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, which currently operates 39 stores under the name Travis Boating Center in Texas, Arkansas, Louisiana, Alabama, Tennessee, Mississippi, Florida, Georgia and Oklahoma, seeks to differentiate itself 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 its 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 boats held for sale. Since 1990, we have opened or acquired 34 additional store locations in the following states: Texas (3), Arkansas (4), Louisiana (4), Alabama (2), Tennessee (5), Mississippi (1), Florida (13), Georgia (1) and Oklahoma (1).
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 60 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."
During fiscal 2000, substantially all of the boat units sold range in size from 16 to 25 feet at prices ranging from $7,500 to $25,000.
We study sales trends from the cities and states where we operate store locations. We use the information from this data to custom design and pre-package combinations of popular brand-name boats, such as Larson, Wellcraft, Scarab, Bayliner, Trophy, Sprint, Sea Ark, Fishmaster and Ranger with outboard motors generally manufactured by Outboard Marine Corporation 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 competitors. We also sell yachts, such as Carver, Martinique, Cruisers and Luhrs that range in length from 25 feet to over 50 feet. By providing many different types of boats with many types of standard features, we attempt to offer the customer an exceptional boat at a competitive price that is ready for immediate use and enjoyment.
We believe that our Company offers a selection of boat, motor and trailer packages that fall within the price range of the majority of all boats, motors and trailers sold in the United States. Our product line generally consists of boat packages priced from $7,500 to $45,000 with approximate even
distribution within this price range. While our sales have historically been concentrated on boats with retail sales prices below $25,000, we believe that as the Company continues to operate in Florida and enters other markets along the Gulf of Mexico or other new coastal areas, that the number of off-shore fishing boats, cabin cruisers and yachts will continue to increase as a percentage of our net sales. Our management believes that by combining flexible financing arrangements with many types of boats having broad price ranges, that we are able to offer boat packages to customers with different purchasing budgets and varying income levels.
Business Strategy
We have developed a multi-state, chain superstore strategy to merchandise a wide selection of recreational boats and accessories . Our objective is to continue to grow as one of the dominant retailers of recreational boats, motors, trailers and marine accessories in the southern United States. Therefore, our strategy includes increasing the number and size of our store locations in the southern United States while also maintaining a focus on possible cities in other regions to which we may desire to expand. 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 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 have a distinctive and stylish trade dress accented with deep blue awnings, a nautical neon building decoration, expansive glass storefronts and brightly lit interiors. The stores range in size from approximately 2,000 (temporary store locations) to over 33,000 square feet and management estimates the average store size at approximately 21,000 square feet. 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 use 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 custom Travis Edition boating packages. Our significant purchasing power and consequent ability to coordinate designs with 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 for sale as options requiring additional charges by many competitors. At our store locations we often also add certain additional features after receipt of the product to enhance our Travis Edition packages. Each Travis Edition is a complete, full-feature package, including the boat, motor, trailer and numerous additional accessories and design features often not found on competitors' products, thus providing customers with superior value. These features often may include enhanced styling such as additional exterior colors, complete instrumentation in dashboards, transoms warranted 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. Each of our Travis Edition boats is generally 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 season. Prices are advertised and clearly posted on each of our boats so that the customer receives the same price at any Travis Boating Center. This selling philosophy is designed to reduce customer anxiety associated with bargaining or negotiation and to offer our customer's prices at or below prices that they generally might receive from competitors. We 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 completed various acquisitions during fiscal 1999 and 1998. We did not have any acquisitions in fiscal 2000. All of the acquisitions were asset purchases (except for Shelby Marine, which was a stock purchase) and have been accounted for using the purchase method of accounting. The operating results of the companies acquired have been included in the consolidated financial statements from the respective date of acquisition. In the acquisitions we purchased selected assets which generally included boat, motor and trailer inventory, parts and accessories inventory and to a lesser extent, property and equipment. A summary of our acquisitions during fiscal 1999 and 1998 follows (in thousands):
Boat Show Participation. We also participate in numerous boat shows, typically held in January through March, in each of the markets that we operate store locations and in additional certain market areas of close proximity. These shows are normally held at convention centers, 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 our assisting 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. It is our belief that we are among the largest volume buyers of outboard motors in the United States. Until fiscal year 1999, we purchased substantially all of our outboard motors from Outboard Marine Corporation ("OMC"), which is the manufacturer of Johnson and Evinrude outboard motors. Beginning with the 1999 fiscal year, we chose to decrease our reliance on OMC and to further diversify the selection of outboard motors offered for sale on our Travis Edition boats. Accordingly, we entered into an agreement to purchase Mercury outboard motors from Brunswick Corporation ("Brunswick"). 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 our manufacturers. Our relationships have allowed us to have substantial input into the design process for the new boats that are introduced in our markets each year by these manufacturers. This design input and coordination with our manufacturers is a primary factor in the pricing, selection and types of the Travis Edition boating packages that we offer for sale in our store locations.
We typically deal with each of our manufacturers pursuant to a non-exclusive dealer agreement. These dealer agreements are usually for one (1) year in term and they typically do not contain any contractual provisions concerning product pricing or purchasing levels. The wholesale prices charged to us by our manufacturers are generally set each year for the entire model year (usually summer to summer), but may be changed at the manufacturer's sole discretion. Unlike most of our other dealer agreements, we have a multi-year term agreement expiring in June, 2001 with Brunswick to purchase outboard motors, and we have agreements expiring in dates ranging from July 2001 to July 2003 with Genmar Industries, Inc. ("Genmar") to purchase boats. The current agreements with these manufacturers include volume discounts from the then prevailing dealer net price over the entire term of each respective agreement. Although these dealer agreements have multi-year terms, 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.
Approximately 32.7% and 12% of our net purchases in fiscal years 2000 and 1999, respectively, were products manufactured by boat manufacturers owned by Genmar. The increase in purchases from Genmar was primarily related to the additional store locations that we opened or acquired in Florida which sell Genmar's Wellcraft and Carver products. Other Genmar boat lines that we purchase include the brands Larson, AquaSport, Scarab, Logic, and Ranger. OMC supplied products that represented approximately $17.0 million, or 10.8%, and $13.3 million, or 14.0%, of our net purchases during fiscal years 2000 and 1999, respectively. Brunswick supplied Mercury outboard motors that represented approximately $17.6 million, or 11.2% and $20.3 million, or 21.4%, of our net purchases during fiscal years 2000 and 1999, respectively. The reductions in purchases of outboard motors from OMC and Mercury have been the result of our arranging just in time deliveries of outboard motors in an effort to lower overall inventory levels and decrease the number of days on hand that inventory is held.
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 Two Key Manufacturers for Almost All of our Outboard Motor Purchases and One of the Manufacturers has filed for Voluntary Bankruptcy under Chapter 11).
Floor plan and other short term financing. We purchase most of our inventory by borrowing money from floor plan and other financing agreements. The seasonal nature of the recreational boating industry impacts the production schedules of the manufacturer's 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," manufacturer's typically offer
product for sale at a price that includes an interest subsidy. Since retail boat dealers typically utilize floor plan financing to provide working capital 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, 2000, the Company and its subsidiaries owed an aggregate of approximately $73.3 million to our lenders for our floor plan and other short term financing agreements.
Competition. We operate in a highly competitive environment. In addition to facing competition generally from many other businesses seeking to attract discretionary spending dollars, the recreational boat industry itself is highly fragmented, resulting in intense competition for customers, access to quality products, access to boat show space in new markets and access to suitable store locations. Our Company relies heavily on boat shows to generate sales. If, for any reason, we were unable to participate in boat shows in our existing or targeted markets, it could have a material adverse effect on our business, financial condition and results of operations.
Our primary competition is from boat dealers operating a single location or several locations in a single state and, to a lesser degree, with national specialty marine stores, catalog retailers, sporting goods stores and mass merchants, particularly with respect to parts and accessories. Dealer competition, which includes one other publicly traded multi-state retailer of recreational boats, continues to increase based on the quality of available products, the price and value of the products and heightened attention levels to customer service. There is significant competition both within markets currently being served by the Company and in new markets into which we plan to enter. While we generally compete in each of our markets with retailers of brands of boats not sold by the Company in that market, it is common for other competitive retailers to sell the same brands of outboard motors. Management believes that a trend in the industry is for independent dealers to attempt to form alliances or buyer's groups, for manufacturers to include more features as standard equipment on boats and consequently, and for competitive dealers to offer packages comparable to those that we offer as our Travis Edition lines. In addition, several of our competitors, especially those selling boating accessories, are large national or regional chains that may have substantially greater financial, marketing and other resources than we may deploy. There can be no assurance that we will be able to compete successfully in the retail marine industry in the future.
Impact of Environmental and Other Regulatory Issues. 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, our primary outboard motor suppliers, Outboard Marine Corporation ("OMC") and Brunswick each have begun the phase-in process for the new EPA compliant outboard motors. However, in fiscal 2000 and 1999, we only purchased minimal quantities of the new EPA compliant outboard motors as a result of a lack of supply of the new product since these manufacturers are still in the initial stages of the new product's release. The boat models we sold with the new EPA compliant outboards in fiscal 2000 and 1999 generally were priced approximately $2,000 higher than those with traditional outboard motors. Management anticipates retail prices to generally be from $500 to $1,500 higher for the new EPA compliant outboards depending on the motor's horsepower. Management, based upon discussions with OMC and Brunswick, believes that the higher retail costs will be offset by enhanced fuel efficiency and acceleration speed, as well as reduced 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.
Employees. As of September 30, 2000, our staff consisted of 701 employees, 665 of whom are full time. The full-time employees include 39 in store level management and 48 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.
Item 2. Properties
We lease our corporate offices which are located at 5000 Plaza on the Lake, Suite 250, 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.
Item 3.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings. We are, however, involved in various legal proceedings arising out of our operations in the ordinary course of business. We believe that the outcome of all such proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended September 30, 2000.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock trades on the Nasdaq Stock Market under the symbol: TRVS. As of December 28, 2000, we believe our shares are beneficially owned by more than 400 shareholders. On December 28, 2000, the last reported sales price of the common stock on the NASDAQ National Market System was $3.00 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 2000 and 1999 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:
We have never declared or paid cash dividends on our Common Stock and presently have no plans to do so. Any change in our dividend policy will be at the sole discretion of the 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 in the foreseeable future. Certain covenants contained in our loan agreements also effectively restrict the payment of any dividends without the lender's prior consent.
Item 6.
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:
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements of the 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. The Company's 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.
Overview
The following discussion compares fiscal years 2000 and 1999 and fiscal years 1999 and 1998, which reflects the inclusion of the audited consolidated financial statements for the fiscal years ended September 30, 2000, 1999 and 1998, respectively. The results of the acquisitions listed in the chart below, from their respective dates of acquisition, are included in the discussion below of the fiscal year in which such acquisition occurred. There were no acquisitions in fiscal 2000.
The following table sets forth for the periods indicated certain financial data as a percentage of net sales:
FISCAL YEAR ENDED SEPTEMBER 30,
1998 1999 2000 ---- ---- ---- Net sales...................... 100.0% 100.0% 100.0% Costs of goods sold............ 73.5 74.4 75.5 ----- ----- ----- Gross profit................... 26.5 25.6 24.5 Selling, general and Administrative expenses..... 17.2 17.0 19.4 Operating income............... 8.4 7.5 3.8 Interest expense............... 1.8 2.1 3.1 Other income (expense)......... 0.1 0.3 0.0 ----- ----- ----- Income before income taxes..... 6.7 5.7 0.7 Income tax expense............. 2.5 2.1 0.3 ----- ----- ----- Net income..................... 4.2% 3.6% 0.4% ===== ===== =====
Results of Operations
Fiscal Year Ended September 30, 2000 Compared to the Fiscal Year Ended September 30, 1999
Net sales. Net sales increased by 19.4% to $217.7 million in fiscal 2000 from $182.3 million in fiscal 1999. The primary component of the increase in net sales during the 2000 fiscal year has been the result of the Ft. Myers store location which was opened in September, 1999 and the two newly opened store locations in Pompano and Stuart, Florida during the 2000 fiscal year. Accordingly, of the increase in net sales of $35.4 million during fiscal 2000, $17.0 million, or 48.0%, is related to these three recent store locations.
During fiscal 2000, the increase in net sales included incremental revenues related to sales of parts/accessories, service labor and used boats, as a result of newly added or expanded parts/accessory and service departments in various store locations and the increased number of store locations in operation. Parts/accessory sales increased to $18.0 million, or 8.3% of net sales, from $15.6 million, or 8.6% of net sales, in fiscal years 2000 and 1999, respectively. Service labor sales increased to $8.8 million, or 4.0% of net sales, from $6.9 million, or 3.8% of net sales, in fiscal years 2000 and 1999, respectively. Used boat sales increased to $13.9 million, or 6.4% of net sales in fiscal 2000, from $11.1 million, or 6.1% of net sales in fiscal 1999. Included in the used boat sales for fiscal 2000 are approximately $4.1 million in wholesale transactions, some of which were related to the Company's planned reduction in overall inventory levels primarily occurring during the fiscal quarter ended September 30, 2000.
During fiscal 2000, comparable store sales decreased by 1.1%, or $1.2 million, (18 stores in base) versus an increase of 1.9%, or $1.5 million, (14 stores in base) during fiscal 1999. Management believes that the comparable store sales decrease was related to various factors including poor weather, higher overall interest rates, erratic levels of consumer confidence and the number of stores eligible for inclusion in the comparable store base calculations. The Company relocated or renovated six stores and opened or acquired an additional 15 stores during fiscal years 2000 and 1999 rendering such locations to be excluded from the comparable store base. The Company's planned acquisition strategy and subsequent renovation of stores to superstore standards is expected to continue to negatively impact the number of stores eligible in comparable store base calculations in relationship to the total number of store locations operated. See "Risk Factors--Our Growth Depends on Our Ability to Acquire and Open New Stores." As such, comparable store performance is expected to remain unstable until a greater number of store locations is eligible in the comparable store base calculations and factors potentially influencing consumer demand (such as weather and consumer confidence) trend favorably within our market areas.
Included within net sales is revenue that the Company earns 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 the Company to "sell" the loan at a rate higher than a minimum rate established by each such lender, and the Company earns fees based on the percentage increase in the loan rate over the lender's minimum rate (the rate "spread"). The Company sells these loans without recourse, except that in certain instances the Company must return the fees earned if the customer repays the loan or defaults in the first 120-180 days. The Company also sells, as a broker, certain types of insurance (property/casualty, credit life, disability) and extended service contracts. The Company 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 increased by 6.4% to approximately $8.3 million in fiscal 2000 from $7.8 million in fiscal 1999. In fiscal 2000, F&I income as a percentage of net sales decreased to 3.8% from 4.3% in fiscal 1999 due primarily to lower overall yields paid by lenders for originating customer finance contracts and competitive pressures on finance rates (which resulted in lower net spreads achieved in the placement of customer financing). Decreases in the percentage of customers buying these products (which is referred to as "sell-through"), particularly by purchasers of the larger, more expensive boats and reduced customer demand for certain insurance products have also been limiting factors.
Gross profit. Gross profit increased by 14.4% to approximately $53.3 million in fiscal 2000 from $46.6 million in fiscal 1999. Gross profit as a percent of sales decreased to 24.5% in fiscal 2000 from 25.6% in fiscal 1999. The Company generally seeks to maintain a gross profit margin of 21% to 23% on its boating packages and to further leverage the margin through sales of parts/accessories, service labor and F&I Products, all of which generally produce gross profit margins in excess of 25%. During the 2000 fiscal year, the gross profit margin was negatively impacted by certain events including the establishment of reserve allowances on inventory in the amount of approximately $1.3 million, including a reserve of approximately $443,000 related to an alleged theft and other fraudulent activities of a single former store manager. The Company also undertook a summer sales campaign to reduce overall inventory levels to improve inventory turn and reduce carrying costs. Management estimates the incremental expense to the gross profit to facilitate these sales promotions and retail price reductions on inventory sold to be approximately $1.2 million.
Net sales attributable to F&I Products, which have a significant impact on the gross profit margin, contributed $8.3 million, or 15.6%, of total gross profit in fiscal 2000, as compared to $7.8 million, or 16.7%, of total gross profit for fiscal 1999. Net sales attributable to F&I Products are reported on a net basis and therefore all of such sales contribute directly to the Company's gross profit. The costs associated with the sale of F&I Products are included in selling, general and administrative expenses.
Selling, general and administrative expenses. Selling, general and administrative expenses increased by 36.5% to $42.3 million in fiscal 2000 from $31.0 million for fiscal 1999. Selling, general and administrative expenses, as a percent of net sales, increased to 19.4% in fiscal 2000 from 17.0% for fiscal 1999. The increase, both in terms of absolute dollars and as a percent of net sales, was primarily attributable to increased lease and other expenses associated with the operation of a larger store network, growth in the corporate-office staffing infrastructure and increased advertising and insurance costs associated with introducing Travis stores into new geographically diverse regions.
Interest expense. Interest expense, in absolute dollars, increased by 81.6% to $6.9 million in fiscal 2000 from $3.8 million in fiscal 1999. Interest expense as a percent of net sales, increased to 3.1% in fiscal 2000 from 2.1% in fiscal 1999. The Company's capital expenditures and growth in operating assets (primarily inventory) have been financed with borrowings from various commercial banks and finance companies. The growth in assets is the result of the Company's larger store network, continued implementation of its management information system, the construction of new superstore facilities in Atlanta, Georgia and San Antonio, Texas and renovations of other store locations to conform with its superstore standards. The higher debt levels and significantly higher short term borrowing rates (relative to the increases in the prime rate during fiscal 2000) have also negatively impacted interest expense. The Company's weighted average interest rate on its inventory financing was approximately 6.9% and 5.5% in fiscal years 2000 and 1999, respectively. The Company anticipates continuing to utilize third party financing sources to support the growth in assets necessary to operate a larger store network and accordingly, the resulting increases in interest expense associated with such borrowings. See "Risk Factors--Our Substantial Indebtedness Could Restrict Our Operations and Make Us More Vulnerable to Adverse Economic Conditions" and "Quantitative and Qualitative Disclosures About Market Risk."
Net income. Net income decreased by 86.4% to approximately $897,000 in fiscal 2000 from $6.6 million in fiscal 1999. While the Company experienced an increase in net sales during fiscal 2000, the reduction in gross profit margins, higher levels of S,G,A expenses and the increase in interest expense negatively impacted net income.
Fiscal Year Ended September 30, 1999 Compared to the Fiscal Year Ended September 30, 1998
Net sales. Net sales increased by 38.4% to $182.3 million in fiscal 1999 from $131.7 million in fiscal 1998. The primary component of the increase in net sales during the 1999 and 1998 fiscal years has been the result of newly-opened or acquired store locations. Accordingly, of the fiscal 1999 increase in net sales, $39.7 million, or 78.5%, is related to the 14 store
locations that were newly opened or acquired. The Company also benefited from growth in comparable store sales. During fiscal year 1999, comparable store sales increased by 1.9%, or $1.5 million, (14 stores in base) versus 6.6%, or $3.7 million, (9 stores in base) during fiscal 1998. See "Risk Factors - Our Growth Depends on Our Ability to Acquire and Open New Stores."
Growth in overall sales volume resulted, in part, from additional new Travis Edition boating packages introduced during fiscal 1999 and 1998. These new additions included the Pro-Line and Polar brand boats in 1998 and Wellcraft, Bayliner and Fishmaster boat models in fiscal 1999, as well as Mercury Motors in November 1999.
During fiscal 1999, the Company experienced increased parts/accessories and service labor sales of 38% and 45%, respectively, primarily through an increased store network. Parts/accessory sales increased to $15.6 million, or 8.6% of net sales, from $11.3 million, or 8.6% of net sales, in fiscal years 1999 and 1998, respectively. Service labor sales increased to $6.9 million, or 3.8% of net sales, from $4.7 million, or 3.6% of net sales, in fiscal years 1999 and 1998, respectively. Net sales also benefited from increased used boat sales in both dollars and as a percentage of sales. Used boat sales increased by 52.5% to $11.1 million (6.1% of total sales) in fiscal 1999, from $7.3 million (5.5% of total sales) in fiscal 1998.
Net sales from comparable stores in fiscal 1999 and 1998, which had 14 and 9 stores respectively, included in the base for calculation, increased by 1.9% and 6.6% in fiscal 1999 and 1998, respectively. The Company relocated or renovated three stores and opened or acquired an additional 12 stores during fiscal years 1999 and 1998 rendering such locations to be excluded from the comparable store base. The Company's planned acquisition strategy and subsequent renovation of stores to superstore standards is expected to continue to negatively impact the number of stores includable in comparable store base calculations in relationship to the total number of store locations operated. See "Risk Factors--Our Growth Depends on Our Ability to Acquire and Open New Stores." As such, comparable store performance is expected to remain unstable.
Included within net sales is revenue that the Company earns 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 the Company to "sell" the loan at a rate higher than a minimum rate established by each such lender, and the Company earns fees based on the percentage increase in the loan rate over the lender's minimum rate. The Company sells these loans without recourse, except that in certain instances the Company must return the fees earned if the customer repays the loan or defaults in the first 120-180 days. The Company also sells, as a broker, certain types of insurance (property/casualty, credit life, disability) and extended service contracts. The Company 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 increased by 9.2% to approximately $7.8 million in fiscal 1999 from $7.1 million in fiscal 1998, In fiscal 1999, F&I income as a percentage of net sales decreased from 5.4% in fiscal 1998 to 4.3% in fiscal 1999 due to competitive pressures on finance rates (which resulted in lower net spreads achieved in the placement of customer financing), as well as overall decreases in the percentage of customers buying these products (which is referred to as "sell-through"), and a reduced demand in certain insurance products.
Gross profit. Gross profit increased by 33.6% to approximately $46.6 million in fiscal 1999 from $34.9 million in fiscal 1998. Gross profit as a percent of sales decreased to 25.6% in fiscal 1999 from 26.5% in fiscal 1998. The Company generally seeks to maintain a gross profit margin of 21% to 23% on its boating packages and is able to further leverage the margin through sales of parts/accessories, service labor and F&I Products, all of which generally produce gross profit margins in excess of 25%. During fiscal 1999, the Company's gross profit margin was negatively impacted by a temporary reduced revenue mix in its boating package margins as a result of acquisition boat inventory that liquidated at below Company standard margins, thus, driving the Company's new boating package margins down to 20.7% and used margins down to 13.4% (Company
standard of 18-20%). This, combined with the 110 basis point reduction in high yielding F&I income, as a percentage of net sales, caused the 90 basis point drop in gross profit margin as a percentage of sales.
Net sales attributable to F&I Products, which have a significant impact on the gross profit margin, contributed $7.8 million, or 16.7%, of total gross profit in fiscal 1999, as compared to $7.1 million, or 20.3%, of total gross profit for fiscal 1998. Net sales attributable to F&I Products are reported on a net basis and therefore all of such sales contribute directly to the Company's gross profit. The costs associated with the sale of F&I Products are included in selling, general and administrative expenses.
Selling, general and administrative expenses. Selling, general and administrative expenses increased by 36.9% to $31.0 million in fiscal 1999 from $22.6 million for fiscal 1998. Selling, general and administrative expenses as a percent of net sales decreased by 18 basis points to 17.00% in fiscal 1999 from 17.18% for fiscal 1998. In absolute dollars, the increase in selling, general and administrative expenses was primarily attributable to increased expenses associated with the operation of a larger store network, growth in the corporate-office staffing infrastructure and increased advertising and insurance costs associated with introducing Travis stores into new geographically diverse regions.
Interest expense. Interest expense, in absolute dollars, increased by 64.9% to $3.8 million in fiscal 1999 from $2.3 million in fiscal 1998. Interest expense as a percent of net sales, increased to 2.1% in fiscal 1999 from 1.8% in fiscal 1998. Subsequent to the Company's Initial Public Offering in June of 1996, capital expenditures and growth in operating assets (primarily inventory) have been financed with borrowings from various commercial banks and finance companies. The growth in assets is the result of the Company's larger store network, continued implementation of its management information system and its planned renovation of store locations to conform with its superstore standards. The higher debt levels have resulted in the increase in interest expense in actual dollars and as a percentage of sales in fiscal years 1999 and 1998. The Company anticipates continuing to utilize bank financing to support the growth in assets necessary to operate a larger store network and accordingly, the resulting increases in interest expense associated with such borrowings. See "Risk Factors--Our Substantial Indebtedness Could Restrict Our Operations and Make Us More Vulnerable to Adverse Economic Conditions" and "Quantitative and Qualitative Disclosures About Market Risk."
Net income. Net income increased by 18.1% to approximately $6.6 million in fiscal 1999 from $5.6 million in fiscal 1998. While the Company continued to benefit from increased sales and controlled SG&A expenses in fiscal 1999, reduced margins, as a percentage of sales, and the increase in interest expense both in actual dollars and as a percent of net sales resulted in net income as a percent of sales decreasing to 3.6% from 4.2% during the same periods.
Quarterly Data and Seasonality
The following table sets forth certain unaudited quarterly financial data for each of the Company's last eight quarters and such data expressed as a percentage of the Company's 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.
The Company's business, as well as the sales demand for various types of boats, tends to be highly seasonal. Strong sales typically begin in January with the onset of the public boat and recreation shows, and continue through July. Over the previous three fiscal years, the average annual net sales for the quarterly periods ended March 31 and June 30 represented in excess of 25% and 40%, respectively, of the Company's annual net sales. With regard to net income, the Company historically generates profits in three of its fiscal quarters and experiences operating losses in the quarter ended December 31 due to a broad seasonal slowdown in sales. During the quarter ended September 30, inventory typically reaches its lowest levels and accumulated cash reserves reach the highest levels. During the quarter ended December 31, the Company generally builds inventory levels in preparation for the upcoming selling season which begins with boat and recreation shows occurring during January through March in certain market areas in which the Company conducts business. Travis Boats' operating results would be materially and adversely affected if net sales were to fall significantly below historical levels during the months of January through June.
The Company's business is also significantly affected by weather patterns. Weather conditions that are unseasonable or unusual may adversely affect the Company's results of operations. For example, drought conditions or merely reduced rainfall levels, as well as excessive rain, may affect the Company's 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 as a result of the expenses associated with new store openings or acquisitions. The Company, prior to fiscal 1997, had attempted to concentrate expansion during the seasonal slowdown generally occurring in the quarter ending December 31. During fiscal 1997, the Company modified its acquisition strategy to acquire store locations through-out the fiscal year. This was done to allow the Company the opportunity to derive in-season sales from the acquisitions as well as to provide a longer period in which to integrate the acquired store's operations. Accordingly, the results for any quarterly period may not be indicative of the expected results for any other quarterly period.
The results for the quarter ended June 30, 2000 were negatively impacted by certain events including the establishment of a reserve of approximately $443,000 related to an alleged theft and other fraudulent activities of a single former store manager. In addition to this reserve amount, the gross profit margin for the quarter ended June 30, 2000 was negatively impacted by sales at the same store location which were transacted at amounts equal to or below the Company's actual cost of such products. The Company believes these sales to have occurred as part of the same alleged activities.
The results for the quarter ended September 30, 2000 were negatively impacted by certain events including the establishment of reserve allowances on inventory in the amount of approximately $750,000 and the expenses of a summer sales campaign to reduce overall inventory levels, improve inventory turn and reduce carrying costs. Management estimates the incremental expense to the gross profit to facilitate these sales promotions and retail price reductions on inventory sold during the quarter to be approximately $1.2 million.
Liquidity and Capital Resources
The Company's short-term cash needs are primarily for working capital to support operations, including inventory requirements, off-season liquidity and store expansion. These short-term cash needs have historically been financed with cash from operations and borrowings under the Company's floor plan and revolving credit lines (collectively the "borrowing agreements"). At September 30, 2000, the Company had approximately $3.0 million in cash, $11.6 million in accounts receivable (primarily contracts in transit from sales, manufacturer rebates receivable and other amounts due from manufacturers) and $78.1 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, $73.3 million outstanding under its borrowing agreements and $4.6 million in other current liabilities and short-term indebtedness including current maturities of notes payable. Included within the current maturities of notes payable 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 (see Subsequent Events in the consolidated audited financial statements of the Company and notes thereto included elsewhere in this Report on Form 10-K). As of September 30, 2000, the aggregate maximum borrowing limits under its borrowing agreements was $110.0 million.
At September 30, 2000 the Company had working capital of approximately $11.0 million. Working capital, as of September 30, 2000, was reduced by the aforementioned balloon payments of approximately $3.6 million, which pending the refinances thereof are classified as a current liability (see Subsequent Events in the consolidated audited financial statements of the Company and notes thereto included elsewhere in this Report on Form 10-K).
In fiscal 2000, operating activities utilized cash flows of $2.8 million due primarily to an increase of $2.4 million in inventories and a net decrease in accounts payable, accrued liabilities and income taxes in the aggregate of $4.9 million. These amounts were offset partially by net income, before depreciation and amortization, of $3.5 million, decreases in accounts receivable and prepaid expenses of $1.0 million, in the aggregate.
In fiscal 1999, operating activities utilized cash flows of $13.3 million due primarily to an increase of $18.0 million and $7.3 million in inventories and accounts receivable, respectively. These amounts were offset partially by net income, before depreciation and amortization, of $8.5 million, an increase in accrued liabilities of $456,000 and an increase in income tax payables of $3.2 million.
Investing activities utilized cash flows of $5.8 million due primarily to the 2 new store locations, newly opened in fiscal 2000, plus the construction of a new superstore facilities in Atlanta, Georgia and San Antonio, Texas. These activities were funded through the Company's borrowing agreements, mortgage debt and internal cash flows.
Financing activities in fiscal 2000 provided $7.4 million of cash flows primarily from additional borrowings under the Company's borrowing agreements. The borrowing agreements include, include borrowing agreements entered into in January, 2000 with Transamerica Distribution Finance ("TDF") and Deutsche Financial Services ("DFS") in the principal amounts of $50.0 million and $60.0 million, respectively. The borrowing agreements, which contain substantially similar terms and have maturity dates of January 2003, provide for a combined borrowing at various sub-prime based or LIBOR based interest rates. Borrowings are pursuant to a borrowing base formula and are used primarily to finance inventory purchases and for general working capital requirements. Substantially all inventory, accounts receivable and intangible assets collateralize these borrowing agreements. The terms of the borrowing agreements also provide for: (i) fees for administrative monitoring, (ii) fees for unused portions of available credit, and (iii) pre-payment fees in the event of the Company's termination of such floor plans prior to their stated maturity dates in January, 2003. The borrowing agreements also include restrictive loan agreements containing various loan covenants and borrowing restrictions, including minimum financial ratios (governing net worth, current assets, debt to worth percentages and cash flow coverage requirements based upon interest expense and monthly principal and interest payments on debts). The payment of dividends or repurchases of the Company's common stock are also substantially limited.
Effective with the company's financial results for the period ended September 30, 2000, the Company was in violation of several financial ratio covenants with TDF and DFS. However, on January 16, 2001, the Company received written waivers from each lender, and, accordingly amended and restated the borrowing agreements to provide for modified ratio levels for each quarterly period through and including September 30, 2001. The amended borrowing agreements, which mature in January 2003, continue to provide for a total of $110 million in inventory floor plan financing and working capital borrowings. Interest on the borrowing agreements ranges from the lender's prime rate minus 0.25% to LIBOR plus 3.0%. The Company believes that the financial covenants established in the amended borrowing agreements will be achieved based upon the Company's current and anticipated performance. Based upon management's Fiscal 2001 operating plan, including the sale/leaseback or refinancing of certain assets, if necessary, and availability under the borrowing agreements, the Company believes that there is adequate liquidity to fund the Company's operations and to make required principal payments under the two borrowing agreements and other outstanding debt. However, material shortfalls or variances from anticipated performance could require the Company to seek further amendment to the amended borrowing agreements or alternate sources of financing.
Management believes the Company to be in compliance with all other terms and conditions of its loan agreements and all proposed terms and conditions established pursuant to the aforementioned waivers of financial covenants.
As of December 19, 2000, $91.3 million was drawn on the borrowing agreements and the Company could borrow an additional $18.7 million, of which approximately $2.9 million was immediately available for borrowing based upon the borrowing formula. As the Company purchases inventory, the amount purchased increases the borrowing base availability and typically the Company makes a determination to borrow depending upon anticipated working capital requirements. Various manufacturers provide the Company interest expense assistance under the borrowing agreements in order to subsidize the carrying cost of inventory. Accordingly, no interest expense is recorded during portions of the year (generally August through May) for certain borrowings under these arrangements. At September 30, 2000 and 1999, the Company had non-interest bearing borrowings of $5,795,000 and $9,896,000 under these arrangements. Discontinuance of these agreements could result in an increase to interest expense. (See Risk Factors - We Rely on Two Key Manufacturers for Almost All of our Outboard Motor Purchases and One of the Manufacturers has filed for Voluntary Bankruptcy under Chapter 11).
Merchandise inventories were $78.1 million and $75.7 million as of September 30, 2000 and 1999, respectively. Accounts receivable decreased by approximately $800,000 to $11.6 million at the end of fiscal 2000 from a year earlier. Costs in excess of net assets acquired decreased by approximately $300,000 to $11.3 million in fiscal 2000 due to the scheduled amortization of this asset.
The Company had capital expenditures of approximately $4.8 million in fiscal 2000 and approximately $7.7 million in fiscal 1999. Capital expenditures during fiscal 2000 and 1999 included the acquisitions of the store locations discussed previously in the section Overview, the renovation of several facilities to the Company's superstore standards and expenditures related to the roll-out of the Company's management information systems in certain store locations. The Company also acquired real estate in San Antonio, Texas, Key Largo, Florida, Clearwater, Florida and completed the construction of a new superstores in Atlanta, Georgia and San Antonio, Texas. These capital expenditures were funded through the Company's borrowing agreements, mortgage debt and internal cash flows.
The Company's borrowing agreements and internally generated working capital should be sufficient to meet the Company's cash requirements in the near future.
New Accounting Standards
In September 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Because of the Company's minimal use of derivative financial instruments, management does not anticipate that the adoption of SFAS No. 133 will have a material impact on the Company's consolidated results of operations, financial position or cash flows.
In December 1999, the SEC staff issued Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements" which provides guidance on revenue recognition issues. The Company is required to implement SAB 101 in fiscal 2001, but management does not believe the adoption of SAB 101 will have a material impact on the Company's financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", which further clarifies APB Opinion No. 25, "Accounting for Stock Issued to Employees". This interpretation did not have a material impact on the Company's financial position or its results of operations.
Inflation
The Company believes that inflation generally has not had a material impact on its operations or liquidity to date.
Item 7A.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
At September 30, 2000, approximately 92.4% 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. During the fiscal year ended September 30, 2000, the average rate of interest of such variable rates was 6.93%. Increases in the variable interest rates result in increased interest expense and decreased earnings and cashflow. Assuming the same level of borrowings for the year ended September 30, 2000, which averaged approximately $94,700,000, an increase of 2% in the average rate of interest would result in an increase in fiscal 2000 interest expense of approximately $1,900,000 and a decrease in fiscal 2000 net income and after-tax cashflow of approximately $1,200,000. Similarly, a decrease in the average rate of interest would result in a decrease in interest expense and an increase in net income and after-tax cashflow.
Item 8.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers
There is incorporated herein by reference that portion of the Company's proxy statement for the 2001 Annual Meeting of Shareholders which appears therein under the captions "Item 1: Election of Directors" and "Information Concerning Directors."
Item 11.
Item 11. Executive Compensation
There is incorporated in this Item 11 by reference that portion of the Company's definitive proxy statement for the 2001 Annual Meeting of Shareholders which appears under the caption "Executive Compensation."
Item 12.
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 2001 Annual Meeting of Shareholders which appears under the caption "Securities Holdings of Principal Shareholders, Directors, Nominees and Officers."
Item 13.
Item 13. Certain Relationships and Related Transactions
There is incorporated in this Item 13 by reference that portion of the Company's definitive proxy statement for the 2001 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.
Item 14. 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 of this Report.
Report of Independent Auditors.................... Consolidated Balance Sheets....................... Consolidated Statements of Income................. Consolidated Statements of Stockholder's Equity... Consolidated Statements of Cash Flows............. Notes to Consolidated Financial Statements........
(a) 2. Financial Statement Schedules
All schedules have been omitted because they are not applicable, not required under the instructions, or the information requested is set forth in the consolidated financial statements or related notes thereto.
(a) 3. Exhibits
The following Exhibits are incorporated by reference to the filing or are included following the Index to Exhibits.
INDEX TO EXHIBITS
(a) Exhibits:
3.1 --Restated Articles of Incorporation of the Registrant, as amended.(1) 3.2 --Restated Bylaws of the Registrant, as amended.(1) 10.2(a) --[Intentionally left blank] 10.2(b) --Dealer Agreement dated as of October 13, 1995, between the Company and Outboard Marine Corporation.(1) 10.3 --[Intentionally left blank] 10.4 --[Intentionally left blank] 10.5(a) --[Intentionally left blank] 10.5(b) --[Intentionally left blank] 10.6(a) --[Intentionally left blank] 10.6(b) --[Intentionally left blank] 10.7(a) --[Intentionally left blank] 10.7(b) --[Intentionally left blank] 10.8(a) --[Intentionally left blank] 10.8(b) --[Intentionally left blank] 10.8(c) --[Intentionally left blank] 10.8(d) --[Intentionally left blank] 10.8(e) --[Intentionally left blank] 10.8(f) --[Intentionally left blank] 10.8(g) --[Intentionally left blank] 10.8(h) --[Intentionally left blank]
10.8(i) --[Intentionally left blank] 10.9(a) --[Intentionally left blank] 10.9(b) --[Intentionally left blank] 10.9(c) --[Intentionally left blank] 10.10(a)--[Intentionally left blank] 10.10(b)--[Intentionally left blank] 10.11 --[Intentionally left blank] 10.12 --[Intentionally left blank] 10.13 --[Intentionally left blank] 10.14 --[Intentionally left blank] 10.15--Asset Purchase Agreement dated as of September 20, 1995, by and among Red River Marine, Inc., Red River Marine, Inc. #2, and TBC Arkansas, Inc.(1) 10.16--Promissory Note dated September 20, 1995, in the original principal amount of $800,000, Payable by TBC Arkansas, Inc. to Benny Hargrove.(1) 10.17(a) --Promissory Note dated as of September 20, 1995, in the original principal amount of $462,145.53, payable by TBC Arkansas, Inc. to Red River Marine, Inc. #2.(1) 10.17(b) --Mortgage With Power of Sale (Realty) dated September 20, 1995, from TBC Arkansas, Inc. to Red River Marine, Inc. #2.(1) 10.18--Promissory Note dated September 20, 1995, in the original principal amount of $230,177.16, payable by TBC Arkansas, Inc. to Red River Marine, Inc. and Red River Marine, Inc. #2.(1) 10.19--Promissory Note dated September 20, 1995, in the original principal amount of $108,750, Payable by TBC Arkansas, Inc. to Red River Marine, Inc. and Red River Marine, Inc. #2.(1) 10.20 --Travis Boats and Motors, Inc. 1995 Incentive Plan.(1) 10.21 ----[Intentionally left blank] 10.22--Form of Option Agreement dated May 17, 1995, between the Company and Michael B. Perrine, Ronnie L. Spradling and Mark T. Walton.(1) 10.23--Form of Indemnification Agreement for Directors and Officers of the Company.(1) 10.24--Management Agreement dated December 14, 1995, by and among TBC Management, Ltd., the Company and its subsidiaries.(1) 10.25 --[Intentionally left blank] 10.26(a) --[Intentionally left blank] 10.26(c) --[Intentionally left blank] 10.27(a) --Second Modification and Extension Agreement dated April 26, 1994, between the Company and NationsBank of Texas, N.A.(1) 10.27(b) --"504" Note dated April 28, 1994, in the original principal amount of $454,000, payable by the Company to Cen-Tex Certified Development Corporation.(1) 10.27(c) --[Intentionally left blank] 10.27(d) --Deed of Trust dated April 28, 1994, from the Company to Wm. H. Harrison, Jr., Trustee.(1) 10.28--[Intentionally left blank]
10.29(a) --[Intentionally left blank] 10.29(b) --[Intentionally left blank] 10.29(c) --[Intentionally left blank] 10.29(d) --[Intentionally left blank] 10.30--Asset Purchase Agreement dated as of November 1, 1996 between Travis Boating Center Tennessee, Inc. and Tri-Lakes Marine, Inc.(2) 10.31--Asset Purchase Agreement dated as of November 1, 1996 between Travis Boating Center Alabama, Inc. and Tri-Lakes Marine, Inc.(2) 10.32--Asset Purchase Agreement dated as of February 19, 1997 between Travis Boating Center Louisiana, Inc. and Bent's Marine, Inc.(3) 10.33--Asset Purchase Agreement dated as of August 1, 1997 between Travis Boating Center Mississippi, Inc. and McLeod Marine, Inc.(4) 10.34--Stock Purchase Agreement dated as of September 30, 1997 among Travis Boating Center Florida, Inc. and Frederic D. Pace and John W. Reinhold providing for the purchase of 100% of the common stock of Adventure Boat Brokerage, Inc. (4) 10.35--Stock Purchase Agreement dated as of September 30, 1997 among Travis Boating Center Florida, Inc. and John W. Reinhold providing for the purchase of 100% of the common stock of Adventure Marine & Outdoors, Inc.(4) 10.36--Stock Purchase Agreement dated as of September 30, 1997 among Travis Boating Center Florida, Inc. and Frederic D. Pace and John W. Reinhold providing for the purchase of 100% of the common stock of Adventure Marine South, Inc.(4) 10.37--[Intentionally left blank] 10.38--Asset Purchase Agreement dated as of November 20, 1997 between Travis Boating Center Tennessee, Inc. and Southeastern Marine Group, Inc.(4) 10.39 --Travis Boats & Motors, Inc. 1995 Incentive Plan.(5) 10.40--Employment Agreement dated November 16, 1999 between TBC Management, Ltd. and Mark T. Walton.(7) 10.41--Employment Agreement dated November 16, 1999 between TBC Management, Ltd. and Michael B. Perrine.(7) 10.42--Employment Agreement dated November 16, 1999 between TBC Management, Ltd. and Ronald L. Spradling.(7) 10.43--Wellcraft Master Dealer Agreement effective September 29. 1998 between the Company and Wellcraft Marine Corp. (7) 10.44--Aquasport Master Dealer Agreement effective September 29, 1998 between the Company and Aquasport, a division of Wellcraft Marine Corp. (7) 10.45--Outboard Marine Corporation Private Label/Retail Store Agreement dated November 13, 1998 between the Company and Outboard Marine Corporation.(7) 10.46--Product Supply Agreement dated June 29, 1999 between the Company, its subsidiaries and Mercury Marine, a division of Brunswick Corporation. (7) 10.47--Larson Master Dealer Agreement effective September 29, 1999 between the Company and Larson/Glastron Boats, Inc. (7) 10.48--Loan and Security Agreement, dated as of January 31, 2000, between Travis Boats & Motors, Inc., along with certain of its subsidiaries, and Deutsche Financial Services corporation related to a Credit Facility of up to $60,000,000.00. (6)
10.49--Loan and Security Agreement dated as of January 31, 2000, by and between Transamerica Commercial Finance Corporation along with certain of its subsidiaries, and Transamerica Commercial Finance Corporation related to a line of credit with a maximum credit amount of $50,000,000.00 (6) 10.50--First Amendment to Loan and Security Agreement, dated January 31, 2000, by and between Deutsche Financial Services Corporation and Travis Boats & Motors, Inc., along with certain of its subsidiaries. (6) 10.51--Letter, dated December 29, 2000, to TBC Management, Inc. from Transamerica Commercial Finance Corporation. (6) 21.1 --List of Subsidiaries of Registrant.(7) 23.1 --Consent of Independent Auditors of Registrant, dated January 22, 2000. 27.1 --Financial Data Schedule
- ---------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 effective June 26, 1996 (File No. 333-03283). (2) Incorporated by reference to the Company's Annual Report on Form 10-K filed with the Commission on December 31, 1996 (File No. 000-20757). (3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed May 15, 1997 (File No. 000-20757). (4) Incorporated by reference to the Company's Annual Report on Form 10-K filed December 29, 1997 (File No. 000-20757). (5) Incorporated by reference to the Company Registration Statement on Form S-8 (File No. 333- 41981). (6) Portions of this exhibit have been omitted and are subject to an application for confidential treatment filed separately with the Commission. (7) Incorporated by reference to the Company's Annual Report on Form 10-K/A filed with the Commission on January 13, 2000 (File No. 600-20757).
No annual report or proxy material has been sent to security holders as of the date of this 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.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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 23, 2001. By: /s/ Mark T. Walton --------------------------- Mark T. Walton Chairman of the Board And President
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below does hereby constitute and appoint Mark T. Walton his true and lawful attorney-in-fact and agent for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to the Travis Boats & Motors, Inc. Annual Report on Form 10-K for the year ending September 30, 2000, 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 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.
Travis Boats & Motors, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended September 30, 2000, 1999 and 1998
Contents
Report of Independent Auditors...............................................F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets..................................................F-3 Consolidated Statements of Income............................................F-5 Consolidated Statements of Stockholders' Equity..............................F-6 Consolidated Statements of Cash Flows........................................F-7 Notes to Consolidated Financial Statements...................................F-9
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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 2000. 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, 2000 and 1999 and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
November 29, 2000, except for Notes 2 and 10 as to which the date is January 16, 2001
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
Travis Boats & Motors, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Description of Business and Consolidation
Travis Boats & Motors, Inc. (the "Company") based in Austin, Texas, is a retailer of boats, motors, trailers and related watersport accessories. The Company operates, in one reportable segment, at locations in the southern region of the United States. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company records revenue on sales of boats, motors, trailers, and related watersport parts and accessories upon delivery to or acceptance by the customer at the closing of the transaction. The Company records revenues from service operations at the time repair or service work is completed.
The Company refers customers to various financial institutions to assist the customers in obtaining financing for their boat purchase. For each loan the financial institutions are able to fund as a result of the referral, the Company receives a fee. Revenue earned by the Company for financing referrals is recognized when the related boat sale is recognized. The fee amount is generally based on the loan amount and the term. Generally, the Company must return a portion of the fee amount received if the customer repays the loan or defaults on the loan within a period of up to 180 days from the initial loan date. The Company records such refunds, which are not significant, in the month in which they occur.
Revenues from insurance and extended service agreements are recorded at the time such agreements are executed which generally coincides with the date the boat, motor and trailer is delivered. Such revenues are not deferred and amortized over the life of the insurance or extended service agreement policies, because the Company sells such policies on behalf of third party vendors or administrators. At the time of sale, the Company records a fee for insurance and extended service agreements net of the related fee that is paid to the third-party vendors or administrators. Since its inception, the Company has incurred no additional costs related to insurance or extended service agreements beyond the fees paid to the third party vendors at the time of sale.
Cash and Cash Equivalents
The Company considers all investments with maturities of ninety days or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and notes payable approximates fair value.
Accounts Receivable
Accounts receivable potentially expose the Company to concentrations of credit risk, as defined by the Statement of Financial Accounting Standards No. 105, Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk. Accounts receivable consist primarily of amounts due from financial institutions upon sales contract funding and amounts due from vendors under rebate programs.
1. Summary of Significant Accounting Policies (continued)
The accounts receivable balances consisted of the following as of September 30, 2000 and 1999 (in thousands):
2000 1999 ------------- -------------
Trade receivables.................... $ 5,540 $ 7,654 Amounts due from manufacturers....... 5,511 4,593 Other receivables.................... 843 421 Allowance for doubtful accounts...... (278) (247) ------------- -------------
$ 11,616 $ 12,421 ============= =============
Activity in the Company's allowance for doubtful accounts is as follows (in thousands):
Balance at September 30, 1997....... $ -0- Additions charged to costs and expenses........... -0- Write-offs of uncollectible accounts............... -0- -------------------------------------- Balance at September 30, 1998....... -0- Additions charged to costs and expenses.......... 247 Write-offs of uncollectible accounts............... -0- -------------------------------------- Balance at September 30, 1999........ 247 Additions charged to costs and expenses........... 187 Write-offs of uncollectible accounts............... (156) -------------------------------------- Balance at September 30, 2000........ $ 278 ======================================
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.
Inventories consisted of the following as of September 30, 2000 and 1999 (in thousands):
2000 1999 ------------- -------------
New boats, motors and trailers....... $ 65,333 $ 63,874 Used boats, motors and trailers...... 5,653 4,932 Parts, accessories and other......... 7,510 7,273 Valuation allowance.................. (417) (379) ------------- -------------
$ 78,079 $ 75,700 ============= =============
1. Summary of Significant Accounting Policies (continued)
Activity in the Company's inventory valuation allowance is as follows (in thousands):
Balance at September 30, 1997....... $ 74 Additions charged to costs and expenses.......... 199 Inventory write-offs....... -0- -------------------------------------- Balance at September 30, 1998....... 273 Additions charged to costs and expenses.......... 106 Inventory write-offs.. -0- -------------------------------------- Balance at September 30, 1999....... 379 Additions charged to costs and expenses.......... 38 Inventory write-offs.. -0- -------------------------------------- Balance at September 30, 2000....... $ 417 ======================================
Property and Equipment
Property and equipment are stated at cost. Provisions for depreciation are determined using the double-declining balance and straight-line methods. The Company uses estimated useful lives of 5 - 20 years for buildings and improvements and 5 - 10 years for furniture, fixtures and equipment.
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, deferred income taxes are provided for temporary differences between the basis of assets and liabilities for financial reporting purposes and for income tax return purposes.
Intangible Assets
Amounts assigned to intangible assets are amortized over the respective estimated useful lives using the straight-line method as follows:
Noncompete agreements 5 to 7 years Goodwill 15 to 25 years
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. The Company groups long-lived assets by store location for purposes of assessing the recoverability of carrying value and measuring potential impairment. To date, the Company has not experienced any events or changes in circumstances that indicate that the recoverability of the carrying amount of an individual store should be assessed.
Goodwill and other intangible assets are recorded at the lower of unamortized cost or fair value. Management reviews the valuation and amortization of intangible assets on a periodic basis, taking into consideration any events or circumstances which might result in diminished fair value. If this review indicates goodwill will not be recoverable, as determined by the undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying value of the goodwill is reduced by the estimated shortfall of discounted cash flows.
1. Summary of Significant Accounting Policies (continued)
Pre-opening Costs
Pre-opening costs related to new store locations are expensed as incurred.
Significant Suppliers
The Company purchased substantially all of its new outboard motors for use on its Travis Edition boat packages from two outboard motor manufacturers, Outboard Marine Corporation and the Brunswick Corporation, in fiscal 2000 and 1999, and from a single outboard motor manufacturer, Outboard Marine Corporation, in fiscal year 1998.
Approximately 33%, 12% and 18% of the Company's net purchases (including product purchased in acquisitions) in fiscal 2000, 1999 and 1998, respectively, were manufactured by boat suppliers with common ownership.
Advertising Costs
Advertising costs are expensed as incurred and were approximately $2,618,000, $1,192,000 and $643,000 during the fiscal years ended September 30, 2000, 1999 and 1998, respectively.
Reclassifications
Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform with the classifications in the 2000 financial statements with no effect on previously reported net income or stockholders' equity
Options to purchase the following shares of common stock were excluded from the computation of diluted EPS for the periods ended September 30, 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.
- ------------------------------------------------------------------------------ Weighted Avg. Weighted Avg. Contractual Life Fiscal Year Excluded Options Exercises Prices in Years - ------------------------------------------------------------------------------ 2000 164,766 $14.40 6.93 1999 97,500 $21.18 7.79 1998 0 n/a n/a
2. Notes Payable and Other Short-Term Obligations
In January 2000, the Company executed new borrowing agreements with two commercial finance companies providing for inventory floor plan financing and working capital borrowings. The agreements, which contain substantially similar terms and have maturity dates of January 2003, provide for a combined borrowing availability of $110 million at various sub-prime based or LIBOR based interest rates (varying from 8.13% to 8.43% at September 30, 2000). Borrowings under the agreements are pursuant to a borrowing base formula and are used primarily to finance inventory purchases and for general working capital requirements. Substantially all inventory, accounts receivable and intangible assets collateralize these borrowing agreements. The terms of the borrowing agreements also provide for: (i) fees for administrative monitoring, (ii) fees for unused portions of available credit, and (iii) pre-payment fees in the event of the Company's termination of such floor plans prior to their stated maturity dates in January 2003. The borrowing agreements also contain various loan covenants and borrowing restrictions, including minimum ratios and a substantial limitation as to payment of dividends or repurchases of the Company's common stock. Effective with the company's financial results for the period ended September 30, 2000, the Company was in violation of several financial ratio covenants with TDF and DFS. However, on January 16, 2001, the Company received written waivers from each lender and, accordingly amended and restated the borrowing agreements to provide for modified ratio levels for each quarterly period through and including September 30, 2001. The amended borrinw gagreements, which mature in January 2003, continue to provide for a total of $110 million in inventory floor plan financing anad working capital borrowings. Interest on the borrowing agreements ranges from the lender's prime rate minus 0.25% to LIBOR plus 3.0%. The Company believes that the financial covenants established in the amended borrowing agreements will be achieved based upon the Company's current and anticipated performance. Based upon manangement's Fiscal 2001 operating plan, including the sale/leaseback or refinancing of certain assets, if necessary, and availability under the borrowing agreements, the Company believes that there is adequate liquidity to fund the Company's operations and to make required principal payments under the two borrowing agreements and other outstanding debt. However, material shortfalls or variances from anaticipated performance could require the Company to seek further amendment to the amended borrowing agreements or alternate sources of financing.
Various manufacturers provide the Company interest expense assistance under the borrowing agreements in order to subsidize the carrying cost of inventory. Accordingly, no interest expense is recorded during portions of the year (August through May) for certain borrowings under these arrangements. At September 30, 2000 and 1999, the Company had non-interest bearing borrowings of $5,795,000 and $9,896,000 under these arrangements. Discontinuance of these agreements could result in an increase to interest expense.
The weighted average interest rate on the borrowing arrangements and the floor plan payables outstanding as of September 30, 2000 and 1999 was 6.9% and 5.5%, respectively.
2. Notes Payable and Other Short-Term Obligations (continued)
Certain notes payable are secured by assets of the Company including equipment, leasehold improvements, vehicles, land and buildings.
At September 30, 2000 and 1999, approximately 92.4% and 84.5% 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 2000, 1999 and 1998.
Aggregate annual maturities required on notes payable at September 30, 2000 are as follows (in thousands):
Year ending
September 30
2001 $ 4,613 2002 1,441 2003 440 2004 1331 2005 309 Thereafter 2,494 ------------------ $ 10,628
==================
3. Leases
The Company leases various facilities, vehicles, and computer software under third party operating leases. In October 1999, the Company entered into a sale leaseback transaction with a leasing company covering substantially all of its motor vehicle fleet. Vehicle leases generally range from 24 to 60 months in term and provide for various residual balances of approximately 20% of the initial lease amount. Lease expense was $3,524,000 in 2000, $2,031,000 in 1999 and $1,188,000 in 1998.
Future minimum payments under non-cancelable operating leases at September 30, 2000 are as follows for each of the years ending September 30 (in thousands):
2001 $ 3,189 2002 2,509 2003 1,887 2004 1,287 2005 690 Thereafter 1,486 ----------------- $ 11,048 =================
Generally, the leases for facilities provide for renewals for various periods at stipulated rates.
4. Acquisitions
The Company made various acquisitions during fiscal 1999 and 1998. All of the acquisitions were asset purchases (except for Shelby Marine which was a stock purchase) and have been accounted for using the purchase method of accounting. The operating results of the companies acquired have been included in the consolidated financial statements from the respective date of acquisition. The assets acquired generally include boat, motor and trailer inventory, parts and accessories inventory and to a lesser extent, property and equipment.
4. Acquisitions (continued)
Pursuant to the purchase terms of The New 3 Three Seas acquisition, the Company agreed to issue 86,005 shares of its common stock valued at approximately $1.1 million upon the registration of such shares with the Securities and Exchange Commission pursuant to the Securities Act of 1933. At September 30, 1999, the value of this stock was accrued as a payable on the balance sheet. The shares of common stock were registered in November 1999 and accordingly issuance of these shares has been reflected in fiscal 2000.
The Company determined the valuation of the securities issued in its purchase transactions in accordance with Emerging Issues Task Force 95-19.
The Company's unaudited consolidated results of operations assuming all acquisitions accounted for under the purchase method of accounting had occurred on October 1, 1997 are as follows for the fiscal years ended September 30, 1999 and 1998:
Year Ended September 30,
1999 1998 ---- ---- Net Sales $206,994,000 $197,365,000 Net Income 7,668,000 7,183,000 Diluted earnings per share 1.74 1.63
The unaudited pro forma results of operations are presented for informational purposes only pursuant to APB 16 and may not necessarily reflect the future results of operations of the Company or what results of operations would have been had the Company owned and operated the business as of October 1, 1997.
5. Income Taxes
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 tax liabilities and assets are as follows (in thousands):
September 30, 2000 1999 ----------------------------------- -----------------------------------
Deferred tax assets: Book over tax depreciation $ 204 $ 121
Accrued salaries and wages 71 136 -----------------------------------
Total deferred tax assets 275 257 Valuation allowance for deferred tax assets - - ----------------------------------- Net deferred tax assets $ 275 $ 257 ===================================
5. Income Taxes (continued)
The differences between the effective tax rate and the U.S. federal statutory rate of 34% are reconciled as follows (in thousands):
Income taxes paid were approximately $1,850,000; $1,563,000 and $4,207,000 in the fiscal years ended September 30, 2000, 1999 and 1998, respectively.
6. Stockholders' Equity
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.
The weighted-average remaining contractual life of options at September 30, 2000 and 1999 is approximately 7.08 and 6.94 years, respectively.
The Company has elected to follow Accounting Principles Board No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
6. Stockholders' Equity (continued)
The assumptions used by the Company to determine the pro forma information regarding net income and earnings per share required by Statement No. 123 are as follows using the Black-Scholes model:
Year Ended September 30, 2000 1999 1998 --------------- ---------------- ----------------
Risk-free interest rate 6.50% 6.00% 6.00% Dividend yield 0% 0% 0% Expected life 5 years 5 years 5 years Volatility 64.5% 39.3% 39.3%
The pro forma amounts under Statement No. 123 are as follows:
Year Ended September 30, 2000 1999 1998 ----------- ----------- -----------
Net income as reported (000's) $897 $6,572 $5,563 Pro forma net income (000's) $738 $6,467 $5,467 Diluted EPS - as reported $0.20 $1.49 $1.26 Pro forma - Diluted EPS $0.17 $1.47 $1.24
The compensation expense associated with the fair value of the options calculated in 2000, 1999 and 1998 is not necessarily representative of the potential effects on reported net income in future years.
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 for the years ended September 30:
Year Ended September 30, 2000 1999 1998 ----------- ------------ -----------
Shares Repurchased (000's) 15 - 0 - - 0 - Total Purchase Price (000's) $59 n/a n/a Average Price per Share $3.92 n/a n/a
7. Commitments and Contingencies
The Company is currently involved in several matters regarding pending or threatened litigation in the normal course of business. Management does not expect the ultimate resolution of these matters to have a material adverse effect on the Company's consolidated financial statements.
8. 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. Expenses related to the plan were not significant in the years ended September 30, 2000, 1999 and 1998.
9. New Accounting Pronouncements
In September 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Because of the Company's minimal use of derivative financial instruments, the adoption of SFAS No. 133 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.
In December 1999, the SEC staff issued Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements" which provides guidance on revenue recognition issues. The Company is required to implement SAB 101 in fiscal 2001, but management does not believe the adoption of SAB 101 will have a material impact on the Company's financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", which further clarifies APB Opinion No. 25, "Accounting for Stock Issued to Employees". This interpretation did not have a material impact on the Company's financial position or its results of operations.
10. Subsequent Events
Loan Transactions - -----------------
Effective December 15, 2000 the Company entered into a loan transaction in the amount of $641,250 with a commercial bank. The loan is secured by certain real estate and improvements in Midland, Texas and has monthly payments of principal and interest of approximately $6,447. The loan has a fixed interest rate of 8.85% and matures in December, 2005.
Effective December 26, 2000 the Company entered into a loan transaction in the amount of $4,450,000 with a commercial bank. The loan is secured by certain real estate and improvements in Atlanta, Georgia, Dallas, Texas and San Antonio, Texas. The loan has monthly payments of principal and interest of approximately $39,745.15. The loan has a variable interest rate initially set at 9.654% and matures in December, 2005. The proceeds of this loan were used, in part, to repay in full the mortgage note payable to bank with a balloon payment due in November, 2000 of $2,987,000. See Footnote #2 "Notes Payable and Other Short Term Obligations".
The chart below reflecting the aggregate annual maturities required on notes payable has been revised to reflect the impact of the two aforementioned loans (in thousands):
Year ending September 30 - Proforma to Reflect effect of Subsequent Loan transactions
2001 $ 1,153 2002 1,630 2003 629 2004 1,539 2005 537 Thereafter 7,244 ------------------ $ 12,732
==================
10. Subsequent Events (continued)
Business Matters - ----------------
On December 22, 2000, one of the Company's primary supplier's of outboard motors, Outboard Marine Corporation ("OMC") filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code. The Company, in the ordinary course of its operations, has certain amounts due from and due to OMC. The Company believes that it has the benefit of certain rights of "off-set" that when implemented will result in the elimination of such amounts without a detrimental effect on its financial operations.
The Company also maintains a contract with an alternative supplier of outboard engines, Brunswick Corporation, covering the terms for the purchase of Mercury outboard motors.