SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD OF ________ TO ________.
Commission File Number 0-20757
TRAVIS BOATS & MOTORS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2024798
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
12116 Jekel Circle, Suite 102, Austin, Texas 78727
(Address of principal executive offices)
Registrant's telephone number, including area code: (512) 347-8787
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Common Stock $.01 par value: 4,299,727 shares as of May 14, 2004.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets:
March 31, 2004 (unaudited) and September 30, 2003.......................1
Consolidated Statements of Operations:
Three and Six Months Ended March 31, 2004 and 2003 (unaudited)..........2
Consolidated Statements of Cash Flows:
Six Months Ended March 31, 2004 and 2003 (unaudited)....................3
Notes to Unaudited Consolidated Financial Statements....................4
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations....................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................16
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities...................................................17
Item 6. Exhibits and Reports on Form 8-K..................................................17
Signatures................................................................................18
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Balance Sheets
( in thousands, except share data )
March 31, September 30,
2004 2003
------------- ----------------
(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 3,144 $ 3,414
Accounts receivable, net 8,001 5,655
Inventories, net 43,535 30,970
Prepaid expenses and other 807 914
------------- ----------------
Total current assets 55,487 40,953
Property and equipment:
Land 4,924 5,124
Buildings and improvements 13,510 13,611
Furniture, fixtures and equipment 9,123 9,134
------------- ----------------
27,557 27,869
Less accumulated depreciation (11,464) (10,634)
------------- ----------------
16,093 17,235
Intangibles and other assets:
Non-compete agreements, net 538 731
Other assets 570 203
------------- ----------------
Total assets $ 72,688 $ 59,122
============= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,108 $ 2,258
Accrued liabilities 2,103 2,001
Deposit on sale/leaseback of real property 1,500 ---
Current portion of deferred gain on sale of real property 107 87
Floor plan and revolving line of credit 44,585 28,658
Current portion of notes payable, convertible subordinated
notes and other short term obligations 2,464 4,723
------------- ----------------
Total current liabilities 54,867 37,727
Deferred gain on sale of real property, net of current portion 910 963
Notes payable, less current portion 5,646 1,591
Convertible subordinated notes, less current portion --- 1,300
Stockholders' equity
Serial Preferred stock, $100 par value,
1,000,000 shares authorized, 80,000 shares outstanding 8,000 8,000
Common Stock, $.01 par value, 50,000,000 authorized,
4,299,727 issued and outstanding 43 43
Paid-in capital 15,094 15,094
Retained deficit (11,872) (5,596)
------------- ----------------
Total stockholders' equity 11,265 17,541
------------- ----------------
Total liabilities and stockholders' equity $ 72,688 $ 59, 122
============= ================
See notes to unaudited consolidated financial statements
1
Travis Boats & Motors, Inc. and Subsidiaries - Consolidated Statements of Operations
(in thousands, except share and per share data)
Three Months ended Six Months ended
March 31, March 31,
2004 2003 2004 2003
--------- --------- --------- ---------
(unaudited) (unaudited)
Net sales....................................... $32,131 $38,132 $45,407 $56,019
Costs of goods sold............................. 25,486 30,543 36,111 44,913
--------- --------- --------- ---------
Gross profit.................................... 6,645 7,589 9,296 11,106
Selling, general and administrative............. 6,946 8,497 12,404 15,978
Depreciation and amortization................... 532 608 1,069 1,265
--------- --------- --------- ---------
7,478 9,105 13,473 17,243
--------- --------- --------- ---------
Operating loss.................................. (833) (1,516) (4,177) (6,137)
Interest expense................................ (716) (931) (1,394) (1,743)
Other income.................................... 38 22 78 43
Impairment on sale/leaseback of real estate..... (543) -- (543) --
--------- --------- --------- ---------
Loss before income taxes........................ (2,054) (2,425) (6,036) (7,837)
Income tax benefit.............................. -- 704 -- 2,533
--------- --------- --------- ---------
Net loss........................................ (2,054) (1,721) (6,036) (5,304)
Preferred stock dividends....................... (120) (120) (240) (240)
--------- --------- --------- ---------
Net loss attributable to common shareholders.... $(2,174) $(1,841) (6,276) (5,544)
========= ========= ========= =========
Loss per share:
Basic and diluted loss per share before
preferred stock dividends.................. (0.48) (0.40) (1.40) (1.22)
Preferred stock dividends....................... (0.03) (0.03) (0.06) (0.06)
--------- --------- --------- ---------
Basic and diluted loss per share................ $ (0.51) $ (0.43) $ (1.46) $ (1.28)
========= ========= ========= =========
Weighted average Basic
and Dilutive common shares outstanding........ 4,299,727 4,329,727 4,299,727 4,329,727
See notes to unaudited consolidated financial statements
2
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Six months ended
March 31,
2004 2003
----------------------------------
(unaudited) (unaudited)
Operating activities:
Net Loss ($6,036) ($5,304)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation.............................................................. 870 999
Amortization.............................................................. 199 215
Impairment on sale/leaseback of real estate............................... 543 ---
Changes in operating assets and liabilities
Accounts receivable.................................................. (2,346) (1,803)
Prepaid expenses..................................................... 107 (235)
Inventories.......................................................... (12,565) (4,654)
Other assets......................................................... (563) 28
Accounts payable..................................................... 1,850 1,513
Accrued liabilities.................................................. 41 956
Deferred gain on sale of real property............................... (33) ---
Income tax recoverable............................................... --- (2,408)
-------------- ---------------
Net Cash used in operating activities........................................ (17,933) (10,693)
Investing Activities:
Purchase of property and equipment........................................ (395) (124)
Deposit on sale/leaseback of real estate.................................. 1,500 ---
Proceeds from sale of property and equipment.............................. 375 ---
-------------- ---------------
Net cash provided by/(used in) investing activities.......................... 1,480 (124)
Financing activities:
Net increase in floorplan; revolving and other short term
obligations............................................................... 15,981 9,451
Proceeds from real estate refinance note.................................. 5,300 ---
Payments on real estate notes............................................. (4,858) ---
Preferred stock dividends................................................. (240) (240)
-------------- ---------------
Net cash provided by financing activities.................................... 16,183 9,211
Change in cash and cash equivalents....................................... (270) (1,606)
Cash and cash equivalents, beginning of period............................ 3,414 4,253
-------------- ---------------
Cash and cash equivalents, end of period..................................... $ 3,144 $ 2,647
============== ===============
See notes to unaudited consolidated financial statements
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared from the records of Travis Boats & Motors, Inc. and subsidiaries
(collectively, the "Company") in accordance with generally accepted accounting
principals for interim financial information. In the opinion of management, such
financial statements include all adjustments (consisting of only recurring
accruals) necessary to present fairly the financial position at March 31, 2004,
and the interim results of operations and cash flows for the three and six month
periods ended March 31, 2004 and 2003. The consolidated balance sheet at
September 30, 2003, presented herein, has been derived from the audited
consolidated financial statements of the Company for the fiscal year then ended.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted for purposes of the condensed
consolidated interim financial statements. The consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including the notes thereto, for the fiscal year ended September 30,
2003 included in the Company's annual Report on Form 10-K/A filed with the
Securities and Exchange Commission on February 2, 2004. Accounting policies
followed by the Company are described in Note 2 to the audited consolidated
financial statements for the fiscal year ended September 30, 2003 included in
the Company's annual report on Form 10-K/A.
The results of operations for the three and six month periods ended March 31,
2004 are not necessarily indicative of the results to be expected for the full
fiscal year.
Controlling Shareholder
As of January 7, 2003, TMRC, LLP, ("Tracker"), a wholly owned subsidiary of
Tracker Marine, LLC, pursuant to certain agreements for assistance in financing
and other matters (the "Agreements"), 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 its ownership of 80,000 shares of the Company's Series A Preferred
Stock, and has not yet designated two additional representatives.
4
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.
The adoption of this Standard had no effect on the Company's financial position,
results of operations or cash flows.
NOTE 2 - LOSS PER SHARE
(in thousands, except share data)
Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
---------- --------- --------- ---------
NUMERATOR
Net loss before preferred stock dividends....... (2,054) (1,721) (6,036) (5,304)
Preferred stock dividends.............................. (120) (120) (240) (240)
Net loss attributable to common shareholders........... $ (2,174) $ (1,841) $ (6,276) $ (5,544)
Weighted average basic and diluted common shares
outstanding....................................... 4,299,727 4,329,727 4,299,727 4,329,727
Basic and diluted loss per share before preferred stock
dividends......................................... (.48) (.40) (1.40) (1.22)
Preferred stock dividends......................... (.03) (.03) (.06) (.06)
Basic and diluted loss per share attributable ---------------------- ---------------------
to common shareholders............................ $ (0.51) $ (0.43) $ (1.46) $ (1.28)
====================== =====================
The foregoing table does not include shares issuable upon the exercise of
outstanding stock options. At March 31, 2004, the Company had issued and
outstanding incentive stock options to certain employees totaling 59,600 shares
which had exercise prices equal to or exceeding the closing price of the
Company's common stock on such date. The 59,600 option shares have a weighted
average exercise price of $6.30 and a weighted average outstanding remaining
life of 6.3 years.
The table also excludes 528,584 shares of common stock subject to issuance
pursuant to $1.3 million in outstanding convertible subordinated notes (see Note
4) and 3,252,826 shares of common stock subject to issuance pursuant to 80,000
shares of Series A Preferred Stock. For the three and six months ended March 31,
2004 and 2003, the conversion price of approximately $2.46 per share of both
issuances exceeded the Company's average market price of its common stock.
5
NOTE 3 - STOCKHOLDERS' EQUITY
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 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. 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.
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)
Three months ended Six months ended
March 31, March 31,
2004 2003 2004 2003
-----------------------------------------------
Net loss attributable to common shareholders as
Reported $ (2,174) $ (1,841) $ (6,276) $ (5,544)
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 (29) (35) (58) (93)
methods for all awards, net of related tax effects
-----------------------------------------------
Proforma net loss attributable to common shareholders $ (2,203) $ (1,876) $ (6,334) $ (5,637)
-----------------------------------------------
Basic and Diluted Loss Per Share
Reported net loss per share attributable to common $ (.51) $ (.43) $ (1.46) $ (1.28)
shareholders
Proforma net loss per share attributable to common $ (.51) $ (.43) $ (1.47) $ (1.30)
Shareholders
The compensation expense associated with the fair value of the options
calculated in the quarter and six month periods ended March 31, 2004 and 2003 is
not necessarily representative of the potential effects on reported net
income/(loss) in future periods.
6
NOTE 4 - CONVERTIBLE SUBORDINATED NOTES AND NOTES PAYABLE
The Company entered into a real estate loan during November 2003 in the original
principal 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 was used for transaction expenses and general working
capital.
On February 6, 2004, the Company agreed to terms with its controlling
shareholder, Tracker, for a $500,000 line of credit. The terms of the line of
credit are set forth in a promissory note payable to Tracker on demand at any
time on or after May 5, 2004 (the "Note"). The Note provides that the Company,
at the discretion of the Operating Committee of its Board of Directors, could
request advances up to the aggregate amount of $500,000. Advances made pursuant
to the Note bear interest at a rate of 10% until the earlier of the date demand
is made by Tracker for repayment or January 5, 2005 at which time the rate will
increase to 18% on any unpaid principal and accrued, but unpaid, interest
amounts. The Note is generally unsecured, subject to Tracker retaining a right
of offset with respect to any cash, credits, rebates, deposits, accounts,
securities, and any other property of the Company in Tracker's possession,
custody or control.
As of the date this report on Form 10-Q, the Company has borrowed $340,000 under
the Note and has made payments to reduce the current outstanding balance to
$133,500.
NOTE 5 - SHORT TERM BORROWINGS
Inventory Borrowing Agreements
The Company finances substantially all of its inventory pursuant to borrowing
agreements (the "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). During the quarter ended March 31, 2004, TCFC was
acquired by GE. The Borrowing Agreements contain substantially similar terms and
financial covenants, however the Company's agreements with GE remain separate.
As of March 31, 2004, the maximum aggregate borrowing availability was limited
to a maximum seasonal credit limit of $60.0 million at various prime based or
LIBOR based interest rates (varying from 4.12% to 4.75%) of which approximately
$44.6 million was funded, and an additional $874,000 was allocated for inventory
orders in process. The Borrowing Agreements are primarily for the purchase of
inventories and, to a far lesser extent, provide available amounts for general
working capital requirements based upon levels of certain used inventory, parts
inventory and accounts receivable. As of March 31, 2004, the Company could
request advances for additional new inventories up to its $60 million credit
limit, but did not have additional material amounts that could be advanced
solely for general working capital uses.
7
NOTE 6 - SALE/LEASEBACKS
In March of 2004, the Company completed a sale/leaseback transaction of its
store location in San Antonio, Texas. The sales price included the Company
receiving a $1.5 million cash down payment and a short term promissory note of
$1.0 million. Accordingly, the transaction has been accounted for as a financing
transaction and the $1.5 million cash down payment received has been accounted
as a deposit liability. The transaction will be re-classified as a
sale/leaseback pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 98 upon the Company's receipt of the remaining $1.0 million amount
outstanding pursuant to the short term promissory note.
In April of 2004, the Company completed a sale/leaseback transaction of its
store location in Claremore, Oklahoma. The transaction has been accounted for as
a sale/leaseback pursuant to Statement of Financial Accounting Standards
("SFAS") No. 98. The property was sold at a sales price of approximately
$560,000 and leased back by the Company pursuant to an operating lease. The gain
of approximately $80,000 resulting from the sale of the property will be
classified as a Deferred Gain and will be amortized ratably over the lease
period which is approximately 5 years.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Some of the information in this Report on Form 10-Q contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. You should
read statements that contain these words carefully because they (1) discuss our
future expectations; (2) contain projections of our future results of operations
or of our future financial condition; or (3) state other "forward-looking"
information. We believe it is important to communicate our expectations to
people that may be interested. However, unexpected events may arise in the
future that we are not able to predict or control. The information that we
describe in this section, as well as any other cautionary language in this
Report on Form 10-Q, give examples of the types of uncertainties that may cause
our actual performance to differ materially from the expectations we describe in
our forward-looking statements and therefore result in a material adverse effect
on our business, operating results and financial condition. For a more
comprehensive discussion of these and the numerous other Risk Factors affecting
our business and operations see the Company's Report on Form 10-K/A filed for
the fiscal year ended September 30, 2003, and other documents filed of record
with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Overview
Travis Boats & Motors, Inc. Travis Boats & Motors, Inc. ("Travis Boats," the
"Company" or "we") is a 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).
8
The Company was incorporated as a Texas corporation in 1979. Since our founding
as a single retail store in Austin, Texas, we have grown both through
acquisitions and the opening of new "start-up" store locations. It was during
the 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 significant inventory stocking
requirements for multi-stores allowed us to maximize volume discounts and
introduce 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.
Based on sales trends from the cities and states where we operate store
locations, we 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 to often include
distinguishing features/branded models and accessories within the base Travis
Edition price. It is the Company's belief that these features/branded models and
accessories 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. 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. We also sell motors, trailers,
accessories and related equipment.
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, we are able to offer boat packages to customers with
different purchasing budgets and varying income levels.
The Company seeks to provide customers with 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.
Quarter Ended March 31, 2004. The Company reported a pre-tax loss of
approximately $2.1 million, on net sales of $32.1 million, for the three months
ended March 31, 2004 versus a pre-tax loss of approximately $2.4 million, on net
sales of $38.1 million for the same quarter of the prior fiscal year. Due to the
seasonal nature of our business, our sales have traditionally been significantly
lower in the quarter ending December 31 and increase following the conclusion of
our boat show season, which usually begins in January and continues through the
end of March. The decrease in net sales relative to the same quarter last year
was related to various factors including, but not limited to, significant
product and brand transition whereby the Company eliminated yacht sales and
began the introduction of new models of off-shore fishing boats to replace its
previously carried comparable product line. Significant initial stocking
requirements resulted in limited product assortment and availability of this new
product in the six months ended March 31, 2004. In addition, some of the
operating losses experienced during the quarter ended March 31, 2004 are
non-cash charges for impairment of real estate pursuant to a sale/leaseback
transaction. To substantially reduce or eliminate the operating losses, the
Company has implemented a number of key initiatives designed to ultimately
improve the Company's financial condition. These initiatives include, but are
not limited to, the consolidation of our vendor relationships to improve
inventory turns, assortments and product consistency in our stores. Management
is optimistic that the Company's recent efforts related to product and brand
transition, reductions in obsolete inventory, and improved supply chain will
have long-term positive impact on performance.
9
RESULTS OF OPERATIONS
Quarter Ended, March 31, 2004 Compared to the Quarter Ended, March 31, 2003 and
Six Months Ended March 31, 2004 Compared to the Six Months Ended March 31,2003.
Net Sales. Net sales in the second quarter of fiscal 2004 decreased to $32.1
million, compared to net sales of $38.1 for the second quarter of fiscal 2003.
For the six months ended March 31, 2004, net sales decreased to $45.4 million,
compared to $56.0 million during the same period of the prior fiscal year.
The decrease in net sales during the quarter and six months ended March 31,
2004 included approximately $1.8 million and $2.8 million, respectively, in
reduced sales as a result of the impact of fewer stores in operation (30 versus
34) and a decrease in comparable store sales. Comparable store sales decreased
by approximately 11% and 14 % (30 stores in base) for the quarter and six months
ended March 31, 2004, respectively. Management believes the decrease in
comparable store sales was related to various factors including, but not limited
to significant product and brand transition. This included the previously
announced decision to eliminate yacht sales, which reduced revenue by
approximately $1.5 million and $3.0 million for the quarter and six months ended
March 31, 2004, respectively. Additionally, during the fall of 2003, the Company
began the introduction of new models of off-shore fishing boats to replace its
previously carried comparable product line. The Company's significant initial
stocking requirements contributed to only a limited assortment and selection of
the new boats being received by the Company during the quarter and six months
ended March 31, 2004. The impact to net sales of yachts and off-shore fishing
boats from these and other related issues was a decrease of approximately $3.3
million and $7.0 million in sales for the quarter and six months ended March 31,
2004, respectively, versus the same periods of the prior fiscal year. Comparable
store sales excluding the impact of the sale of yachts and off-shore fishing
boats were flat for the quarter ended March 31, 2004.
Management believes that the impact of the significant product and brand
transition on net sales will diminish in the quarter ended June 30, 2004. As of
the date of this Report on Form 10-Q, the Company has received additional
stocking levels of the new product offerings and the Company expects to continue
to receive significant additional stocking levels of the new products in advance
of the summer sales season.
Gross Profit. Gross profit decreased by 12.4% to approximately $6.6 million in
the second quarter of fiscal 2004 from $7.6 million in the same quarter of
fiscal 2003. Gross profit, as a percent of net sales, increased to 20.7% from
19.9% during the same periods. For the six months ended March 31, 2004, gross
profit decreased 16.3% to $9.3 million from $11.1 million in the same period of
the prior year. Gross profit, as a percent of sales, increased to 20.5% from
19.8% during the same period.
The increase in gross profit as a percent of net sales was primarily related to
(i) increases in the sale of parts and accessories as a percent of net sales and
(ii) improved margins on the sales of our new and used boat, motor, and trailer
inventory. We believe that gross profit, as a percent of net sales, may continue
to grow during fiscal 2004 over comparable periods of fiscal 2003 because the
Company's gross profit in fiscal year 2003 was adversely impacted by Company's
aggressive sell-through of substantial amounts of aged and discontinued
inventories at reduced sales prices and margins. 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.
10
F&I Products. We offer our customers the ability to purchase extended service
contracts and insurance coverages, including credit life and accident/disability
coverages (collectively "F&I Products"). The extended service contracts provide
customers with coverage for mechanical engine breakdown for a period (usually 36
or 48 months) beginning after the stated warranty term of the original
manufacturer expires. The insurance coverages provide the customer with funds to
repay a portion or all of their boat loan in the event of death, disability or
other covered event.
Since we have business relationships with numerous financial lenders we
also offer to assist our customers in obtaining financing for their boat
purchase. If the customer purchases F&I Products or utilizes financing 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 sold.
Net sales of these products contributed approximately $975,000, or 14.7%,
and $1.3 million, or 13.9%, of total gross profit for the quarter and six months
ended March 31, 2004, respectively, as compared to $1.3 million, or 17.6%, and
$1.7 million, or 15.6%, of total gross profit for the same periods of the prior
fiscal year. Management believes that the decrease in F&I income is related to
the sale of fewer extended service contracts during the quarter ended March 31,
2004 as a result of certain original equipment manufacturers ("OEM") increasing
the coverage term of the standard OEM warranties as marketing incentives to
retail purchasers during the boat show season.
Net sales attributable to F&I Products are reported on a net basis,
therefore, all of such sales contribute directly to the Company's gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $6.9 million in the second quarter of
fiscal 2004 from $8.5 million for the second quarter of fiscal 2003. As a
percent of net sales, selling, general and administrative expenses decreased to
21.6% in the second quarter of fiscal 2004 from 22.3% for the second quarter of
fiscal 2003. For the six months ended March 31, 2004, selling, general and
administrative expenses were $12.4 million, or 27.3% as a percentage of net
sales, versus $16.0 million, or 28.5% as a percentage of net sales in the same
period of the prior fiscal year.
These reductions in expenses were generally related to operating fewer
store locations (30 vs 34) and the expense containment strategies adopted in
fiscal 2003 in conjunction with the business plan implemented by the Company 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. Although rent expenses declined in actual
dollars, this was somewhat offset by increased rents resulting from new leases
on three (3) stores pursuant to sale/leaseback transactions completed beginning
in September 2003 (see Depreciation and Amortization Expenses).
Depreciation and Amortization Expenses. Depreciation and amortization expenses
decreased to $532,000 in the second quarter of fiscal 2004 from $608,000 for the
second quarter of fiscal 2003. Depreciation and amortization expenses, as a
percentage of net sales, were 1.7% and 1.6% for the quarter ended March 31, 2004
and 2003, respectively. Depreciation and amortization expenses declined to
approximately $1.1 million for the six months ended March 31, 2004 from $1.3
million for the same period of the prior fiscal year.
11
The decrease in depreciation and amortization expenses, in actual dollars,
was primarily attributable to reductions in fixed assets (real estate) related
to the sale of three (3) stores pursuant to sale/leaseback transactions
effective beginning in September 2003 (see Selling, General and Administrative
Expenses ).
Interest Expense. Interest expense decreased to $716,000 in the second quarter
of fiscal 2004 from $931,000 in the second quarter of fiscal 2003. Interest
expense, as a percent of net sales, decreased to 2.2% from 2.4% of net sales in
the same periods.
The decreased interest expense 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. The Company has successfully reduced
inventory levels from improved supply chain management and as a result of the
sell-through of aged and discontinued inventories during fiscal 2003.
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
Impairment on Sale/Leaseback of Real Estate. We recorded a non-cash, impairment
charge of $543,000 during the quarter ended March 31, 2004. The impairment
charge was the result of the Company's completion of a sale/leaseback of its
store location in San Antonio, Texas. The sales price included $1.5 million cash
and a short term promissory note of $1.0 million. Accordingly, the transaction
has been accounted for as a financing transaction pending the buyer's payment of
the short term note at which time the transaction will be re-classified as a
sale/leaseback pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 98.
Income Taxes. 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, pursuant to SFAS No. 109, the Company has not
recognized any 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. Accordingly, the Company did not record an
income tax benefit for the three or six month periods ended March 31, 2004.
For the six months ended March 31, 2004, the Company reported a net loss
attributable to common shareholders of $6.3 million ($1.46 per basic and diluted
share) versus a net loss attributable to common shareholders of $5.5 million
($1.28 per basic and diluted share) for the same period of the prior fiscal
year.
The increase in the net loss attributable to common shareholders in the
quarter and the six months ended March 31, 2004 resulted from the impact of the
non-cash impairment charge of $543,000 and the Company not recognizing income
tax benefits pursuant to SFAS No. 109.
LIQUIDITY AND CAPITAL RESOURCES
Our short-term cash needs are primarily for working capital to support
operations, including inventory requirements, off-season liquidity and store
infrastructure. These short-term cash needs have historically been financed with
cash from operations and further supplemented by borrowings under our floor plan
and revolving credit lines (collectively the "Borrowing Agreements").
On March 31, 2004, we had approximately $3.1 million in cash, $8.0 million in
accounts receivable (primarily contracts in transit from boat sales,
manufacturer rebates receivable and other amounts due from manufacturers) and
$43.5 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 $6.2
million of accounts payable and accrued liabilities, $44.6 million outstanding
under our borrowing agreements and approximately $2.5 million in short-term
indebtedness including current maturities of notes payable of approximately
$824,000; plus $340,000 payable under a short term note to Tracker and
convertible subordinated promissory notes of $1.3 million.
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On March 31, 2004, we had working capital of approximately $620,000. Working
capital, as of that date, was negatively impacted by the net loss and the
aforementioned $2.5 million in current portion of short-term indebtedness.
Working capital also was reduced $1.5 million by a cash down payment on the
sale/leaseback of real estate. The cash down payment is accounted for as
liability until the transaction is finalized and accounted for as a
sale/leaseback pursuant to SFAS No. 98.
For the six months ended March 31, 2004, operating activities utilized cash
flows of $17.9 million due primarily to an increase of $12.6 million in
inventories. The Company historically builds inventory balances during the six
months ended March 31, in advance of the seasonal boat shows. The boat shows
generally begin during January and continue through March of each year.
Historically, inventory continues to increase through the March quarter based on
boat show volumes and seasonal sales increases. Inventories generally fall to a
seasonal low in the September quarter.
For the six months ended March 31, 2004, investing activities provided cash
flows of $1.5 million. This was primarily a result of the Company selling the
land and buildings associated with a location in Little Rock, Arkansas that had
been closed during the 2003 fiscal year offsetting capital expenditures, offset
by receipt by the Company of a $1.5 million deposit on a sale/leaseback of real
estate.
Financing activities during the quarter ended March 31, 2004 provided cash flows
of $16.2 million primarily from the net proceeds of funds borrowed under our
inventory Borrowing Agreements for the purchase of our off-season and boat show
inventories. Our primary financing agreements are for the purchase of our boat,
motor and trailer inventories.
Borrowing Agreements. The Company finances substantially all of its inventory
pursuant to its 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. During the quarter ended March 31, 2004, TCFC was acquired
by GE. The Borrowing Agreements contain substantially similar terms and
financial covenants, however the Company's borrowing agreements with GE remain
separate. As of March 31, 2004, the maximum aggregate borrowing availability was
limited to a maximum seasonal credit limit of $60.0 million at various prime
based or LIBOR based interest rates (varying from 4.12% to 4.75%) of which
approximately $44.6 million was funded and $874,000 allocated for inventory
orders in process. The Borrowing Agreements are primarily for the purchase of
inventories and, to a far lesser extent, provide available amounts for general
working capital requirements based upon levels of certain used inventory, parts
inventory and accounts receivable. As of March 31, 2004, the Company could
request advances for additional new inventories up to its $60 million credit
limit, but did not have additional material amounts that could be advanced
solely for general working capital uses.
13
Effective with the submission of its results for the period ended March 31,
2004, the Company was out of compliance with several financial covenant terms
and conditions of its Borrowing Agreements. TCFC and GE provided the Company
with a waiver of such covenant violations provided that the Company arranges a
meeting prior to June 3, 2004 with its lenders to discuss its plans for
improving its financial performance and also provided that no further defaults
occur prior to the maturity date of October 30, 2004.
While the Company intends to display to its lenders that it has made
improvements in its underlying financial performance and request additional
renewals of its credit line with substantially similar terms and conditions,
there can be no assurance that such will be granted or that credit will be
available with terms and conditions 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 would have a material
adverse effect on our business, financial condition and results of operations
and require us to seek additional equity capitalization or alternate sources of
financing.
$5,300,000 Real Estate Loan. The Company entered into a real estate loan during
November 2003 in the original principal 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 was used for transaction
expenses and general working capital. The loan is secured by a first lien on the
land and buildings of the Company's store locations in Atlanta, Georgia;
Clearwater, Florida, San Antonio, Texas; Claremore, Oklahoma; Pascagoula,
Mississippi; and Bossier City, Louisiana and Baton Rouge, Louisiana. As of the
date of this report on Form 10-Q, the outstanding principal balance on the loan
has been reduced to $3,700,000 as a result of payments related to sale/leaseback
transactions in San Antonio, Texas and Claremore, Oklahoma. The loan will be
reduced by an additional $1.0 million upon the collection of the short term
promissory note received by the Company pursuant to terms of its San Antonio
transaction.
$500,000 Line of Credit From Tracker. Due in part to the additional working
capital requirements needed to facilitate the Company's significant product and
brand transition (primarily the introduction of off-shore fishing boat models
and elimination of its yacht sales) and the seasonal decline in sales
experienced during the quarter ended December 31, 2003, management and the
Company's controlling shareholder determined that additional working capital
financing was necessary to enhance general working capital. Such working capital
was needed in anticipation of the Company's historic seasonal volume increases
in net sales from the boat shows beginning in January and also to adequately
prepare the Company for the increase in demand traditionally associated with the
spring and summer months.
On February 6, 2004, the Company agreed to terms with its controlling
shareholder, Tracker, for a $500,000 line of credit. The terms of the line of
credit are set forth in a promissory note payable to Tracker on demand at any
time on or after May 5, 2004 (the "Note"). The Note provides that the Company,
at the discretion of the Operating Committee of its Board of Directors, could
request advances up to the aggregate amount of $500,000. Advances made pursuant
to the Note bear interest at a rate of 10% until the earlier of the date demand
is made by Tracker for repayment or January 5, 2005 at which time the rate will
increase to 18% on any unpaid principal and accrued, but unpaid, interest
amounts. The Note is generally unsecured, subject to Tracker retaining a right
of offset with respect to any cash, credits, rebates, deposits, accounts,
securities, and any other property of the Company in Tracker's possession,
custody or control.
14
As a pre-condition to the Note, Tracker required that the Company take the
following actions, all of which were approved by the Company's board of
directors on February 6, 2004:
o Declare a cash dividend, payable on or before May 5, 2004, in the aggregate
amount of $240,000 to Tracker as the holder of all of the Corporation's 6%
Series A Cumulative Convertible Preferred Stock with respect to the
quarters ended September 30, 2003, and December 31, 2003.
o Re-establish the Operating Committee of our Board of Directors. The
Operating Committee, which consists of Kenneth N. Burroughs, Robert Ring,
and Richard Birnbaum, is to: determine whether additional borrowings are
necessary pursuant to the Note, and with respect thereto, review the
overall financial operations and expenses of the Company. Such duties may
be performed without the necessity of further actions or approval by the
entire Board of Directors.
As of the date this report on Form 10-Q, the Company has borrowed $340,000 under
the Note and has made payments to reduce the current outstanding balance to
$133,500. The Company has declared the cash dividend in the aggregate amount of
$240,000 but has advised Tracker that it presently intends to pay the dividend
in June of 2004 with anticipated operating cash flows from projected May
revenues. Tracker has agreed to this request.
As evidenced by management's decision to seek additional financing in the form
of the Note, further shortfalls or variances from anticipated performance or the
timing of certain expenses or revenues may 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.
SEASONALITY
Our business, as well as the sales demand for various types of boats, tends to
be highly seasonal. Our strongest sales period historically 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 additional operating losses.
Our business is also significantly affected by weather patterns. Weather
conditions that are unseasonable or unusual may adversely affect our results of
operations. For example, drought conditions or merely reduced rainfall levels,
as well as excessive rain, may affect our sale of boating packages and related
products and accessories.
Quarterly results may fluctuate due to many factors. Some of these factors
include, weather conditions, timing of special events such as boat shows,
availability of product and the opening or closing of store locations. The
Company also believes that the net sales for the six months ended March 31, 2004
were impacted by the significant product and brand transition. This included the
elimination of yacht sales and the Company's introduction of new models of
off-shore fishing boats. Accordingly, the results for any quarterly period may
not be indicative of the expected results for any other quarterly period (see
Net sales).
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NASDAQ LISTING REQUIREMENTS
We must comply with listing requirements for the Nasdaq Stock Market. We
transferred our common stock to the Nasdaq Small Cap Market effective as of
October 25, 2002. We requested the transfer because our Company did not comply
with all of the requirements for trading on the Nasdaq National Market. By
letter dated as of January 15, 2004 we were notified by Nasdaq that the closing
price for our common stock for the 30 days prior thereto was below the minimum
$1.00 bid price required by Nasdaq Small Cap Market. Later, by letter dated as
of April 8, 2004 we were notified by Nasdaq that we had regained compliance.
In addition, Nasdaq recently adopted a number of corporate governance listing
standards that must be satisfied to maintain listing on the Nasdaq Small Cap
Market. These standards require, among other things, that a company's audit
committee (i) have only "independent" members, and (ii) adopt a qualifying audit
committee charter. While the Company is exempt under Nasdaq Rule 4350(c)(5) and
Nasdaq IM-4350-4 from many of the new governance standards due to its status as
a "controlled company," it will nevertheless need to assess the need to comply
with certain other material requirements in advance of issuing its proxy
statement for the next annual meeting.
Failure to maintain the listing of our common stock on the NASDAQ Small Cap
Market would adversely impact the liquidity of the Company's common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Changes in short-term interest rates on loans from financial institutions could
materially affect the Company's earnings because the interest rates charged on
certain underlying obligations are variable.
At March 31, 2004, a hypothetical 100 basis point change in interest rates on
the Company's borrowing agreement obligations would result in a change of
approximately $446,000 in annual pre-tax expenses of the Company. The estimated
change in expenses is based upon the change in interest expense of the Company's
borrowing agreement obligations and assumes no change in the volume or
composition of such debt at March 31, 2004.
Item 4. Controls and Procedures
An evaluation as of the end of the period covered by this quarterly report was
carried out under the supervision and with the participation of the Company's
management, including the Company's President and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's "disclosure
controls and procedures" (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, the
President and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely making known to them material information
required to be disclosed in our reports filed or submitted under the Exchange
Act. There has been no change in our internal control over financial reporting
during the quarter ended March 31, 2004 that has materially affected, or is
reasonably likely to affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
Effective with the submission of its results for the period ended March 31,
2004, the Company was out of compliance with several financial covenant terms
and conditions of its Borrowing Agreements. TCFC and GE provided the Company
with a waiver of such covenant violations provided that the Company arranges a
meeting prior to June 3, 2004 with its lenders to discuss its plans for
improving its financial performance and also provided that no further defaults
occur prior to the maturity date of October 30, 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) of the Exchange Act
31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) of the Exchange Act
32.1 Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to Rule 13a-14(b)
of the Exchange Act and 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
During the quarter ended March 31, 2004 through the date of this Report on Form
10-Q, the Company filed the following Reports on Form 8-K:
January 12, 2004 Report on Form 8-K for financial statements and exhibits
including incorporation of press releases dated May 6, 2003; August 4, 2003
and December 2, 2003 issued by the Company.
February 3, 2004 Report on Form 8-K for financial statements and exhibits
including incorporation of press releases dated February 3, 2004 issued by
the Company.
February 20, 2004 Report on Form 8-K for announcement of changes in
certifying accountant's for the Company.
April 7, 2004 Report on Form 8-K for announcement of changes in certifying
accountant's for the Company.
April 29, 2004 Report on Form 8-K for financial statements and exhibits
including incorporation of press releases dated April 29, 2004 issued by
the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereto duly authorized.
Date: May 17, 2004 Travis Boats & Motors, Inc.
By: /s/ Michael B. Perrine
------------------------------------------------
Michael B. Perrine
Chief Financial Officer, Treasurer and Secretary
(Principal Accounting and Financial Officer)
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