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 October 31, 2008 and January 31, 2008 and results of operations of the Company as of and for the periods ended October 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. 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, hot dogs, chili dogs 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 October 31, 2008 and October 31, 2007
Gross sales from continuing operations at the Company’s travel centers decreased by 14.4% to $5.917 million for the three months ended October 31, 2008, from $6.909 million for the three months ended October 31, 2007. Merchandise sales from continuing operations decreased 24.0% to $1.678 million for the three months ended October 31, 2008, from $2.207 million for the three months ended October 31, 2007. The decrease is primarily due to decreases in all merchandise categories with the exception of a slight increase in cigarette sales. The overall decrease in general merchandise sales is due to a slowing economy. In Arizona, a major interchange construction project adversely affected merchandise sales at two locations. In addition, increases in gasoline prices continue to have a negative impact on travel and sales. Retail gasoline sales from continuing operations decreased 7.8% to $2.390 million for the three months ended October 31, 2008, from $2.591 million for the same period in 2007. The decrease is due to a decrease in gallons sold of approximately 228,000 gallons partially offset by an increase in the average retail price per gallon of approximately $0.82 per gallon. The average gallon of gasoline retailed for approximately $3.90 for the three months ended October 31, 2008 compared to $3.08 for the three months ended October 31, 2007. Restaurant sales from continuing operations decreased 20.3% to $463,000 for the three months ended October 31, 2008, from $581,000 for the three months ended October 31, 2007. The decrease is primarily due to a change 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, hot dogs, chili dogs 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 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 9.4% to $1.386 million for the three months ended October 31, 2008, from $1.530 million for the three months ended October 31, 2007. The decrease is primarily due to a decrease in gasoline gallons purchased of approximately 134,000 gallons in the current period, partially offset by market price increases.
Cost of goods sold for continuing operations decreased 10.4% to $4.295 million for the three months ended October 31, 2008, from $4.792 million for the three months ended October 31, 2007. Merchandise cost of goods from continuing operations decreased 26.0% to $585,000 for the three months ended October 31, 2008, from $791,000 for the three months ended October 31, 2007. The decrease relates to the decrease in sales. Retail gasoline cost of goods from continuing operations decreased 5.6% to $2.178 million for the three months ended October 31, 2008, from $2.306 million for the three months ended October 31, 2007. The decrease 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 12.3% to $150,000 for the three months ended October 31, 2008, from $171,000 for the three months ended October 31, 2007. The decrease is primarily due to one of the Company’s Dairy Queen locations changing from a full-service restaurant to a restaurant serving only soft serve ice cream, hot dogs, chili dogs and drinks, partially offset by increases in food prices and gasoline delivery surcharges. Wholesale gasoline cost of goods decreased 9.3% to $1.382 million for the three months ended October 31, 2008, from $1.524 million for the three months ended October 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 73.2% for the three months ended October 31, 2008, as compared to 71.9% for the three months ended October 31, 2007. The increase is primarily due to the increase in gasoline cost of goods as a result of overall market price increases during the period.
Gross profit from continuing operations decreased 15.9% to $1.574 million for the three months ended October 31, 2008, from $1.871 million for the three months ended October 31, 2007. The decrease is primarily due to the decrease in sales partially offset by a decrease in discounts on sales resulting from the fact that in August 2007 a promotion was offered discounting all merchandise by 25%, while no such promotion was offered in the three months ended October 31, 2008.
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 $1.755 million for the three months ended October 31, 2008, from $1.849 million for the three months ended October 31, 2007. The decrease is due to reductions in (i) personnel related costs, (ii) costs associated with the Company’s inventory bar-coding project, (iii) donations, (iv) sign repair and maintenance costs, (v) supplies, (vi) freight costs as a result of volume purchasing, (vii) bank card fees, as a result of the decrease in sales and (viii) accounting costs due to costs in the prior period related to Section 404 of Sarbanes-Oxley internal controls over financial reporting compliance. The above reductions were partially offset by increases in investor relations and legal costs associated with the Company’s stock repurchase program (see Note 4 to the Consolidated Financial Statements).
Depreciation and amortization expense for continuing operations increased 3.4% to $212,000 for the three months ended October 31, 2008, from $205,000 for the three months ended October 31, 2007. The increase is associated with certain asset additions for the three months ended October 31, 2008, partially 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 114.8% to a loss of $393,000 for the three months ended October 31, 2008, compared to a loss from continuing operations of $183,000 for the three months ended October 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 44.8% to $32,000 for the three months ended October 31, 2008, compared to interest income of $58,000 for the three months ended October 31, 2007. The decrease is due to lower interest rates on the Company’s marketable securities, the decision not to renew several certificates of deposit as they became due and lower receivable balances in the current period. There was a gain from the sale of assets of $7,000 for the three months ended October 31, 2008 compared to a gain of $10,000 for the three months ended October 31, 2007. The gain of $7,000 for the three months ended October 31, 2008 is due primarily to installment payments received related to notes receivable that include deferred gains of approximately $26,000 and a gain of approximately $1,000 on the sale of equipment partially offset by a loss of approximately $20,000 of billboard signs. The gain of $10,000 for the three months ended October 31, 2007 is due to installment payments received related to notes receivable that include deferred gains of approximately $5,000 and a gain on the sale of property, fixtures and equipment located in Lordsburg, New Mexico to Don Juan Restaurant of approximately $5,000. Rental income was $40,000 for the three months ended October 31, 2008 compared to $38,000 for the three months ended October 31, 2007. Interest expense decreased 14.5% to $71,000 for the three months ended October 31, 2008, from $83,000 for the three months ended October 31, 2007. The decrease is primarily due to normal scheduled payments.
The loss from continuing operations before income taxes increased 140.6% to a loss of $385,000 for the three months ended October 31, 2008, compared to a loss before income taxes from continuing operations of $160,000 for the three months ended October 31, 2007, primarily due to decreases in net revenues as a result of a slowing economy. As a percentage of net revenues, the loss from continuing operations before income taxes was 6.7% for the three months ended October 31, 2008, compared 2.7% for the three months ended October 31, 2007.
The income tax benefit for continuing operations increased 169.8% to an income tax benefit of $143,000 for the three months ended October 31, 2008, compared to an income tax benefit for continuing operations of $53,000 for the three months ended October 31, 2007. The increase is a result of the increase in the loss from continuing operations before income taxes.
BOWLIN TRAVEL CENTERS, INC.
The foregoing factors contributed to a net loss from continuing operations of $242,000 for the three months ended October 31, 2008, compared to a net loss from continuing operations of $107,000 for the three months ended October 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 $19,000 for discontinued operations for the three months ended October 31, 2008 compared to a loss of $68,000 for the three months ended October 31, 2007. There is an income tax benefit of $7,000 for the three months ended October 31, 2008, compared to an income tax benefit of $28,000 for the three months ended October 31, 2007. The net loss from discontinued operations for the three months ended October 31, 2008 is $12,000 compared to a net loss from discontinued operations for the three months ended October 31, 2007 of $40,000.
The foregoing factors contributed to a net loss for the three months ended October 31, 2008 of $254,000 compared to a net loss of $147,000 for the three months ended October 31, 2007.
Comparison of the Nine Months Ended October 31, 2008 and October 31, 2007
Gross sales from continuing operations at the Company’s travel centers decreased by 7.9% to $20.243 million for the nine months ended October 31, 2008, from $21.986 million for the nine months ended October 31, 2007. Merchandise sales from continuing operations decreased 18.4% to $6.023 million for the nine months ended October 31, 2008, from $7.379 million for the nine months ended October 31, 2007. The decrease is primarily due to decreases in all merchandise categories with the exception of 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 sales due to a slowing economy. In Arizona, a major interchange construction project adversely affected merchandise sales at two locations. County ordinances that regulated the sales of fireworks at one of the Company’s retail locations during the current period caused an abnormal decrease. In addition, increases in gasoline prices continue to have a negative impact on travel and sales. Retail gasoline sales from continuing operations increased 1.5% to $8.114 million for the nine months ended October 31, 2008, from $7.998 million for the same period in 2007. The increase is due to an increase in the average retail price per gallon of approximately $0.80 per gallon, partially offset by a decrease in gallons sold of approximately 512,000 gallons. The average gallon of gasoline retailed for approximately $3.87 for the nine months ended October 31, 2008 compared to $3.07 for the nine months ended October 31, 2007. Restaurant sales from continuing operations decreased 16.1% to $1.610 million for the nine months ended October 31, 2008, from $1.920 million for the nine months ended October 31, 2007. The decrease is primarily due to a change 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, hot dogs and chili dogs 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 continue to have a negative impact on travel and restaurant sales. Wholesale gasoline sales to independent retailers decreased 4.1% to $4.496 million for the nine months ended October 31, 2008, from $4.689 million for the nine months ended October 31, 2007. The decrease is primarily due to a decrease of approximately 455,000 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 decreased 3.1% to $14.474 million for the nine months ended October 31, 2008, from $14.935 million for the nine months ended October 31, 2007. Merchandise cost of goods from continuing operations decreased 16.7% to $2.161 million for the nine months ended October 31, 2008, from $2.594 million for the nine months ended October 31, 2007. The decrease relates to the decrease in sales. Retail gasoline cost of goods from continuing operations increased 3.2% to $7.348 million for the nine months ended October 31, 2008, from $7.123 million for the nine months ended October 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 12.0% to $482,000 for the nine months ended October 31, 2008, from $548,000 for the nine months ended October 31, 2007. The decrease is primarily due to one of the Company’s Dairy Queen locations changing from a full-service restaurant to a restaurant that sells only soft serve ice cream, hot dogs, chili dogs and drinks, partially offset by increases in food prices and gasoline delivery surcharges. Wholesale gasoline cost of goods decreased 4.0% to $4.483 million for the nine months ended October 31, 2008, from $4.670 million for the nine months ended October 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 72.0% for the nine months ended October 31, 2008, as compared to 69.1% for the nine months ended October 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 $5.619 million for the nine months ended October 31, 2008, from $6.673 million for the nine months ended October 31, 2007. The decrease is primarily due to the decrease in sales partially offset by a decrease in discounts on sales resulting from the fact that in August 2007 a promotion was offered discounting all merchandise by 25%, while no such promotion was offered in the nine months ending October 31, 2008.
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 7.3% to $5.335 million for the nine months ended October 31, 2008, from $5.756 million for the nine months ended October 31, 2007. The decrease is due to reductions in (i) personnel related costs, (ii) costs associated with the Company’s inventory bar-coding project, (iii) freight costs as a result of volume purchasing, (iv) bank card fees as a result of the decrease in sales and (v) accounting costs in the prior period related to Section 404 of Sarbanes-Oxley internal controls over financial reporting compliance. The above cost reductions were partially offset by increases in investor relations and legal costs associated with the Company’s stock repurchase program (see Note 4 to the Consolidated Financial Statements).
Depreciation and amortization expense for continuing operations increased 6.6% to $633,000 for the nine months ended October 31, 2008, from $594,000 for the nine months ended October 31, 2007. The increase is associated with certain asset additions for the nine months ended October 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 208.0% to a loss of $349,000 for the nine months ended October 31, 2008, compared to operating income from continuing operations of $323,000 for the nine months ended October 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 21.8% to $104,000 for the nine months ended October 31, 2008, compared to interest income of $133,000 for the nine months ended October 31, 2007. The decrease is due to lower interest rates on the Company’s marketable securities, the decision not to renew several certificates of deposit as they became due and lower receivable balances in the current period. There was a gain from the sale of assets of $17,000 for the nine months ended October 31, 2008 compared to a gain of $37,000 for the nine months ended October 31, 2007. The gain of $17,000 for the nine months ended October 31, 2008 is due primarily to installment payments received related to notes receivable that include deferred gains of approximately $37,000 offset by a loss of approximately $20,000 of billboard signs. The gain of $37,000 for the nine months ended October 31, 2007 is due to installment payments received related to notes receivable that include deferred gains of approximately $37,000, an earnest deposit of $24,000 that was forfeited due to a purchase agreement closing date expiring, a gain of approximately $5,000 from the sale of property, fixtures and equipment located in Lordsburg, New Mexico to Don Juan Restaurant, 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 $117,000 for the nine months ended October 31, 2008 compared to $123,000 for the nine months ended October 31, 2007. Interest expense decreased 30.2% to $208,000 for the nine months ended October 31, 2008, from $298,000 for the nine months ended October 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 199.7% to a loss of $319,000 for the nine months ended October 31, 2008, compared to income before income taxes from continuing operations of $320,000 for the nine months ended October 31, 2007, primarily due to decreases in net revenues as a result of a slowing economy. As a percentage of net revenues, the loss from continuing operations before income taxes was 1.6% for the nine months ended October 31, 2008, compared to income from continuing operations before income taxes of 1.5% for the nine months ended October 31, 2007.
Income tax expense for continuing operations decreased 184.2% with an income tax benefit of $112,000 for the nine months ended October 31, 2008, compared to income tax expense for continuing operations of $133,000 for the nine months ended October 31, 2007. The decrease is a result of the loss in income from continuing operations before income taxes compared to income from continuing operations before income taxes in the prior period.
The foregoing factors contributed to a net loss from continuing operations of $207,000 for the nine months ended October 31, 2008, compared to net income from continuing operations of $187,000 for the nine months ended October 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 $40,000 for discontinued operations for the nine months ended October 31, 2008 compared to a loss of $270,000 for the nine months ended October 31, 2007. There is an income tax benefit of $14,000 for the nine months ended October 31, 2008, compared to an income tax benefit of $107,000 for the nine months ended October 31, 2007. The net loss from discontinued operations for the nine months ended October 31, 2008 is $26,000 compared to a net loss from discontinued operations for the nine months ended October 31, 2007 of $163,000.
Income from the disposal of discontinued operations, net of income tax expense of $549,000 for the nine months ended October 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.
BOWLIN TRAVEL CENTERS, INC.
The foregoing factors contributed to a net loss for the nine months ended October 31, 2008 of $233,000 compared to net income of $573,000 for the nine months ended October 31, 2007.
Liquidity and Capital Resources
At October 31, 2008, the Company had working capital of $6.363 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 October 31, 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 marketable securities of $500,000, a decrease in inventory of $119,000, a decrease in accounts receivable of $31,000, an increase in the current portion of long-term debt of $11,000 and an increase in deferred revenue of $10,000 partially offset by a decrease in accrued liabilities of $217,000, an increase in income taxes of $64,000, a decrease in accounts payable of $32,000 and an increase in prepaid expenses of $20,000. The decrease in marketable securities, which consist of twelve-month certificates of deposit, is primarily due to non-renewal of several certificates of deposit as they became due, the funds from which will be used for capital expenditures and for operations as sales continue to decline. The decrease in inventory is primarily due to inventory decreases at the Company’s retail locations partially offset by an increase in gasoline inventory as a result of higher market prices at the end of the period as well as an increase in inventory at the Company’s central warehouse as the Company prepares for holiday sales. The decrease in accounts receivable is primarily due to payments received resulting in lower receivable balances. The increase in the current portion of long-term debt is primarily due to greater principal reduction as a result of a lower interest rate. The increase in deferred revenue is primarily due to non-renewable outdoor leases in the prior period. The decrease in accrued liabilities is primarily due to decreases in accrued salaries and wages and payment of payroll taxes related to discretionary bonuses that were accrued through January 31, 2008 and paid during the current fiscal year partially offset by an increase in accrued property taxes that will be paid in December 2008 as well as an increase in accrued vacation payable. The increase 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 decrease in accounts payable is primarily due to timing of electronic fund transfers related to the Company’s wholesale gasoline sales. The increase in prepaid expenses is primarily due to an increase in prepaid insurance as June 1, 2008 was the renewal date partially offset by prepaid rent.
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. The third quarter of the fiscal year is not as strong due to the end of summer. 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 $162,000 for the nine months ended October 31, 2008, compared to net cash provided by operating activities from continuing operations of $214,000 for the nine months ended October 31, 2007. Net cash provided by operating activities for the nine months ended October 31, 2008 is primarily attributable to depreciation and amortization expense of $645,000, offset by a net loss of $233,000, changes in net operating assets and liabilities of $174,000, a decrease in net deferred income taxes of $62,000 and the gain on sale of assets of $17,000. Net cash provided by operating activities for the nine months ended October 31, 2007 is primarily attributable to net income of $573,000 adjusted for depreciation and amortization expense of $655,000, and the retirement of debt of issuance costs of $132,000 partially offset by the gain on sale of assets of $1.004 million and a decrease in deferred income taxes of $108,000.
BOWLIN TRAVEL CENTERS, INC.
Net cash used in investing activities for the nine months ended October 31, 2008 was $65,000, primarily consisting of purchases of property and equipment of $653,000 partially offset by a decrease in marketable securities of $500,000 and payments from notes receivable, net, of $82,000. Net cash used in investing activities for the nine months ended October 31, 2007 was $117,000, primarily consisting of an increase in marketable securities of $1.727 million which includes the purchase of $1.500 million of marketable securities from the proceeds of the disposal of one discontinued operation and $874,000 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 of $2.448 million and payments from notes receivable, net, of $78,000.
Net cash used by financing activities for the nine months ended October 31, 2008 was $90,000, which consisted of payments on long-term debt. For the nine months ended October 31, 2007, net cash used in financing activities was $204,000, 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 nine months ended October 31, 2008, retail gasoline sales from continuing operations accounted for approximately 40.4% of the Company’s net sales.
