| 1. | The condensed financial statements of Bowlin Travel Centers, Inc. (the “Company”) as of and for the three months ended April 2008 and 2007 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods. The interim financial statements should be read in conjunction with the financial statements and notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2008. Results of operations for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. |
| 2. | The Company continues to list for sale two retail locations. One location is in Alamogordo, New Mexico and the other retail location is in Edgewood, New Mexico. |
The property, fixtures and equipment located 4 miles north of Alamogordo listed for sale have been identified as a component as defined in FAS Statement No. 144 – Accounting for Impairment or Disposal of Long-Lived Assets (as amended). The carrying value of the property, fixtures and equipment of approximately $650,000 and $653,000 have been reclassified as assets held for sale in the April 30, 2008 and January 31, 2008 balance sheets, respectively. The results of operations of approximately ($13,000) and ($10,000) for the three months ended April 30, 2008 and 2007, respectively, have been reclassified to loss from discontinued operations of a component, net of the related income tax benefit.
The property, fixtures and equipment located in Edgewood listed for sale have been identified as a component as defined in FAS Statement No. 144 – Accounting for Impairment or Disposal of Long-Lived Assets (as amended). On October 31, 2007, the Company closed the Edgewood location. The carrying value of the property, fixtures and equipment of approximately $467,000 and $470,000 have been reclassified as assets held for sale in the April 30, 2008 and January 31, 2008 balance sheets, respectively. The results of operations of approximately ($1,000) and ($27,000) for the three months ended April 30, 2008 and 2007, respectively, have been reclassified to loss from discontinued operations of a component, net of the related income tax benefit.
The results of operations for the three months ended April 30, 2007, include approximately ($8,000) which was reclassified to loss of discontinued operations of a component, net of the related income tax benefit. This component was sold May 24, 2007.
| 3. | New Accounting Pronouncements. |
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. This pronouncement amends SFAS No. 133 and requires enhanced disclosures abut an entity’s derivative and hedging activities thereby improving the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently assessing the effect of SFAS No. 161 on its financial statements, but it is not expected to be material.
BOWLIN TRAVEL CENTERS, INC.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” This statement provides new accounting guidance and disclosure and presentation requirements for noncontrolling interest in a subsidiary. SFAS No. 160 is effective for the first fiscal year beginning on or after December 15, 2008. The Company is currently assessing the effect of SFAS No. 160 on its financial statements, but it is not expected to be material.
In December 2007, the FASB issued SFAC No. 141(R), “Business Combinations.” This statement provides new accounting guidance and disclosure requirements for business combinations. SFAS No. 141(R) is effective for business combinations which occur in the first fiscal year beginning on or after December 15, 2008.
In December 2007, the FASB finalized the provisions of the Emerging Issues Task Force (EITF) Issue No. 07-1, “Accounting for Collaborative Arrangements.” This EITF Issue provides guidance and requires financial statement disclosures for collaborative arrangements. EITF Issue No. 07-1 is effect for financial statements issued for fiscal years beginning after December 15, 2008. The Company is currently assessing the effect of EITF Issue No. 07-1 on its financial statements but it is not expected to be material.
BOWLIN TRAVEL CENTERS, INC.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Certain statements contained herein with respect to factors which may affect future earnings, including management’s beliefs and assumptions based on information currently available, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements that are not historical facts involve risks and uncertainties, and results could vary materially from the descriptions contained herein.
Overview
The following is a discussion of the financial condition as of April 30, 2008 and January 31, 2008 and results of operations of the Company as of and for the periods ended April 30, 2008 and 2007. This discussion should be read in conjunction with the Financial Statements of the Company and the related notes included in the Company’s annual report on Form 10-K for fiscal year ended January 31, 2008.
The Company’s principal business activities include the operation of full-service travel centers and restaurants that offer brand name food and gasoline, and a unique variety of Southwestern merchandise to the traveling public in New Mexico and Arizona.
The Company’s gross retail sales include merchandise, retail gasoline sales, restaurant sales and wholesale gasoline sales. Each of the Company’s travel center locations retails a variety of unique Southwestern souvenirs and gifts. The Company operates ten full-service travel centers along interstate highways in Arizona and New Mexico. Two of the Company’s travel centers are held for sale; one of which closed on October 31, 2007. Eight of the ten retail operations retail gasoline. Four of the Company’s ten locations have full-service restaurants that operate under the Dairy Queen/Brazier or Dairy Queen brand names; one of the Company’s ten locations operates a DQ Treat restaurant that sells only soft serve ice cream and drinks. The merchandise, gasoline and restaurant retail sales are all a part of the Company’s ongoing retail business and have been aggregated.
The Company wholesales gasoline to three independent third party locations. The wholesale gasoline does not meet the operating segment definition criteria of paragraph 10(b) of FAS 131, Disclosures about Segments of an Enterprise and Related Information, as the Company does not review wholesale gasoline operating results for decision making about resource allocation. Therefore, wholesale gasoline sales have been aggregated with the Company’s business activities.
The discussion of results of operations, which follows, compares such selected operating data for the interim periods presented.
BOWLIN TRAVEL CENTERS, INC.
Results of Operations
Comparison of the Three Months Ended April 30, 2008 and April 30, 2007
Gross sales from continuing operations at the Company’s travel centers decreased by 1.5% to $6.627 million for the three months ended April 30, 2008, from $6.726 million for the three months ended April 30, 2007. Merchandise sales from continuing operations decreased 14.2% to $1.877 million for the three months ended April 30, 2008, from $2.187 million for the three months ended April 30, 2007. The decrease is primarily due to decreases in general merchandise, handmade and gold jewelry, t-shirts and fireworks partially offset by an increase in moccasins, c-store and cigarettes. There is a decrease in firework sales of approximately $65,000 at one of the Company’s retail locations due to county ordinances that regulate the sales of fireworks. In addition, increases in gasoline prices continue to have a negative impact on travel and sales. Retail gasoline sales from continuing operations increased 12.2% to $2.742 million for the three months ended April 30, 2008, from $2.443 million for the same period in 2007. The increase is due to an increase in the average retail price per gallon of approximately $0.72 per gallon, partially offset by a decrease in gallons sold of approximately 95,000 gallons. The average gallon of gasoline retailed for approximately $3.51 for the three months ended April 30, 2008 compared to $2.79 for the three months ended April 30, 2007. Restaurant sales from continuing operations decreased 10.0% to $546,000 for the three months ended April 30, 2008, from $607,000 for the three months ended April 30, 2007. The decrease is due to a change during the quarter at one of the Company’s Dairy Queen locations from a full-service restaurant to a DQ Treat restaurant that sells only soft serve ice cream and drinks. In addition, convenience store food sales at Picacho Peak Plaza negatively affect restaurant sales at the Picacho Peak DQ and increases in gasoline prices that continue to have a negative impact on travel and restaurant sales. Wholesale gasoline sales to independent retailers decreased 1.8% to $1.462 million for the three months ended April 30, 2008, from $1.489 million for the three months ended April 30, 2007. The decrease is primarily due to a decrease of approximately 157,000 in gasoline gallons purchased in the current period, partially offset by market price increases.
Cost of goods sold for continuing operations increased 4.4% to $4.790 million for the three months ended April 30, 2008, from $4.586 million for the three months ended April 30, 2007. Merchandise cost of goods from continuing operations decreased 9.0% to $701,000 for the three months ended April 30, 2008, from $770,000 for the three months ended April 30, 2007. The decrease relates to the decrease in sales. Retail gasoline cost of goods from continuing operations increased 14.1% to $2.470 million for the three months ended April 30, 2008, from $2.164 million for the three months ended April 30, 2007. The increase corresponds to increases in overall market prices during the period and is partially offset by a decrease in gallons sold. Restaurant cost of goods from continuing operations decreased 4.7% to $162,000 for the three months ended April 30, 2008, from $170,000 for the three months ended April 30, 2007. The decrease is due to one of the Company’s Dairy Queen locations changing from a full-service restaurant to a soft serve ice cream and drinks only restaurant, partially offset by increases in gasoline delivery surcharges. Wholesale gasoline cost of goods decreased 1.7% to $1.457 million for the three months ended April 30, 2008, from $1.482 million for the three months ended April 30, 2007. The decrease is primarily due to a decrease in gasoline gallons purchased in the current period, partially offset by market price increases. Cost of goods sold as a percentage of net revenues increased to 72.8% for the three months ended April 30, 2008, as compared to 68.7% for the three months ended April 30, 2007. The increase is primarily due to the increase in gasoline cost of goods as a result of overall market prices increases during the period.
Gross profit from continuing operations decreased 14.4% to $1.789 million for the three months ended April 30, 2008, from $2.091 million for the three months ended April 30, 2007. The decrease is primarily due to the increase in market prices related to retail and wholesale gasoline as well as a decrease in sales.
BOWLIN TRAVEL CENTERS, INC.
General and administrative expenses for continuing operations consist primarily of salaries, bonuses and commissions for travel center personnel, property costs and repairs and maintenance. General and administrative expenses for continuing operations also include executive and administrative compensation and benefits, accounting, legal and investor relations fees. General and administrative expenses for continuing operations decreased 5.1% to $1.722 million for the three months ended April 30, 2008, from $1.815 million for the three months ended April 30, 2007. The decrease is due to decreases in personnel related costs, costs associated with the Company’s inventory bar-coding project, general repair and maintenance that included repair and maintenance related to overall weather conditions such as snow removal and wind damage in the prior period, supplies, freight as a result of volume purchasing, bank card fees as a result of the decrease in sales partially offset by increases in sign repair and maintenance due to prior period weather conditions that limited the Company’s ability to travel to billboard locations, and a decrease in overall insurance costs.
Depreciation and amortization expense for continuing operations increased 8.2% to $210,000 for the three months ended April 30, 2008, from $194,000 for the three months ended April 30, 2007. The increase is associated with certain asset additions for the three months ended April 30, 2008 offset by some assets becoming fully depreciated or disposed of.
The above factors contributed to an overall decrease in operating income from continuing operations of 274.4% to a loss of $143,000 for the three months ended April 30, 2008, compared to operating income from continuing operations of $82,000 for the three months ended April 30, 2007.
Non-operating income (expense) for continuing operations includes interest income, gains and losses from the sale of assets, rental income and interest expense. Interest income for continuing operations increased 44.4% to $39,000 for the three months ended April 30, 2008, compared to interest income of $27,000 for the three months ended April 30, 2007. The increase is due to additional certificates of deposit purchased by the Company from the proceeds of the sale of the Rio North facility in May 2007. There was a gain from the sale of assets of $5,000 for the three months ended April 30, 2008 from $28,000 for the three months ended April 30, 2007. The gain of $5,000 for the three months ended April 30, 2008 is due primarily to installment payments received related to notes receivable that include deferred gains. The gain of $28,000 for the three months ended April 30, 2007 is due to installment payments received related to notes receivable that include deferred gains of approximately $5,000, an earnest deposit of $25,000 that was forfeited due to a purchase agreement closing date expiring, partially offset by a loss of approximately $2,000 on the sale of equipment. Rental income was $38,000 for the three months ended April 30, 2008 compared to $47,000 for the three months ended April 30, 2007. Interest expense decreased 10.5% to $68,000 for the three months ended April 30, 2008, from $76,000 for the three months ended April 30, 2007. The decrease is primarily due to the Company’s exchange of debt with its primary lender in November 2007 that resulted in a lower interest rate.
Income (loss) from continuing operations before income taxes decreased 217.3% to a loss of $129,000 for the three months ended April 30, 2008, compared to income before income taxes from continuing operations of $110,000 for the three months ended April 30, 2007, due to an increase in cost of goods sold primarily resulting from an increase in the market price of gasoline, and a decrease in gross sales. As a percentage of net revenues, the loss from continuing operations before income taxes was 2.0% for the three months ended April 30, 2008, compared to income from continuing operations before income taxes of 1.6% for the three months ended April 30, 2007.
BOWLIN TRAVEL CENTERS, INC.
Income tax benefit (expense) for continuing operations increased 182.5% with an income tax benefit of $47,000 for the three months ended April 30, 2008, compared to income tax expense for continuing operations of $57,000 for the three months ended April 30, 2007. The decrease is a result of the loss from continuing operations before income taxes of $129,000 for the three months ended April 30, 2008 compared to income from continuing operations before income taxes of $110,000 for the three months ended April 30, 2007.
The foregoing factors contributed to a net loss from continuing operations of $82,000 for the three months ended April 30, 2008, compared to net income from continuing operations of $53,000 for the three months ended April 30, 2007.
Discontinued operations include the property, fixtures and equipment for the two retail locations that the Company has listed for sale (see Note 2 to the Condensed Financial Statements). There is a loss of $22,000 for discontinued operations for the three months ended April 30, 2008 compared to a loss of $93,000 for the three months ended April 30, 2007. There is an income tax benefit of $8,000 for the three months ended April 30, 2008, compared to an income tax benefit of $48,000 for the three months ended April 30, 2007. The net loss from discontinued operations for the three months ended April 30, 2008 is $14,000 compared to a net loss from discontinued operations for the three months ended April 30, 2007 of $45,000.
The foregoing factors contributed to a net loss for the three months ended April 30, 2008 of $96,000 compared to net income of $8,000 for the three months ended April 30, 2007.
Liquidity and Capital Resources
At April 30, 2008, the Company had working capital of $6.696 million compared to working capital of $6.705 million at January 31, 2008 (“working capital” is the excess of total current assets over total current liabilities). At April 30, 2008, the Company had a current ratio of 5.8:1; compared to a current ratio of 5.4:1 as of January 31, 2008 (“current ratio” is the ratio of current assets to current liabilities). The decrease in working capital is primarily due to a decrease in cash of $426,000, a decrease in prepaid expenses of $64,000, an increase in accounts payable of $182,000 offset by an increase in marketable securities of $200,000, an increase in inventory of $113,000, an increase in income taxes of $32,000, a decrease in accrued liabilities of $306,000 and a decrease in deferred revenue of $10,000. The decrease in cash is due to lower cash balances at April 30, 2008 as a result of purchasing merchandise in preparation for the Company’s summer peak season that typically begins in the second quarter as well as a decrease in net income due to a decrease in sales and an increase in cost of goods sold as a result of an increase in the market price of gasoline. The decrease in prepaid expenses is primarily due to a decrease in prepaid insurance as the Company nears its June 1, 2008 renewal date and prepaid rent. The increase in accounts payable is primarily due to purchasing merchandise as the Company prepares for summertime sales as well as timing of electronic fund transfers related to the Company’s wholesale gasoline sales. The increase in marketable securities, which consist of twelve-month certificates of deposit, is due to more certificates with maturity dates greater than three months in the current period. The increase in inventory is primarily due to merchandise increases at the Company’s central warehouse and retail locations as the Company prepares for summertime sales that typically occur in the second quarter and an increase in gasoline inventory as a result of higher market prices partially offset by a decrease in gasoline gallon inventory. The increase in income tax assets is a result of deferred tax assets and liabilities recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing current assets and liabilities and their respective tax bases. The decrease in accrued liabilities is primarily due to decreases in accrued salaries and wages plus the related payroll taxes, as discretionary bonuses were accrued through January 31, 2008 to be paid the following fiscal year partially offset by an increase in property taxes that were paid in December 2007 and have been accruing since that time. The decrease in deferred revenue is a result of outdoor advertising billboard revenue as the Company had several annual contracts that did not begin until August 1, 2007.
BOWLIN TRAVEL CENTERS, INC.
The Company’s travel center operations are subject to seasonal fluctuations. The first quarter of the fiscal year is typically the weakest. Throughout the Company’s fiscal year, revenues and earnings may experience substantial fluctuations from quarter to quarter. These fluctuations could result in periods of increased or decreased cash flow as well as increased or decreased net income.
Net cash used in operating activities from continuing operations was $124,000 for the three months ended April 30, 2008, compared to net cash provided by operating activities from continuing operations of $80,000 for the three months ended April 30, 2007. Net cash used in operating activities for the three months ended April 30, 2008 is primarily attributable to a net loss of $96,000, adjusted for depreciation and amortization expense of $214,000, offset by cash used by net operating assets and liabilities of $215,000, a decrease in net deferred income taxes of $23,000 and the gain on sale of assets of $5,000. Net cash provided by operating activities for the three months ended April 30, 2007 was primarily attributable to net income of $8,000 adjusted for depreciation and amortization expense of $206,000, offset by changes in net operating assets and liabilities of $44,000, a decrease in net deferred income taxes of $69,000 and the gain on sales of assets of $28,000.
Net cash used in investing activities for the three months ended April 30, 2008 was $271,000 primarily consisting of an increase in marketable securities of $200,000, $85,000 used for purchases of property and equipment partially offset by payments from notes receivable, net, of $19,000. Net cash used in investing activities for the three months ended April 30, 2007 was $435,000, primarily consisting of an increase in marketable securities of 328,000, $157,000 used for purchases of property and equipment partially offset by the proceeds from the sale of property and equipment of $28,000 and payments from notes receivable, net, of $17,000.
Net cash used by financing activities for the three months ended April 30, 2008 was $31,000, which consisted of payments on long-term debt. For the three months ended April 30, 2007, net cash used in financing activities was $52,000, which consisted of payments on long-term debt.
The Company’s business and cash flow from operations rely on revenues generated from the sale of gasoline. During the quarter ended April 30, 2008, retail gasoline sales from continuing operations accounted for approximately 41.7% of the Company’s net sales.
