<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
[X]
For the quarter ended October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commission file number 0-22515
WEST MARINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-035-5502
- - --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
500 Westridge Drive, Watsonville, CA 95076-4100
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (831) 728-2700
---------------
N/A
- - --------------------------------------------------------------------------------
Former Name, Former Address and Former Year, if Changed Since Last Report
Indicate by a 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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by a check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act subsequent to the distribution of securities under a plan confirmed
by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
At October 3, 1998, the number of shares outstanding of the registrant's common
stock was 16,917,055.
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
ASSETS 1998 1998
--------------- ---------------------------- ----------------------------
<S> <C> <C>
(Unaudited)
Current assets:
Cash $ 1,243 $ 1,010
Accounts receivables, net 6,178 5,003
Merchandise inventories 174,249 166,290
Prepaid expenses and other current assets 12,866 11,660
---------------------------- ----------------------------
Total current assets 194,536 183,963
Property and equipment, net 60,601 50,815
Intangibles and other assets, net 40,155 41,110
---------------------------- ----------------------------
Total assets $295,292 $275,888
============================ ============================
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------
Current liabilities:
Accounts payable $ 30,820 $ 26,629
Accrued expenses 12,437 5,456
Deferred current liabilities 796 788
Current portion of long-term debt 2,106 1,848
---------------------------- ----------------------------
Total current liabilities 46,159 34,721
Long-term debt 90,292 92,960
Deferred items and other non-current obligations 1,969 1,889
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 16,917,055
and 16,494,205 at October 3, 1998 and
January 3, 1998, respectively 17 17
Additional paid-in capital 105,305 103,245
Retained earnings 51,550 43,056
---------------------------- ----------------------------
Total stockholders' equity 156,872 146,318
---------------------------- ----------------------------
Total liabilities and stockholders'
equity $295,292 $275,888
============================ ============================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts and store data)
13 WEEKS 13 WEEKS 39 WEEKS 39 WEEKS
ENDED ENDED ENDED ENDED
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1998 1997 1998 1997
----------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net sales $121,449 $115,471 $364,990 $331,995
Cost of goods sold including
Buying and occupancy 89,657 82,247 264,322 231,990
----------------- ---------------- ----------------- ------------------
Gross profit 31,792 33,224 100,668 100,005
Selling, general and administrative
expense 25,438 24,448 78,523 72,554
Expenses related to DC move - 3,284 -
----------------- ---------------- ----------------- ------------------
Income from operations 6,354 8,776 18,861 27,451
Interest expense 1,389 622 4,462 2,506
----------------- ---------------- ----------------- ------------------
Net income before taxes 4,965 8,154 14,399 24,945
Provision for income taxes 2,036 3,282 5,904 10,073
----------------- ---------------- ----------------- ------------------
Net income $ 2,929 $ 4,872 $ 8,495 $ 14,872
================= ================ ================= ==================
Net income per common and common
equivalent share:
Basic $0.17 $0.29 $0.50 $0.90
================= ================ ================= ==================
Diluted $0.17 $0.28 $0.48 $0.85
================= ================ ================= ==================
Weighted average common and common
equivalent shares outstanding:
Basic 16,916 16,691 16,873 16,614
================= ================ ================= ==================
Diluted 17,290 17,495 17,560 17,589
================= ================ ================= ==================
Stores open at end of period 212 176
================= ==================
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
39 WEEKS 39 WEEKS
ENDED ENDED
OCTOBER 3, SEPTEMBER 27,
1998 1997
-------------------------- ----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,495 $ 14,872
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,618 6,146
Gain on sale of assets (85) 0
Provision for deferred income taxes 8 0
Accounts receivable, net (1,175) (2,165)
Merchandise inventories (7,959) (28,507)
Prepaid expenses and other assets (1,206) (4,021)
Other assets (17) 0
Accounts payable 4,191 723
Accrued expenses 7,707 3,041
Deferred items 80 228
-------------------------- ----------------------------
Net cash provided by (used in) operating activities 18,657 (9,683)
Cash flows from investing activities:
Purchases of property and equipment (14,803) (15,784)
-------------------------- ----------------------------
Net cash used in investing activities (14,803) (15,784)
Cash flows from financing activities:
Net proceeds (repayments) from line of credit (2,800) 23,899
Net repayments of long-term debt (2,155) (1,425)
Sale of common stock pursuant to
associate stock purchase plan 428 467
Exercise of stock options 906 2,794
-------------------------- ----------------------------
Net cash (used in) provided by financing activities (3,621) 25,735
-------------------------- ----------------------------
Net increase in cash 233 268
Cash:
Beginning of period 1,010 894
-------------------------- ----------------------------
End of period $ 1,243 $ 1,162
========================== ============================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Thirty-nine Weeks Ended October 3, 1998 and September 27, 1997
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of West Marine, Inc. (the "Company") without audit,
and in the opinion of management, include all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position at
October 3, 1998 and September 27, 1997; and the interim results of operations
and cash flows for the 13 weeks and 39 weeks then ended. The condensed
consolidated balance sheet at January 3, 1998, presented herein, has been
derived from the audited consolidated financial statements of the Company for
the fiscal year then ended. The results of operations for the 13 week and 39
week periods presented herein are not necessarily indicative of the results to
be expected for the full year.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the fiscal year ended January 3,
1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted for purposes of the condensed
consolidated interim financial statements. The condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements, including the notes thereto, for the year ended
January 3, 1998.
NOTE 2 - ACCOUNTING PRINCIPLES
Effective January 3, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. The Company's
comprehensive income does not differ from its net income for the thirteen and
thirty-nine weeks ended October 3, 1998.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations
General
- - -------
West Marine distributes its merchandise through three divisions, Stores (retail
and wholesale) and Catalog (retail) under the names of West Marine and E&B
Discount Marine as well as Port Supply (wholesale). West Marine operated 212
stores in 33 states as of October 3,1998, compared to 176 stores in 29 states as
of September 27, 1997.
Results of Operations
- - ---------------------
Net sales increased $6.0 million, or 5.2%, from $115.5 million during the third
quarter of fiscal 1997 to $121.4 million during the third quarter of fiscal
1998. This increase was attributable to an increase in net sales from the
Company's Stores and Port Supply divisions partially offset by a decrease in net
sales in the Company's Catalog division. Store net sales increased $5.9
million, or 6.2%, to $101.7 million during the third quarter of fiscal 1998.
Net sales from comparable stores decreased $3.9 million, or 4.2%. (The
Company's fiscal year is a 52- or 53- week period ending on the Saturday nearest
to December 31. Fiscal year 1997 began December 29, 1996, which was a 53-week
year, while fiscal year 1998 began January 4, 1998, a 52-week year. As such,
the one-week difference has resulted in lower comparative sales for the third
quarter of 1998 compared with the prior year.) Catalog net sales decreased $.8
million, or 7.2%, to $10.1 million. Catalog net sales have been negatively
impacted by new store openings by the Company and its competitors. Management
expects the catalog sales trend to remain negative through the end of 1998.
Port Supply net sales increased $0.9 million, or 9.7%, to $9.6 million.
Stores, Catalog and Port Supply net sales represented 83.7%, 8.4% and 7.9%,
respectively, of the Company's net sales for the third quarter of fiscal 1998
compared to 82.9%, 9.5% and 7.6%, respectively, of the Company's net sales for
the third quarter of fiscal 1997.
Net sales increased $33.0 million, or 9.9%, from $332.0 million during the first
nine months of fiscal 1997 to $365.0 million during the first nine months of
fiscal 1998. This increase was attributable to an increase in net sales from
the Company's Stores and Port Supply divisions partially offset by a decrease in
net sales in the Company's Catalog division. Store net sales increased $33.5
million, or 12.5%, to $301.7 million during the first nine months of fiscal
1998. Net sales from comparable stores increased 1.2% and contributed $3.1
million of the increase in net sales. Catalog net sales decreased $2.7 million,
or 7.5%, to $33.6 million. Port Supply net sales increased $2.2 million, or
8.0%, to $29.7 million. Stores, Catalog and Port Supply net sales represented
82.7%, 9.2% and 8.1%, respectively, of the Company's net sales for the first
nine months of fiscal 1998 compared to 80.8%, 10.9% and 8.3%, respectively, of
the Company's net sales for the first nine months of fiscal 1997.
<PAGE>
Gross profit decreased $1.4 million, or 4.3%, in the third quarter of fiscal
1998 compared to the third quarter of fiscal 1997. As a percentage of net
sales, gross profit was 26.2% in the third quarter of fiscal 1998 compared to
28.8% in the same period last year. The decrease in gross profit, as a
percentage of net sales, was primarily due to increased distribution costs.
Management expects that for the remainder of 1998, distribution costs will
continue to run higher than previous years due to the start-up productivity
level of the East Coast distribution center located in Rock Hill, South
Carolina, which began operations in January 1998.
Gross profit increased $663,000, or .7%, in the first nine months of fiscal 1998
compared to the first nine months of fiscal 1997. As a percentage of net sales,
gross profit was 27.6% in the first nine months of fiscal 1998 compared to 30.1%
in the same period last year. The decrease in gross profit, as a percentage of
net sales, was primarily due to increased distribution costs.
Selling, general and administrative expenses increased $990,000, or 4.0%, in the
third quarter of fiscal 1998 compared to the third quarter of fiscal 1997,
primarily due to increases in direct expenses related to the growth in Stores,
offset by decreased advertising costs, primarily in the Catalog division. As a
percentage of net sales, selling, general and administrative expenses decreased
to 21.0% in the third quarter of fiscal 1998 compared to 21.2% in the third
quarter of fiscal 1997. This decrease was primarily due to the Company's cost
reduction efforts. The Company plans to continue its focus on reducing selling,
general and administrative expenses through the end of 1998.
Selling, general and administrative expenses increased $6.0 million, or 8.2%, in
the first nine months of fiscal 1998 compared to the first nine months of fiscal
1997, primarily due to increases in direct expenses related to the growth in
Stores. Stores direct expenses represented approximately 80% or $4.8 million of
the increase. As a percentage of net sales, selling, general and administrative
expenses decreased to 21.5% in the first nine months of fiscal 1998 compared to
21.9% in the first nine months of fiscal 1997. This decrease reflected the
Company's cost management efforts during the first nine months of fiscal 1998.
Expenses related to the distribution center move, incurred in the first
quarter of fiscal 1998, included $3.3 million of expenses for the relocation
and consolidation of West Marine's two East Coast distribution facilities into
one located in Rock Hill, South Carolina.
Interest expense increased $767,000 and $2.0 million in the third quarter and
the first nine months of fiscal 1998, respectively, compared to the same periods
during fiscal 1997, primarily as a result of higher average borrowings under the
Company's line of credit.
<PAGE>
Liquidity and Capital Resources
- - -------------------------------
Net cash from operations during the first nine months of 1998 was a positive
$18.7 million versus a net use of funds of $9.7 million in the first nine months
of 1997. The strong improvement in cash flow was primarily due to management's
focus in managing inventory levels both at the store level and the distribution
center. The 1997 increase reflects an expansion of SKU selections offered by
the Company and the existence of three distribution centers. The consolidation
this year into two distribution centers resulted in lower inventory levels and
lower required safety stock. The increase in accounts payable and inventory in
1998 was primarily attributable to the addition of 28 new stores in the first
nine months of fiscal 1998.
Net cash used in investing activities was $14.8 million primarily spent on new
store construction, the Rock Hill distribution center and software upgrades.
Net cash used in financing activities during the first nine months of fiscal
1998 was $3.6 million, consisting primarily of repayments under the Company's
line of credit and long-term debt.
Due to the previously disclosed problems with the distribution center, the
Company is in the process of amending certain debt covenants applicable to the
third and fourth quarters of 1998 related to its $90 million revolving line of
credit and $40.0 million private placement. Management believes that its cash
flow from operations, together with the renegotiated bank debt financing will
be sufficient to fund the Company's operations through the next year.
Year 2000
- - ---------
The Company has developed a plan to deal with the Year 2000 (Y2K) issue. The
plan covers systems and vendor issues that will be generated by the change of
the year from 1999 to 2000. The portion of the plan relating to the Company's
systems includes a detailed survey of the current systems and associated
upgrades, as well as options relating to the replacement or reprogramming of
current systems that will be required to bring the Company's systems into
compliance with the Y2K issue. The Company expects the majority of the system
changes to be complete by early 1999, with final system and vendor issues
resolved by the late summer of 1999. All necessary systems modifications have
been defined and modification developments are substantially underway. System
programming and testing will be completed by early 1999 with final integration
testing to occur during mid-1999. Implementation is expected in the third
quarter of 1999. There can be no guarantee that the Company's systems will be
timely converted or that the failure of such systems to be Y2K compliant will
not have a material adverse effect on the Company's results of operations,
financial condition or liquidity.
<PAGE>
As a normal part of investing in systems, the Company is upgrading certain
systems to improve operational efficiencies, improve services to customers and
provide information to management. As a result of such upgrades, these
systems will be Y2K compliant. Systems that have been upgraded prior to this
filing include the Point Of Sale (POS) system, the wholesale system, the
warehouse management system and the basic operating systems for the network on
the AS400. The remaining systems that are being upgraded include the
merchandising and finance systems which are expected to be implemented
September 1999.
Due to the Y2K issue, certain systems enhancement projects have been deferred
until late 1999 and 2000. Deferring these projects should not have a material
adverse effect on the Company's results of operations, financial condition or
liquidity.
The plan developed to address vendor issues covers product and systems issues
and includes product certification, systems integration, testing, and
communication strategies. The Company is in the process of reviewing vendor
compliance with regards to the Y2K issue. The status of merchandise vendor
compliance is expected to be known by the end of 1998. There can be no
guarantee that the products and systems of other companies on which the Company
relies on will be timely converted or that the failure of such products and
systems to be Y2K compliant will not have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
The Company has incurred costs of less than $100,000 as of October 3, 1998
related to the Y2K issue. The total cost of the Company's Y2K compliance
efforts is expected to be $250,000. The Company has funded and will continue to
fund these expenditures through operating income and borrowings.
The Company is confident that it will meet the deadlines related to the Y2K
issue, however, the Company's contingency plans include the reallocation of
information systems resources to address areas of concerns.
Seasonality
- - -----------
Historically, the Company's business has been highly seasonal. As a result of
the acquisition of E&B Marine in June 1996 and the continued expansion through
new store openings, the Company is even more susceptible to seasonality as a
larger percentage of stores sales occur in the second and third quarters of the
year. During 1997, 61.9% 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. The Company expects sales will
become more susceptible to seasonality and weather as it continues to expand its
operations.
<PAGE>
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
- - -----------------------------------------------------------------------------
1995:
- - -----
The statements in this filing 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 new and existing store operations. The Company's Catalog
division has faced market share erosion in areas where stores have been opened
by either the Company or its competitors. Management expects this trend to
continue. The consolidation of the Company's East Coast distribution facilities
has resulted in costs and inefficiencies which have adversely affected gross
profit during the first nine months of 1998, and are expected to continue. 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 to increase 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. In addition, acquisitions involve a number of 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 market for recreational boating supplies is highly competitive. Competitive
pressures resulting from competitors' pricing policies have adversely affected
the Company's gross profit in the past. 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 third 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.
Part II Other Information
Item 5. Other Information
Management Changes
- - ------------------
Effective November 13, 1998, Mr. John H. Edmondson joined the Company as chief
executive officer. Mr. Edmondson replaced Mr. Randy Repass, the co-founder,
who has served as the interim chief executive officer since July 1998. Mr.
Repass replaced Crawford Cole, the Company's previous president and chief
executive officer, who resigned for personal reasons. Mr. Repass remains
Chairman of the Board of the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Exhibits and Reports on Form 8-K
No reports on Form 8-K have been filed for the period being
reported.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 13, 1998 WEST MARINE, INC.
-----------------
By. /s/ Randolph K. Repass
--------------------------
Randolph K. Repass
Chairman of the Board
By. /s/ John Zott
--------------------------
John Zott
Senior Vice President, Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DATED OCTOBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> OCT-31-1998
<CASH> 1,243
<SECURITIES> 0
<RECEIVABLES> 6,178<F1>
<ALLOWANCES> 0
<INVENTORY> 174,249
<CURRENT-ASSETS> 194,536
<PP&E> 60,601<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 295,292
<CURRENT-LIABILITIES> 46,159
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 156,855
<TOTAL-LIABILITY-AND-EQUITY> 295,292
<SALES> 121,449
<TOTAL-REVENUES> 121,449
<CGS> 89,657
<TOTAL-COSTS> 89,657
<OTHER-EXPENSES> 25,438
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,389
<INCOME-PRETAX> 4,965
<INCOME-TAX> 2,036
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,929
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
<FN>
<F1>AMOUNT REPRESENTS RECEIVABLES NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2>AMOUNT REPRESENTS PP&E NET OF ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
