COBALT BOATS, LLC
FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2016 AND 2015
WITH
INDEPENDENT AUDITOR’S REPORT
COBALT BOATS, LLC
FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2016 AND 2015
WITH
INDEPENDENT AUDITOR’S REPORT
COBALT BOATS, LLC
FINANCIAL STATEMENTS
Years Ended September 30, 2016 and 2015
TABLE OF CONTENTS
Page
Independent Auditor’s Report .............................................................................................. 1
Financial Statements:
Balance Sheets ............................................................................................................... 2
Statements of Income ..................................................................................................... 3
Statements of Members’ Deficit ...................................................................................... 4
Statements of Cash Flows .............................................................................................. 5
Notes to Financial Statements ............................................................................................. 6 - 15
This is a copy of the Company’s annual financial statements reproduced
from an electronic file. An original copy of this document
is available at the Company’s office.
INDEPENDENT AUDITOR’S REPORT
Board of Directors
Cobalt Boats, LLC
Report on the Financial Statements
We have audited the accompanying financial statements of Cobalt Boats, LLC, which comprise the
balance sheets as of September 30, 2016 and 2015, and the related statements of income, members’
deficit and cash flows for the years then ended and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation and maintenance of internal control relevant to the preparation
and fair presentation of financial statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation
of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Cobalt Boats, LLC as of September 30, 2016 and 2015, and the results of its
operations and its cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States of America.
Allen, Gibbs & Houlik, L.C.
December 5, 2016
COBALT BOATS, LLC
BALANCE SHEETS
September 30, 2016 and 2015
ASSETS
2016 2015
CURRENT ASSETS
Cash and cash equivalents $ 1,969,513 $ 2,856,226
Accounts receivable, less allowance for
doubtful accounts of $76,061 and $76,217 5,841,421 7,788,542
Inventories 8,514,345 9,389,444
Prepaid expenses 415,488 615,226
Total current assets 16,740,767 20,649,438
PROPERTY, PLANT AND EQUIPMENT
Land 232,863 224,437
Building and improvements 16,429,665 16,421,179
Machinery and equipment 10,771,465 10,448,977
Tooling 13,130,842 12,731,116
Construction-in-progress 441,610 161,324
41,006,445 39,987,033
Accumulated depreciation (30,259,755) (27,557,974)
Total property, plant and equipment 10,746,690 12,429,059
OTHER ASSETS
Related party notes and interest
receivable 2,736,758 2,327,165
Other assets 189,472 235,867
Total other assets 2,926,230 2,563,032
Total assets $ 30,413,687 $ 35,641,529
The accompanying notes are an integral
part of these financial statements.
2
LIABILITIES AND MEMBERS’ DEFICIT
2016 2015
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,012,657 $ 3,017,986
Current maturities of capital lease obligations 84,171 337,739
Current portion of redemption payable 1,458,973 1,458,973
Accounts payable 4,723,611 7,122,355
Accrued expenses 8,866,104 8,931,726
Total current liabilities 18,145,516 20,868,779
Redemption payable to current and former members,
less current portion 1,458,973 1,458,973
Accrued expenses, long-term 4,324,000 4,362,000
Long term debt, less current maturities 16,500,000 23,762,640
Interest rate swap 200,000 246,152
Capital lease obligations, less current maturities -- 83,758
Total liabilities 40,628,489 50,782,302
MEMBERS' DEFICIT
Series A, preferred - 44,690 units issued 31,497,157 31,497,157
Accumulated distributions to preferred units (15,074,450) (14,976,654)
Treasury units - Series A, preferred - 43,718 units, at cost (54,655,202) (53,196,228)
Common - 62,081 units issued 13,079,940 13,079,940
Accumulated distributions to common units (45,685,390) (40,561,623)
Retained earnings 60,623,143 49,016,635
Members' deficit (10,214,802) (15,140,773)
Total liabilities and members' deficit $ 30,413,687 $ 35,641,529
COBALT BOATS, LLC
STATEMENTS OF INCOME
Years Ended September 30, 2016 and 2015
The accompanying notes are an integral
part of these financial statements.
3
2016 2015
Gross sales $ 146,914,500 $ 154,669,732
Less sales discounts 9,787,060 10,684,431
Net sales 137,127,440 143,985,301
Cost of goods sold 108,579,553 114,691,568
Gross profit 28,547,887 29,293,733
Operating expenses:
Selling, general and administrative expenses 12,822,211 13,566,576
Research and development 1,722,564 1,916,455
Total operating expenses 14,544,775 15,483,031
Operating income 14,003,112 13,810,702
Interest expense (590,176) (919,742)
Other expense, net (1,806,428) (841,551)
Net income $ 11,606,508 $ 12,049,409
COBALT BOATS, LLC
STATEMENTS OF MEMBERS’ DEFICIT
Years Ended September 30, 2016 and 2015
The accompanying notes are an integral
part of these financial statements.
4
Preferred
units
Accumulated
distributions to
preferred units
Treasury
units
Common
units
Accumulated
distributions to
common units
Retained
earnings
Total members'
deficit
Balance, September 30, 2014 $ 31,497,157 $ (14,481,403) $ (51,725,866) $ 13,079,940 $ (34,980,198) $ 36,967,226 $ (19,643,144)
Distributions to preferred (495,251) (5,581,425) (6,076,676)
and common units
Purchase of treasury units (1,470,362) (1,470,362)
Net income 12,049,409 12,049,409
Balance, September 30, 2015 31,497,157 (14,976,654) (53,196,228) 13,079,940 (40,561,623) 49,016,635 (15,140,773)
Distributions to preferred (97,796) (5,123,767) (5,221,563)
and common units
Purchase of treasury units (1,458,974) (1,458,974)
Net income 11,606,508 11,606,508
Balance, September 30, 2016 $ 31,497,157 $ (15,074,450) $ (54,655,202) $ 13,079,940 $ (45,685,390) $ 60,623,143 $ (10,214,802)
COBALT BOATS, LLC
STATEMENTS OF CASH FLOWS
Years Ended September 30, 2016 and 2015
The accompanying notes are an integral
part of these financial statements.
5
2016 2015
Cash flows from operating activities:
Net income $ 11,606,508 $ 12,049,409
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 2,702,583 2,645,557
Loss on sale of property, plant and equipment -- (21,127)
Impairment on property, plant and equipment 370,000 --
Changes in assets and liabilities:
Accounts receivable 1,947,121 (1,288,315)
Inventories 875,099 (1,388,675)
Prepaid expenses 199,738 10,369
Other assets 46,395 28,469
Accounts payable (2,398,744) 924,223
Accrued expenses (103,622) 740,608
Redemption payable to current and former
members -- 1,458,973
Net cash flows from operating activities 15,245,078 15,159,491
Cash flows from investing activities:
Purchases of property, plant and equipment (1,390,214) (2,090,171)
Proceeds from sale of property, plant and equipment -- 30,902
Net change in notes and interest receivable (409,593) (848,406)
Net cash flows from investing activities (1,799,807) (2,907,675)
Cash flows from financing activities:
Payments on long term debt (7,267,969) (3,281,628)
Payments on capital lease obligations (337,326) (328,916)
Net change in interest rate swap (46,152) 246,152
Distributions to preferred units (97,796) (495,251)
Distributions to common units (5,123,767) (5,581,425)
Purchase of treasury units (1,458,974) (1,470,362)
Net cash flows from financing activities (14,331,984) (10,911,430)
Net change in cash and cash equivalents (886,713) 1,340,386
Cash and cash equivalents, beginning of year 2,856,226 1,515,840
Cash and cash equivalents, end of year $ 1,969,513 $ 2,856,226
Supplemental cash flow information:
Interest paid $ 556,862 $ 661,735
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - The Company’s principal line of business is the production and sale of
high-end, luxury run-about boats and deck boats ranging in size from 20 to 40 feet. The
principal markets for the Company’s products include both domestic and foreign dealers. The
Company extends credit to various companies, primarily boat dealers, in the normal course of
business. The Company’s customers are not concentrated in any geographic region, but are
concentrated in the boating industry.
Estimates - The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect: (1) the reported amounts of assets and liabilities, (2) disclosures
such as contingencies, and (3) the reported amounts of revenues and expenses included in
such financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and in banks and short-term investments with original maturities of
90 days or less.
Concentration of Credit Risk - The Company maintains its cash in bank deposit accounts that,
at times, may exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant credit risk on
cash.
Accounts Receivable - Trade receivables are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all outstanding amounts on a
periodic basis. Management determines the allowance for all doubtful accounts by identifying
troubled accounts and by using historical experience applied to an aging of all accounts.
Receivables are written off when deemed uncollectible. Recoveries of receivables previously
written off are recorded when received.
A trade receivable is considered to be past due if any portion of the receivable balance is
outstanding for more than 60 days. Currently, the Company does not charge interest on past
due amounts.
The Company factors receivables generated from sales to certain international dealers on a
floor plan financing agreement under a master factoring agreement with Wells Fargo
Commercial Distribution Financing (WFCDF). In connection with this factoring agreement, the
Company has agreed to a repurchase obligation if the dealer defaults, whereby the Company
is obligated to repurchase the product sold to the dealer and regain any remaining rights of the
dealer receivable originally purchased by WFCDF. The factoring agreement is treated as a
collateralized receivables financing arrangement. Outstanding factored receivables under this
agreement as of September 30, 2016 and 2015 were included in accounts receivable in the
approximate amount of $463,000 and $693,000, respectively, and the corresponding
obligation has been included in accrued expenses. The Company has not experienced any
losses related to activity under this agreement.
Inventories - Inventories are stated at the lower of cost (last-in, first-out) or market.
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant and Equipment - Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method. Estimated useful lives for property and equipment are as
follows:
Buildings and improvements 7 - 40 years
Machinery and equipment 3 - 10 years
Tooling 3 - 5 years
The cost of maintenance and repairs is charged to income as incurred; significant renewals
and betterments are capitalized. The Company considers whether or not a long-lived asset is
impaired using the U.S. accounting principles on impairment or disposal of long-lived assets.
Depreciation expense on property, plant and equipment for 2016 and 2015 amounted to
$2,702,583 and $2,645,557, respectively.
Impairment of Long-Lived Assets - The Company periodically reviews the carrying value of its
long-lived assets to determine if events and circumstances exist indicating that the assets
might be impaired. If facts or circumstances support the possibility of impairment, the
Company prepares projections of undiscounted cash flows, without interest charges, of the
asset, to determine if the amounts estimated to be generated by those assets are less than the
carrying amounts of those assets. If impairment is indicated, an adjustment is made to the
carrying amount based on the difference between the sum of the expected future
undiscounted net cash flows and the carrying amount of the asset. Impairment in the amount
of $370,000 and $0 related to tooling was record in 2016 and 2015, respectively.
Future Appreciation Rights Plan - Effective on October 1, 2009, the Company adopted a future
appreciation rights (FAR) plan (Plan) for eligible employees and members of the Board of
Managers as selected by the Plan committee (Committee). Under the Plan, eligible
participants are granted a FAR, subject to an individual agreement with the participant. The
FAR may be at any grant price, determined in the reasonable discretion of the Committee.
Each FAR shall vest at the rate of 20% per year of employment after the date of the grant.
Upon termination of employment, the then vested value, as defined (if any) in excess of the
grant price, shall be paid out over three years. As of September 30, 2016 and 2015, the
Company had issued FAR’s representing 6.5% and 6.25%, respectively, of (common and
preferred) equity value, at grant prices ranging from $0 to $1,630. The Company had accrued
only the vested portion of the FAR under this plan as of September 30, 2016 and 2015. The
accrued obligation was approximately $4,536,000 and $4,362,000 at September 30, 2016 and
2015, respectively (of which, $212,000 is considered current in 2016). Expense was
approximately $174,000 and $347,000 for the years ended September 30, 2016 and 2015,
respectively. The expense is included in other expense, net on the Statements of Income.
Derivative Financial Instruments - The Company uses derivatives consisting of interest rate
swap agreements that qualify as cash flow hedges and applies the simplified hedge
accounting approach for private companies. This guidance, which allows for the election on a
swap-by-swap basis, allows the Company to use a simplified approach where swaps are
assumed to be effective and are recorded at their settlement value.
The Company does not enter into any derivative transactions for trading or speculative
purposes and mitigates credit risk on derivative instruments by dealing only with a financially
sound counterparty. Accordingly, the Company does not anticipate loss from nonperformance.
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Estimated Warranty - The Company offers a comprehensive warranty program with the
following terms: (i) one year period for fuel tank, halon and windshield; (ii) two to three year
period for gelcoat finish, upholstery, canvas and certain components; (iii) five year period for
electrical, controls and accessories and other components; and (iv) ten year period for the hull
and deck structure. Warranties related to the powertrain are provided by the original
equipment manufacturer (up to a five-year period) or through a purchased extended warranty
program for up to a total of five years. This warranty program covers other equipment
extending the warranty period up to five years. The Company records the expense associated
with the purchased extended powertrain warranty when the Company sells the boat to the
dealer.
At the time that sales are recognized, the Company records an estimated warranty obligation
based upon the historical relationship of warranty costs to sales and any specific warranty
issues that may be identified. The Company periodically assesses the adequacy of the
estimated warranty obligation and adjusts the liability as necessary. The estimated warranty
obligation is subject to revision in the future and could result in changes in expense
recognition.
Income Taxes - The Company is a limited liability company that is taxed as a partnership.
Therefore, the Members report their proportionate share of the corporate taxable income or
loss on their individual federal and state income tax returns.
The Company makes and records quarterly distributions as paid to its Members at a combined
rate for federal, state and local income taxes as defined by the Company’s operating
agreement, payable from net profits. During fiscal 2016 and 2015, the Company paid
$5,221,563 and $6,076,676, respectively, in distributions specifically for taxes related to the
allocated share of taxable income to the preferred and common units.
The Company recognizes the financial statement effects of a tax position only when it believes
it can more likely than not sustain the position upon an examination by the relevant tax
authority.
Redeemable Preferred Units - The Company has issued preferred member units with
preference rights that include an 8% priority return (subject to certain limitations). In the event
of a sale of the Company, or similar liquidity event, the Company is obligated to make
distributions first to preferred unit holders to return their capital contributions and then to pay
their priority return, prior to returning the capital of common unit holders and making
distributions in proportion to the respective number of units held by the Members.
At the option of the preferred equity unit holders, at any time after March 31, 2015, the
preferred equity is subject to mandatory redemption at a distributable amount as defined in the
operating agreement. In general, this reflects a return of capital to the preferred unit holders,
plus the payment of a priority return of 8% compounded annually, encompassing prior
distributions, but exclusive of tax distributions. The redemption distributable amount at
September 30, 2016 and 2015 was approximately $1,287,000 and $1,192,000, respectively.
A majority of these units were redeemed in 2014. See Note 2 for additional disclosure.
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition - The Company recognizes revenue in accordance with the terms of the
sale. Accordingly, revenue is recognized when the manufacturing process has been
completed and risk of loss in the inventory has transferred to the dealer. Under the
Company's dealer agreements, ownership of the inventory being sold, and risk of loss, passes
to the dealer upon delivery by the Company to the carrier; in the event the dealer is unable to
accept shipment when scheduled by the Company, usually due to dealer storage limitations,
the Company nevertheless invoices the dealer, and upon the issuance of the invoice,
ownership of the inventory passes to the dealer, regardless of the location of the inventory.
Often, the Company sells its products to a dealer that has arranged financing through a pre-
arranged floor plan lender (see Note 9). Accordingly, once approval is obtained from the
financing company, the dealer is invoiced, and the Company collects the receivable, whether
shipment has occurred or been delayed by the dealer (as of September 30, 2016 and 2015,
shipment had been delayed on 24 and 12 units representing sales values of approximately
$1,982,000 and $1,136,000, respectively). The Company records freight revenue for delivered
units as an offset to freight delivery expense with the net amount recorded in selling, general,
and administrative expenses in the Statements of Income.
The Company has a "winter stocking" program to encourage dealers to purchase boats during
the winter season by providing dealers with sales discounts, which subsidize the financing
costs to the dealer to carry the inventory during the off season. Often, these discounts are
paid by the Company after the sale has occurred, during the inventory carrying period. The
Company estimates the sales discounts to be paid during the winter season, and accrues such
discounts in the period the sale occurs. At September 30, 2016 and 2015, the Company had
accrued approximately $543,000 and $662,000, respectively, for this sales discount.
The Company also has other rebate programs available to dealers, which were discontinued in
fiscal 2016:
Exclusivity Rebate Program - Certain dealers within the Company’s network qualify for an
additional rebate if they only sell the Company’s products in the markets they serve.
These rebates are paid to dealers that remain qualified through the end of the respective
model years. At September 30, 2016 and 2015, unpaid rebates in this program totaled
approximately $50,000 and $194,000, respectively.
Customer Satisfaction Program - Dealers, who attain certain levels of customer
satisfaction ratings, measured quarterly, can earn up to a 2% rebate on purchases made
in the preceding quarter. The Company had accrued $50,000 and $608,136 as of
September 30, 2016 and 2015, respectively, for rebates due to dealers under this
program.
Research and Development - Expenditures for research and development are expensed as
incurred.
Advertising - The Company charges the costs of advertising to expense as incurred.
Advertising expense for the years ended September 30, 2016 and 2015 was approximately
$515,000 and $510,000, respectively.
Fair Value of Financial Instruments - The carrying amount of financial instruments, including
cash, receivables, payables and short-term borrowings, approximates fair value due to the
short maturity of these instruments. The carrying amount of long term debt approximates fair
value as the interest rates fluctuate with market interest rates. The fair value of interest rate
swap agreements approximates settlement value.
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassification - Certain amounts in the prior year financial statements have been reclassified
to conform with the current year presentation.
Accounting Policies not yet Adopted - The FASB issued a new accounting standard, Revenue
from Contracts with Customers, which supersedes nearly all existing revenue recognition
guidance under U.S. accounting principles. The core principle of the new standard is to
recognize revenues when promised goods or services are transferred to customers in an
amount that reflects the consideration to which an entity expects to be entitled for those goods
or services. The new accounting standard defines a five-step process to achieve this core
principle and, in doing so, more judgment and estimates may be required within the revenue
recognition process than are required under existing U.S. accounting principles. The standard
is first effective for the Company with its 2019 year.
The FASB issued a new accounting standard, Inventory - Simplifying the Measurement of
Inventory, which will require the Company to report inventory at lower of cost or net realizable
value. The Standard is first effective for the Company with its 2017 year.
The FASB recently issued a new accounting standard, Leases. This new standard will include
substantial changes for accounting by lessees; existing operating leases and all new leases,
unless immaterial, will require balance sheet recognition. The standard is first effective for the
Company with its 2020 year, with early adoption permitted.
The Company is currently evaluating the impact of the pending adoption of these new
standards.
Subsequent Events - Subsequent events have been evaluated through the date of
December 5, 2016, which is the date that these financial statements were available to be
issued.
2. PURCHASE OF TREASURY UNITS
On September 9, 2014, the Company purchased 43,718 shares of Series A, preferred units
from three shareholders. The total cost of the treasury units purchased and recorded at
September 30, 2014 was $50,266,893 which included costs totaling $336,270 for legal
expenses related to the execution of the transaction. In addition, the Company is obligated to
make additional contingent payments in fiscal years 2015 through 2017 to the current and
former shareholders of up to $4,376,920 upon the occurrence of events as defined in the
respective purchase agreements. Contingent payments in the amounts of $4,376,920 and
$2,917,946, per the purchase agreement, have been paid or accrued and recorded in treasury
stock at September 30, 2016 and 2015, respectively, as applicable requirements for the
accrual have been met or, in the belief of management, will be met. At September 30, 2016
and 2015, $1,458,973 represents payments currently payable and the balance is considered
long term.
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
11
3. INVENTORIES
Inventories at current cost at September 30, 2016 and 2015 consist of the following:
2016 2015
Raw materials and manufactured parts $ 6,046,649 $ 7,024,654
Work-in-process, net 3,646,149 3,330,961
Finished goods 1,179,143 1,466,975
10,871,941 11,822,590
Less allowance to adjust the carrying value of inventories
to last-in, first-out (LIFO) basis (2,357,596) (2,433,146)
LIFO inventories $ 8,514,345 $ 9,389,444
If inventory had been stated at current costs, net income would have decreased $75,550 and
increased $23,457 for the years ended September 30, 2016, and 2015, respectively.
The Company has also established a reserve for obsolescence against parts in inventory for
discontinued boat models. While these parts are no longer used on current boat models, they
may be used as spare parts. The amount of the reserve is based on parts with no activity for
one year. The reserve was approximately $1,326,000 and $1,168,000 at September 30, 2016
and 2015, respectively, and is included in raw materials and manufactured parts.
4. RELATED PARTY NOTES RECEIVABLE
As of September 30, 2016 and 2015, the Company had unsecured demand notes and interest
receivable from officers and employees of $2,736,758 and $2,327,165, respectively. The
notes were evidenced by demand notes and bear interest at rates up to 3.00%. The Company
does not expect that a demand for payment will be made on these notes during the next fiscal
year, and therefore, these notes have been classified as long-term. Activity on the officers’ and
employees’ notes during fiscal 2016 and 2015 was as follows:
2016 2015
Beginning balance $ 2,327,165 $ 1,478,759
Advances including interest 902,235 897,410
Payments (492,642) (49,004)
Ending balance $ 2,736,758 $ 2,327,165
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
12
5. ESTIMATED WARRANTY OBLIGATION
Estimated warranty obligations as of September 30, consist of the following:
2016 2015
Balance, beginning of year $ 4,855,000 $ 4,447,000
Estimated provision for warranty expense 2,038,000 2,160,000
Warranty payments (1,872,000) (1,752,000)
Balance, end of year $ 5,021,000 $ 4,855,000
Estimated warranty obligations are included in accrued expenses in the accompanying
balance sheets, while warranty expense is included in selling, general and administrative
expenses in the accompanying statements of income.
6. NOTES PAYABLE UNDER REVOLVING LINE OF CREDIT
Effective in 2014, the Company has a $10,000,000 line of credit with JPMorgan Chase Bank,
N.A. The line of credit matures on September 8, 2019, and interest is charged at an adjusted
LIBOR rate defined in the credit agreement as the quotient of LIBOR divided by one minus the
reserve requirement, applicable to the current interest period. This rate is then added to a
marginal rate ranging from 1.15% to 1.95% (effective rate at September 30, 2016 was 1.92%).
Borrowings under the line of credit agreement are limited to 80% of eligible accounts
receivable, 65% of eligible engine inventory, and 50% of all other inventory less applicable
reserves. Substantially all accounts receivable, inventory, and general intangibles are pledged
as collateral under the line of credit agreement. The line of credit agreement contains
restrictions on additional borrowings, payment of dividends, and capital expenditures, and
requires maintenance of certain customary financial covenants relating to working capital,
tangible net worth, and debt service. The Company had no borrowings on this line of credit at
September 30, 2016 and 2015, with available borrowing of approximately $7.9 million at
September 30, 2016.
7. LONG TERM DEBT OBLIGATIONS
Long-term debt at September 30, 2016 and 2015 consists of the following:
2016 2015
Note payable to a bank; due in monthly principal payments of
$250,000 plus interest at an adjusted LIBOR rate as outlined in
the security agreement (effective rate was 1.92% at
September 30, 2016) through maturity in September, 2019. The
loan is collateralized by accounts receivable and inventory.
$ 19,500,000 $ 26,750,000
Notes payable on machinery; due in monthly payments of $1,564
including interest at 3.50% through maturity in April of 2017.
The notes are collateralized by machinery.
12,657 30,626
19,512,657 26,780,626
Less current maturities 3,012,657 3,017,986
$ 16,500,000 $ 23,762,640
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
13
7. LONG TERM DEBT OBLIGATIONS (CONTINUED)
Annual maturities of long-term debt at September 30, 2016, are as follows:
Year ending September 30,
2017 $ 3,012,657
2018 3,000,000
2019 13,500,000
2020 --
$ 19,512,657
8. CAPITAL LEASE OBLIGATIONS
The Company leases certain facilities and equipment through capitalized lease obligations
underlying taxable and non-taxable Industrial Revenue Bonds issued by the City of Neodesha,
Kansas. The facilities and equipment are being leased at an amount sufficient to pay principal
and interest on the bonds and an option exists to purchase the facility and equipment at the
end of the lease.
The Company issued IRB’s for property tax abatements and purchased the IRB’s. Such
bonds are offset, resulting in no effect on the Company’s financial statements.
During 2007, the Company issued industrial revenue bonds (IRBs) for $2.7 million to fund the
Company’s expansion. These bonds were purchased by a bank and are payable in monthly
principal and interest installments of $28,746 with an interest rate of LIBOR plus 2.5% through
maturity in December 2016. The effective interest rate on these bonds was 2.70% at
September 30, 2016. The bonds are collateralized by leased assets noted below. Remaining
principal on these bonds at September 30, 2016 and 2015 was $84,171 and $421,497,
respectively.
Future minimum lease payments under the above IRB capital lease as of September 30, 2016
are as follows:
Year Ending September 30,
Capital Lease
Payments
2017 $ 84,592
Less amount representing interest 421
Present value of future minimum lease payments $ 84,171
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
14
8. CAPITAL LEASE OBLIGATIONS (CONTINUED)
The following is an analysis of the cost of leased property under the above IRB capital leases:
September 30,
2016 2015
Land $ 207,886 $ 207,886
Building and improvements 7,204,405 7,204,405
Machinery and equipment 709,887 709,887
Tooling 1,291,814 1,291,814
9,413,992 9,413,992
Less accumulated amortization (7,426,402) (7,095,725)
$ 1,987,590 $ 2,318,267
As of September 30, 2015, the Company had approximately $3,200,000 of equipment,
building improvement costs and restricted revenue bond funds where the related industrial
revenue bonds have been purchased by the Company. As of September 30, 2016, the
Company had paid all industrial revenue bonds in full. All property under capital leases is titled
to the City, for property tax purposes, for the term of the leases.
9. COMMITMENTS AND CONTINGENCIES
In addition to the accounts receivable master factoring agreement, as discussed in Note 1, the
Company is contingently liable to banks and other financial institutions for collateral
repurchase agreements, which provide pre-arranged floor plan financing to most of the
Company’s independent dealers in connection with their purchase of the Company’s products,
under the Company’s floor plan arrangements. These agreements provide for the Company to
repurchase its products from the financial institution in the event that they have repossessed
them upon a dealer’s default. In the event the Company is required to repurchase the
products, any loss would be reduced by the ultimate resale value. As of September 30, 2016
and 2015, the Company has not recorded a liability and the maximum potential liability for
repurchased boats under the floor plan was approximately $11,576,000 and $11,586,000
respectively.
For the years ended September 30, 2016 and 2015, the Company has not experienced any
losses on repurchased boats under these agreements. The Company considers these
agreements when estimating its allowance for doubtful accounts.
The Company is a defendant in lawsuits arising from the normal course of business. In
management’s opinion, liabilities arising from such claims, if any, would not have a material
adverse effect on the financial statements of the Company.
COBALT BOATS, LLC
NOTES TO THE FINANCIAL STATEMENTS
15
10. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) plan that covers substantially all full-time
eligible employees. Under this plan, the Company discretionarily matches employee
contributions up to a maximum of 6% as determined annually by the Company. The expense
for the years ended September 30, 2016 and 2015 was approximately $141,000 and
$134,000, respectively. The Internal Revenue Service has approved the tax-exempt status of
this plan.
11. INTEREST RATE SWAP
On January 3, 2015, the Company entered into an interest rate swap agreement accounted for
by the simplified hedge accounting method. This swap has a notional amount of $15,000,000,
an effective date of January 2015 with a fixed interest rate of 1.47% plus a term loan spread of
1.40% (effective rate at September 30, 2016 is 2.87%) and a maturity date of August 2019. As
of September 30, 2016 and 2015, the settlement value was estimated to be $200,000 and
$245,152, respectively, and the Company recorded a corresponding liability with an offset to
interest expense.
