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 July 31, 2008 and January 31, 2008 and results of operations of the Company as of and for the periods ended July 31, 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 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 July 31, 2008 and July 31, 2007
Gross sales from continuing operations at the Company’s travel centers decreased by 7.8% to $7.699 million for the three months ended July 31, 2008, from $8.350 million for the three months ended July 31, 2007. Merchandise sales from continuing operations decreased 17.3% to $2.468 million for the three months ended July 31, 2008, from $2.985 million for the three months ended July 31, 2007. The decrease is primarily due to decreases in general merchandise, fireworks, t-shirts and handmade and gold jewelry sales partially offset by an increase in convenience store sales that include food such as chips, nuts, cookies and prepackaged sandwiches along with a variety of bottled and canned drinks and cigarette sales. There is a decrease in general merchandise due to a slowing economy. In Arizona, a major interchange construction project adversely affected merchandise sales at two locations. There is a decrease in firework sales primarily due to county ordinances that regulated the sale of fireworks at one of the Company’s retail locations during the current period. In addition, increases in gasoline prices continue to have a negative impact on travel and sales. Retail gasoline sales from continuing operations increased 0.6% to $2.982 million for the three months ended July 31, 2008, from $2.964 million for the same period in 2007. The increase is due to an increase in the average retail price per gallon of approximately $0.88 per gallon, partially offset by a decrease in gallons sold of approximately 181,000 gallons. The average gallon of gasoline retailed for approximately $4.23 for the three months ended July 31, 2008 compared to $3.35 for the three months ended July 31, 2007. Restaurant sales from continuing operations decreased 17.9% to $601,000 for the three months ended July 31, 2008, from $731,000 for the three months ended July 31, 2007. The decrease is due to a change at one of the Company’s Dairy Queen locations from a full-service restaurant to a DQ Treat restaurant that sold only soft serve ice cream and drinks during the quarter. A major interchange construction project in Arizona adversely affected restaurant sales at one location. In addition, convenience store food sales at Picacho Peak Plaza negatively affected restaurant sales at the Picacho Peak DQ and increases in gasoline prices continue to have a negative impact on travel and restaurant sales. Wholesale gasoline sales to independent retailers decreased 1.3% to $1.649 million for the three months ended July 31, 2008, from $1.670 million for the three months ended July 31, 2007. The decrease is primarily due to a decrease of approximately 163,000 in gasoline gallons purchased in the current period, partially offset by market price increases.
Cost of goods sold for continuing operations decreased 3.0% to $5.390 million for the three months ended July 31, 2008, from $5.557 million for the three months ended July 31, 2007. Merchandise cost of goods from continuing operations decreased 15.3% to $875,000 for the three months ended July 31, 2008, from $1.033 million for the three months ended July 31, 2007. The decrease relates to the decrease in sales. Retail gasoline cost of goods from continuing operations increased 1.8% to $2.700 million for the three months ended July 31, 2008, from $2.652 million for the three months ended July 31, 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 17.8% to $171,000 for the three months ended July 31, 2008, from $208,000 for the three months ended July 31, 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 food prices as well as gasoline delivery surcharges. Wholesale gasoline cost of goods decreased 1.2% to $1.644 million for the three months ended July 31, 2008, from $1.664 million for the three months ended July 31, 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 70.5% for the three months ended July 31, 2008, as compared to 67.2% for the three months ended July 31, 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.
BOWLIN TRAVEL CENTERS, INC.
Gross profit from continuing operations decreased 16.8% to $2.255 million for the three months ended July 31, 2008, from $2.711 million for the three months ended July 31, 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.
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 11.3% to $1.856 million for the three months ended July 31, 2008, from $2.093 million for the three months ended July 31, 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 includes weed and trash clean up at the retail locations, supplies, freight as a result of volume purchasing, bank card fees as a result of the decrease in sales and accounting costs in the prior period related to Section 404 of Sarbanes-Oxley internal controls over financial reporting compliance partially offset by increases in sign repair and maintenance due to the cost of removing eight sign structures in Arizona.
Depreciation and amortization expense for continuing operations increased 8.8% to $211,000 for the three months ended July 31, 2008, from $194,000 for the three months ended July 31, 2007. The increase is associated with certain asset additions for the three months ended July 31, 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 55.7% to $188,000 for the three months ended July 31, 2008, compared to operating income from continuing operations of $424,000 for the three months ended July 31, 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 decreased 31.4% to $33,000 for the three months ended July 31, 2008, compared to interest income of $47,000 for the three months ended July 31, 2007. The decrease is due to lower interest rates on the Company’s marketable securities as well as lower receivable balances in the current period. There was a gain from the sale of assets of $5,000 for the three months ended July 31, 2008 compared to a loss of $1,000 for the three months ended July 31, 2007. The gain of $5,000 for the three months ended July 31, 2008 is due primarily to installment payments received related to notes receivable that include deferred gains. The loss of $1,000 for the three months ended July 31, 2007 is due to installment payments received related to notes receivable that include deferred gains of approximately $27,000, partially offset by a loss of approximately $1,000 on the sale of a vehicle and a write off of approximately $28,000 of impaired assets. Rental income was $38,000 for the three months ended July 31, 2008 compared to $39,000 for the three months ended July 31, 2007. Interest expense decreased 49.3% to $70,000 for the three months ended July 31, 2008, from $138,000 for the three months ended July 31, 2007. The decrease is primarily due to the retirement of loan fees of approximately $62,000 associated with the Company’s exchange of debt commitment with its primary lender in the prior period.
Income from continuing operations before income taxes decreased 47.7% to income of $194,000 for the three months ended July 31, 2008, compared to income before income taxes from continuing operations of $371,000 for the three months ended July 31, 2007, primarily due to decreases in net revenues, general and administrative expenses and cost of goods sold as a result of a slowing economy. As a percentage of net revenues, the income from continuing operations before income taxes was 2.5% for the three months ended July 31, 2008, compared to income from continuing operations before income taxes of 4.5% for the three months ended July 31, 2007.
Income tax expense for continuing operations decreased 40.0% with income tax expense of $78,000 for the three months ended July 31, 2008, compared to income tax expense for continuing operations of $130,000 for the three months ended July 31, 2007. The decrease is a result of the decrease in income from continuing operations before income taxes.
BOWLIN TRAVEL CENTERS, INC.
The foregoing factors contributed to net income from continuing operations of $116,000 for the three months ended July 31, 2008, compared to net income from continuing operations of $241,000 for the three months ended July 31, 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 income of $3,000 for discontinued operations for the three months ended July 31, 2008 compared to a loss of $109,000 for the three months ended July 31, 2007. There is income tax expense of $1,000 for the three months ended July 31, 2008, compared to an income tax benefit of $30,000 for the three months ended July 31, 2007. The net income from discontinued operations for the three months ended July 31, 2008 is $2,000 compared to a net loss from discontinued operations for the three months ended July 31, 2007 of $79,000.
Income from the disposal of discontinued operations, net of income tax expense of $549,000 for the three months ended July 31, 2007, is due to the sale of property, fixtures and equipment located 17 miles west of Albuquerque, New Mexico at the Rio Puerco exit. The gain on the sale of the property, fixtures and equipment of approximately $967,000 was reduced by the retirement of loan fees of approximately $69,000 that were related to this retail location and the exchange of debt associated with the Company’s commitment with its primary lender, and is net of income tax expense of approximately $349,000.
The foregoing factors contributed to net income for the three months ended July 31, 2008 of $118,000 compared to net income of $711,000 for the three months ended July 31, 2007.
Comparison of the Six Months Ended July 31, 2008 and July 31, 2007
Gross sales from continuing operations at the Company’s travel centers decreased by 5.0% to $14.326 million for the six months ended July 31, 2008, from $15.077 million for the six months ended July 31, 2007. Merchandise sales from continuing operations decreased 16.0% to $4.345 million for the six months ended July 31, 2008, from $5.172 million for the six months ended July 31, 2007. The decrease is primarily due to decreases in general merchandise, fireworks, handmade and gold jewelry and t-shirt sales partially offset by an increase in convenience store sales that include food such as chips, nuts, cookies and prepackaged sandwiches along with a variety of bottled and canned drinks, as well as moccasins and cigarette sales. There is a decrease in general merchandise due to a slowing economy. In Arizona, a major interchange construction project adversely affected merchandise sales at two locations. The decrease in firework sales is primarily due to county ordinances that regulated the sales of fireworks at one of the Company’s retail locations during the current period. In addition, increases in gasoline prices continue to have a negative impact on travel and sales. Retail gasoline sales from continuing operations increased 5.8% to $5.724 million for the six months ended July 31, 2008, from $4.817 million for the same period in 2007. The increase is due to an increase in the average retail price per gallon of approximately $0.79 per gallon, partially offset by a decrease in gallons sold of approximately 276,000 gallons. The average gallon of gasoline retailed for approximately $3.86 for the six months ended July 31, 2008 compared to $3.07 for the six months ended July 31, 2007. Restaurant sales from continuing operations decreased 14.3% to $1.147 million for the six months ended July 31, 2008, from $1.338 million for the six months ended July 31, 2007. The decrease is due to a change at one of the Company’s Dairy Queen locations from a full-service restaurant to a DQ Treat restaurant that sold only soft serve ice cream and drinks. A major interchange construction project in Arizona adversely affected restaurant sales at one location. 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 1.6% to $3.110 million for the six months ended July 31, 2008, from $3.159 million for the six months ended July 31, 2007. The decrease is primarily due to a decrease of approximately 321,000 in gasoline gallons purchased in the current period, partially offset by market price increases.
BOWLIN TRAVEL CENTERS, INC.
Cost of goods sold for continuing operations increased 0.4% to $10.180 million for the six months ended July 31, 2008, from $10.143 million for the six months ended July 31, 2007. Merchandise cost of goods from continuing operations decreased 12.6% to $1.575 million for the six months ended July 31, 2008, from $1.803 million for the six months ended July 31, 2007. The decrease relates to the decrease in sales. Retail gasoline cost of goods from continuing operations increased 7.3% to $5.170 million for the six months ended July 31, 2008, from $4.817 million for the six months ended July 31, 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 11.7% to $333,000 for the six months ended July 31, 2008, from $377,000 for the six months ended July 31, 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 food prices as well as gasoline delivery surcharges. Wholesale gasoline cost of goods decreased 1.4% to $3.101 million for the six months ended July 31, 2008, from $3.146 million for the six months ended July 31, 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 71.6% for the six months ended July 31, 2008, as compared to 67.9% for the six months ended July 31, 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 15.8% to $4.044 million for the six months ended July 31, 2008, from $4.802 million for the six months ended July 31, 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.
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 8.4% to $3.578 million for the six months ended July 31, 2008, from $3.907 million for the six months ended July 31, 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 includes weed and trash clean up and repair and maintenance related to overall weather condition 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 and accounting costs in the prior period related to Section 404 of Sarbanes-Oxley internal controls over financial reporting compliance 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 as well as the cost of removing eight sign structures in Arizona.
Depreciation and amortization expense for continuing operations increased 8.2% to $421,000 for the six months ended July 31, 2008, from $389,000 for the six months ended July 31, 2007. The increase is associated with certain asset additions for the six months ended July 31, 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 91.1% to $45,000 for the six months ended July 31, 2008, compared to operating income from continuing operations of $506,000 for the six months ended July 31, 2007.
BOWLIN TRAVEL CENTERS, INC.
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 decreased 4.4% to $71,000 for the six months ended July 31, 2008, compared to interest income of $75,000 for the six months ended July 31, 2007. The decrease is due to lower interest rates on the Company’s marketable securities as well as lower receivable balances in the current period. There was a gain from the sale of assets of $10,000 for the six months ended July 31, 2008 compared to a gain of $27,000 for the six months ended July 31, 2007. The gain of $10,000 for the six months ended July 31, 2008 is due primarily to installment payments received related to notes receivable that include deferred gains. The gain of $27,000 for the six months ended July 31, 2007 is due to installment payments received related to notes receivable that include deferred gains of approximately $32,000 and an earnest deposit of $25,000 that was forfeited due to a purchase agreement closing date expiring, partially offset by a write off of approximately $28,000 of impaired assets, and a loss of approximately $1,000 on the sale of equipment and two vehicles. Rental income was $77,000 for the six months ended July 31, 2008 compared to $86,000 for the six months ended July 31, 2007. Interest expense decreased 35.8% to $138,000 for the six months ended July 31, 2008, from $215,000 for the six months ended July 31, 2007. The decrease is primarily due to the retirement of loan fees of approximately $62,000 associated with the Company’s exchange of debt commitment with its primary lender in the prior period.
Income from continuing operations before income taxes decreased 86.5% to income of $65,000 for the six months ended July 31, 2008, compared to income before income taxes from continuing operations of $481,000 for the six months ended July 31, 2007, primarily due to decreases in net revenues, general and administrative expenses and cost of goods sold as a result of a slowing economy. As a percentage of net revenues, the income from continuing operations before income taxes was 0.5% for the six months ended July 31, 2008, compared to income from continuing operations before income taxes of 3.2% for the six months ended July 31, 2007.
Income tax expense for continuing operations decreased 83.4% with income tax expense of $31,000 for the six months ended July 31, 2008, compared to income tax expense for continuing operations of $187,000 for the six months ended July 31, 2007. The decrease is a result of the decrease in income from continuing operations before income taxes.
The foregoing factors contributed to a net income from continuing operations of $34,000 for the six months ended July 31, 2008, compared to net income from continuing operations of $294,000 for the six months ended July 31, 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 $20,000 for discontinued operations for the six months ended July 31, 2008 compared to a loss of $201,000 for the six months ended July 31, 2007. There is an income tax benefit of $7,000 for the six months ended July 31, 2008, compared to an income tax benefit of $78,000 for the six months ended July 31, 2007. The net loss from discontinued operations for the six months ended July 31, 2008 is $13,000 compared to a net loss from discontinued operations for the six months ended July 31, 2007 of $123,000.
Income from the disposal of discontinued operations, net of income tax expense of $549,000 for the six months ended July 31, 2007, is due to the sale of property, fixtures and equipment located 17 miles west of Albuquerque, New Mexico at the Rio Puerco exit. The gain on the sale of the property, fixtures and equipment of approximately $967,000 was reduced by the retirement of loan fees of approximately $69,000 that were related to this retail location and the exchange of debt associated with the Company’s commitment with its primary lender, and is net of income tax expense of approximately $349,000.
The foregoing factors contributed to net income for the six months ended July 31, 2008 of $21,000 compared to net income of $720,000 for the six months ended July 31, 2007.
BOWLIN TRAVEL CENTERS, INC.
Liquidity and Capital Resources
At July 31, 2008, the Company had working capital of $6.766 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 July 31, 2008, the Company had a current ratio of 5.4:1; 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 increase in working capital is primarily due to an increase in marketable securities of $200,000, an increase in inventory of $68,000, an increase in prepaid expenses of $47,000, a decrease in accrued liabilities of $133,000 and a decrease in deferred revenue of $19,000 offset by a decrease in cash of $144,000, a decrease in accountants receivable of $59,000, a decrease in income taxes of $56,000 and an increase in accounts payable of $138,000. 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 as the Company prepared 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 prepaid expenses is primarily due to an increase in prepaid insurance for which June 1, 2008 was the renewal date partially offset by prepaid rent. 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 accrued sales tax liability related to summertime sales as well as 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. The decrease in cash is due to lower cash balances at July 31, 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 accounts receivable is primarily due to payments received resulting in lower receivable balances. The decrease in income taxes asset is primarily due to 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 increase in accounts payable is primarily due to purchasing merchandise as the Company prepared for summertime sales as well as timing of electronic fund transfers related to the Company’s wholesale gasoline sales.
The Company’s travel center operations are subject to seasonal fluctuations. The first quarter of the fiscal year is typically the weakest. The second quarter is normally the Company’s strongest due to the summer being the Company’s peak season. 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 provided by operating activities from continuing operations was $396,000 for the six months ended July 31, 2008, compared to net cash provided by operating activities from continuing operations of $383,000 for the six months ended July 31, 2007. Net provided by in operating activities for the six months ended July 31, 2008 is primarily attributable to net income of $21,000, adjusted for depreciation and amortization expense of $429,000, offset by cash used by net operating assets and liabilities of $14,000, a decrease in net deferred income taxes of $32,000 and the gain on sale of assets of $10,000. Net cash provided by operating activities for the six months ended July 31, 2007 is primarily attributable to net income of $720,000 adjusted for depreciation and amortization expense of $439,000, the retirement of debt issuance costs of $132,000 associated with the Company’s exchange of debt commitment with its primary lender and changes in net operating assets and liabilities of $160,000, partially offset by a decrease in net deferred income taxes of $88,000 and the gain on sales of assets of $994,000.
BOWLIN TRAVEL CENTERS, INC.
Net cash used in investing activities for the six months ended July 31, 2008 was $479,000, primarily consisting of an increase in marketable securities of $200,000 and $318,000 used for purchases of property and equipment partially offset by payments from notes receivable, net, of $38,000. Net cash used in investing activities for the six months ended July 31, 2007 was $37,000, primarily consisting of an increase in marketable securities of $1.878 million which includes the purchase of $1.500 million of marketable securities from the proceeds of the disposal of one discontinued operation and $623,000 used for purchases of property and equipment partially offset by the proceeds from the sale of property and equipment and the sale of property, fixtures and equipment located 17 miles west of Albuquerque, New Mexico at the Rio Puerco exit of $2.362 million and payments from notes receivable, net, of $61,000.
Net cash used by financing activities for the six months ended July 31, 2008 was $61,000, which consisted of payments on long-term debt. For the six months ended July 31, 2007, net cash used in financing activities was $155,000, 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 six months ended July 31, 2008, retail gasoline sales from continuing operations accounted for approximately 40.2% of the Company’s net sales.
