<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended Commission File Number
December 28, 1996 0-22512
WEST MARINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-035-5502
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
500 Westridge Drive,
Watsonville, California 95076-4100
(Address of principal executive offices) (Zip Code)
Telephone Number: (408) 728-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
At March 21, 1997, the aggregate market value of the registrant's Common Stock
held by non-affiliates of the registrant was approximately $225,833,440.
At March 21, 1997, the number of shares outstanding of registrant's Common
Stock was 16,528,713.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the Company's 1997 Annual Meeting of
Stockholders is incorporated by reference in Part III of this Form 10-K.
<PAGE>
PART I
ITEM 1 - BUSINESS
GENERAL
West Marine, Inc. ("West Marine" or the "Company") is the leading specialty
retailer of recreational boating supplies and apparel in the United States. At
fiscal year-end 1996, the Company offered products through 151 stores in 26
states and through catalogs which it distributes several times each year. The
Company's business strategy is to offer an extensive selection of high quality
marine supplies and apparel to the recreational aftermarket for both sailboats
and powerboats at competitive prices in a convenient, one-stop shopping
environment emphasizing customer service and technical assistance. The Company
also is engaged through its Port Supply division and its stores in the wholesale
distribution of products to commercial customers and other retailers.
West Marine was incorporated in Delaware in September 1993 as the holding
company for West Marine Products, Inc., which was incorporated in California in
1976. Unless the context otherwise requires, "West Marine" and the "Company"
refer to both West Marine, Inc. and its subsidiaries West Marine Products, Inc.
and E&B Marine, Inc. The Company's principal executive offices are located at
500 Westridge Drive, Watsonville, California 95076-4100 and its telephone number
is (408) 728-2700.
RECENT DEVELOPMENTS
On June 17, 1996, the Company completed its acquisition of E&B Marine, Inc. (E&B
Marine) a specialty retailer of marine supplies with 64 stores and a mail order
catalog operation. Under the terms of the acquisition, all of the outstanding
shares of E&B Marine were exchanged for approximately 1.2 million shares of
West Marine, Inc. common stock. The value of the shares, including the value of
stock options converted, was $41.6 million. The acquisition was accounted for as
a purchase, and accordingly, the acquired assets and liabilities were recorded
at their estimated fair values as of the date of the acquisition. The principal
assets acquired and liabilities assumed were inventories ($37.6 million),
deferred income taxes ($7.1 million), property ($3.7 million), other assets
($3.8 million), accounts payable and accrued expenses ($23.6 million), debt
($21.6 million), and other liabilities ($1.3 million).
During 1996, the Company expanded its operations -- by acquiring 64 new stores
in connection with the E&B Marine acquisition and opening an additional 16 new
stores and entering into new geographic markets in South Carolina, Georgia,
Alabama, Mississippi, New Hampshire, Wisconsin and Pennsylvania.
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EXPANSION STRATEGY
Stores. Since opening its first store in 1975, the Company has grown through
internal expansion and acquisitions, and operated 151 stores in 26 states at
fiscal year-end 1996. As shown in the table below, the Company has achieved
increasing geographic diversification within the United States in recent years.
The following table sets forth, by geographic region, the number of stores open
at the end of each of the following fiscal years:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
West 19 20 22 24 27
Great Lakes 2 6 18
Gulf Coast 4 4 4 7
Northeast 3 6 13 16 44
Atlantic 1 2 4 11
Southeast 5 6 11 18 44
- - - - -
Total 27 37 54 72 151
== == == == ===
</TABLE>
The Company intends to continue to enhance its store presence in fiscal 1997.
West Marine expects that substantially all of its new stores in 1997 will be
located in regions other than the West Coast. The Company's expansion plan is
dependent upon the Company's ability to further penetrate these markets
successfully. The Company will continue to pursue the acquisition of other
companies' assets and product lines that either complement or expand its
existing business. The Company's ability to expand will depend on a number of
factors, including the adequacy of the Company's capital resources and the
ability to locate suitable store sites and negotiate acceptable lease terms, to
hire, train and integrate employees and to adapt its distribution and other
operational systems. There is no assurance that the Company will be able to
achieve its planned expansion or that such expansion will be accomplished on a
profitable basis. Failure to achieve its planned expansion could have a material
adverse effect on the Company.
Catalog and Port Supply. Although the Company expects that increases in net
sales and net income, if any, will be principally due to expansion of its store
operations, the Company anticipates growth in its Port Supply operations and its
catalog operations. An increased percentage of Port Supply sales in fiscal 1997
is expected to come from the East Coast and Midwest regions due to continued
service improvements and ongoing store expansion in these areas. In addition,
the Company's Port Supply division is focusing on certain international
locations such as the Pacific Rim, the Caribbean, Canada and Mexico. Catalog
operations in fiscal 1997 will focus on geographic areas not serviced by West
Marine or E&B Marine stores, including Canada and certain other international
locations. The Company expects that catalog sales and Port Supply sales will
continue to represent declining percentages of the Company's total net sales.
MERCHANDISING
Merchandise Selection. The Company offers its customers the convenience of
one-stop shopping through a comprehensive selection of high quality marine
supplies and apparel for their complete recreational boating needs. The products
distributed by the Company are intended to serve the recreational aftermarket
for both sailboats and powerboats, with a large percentage of the Company's
products applicable for use with both types of vessels. The Company believes
powerboats represent a substantial majority of boats registered in the United
States, but that powerboat owners represent a lesser percentage of its current
customer base. In fiscal 1996, the Company added over 8,000 items to its
inventory selection, the majority of which were specifically aimed at meeting
the needs of powerboat owners. The Company does not sell boats (other than
inflatable boats and dinghies), sails or inboard motors. The Company's
merchandise selection at fiscal 1996 year-end consisted of approximately 32,000
SKUs representing over 1,000 brand names and "West Marine" private label
products. The Company believes its private label merchandise provides a
competitive advantage by offering customers an assortment of quality and, in
some cases, unique merchandise at attractive values.
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Merchandise sold by the Company can be divided into three general merchandise
categories:
Marine Supplies. The Company offers a wide variety of products which can be
generally classified into the following categories:
o safety equipment, such as lifejackets, liferafts, safety harnesses
and bilge pumps
o anchoring, docking and cordage equipment, such as anchors, rope,
chains, fenders and cleats
o sailboat equipment, such as racing braids, mainsail controls, boom
vangs and winches
o ventilation and plumbing equipment, such as air conditioning units,
marine heads and heaters
o maintenance products, such as paints, varnishes, stains, sealants and
marine washers
o electrical and mechanical equipment, such as solar panels, batteries,
alternators and generators
o inflatable and water sports equipment, such as inflatable boats,
skiboards, water skis and wetsuits
o power boat equipment, such as outboard motors, fuel tanks, steering
systems and trailers.
These products include brand name offerings, as well as "West Marine" private
label merchandise. Marine supplies represented a substantial majority of the
Company's net sales in fiscal 1996.
Electronics. The Company carries state-of-the-art marine global positioning
navigational systems ("GPS"), as well as other electronic equipment such as
ship-to-shore radios, marine stereos, autopilots, fish finders and depth
finders. The Company also offers "West Marine" private label VHF radios and
other electrical equipment.
Softgoods. West Marine features a broad selection of high quality boating
apparel and footwear including well-known brands. The Company also offers a
selection of foul weather gear, shirts, shorts, jackets, hats, boots, and other
apparel bearing the "West Marine" private label. Softgoods represented 7% of the
Company's net sales in fiscal 1996.
The Company strives to maintain consistent in-stock availability of merchandise.
A typical store carries approximately 30% of the 32,000 SKUs offered by the
Company. An individual store's merchandise mix is tailored to respond to local
market conditions and buying preferences. Any items stocked by the Company but
not available in a particular store can generally be shipped to the customer
within 24 hours. In addition, the Company can place special orders for customers
for products which the Company does not normally stock.
Pricing. The Company's policy is to offer its products at prices that are
competitive with the prices charged by other national and regional marine supply
specialty retailers in the markets it serves and that are generally lower than
prices charged by local independent operators. To implement this pricing policy,
the Company monitors pricing at competing stores and adjusts its prices as
necessary to ensure competitive positioning. Replaceable price signage is
clearly posted on shelving instead of directly on each item, enabling rapid
price changes on items in the stores. The Company's commitment to offering
competitive prices is supported by its price matching program where the Company
will, for a period of 30 days, either match the competitor's price or refund the
difference between the Company's price and the competitor's price. Most pricing
decisions are made centrally by the Company's buyers. However, store managers
are responsible for monitoring local competition and adjusting prices to remain
competitive. The Company believes that its competitive pricing policy, together
with its price matching program, are important factors in establishing and
maintaining a favorable reputation among customers.
SOURCING AND PURCHASING
Vendor Relationships. The Company purchased merchandise from more than 1,000
vendors during fiscal 1996 and achieved significant efficiencies through
quantity purchases and direct orders from suppliers. West Marine offers many of
the brands best known to its target customers. In fiscal 1996, no vendor
accounted for more than
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9% of the Company's merchandise purchases and the Company's 20 largest vendors
accounted for approximately 36.3% of the Company's merchandise purchases. The
Company deals with its suppliers on an order-by-order basis and has no long-term
purchase contracts or other contractual assurances of continued supply or
pricing.
The Company strives to maintain strong and interactive relationships with its
vendors. Buyers meet regularly with major vendors to stay abreast of new
products, new technology and prices. In addition, West Marine conducts a "Very
Important Vendor" Program once a year at which key vendors are encouraged to
discuss their business and relationship with the Company's key executives. The
Company works closely with its vendors, frequently sharing information regarding
market research and the Company's performance and goals. The Company also
receives cooperative advertising allowances from certain vendors.
Private Label Merchandise. The Company's private label merchandise is
manufactured to the Company's specifications on a contract basis domestically,
and to a lesser extent, in Europe and the Pacific Rim, and typically has higher
gross margins than brand name merchandise. The Company has no long-term
contracts with its manufacturing sources and competes with other companies for
production facilities and import quota capacity.
Purchasing. The Company's Senior Vice President of Merchandising, oversees the
purchasing of the Company's merchandise. This manager supervises a group of
buyers, each of whom has responsibility for specified product categories. The
Company's buyers are also responsible for specifying private label merchandise
and for contracting the manufacture of these goods and assuring their delivery.
The Company's Assistant Vice President, Inventory Management oversees a staff
responsible for managing inventory levels in the distribution facilities and the
stores and for minimizing in-store out-of-stocks. Inventory managers are
assisted by a sophisticated management information system which provides them
with current inventory, price and volume information by SKU and recommended
purchase quantities, allowing them to react quickly to market changes.
CUSTOMER SERVICE
The Company is committed to achieving total customer satisfaction and to
encouraging repeat business by providing a high level of knowledgeable,
attentive and personalized customer service. To develop responsive, well-trained
sales associates, the Company has devoted significant resources to developing
and implementing extensive employee training programs aimed at increasing
product knowledge and responsiveness to customer needs. In addition, the Company
provides a price matching program, special order capabilities and a "no hassle"
satisfaction guarantee that permits customers who are not completely satisfied
to return any items for an exchange, credit or refund. To educate customers on
the latest developments in boating and product offerings, the Company conducts
classes and seminars. The Company's master catalog also provides technical
information relating to various marine subjects. To provide customers easy
access to factory authorized repair service, the Company maintains an in-house
service center at its facilities in Hollister, California to repair electronics,
outboard motors and inflatable boats. Based on information received from its
customers, the Company believes it has established a reputation for excellent
customer service.
SITE SELECTION AND STORE DESIGN
In selecting which markets to enter, the Company evaluates a number of criteria,
including proximity to existing operations and the performance of catalog sales
in that market, as well as the size, strength and merchandising philosophy of
potential competitors. In choosing specific sites within a market, the Company
applies standardized site selection criteria which take into account numerous
factors including the number of boat slips and boats within a certain radius,
local demographics and overall retail activity.
Most of the Company's stores are located adjacent to or near boat marinas to
provide customers convenient access. Most stores have large, readily
identifiable signage, easy access from major roads and adequate customer
parking. The stores currently range in size from approximately 3,000 to 15,100
square feet. The Company generally seeks to open stores of approximately 7,500
square feet. The stores are generally open seven days and, during the boating
season, six nights per week, including most holidays.
The format of West Marine and E&B Marine stores depends to a certain degree on
the size of the store and the buying patterns of the local markets. Merchandise
is displayed in functional product groupings clearly identified
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by signs hanging in each aisle. The layout of the store is designed to expose
each customer to a large proportion of the store's product offerings and to
stimulate customer purchases. For example, frequently purchased items such as
rope, varnish and other maintenance supplies are generally displayed at the rear
of the store, whereas items that are higher margin and have a strong impulse
purchasing orientation are displayed in the front of the store. Eye-catching
end-cap displays feature new product offerings or promotional items or focus on
a particular product category, such as safety equipment. The Company's brightly
lit, well organized stores are designed to provide an enjoyable shopping
environment.
STORE OPERATIONS
Management and Associates. The Company's stores are organized into geographic
regions with a regional manager responsible for each region. Regional managers
report to the Chief Operating Officer. Each region is then organized into
districts, each with a district manager responsible for the store operations
within his or her district. The Company's district managers frequently visit the
cluster of stores within their respective geographic areas to monitor financial
performance and ensure adherence to Company's operating standards. The typical
staff for a West Marine store consists of one store manager, an assistant store
manager, an inventory manager and between eight and twenty additional hourly
sales associates, most of whom work part-time. Store managers make all hiring
decisions, monitor and respond to local competitive forces and, in certain
cases, supplement their stores' merchandise mix with products suited for their
specific market.
Training and Compensation. Customer service is a defining feature of the West
Marine corporate culture. The Company believes that knowledgeable and
enthusiastic sales associates have a direct impact on profitability. The Company
places great emphasis on associate training, offering new hire training,
on-the-job training, and additional self-paced training and field tests to help
ensure that sales associates are thoroughly familiar with the technical elements
of the Company's product offerings. Store managers, most of whom are drawn from
the Company's sales associates, also complete an intensive training program. In
addition, each new district manager attends a multistore training program and
thereafter participates in semi-annual training workshops.
All store and district managers and all sales associates participate in an
incentive plan that ties compensation awards to the achievement of specified
store profits, group performance goals and overall Company profits. In addition,
the Company advocates broad-based participation in its stock option plans and
all associates and managers are eligible to receive option grants. The Company
believes that through its training programs, incentive pay and stock option and
stock purchase programs, it has developed a sense of ownership amongst the
associates which has served to limit turnover in its store staff.
CATALOG OPERATIONS
The Company's catalog operations offer customers convenience in the purchasing
of recreational boating supplies and apparel. In addition, catalog operations
also service retail markets where the Company has not opened stores. The Company
believes that catalog operations have served as an effective marketing and
advertising tool for the Company's store operations.
The Company mails master merchandise catalogs throughout the United States once
a year. In addition, smaller seasonal full-color catalogs and flyers are mailed
monthly. The Company believes sales growth has been attributable to the
enhancement of its master catalog as well as continued refinement of its mailing
strategies. The catalogs also provide technical information regarding product
offerings and advertises seminars and other promotional events sponsored by the
Company and the locations of the Company's stores.
During fiscal 1997, the Company plans to release three versions of its master
catalog. One version will feature the complete selection of products offered by
the Company (approximately 32,000 SKUs) while the other two versions will focus
on sailboat related items and powerboat related items, respectively. Each of
these catalogs will feature approximately 22,000 of the Company's 32,000 SKUs.
The Company believes this will be a cost efficient means of focusing advertising
efforts on target market segments.
The Company maintains an extensive mailing list for distribution of its
catalogs. The Company solicits requests for its catalogs through card decks, its
own website, and ads in international boating magazines. Each store
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customer is offered a catalog and requested to join the Company's mailing list.
The Company also rents mailing lists from the publishers of boating magazines
and others.
The Company composes and produces complete camera-ready copy and artwork for its
catalogs at its executive offices in Watsonville, California, utilizing a
desktop publishing system. This enables the Company to make both pricing and
product changes until shortly before the catalogs are printed. The Company's
catalogs are printed and distributed by a leading commercial printer which
produces similar publications for several other mail-order merchandisers.
The Company receives all catalog orders by mail or telephone at its Watsonville,
California office or its Edison, New Jersey call center. Merchandise is then
distributed to customers from one of the Company's distribution facilities. The
Hollister distribution facility services primarily the West Coast while the
Charlotte, North Carolina distribution facility services primarily the
Northeast, Southeast, Gulf Coast, Great Lakes and Midwest. The Company's Edison,
New Jersey facility does not fulfill catalog orders. The Company believes that
having distribution centers on both coasts and its large in-stock merchandise
selection are competitive advantages, enabling the Company to respond to mail
and telephone orders promptly.
PORT SUPPLY OPERATIONS
The Company's Port Supply division was created to take advantage of purchasing
and distribution efficiencies and to address a broader customer base. Through
this division, the Company distributed marine supplies at wholesale prices to
approximately 19,000 commercial customers in fiscal 1996, including customers
involved in boat sales, boat building, yacht chartering, sailmaking and
commercial fishing, as well as to other marine supplies retailers who resell the
items. Most of the Port Supply division's customers are located on the West
Coast, primarily in California. However, as the Company expands its store
operations, the Company expects growth in the Port Supply operations to come
from regions other than the West Coast. The Port Supply division's sales force
is supervised by the Vice President and General Manager of this division. The
Company distributes its master catalog, together with a wholesale price list, to
its customers and prospective customers annually and issues supplemental
wholesale pricing information periodically.
DISTRIBUTION
The Company has three distribution centers, one located on the West Coast and
two located on the East Coast. The West Coast distribution center is 162,000
square feet and is located in Hollister, California. The East Coast distribution
centers are located in Charlotte, North Carolina and Edison, New Jersey and are
115,000 square feet and 185,000 square feet, respectively. The Company's
merchandise is received, inspected, processed, warehoused and distributed
through these three facilities. The Hollister facility services primarily the
West Coast while the North Carolina and New Jersey facilities service primarily
the Northeast, Southwest, Gulf Coast and Great Lakes, in each case depending
upon product distribution efficiencies. During 1997, the Company plans to
consolidate its two East Coast distribution centers into one expanded facility
in or near Rockhill, South Carolina.
Vendors ship all products to one of the distribution centers where the
merchandise is inspected, verified against the original purchase order, ticketed
and repackaged for shipment to stores and to catalog and Port Supply customers.
Various methods of transportation are used to ship products, including truck and
air freight and the Company's trucks and vans. Store inventory levels are
analyzed through the Company's management information systems. The store level
automatic replenishment system maintains variable stock levels for each SKU in
each store location. The inventory purchasing system maintains variable stock
levels for each SKU in each distribution center location. Normally, merchandise
is sent to stores once a week. However, during certain seasonal periods, stores
may receive more than one shipment per week.
INFORMATION SYSTEMS
West Marine has invested significant resources in management information systems
that provide store managers and corporate management daily information on sales,
gross margins and inventory levels. The Company utilizes a fully integrated
software system which runs on multiple IBM AS/400 computers. This third party
system has been designed to integrate all major aspects of the Company's
business including sales, warehousing, distribution,
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purchasing, inventory control, merchandise planning and replenishment, as well
as various financial systems. The Company has recently implemented a radio-
frequency-based version of the system in its West Coast distribution center and
plans to deploy this system in its consolidated East Coast distribution center
in 1997. All purchasing functions are processed through a secondary software
application which is fully integrated with the core system.
Each of the Company's stores is linked to the Company's headquarters through a
point-of-sale system that provides inventory look up and sales history and
permits electronic mail. The point-of-sale system keeps a record, updated daily,
of each merchandise item from receipt to sale. The system permits "price
look-up" and on-line credit card approval and also has scanning capabilities,
which are expected to improve transaction accuracy, speed checkout time and
increase overall store efficiency when fully implemented.
The Company believes that the systems it has developed will enable it to
continue to improve customer service, operational efficiency and management's
ability to monitor critical performance factors.
MARKETING
In addition to its catalogs and monthly sales flyers, the Company advertises in
local boating magazines and trade journals, sponsors and participates in boating
events, conducts technical seminars for customers on topics ranging from marine
safety to advances in marine electronics, and supports boating and environmental
organizations. The Company also sponsors and participates in a variety of
recreational boating activities.
In connection with store openings, the Company conducts a grand opening at which
prizes are awarded, sale prices are instituted and gifts are provided to
customers. The Company also donates $1 for every person attending a store grand
opening to a local environmental or community group and also contributes to
these groups on a regular basis by providing financial support or free products.
In connection with its promotional efforts, the Company leases or owns several
boats, including a 40-foot sailboat. These boats are equipped with a variety of
the products distributed by the Company and are used to test products before and
after the Company decides to distribute them. Sales associates and managers are
encouraged to participate as crew on the boats to familiarize themselves with
the products sold by the Company.
COMPETITION
The retail market for marine supplies is highly competitive and the Company
expects the level of competition to increase. The Company's stores compete with
other national specialty marine supply stores such as Boat/U.S. and Boaters
World. Many of these competitors have stores in the markets in which the Company
now operates and in which it plans to expand. The Company also competes with a
wide variety of local and regional specialty stores and, to a lesser extent,
sporting good stores and mass merchants. The Company's catalog operations
compete with other catalog retailers as well as competitors' stores and with the
Company's own stores as stores expand into markets historically serviced by the
Company's catalog division. The Company also has a number of competitors in the
wholesale distribution of marine products. Certain of the Company's competitors
have greater financial, marketing and other resources than the Company. In
addition, a key competitive factor in the marine supplies market is price.
Competitive pressures resulting from competitors' pricing policies have
adversely affected the Company's gross margins and such pressures are expected
to continue.
The principal factors of competition in the Company's marketplace are quality
and variety of merchandise, price, customer service and convenience. The Company
believes that it competes successfully on the basis of all such factors.
TRADEMARKS AND SERVICE MARKS
The Company is the owner in the United States of the trademark and service mark
"West Marine", and "E&B Marine", among others. These marks are registered with
the United States Patent and Trademark Office. Each federal registration is
renewable indefinitely if the mark is still in use at the time of renewal.
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ASSOCIATES
As of December 28, 1996, the Company had 2,704 associates, of whom approximately
1,569 were full-time and approximately 1,135 were part-time and temporary. In
addition, a significant number of seasonal associates are hired during the
Company's peak selling seasons.
EXECUTIVE OFFICERS
The following table sets forth information regarding the executive officers of
the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Randolph K. Repass 53 Chairman of the Board
Crawford Cole 38 President, Chief Executive Officer and Director
Richard E. Everett 43 Executive Vice President, Chief Operating Officer and Director
John C. Zott 38 Senior Vice President, Finance, Chief Financial Officer and Secretary
Robert Hebeler 39 Senior Vice President, Merchandise
</TABLE>
Randolph K. Repass has been Chairman of the Board of the Company since
founding the Company in 1968 and was the Company's Chief Executive Officer from
1968 until April 1995. He served as President from 1968 to 1990 and reassumed
the position of President temporarily in 1993. Mr. Repass began his career in
engineering and marketing with Fairchild Semiconductor in 1966. He is the
President of Sail America, a sailing industry asociation and is currently
Chairman of the Board of New England Ropes, Inc. He received a B.S. degree in
electrical engineering from Duke University.
Crawford L. Cole became President and Chief Executive Officer of the
Company in April 1995 and has served as a director since 1990. From August 1993
to April 1995, Mr. Cole was a self-employed business consultant. He was the
Company's President from July 1990 to August 1993. From July 1987 to May 1990,
Mr. Cole was a Senior Vice President of Northern Automotive, an autoparts
retailer. Mr. Cole holds a B.S. degree in mechanical engineering from the
University of Virginia and an M.B.A. from the University of Georgia.
Richard E. Everett joined West Marine in 1980, became Executive Vice
President Chief Operating Officer in 1995 and has served as a director since
1994. He currently oversees the Company's store operations, real estate, store
planning and construction. During his career with West Marine, Mr. Everett has
held a number of positions in store operations. He began as a store associate,
was promoted to a store manager, and has served as district manager for several
of the Company's districts. Prior to his current position in West Marine, Mr.
Everett was Senior Vice President of Store Operations. He founded and operated a
sailboat rigging company prior to joining West Marine. Mr. Everett received a
B.S. degree from the College of Natural Resources at the University of
California, Berkeley.
John Zott joined the Company in 1990, became Senior Vice President in
1995, and has served as Chief Financial Officer since 1990. Prior to that, Mr.
Zott was the Controller for The Nature Company, a specialty retailer, from 1988
to 1990. Mr. Zott holds a B.S. degree in accounting and an MBA from the
University of Detroit.
Robert E. Hebeler joined the Company in January 1996, as Senior Vice
President of Merchandising. Prior to that, Mr. Hebeler was the Vice President of
Merchandising and Marketing for Gander Mountain Inc., a specialty retailer and
cataloger from 1993 to 1996. Mr. Hebeler holds a B.A. degree from Michigan State
University and an M.M.A. degree from Aquinas College.
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ITEM 2 -- PROPERTIES
The Company's corporate offices are located in a 95,000 square foot facility in
Watsonville, California, which the Company occupies under a lease expiring in
2007. The Company operates a 162,000 square foot distribution center located in
Hollister, California with a lease that expires in 2010. The Company also
occupies a 115,000 square foot facility located in Charlotte, North Carolina and
a 185,000 square foot facility in Edison, New Jersey. These leases expire in
2001 and 1998, respectively. During 1997, the Company plans to consolidate its
two East Coast distribution centers into one expanded facility in or near
Rockhill, South Carolina.
At December 28, 1996, the Company's 151 stores included an aggregate of
approximately 1,279,392 square feet of space. The Company's stores are all
leased, typically for a ten year term, with options to renew for additional
terms. In most cases, the Company pays a fixed rent. Substantially all of the
leases require the Company to pay insurance, utilities, real estate taxes and
repair and maintenance expenses.
ITEM 3 - LEGAL PROCEEDINGS
Litigation
The Company is not a party to any material litigation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
West Marine, Inc. common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol WMAR. The following table sets forth for
the period indicated, the high and low closing sales prices for the Company's
common stock, as reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
FISCAL 1996
- -----------
Stock trade price:
High $24 1/2 $37 1/2 $39 3/4 $37
Low $15 1/4 $24 1/4 $26 1/4 $26 3/4
FISCAL 1995
- -----------
Stock trade price:
High $26 1/2 $26 $30 3/4 $35
Low $27 1/2 $23 1/2 $25 $28 3/4
</TABLE>
As of March 21, 1997, there were approximately 2,160 holders of record of the
Company's common stock.
10
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
(in thousands, except per share and operating data)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
Consolidated Income Statement Data:
Net sales .................................. $ 97,117 $122,815 $169,923 $224,204 $323,300
Income from operations ..................... 5,819 6,904 10,935 16,198 21,156
Income before income taxes ................. 5,134 5,903 9,740 14,819 19,490
Net income ................................. 5,985 8,975 11,566
Pro forma net income (1) ................... 3,080 3,542
Net income per common and common
equivalent share:
Primary ............................ $ 0.45 $ .61 $ 0.68
Fully diluted ...................... $ 0.45 $ .60 $ 0.68
Pro forma net income per common and
common equivalent share (1):
Primary and fully diluted........... $ 0.34
Supplemental pro forma net income per
common and common equivalent share (1):
Primary ............................ $ 0.28 $ 0.30
Fully diluted ...................... $ 0.27 $ 0.30
Consolidated Balance Sheet Data:
- -------------------------------
Working capital ............................ $ 12,600 $ 21,724 $ 30,757 $ 58,619 $ 92,948
Total assets ............................... 36,050 46,458 70,385 95,845 211,514
Long-term debt ............................. 7,446 4,459 12,297 8,284 37,997
Operating Data:
- --------------
Stores open at year-end .................... 27 37 54 72 151
Comparable store net sales increase ........ 4.3% 8.0% 15.8% 9.0% 5.4%
</TABLE>
(1) Pro forma net income reflects the Company's earnings as if it had been a C
Corporation for tax puposes. Pro forma net income per share is based on the
weighted average common and common equivalent shares outstanding during the
period as calculated using the treasury stock method. For purposes of this
calculation, all stock options granted within one year of the Company's initial
public offering are treated as outstanding for all periods. The supplemental pro
forma net income per share calculation is based upon the weighted average
shares used in the pro forma net income per share calculation plus 803,213
shares offered by the Company in its initial public offering to fund the $10
million distribution of undistributed taxable S Corporation earnings.
11
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPANY OVERVIEW
West Marine distributes its merchandise through three divisions, stores (retail
and wholesale) and catalog (retail) under the names of West Marine and E&B
Marine as well as Port Supply (wholesale). West Marine operated 151 stores in 26
states as of December 28, 1996, compared to 72 stores in 19 states as of
December 30, 1995.
On June 17, 1996, West Marine acquired E&B Marine, Inc., a specialty retailer of
marine supplies with 64 stores and a mail order catalog operation (see note 2 to
consolidated financial statements). The acquisition was accounted for under the
purchase method of accounting. Accordingly, E&B Marine's results of operations
for the period subsequent to the acquisition are included with West Marine's
results of operations.
RESULTS OPERATIONS
The following table sets forth certain income statement components expressed as
a percent of sales:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0%
Cost of goods sold including buying
and occupancy ........................... 70.8 71.4 71.1
----- ----- -----
Gross profit ................................. 29.2 28.6 28.9
Selling, general and administrative
expenses................................. 21.7 21.4 22.5
Expenses related to integrating E&B Marine.... 0.9 __ __
----- ----- -----
Income from operations........................ 6.6 7.2 6.4
Interest expense ............................. 0.5 0.6 0.7
----- ----- -----
Income before income taxes ................... 6.1 6.6 5.7
Provision for income taxes ................... 2.5 2.6 2.2
----- ----- -----
Net income.................................... 3.6% 4.0% 3.5%
===== ===== =====
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
During 1996 the Company reported record sales and profits. Sales for 1996
increased 44.2% to $323.3 million compared to $224.2 million in 1995. This
increase was attributable to increases in sales from each of the Company's three
divisions. Store sales increased 51.0% to $250.3 million. The increase in store
sales was primarily due to the acquisition of the 64 E&B Marine stores in June
1996 and the 16 additional West Marine stores opened in 1996. Net sales from
comparable West Marine stores increased 5.4% and contributed $8.7 million, or
10.3% of the increase. Catalog sales increased 24.6% to $40.8 million. The
Company believes that the Catalog sales increase is attributable to the E&B
Marine acquisition as well as a refined mailing strategy and
12
<PAGE>
product mix enhancements. Port Supply sales increased 25.5% to $32.2 million,
resulting primarily from the Company's continued East Coast expansion. During
the first six months of 1997, the Company expects sales increases to be
positively affected by the E&B Marine merger.
Gross profit increased 47.0% in 1996 compared to 1995 primarily due to the
increase in sales. Gross profit as a percentage of sales increased to 29.2% in
1996 from 28.6% in 1995, primarily reflecting improved buying leverage offset by
increased occupancy costs as a percentage of net sales primarily at E&B Marine
locations and the West Coast distribution center that opened in the early part
of 1996. During the next year, the Company plans to replace and consolidate its
North Carolina distribution center and its newly acquired Edison, New Jersey
distribution center, which could increase costs which would have an adverse
affect on gross profits until the replacement distribution center has matured.
Selling, general and administrative expenses increased $22.2 million, or 46.3%,
in 1996, primarily due to increases in direct expenses related to the growth in
West Marine stores and the acquired E&B Marine stores. Store direct expense
represented approximately 69.1% of the $22.2 million increase. As a percentage
of sales, selling, general and administrative expenses increased from 21.4% in
1995 to 21.7% in 1996 primarily due to the growth in stores.
Expenses related to integrating E&B Marine totaled $3.0 million or .9% of 1996
sales. Such costs represented one time charges for the closing of the E&B Marine
corporate headquarters, converting E&B Marine distribution, buying and financial
operations to West Marine systems and other non-recurring expenses.
Income from operations increased $5.0 million, or 30.6% , from 1995 to 1996. As
a percentage of net sales, income from operations decreased to 6.6% in 1996 from
7.2% in 1995. Excluding E&B Marine integration costs of $3 million, income from
operations increased 38.8% and as a percentage of sales was 7.5% in 1996.
Interest expense increased $287,000 or 20.8%, in 1996 compared to 1995,
primarily as a result of higher average borrowings under the Company's line of
credit during 1996, principally to fund increased levels of inventory due to the
increase in stores.
FISCAL 1995 COMPARED TO FISCAL 1994
Sales for 1995 increased 31.9% to $224.2 million compared to $169.9 million in
1994. This increase was attributable to increases in sales from each of the
Company's three divisions. Store sales increased 33.2% to $165.8 million. The
increase in store sales was primarily attributable to new store openings and
increases in sales of existing stores. The opening of 18 stores in 1995
contributed $10.3 million or 24.9% of the increase. Sales from comparable stores
increased 9.0% and contributed $10.8 million, or 26.2% of the increase. Catalog
sales increased 30.3% to $32.8 million. The Company believes that the increase
in catalog sales reflected the increase in size of the Company's master catalog
from 720 pages in 1994 to 864 pages in 1995, along with a more focused
circulation strategy. Port Supply sales increased 26.2% to $25.6 million,
resulting primarily from the Company's continued East Coast expansion and the
addition of overnight delivery service to the Florida market.
Gross profit increased 30.6% in 1995 compared to 1994 primarily due to the
increase in sales. Gross profit as a percentage of sales decreased to 28.6% in
1995 from 28.9% in 1994, primarily reflecting increased purchasing and
distribution costs. During December 1995, the Company successfully completed a
move of its West Coast distribution center into a 162,000 square-foot facility
in Hollister, California.
Selling, general and administrative expenses increased $9.8 million, or 25.6%,
in 1995, primarily due to increases in store operating expenses relating to the
growth in stores. New store expenses represented approximately 66.8% of the $9.8
million increase. As a percentage of sales, selling, general and administrative
expenses decreased from 22.5% in 1994 to 21.4% in 1995. The improvement in the
selling, general and administrative expense rate resulted from the allocation of
overhead and fixed expenses over a larger sales base.
Income from operations increased $5.3 million, or 48.1%, from 1994 to 1995. As a
percentage of net sales, income from operations increased to 7.2% in 1995 from
6.4% in 1994.
13
<PAGE>
Interest expense increased $184,000, or 15.4%, in 1995 compared to 1994,
primarily as a result of higher weighted average interest rates during 1995 and,
to a lesser extent, higher average borrowings under the Company's line of
credit, principally to fund new stores.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company's primary sources of capital were from operations and
bank borrowings. Net cash provided by operations during 1996 was $6.3 million,
consisting primarily of earnings excluding depreciation and changes in deferred
income taxes, a $6.3 million increase in accounts payable, offset by a $13.7
million increase in inventory, a $3.6 million increase in accounts receivable,
prepaid expenses and other assets, and a $2.3 million increase in accrued
expenses. The inventory increase was primarily attributable to the addition of
16 new West Marine stores opened in 1996 as well as enhancing the product
selection at the 64 E&B stores acquired, and the expansion of the merchandise
selection offered by the Company. Net cash used in investing activities was
$16.2 million primarily for the purchase of property and equipment. Net cash
provided from financing activities was $10.5 million, consisting of $7.3 million
from the Company's line of credit and $3.5 million received from the exercise of
stock options and the sales of common stock pursuant to the associate stock
purchase plan, offset by repayments on the Company's long term debt of $305,000.
Cash increased by $495,000 during 1996 from $399,000 at the end of fiscal 1995
to $894,000 at the end of fiscal 1996. West Marine's primary cash requirements
are related to capital expenditures for new stores, including leasehold
improvement costs and fixtures, and merchandise inventory for stores. The
Company expects to spend approximately $20 million on capital expenditures
during 1997. The Company intends to pay for its expansion through cash generated
from operations and bank borrowings. The Company believes that cash from
operations, together with the current credit line will be sufficient to fund the
Company throughout 1997.
At December 28, 1996, the Company had available a $60 million revolving line of
credit with two banks which expires on July 4, 1999. Depending on the Company's
election at the time of borrowing, the line bears interest at either the bank's
reference rate or LIBOR plus a factor ranging from .6% to 1.0%. As of December
28, 1996, borrowings from the credit line were $37 million bearing interest at
rates ranging from 6.18% to 6.37%. As of December 30, 1995, borrowings from the
credit line were $8 million bearing interest at 6.41%. In connection with the
acquisition, the Company assumed $20 million of E&B Marine's obligations which
were transferred into the Company's existing line of credit. The loan agreements
are unsecured and contain certain restrictive covenants including maximum
leverage ratio, minimum cash flow coverage ratio, minimum working capital, and
maximum funded debt ratio, and restricts the repurchase or redemption of stock
and the paying of dividends. In February 1997, the Company amended its bank
agreements increasing its available line of credit to $70 million which will be
reduced to $60 million on June 28, 1997.
BUSINESS TRENDS
West Marine's growth in sales has been principally fueled by geographic
expansion through acquisition, the opening of new stores and, to a lesser
extent, by comparable-store net sales increases. Although the Company believes
that the Catalog and Port Supply divisions will continue to grow, future Company
net sales and profit growth, if any, will be increasingly dependent on the
opening and profitability of new stores. The Company's Catalog division has also
faced market share erosion in markets where stores have been opened by either
the Company or competitors. Management expects this trend will continue.
In most of the Company's product categories, prices have remained stable or have
declined over the last three years, a trend which management expects is likely
to continue. As a result, sales increases during such periods have generally not
been attributable to increases in prices. In recent years, competition has
increased which has adversely affected the Company's gross profits. These
competitive and pricing pressures are likely to continue.
14
<PAGE>
SEASONALITY
Historically, the Company's business has been highly seasonal. As a result of
the acquisition of E&B Marine, the Company is even more susceptible to
seasonality as a larger percentage of E&B Marine stores' sales occur in the
second and third quarters of the year. During 1996, 63.1% of the Company's net
sales and an even higher percentage of its net income occurred during the second
and third quarters, principally during the period from April through July which
represents the peak boating months in most of the Company's markets. In
addition, the Company will become even more susceptible to seasonality and
weather as it continues to expand its operations in the Northeast and Midwest.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
The statements in this filing or in documents incorporated by reference herein
that relate to future plans, events, expectations, objectives or performance (or
assumptions underlying such matters) are forward-looking statements that involve
a number of risks and uncertainties. Set forth below are certain important
factors that could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements.
The Company's growth has been fueled principally by the E&B Marine acquisition
and the Company's store operations. If the Company were to encounter
unanticipated costs and difficulties related to the integration of the E&B
Marine acquisition this could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition,
acquisitions involve a number of special risks, including the diversion of
management's attention to the assimilation of the operations and personnel of
the acquired business, potential adverse short-term effects on the Company's
operating results and amortization of acquired intangible assets. The Company's
continued growth depends to a significant degree on its ability to continue to
expand its operations through the opening of new stores and to operate those
stores profitably, as well as increasing sales at its existing stores. The
Company's planned expansion is subject to a number of factors, including the
adequacy of the Company's capital resources and the Company's ability to locate
suitable store sites and negotiate acceptable lease terms, to hire, train and
integrate employees and to adapt its distribution and other operations systems.
The market for recreational boating supplies is highly competitive. Competitive
pressures resulting from competitors' pricing policies have adversely affected
the Company's gross profit and such pressures are expected to continue.
Furthermore,the expected consolidation of the Company's East Coast distribution
facilities could disrupt the Company's business and adversely affect gross
profits. In addition, the Company's operations could be adversely affected if
unseasonably cold weather, prolonged winter conditions or extraordinary amounts
of rainfall were to occur during the peak boating season in the second and third
quarters.
Additional factors which may affect the Company's financial results include
consumer spending on recreational boating supplies, environmental regulations,
demand for and acceptance of the Company's products and other risk factors
disclosed from time to time in the Company's SEC filings.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
[DELOITTE & TOUCHE LOGO]
The Board of Directors and Stockholders
West Marine, Inc.,
We have audited the accompanying consolidated balance sheets of West
Marine, Inc. and subsidiaries (the "Company") as of December 28, 1996 and
December 30, 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended December 28, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company at December 28,
1996 and December 30, 1995 and the results of its operations and its cash flows
for each of the three fiscal years in the period ended December 28, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
San Francisco, California
February 12, 1997
16
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
FISCAL FISCAL
YEAR-END YEAR-END
ASSETS 1996 1995
---------- -------- --------
<S> <C> <C>
Current assets:
Cash .......................................................... $ 894 $ 399
Accounts receivable, net ..................................... 3,742 2,922
Merchandise inventories ....................................... 122,731 71,374
Prepaid expenses and other current assets ..................... 10,803 3,463
-------- --------
Total current assets ............................. 138,170 78,158
Property and equipment, net ........................................ 30,654 16,500
Intangibles and other assets, net .................................. 42,690 1,187
-------- --------
Total assets ..................................... $211,514 $ 95,845
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------
Current liabilities:
Accounts payable .............................................. $ 33,627 $ 13,597
Accrued expenses .............................................. 10,901 5,699
Current portion of long-term debt ............................. 694 243
-------- --------
Total current liabilities ........................ 45,222 19,539
Long-term debt ..................................................... 37,997 8,284
Deferred items and other non-current obligations ................... 1,764 743
Stockholders' equity:
Preferred stock, $.001 par value: 1,000,000 shares
authorized; no shares outstanding
Common stock, $.001 par value: 50,000,000 shares
authorized; issued and outstanding 16,494,205
and 14,938,412 at fiscal year-end 1996 and 1995, respectively 16 15
Additional paid-in capital .................................... 98,632 50,947
Retained earnings ............................................. 27,883 16,317
-------- --------
Total stockholders' equity ....................... 126,531 67,279
======== ========
Total liabilities and stockholders' equity ....... $211,514 $ 95,845
======== ========
</TABLE>
See notes to consolidated financial statements
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts and store data)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales ................................ $323,300 $224,204 $169,923
Cost of goods sold including
buying and occupancy ................... 228,888 159,988 120,745
-------- -------- --------
Gross profit ........................ 94,412 64,216 49,178
Selling, general and administrative
expenses ............................... 70,261 48,018 38,243
Expenses related to integrating E&B Marine 2,995
-------- -------- --------
Income from operations .............. 21,156 16,198 10,935
Interest expense ......................... 1,666 1,379 1,195
-------- -------- --------
Income before income taxes .......... 19,490 14,819 9,740
Provision for income taxes ............... 7,924 5,844 3,755
======== ======== ========
Net income .......................... $ 11,566 $ 8,975 $ 5,985
======== ======== ========
Net income per common and common
equivalent share
Primary ................... $ 0.68 $ 0.61 $ 0.45
======== ======== ========
Fully diluted ............. $ 0.68 $ 0.60 $ 0.45
======== ======== ========
Weighted average common and common
equivalent shares outstanding
Primary ................... 16,948 14,766 13,198
======== ======== ========
Fully diluted ............. 16,951 14,860 13,198
======== ======== ========
Stores open at end of year ............... 151 72 54
======== ======== ========
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at fiscal year-end, 1993 ...................... 12,394,452 $13 $23,054 $ 1,749 $ 24,816
Net income ............................................ 5,985 5,985
Exercise of stock options, including tax benefit ...... 96,274 68 68
Distributions to stockholders ......................... (392) (392)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at fiscal year-end, 1994 ...................... 12,490,726 13 23,122 7,342 30,477
Net income ............................................ 8,975 8,975
Sale of common stock pursuant to secondary offering,
net of offering costs of $373 .................... 2,360,000 2 27,284 27,286
Exercise of stock options, including tax benefit ...... 56,562 247 247
Sale of common stock pursuant to associate stock
purchase plan .................................... 31,124 294 294
- -----------------------------------------------------------------------------------------------------------------------------
Balance at fiscal year-end, 1995 ...................... 14,938,412 15 50,947 16,317 67,279
Net income ............................................ 11,566 11,566
Issuance of common stock in the E&B Marine acquisition. 1,195,486 1 39,192 39,193
Value of stock options converted in the E&B Marine
acquisition ...................................... 2,382 2,382
Exercise of stock options ............................. 313,275 2,791 2,791
Tax benefit from exercise of non-qualified stock options 2,660 2,660
Sale of common stock pursuant to associate
stock purchase plan..................... 47,032 660 660
- -----------------------------------------------------------------------------------------------------------------------------
Balance at fiscal year-end, 1996 ...................... 16,494,205 $16 $98,632 $27,883 $126,531
=========== === ======= ======= ========
</TABLE>
See notes to consolidated financial statements
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
( in thousands, except share data)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 11,566 $ 8,975 $ 5,985
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .................................. 5,651 3,425 2,357
Provision for deferred income taxes .......................... 2,115 647 (630)
Provision for doubtful accounts .............................. 278 240 215
Change in assets and liabilities, net of effect of acquisitions:
Accounts receivable ........................................... (986) (786) (892)
Merchandise inventories ....................................... (13,738) (19,591) (16,066)
Prepaid expenses and other current assets ..................... (1,899) (766) (1,205)
Other assets .................................................. (683) (121) (142)
Accounts payable .............................................. 6,295 5,663 1,770
Accrued expenses .............................................. (2,341) 895 932
Deferred rent ................................................. 21 88 185
-------- -------- --------
Net cash provided by (used in) operating activities .................. 6,279 (1,331) (7,491)
Cash flows from investing activities:
Purchases of property and equipment ................................ (13,913) (7,836) (5,782)
Acquisitions ....................................................... (2,336) (472) (2,206)
-------- -------- --------
Net cash used in investing activities ................................ (16,249) (8,308) (7,988)
Cash flows from financing activities:
Net proceeds from (payments on) line of credit . ................... 7,319 (17,900) 20,900
Payments on long-term debt ......................................... (305) (200) (5,100)
Proceeds from issuance of common stock,
net offering expenses ............................................ 27,286
Sale of common stock pursuant to
associate stock purchase plan .................................... 660 294
Exercise of stock options .......................................... 2,791 247 68
Payment of distributions to stockholders ........................... (392)
-------- -------- --------
Net cash provided by financing activities ............................ 10,465 9,727 15,476
-------- -------- --------
Net increase (decrease) in cash ...................................... 495 88 (3)
Cash:
Beginning of year .................................................. 399 311 314
-------- -------- --------
End of year ........................................................ $ 894 $ 399 $ 311
======== ======== ========
Other cash flow information:
Cash paid for interest ............................................. $ 1,448 $ 1,320 $ 1,155
Cash paid for income taxes ......................................... $ 5,296 $ 5,459 $ 4,787
Equipment acquired through noncash
capital lease transactions ....................................... $ 1,432 $ 277
Tax benefit from exercise of non-
qualified stock options .......................................... $ 2,660
Acquisition of E&B Marine, Inc. for 1,195,000 shares
of common stock (see note 2) ..................................... $ 41,575
</TABLE>
See notes to consolidated financial statements
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- West Marine, Inc. (the "Company"), a Delaware corporation, is a
specialty retailer and wholesaler of boating supplies and apparel, which it
markets through 151 retail stores in the United States and mail order catalogs.
Principles of Consolidation -- The consolidated financial statements include the
accounts of West Marine, Inc. and its subsidiaries. Intercompany balances and
transactions are eliminated in consolidation.
Fiscal Year -- The Company's fiscal year ends on the Saturday closest to
December 31 based on a 52/53 week year. Fiscal years 1996, 1995 and 1994 ended
on December 28, 1996, December 30, 1995 and December 31, 1994, respectively.
Accounting Estimates -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Merchandise inventories are stated at the lower of cost (first-in, first-out
method) or market. Cost includes acquisition and distribution costs which have
been capitalized in merchandise inventories in order to better match sales with
these related costs.
Deferred Catalog and Advertising Costs -- The Company capitalizes the direct
cost of producing and distributing its catalogs. Capitalized catalog costs are
amortized, once the catalog is mailed, over the expected sales period which is
generally six months. Deferred catalog costs amounted to $756,000 and $321,000
at fiscal year-end 1996 and 1995, respectively. Advertising costs are expensed
as incurred and amounted to $4.5 million, $3.1 million, and $2.5 million in
1996, 1995, and 1994, respectively.
Property and Equipment is stated at cost. Furniture and equipment is depreciated
using the straight-line method over the estimated useful lives of the various
assets which range from three to five years. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful lives of the
improvements.
Pre-Opening Costs are expensed as incurred.
Intangibles and Other Assets -- The excess of cost over tangible net assets
acquired is amortized over periods ranging from 5 to 40 years. Whenever events
or changes in circumstances have indicated that the carrying amount of its
assets might not be recoverable, the Company, using its best estimates based on
reasonable and supportable assumptions and projections, has reviewed for
impairment the carrying value of long-lived identifiable assets and intangibles
to be held and used in the future.
Deferred Rent -- Certain of the Company's operating leases contain predetermined
fixed increases of the minimum rental rate during the initial term. For these
leases, the Company recognizes the related rental expense on a straight-line
basis over the life of the lease and records the difference between the amount
charged to rent expense and the rent paid as deferred rent.
Income Taxes -- The Company's income taxes are accounted for under the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", which requires the liability method of accounting.
21
<PAGE>
Fair Value of Financial Instruments -- The carrying value of cash, accounts
receivable, accounts payable, and long-term debt approximates the estimated fair
values.
Stock-based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, no compensation cost has been recognized for its fixed cost stock
option plans or its associate stock purchase plan.
Stock Split -- On June 17, 1996, the Company effected a two-for-one stock split.
Accordingly, all per share and stock option data have been restated to reflect
the split.
Earnings Per Share are based on primary and fully diluted weighted average
common and common equivalent shares outstanding during the year, as calculated
under the treasury stock method. The Company's common equivalent shares consist
of outstanding stock options.
Reclassifications -- Certain fiscal 1995 and 1994 amounts have been reclassified
to conform with the fiscal 1996 presentation.
NOTE 2: ACQUISITION
On June 17, 1996, the Company completed its acquisition of E&B Marine, Inc.
("E&B Marine") a specialty retailer of marine supplies with 64 stores and a mail
order catalog operation. Under the terms of the acquisition, all of the
outstanding shares of E&B Marine, Inc. were exchanged for approximately 1.2
million shares of West Marine, Inc. common stock. The value of the shares,
including the value of stock options converted, was $41.6 million. The
acquisition has been accounted for as a purchase, and accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values as of
the date of the acquisition. The principal assets acquired and liabilities
assumed were inventory ($37.6 million), deferred income taxes ($7.1 million),
property ($3.7 million), other assets ($3.8 million), accounts payable and
accrued expenses ($23.6 million), debt ($21.6 million), and other liabilities
($1.3 million). The excess of the purchase price over the net identifiable
assets acquired ($38.4 million) has been included in intangible assets and is
being amortized over a forty-year period on a straight-line basis.
The following unaudited pro forma income statement summary combines the results
of operations of the Company and E&B Marine as if the acquisition had occurred
at the beginning of the 1996 and 1995 fiscal years. The pro forma income
statement summary does not necessarily reflect the results of operations as they
would have been if these combined companies had constituted a single entity
during these periods.
Pro Forma Income Statement Summary (in thousands, except share data):
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Net sales .......... $ 387,783 $334,022
========= ========
Net income ......... $ 12,618 $ 9,150
========= ========
Net income per share $ 0.72 $ 0.57
========= ========
</TABLE>
Included in the pro forma income statement summary above is an actual $3 million
charge to earnings in the third quarter of fiscal 1996 for costs associated with
integrating E&B Marine into the operations of the Company.
22
<PAGE>
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL Fiscal
YEAR-END Year-end
1996 1995
-------- --------
<S> <C> <C>
Furniture and equipment $ 17,701 $12,396
Computer equipment 14,738 7,320
Leasehold improvements 14,272 8,909
Land and building 577
-------- -------
Subtotal ............... 47,288 28,625
Accumulated depreciation
and amortization .. (16,634) (12,125)
-------- -------
Total property and
equipment, net .... $ 30,654 $16,500
======== =======
</TABLE>
NOTE 4: LONG-TERM DEBT
At December 28, 1996, the Company had available a $60 million revolving line of
credit with two banks which expires on July 4, 1999. Depending on the Company's
election at the time of borrowing, the line bears interest at either the bank's
reference rate or LIBOR plus a factor ranging from .6% to 1.0%. At fiscal
year-end 1996, borrowings from the credit lines were $37 million bearing
interest at rates ranging from 6.18% to 6.37%. At fiscal year-end 1995,
borrowings from the credit lines were $8 million bearing interest at 6.41%. In
February 1997, the Company amended its bank agreement extending its available
line of credit up to $70 million which will be reduced to $60 million on June
28, 1997. All other conditions were substantially unchanged.
During fiscal 1996 and 1995, the weighted average interest rates in effect were
6.5% and 7.5%, respectively.
At fiscal year-end 1996 and 1995, the Company had $850,000 and $100,000 of
outstanding stand-by letters of credit. At fiscal year-end 1995, the Company had
$310,000 of outstanding commercial letters of credit.
The loan agreement is unsecured and contains certain restrictive covenants
including maximum leverage ratio, minimum cash flow coverage ratio, minimum
working capital, and maximum funded debt ratio; and restricts the repurchase or
redemption of stock and the paying of dividends.
Long term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL Fiscal
YEAR-END Year-end
1996 1995
---- ----
<S> <C> <C>
Line of credit ................ $37,000 $ 8,000
Capital lease obligations
interest at 4.9% to 9.4%.... 1,691 527
------- -------
Subtotal ...................... 38,691 8,527
Less current portion .......... 694 243
------- -------
Total ......................... $37,997 $ 8,284
======= =======
</TABLE>
At fiscal year-end 1996, future minimum principal payments on long-term debt
were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 694
1998 543
1999 37,433
2000 21
-------
Total $38,691
=======
</TABLE>
23
<PAGE>
NOTE 5: RELATED PARTY TRANSACTIONS
The Company purchases merchandise from a supplier in which the Company's
Principal Stockholder owns stock and is a member of the board of directors.
Additionally, the Principal Stockholder's brother is the President and his
father is a member of the board of directors and a major stockholder of the
supplier. Cost of sales during fiscal 1996, 1995 and 1994 includes $4.3 million,
$3.8 million and $3.1 million from such related party. Accounts payable to the
supplier at fiscal year-end 1996 and 1995 were $233,000 and $196,000,
respectively.
The Company leases its corporate headquarters and two retail stores from three
partnerships in which the Company's Principal Stockholder is the general partner
(See Note 6). In addition, one retail store and a sailboat are leased directly
from the Principal Stockholder.
NOTE 6: LEASES
The Company leases certain equipment, retail stores, three distribution centers
and its corporate headquarters. The Company also sublets space at various
locations on both month-to-month and noncancellable sublease agreements. Certain
store operating leases provide for rent adjustments based on the consumer price
index.
The aggregate future minimum annual rental payments and sublease income under
noncancellable leases in effect at fiscal year-end 1996, were as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating Sublease Net Lease
Leases Leases Income Commitments
------- --------- --------- -----------
<S> <C> <C> <C> <C>
1997............................... $ 818 $ 17,417 $146 $ 18,089
1998............................... 535 15,564 38 16,061
1999............................... 447 14,188 4 14,631
2000............................... 21 11,509 11,530
2001............................... 9,941 9,941
Thereafter ........................ 32,314 32,314
------ -------- ---- --------
Total minimum lease
commitment .................... 1,821 $100,933 $188 $102,566
====== ======== ==== ========
Less amount representing interest.. 130
------
Present value of obligations
under capital leases........... 1,691
Less current portion .............. 694
------
Long term obligations under
capital leases ................ $ 997
======
</TABLE>
The components of rent expense for fiscal 1996, 1995 and 1994 were as follows
(in thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Minimum rent ........ $10,726 $ 5,706 $ 4,189
======= ======= =======
Percent rent ........ $ 154 $ 180 $ 207
======= ======= =======
Sublease income ..... $ 164 $ 127 $ 147
======= ======= =======
Rents paid to related
parties .......... $ 1,764 $ 1,013 $ 1,001
======= ======= =======
</TABLE>
The cost and the related accumulated amortization of assets under capital leases
aggregated $1.9 million and $901,000, respectively, at fiscal year-end 1996 and
$1.2 million and $608,000, respectively, at fiscal year-end 1995.
24
<PAGE>
NOTE 7: STOCK OPTION PLANS
FIXED STOCK OPTION PLANS
The Company's 1990 Stock Option Plan (the "1990 Plan" ) provides for
incentive stock options to be granted for the purchase of an aggregate of 2.1
million shares of common stock to employees and directors at prices not less
than 100% of the fair market value at the date of grant. Options under this plan
are generally exercisable equally over five years from the date of the grant,
unless otherwise provided.
The Company's 1993 Omnibus Equity Incentive Plan as amended, ("the 1993
Plan"), provides for options to be granted for the purchase of an aggregate of
3.8 million shares of common stock at prices not less than 85% of the fair
market value at the date of grant. Options under this plan are generally
exercisable equally over five years from the date of the grant, unless otherwise
provided.
The Company's Non-employee Director Stock Option Plan (the "Director
Plan") has reserved 100,000 shares of common stock for issuance to non-employee
directors of the Company. Option prices are granted at 100% of fair market
value, and are generally exercisable six months after the grant date.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") requires the disclosure of pro forma net
income and net income per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: four to seven year expected life from
date of grant; stock volatility, 55% in 1996 and 45% in 1995; risk free interest
rates, 5.89% to 6.62% in 1996 and 5.47% to 6.44% in 1995; and no dividends
during the expected term. The Company's calculations are based on a single
option valuation approach and forfeitures are recognized as they occur. If the
computed fair values of the 1996 and 1995 awards had been amortized to expense
over the vesting period of the awards, pro forma net income and net income per
share (primary and fully diluted) would have been $9 million ($0.54 per share)
in fiscal 1996 and $8 million ($0.54 per share) in fiscal 1995. However, the
impact of outstanding non-vested stock options granted prior to 1995 has been
excluded from the pro forma calculation; accordingly, the fiscal 1996 and fiscal
1995 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all future applicable stock
options.
25
<PAGE>
Option activity under the plans was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding, fiscal year-end 1993 ................................................ 1,013,448 $ 2.49
Granted .......................................................................... 525,878 8.72
Exercised ........................................................................ (96,274) 0.70
Cancelled ........................................................................ (56,552) 4.95
--------- ------
Outstanding, fiscal year-end 1994 (464,168 exercisable at a weighted average price
of $2.29) ........................................................................ 1,386,500 4.90
Granted (Weighted average grant date fair value- $7.02) .......................... 1,159,880 11.22
Exercised ........................................................................ (57,342) 4.36
Cancelled ........................................................................ (20,568) 7.62
--------- ------
Outstanding, fiscal year-end 1995 (845,664 exercisable at a weighted average price
of $5.72) ........................................................................ 2,268,470 7.89
Options converted in the E&B Marine acquisition .................................. 139,384 14.42
Granted (Weighted average grant date fair value- $13.29) ........................ 653,158 20.65
Exercised ........................................................................ (313,275) 8.10
Cancelled ........................................................................ (50,358) 13.32
--------- ------
Outstanding, fiscal year-end 1996 (1,084,741 exercisable at a weighted average
price of $7.37) .................................................................. 2,697,379 $11.09
========= ======
</TABLE>
Additional information regarding options outstanding at fiscal year-end 1996 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
WEIGHTED AVG.
REMAINING
RANGE OF EXERCISE NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$ 0.43 - $8.63 949,434 5.99 $ 4.39 640,107 $ 3.72
8.75 - 12.50 1,059,897 8.22 11.12 412,091 11.81
14.75 - 32.99 688,048 9.00 20.30 32,543 22.94
--------------- --------- ---- ------ --------- ------
$ 0.43 - $32.99 2,697,379 7.69 $11.09 1,084,741 $ 7.37
========= =========
</TABLE>
At fiscal year-end 1996, 2.3 million and 54,000 shares were available for
future grants under the 1993 Plan and the Directors' Plan, respectively. The
Company does not intend to grant any additional options under the 1990 Plan.
26
<PAGE>
ASSOCIATE STOCK PURCHASE PLAN
The Company has a stock buying plan covering all eligible associates.
Participants in the plan can purchase West Marine stock through regular payroll
deductions. The stock is purchased on the last business day of October and April
at 85% of the fair market value on the date of purchase. Shares issued under the
plan were 47,032 and 31,124 in 1996 and 1995 at weighted average prices of
$14.03 and $9.46, respectively. The weighted average fair value of the 1996 and
1995 awards was $31.48 and $14.01, respectively. At fiscal year-end 1996,
121,844 shares were reserved for future issuances under the stock buying plan.
NOTE 8: INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Currently Payable:
Federal ....... $4,545 $4,195 $3,603
State ......... 1,264 1,002 782
------ ------ ------
Total ....... 5,809 5,197 4,385
------ ------ ------
Deferred:
Federal ....... 1,823 532 (551)
State ......... 292 115 (79)
------ ------ ------
Total ....... 2,115 647 (630)
------ ------ ------
Total ............ $7,924 $5,844 $3,755
====== ====== ======
</TABLE>
A reconciliation of the Company's statutory income tax rate with its effective
income tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate 35.0% 34.0% 34.0%
State income taxes,
net of federal
tax benefit ...... 4.9 5.3 5.3
Other ................ 0.8 0.1 (0.7)
---- ---- ----
Effective tax rate ... 40.7% 39.4% 38.6%
==== ==== ====
</TABLE>
27
<PAGE>
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts measured by tax laws. Temporary differences which give rise to deferred
tax assets (liabilities) are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL FISCAL
1996 1995
---- ----
<S> <C> <C>
Current:
Reserves .................. $ 2,351 $ 721
Net operating loss
carryforwards ............. 3,678
Paid time off ............. 341 243
State tax benefit ......... 161 183
Change of tax accounting
method ............... 133 242
Deferred catalog costs .... (1,012) (655)
Capitalized inventory costs (1,342) (545)
Cash discounts ............ (517) (379)
Valuation allowance ....... (504)
Other ..................... (338) 13
------- -------
Subtotal ............. 2,951 (177)
Noncurrent:
Deferred rent ............. 304 315
Fixed assets .............. 1,764 170
Reserves .................. 610
Change of tax accounting
method ............... (333) (532)
Other ..................... 69
------- -------
Total ..................... $ 5,296 ($ 155)
======= =======
</TABLE>
As part of the E&B Marine acquisition the Company provided deferred taxes
on various temporary differences, including additional reserves and write down
of fixed assets.
At fiscal year-end 1996, the Company had unused tax net operating loss
carryforwards, attributable to E&B Marine, of approximately $8.3 million which
expire in the year 2003 through 2006. The utilization of the tax loss
carryforwards may be limited in subsequent years as a result of prior ownership
changes as required under sections 381 and 382 of the Internal Revenue Code.
28
<PAGE>
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan covering all eligible full-
time employees. The Company matches 33% of an employee's contribution up to 5%
of the employee's annual compensation. The Company's contributions to the Plan
for fiscal 1996, 1995 and 1994 were $278,000, $171,000 and $141,000,
respectively.
As a result of the acquisition of E&B Marine, the Company has a suspended
defined benefit plan (the "Defined Benefit Plan"), under which the minimum
benefit contribution is calculated by the plan actuaries. The Defined Benefit
Plan provides an existing participant with the excess, if any, of amounts
required under the Company's pension formula over the value of the retiree's
account balance as of the date the Defined Benefit Plan was suspended (January
28, 1994). A discount rate of 6% and a rate of return on assets of 8% were used
by the actuary in determining the Plan status at fiscal year-end 1996.
The actuarial present value of the benefit obligations at fiscal year-end
1996 was (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Accumutated benefit obligation, of which $2,965 was vested ................. $ 3,012
-------
Projected benefit obligation for services rendered ......................... $ 3,012
Fair value of plan assets, primarily common stocks and U.S. government bond
commingled funds with the custodian ........................................ 2,145
-------
Projected benefit obligation in excess of fair value of plan assets ........ 867
Deferred gain .............................................................. 133
-------
Accrued pension liability ............................................. $ 1,000
=======
</TABLE>
Net pension plan expense for fiscal 1996 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Actual return on assets .................................................... $ 146
Interest cost on projected benefit obligation .............................. (91)
Net amortization ........................................................... (65)
-------
Net pension expense ................................................... $ 10
=======
</TABLE>
29
<PAGE>
QUARTERLY FINANCIAL DATA
(In thousands, except per share data unaudited)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
FISCAL 1996
Net sales ..................... $ 49,947 $ 99,480 $104,547 $ 69,326
Gross profit .................. 13,679 31,813 30,325 18,595
Income from operations ........ 846 13,037 5,762 [1] 1,511
Net income .................... 332 7,577 3,116 [1] 541
Net income per common and
common equivalent share:
Primary .................. $ 0.02 $ 0.46 $ 0.18 $ 0.03
Fully diluted ............ $ 0.02 $ 0.46 $ 0.18 $ 0.03
Stock trade price:
High ..................... $24 1/2 $37 1/2 $39 3/4 $37
Low ...................... $15 1/4 $24 1/4 $26 1/4 $26 3/4
FISCAL 1995
Net sales ..................... $ 42,222 $ 76,084 $ 60,273 $ 45,625
Gross profit .................. 11,724 22,480 16,969 13,043
Income from operations ........ 858 8,918 4,630 1,792
Net income .................... 146 5,130 2,714 985
Net income per common and
common equivalent share:
Primary .................. $ 0.01 $ 0.35 $ 0.17 $ 0.06
Fully diluted ............ $ 0.01 $ 0.35 $ 0.17 $ 0.06
Stock trade price:
High ..................... $26 1/2 $26 $30 3/4 $35
Low ...................... $27 1/2 $23 1/2 $25 $28 3/4
</TABLE>
West Marine, Inc. common stock trades on The Nasdaq National Market Tier of The
Nasdaq Stock Market under the symbol WMAR.
[1] Income from operations and net income for the third quarter of fiscal 1996
is net of a $3 million pre-tax charge for expenses related to integrating E&B
Marine.
30
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by
reference from the Company's Definitive Proxy Statement for the 1996 Annual
Meeting of Stockholders under the captions "Election of Directors" and "Section
16(a) Information." See also Item I above.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference from the Company's Definitive Proxy Statement for the 1996 Annual
Meeting of Stockholders under the captions "Further Information Concerning the
Board of Directors" and "Executive Compensation".
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by
reference from the Company's Definitive Proxy Statement for the 1996 Annual
Meeting of Stockholders under the captions "Election of Directors" and
"Ownership of Management and Principal Stockholders."
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference from the Company's Definitive Proxy Statement for the 1996 Annual
Meeting of Stockholders under the caption "Executive Compensation".
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(b) No reports on Form 8-K were filed during the quarter ended
December 28, 1996
(c) Exhibits:
See attached Exhibit Index on page 33 and 34 of this form 10-K.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 24, 1997 WEST MARINE, INC.
By: /s/ Crawford Cole
------------------------------
Crawford Cole
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 24, 1997.
Signature
Capacity
/s/ Randolph K. Repass
- ----------------------
(Randolph K. Repass)
Chairman of the Board
/s/ Crawford Cole
- ----------------------
(Crawford Cole)
President and Chief Executive Officer
/s/ John Zott
- ----------------------
(John Zott)
Senior Vice President, Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
/s/ Geoff Eisenberg
- ----------------------
(Geoff Eisenberg)
Director
/s/ Richard Everett
- ----------------------
(Richard Everett)
Executive Vice President and Chief Operating Officer
/s/ James Curley
- ----------------------
(James Curley)
Director
/s/ Ronald Young
- ----------------------
(Ronald Young)
Director
/s/ Walter Scott
- ----------------------
(Walter Scott)
Director
/s/ David McComas
- ----------------------
(David McComas)
Director
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
- ------- ------- ----
<C> <S> <C>
2.1 Agreement and Plan of Merger dated as of April 2, 1996 among the
Registrant, WM Merger Sub, Inc. and E&B Marine Inc. ("E&B Marine")
(incorporated by reference to Exhibit 2.1 to Registrant's Current
Report on Form 8-K dated April 2, 1996).
2.2 Stockholders Agreement, dated as of April 2, 1996, by and between
the Registrant and certain stockholders of E&B Marine (incorporated
by reference to Exhibit 2.2 to Registrant's Current Report on Form
8-K dated April 2, 1996).
2.3 Letter Amendment of Stockholders Agreement, dated May 10, 1996,
between the Registrant and certain stockholders of E&B Marine
(incorporated by reference to Exhibit 2.3 to the Company's
registration statement on Form S-4 (Registration No. 333-02903)).
3.1 Certificate of Incorporation (incorporated by reference to exhibit 3.1
to the Company's registration statement on Form S-1 (Registration No.
33-69604)).
3.2 Registrant's Bylaws (incorporated by reference to exhibit 3.2 to the
Company's registration statement on Form S-1 (Registration No.
33-69604)).
4.1 Specimen Common Stock Certificate (incorporated by reference to exhibit
4.1 to the Company's registration statement on Form S-1 (Registration
No. 33-69604)).
10.1 Credit Agreement dated as of November 2, 1995 among WMP, Bank of
America National Trust and Savings Association, NationsBank of Texas,
National Association and the other financial institutions party thereto
(incorporated by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995).
10.1.1 Amendment to credit agreement dated February 20, 1997 among WMP, Bank
of America National Trust and Savings Association and other financial
institutions party thereto.
10.2 Guaranty entered into as of November 2, 1995 by Registrant in favor of
Bank of America National Trust and Savings Association (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 30, 1995).
10.3* 1990 Stock Option Plan and form of incentive stock option agreement
(incorporated by reference to exhibits 4.2 and 4.4, respectively, to
the Company's registration statement on Form S-8 (Registration No.
33-72956)).
10.4 Form of Indemnification Agreement between the Registrant and its
directors and officers (incorporated by reference to exhibit 10.4 to
the Company's registration statement on Form S-1 (Registration No.
33-69604)).
10.5* 1993 Omnibus Equity Incentive Plan including form of Stock Option
Agreement (incorporated by reference to exhibits 4.1 and 4.3,
respectively, to the Company's registration statement on Form S-8
(Registration No. 33-72956)).
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
- ------- ------- ----
<C> <S> <C>
10.6* 401(k) Plan (incorporated by reference to exhibit 10.6 to the
Company's registration statement on Form S-1 (Registration No.
33-69604)).
10.7 Lease Agreement dated January 15, 1988 between Watsonville Freeholders
and WMP for the Watsonville, California headquarters and distribution
facilities (incorporated by reference to exhibit 10.7 to the Company's
registration statement on Form S-1 (Registration No. 33-69604)).
10.8 Sublease Agreement dated August 31, 1992 between Holtzman's Little Folk
Shop, Inc. and WMP for the Charlotte, North Carolina distribution
facilities (incorporated by reference to exhibit 10.8 to the Company's
registration statement on Form S-1 (Registration No. 33-69604)).
10.9 Lease dated June 15, 1995 between John E. Van Valkenburgh and Carl D.
Panattoni and WMP for the Hollister, California distribution facility
(incorporated by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995).
10.10 Lease dated December 20, 1985 between Randolph K. Repass and West
Marine Products, Inc. for the Palo Alto, CA store (incorporated by
reference to exhibit 10.11 to the Company's registration statement on
Form S-1 (Registration No. 33-69604)).
10.11 Lease dated December 30, 1992 between Braintree Freeholders and WMP for
the Braintree, MA store (incorporated by reference to exhibit 10.12 to
the Company's registration statement on Form S-1 (Registration No.
33-69604)).
10.12 Lease dated July 28, 1982 between Santa Cruz Freeholders and WMP for
the Santa Cruz, CA store (incorporated by reference to exhibit 10.13 to
the Company's registration statement on Form S-1 (Registration No.
33-69604)).
10.13* Nonemployee Director Stock Option Plan and form of option agreement
thereunder (incorporated by reference to exhibit 10.18 in the
Company's Quarterly Report on Form 10-Q for the quarter ended April 2,
1994).
11.1 Statement re computation of per share earnings.
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
- ------------------------
* Indicates, as required by Item 14(a)(3), a management contract or compensatory
plan required to be filed as an exhibit to this Form 10-K.
34
<PAGE>
EXHIBIT 10.1.1
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
---------
February 20, 1997, is entered into by and among WEST MARINE, INC. (the
"Company"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as agent for
-------
itself and the Banks (the "Agent"), and the several financial institutions party
-----
to the Credit Agreement (collectively, the "Banks").
-----
RECITALS
--------
A. The Company, Banks, and Agent are parties to a Credit Agreement dated
as of June 14, 1996 (the "Credit Agreement") pursuant to which the Agent and the
----------------
Banks have extended certain credit facilities to the Company.
B. The Company has requested that the Banks agree to certain amendments of
the Credit Agreement.
C. The Banks are willing to amend the Credit Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
-------------
herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement.
------------------------------
a. Schedule 2.01 of the Credit Agreement shall be replaced with Revised
Schedule 2.01 attached to this Amendment.
3. Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Agent and the Banks as follows:
a. No Default or Event of Default has occurred and is continuing.
b. The execution, delivery and performance by the Company of this
Amendment have been duly authorized by all necessary corporate and other action
and do not and will not require any registration with, consent or approval of,
notice to or action by, any Person (including any Governmental Authority) in
order to be effective and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligations of the Company,
enforceable against it in accordance with its respective terms, without defense,
counterclaim or offset.
c. All representations and warranties of the Company
1
<PAGE>
contained in the Credit Agreement are true and correct.
d. The Company is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon the Agent and
the Banks or any other Person.
4. Effective Date. This Amendment will become effective as of February
--------------
20, 1997 (the "Effective Date"), provided that each of the following conditions
-------------- --------
precedent is satisfied:
a. The Agent has received from the Company and each of the Banks a
duly executed original (or, if elected by the Agent, an executed facsimile copy)
of this Amendment, together with a duly executed Guarantor Acknowledgment and
Consent in the form attached hereto (the "Consent").
-------
b. The Agent has received from the Company and all guarantors a copy
of a resolution passed by the board of directors of such corporation, certified
by the Secretary or an Assistant Secretary of such corporation as being in full
force and effect on the date hereof, authorizing the execution, delivery and
performance of this Amendment or the Consent, as applicable.
5. Reservation of Rights. The Company acknowledges and agrees that the
---------------------
execution and delivery by the Agent and the Banks of this Amendment shall not be
deemed to create a course of dealing or otherwise obligate the Agent or the
Banks to forbear or execute similar amendments under the same or similar
circumstances in the future.
6. Miscellaneous.
-------------
a. Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and effect
and all references therein to such Credit Agreement shall henceforth refer to
the Credit Agreement as amended by this Amendment. This Amendment shall be
deemed incorporated into, and a part of, the Credit Agreement.
b. This Amendment shall be binding upon and inure to the benefit of
the parties hereto and thereto and their respective successors and assigns. No
third party beneficiaries are intended in connection with this Amendment.
c. This Amendment shall be governed by and construed in accordance with
the law of the State of California.
d. This Amendment may be executed in any number of counterparts, each
of which shall be deemed an original, but all such counterparts together shall
constitute but one and the same instrument. Each of the parties hereto
understands and agrees that this document (and any other document required
herein) may be delivered by any party thereto either in the form of an
2
<PAGE>
executed original or an executed original sent by facsimile transmission to be
followed promptly by mailing of a hard copy original, and that receipt by the
Agent of a facsimile transmitted document purportedly bearing the signature of a
Bank or the Company shall bind such Bank or the Company, respectively, with the
same force and effect as the delivery of a hard copy original. Any failure by
the Agent to receive the hard copy executed original of such document shall not
diminish the binding effect of receipt of the facsimile transmitted executed
original of such document of the party whose hard copy page was not received by
the Agent.
e. This Amendment, together with the Credit Agreement, contains the
entire and exclusive agreement of the parties hereto with reference to the
matters discussed herein and therein. This Amendment supersedes all prior
drafts and communications with respect thereto. This Amendment may not be
amended except in accordance with the provisions of Section 11.01 of the Credit
Agreement.
f. If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
g. The Company covenants to pay to or reimburse the Agent and the
Banks, upon demand, for all costs and expenses (including allocated costs of in-
house counsel) incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment, including without
limitation appraisal, audit, search and filing fees incurred in connection
therewith.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
WEST MARINE, INC.
By /s/ John C. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
----------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Agent
By /s/ Gary Flieger
--------------------------------
Gary Flieger
Vice President
3
<PAGE>
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a Bank
and an Issuing Bank
By /s/ Kenneth E. Jones
----------------------------
Kenneth E. Jones
Vice President
NATIONSBANK OF TEXAS, NATIONAL
ASSOCIATION, as a Bank and an
Issuing Bank
By /s/ Tom F. Scharfenberg
----------------------------
Tom F. Scharfenberg
Vice President
4
<PAGE>
REVISED SCHEDULE 2.01
---------------------
<TABLE>
<CAPTION>
COMMITMENTS
-----------
AND PRO RATA SHARES
-------------------
Pro Rata
Bank Commitment Share
- ---- ---------- -----
<S> <C> <C>
From February 20, 1997,
through and including June 30, 1997:
- -----------------------------------
Bank of America National
Trust and Savings
Association $35,000,000 50%
NationsBank of Texas,
National Association $35,000,000 50%
TOTAL $70,000,000 100%
On July 1, 1997, and thereafter:
- -------------------------------
Bank of America National
Trust and Savings
Association $30,000,000 50%
NationsBank of Texas,
National Association $30,000,000 50%
TOTAL $60,000,000 100%
</TABLE>
5
<PAGE>
GUARANTOR ACKNOWLEDGMENT
AND CONSENT
------------------------
The undersigned, each a guarantor or third party pledgor with respect
to the Company's obligations to the Agent and the Banks under the Credit
Agreement, hereby (i) acknowledge and consent to the execution, delivery and
performance by Company of the foregoing First Amendment to Credit Agreement (the
"Amendment"), and (ii) reaffirm and agree that the respective guaranty, third
---------
party pledge or security agreement to which the undersigned is party and all
other documents and agreements executed and delivered by the undersigned to the
Agent and the Banks in connection with the Credit Agreement are in full force
and effect, without defense, offset or counterclaim. (Capitalized terms used
herein have the meanings specified in the Amendment.)
WEST MARINE PRODUCTS, INC., a California
corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
E&B MARINE INC., a Delaware corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
E&B MARINE SUPPLY, INC., a Maryland
corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
E&B MARINE SUPPLY, INC., a New Jersey
corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
6
<PAGE>
E&B MARINE SUPPLY (Florida), Inc., a
Delaware corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
GOLDBERGS' MARINE DISTRIBUTORS, INC., a
Delaware corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
JAMES BLISS & CO., INC., a Massachusetts
corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
SEA RANGER MARINE INC., a Delaware
corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
KRISTA CORPORATION, a Delaware corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
CENTRAL MARINE SUPPLY INC., a New Jersey
corporation
By /s/ J. Zott
-------------------------------
Typed Name John Zott
-----------------------
Title CFO
---------------------------
7
<PAGE>
EXHIBIT 11.1
WEST MARINE, INC.
STATEMENT RE: COMPUTATION OF
NET INCOME PER SHARE
(in thousands except per share amounts)
<TABLE>
<CAPTION>
FISCAL FISCAL
1996 1995
------- -------
PRIMARY
- -------------------------
<S> <C> <C>
Net income ...................................... $11,566 $ 8,975
======= =======
Weighted average common shares outstanding ...... 15,748 14,054
Common equivalent shares:
Stock options ............................... 1,200 712
------- -------
Weighted average common and
common equivalent shares ...................... 16,948 14,766
======= =======
Net income per common and common equivalent share $ 0.68 $ 0.61
======= =======
FULLY DILUTED
- -------------------------
Net income ...................................... $11,566 $ 8,975
======= =======
Weighted average shares outstanding ............. 15,748 14,054
Common equivalent shares:
Stock options ............................... 1,203 806
------- -------
Weighted average common and
common equivalent shares ...................... 16,951 14,860
======= =======
Net income per common and common equivalent share $ 0.68 $ 0.60
======= =======
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
West Marine Products, Inc., a Delaware corporation
E&B Marine, Inc., a Delaware corporation
E&B Marine Supply, Inc., a New Jersey corporation
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-04712, No. 333-03728, No. 33-89322, and No. 33-72956 of West Marine, Inc. on
Form S-8 of our report dated February 12, 1997, appearing in the Annual Report
on Form 10-K of West Marine, Inc. for the year ended December 28, 1996.
/s/ Deloitte & Touche LLP
- -----------------------------
Deloitte & Touche LLP
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS DATED DECEMBER 28, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 894
<SECURITIES> 0
<RECEIVABLES> 3,742<F1>
<ALLOWANCES> 459
<INVENTORY> 122,731
<CURRENT-ASSETS> 138,170
<PP&E> 30,654<F2>
<DEPRECIATION> 16,634
<TOTAL-ASSETS> 211,514
<CURRENT-LIABILITIES> 42,222
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 211,514
<SALES> 323,300
<TOTAL-REVENUES> 323,300
<CGS> 228,888
<TOTAL-COSTS> 228,888
<OTHER-EXPENSES> 73,256<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,666
<INCOME-PRETAX> 19,490
<INCOME-TAX> 7,924
<INCOME-CONTINUING> 11,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,566
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
<FN>
<F1>Amount represents receivables net of the allowance for doubtful accounts.
<F2>Amount represents PP&E net of accumulated depreciation.
<F3>Amount represents SG&A of $70,261 and expenses related to integrating E&B
Marine of $2,995.
</FN>
</TABLE>
