002 2003
Net sales............................................... 100.0% 100.0% 100.0%
Costs of goods sold..................................... 76.6 79.0 80.3
-------------------------------------------
Gross profit............................................ 23.4 21.0 19.7
Selling, general and administrative expenses............ 21.1 22.1 23.8
Operating income/(loss)................................. 0.8 (2.5) (5.9)
Interest expense........................................ 3.3 2.3 2.3
-------------------------------------------
Loss before income taxes and cumulative effect of
acounting change and preferred stock dividends....... (2.4) (4.8) (8.1)
Income tax (expense)/benefit............................ 0.8 (1.0) 1.8
-------------------------------------------
Loss before cumulative effect of accounting change and
preferred stock dividends............................ (1.7%) (5.8%) (6.3%)
------------- --------- --------
Cumulative effect of accounting change, net............. 0.0 (3.7) 0.0
Preferred stock dividends............................... 0.0 (.11) (.34)
Net loss attributable to common shareholders............ (1.7%) (9.6%) (6.7%)
------------- --------- --------
Fiscal Year Ended September 30, 2003 Compared to the Fiscal Year Ended September
30, 2002
Net sales. Net sales for the fiscal year ended September 30, 2003 were
$140.7 million, a decrease of approximately $35.8 million or 20.3% from the net
sales of $176.5 million for the fiscal year ended September 30, 2002.
The decrease in net sales resulted from (i) a decrease in comparable store
sales, (ii) reduced sales as a result of the impact of fewer stores in operation
(30 versus 34) and (iii) a decline in average retail prices based on our
aggressive sell-through of non-current inventory. Comparable store sales
declined by 15.7% (30 stores in base) for the fiscal year ended September 30,
2003 compared to a decrease of 6.1% (33 stores in base) during the prior fiscal
year. $10.7 million of the decrease in net sales for the fiscal year ended
September 30, 2003 is attributable to our decision to close and consolidate
store operations in Englewood, Florida; Knoxville, Tennessee; Pickwick,
Tennessee and Little Rock, Arkansas into other Travis Boating Center locations
because we believed that store volumes and product assortments could not
generate profitable operations or positive cash flows in those markets.
During the fiscal year ended September 30, 2003, the Company implemented a
strategy to aggressively accelerate the sale of certain aged and discontinued
product during the primary summer boating season. As a result, we sold
approximately $20.0 million of non-current and aged inventory at reduced retail
sales prices and gross profit margins. While contributing to the decline in net
sales and gross margins, offsetting benefits of the strategy included
18
improvement of our inventory turns and product mix refinement. Additionally,
since substantially all of the targeted aged inventory was ineligible for
borrowing against under our inventory borrowing agreements, the sales proceeds
represented incremental working capital. Management believes that the aggressive
sell-through of additional non-current and aged inventory is substantially
complete based upon the significant improvement in average days on hand of its
inventory as of September 30, 2003. We believe that additional factors
contributing to the decline in net sales and the decrease in comparable store
sales included, but were not limited to, continued erratic levels of consumer
confidence and employment uncertainty.
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 7.8% to approximately
$4.7 million in fiscal 2003 from $5.1 million in fiscal 2002. However, as a
percentage of net sales, F&I income increased to 3.4% in fiscal 2003 from 2.9%
in fiscal 2002. Management attributes the improvement in F&I income, as a
percentage of net sales, to (i) improved training and (ii) implementing
processes that allow for remote handling of F&I functions in several markets
which had previously under-performed relative to certain of our Company
benchmarks and goals. Additionally, in fiscal 2003, our sales of larger, more
expensive yachts over 35 feet in length declined and we eliminated yachts from
our product offering. We believe this is a benefit to F&I income as a percent of
our net sales since the percentage of customers buying F&I products (which is
referred to as "penetration"), is historically greater among purchasers of our
Travis Edition boats that are less than 25 feet in length.
Gross profit. For the fiscal year ended, September 30, 2003, gross profit
decreased 25.4% to $27.7 million from $37.1 million in the prior fiscal year.
Gross profit, as a percent of sales, decreased to 19.7% from 21.0% during the
same period in fiscal 2002.
The decrease in total gross profit, both in actual dollars and as a percent
of net sales, was primarily related to the overall decline in sales from the
factors discussed above in Net Sales. We believe that we will experience less
erratic levels of overall gross profit margins during the 2004 fiscal year
resulting, in part, to (i) improved days on hand of our inventory and our
product mix and (ii) the substantial completion of the sell-through of aged and
discontinued inventories discussed above in Net Sales.
Our decline in gross profit margin during fiscal 2003 was partially offset
by the increase in our F&I income, as a percentage of net sales. Net sales of
F&I Products, which have a significant impact on the gross profit margin,
contributed $4.7 million, or 17.0%, of total gross profit in fiscal 2003, as
compared to $5.1 million, or 13.9%, of total gross profit for fiscal 2002. 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 primarily commissions and are included in our
selling, general and administrative expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased to $33.5 million in fiscal 2003 from $39.0
million in the prior fiscal year. Selling, general and administrative expenses,
as a percent of net sales, were 23.8% in fiscal 2003, compared to 22.1% in
fiscal 2002.
The decrease in selling, general and administrative expenses, in actual
dollars, for the fiscal year ended September 30, 2003 versus the prior fiscal
year was primarily attributable to the reduction in wages, commissions, bad debt
expenses and the overall decline in net sales. Commissions are generally
variable based on sales volumes. Our "fixed wage" headcount has been managed
primarily through attrition, selective position consolidation and adoption of
store staffing models intended to reduce employee turnover and staff stores
based on a best practices approach. The reduction in overall expenses was
partially offset by percentage increases in certain expenses, primarily
19
insurance, rents and taxes since these expenses are generally based on premiums
or assessment estimates from prior years in which we had higher levels of net
sales and inventories.
A significant component of selling, general and administrative expenses for
fiscal years ended September 30, 2003 and 2002 were non-cash, bad debt expenses
of approximately $1.3 million and $2.1 million, respectively. Despite our
enhanced collection efforts, we have experienced 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. Also, effective during our 2003 fiscal year, we discontinued
purchasing boats from several vendors and believe that collection from
discontinued vendors may result in additional delays or possible disputes.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses remained flat at approximately $2.5 million in the fiscal years ended
September 30, 2003 and 2002. However, depreciation and amortization expenses, as
a percent of net sales, increased to 1.7% in fiscal 2003 from 1.4% for the prior
fiscal year primarily as a result of our decline in net sales.
Interest expense. Interest expense decreased to $3.3 million in fiscal 2003
from $4.0 million in the prior fiscal year. Interest expense, as a percent of
net sales, remained flat at 2.3% of net sales in fiscal years 2003 and fiscal
2002, respectively.
The decreased interest expense, in actual dollars, 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
sell-through of aged and discontinued inventories discussed above in Net Sales.
Although our strategy is to maintain lower inventory levels and improve
inventory turns, 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."
Income Taxes. Our effective income tax benefit rate for the year ended
September 30, 2003 applicable to the operating loss, was reduced by the creation
of a valuation allowance 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. Our federal income tax
return for the 12 months ended December 30, 2002 fully exhausted all available
refunds of federal income taxes previously paid by our Company. Accordingly,
beginning with the quarter ending March 31, 2003, we did not recognize income
tax benefits on our books from operating losses, due to uncertainties associated
with the utilization of the operating loss carry-forwards in future periods.
Net loss. For the fiscal year ended September 30, 2003, the Company, after
preferred stock dividends of $480,000, reported a net loss of $9.4 million
($2.17 per basic and diluted share) compared to a net loss for the prior 2002
fiscal year of $10.3 million ($2.41 per basic and diluted share), after
preferred stock dividends of $187,000; but prior to the effect of the cumulative
accounting change. (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).
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
20
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 2002 from $6.6 million in fiscal 2001. 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 "penetration"), particularly by
purchasers of the larger, more expensive boats and reduced customer demand for
certain insurance products have also been limiting factors.
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.
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
primarily commissions and 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 $41.8
million in the prior fiscal year. During the prior 2001 fiscal year, our SGA
expenses included 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 21.1% 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
21
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 begun to reduce 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
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.
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) of $10.3 million ($2.41 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, 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.
22
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.
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 2002 Fiscal Year 2003
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................................... $ 20,666 $ 47,388 $ 67,825 $ 40,644 $ 17,887 $ 38,132 $ 53,129 $ 31,566
Gross profit................................ 4,065 10,469 15,211 7,327 3,517 7,589 10,993 5,556
Selling, general and administrative expense. 7,314 9,010 10,850 11,805 7,481 8,497 8,704 8,480
Store Closing Costs......................... -- -- -- -- -- -- 307 --
Operating income/(loss)..................... (3,876) 843 3,736 (5,089) (4,621) (1,516) 1,384 (3,502)
Interest expense............................ 1,039 1,116 1,054 810 812 931 872 667
Income/(loss) before taxes, preferred stock
dividends and cumulative effect of
accounting change........................... (3,104) (253) 2,504 (8,579) (5,413) (2,425) 558 (4,154)
Preferred stock dividends................... -- -- (67) (120) (120) (120) (120) (120)
Cumulative effect of accounting change, net. (6,528) -- -- -- -- -- -- --
Net income/(loss) attributable to common
shareholders................................ (9,632) (160) 1,510 (8,699) (3,703) (1,841) 438 (4,274)
Basic earnings/(loss) per share before
preferred stock dividends and cumulative
effect of accounting change................. (.71) (.04) .36 (1.98) (.83) (.40) .13 (.96)
Diluted earnings/(loss) per share before
preferred stock dividends and cumulative
effect of accounting change................. (.71) (.04) .25 (1.98) (.83) (.40) .07 (.96)
Preferred stock dividends................... -- -- (.01) (.03) (.03) (.03) (.03) (.03)
Cumulative effect of accounting change, net. (1.50) -- -- -- -- -- -- --
Basic earnings/(loss) per share attributable
to common shareholders...................... (2.21) (.04) .35 (2.01) (.86) (.43) .10 (.99)
Diluted earnings/(loss) per share
attributable to common shareholders......... (2.21) (.04) .25 (2.01) (.86) (.43) .07 (.99)
Weighted avg. common shares outstanding -
basic....................................... 4,355 4,348 4,346 4,334 4,330 4,330 4,313 4,308
Weighted avg. common shares outstanding
- - diluted................................... 4,355 4,348 6,524 4,334 4,330 4,330 8,095 4,308
- --------------------------------------------------------------------------------------------------------------------------------
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................................ 19.7 22.1 22.4 18.0 19.7 19.9 20.7 17.6
Selling, general and administrative
expense..................................... 35.4 19.0 16.0 29.0 41.8 22.3 16.4 26.9
Operating income/(loss)..................... (18.8) 1.8 5.5 (12.5) (25.8) (4.0) 2.6 (11.1)
Interest expense............................ 5.0 2.4 1.6 2.0 4.5 2.4 1.6 2.1
Income/(loss) before taxes, preferred stock
dividends and cumulative effect of
accounting change........................... (15.0) (.53) 3.7 (21.1) (30.3) (6.4) 1.1 (13.2)
Preferred stock dividends................... -- -- (.10) (.30) (.67) (.31) (.23) (.38)
Cumulative effect of accounting change, net. (31.6) -- -- -- -- -- -- --
Net income/(loss) attributable to common
shareholders................................ (46.6) .34 2.2 (21.4) (20.7) (4.8) .82 (13.5)
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,
23
as well as excessive rain, may affect our sale of boating 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, 2003 and 2002 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, 2003:
Year Ended September 30, Line of Long-Term Convertible Operating Total
(000's) Credit Debt Notes Leases
- ------------------------------------ -------------- ------------- -------------- ------------ ------------
2004 $ 28,658(1) $ 4,723(2) $ 2,781 $ 36,162
2005 1,579 $ 1,300 2,262 5,141
2006 686 1,835 2,521
2007 419 1,290 1,709
2008 80 815 895
Thereafter 127 2,148 2,275
-------------- ------------- -------------- ------------ ------------
Total $ 28,658 $ 7,614 $ 1,300 $ 11,131 $ 48,703
============== ============= ============== ============ ============
(1) Our inventory borrowing agreements matured in October 2003. (see Note
13 "Subsequent Events" included in the consolidated audited financial
statements of the Company and Notes thereto included elsewhere in this
Report on Form 10-K)
(2) Includes a $3.7 million real estate loan with a maturity of December
31, 2003, that subsequent to September 30, 2003 was refinanced on a 3
year promissory note with another lender. (see Note 13 "Subsequent
Events" included in the consolidated audited financial statements of
the Company and Notes thereto included elsewhere in this Report on
Form 10-K)
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"). In our
prior 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, 2003, we had approximately $3.4 million in cash, $5.7
million in accounts receivable (primarily contracts in transit from sales,
manufacturer rebates receivable and other amounts due from manufacturers) and
$31.0 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 $4.3
million of accounts payable and accrued liabilities, $28.7 million outstanding
under our borrowing agreements and $4.7 million in short-term indebtedness
including (i) current maturities of notes payable of $311,000 and (ii) real
estate loans in the amount of approximately $4.4 million with balloon payments
due at maturity in December 2003 (see Note 13 "Subsequent Events" included in
the consolidated audited financial statements of the Company and Notes thereto
included elsewhere in this Report on Form 10-K) and June 2004.
24
As of September 30, 2003, the aggregate maximum borrowing limits under our
borrowing agreements was $55.5 million. (see Note 13 - "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, 2003, we had working capital of approximately $3.2
million. Working capital, as of that date, was reduced by our net loss and the
aforementioned $4.4 million in real estate loans with balloon payments due at
maturity in December 2003 (see Note 13 - "Subsequent Events" in the consolidated
audited financial statements of the Company and notes thereto included elsewhere
in this Report on Form 10-K) and June 2004, classified as current liabilities.
In fiscal 2003, operating activities provided cash flows of $23.4 million
due primarily to the decrease of $26.0 million in inventories (primarily as a
result of our fiscal year 2003 business plan inventory sell-through strategies)
and a net decrease in accounts receivable. These amounts were offset partially
by the net loss of $8.9 million and a decrease in accounts payable.
In fiscal 2002, operating activities provided cash flows of $3.9 million
due primarily to the decrease of $8.2 million in inventories 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.
Investing activities in fiscal 2003 provided cash flows of $2.9 million due
primarily to the sale and leaseback of our store locations in Austin, Texas and
Dallas, Texas. The two properties were sold at a collective sales price of
approximately $3.3 million and leased back by the Company pursuant to long term
operating leases.
Financing activities in fiscal 2003 used cash flows of $27.2 million
primarily from the repayment of amounts outstanding under our borrowing
agreements and other notes payable. The repayments were generally from the
proceeds of our (i) net reduction in overall inventory levels during the period
and (ii) repayments of real estate loans in conjunction with the sale/leaseback
of certain stores discussed above. We finance substantially all of our inventory
pursuant to borrowing agreements 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 contain substantially similar
terms and financial covenants. As of September 30, 2003, the maximum aggregate
borrowing availability was limited to a maximum credit limit of $55.5 million at
various prime based or LIBOR based interest rates (varying from 4.12% to 4.75%)
and approximately $28.7 million was outstanding. The borrowing agreements are
primarily for the purchase of inventories and do not provide available amounts
for general working capital requirements. Based on the terms of the borrowing
agreements we could request for the lenders to advance funds to manufacturers
for additional inventory purchases up to the remaining available credit limit.
As we purchase inventory, we authorize our lenders to remit payment directly to
the manufacturers pursuant to our borrowing agreements. 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 fees for administrative
monitoring and for any unused portions of available credit. Also, 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 limited borrowings under these
agreements. Discontinuance of these agreements could result in an increase to
interest expense. Acquisitions, the payment of common stock dividends or
repurchases of our common stock are also substantially limited without prior
consent.
The borrowing agreements, which originated in fiscal 2000, expired during
fiscal 2003 and were subsequently renewed through October 15, 2003 pending each
lender's review of our request for a 12 month renewal term. As of the date of
this Report on Form 10-K, we have been notified by each lender that our request
has been reviewed and subject to appropriate documentation our new expiration
date will be in October 2004. The renewed borrowing agreements are expected to
include loan agreements containing various loan covenants and borrowing
restrictions, including, but not limited to, minimum financial ratios governing
net worth, inventory turn, accounts receivable turn and percentage levels of
operating expenses. (See Note 13 - "Subsequent Events" in the consolidated
25
audited financial statements of the Company and notes thereto included elsewhere
in this Report on Form 10-K).
As of the date of this report on Form 10-K, management believes the Company
to be in compliance with all terms and conditions of its borrowing agreements.
Merchandise inventories were $31.0 million and $57.0 million as of
September 30, 2003 and 2002, respectively. Accounts receivable, on a net basis,
decreased by approximately $4.0 million to $5.7 million at the end of fiscal
2003 from the same time one year earlier due to the write-off of uncollectable
accounts, an increase in the allowance and the general collection of
receivables. Noncompete agreements decreased by approximately $418,000 to
$731,000 in fiscal 2003 due to the scheduled amortization of this asset.
We had net capital expenditures of approximately $480,000 in fiscal 2003
and approximately $1.1 million in fiscal 2002. The capital expenditures were
primarily used for the purchase and replacement of assets used in operations of
the store locations. These capital expenditures were primarily funded through
our internal cash flows.
Based upon management's fiscal 2004 operating plan, including the (i) the
detailed review and assessment of labor requirements and operating policies and
procedures we implemented to significantly reduce operating expenses for
corporate and store overhead, (ii) revenue opportunities based on the review and
benchmarking of all stores in the areas of parts, service and finance to
leverage the best practices and achievements of our top producing stores, (iii)
improvement in inventory days on hand, turns and assortments, (iv) the
sale/leaseback or refinancing of certain assets and (v) the borrowing
agreements, management believes that there is sufficient liquidity and resources
to fund fiscal year 2004 operations in the ordinary course of our operations.
However, our auditors have issued an opinion referencing "going concern"
limitations based on our operating losses and the matured status of our
borrowing agreements which as of the date of this Report on Form 10-K are
pending renewal (see Notes 1 and 13 in the consolidated audited financial
statements of the Company and notes thereto included elsewhere in this Report on
Form 10-K). Further, material shortfalls or variances from anticipated
performance or the timing of certain expenses or revenues could result in an
adverse impact on our business, financial condition and results of operations
requiring us to seek additional equity capitalization, borrowings or other
alternate sources of financing. (See Risk Factors "Execution of Business
Plans").
New Accounting Standards
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. There was no material impact from the adoption of this
Statement on January 1, 2003.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
EITF 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Management does not expect
the adoption of EITF 00-21 to have a material impact on the Company's financial
position, results of operations or cash flows.
In December 2002, the FASB issued Statement 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. Statement 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Statement 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, Statement 148 requires disclosure of the
pro forma effect in interim financial statements. The Company adopted the annual
disclosure requirements of Statement 148, which are effective for fiscal years
ending after December 15, 2002 and elected to continue to account for employee
stock options under APB No. 25. The interim disclosure requirements are
effective for interim periods commencing after December 15, 2002. The adoption
of this standard had no effect on the Company's financial position, results of
operations or cash flows.
26
In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not expect
adoption of FIN 46 to have a material impact on our financial position, results
of operations or cash flows.
In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 requires that certain financial instruments that are settled in
cash, including certain types of mandatorily redeemable securities, be
classified as liabilities rather than as equity or temporary equity. Statement
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period after June 15, 2003. Management does not expect the adoption of Statement
150 to have a material effect on the Company's financial position, results of
operations or cash flows.
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, 2003, approximately 80.6% 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, 2003, the average rate
of interest of such variable rates was 4.46%. 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,
2003, which averaged approximately $50.7 million, an increase of 2% in the
average rate of interest would result in an increase in fiscal 2003 interest
expense and net loss of approximately $1.0 million. Conversely, a decrease in
the average rate of interest would result in decreased interest expense and a
decrease in net loss and improved 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 or information statement for the 2004 Annual Meeting of Shareholders which
appears therein under the captions "Item 1: Election of Directors" and
"Information Concerning Directors."
27
Item 11. Executive Compensation
There is incorporated in this Item 11 by reference that portion of the
Company's definitive proxy or information statement for the 2004 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 2004 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, 2003 the Company purchased
approximately $10.9 million, or 15.6% 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 or information statement for the 2004 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.
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.
(b) Current Reports on Form 8-K--January 12, 2004. Item 12, Travis Boats &
Motors reports Second and Third Quarter Fiscal 2003 and Fiscal Year 2003 Results
and Updates on Key Initiatives.
(c) Exhibits - The following Exhibits are incorporated by reference to the
filing or are included following the Index to Exhibits.
28
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.(7)
4.2--A form of the Warrant to Purchase Series A Preferred Stock of Travis Boats
& Motors, Inc.(7)
4.3--A copy of the Travis Boats & Motors, Inc. Amended and Restated Statement of
Designations of 6% Series A Cumulative Convertible Preferred Stock dated
April 8, 2002.(7)
10.1--Loan and Security Agreement dated November __, 2003, by and among Travis
Boats & Motors, Inc., its subsidiaries and Kennedy Funding, Inc., as agent
for the lenders named therein (to be filed by amendment).
10.2--Promissory Note dated November 10, 2003, executed by Travis Boats &
Motors, Inc. and its subsidiaries, payable to Kennedy Funding, Inc. and
Angloamerican Servicing, LLC (to be filed by amendment).
10.3--Deed of Trust, Assignment of Rents, Security Agreement and Financing
Statement dated November 10, 2003, from Travis Boats & Motors, Inc. to
Ronald Dold, trustee for Kennedy Funding, Inc., as agent (to be filed by
amendment).
10.4--Subordination Agreement dated December __, 2003, between Transamerica
Commercial Finance Corporation, as agent, and Kennedy Funding, Inc. and
Anglo Financial Servicing, LLC (to be filed by amendment).
10.5--Subordination Agreement dated December __, 2003, between Transamerica
Commercial Finance Corporation, as agent, and Kennedy Funding, Inc. and
Anglo Financial Servicing, LLC (to be filed by amendment).
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)
10.17(b)--Mortgage With Power of Sale (Realty) dated September 20, 1995, from
TBC Arkansas, Inc. to Red River Marine, Inc. #2.(1)
10.20--Travis Boats and Motors, Inc. 1995 Incentive Plan.(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)
10.34--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.(2)
29
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.(2)
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.(2)
10.40--Employment Agreement dated November 16, 1999 between TBC Management,
Ltd. and Mark T. Walton.(3)
10.41--Employment Agreement dated November 16, 1999 between TBC Management,
Ltd. and Michael B. Perrine.(3)
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.(8)
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.(8)
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.(8)
10.51--Letter, dated December 29, 2000, to TBC Management, Inc. from
Transamerica Commercial Finance Corporation.(8)
10.52--TBC Management Ltd. Part I Amendment to Employment Agreement with Mark
T. Walton.(4)
10.54--TBC Management Ltd. Part I Amendment to Employment Agreement with
Michael B. Perrine.(4)
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.
10.62--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.
10.66--Travis Boats & Motors, Inc. Subordinated Note Purchase Agreement between
Travis Boats & Motors, Inc. and Shareholder Purchasers, dated as of
December 14, 2001.(4)
10.67--Form of Convertible Subordinated Promissory Note (Travis Boats & Motors,
Inc. to Shareholder Purchaser), dated as of December 14, 2001.(4)
10.68--A copy of the Preferred Stock and Warrant Purchase Agreement, by and
between Travis Boats & Motors, Inc., and TMRC, L.L.P., dated March 13,
2002.(7)
30
10.69--A copy of the 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.(7)
10.70--A copy of the TBC Management, Ltd. Amendment No. 2 to Employment
Agreement with Mark T. Walton, dated March 13, 2002.(7)
10.71--A copy of the TBC Management, Ltd. Amendment No. 2 to Employment
Agreement with Michael B. Perrine, dated March 13, 2002.(7)
10.73--A copy of the 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.(7)
10.74--A copy of the 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.(7)
10.75--A copy of the 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.(7)
10.76--A copy of the 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.(7)
10.77--Term Sheet, dated January 7, 2003, by and between Travis Boats & Motors,
Inc., and TMRC, L.L.P.(6)
10.78--Loan and Security Agreement, dated as of January 7, 2003, by and between
Travis Boats & Motors, Inc., and TMRC, L.L.P.(6)
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").(6)
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.(6)
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.(6)
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.(6)
10.83--Option Agreement dated January 7, 2003, by and between Mark T. Walton and
TMRC, L.L.P.(6)
10.84--Option Agreement dated January 7, 2003, by and between Robert C. Siddons
and TMRC, L.L.P.(6)
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.(6)
10.86--StockOption Cancellation Agreement dated January 7, 2003, by and between
Travis Boats & Motors, Inc., and Michael B. Perrine.(6)
10.87--Stock Option Cancellation Agreement dated January 7, 2003, by and between
Travis Boats & Motors, Inc., and Mark T. Walton.(6)
10.88--Stock Option Cancellation Agreement dated January 7, 2003, by and between
Travis Boats & Motors, Inc., and Richard Birnbaum.(6)
10.89--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.(6)
10.90--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.(6)
11.1--Travis Boats & Motors, Inc., Earnings Press Release dated December 31,
2002.(6)
21--List of Subsidiaries of Registrant.(3)
23--Consent of Independent Auditors (filed herewith).
31.1--Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2--Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1--Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 (filed herewith).
32.2--Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 (filed herewith).
(d) Financial Statement Schedules. See Item 15(a)(2) above.
(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
December 29, 1997 (File No. 000-20757).
(3) 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).
(4) 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).
31
(5) Incorporated by reference to the Company's Periodic Report on Form 8-K
filed with the Commission on March 13, 2002.
(6) Incorporated by reference to the Company's Periodic Report on Form 8-K
filed with the Commission on January 15, 2003.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K filed
with the Commission on January 21, 2003 (File No. 000-20757).
(8) Portions of this exhibit have been omitted and are subject to an
application for confidential treatment filed separately with the
Commission.
32
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended September 30, 2003, 2002 and 2001
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, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2003. 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, 2003 and 2002 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2003, 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. As more fully described
in Note 1, the Company has incurred recurring losses and its current agreements
for floor plan and revolving lines of credit have matured. 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.
As discussed in Note 4 to the financial statements, on October 1, 2001, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, to change its method of accounting for goodwill and
other intangible assets.
/s/ Ernst & Young LLP
Austin, Texas
November 21, 2003, except for Note 13 as to which the date is January 12, 2004
F-2
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
September 30,
2003 2002
--------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 3,414 $ 4,253
Accounts receivable, net of allowance for doubtful
accounts of $2,100 in 2003 and $2,058 in 2002 5,655 9,681
Prepaid expenses 914 1,009
Income taxes recoverable and deferred tax asset --- 611
Inventories 30,970 56,957
--------------- -------------
Total current assets 40,953 72,511
Property and equipment:
Land 5,124 5,982
Buildings and improvements 13,611 15,899
Furniture, fixtures and equipment 9,134 9,327
--------------- -------------
27,869 31,208
Less accumulated depreciation (10,634) (9,820)
--------------- -------------
17,235 21,388
Noncompete agreements, net of accumulated amortization of 731 1,149
$2,479 in 2003 and 2,061 in 2002
Other assets 203 384
--------------- -------------
Total assets $59,122 $95,432
=============== =============
See accompanying notes.
F-3
September 30,
2003 2002
------------- -------------
Liabilities
Current liabilities:
Accounts payable $ 2,258 $ 4,122
Accrued liabilities 2,001 1,439
Current portion of deferred gain on sale of real property 87 ---
Floor plan and revolving lines of credit payable 28,658 50,949
Current portion of notes payable and other short term obligations 4,723 1,025
Notes payable classified as short term obligations --- 6,436
------------- -------------
Total current liabilities 37,727 63,971
Deferred gain on sale of real property, net of current portion 963 ---
Notes payable, less current portion 1,591 3,225
Convertible notes 1,300 1,300
Stockholders' equity:
Series A Preferred stock, $100 par value, 1,000,000 shares 8,000 8,000
authorized, 80,000 shares issued and outstanding at September
30, 2003 and 2002, respectively
Common stock, $.01 par value, 50,000,000 shares authorized, 4,299,727 43 43
and 4,329,727 shares issued and outstanding at September 30, 2003 and
2002, respectively
Paid-in capital 15,094 15,109
Retained earnings/(accumulated deficit) (5,596) 3,784
------------- -------------
Total stockholders' equity 17,541 26,936
------------- -------------
Total liabilities and stockholders' equity $59,122 $95,432
============= =============
See accompanying notes.
F-4
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except share data)
Year ended September 30,
2003 2002 2001
------------ ------------ ------------
Net sales................................................................ $140,715 $176,523 $198,539
Cost of sales............................................................ 113,059 139,451 152,160
------------ ------------ ------------
Gross profit............................................................. 27,656 37,072 46,379
Selling, general and administrative expenses............................. 33,469 38,984 41,813
Depreciation and amortization............................................ 2,441 2,474 2,906
------------ ------------ ------------
35,910 41,458 44,719
Operating income/(loss).................................................. (8,254) (4,386) 1,660
Interest expense......................................................... (3,281) (4,018) (6,533)
Other income/(expense)................................................... 103 (167) 43
------------ ------------ ------------
Loss before income taxes and cumulative effect of
accounting change.................................................. (11,432) (8,571) (4,830)
Income tax (expense)/benefit............................................. 2,533 (1,693) 1,549
------------ ------------ ------------
Loss before cumulative effect of accounting change....................... (8,899) (10,264) (3,281)
Cumulative effect of accounting change, net of taxes of $2,281........... --- (6,528) ---
------------ ------------ ------------
Net loss............................................................ $(8,899) $(16,792) $(3,281)
============ ============ ============
Preferred stock dividends................................................ (480) (187) ---
------------ ------------ ------------
Net loss attributable to common shareholders........................ $(9,379) $(16,979) $(3,281)
============ ============ ============
Basic/Diluted loss per share:
Loss before cumulative effect of accounting change
and preferred stock dividends................................... $(2.05) $(2.36) $(.75)
Cumulative effect of accounting change, net of taxes................ --- (1.50) ---
Preferred stock dividends........................................... (.12) (.05) ---
------------ ------------ ------------
Net loss attributable to common shareholders........................ $(2.17) $(3.91) $(.75)
============ ============ ============
See accompanying notes.
F-5
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
Retained
Common Preferred Paid-in Earnings
Shares Amount Shares Amount Capital (deficit) Total
------------ ---------- -------------- ----------- --------- ------------ ----------
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
------------ ---------- -------------- ----------- --------- ------------ ----------
Repurchase and cancellation of
common stock (30) ----- ----- ----- (15) ----- (15)
Preferred stock dividends ----- ----- ----- ----- ----- (480) (480)
Net loss ----- ----- ----- ----- ----- (8,899) (8,899)
------------ ---------- -------------- ----------- --------- ------------ ----------
Balance at September 30, 2003 4,300 $ 43 80 $ 8,000 $ 15,094 $ (5,596) $17,541
============ ========== ============== =========== ========= ============ ==========
See accompanying notes.
F-6
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year Ended September 30,
2003 2002 2001
------------ ---------- ------------
OPERATING ACTIVITIES
Net loss $(8,899) $(16,792) $(3,281)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 2,011 2,016 2,018
Amortization 430 458 888
Disposal of assets from closed store locations 294 --- ---
Cumulative effect of accounting change, net --- 6,528 ---
Deferred income taxes 401 595 (320)
Changes in operating assets and liabilities:
Accounts receivable 4,027 1,670 265
Prepaid expenses 95 (230) 144
Inventories 25,986 8,208 12,915
Other assets 182 (64) (74)
Accounts payable (1,865) (1,753) 1,516
Accrued liabilities 562 236 (623)
Income taxes recoverable/income tax payable 210 2,995 43
--------- ------------ -------------
Net cash provided by operating activities 23,434 3,867 13,491
INVESTING ACTIVITIES
Purchase of property and equipment (480) (1,063) (1,495)
Proceeds from the sale of property and equipment 3,365 --- ---
--------- ------------ -------------
Net cash provided by/ (used in) investing activities 2,885 (1,063) (1,495)
FINANCING ACTIVITIES
Net increase (decrease) in notes payable and other short-term obligations (26,663) (8,818) (13,457)
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 payments for repurchase of common stock (15) (56) (122)
Preferred stock dividends (480) (187) ---
--------------------------------------
Net cash provided by (used in) financing activities (27,158) 61 (13,579)
Change in cash and cash equivalents (839) 2,865 (1,583)
Cash and cash equivalents, beginning of year 4,253 1,388 2,971
--------------------------------------
Cash and cash equivalents, end of year $3,414 $4,253 $1,388
======================================
See accompanying notes.
F-7
Travis Boats & Motors, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
Controlling Shareholder
As of January 7, 2003, TMRC, LLP, ("Tracker"), pursuant to certain
agreements for assistance in financing and other matters (the "Agreements") has
assumed effective control of the Company. Tracker and affiliated entities have
operations in marine and outdoor lifestyle retail and manufacturing. Tracker is
the manufacturer of various pleasure boatlines including: Tracker, Mako, Nitro,
ProCraft, Fisher and numerous other popular models.
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 57%
or 4,611,119 shares on a fully-diluted, as-converted basis. Tracker also 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.
In fiscal 2003 we purchased approximately $10.9 million or 15.6% of our
inventory from Tracker.
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
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.
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.
F-8
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 and Allowance for Doubtful Accounts
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 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 on 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 Company does not require or obtain collateral on its
accounts receivable.
F-9
The accounts receivable balances consisted of the following (in thousands):
September 30,
2003 2002
-----------------------------
Trade receivables $ 3,119 $ 4,712
Amounts due from manufacturers/vendors 4,065 6,377
Other receivables 571 650
Allowance for doubtful accounts (2,100) (2,058)
-----------------------------
$5,655 $9,681
=============================
Activity in the Company's allowance for doubtful accounts is as follows (in
thousands):
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
-------------
Additions charged to costs and expenses 1,301
Write-offs of uncollectible accounts (1,259)
-------------
Balance at September 30, 2003 $2,100
=============
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 inventory exceeds its fair value,
such inventory is written down to its fair value. The Company utilizes
historical experience and current sales trends as the basis for its 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.
Additional 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.
F-10
Inventories consisted of the following (in thousands):
September 30,
2003 2002
------------- ---------------
New boats, motors and trailers $23,227 $47,120
Used boats, motors and trailers 2,892 5,071
Parts, accessories and other 5,405 6,179
Valuation allowance (554) (1,413)
------------- ---------------
$30,970 $56,957
============= ===============
Activity in the Company's inventory valuation allowance is as follows (in
thousands):
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
-------------
Additions charged to costs and expenses 189
Reduction of reserve due to inventory sold (1,048)
-------------
Balance at September 30, 2003 $554
=============
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation are
determined using the straight-line method. The Company uses estimated useful
lives of 5 - 20 years for buildings and improvements and 5 - 10 years for
furniture, fixtures and equipment.
In September 2003, the Company consummated the sale and concurrent
leaseback ("sale/leasebacks") of the land and buildings of two of its store
locations. The properties were sold at a collective sales price of approximately
$3.3 million and leased back by the Company pursuant to long term operating
leases. The gain of approximately $1.1 million resulting from the sale of the
properties has been classified as a Deferred Gain and will be amortized ratably
over the lease period which is approximately 10 years.
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 has been recorded for these deferred tax assets since that
time.
F-11
Impairment of Long-lived Assets
Long-lived assets consist primarily of property and equipment and
intangible assets. Property and equipment and other intangible assets are
carried on the Company's financial statements based on their cost less
accumulated depreciation or amortization. The Company evaluates property and
equipment and other intangible assets held and used by the Company for
impairment whenever events or changes in circumstances indicate that their net
book value may not be recoverable. When such factors and circumstances exist,
the Company compares the projected undiscounted future cash flows associated
with the future use and disposal of the related asset or group of assets to
their respective carrying amounts. Impairment, if any, is measured as the excess
of the carrying amount over the fair value, based on market value when
available, or discounted expected cash flows of those assets and is recorded in
the period in which the determination is made.
Goodwill and Identifiable 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)
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.
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 2003, 2002 and 2001 fiscal years this included
outboard motors purchased from American Suzuki Motor Corporation and Brunswick
Corporation.
Approximately 25%, 36% and 42% of the Company's net purchases in fiscal
2003, 2002 and 2001, respectively, were manufactured by boat suppliers owned by
Genmar Holdings.
Approximately 16% of the Company's net purchases in fiscal 2003 were from
Tracker. (See Note 1 - Basis of Presentation)
Advertising Costs
Advertising costs are expensed as incurred and were approximately
$1,494,000, 1,435,000 and $2,295,000 during the fiscal years ended September 30,
2003, 2002 and 2001, respectively.
Stock Based Compensation
The Company accounts for its employee stock-based compensation using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
The Company makes disclosures regarding employee stock-based compensation using
the fair value method in accordance with Statement of Financial Accounting
Standards ("Statement") 123, Accounting for Stock-Based Compensation. The
Company has calculated the fair value of options granted in these periods using
the Black-Scholes option-pricing model and has determined the pro forma impact
on net loss.
F-12
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)
Year Ended September 30,
2003 2002 2001
--------------------------------------
Net loss attributable to common shareholders as
Reported (000's) $ (9,379) $ (16,979) $ (3,281)
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
expense determined under the fair value
methods for all awards, net of related tax effects (158) (315) $ (179)
--------------------------------------
Proforma net loss attributable to common shareholders $ (9,537) $ (17,294) $ (3,460)
--------------------------------------
Basic and Diluted Loss Per Share
Reported net loss per share attributable to common
shareholders $ (2.17) $ (3.91) $ (.75)
Proforma net loss per share attributable to common
shareholders $ (2.21) $ (3.98) $ (.79)
The compensation expense associated with the fair value of the options
calculated in 2003, 2002 and 2001 is not necessarily representative of the
potential effects on reported net income/(loss) in future years.
Reclassifications
Certain amounts in the 2002 and 2001 financial statements have been
reclassified to conform with the classifications in the 2003 financial
statements with no effect on previously reported net loss or stockholders'
equity.
New Accounting Standards
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. There was no material impact from the adoption of this
Statement on January 1, 2003.
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
EITF 00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF 00-21 will apply to revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. Management does not expect
the adoption of EITF 00-21 to have a material impact on the Company's financial
position, results of operations or cash flows.
In December 2002, the FASB issued Statement 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. Statement 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. Statement 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, Statement 148 requires disclosure of the
pro forma effect in interim financial statements. The Company adopted the annual
disclosure requirements of Statement 148, which are effective for fiscal years
F-13
ending after December 15, 2002 and elected to continue to account for employee
stock options under APB No. 25. The interim disclosure requirements are
effective for interim periods commencing after December 15, 2002. The adoption
of this standard had no effect on the Company's financial position, results of
operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not expect
adoption of FIN 46 to have a material impact on our financial position, results
of operations or cash flows.
In May 2003, the FASB issued Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
Statement 150 requires that certain financial instruments that are settled in
cash, including certain types of mandatorily redeemable securities, be
classified as liabilities rather than as equity or temporary equity. Statement
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period after June 15, 2003. Management does not expect the adoption of Statement
150 to have a material effect on the Company's financial position, results of
operations or cash flows.
3. Loss Per Share
Year ended September 30,
2003 2002 2001
--------------------------------------
(in thousands, except per share data)
Numerator:
Net loss before cumulative effect of accounting
change and preferred stock dividends............................. $ (8,899) $ (10,264) $ (3,281)
Cumulative effect of accounting change, net of tax................. -- (6,528) --
Preferred stock dividends.......................................... (480) (187) --
------------ ------------- -------------
Net loss attributable to common shareholders....................... $ (9,379) $ (16,979) $ (3,281)
============ ============= =============
Weighted average basic and diluted common shares
outstanding........................................................ 4,320 4,345 4,375
============ ============= =============
Basic and Diluted loss per share before cumulative effect
of accounting change and preferred stock dividends................. $ (2.05) $ (2.36) $ (.75)
Cumulative effect of accounting change, net of tax................. -- (1.50) --
Preferred stock dividends.......................................... (.12) (.05) --
------------ ------------- -------------
Basic and Diluted loss per share attributable to
common shareholders................................................ $ (2.17) $ (3.91) $ (.75)
============ ============= =============
F-14
Options to purchase the following shares of common stock were excluded from
the computation of diluted EPS for the years ended September 30, 2003, 2002 and
2001 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
- -------------------------- ------------------------ ------------------------ -------------------------------
2003 61,100 $ 6.47 6.59
2002 311,298 $ 5.14 6.09
2001 404,964 $ 6.80 6.67
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 fiscal year ended
September 30, 2003, the conversion price of approximately $2.46 per share of
both issuances exceeded the Company's average market price of its common stock.
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
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 the
Company's market capitalization relative to its 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 loss and loss per basic and diluted share for the fiscal years ended
September 30, 2003, 2002 and 2001 adjusted to exclude amortization expense of
goodwill (net of income taxes) is as follows (in thousands):
Fiscal Year Ended
September 30,
2003 2002 2001
----------- ---------- ----------
Net loss attributable to common shareholders............. $ (9,379) $ (16,979) $ (3,281)
Cumulative effect of accounting change, net.............. -- 6,528 --
Goodwill amortization, net............................... -- -- 259
----------- ----------- ----------
Adjusted net loss attributable to common shareholders.... $ (9,379) $ (10,451) $ (3,022)
=========== =========== ==========
Loss per share
Basic and Diluted:
Reported net loss attributable to common shareholders.... $ (2.17) $ (3.91) $ (0.75)
Cumulative effect of accounting change................ -- 1.50 --
Goodwill amortization, net of tax..................... -- -- 0.06
----------- ----------- ----------
Adjusted net loss attributable to common shareholders.... $ (2.17) $ (2.41) $ (0.69)
=========== =========== ==========
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 $3,210,000 while the associated
accumulated amortization balance at September 30, 2003, 2002 and 2001,
respectively, was $2,479,000, 2,061,000 and $1,603,000, respectively. The
F-15
aggregate amortization expense on non-compete agreements was $418,000, $464,000
and $410,000 for the fiscal years ended September 30, 2003, 2002 and 2001,
respectively. Estimated amortization expense for the next four fiscal years is
approximately $385,000 in 2004; $235,000 in 2005, $111,000 in 2006 and $0 in
2007.
5. Notes Payable and Other Short-Term Obligations
We finance substantially all of our inventory pursuant to borrowing
agreements 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 contain substantially similar terms and financial covenants. As of
September 30, 2003, the maximum aggregate borrowing availability was limited to
a maximum credit limit of $55.5 million at various prime based or LIBOR based
interest rates (varying from 4.12% to 4.75%) and approximately $28.7 million was
outstanding. The borrowing agreements are primarily for the purchase of
inventories and do not provide available amounts for general working capital
requirements. Based on the terms of the borrowing agreements we could request
for the lenders to advance funds to manufacturers for additional inventory
purchases up to the remaining available credit limit. As we purchase inventory,
we authorize our lenders to remit payment directly to the manufacturers pursuant
to our borrowing agreements. 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 fees for administrative monitoring and for any unused portions
of available credit. Also, 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
limited borrowings under these agreements. Discontinuance of these agreements
could result in an increase to interest expense. Acquisitions, the payment of
common stock dividends or repurchases of our common stock are also substantially
limited without prior consent.
The borrowing agreements, which originated in fiscal 2000, expired during
fiscal 2003 and were subsequently renewed through October 15, 2003 pending each
lender's review of our request for a 12 month renewal term. As of the date of
this Report on Form 10-K, we have been notified by each lender that our request
has been reviewed and subject to appropriate documentation our new expiration
date will be in October 2004. The renewed borrowing agreements are expected to
include loan agreements containing various loan covenants and borrowing
restrictions, including, but not limited to, minimum financial ratios governing
net worth, inventory turn, accounts receivable turn and percentage levels of
operating expenses. (See Note 13 - "Subsequent Events" in the consolidated
audited financial statements of the Company and notes thereto included elsewhere
in this Report on Form 10-K).
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, 2003 and 2002 was 4.4% and
4.9%, respectively.
F-16
Notes payable and other short-term obligations consist of the following (in
thousands, except per share amounts and payment amount/terms in Summary Data):
September 30,
2003 2002
----------- -----------
Short term 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 maturity at October 2003. $ 28,658 $ 50,949
Notes payable (see summary data below) 7,614 11,986
----------- -----------
Total notes payable and other short-term obligations 36,272 62,935
----------- -----------
Less revolving and floor plan credit agreements (28,658) (50,949)
Less real estate notes with balloon payments (4,412) (529)
Less real estate notes classified as current ---- (6,436)
Less current portion of notes payable (311) (496)
----------- -----------
(33,381) (58,410)
----------- -----------
Total notes payable, less current portion $ 2,891 $ 4,525
=========== ===========
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 12.0%,
due in monthly principal and interest installments ranging from $1,899
to $52,000, maturing beginning in December 2003. $ 6,029 $ 10,160
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. 207 304
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 April
2005. These notes are unsecured. 78 222
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 1,300
----------- -----------
Total notes payable $ 7,614 $ 11,986
=========== ===========
5. Notes Payable and Other Short-Term Obligations (continued)
At September 30, 2003 and 2002, approximately 80.6% and 89.6% 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 2003, 2002 and 2001.
F-17
Aggregate annual maturities required on notes payable at September 30, 2003
are as follows (in thousands):
Year Ending September 30
- ---------------------------------------
2004 $4,723 (1)
2005 1,579
2006 686
2007 419
2008 80
Thereafter 127
-------------------
$7,614
===================
(1) Includes a $3.7 million real estate loan with a maturity of December 31,
2003, that subsequent to September 30, 2003 was refinanced on a 3 year
promissory note with another lender. (see Note 13 - "Subsequent Events")
6. Fee on Repayment of Subordinated Debt
The Company recorded an expense of $206,000, on the June 10, 2002 repayment
of the $3.0 million convertible subordinated promissory note originally issued
on December 14, 2001 (see Note 9). This expense 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.
In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). The new statement provides new guidance for debt extinguishment
transactions that are part of an entity's recurring operations. SFAS 145 is
effective for fiscal years beginning after May 15, 2002. As a result, the
Company reclassified the debt extinguishment transactions from extraordinary
items. These costs are now included within other income/expense in the statement
of operations with the tax benefit adjusted to reflect the reclassification.
7. Leases
The Company leases various retail facilities, dock space, vehicles, and
computer software under third party operating leases. Rent expense was
approximately $3,241,000 in 2003, $3,441,000 in 2002 and $3,841,000 in 2001.
Future minimum payments under non-cancelable operating leases at September
30, 2003 are as follows for each of the years ending September 30 (in
thousands):
Year Ending September 30
-------------------------------
2004 $2,781
2005 2,262
2006 1,835
2007 1,290
2008 815
Thereafter 2,148
Generally, the leases for facilities provide for renewals for various
periods at stipulated rates.
F-18
8. Income Taxes
Tax year ended December 31,
2003 2002 2001
--------------------------------------
(in thousands)
Current expense/(benefit)
Federal............................................................ $ (0,000) $ (1,087) $ (1,100)
State.............................................................. -- (96) (129)
------------ ------------- -------------
Total current expense/(benefit)........................................ $ (0,000) $ (1,183) $ (1,229)
============ ============= =============
Deferred expense/(benefit)
Federal............................................................ $ (0.00) $ 547 $ (320)
State.............................................................. -- 48 --
------------ ------------- -------------
Total provision/(benefit) for income taxes............................. $ (0.00) $ (588) $ (1,549)
============ ============= =============
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,
2003 2002 2001
--------------------------------------
(in thousands)
Federal statutory rate.............................................. $ (0,000) $ (5,909) $ (1,642)
State taxes, net of federal benefit................................. -- (454) (129)
Other............................................................... -- 1,176 222
Valuation allowance................................................. -- 4,599 ---
------------ ------------- -------------
$ (0,000) $ (588) $ (1,549)
============ ============= =============
F-19
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,
2003 2002
-----------------------------
Deferred tax assets:
Book over tax depreciation/amortization $ 000 $3,582
Reserve and allowances 000 1,017
-----------------------------
Net deferred tax assets 000 4,599
Valuation allowance for net deferred tax assets (000) (4,599)
-----------------------------
Net deferred taxes $ --- $ ---
=============================
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 $___ and $4.6 million during the fiscal years ended September 30,
2003 and 2002, respectively.
Income taxes received were approximately ($ 000), ($1,500,000) and
($1,200,000)in the fiscal years ended September 30, 2003, 2002, and 2001,
respectively.
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.
F-20
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.
Total option activity for the years ended September 30, 2003, 2002 and 2001:
Number of Shares Range of Exercise Prices Wtd Avg Exercise Price
-------------------- -------------------------- ---------------------------
Outstanding at September 30, 2000 391,131 $3.8125 - $22.50 $ 9.20
--------------------
Granted 82,333 $2.70 - $4.00 $ 3.07
Exercised --- --- ---
Forfeited/Cancelled (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/Cancelled (133,666) $2.70 - $20.00 $ 9.38
Outstanding at September 30, 2002 311,298 $2.45 - $22.375 $ 5.14
--------------------
Granted --- --- ---
Exercised --- --- ---
Forfeited/Cancelled (250,198) $2.50 - $15.00 $ 4.82
--------------------
Outstanding at September 30, 2003 61,100 $2.45 - $22.375 $ 6.47
====================
--------------------
Exercisable at September 30, 2003 47,500 $2.45 - $22.375 $ 7.27
====================
Options available for grant at
September 30, 2003 371,873
===================
Common stock reserved for issuance
At September 30, 2003 432,973
===================
The weighted-average remaining contractual life of options at September 30,
2003 and 2002 is approximately 6.59 years and 6.09 years, respectively.
F-21
Options outstanding at September 30, 2003, 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 22,000 $3.17 7.93 10,400 $3.60
$5.75 - $5.75 21,500 $5.75 6.55 21,500 $5.75
$8.875 - $10.00 13,600 $9.08 5.12 11,600 $9.12
$15.00 - $22.375 4,000 $19.61 4.47 4,000 $19.61
- --------------------- --------------- ----------------- ----------------- ----------------- -----------------
$2.45 - $22.375 61,100 $6.47 6.59 47,500 $7.27
The assumptions used by the Company to determine the pro forma information
regarding net loss and loss per share required by Statement No. 123 are as
follows using the Black-Scholes model:
Year Ended September 30,
2003 2002 2001
--------------------------------------------
--------------------------------------------
Risk-free interest rate 3.00% 3.00% 3.00%
Dividend yield 0% 0% 0%
Expected life 5 years 5 years 5 years
Volatility 94.7% 67.7% 65.2%
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,
2003 2002 2001
---------------------------------------
---------------------------------------
Shares Repurchased (000's) 30 29 40
Total Purchase Price (000's) $15 $56 $122
Average Price per Share $0.50 $1.90 $3.07
F-22
11. Commitments and 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.
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 the Company received payments from OMC
that were are deemed to be preferential payments under applicable bankruptcy
law, and demands the repayment thereof.
The Company, based upon review of the case and discussions with its legal
counsel, believes the lawsuit to be similar to numerous filed on former OMC
dealers on behalf of OMC and that it is without merit. There is no guarantee
that our Company will prevail in defense of this or other lawsuits. Lawsuits
resulting in a substantial unfavorable verdict or resolution for the Company
could have a material adverse impact on the results of operations.
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, 2003, 2002 and 2001 and plan expenses
during the same period were not significant.
13. Subsequent Events
Effective November 10, 2003, the Company entered into a new real estate
loan in the amount of $5.3 million. The loan has a three year maturity. Interest
payments are due monthly based upon interest at 12%, and all principal is
repayable at maturity. Proceeds of the loan were used to refinance other real
estate indebtedness maturing December 31, 2003 in the approximate amount of $3.7
million and the remainder will be used for transaction expenses and general
working capital.
Effective December 19, 2003, the Company consummated the sale of the land
and building of its former store location in Little Rock, Arkansas for $375,000.
The proceeds repaid the existing mortgage on the premises in the amount of
approximately $170,000 and the remainder will be used for transaction expenses
and general working capital.
After giving effect to the aforementioned transactions; the proforma
aggregate annual maturities required on notes payable at September 30, 2003
would be as follows (in thousands):
Year Ending September 30
- ---------------------------------------
2004 $ 984
2005 1,551
2006 656
2007 5,687
2008 44
Thereafter 108
-------------------
$9,030
===================
Effective by correspondence dated January 6, 2004 and January 9, 2004 the
Company received notice from Transamerica Commercial Finance Corporation
("TCFC") and GE Commercial Distribution Finance Corporation ("GE") (formerly
known as Deutsche Financial Services Corporation ("DFS") that the maturity of
its borrowing agreements had been renewed from October 30, 2003 through October
31, 2004 subject to appropriate documentation. Pursuant to the correspondence,
the borrowing agreements are in the initial combined amount of $60.0 million;
F-23
with a seasonal reduction to $42.5 million in July 2004. Documentation includes
loan agreements containing various loan covenants and borrowing restrictions,
including, but not limited to, minimum financial ratios governing net worth,
inventory turn, accounts receivable turn and percentage levels of operating
expenses.
The Company anticipates filing the amended documents of record upon the
execution of the amended definitive agreements.
F-24
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 13, 2004 By: /s/ MARK T. WALTON
-----------------------------------
Mark T. Walton
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, 2003, 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/ RICHARD S. BIRNBAUM Chairman of the Board January 13, 2004
Richard S. Birnbaum
/s/ MARK T. WALTON President (Principal Executive Officer) January 13, 2004
Mark T. Walton
/S/ MICHAEL B. PERRINE Chief Financial Officer, Secretary and January 13, 2004
Michael B. Perrine Treasurer (Principal Financial and
Accounting Officer)
/S/ KENNETH BURROUGHS Director January 13, 2004
Kenneth Burroughs
/s/ JAMES P. KARIDES, CPA Director January 13, 2004
James P. Karides, CPA
/S/ ROBERT L. RING Director January 13, 2004
Robert L. Ring