ITEM 1. BUSINESS
General
Travis Boats & Motors, Inc. ("Travis Boats" or the "Company") is a leading multi-state superstore retailer of recreational boats, motors, trailers and related marine accessories in the southern United States. The Company, which currently operates 38 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" and the "Company"' 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, the Company has grown both through acquisitions and the establishment of new store locations. During the 1980s, the Company expanded into San Antonio, Texas with the construction of a new store facility. The Company subsequently made acquisitions of boat retailers operating within the Texas markets of Midland, Dallas and Abilene. It was during this initial period of expansion that the Company began developing the systems necessary to manage a multi-store operation and leveraging the economies of scale associated with volume purchasing. The Company's success in these areas led to the proprietary Travis Edition packaging concept and the Company's pricing philosophy. Since 1990, Travis Boats has opened or acquired 33 additional store locations in the following states: Texas (3), Arkansas (4), Louisiana (4), Alabama (2), Tennessee (5), Mississippi (1), Florida (12), Georgia (1) and Oklahoma (1).
The Company sells approximately 75 different Travis Edition models of brand-name fishing, water-skiing and general recreational boats, along with motors, trailers, accessories and related equipment. Personal watercraft, off-shore fishing boats and cabin cruisers are also offered for sale at selected store locations. During fiscal 1999, substantially all of the boat units sold range in size from 16
to 25 feet at prices ranging from $7,500 to $25,000. Approximately 1.7% of new boat sales are personal watercraft with retail prices generally ranging from $5,000 to $10,000 and approximately 6.7% of new boat sales are off-shore fishing boats and cruisers with lengths of 27 feet or greater and generally ranging in retail price from $50,000 to $300,000. The Company's retail pricing structure seeks to maintain a consistent gross profit percentage for each of its Travis Edition models. See "Business Strategy - Travis Edition Concept."
The Company custom designs and pre-packages combinations of popular brand-name boats, such as Larson, Wellcraft, Bayliner, Sprint, and Sea Ark boats with outboard motors generally manufactured by Outboard Marine Corporation or Brunswick, along with trailers and numerous accessories, under its proprietary Travis Edition product line. 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. These factors enable the Company to provide the customer with an exceptional product that is conveniently packaged for immediate enjoyment and competitively priced.
The Company believes that it 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. The Company's product line generally consists of boat packages priced from $7,500 to $25,000 with approximate even distribution within this price range. While the Company's sales have historically been concentrated on boats with retail sales prices below $25,000, the Company in limited market areas and quantities does sell boats that have retail sales prices in excess of $200,000. Additionally, as the Company continues to operate in Florida and enters other markets along the Gulf of Mexico or other new coastal areas, management believes that the distribution of off shore fishing boats and cabin cruisers will continue to increase as a percentage of net sales. Management believes that by combining flexible financing arrangements with an even distribution of products through a broad price range, the Company is able to offer boat packages to customers with different purchasing budgets and varying income levels.
Business Strategy
The Company has developed a multi-state, chain superstore merchandising strategy in the recreational boating business. The Company's 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. As such the Company's strategy is to increase its store location count in the southern United States while also maintaining a focus on possible expansion into other regions. Management's merchandising strategy is based on providing customers with a comprehensive selection of quality, brand name boats and boating products in a comfortable superstore environment. The Company intends to continue to build brand identity by placing the Travis Edition name on complete boating packages. Travis Boats has developed and implemented a business strategy designed to increase its market penetration within both existing and new market areas through a variety of advertising and promotional events. The Company intends to emphasize the following key elements of its 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, giving a "ready to take home" impression. Professionally-trained mechanics operate service bays, providing customers with quality and reliable maintenance and repair service.
Travis Edition concept. The Company uses extensive market research, combined with the design resources of its manufacturers, to develop custom Travis Edition boating packages. The Company's significant purchasing power and consequent ability to coordinate designs with manufacturers have enabled the Company to obtain products directly from the factory at the lowest prices, with favorable delivery schedules and with distinguishing features and accessories that have historically been unavailable to, or listed as optional by, many competitors. The Company can also add certain additional features after receipt of the product to enhance the Company's 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. In addition, Travis Edition boats are generally identified by the Company's attractive private label logo as well as the respective manufacturer's logo.
Unlike most recreational boat dealers, the Company establishes firm prices on its Travis Edition packages and generally maintains such prices for an entire season. Prices are advertised and clearly posted so that the customer receives the same price at any Travis Boating Center. The Company's selling philosophy is designed to eliminate customer anxiety associated with bargaining or negotiation and result in a price at or below prices generally available from competitors. The Company believes this pricing strategy and low-pressure sales style provide the customer with the comfort and confidence of having received a better boat with more features at a lower price. In the Company's view, this approach has promoted good customer relationships and enhanced the Company's reputation in the industry as a leading provider of quality and value.
Acquisitions. The Company has made various acquisitions during the three year period ended September 30, 1999. All of the acquisitions were asset purchases (except for Adventure Marine and Shelby Marine, which were stock purchases) 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. A summary of the Company's acquisitions follows:
Boat Show Participation. The Company also participates in boat shows, typically held in January through March, in each of its markets and in certain markets of close proximity. These shows are normally held at convention centers, with all area dealers purchasing space to display their respective product offerings. Boat shows and other offsite promotions generate a significant amount of interest in 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 the Travis Edition boat packages the Company offers customers the ability to purchase extended service contracts and insurance coverages, including credit life and accident/disability coverages (collectively "F&I Products"). The Company also offers to assist the customer in obtaining financing for their boat purchase through a diversified group of financial institutions with which the Company maintains financing agreements. The Company earns commissions on these F&I Products based upon the Company's mark-up over the cost of the products. F&I Products account for a substantial portion of the Company's income, the most significant component of which is the income resulting from the Company's origination of customer financing.
Operations
Purchasing. The Company believes it is among the largest volume buyers of outboard motors in the United States. Until fiscal year 1999, the Company purchased substantially all of its outboard motors from Outboard Marine Corporation ("OMC"), which is the manufacturer of Johnson outboard motors. Beginning with the 1999 fiscal year, the Company elected to further diversify its outboard motor selection and entered into an agreement to purchase Mercury outboard motors from Brunswick Corporation ("Brunswick"). The Company is also among the largest domestic volume buyer of boats from many of the boat manufacturers it represents. As a result, the Company has significant access to the manufacturers and substantial input into the design process for the new boats that are introduced to the market each year by such manufacturers. In addition, the Company has designed and developed, in coordination with its manufacturers, signature Travis Edition boating packages which account for the vast majority of its total new boat sales.
The Company typically deals with each of its manufacturers pursuant to an annually renewable, non-exclusive dealer agreement which does not contain any contractual provisions concerning product pricing or purchasing levels. Pricing is generally established on an annual basis, but may be changed at the manufacturer's sole discretion. The Company's agreements with OMC and Brunswick to purchase outboard motors, as well as its agreements to purchase boats from GenMar Industries, Inc. ("Genmar"), unlike its other dealer agreements, are multi-year in nature. These current agreements include volume discounts from the then prevailing dealer net price over the entire term of the respective agreement. This dealers agreement typically may be canceled by either party if volume of product purchased or available to be purchased is not maintained at pre-established levels.
Approximately 12% and 18% of the Company's net purchases in fiscal years 1999 and 1998, respectively, were products manufactured by boat manufacturers owned by Genmar. Genmar's boat lines purchased by the Company include Larson, AquaSport, Wellcraft, Scarab, and Carver. OMC supplied products that represented approximately $32.4 million, or 36.3%, and $17.7 million, or 42.1%, of the Company's net purchases during fiscal years 1999 and 1998, respectively. Brunswick supplied Mercury
outboard motors that represented approximately $32.4 million, or 36.3%, of the Company's net purchases during the 1999 fiscal year.
The Company's right to display some product lines or prices in certain markets, including the Internet, may be restricted by arrangements with certain manufacturers.
Floor plan and other inventory financing. The Company acquires a substantial portion of its inventory through floor plan and other financing agreements. Inventory is generally purchased under floor plan lines of credit (secured by such inventory) maintained with third party finance companies or under revolving lines of credit maintained with commercial banks, depending upon the type of product purchased. 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," manufacture'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 substantially all manufacturers in the marine industry offering such programs. Management believes that these financing arrangements are standard within the industry. As of September 30, 1999, the Company and its subsidiaries owed an aggregate of approximately $68.6 million pursuant to the floor plan and revolving lines of credit.
Competition. The Company operates in a highly competitive environment. In addition to facing competition generally from 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 suitable store locations. The Company relies heavily on boat shows to generate sales. If the Company is impeded in its ability to participate in boat shows in its existing or targeted markets, it could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company competes primarily with single location or single state boat dealers 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 attention to customer service. There is significant competition both within markets currently being served by the Company and in new markets into which the Company plans to enter. While the Company generally competes in each of its 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 offered by the Company as its Travis Edition lines. In addition, several of the Company's competitors, especially those selling boating accessories, are large national or regional chains that may have substantially greater financial, marketing and other resources than the Company. There can be no assurance that the Company 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 schedules than the EPA. The Company's 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 1999 and 1998, the Company 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 Company's boat models sold with the new EPA compliant outboards in fiscal 1999 and 1998 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 the Company's business, financial condition and results of operations.
The Company, in the ordinary course of its business, is 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 the Company's policy to use appropriately licensed waste disposal firms to handle this refuse. If there were improper disposal of these products, it could result in potential liability for the Company. Although the Company does not own or operate any underground petroleum storage tanks, it currently maintains several 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 the Company's business, financial condition and results of operations.
Trademarks and service marks. The Company does not hold any registered trade or service marks at this time but has trademark applications pending with the U.S. Patent and Trademark Office for the names "Travis Boating Center" and "Travis Edition," for its corporate logo and for the overall appearance and trade dress of its Travis Boating Centers. There can be no assurance that any of these applications will be granted. However, based on a number of years of use, the Company believes it has common law rights to these marks at least in its current market areas. Notwithstanding the foregoing, the Company has 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 in Knoxville, Tennessee and a 50 mile radius therefrom.
Web site. The Company operates a Web site under the name "travisboatingcenter.com." The Company owns the URL name for this name and numerous derivations thereof.
Employees. As of September 30, 1999, the Company's staff consisted of 708 employees, 668 of whom are full time. The full-time employees include 37 in store level management and 51 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. The Company considers its relations with its employees to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases its corporate offices which are located at 5000 Plaza on the Lake, Suite 250, Austin, Texas. The Company also owns 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. The Company typically pays a fixed rent and in substantially all of the leased locations the Company is responsible for the payment of taxes, insurance, repairs and maintenance.
ITEM 3.
ITEM 3. 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 1999 and 1998, which reflects the inclusion of the audited consolidated financial statements for the fiscal years ended September 30, 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.
The following table sets forth for the periods indicated certain financial data as a percentage of net sales:
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
Highlights
Fiscal year 1999 was a record year for the Company, which included the following achievements compared to fiscal 1998:
* Net sales increased 38.4% to $182.3 million. * Net income increased by 18.1% to $6.6 million from $5.6 million. * Diluted earnings per share increased by 18.3% to $1.49 from $1.26.
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. The Company plans to continue to explore the used boat market and potential sites for used boat superstores and brokerage facilities.
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 until higher percentages of the Company's stores are includable in comparable store calculations.
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 commericla 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 superst 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. Operations and Make Us More Vulnerable to Adverse Economic Conditions" and "Qualitative and Quantitative Disclosures About Market Risk." See "Risk Factors--Our Substantial Indebtedness Could Restrict Our standards.
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. Net income attributable to F&I Products increased by 9.2% to approximately $1.24 million (18.8% of net income) in fiscal 1999 from $1.13 million (20.3% of net income) in fiscal 1998. The calculation of net income attributable to F&I Products is based on an allocation of gross profit after adjusting for costs which management believes are directly allocable to F&I Products.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
Net sales. Net sales increased by 44.3% to $131.7 million in fiscal 1998 from $91.3 million in fiscal 1997. The primary component of the increase in net sales during the 1998 and 1997 fiscal years has been the result of newly opened or acquired store locations. Accordingly, of the increase in net sales, $36.6 million, or 90.6% is related to the store locations that were (i) newly opened or acquired (12), or (ii) those relocated or renovated (3) to meet the Company's superstore standards during fiscal 1998 or 1997. The Company also benefited from growth in comparable store sales. During fiscal year 1998, comparable store sales increased by 6.6%, or $3.7 million, (9 stores in base) versus 5.7%, or $2.1 million, (6 stores in base) during fiscal 1997. See "Risk Factors-Our Success Will Depend on How Well We Manage Our Growth."
Growth in overall sales volume was also in part the result of additional new Travis Edition boating packages introduced during fiscal 1998 and 1997. This included the new addition of the Pro- Line and Polar brand boats as well as new boat models introduced by the Company's existing boat manufacturers. These additional new Travis Edition boat lines have allowed the Company to further broaden its boat line-up in an effort to continue to address the needs and desires of the recreational boating population. During fiscal 1998, the Company experienced increased parts/accessories and service labor sales as an increased percentage of the Company's store base was relocated or renovated to superstore standards which provide larger and more accessible areas to merchandise its product selection and conduct repair work on boats. This resulted in enhanced sales of parts/accessories and service labor both in actual dollars and as a percentage of net sales. Parts/accessory sales increased to $11.3 million, or 8.6% of net sales, from $8.6 million, or 9.4% of net sales, in fiscal years 1998 and 1997, respectively. Service labor sales increased to $4.7 million, or 3.6% of net sales, from $3.3 million, or 3.6% of net sales, in fiscal years 1998 and 1997, respectively. Net sales also benefited from used boat sales including those used boat sales from the Company's used boat superstores located at its Beaumont, Texas and Heber Springs, Arkansas store locations. The used boat sales in fiscal 1998 and fiscal 1997, were approximately $7.3 million and $4.0 million, respectively. The Company plans to continue to explore the used boat market and potential sites for used boat superstores.
Net sales from comparable stores, which had 9 stores included in the base for calculation, increased by 6.6% and 5.7% in fiscal year 1998 and 1997, respectively. The Company relocated or renovated 3 stores and opened or acquired an additional twelve stores during fiscal years 1998 and 1997 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 until higher percentages of the Company's stores are includable in comparable store calculations.
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 78.2% to approximately $7.1 million in fiscal 1998 from $4.0 million in fiscal 1997. This improvement was primarily due to higher net spreads achieved in the placement of customer financing, as well as overall increases in the percentage of customers buying these products (which is referred to as "sell-through"). This increase was enhanced by the Company's continued emphasis on training of F&I employees and achievement of established goals. See "Risk Factors--Much of Our Income Is from Financing, Insurance and Extended Service Contracts, Which is Dependent on Third Party Lenders and Insurance Companies."
Gross profit. Gross profit increased by 45.7% to approximately $34.9 million in fiscal 1998 from $24.0 million in fiscal 1997. Gross profit as a percent of sales increased to 26.5% in fiscal 1998 from 26.2% in fiscal 1997. 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 1998, the Company's gross profit margin was positively impacted by the increased revenues derived from the parts/accessory, service labor and used boat sales as discussed above in Net Sales.
Net sales attributable to F&I Products, which have a significant impact on the gross profit margin, contributed $7.1 million, or 20.3%, of total gross profit in fiscal 1998, as compared to $4.0 million, or 16.6%, of total gross profit for fiscal 1997. 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 45.4% to $22.6 million in fiscal 1998 from $15.6 million for fiscal 1997. Selling, general and administrative expenses as a percent of net sales increased by 14 basis points to 17.18% in fiscal 1998 from 17.04% for fiscal 1997. In absolute dollars and as a percentage of net sales, 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 insurance costs associated with introducing Travis stores into new geographically diverse regions. Rental expense also increased as a percent of net sales as the Company expanded and relocated its Corporate headquarters, which had previously been located in the Austin, Texas superstore facility, in June 1997.
Interest expense. Interest expense, in absolute dollars, increased by 70.6% to $23 million in fiscal 1998 from $1.4 million in fiscal 1997. Interest expense as a percent of net sales, increased to 1.8% in fiscal 1998 from 1.5% in fiscal 1997. 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 commericla 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 super stores. 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. Operations and Make Us More Vulnerable to Adverse Economic Conditions" and "Qualitative and Quantitative Disclosures About Market Risk." See "Risk Factors--Our Substantial Indebtedness Could Restrict our standards.
Net income. Net income increased by 39.7% to approximately $5.6 million in fiscal 1998 from $4.0 million in fiscal 1997. While the Company continued to benefit from enhanced gross profit margins in fiscal 1998, 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 4.2% from 4.4% during the same periods. Net income attributable to F&I Products increased by 33.3% to approximately $1.6 million in fiscal 1998 from $1.2 million in fiscal 1997. The calculation of net income attributable to F&I Products is based on an allocation of gross profit after adjusting for costs which management believes are directly allocable to F&I Products.
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-year period, the average annual net sales for the quarterly periods ended March 31 and June 30 represented approximately 27% and 41%, 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.
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 "credit facilities"). At September 30, 1999, the Company had working capital of $12.1 million, including $4.1 million in cash, $12.4 million in accounts receivable (primarily contracts in transit from sales) and $75.7 million in inventories, offset by approximately $6.8 million of accounts payable and accrued liabilities, $35.4 million outstanding under floor plan lines of credit, approximately $33.2 million under revolving lines of credit and $6.8 million in other current liabilities and short-term indebtedness including current maturities of long-term debt. Contracts in transit are amounts receivable from a customer or a customer's financial institution related to that customer's purchase of a boat. As of September 30, 1999, the aggregate maximum borrowing limits under floor plan and revolving lines of credit were approximately $54.0 million and $55.0 million, respectively.
In fiscal 1998, operating activities generated cash flows of $2.9 million due primarily to increased net profits, controlled inventory growth and proceeds received on unearned manufacturer rebate revenues. Management believes that store inventory levels at September 30, 1998 were below standard stocking levels as the Company was in the process of contract discussions with its primary outboard motor supplier, Outboard Marine Corporation. The Company was also in discussions with a new alternate outboard motor supplier, Mercury Marine. The Company could not order outboard motor powered boats until a determination of what type of outboard motor was to be placed on the boat. The Company agreed in principal to agreements with Outboard Marine Corporation and Mercury Marine in November of 1998 and the Company has since re-stocked its store locations to levels that management believes are historically appropriate.
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 $667,000 and an increase in income tax payables of $3.2 million.
Investing activities utilized cash flows of $13.8 million due primarily to the 14 new store locations, either newly opened or acquired in fiscal 1999, along with the construction of a new facility in Gwinnett County, Georgia. In addition, the Company purchased real estate in Clearwater, Florida (for the relocation of the St. Petersburg, Florida location), Key Largo, Florida and San Antonio, Texas (to take the place of the existing one). These activities were funded through the mix of the Company's revolving line of credit facility, with Bank of America (formerly NationsBank of Texas, N.A.) as agent, mortgage debt and internal cash.
Financing activities in fiscal 1999 provided $26.6 million of cash flows primarily from the net proceeds of borrowings under the Company's credit facilities. The Company has a $55.0 million revolving line of credit agented by Bank of America (formerly NationsBank of Texas, N.A.) This line of credit provides for borrowing pursuant to a borrowing formula based upon certain of the Company's inventory and accounts receivable. Collateral for this indebtedness consists of a security interest in specific inventories (and proceeds thereof), accounts receivable and contracts in transit. The line has a maturity on January 31, 2000 and pricing is at the Company's election of the prime rate minus 1.00% or on a LIBOR- based price structure. There is a fee on the unused portion assessed quarterly. A comprehensive loan agreement governs the line of credit. The agreement contains financial covenants regulating debt service coverages, tangible net worth, operating leverage and restrictions on dividends or distributions. As of December 15, 1998, $41.5 million was drawn on the revolving line and the Company could borrow an additional $13.5 million, of which approximately $5.4 million was immediately available for borrowing based upon the revolving line's 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. The Company is presently out of compliance with one of the financial ratios of the current revolving line of credit. The Company, however, is currently in the process of refinancing and increasing this credit facility to provide for borrowings up to $125.0 million with several financial lenders, including certain lenders that currently provide a portion of the $55.0 million loan. This refinancing is expected to occur on or before February 1, 2000 and will not include the ratio that is out of compliance at the present time. Management believes the Company to be in compliance with all other terms and conditions of the current loan agreement and all proposed terms and conditions being set forth in the new refinanced line of credit.
The Company also maintains floor plan lines of credit with various finance companies totaling approximately $54.0 million in credit limits, which generally have no stated maturity and utilize subsidies from manufacturers to provide for certain interest free periods each calendar year (usually August through at least May). Certain floor plan lines of credit with finance companies are governed by loan agreements containing financial covenants concerning, among others, minimum tangible net worth and leverage ratios. As of December 15, 1999, approximately $46.2 million was drawn under the floor plan lines. Management believes the Company is in compliance with the terms and conditions of these loan agreements.
Merchandise inventories were $38.9 million and $75.7 million as of September 30, 1998 and September 30, 1999, respectively. Accounts receivable increased by approximately $7.5 million to $12.4 million at the end of fiscal 1999 from a year earlier. The receivables amount represents primarily contracts in transit generated from sales. Costs in excess of net assets acquired increased to by approximately $5.4 million to $11.6 million in fiscal 1999 due to the acquisitions during fiscal 1999 discussed previously in the section Overview.
The Company had capital expenditures of approximately $7.7 million in fiscal 1999 and approximately $4.3 million in fiscal 1998. Capital expenditures during fiscal 1998 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 is under the construction of a new superstore located in Gwinnett County, Georgia (relocating the Roswell, Georgia temporary store location). The fiscal 1998 and 1999 capital expenditures were primarily financed under the Company's credit facilities, mortgages and internal cash.
The Company's proposed refinanced $125.0 revolving credit facility, which includes enhanced advance rates on new and used boat inventories and certain accounts receivable, existing floorplan lines of credit and internally generated working capital should be sufficient to meet the Company's cash requirements in the near future.
Disclosure of Year 2000 Issues and Consequences
The Year 2000 Issue ("Y2K") is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations in the Company's point of sale, accounting and other financial operations which could cause disruptions of operations, including, among other things, could result in a temporary inability to process financial transactions, or engage in similar normal business or financial reporting activities. Similarly, material suppliers to the Company may be unable to produce or ship product in the ordinary course of their business operations.
Based on recent system evaluations, surveys, and on-site inventories, the Company determined that it will be required to modify or replace minimal portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. As part of a previously planned company-wide upgrade to its accounting systems initiated in March of 1998, the Company has replaced its integrated accounting and point-of-sale management information system ("MIS"). The new MIS system is currently operating in all 38 store locations. The new MIS system was selected in part due to its ability to allow the Company increased efficiencies in its efforts to further centralize full financial and accounting operations. The Company has received assurances that new MIS system is a Y2K compliant system.
The Company has one other key system that is not part of the integrated package. The Company contracts with Automatic Data Processing ("ADP") for payroll processing. ADP has provided the Company with separate software, which is used to administer the company-wide payroll. The Human Resources department of the Company has completed installation of a year 2000 compliant version that has been provided to the Company by ADP.
A survey has been performed on all back office software packages. We have not seen any material date macros or other date related functions that would be materially affected by dates beyond December 31, 1999.
Significant non-technical systems and equipment that may contain microcontrollers that are not Y2K compliant are being identified and have been addressed if deemed critical. This includes, but is not limited to, telephone systems, copiers, fax machines and point of sale credit card authorization terminals.
The Company has utilized a written questionnaire specifically designed to query significant vendors, including but not limited to, boat suppliers, parts/accessory suppliers and wholesalers, and financial institutions. Certain of the companies queried have responded to questionnaires stating that their systems are Y2K compliant. The Company is monitoring the status of the questionnaire respondents that have indicated that Y2K compliance was not yet complete, but is anticipated to be complete during calendar year 1999. The Company has not received any questionnaires from companies that have expressed an inability or business related purpose that would render them unable to reach Y2K compliance. To date, the Company is not aware of any Y2K issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that significant vendors will be Y2K ready. The inability of vendors to complete their Y2K resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by significant vendors is not determinable.
While the Company believes its efforts will provide reasonable assurance that material disruptions will not occur due to internal failure, the possibility of interruption still exists.
In the ordinary course of business, the Company has acquired a significant amount of Y2K compliant hardware and software. These purchases were part of specific operational and financial system enhancements with completion dates during late 1999 that were planned without specific regard to the Y2K issue. These system enhancements resolve many Y2K problems and have not been delayed as a result of any additional efforts to address the Y2K issue. The Company expects that Minimal costs will be associated with Y2K issue. The Company does not expect the Y2K cost of unforeseen hardware or software applications to exceed $100,000.
Management believes it has an effective program in place to resolve the Y2K issue. However, disruptions in the economy generally resulting from the Y2K issues could also result in a materially adverse affect to the Company.
The Company currently has assigned three management level employees to further identify risks and carry out contingency plans in the event the Company, or its vendors, does not complete all phases of the Y2K program.
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 April 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. The SOP requires costs of start-up activities and organization costs to be expensed as incurred, and is effective for fiscal years beginning after December 15, 1998. The effects of adoption must be reported as a cumulative change in accounting principle. The Company expects that the impact of adoption will not be material to its financial position or 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 1999, approximately 84.5% 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, 1999, the average rate of interest of such variable rates was 5.47%. 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, 1999, which averaged approximately $46,853,000, an increase of 2% in the average rate of interest would result in an increase in 1999 interest expense of approximately $937,060 and a decrease in 1999 net income and after-tax cashflow of approximately $592,878. 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. FINANCIAL STATEMENTS
For the financial statements and supplementary data required by this Item 8, see the Index to Consolidated Financial Statements and Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 1. DIRECTORS AND EXECUTIVE OFFICERS
There is incorporated herein by reference that portion of the Company's proxy statement for the 2000 Annual Meeting of Shareholders which appears therein under the captions "Item 1: Election of Directors" and "Information Concerning Directors."
ITEM 2. EXECUTIVE COMPENSATION
There is incorporated in this Item 11 by reference that portion of the Company's definitive proxy statement for the 2000 Annual Meeting of Shareholders which appears under the caption "Executive Compensation."
ITEM 3. 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 2000 Annual Meeting of Shareholders which appears under the caption "Securities Holdings of Principal Shareholders, Directors, Nominees and Officers."
ITEM 4.
ITEM 4. 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 2000 Annual Meeting of Shareholders which appears under the captions "Certain Relationships and Related Transactions" and "Compensation Committee Interlocks and Insider Participation."
PART IV
ITEM 1. 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 --Dealer Agreement dated as of August 17, 1995, between the Company and Mastercrafters Corporation.(1)(6) 10.5(a) --Inventory Security Agreement and Power of Attorney dated as of November 30, 1993, Between Bombardier Capital Inc. and the Company.(1)
10.5(b) --Inventory Security Agreement and Power of Attorney dated as of November 30, 1993, Between Bombardier Capital Inc. and Falcon Marine Abilene, Inc.(1)
10.6(a) --Agreement for Wholesale Financing dated as of August 17, 1995, by and among Deutsche Financial Services Corporation, the Company and its subsidiaries; and Amendment to Agreement for Wholesale Financing dated as of September 22, 1995.(1)
10.6(b) --Agreement for Wholesale Financing dated as of August 17, 1995, between Deutsche Financial Services Corporation and Travis Boats & Motors Baton Rouge, Inc.(1)
10.7(a) --Inventory Loan Agreement dated as of September 20, 1995, between TBC Arkansas, Inc. And Hibernia National Bank.(1)
10.7(b) --Commercial Security Agreement dated September 1, 1995, between TBC Arkansas, Inc. and Hibernia National Bank.(1)
10.8(a) --Inventory Loan Agreement dated as of December 17, 1992, between Travis Boats & Motors Baton Rouge, Inc. and Hibernia National Bank; and First Amendment to Inventory Loan Agreement dated as of February 7, 1994.(1)
10.8(b) --Promissory Note dated May 30, 1995, in the original principal amount of $100,000, payable By Travis Boats & Motors Baton Rouge, Inc. to Hibernia National Bank.(1)
10.8(c) --Promissory Note dated May 30, 1995, in the original principal amount of $800,000, payable By Travis Boats & Motors Baton Rouge, Inc. to Hibernia National Bank.(1)
10.8(d) --Promissory Note dated July 14, 1995, in the original principal amount of $480,000, payable By Travis Boats & Motors Baton Rouge, Inc. to Hibernia National Bank.(1)
10.8(e) --Business Loan Agreement dated July 14, 1995, between Travis Boats & Motors Baton Rouge, Inc. and Hibernia National Bank.(1)
10.8(f) --Commercial Security Agreement dated July 14, 1995, between Travis Boats & Motors Baton Rouge, Inc. and Hibernia National Bank.(1)
10.8(g) --Collateral Mortgage dated July 14, 1995, from Travis Boats & Motors Baton Rouge, Inc. to Hibernia National Bank.(1)
10.8(h) --Assignment of Leases and Rents dated July 14, 1995, between Travis Boats & Motors Baton Rouge, Inc. and Hibernia National Bank.(1)
10.8(i) --Pledge of Collateral Mortgage Note dated July 14, 1995, from Travis Boats & Motors Baton Rouge, Inc. to Hibernia National Bank.(1)
10.9(a) --Promissory Note dated September 1, 1995, in the original principal amount of $3,000,000, Payable by TBC Arkansas, Inc. to Hibernia National Bank.(1)
10.9(b) --Commercial Guaranty dated September 1, 1995 by the Company in favor of Hibernia National Bank guarantying a $3,000,000 Promissory Note.(1)
10.9(c) --Promissory Note dated September 1, 1995, in the original principal amount of $250,000, Payable by TBC Arkansas to Hibernia National Bank.(1)
10.10(a) --Amended and Restated Loan Agreement dated as of September 15, 1995, by and among NationsBank of Texas, N.A., the Company and its subsidiaries.(1)
10.10(b) --Security Agreement dated July 31, 1995, by and among NationsBank of Texas, N.A., the Company and its subsidiaries.(1)
10.11--General Promissory Note dated August 31, 1995, in the original principal amount of $300,000, payable by the Company to Amerisure Property & Casualty, Ltd.(1)
10.12--General Promissory Note dated August 31, 1995, in the original principal amount of $100,000, payable by the Company to Capitol Commerce Reporter, Inc.(1)
10.13--General Promissory Note dated August 31, 1995, in the original principal amount of $75,000, payable by the Company to Capitol Commerce Reporter, Inc.(1)
10.14--General Promissory Note dated August 31, 1995, in the original principal amount of $50,000, payable by the Company to Joe Simpson and Pat Simpson.(1)
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) --First Lien Promissory Note dated September 15, 1995, in the original principal amount of $679,000, payable by Travis Snowden Marine, Inc. to NationsBank of Texas, N.A.(1)
10.26(c) --First Lien Deed of Trust, Assignment, Security Agreement and Financing Statement dated September 15, 1995, from Travis Snowden Marine, Inc. to Michael F. Hord, Trustee.(1)
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) --Deed of Trust, Assignment, Security Agreement and Financing Statement dated March 5, 1993, from the Company to Michael F. Hord, Trustee.(1) 10.27(d) --Deed of Trust dated April 28, 1994, from the Company to Wm. H. Harrison, Jr., Trustee.(1) 10.28 --Trust Agreement dated December 31, 1994, by and among Ideal Insurance Company, Ltd. and the Company.(1)
10.29(a) --Revolving Credit Agreement dated as of December 12, 1996, in the original principal Amount of $15,000,000 by and among the Company, its Subsidiaries and NationsBank of Texas, N.A. as agent.(2)
10.29(b) --Commercial Security Agreement dated as of December 12, 1996 by and among the Company, its Subsidiaries and NationsBank of Texas, N.A. as agent.(2)
10.29(c)--Promissory Note dated as of December 12, 1996 in and original principal amount of $9,000,000 among the Company, its subsidiaries and NationsBank of Texas, N.A., as agent.(2)
10.29(d) --Promissory Note dated as of December 12, 1996 in the original principal amount of $6,000,000 among the Company, its subsidiaries and NationsBank of Texas, N.A. as agent.(2)
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--First Amendment to Revolving Credit Agreement dated as of October 31, 1997, in the original principal amount of $55,000,000 by and among the Company, its Subsidiaries and NationsBank of Texas, N.A. as agent.(4)
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.
10.41--Employment Agreement dated November 16, 1999 between TBC Management, Ltd. and Michael B. Perrine.
10.42--Employment Agreement dated November 16, 1999 between TBC Management, Ltd. and Ronald L. Spradling.
10.43--Wellcraft Master Dealer Agreement effective September 29. 1998 between the Company and Wellcraft Marine Corp. (6)
10.44--Aquasport Master Dealer Agreement effective September 29, 1998 between the Company and Aquasport, a division of Wellcraft Marine Corp. (6)
10.45--Outboard Marine Corporation Private Label/Retail Store Agreement dated November 13, 1998 between the Company and Outboard Marine Corporation.(6)
10.46--Product Supply Agreement dated June 29, 1999 between the Company, its subsidiaries and Mercury Marine, a division of Brunswick Corporation. (6)
10.47--Larson Master Dealer Agreement effective September 29, 1999 between the Company and Larson/Glastron Boats, Inc. (6)
16 --Letter re: change in certifying accountant(1)
21.1 --List of Subsidiaries of Registrant.
23.1 --Consent of Independent Auditors of Registrant, dated December 27, 1999.
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 December 31. 1006 (File No. 000-20757)
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed May 15, 1997 ..(File No. 000-2057).
(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.
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: December 24, 1999 By: /s/ Mark T. Walton - - ------------------------ ----------------------- Mark T. Walton Chairman of the Board And President
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, 1999, 1998 and 1997
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, 1999 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1999. 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 generally accepted auditing standards. 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, 1999 and 1998 and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP -----------------------
December 8, 1999 Austin, Texas
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 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 generally accepted accounting principles 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.
COMPREHENSIVE INCOME
In September 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The adoption of SFAS No. 130 by the Company had no impact as the Company had no items of comprehensive income for all years presented.
SEGMENTS
Effective October 1, 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. The adoption of SFAS No. 131 did not have a significant effect on the disclosure of segment information as the Company continues to consider its business activities to be in a single segment.
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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
For purposes of the statement of cash flows, the Company considers all investments with maturities of ninety days or less when purchased to be cash equivalents.
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.
The accounts receivable balances consisted of the following as of September 30, 1999 and 1998 (in thousands):
1999 1998 ------------ --------------
Trade receivables............... $ 7,793 $3,708 Amounts due from manufacturers.. 4,593 1,139 Other receivables............... 282 46 Allowance for doubtful accounts. (247) 0 ------------- --------------- $12,421 $4,893 ============= ===============
Activity in the Company's allowance for doubtful accounts is as follows (in thousands):
Balance at September 30, 1996.......... $ -0- Additions charged to costs and expenses.................. -0- Write-offs of uncollectible accounts...................... -0- --------------------------------------- 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 ===
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consist of boats, motors, trailers and related watersport parts and accessories. Inventories are carried at the lower of cost or market. Cost for boats, motors and trailers is determined using the specific identification method. Cost for parts and accessories is determined using the first-in, first-out method.
Inventories consisted of the following as of September 30, 1999 and 1998 (in thousands):
1999 1998 ------------ -----------
New boats, motors and trailers........ $63,874 $32,089 Used boats, motors, and trailers...... 4,932 2,559 Parts, accessories and other.......... 7,273 4,559 Valuation allowance................... (379) (273) ------------ ------------ $75,700 $38,934 ============ ============
Balance at September 30, 1996.......... $ -0- Additions charged to costs and expenses.................. 74 Write-offs of uncollectible accounts...................... -0- --------------------------------------- Balance at September 30, 1997.......... 74 Additions charged to costs and expenses.................. 199 Write-offs of uncollectible accounts...................... -0- --------------------------------------- Balance at September 30, 1998.......... 273 Additions charged to costs and expenses.................. 106 Write-offs of uncollectible accounts...................... -0- --------------------------------------- Balance at September 30, 1999.......... 379 ===
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Provisions for depreciation are determined using 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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
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 cash flows.
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 1999, and from a single outboard motor manufacturer, Outboard Marine Corporation, in fiscal years 1998 and 1997.
Approximately 12%, 18% and 34% of the Company's net purchases (including product purchased in acquisitions) in fiscal 1999, 1998 and 1997, respectively, were manufactured by boat suppliers with common ownership.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were approximately $1,192,000, $643,000 and $829,000 during the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
NOTES PAYABLE AND OTHER SHORT-TERM OBLIGATIONS
Interest expense on notes payable and other short-term obligations is recorded as incurred. The Company receives interest assistance on certain floor plan payables from various boat and motor manufacturers to subsidize the carrying cost of inventory. Accordingly, no interest expense is recorded during portions of the year on floor plan payables which include noninterest bearing payment terms. Discontinuance of the interest assistance payments could result in an increase in interest expense.
UNEARNED REVENUE
Amounts received from vendors in connection with agreed upon rebates or discounts are deferred until the related product is sold and such rebate or discount is earned.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON SHARE
Options to purchase 97,500 shares of common stock with a weighted average strike price of $21.18 and a weighted average outstanding remaining life of 7.79 years were excluded from the computation of diluted EPS for the period ended September 30, 1999 as the option's exercise prices were greater than the average market price of the Company's common stock during the fiscal year then ended. There were no option shares excluded from the computation of diluted EPS for the fiscal years ended September 30, 1998 and 1997.
2. NOTES PAYABLE AND OTHER SHORT-TERM OBLIGATIONS
Notes payable and other short-term obligations consist of the following (in thousands):
SEPTEMBER 30, 1999 1998 ----------------- ------------------
Floor plans payable to commercial finance companies under revolving line of credit agreements with interest ranging from 0% to prime minus 1.00% (7.25% at September 30, 1999) with no stated maturity date. $ 35,408 $ 10,148 Note payable to bank under a $55 million revolving line of credit agreement with interest ranging from prime minus 1.00% to prime minus 1.60% (7.25% at September 30, 1999), due January 31, 2000. 33,150 15,000 Notes payable (see terms below) 7,886 5,937 ----------------- ------------------ Total notes payable and other short-term obligations 76,444 31,085 Less current portion (69,547) (26,105) ----------------- ------------------ Total notes payable, less current portion $ 6,897 $ 4,980 ================= ==================
2. NOTES PAYABLE AND OTHER SHORT-TERM OBLIGATIONS (CONTINUED)
The floor plans payable are secured by specific boat, motor and trailer inventory, as well as general security filings on all inventory and certain equipment. The floor plans payable to commercial finance companies include noninterest bearing payment terms for part of the calendar year (typically the months of August through May). As of September 30, 1999 and 1998, the amount of noninterest bearing floor plans payable to finance companies were $9,896,260 and $3,488,888, respectively.
Floor plans payable of certain of the Company's subsidiaries are guaranteed by the Company. The Company is significantly limited as to annual dividends for preferred and common stock.
As of September 30, 1999, the Company was in violation of a financial ratio covenant related to its $55 million revolving line of credit agreement with a bank. The Company has not requested a waiver from the bank regarding such violation as the line of credit expires on January 31, 2000. Management of the Company is currently negotiating revolving credit facilities with two commercial financial companies in the amount of approximately $125 million. The new credit facilities would be used to refinance the expiring $55 million line of credit and to provide additional borrowing capacity.
The weighted average interest rate on floor plan payables and revolving lines of credit outstanding as of September 30, 1999 and 1998 was 5.5% and 4.8%, respectively.
Notes payable consist of the following:
SEPTEMBER 30, 1999 1998 ----------------- ------------------ (IN THOUSANDS)
Mortgage notes payable to various banks, organizations and individuals under deeds of trust with interest ranging from 6.0% to prime plus 1%, due in monthly principal and interest installments ranging from $1,493 to $10,289, maturing beginning in February 2000. $6,045 $3,480
Notes payable to various banks, a corporation and an individual for vehicles, equipment and leasehold improvements with interest ranging from 7.1% to 8.5%, due in principal installments ranging from $486, including interest, monthly to $62,500, plus interest quarterly, maturing beginning in February 2000. 757 1,030
Acquisition related notes payable to individuals and corporations with interest ranging from 8.25% to 8.75%, due in monthly principal and interest installments ranging from $291 to $12,770, maturing beginning in February 2000. 1,084 1,427 ----------------- ------------------ Total notes payable $7,886 $5,937 ================= ==================
Certain notes payable are secured by assets of the Company including inventory, accounts receivable, equipment, leasehold improvements, vehicles, land and buildings. Notes payable of certain of its subsidiaries are guaranteed by the Company.
2. NOTES PAYABLE AND OTHER SHORT-TERM OBLIGATIONS (CONTINUED)
At September 30, 1999 and 1998, approximately 84.5% and 64.8% 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 1999, 1998 and 1997.
Aggregate annual maturities required on notes payable at September 30, 1999 are as follows (in thousands):
Year ending September 30 - - ------------
2000 $ 989 2001 990 2002 1,437 2003 661 2004 603 Thereafter 3,206 ----------- $ 7,886 ===========
3. LEASES
The Company leases various facilities under operating leases. Rent expense was $2,031,000 in 1999, $1,188,000 in 1998 and $546,000 in 1997. Generally, the leases provide for renewals for various periods at stipulated rates. Future minimum rentals due under noncancelable leases are as follows for each of the years ending September 30 (in thousands):
2000 $ 2,489 2001 2,427 2002 1,813 2003 1,275 2004 886 Thereafter 1,902 --------- $10,792 =========
4. ACQUISITIONS
The Company has made various acquisitions during the three year period ended September 30, 1999. All of the acquisitions were asset purchases (except for Adventure Marine and Shelby Marine, which were stock purchases) 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. A summary of the Company's acquisitions follows:
4. ACQUISITIONS (CONTINUED)
Pursuant to the purchase terms of The New 3 Three Seas acquisition, the Company has 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. The shares of common stock were not registered as of the fiscal year ended September 30, 1999. Accordingly, the Company has classified the amount payable of $1.1 million as a liability due to The New 3 Seas, Inc.
The Company determines 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, 1998 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 7,667,972 $7,192,790 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, 1998.
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, 1999 1998 ----------------- ------------------
Deferred tax assets: Book over tax depreciation $ 121 $ 96 Accrued salaries and wages 136 180 ----------------- ------------------ Total deferred tax assets 257 276 Valuation allowance for deferred tax assets - - Net deferred tax assets $ 257 $ 276 ================= ==================
Significant components of the provisions for income taxes are as follows (in thousands):
Year ended September 30, 1999 1998 1997 ---------------------------------------------------
Current expense: Federal $3,424 $2,791 $1,993 State 403 410 231 Total current expense 3,827 3,201 2,224
Deferred expense (benefit): Federal 19 17 (83) State - - (9) --------------------------------------------------- Total deferred expense (benefit) 19 17 (92) --------------------------------------------------- Total provision for income taxes $3,846 $3,218 $2,132 ===================================================
The differences between the effective tax rate and the U.S. federal statutory rate of 34% are reconciled as follows (in thousands):
Year ended September 30,
1999 1998 1997 -------------- -------------- --------------
Income tax expense at the federal statutory rate $3,542 $2,986 $2,079 State income taxes 403 410 223 Other (99) (178) (170) ------------------------------------------------------- $3,846 $3,218 $2,132 =======================================================
5.INCOME TAXES (CONTINUED)
Income taxes paid were approximately $1,563,000; $4,207,000 and $1,900,000 in the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
6.STOCKHOLDERS' EQUITY
In March 1995, the Company granted options to purchase shares of the Company's common stock to certain officers of the Company which vest over five years.
In December 1995, the Company adopted 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.
In March 1998, the Company amended its 1995 Incentive Stock Option 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. As of September 30, 1999, the Company was eligible to issue or transfer up to an additional 109,525 shares of common stock pursuant to the Plan.
Total option activity for the years ended September 30, 1999, 1998 and 1997:
6. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted-average remaining contractual life of options at September 30, 1999 and 1998 is approximately 6.94 and 7.91 years, respectively.
Options outstanding at September 30, 1999, are comprised of the following:
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 market price of the underlying stock on the date of grant, no compensation expense is recognized.
The assumptions used by the Company to determine the pro forma information regarding net income and earnings per share required by Statement No. 123 are as follows using the Black-Sholes model:
YEAR ENDED SEPTEMBER 30, 1999 1998 1997 ---------------- ---------------- ----------------
Risk-free interest rate 6.00% 6.00% 6.42% Dividend yield 0% 0% 0% Expected life 5 years 5 years 5 years Volatility 39.3% 39.3% 34.3%
The pro forma amounts under Statement No. 123 are as follows:
YEAR ENDED SEPTEMBER 30,
1999 1998 1997 ---------------- ---------------- ----------------
Net income as reported (000's) $6,572 $5,563 $3,982 Pro forma net income (000's) $6,467 $5,467 $3,968 Diluted EPS - as reported $ 1.49 $ 1.26 $ .94 Pro forma - Diluted EPS $ 1.47 $ 1.24 $ .93
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
In January 1995, the Company adopted a 401(k) retirement plan which is available to all full-time employees. The Company may, in its discretion, make matching contributions which the Company, in its discretion, determines from year to year. The Company's expenses related to the plan were not significant in the years ended September 30, 1999, 1998 and 1997.
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, 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 April 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. The SOP requires costs of start-up activities and organization costs to be expensed as incurred, and is effective for fiscal years beginning after December 15, 1998. The effects of adoption must be reported as a cumulative change in accounting principle. The Company expects that the impact of adoption will not be material to its financial position or results of operations.
10. SUBSEQUENT EVENTS
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.
In October 1999, the Company entered into a real estate term loan with a commercial bank providing for up to $4 million of financing for the Company's land and buildings in Dallas and San Antonio, Texas and Atlanta, Georgia.
In November 1999, the Company completed the registration of 86,005 shares of common stock on Form S-3 with the Securities and Exchange Commission issued pursuant to the acquisition of The New Three Seas, Inc. (September 1999).
In November 1999, the Company entered into a transaction with a finance company providing for up to $5.0 million of financing for the Company's used boat, motor and trailer inventory pursuant to a specific borrowing base formula.