<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarter ended April 3, 1999
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 Incorporation (I.R.S. Employer
or Organization) Identification No.)
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
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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
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
At May 10, 1999, the number of shares outstanding of the registrant's common
stock was 17,079,417.
<PAGE>
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
April 3, January 2,
1999 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,769 $ 1,024
Accounts receivable, net 7,079 4,660
Merchandise inventories 179,604 160,069
Prepaid expenses and other current assets 14,549 11,574
----------------- -----------------
Total current assets 208,001 177,327
Property and equipment, net 61,209 60,219
Intangibles and other assets, net 41,786 41,999
----------------- -----------------
TOTAL ASSETS $ 310,996 $ 279,545
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42,207 $ 23,759
Accrued expenses 9,174 4,548
Deferred current liabilities 3,263 3,263
Current portion of long-term debt 1,657 1,783
----------------- -----------------
Total current liabilities 56,301 33,353
Long-term debt 105,395 94,367
Deferred items and other non-current obligations 2,155 2,055
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: 17,001,731 at
April 3, 1999 and 16,984,528 at January 2, 1999 17 17
Additional paid-in capital 105,752 105,599
Retained earnings 41,376 44,154
----------------- -----------------
Total stockholders' equity 147,145 149,770
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 310,996 $ 279,545
================= =================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share and store data)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
April 3, April 4,
1999 1998
-------------- ---------------
<S> <C> <C>
Net sales $ 93,572 $ 84,198
Cost of goods sold including buying
and occupancy 71,444 62,327
-------------- ---------------
Gross profit 22,128 21,871
Selling, general and administrative expense 25,125 22,905
Expenses related to distribution center move - 3,284
-------------- ---------------
Income (loss) from operations (2,997) (4,318)
Interest expense 1,711 1,728
-------------- ---------------
Income (loss) before taxes (4,708) (6,046)
Benefit from income taxes 1,930 2,479
-------------- ---------------
Net income (loss) $ (2,778) $ (3,567)
============== ===============
Net income (loss) per common and common
equivalent share:
Basic $ (0.16) $ (0.21)
Diluted $ (0.16) $ (0.21)
============== ===============
Weighted average common and common
equivalent shares outstanding
Basic 16,996 16,811
============== ===============
Diluted 16,996 16,811
============== ===============
Stores open at end of period 219 194
============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
April 3, April 4,
1999 1998
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (2,778) $ (3,567)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 3,518 2,621
Loss on sale of assets - (85)
Provision for deferred income taxes - 6
Provision for doubtful accounts 132 77
Accounts receivable, net (2,551) (1,816)
Merchandise inventories (19,535) (15,477)
Prepaid expenses and other current assets (2,975) (381)
Other assets (115) (90)
Accounts payable 18,448 12,424
Accrued expenses 4,635 2,671
Deferred items 100 68
--------------- ---------------
Net cash used in operating activities (1,121) (3,549)
--------------- ---------------
INVESTING ACTIVITIES:
Purchases of property and equipment (4,180) (6,902)
--------------- ---------------
Net cash used in investing activities (4,180) (6,902)
--------------- ---------------
FINANCING ACTIVITIES:
Net proceeds from line of credit 11,600 11,900
Net repayments of long-term debt (698) (1,268)
Sale of common stock pursuant to associate stock purchase plan 81 -
Exercise of stock options 63 554
--------------- ---------------
Net cash provided by financing activities 11,046 11,186
--------------- ---------------
NET INCREASE IN CASH 5,745 735
CASH AT BEGINNING OF PERIOD 1,024 1,010
--------------- ---------------
CASH AT END OF PERIOD $ 6,769 $ 1,745
=============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended April 3, 1999 and April 4, 1998 (Unaudited)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of West Marine, Inc. ("West Marine" or the "Company")
without audit, and in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary to fairly present the
financial position at April 3, 1999 (unaudited) and April 4, 1998 (unaudited);
and the interim results of operations and cash flows for the 13 week periods
then ended. The condensed consolidated balance sheet at January 2, 1999,
presented herein, has been derived from the audited consolidated financial
statements of the Company for the fiscal year then ended, included in the
Company's annual report on Form 10-K. The results of operations for the 13 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 2,
1999. 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, included in the Company's annual
report on Form 10-K. 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 2, 1999, included in the
Company's annual report on Form 10-K.
NOTE 2 - Accounting Principles
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999 and is not to be applied
retroactively to financial statements for prior periods. In the opinion of
management, SFAS No. 133 will not have a material effect on the Company's
financial position or results of operations.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations
General
- -------
West Marine is the largest specialty retailer of recreational and commercial
boating supplies and apparel in the United States. The Company has three
divisions (Stores, Wholesale ("Port Supply"), and Catalog), which all sell
after-market recreational boating supplies directly to customers. As of April
3, 1999, the Company offered its products through 219 stores in 34 states under
the names West Marine and E&B Marine 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 after-market for both sailboats and powerboats at competitive
prices in a convenient, one-stop shopping environment emphasizing customer
service and technical assistance. The Company is also engaged, through its Port
Supply business line and its stores, in the wholesale distribution of products
to commercial customers and other retailers.
Results of Operations
- ---------------------
Net sales increased by $9.4 million, or 11.1%, to $93.6 million for the first
quarter of fiscal 1999, compared to $84.2 million for the same period a year
ago, primarily due to increases in net sales in the Company's Stores and Port
Supply divisions. Stores net sales were $73.7 million for the first quarter of
fiscal 1999, an increase of $6.4 million, or 9.5%, over the $67.3 million
recorded for the first quarter of fiscal 1998. Net sales in new stores were
$4.0 million for the first quarter of fiscal 1999, and net sales from comparable
stores increased by $2.4 million, or 3.6%, compared to the same period a year
ago. Sales recorded by Port Supply increased by $2.4 million, or 27.1%, to
$11.1 million for the first quarter of fiscal 1999, compared to the first
quarter of fiscal 1998. Catalog sales increased by $0.5 million, or 6.3%, for
the first quarter of fiscal 1999, compared to $8.7 million for the first quarter
of fiscal 1998. Net sales were favorably impacted during the first quarter of
fiscal 1999 by new store and Port Supply growth, as well as by marketing
programs undertaken by West Marine to expand its customer base and improve brand
name recognition.
Stores, Port Supply, and Catalog net sales represented 78.7%, 11.8%, and 9.3%,
respectively, of the Company's net sales for the first quarter of fiscal 1999,
compared to 79.9%, 10.3%, and 9.7%, respectively, of the Company's net sales for
the first quarter of fiscal 1998. The Company also recorded net sales from its
insurance program, which represented less than 1% of the Company's net sales for
the first quarter of fiscal 1999 and 1998.
The Company's gross profit increased by $0.3 million, or 1.2%, in the first
quarter of fiscal 1999 compared to the first quarter of fiscal 1998. Gross
profit represented 23.6% of net sales in the first quarter of fiscal 1999,
compared to 26.0% in the same period a year ago. The decrease in gross profit
as a percentage of net sales was primarily due to promotions to sell
discontinued product in the first quarter of fiscal 1999 compared to the same
period a year ago and due to an increase in distribution costs. The increase in
distribution costs was primarily due to its new Rock Hill, South Carolina
distribution center operating at a higher capacity in the first quarter of
1999.
Selling, general, and administrative expenses increased by $2.2 million, or
9.7%, to $25.1 million for the first quarter of fiscal 1999 compared to the
similar period a year ago, primarily due to increases in direct expenses related
to the growth in Stores and increased marketing expenses. Selling, general,
and administrative expenses declined to 26.8% of net sales in the first
quarter of fiscal 1999, compared to 27.2% for the same period in fiscal 1998.
This decrease was the result of
<PAGE>
cost-reduction measures implemented during 1998 as part of a Company-wide
expense management program.
Results for the first quarter of 1998 included one-time expenses related to
the relocation and consolidation of the Company's east coast distribution
centers.
Interest expense on the Company's borrowings was $1.7 million for the first
quarter of fiscal 1999, which was similar to the amount recorded for the first
quarter of fiscal 1998.
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $1.1 million for the first quarter of
fiscal 1999, compared to $3.5 million for the first quarter of fiscal 1998,
primarily due to growth in accounts payable, offset in part by an increase in
merchandise inventories. The Company utilized cash to increase its level of
merchandise inventories by $19.5 million during the first quarter of 1999,
compared to $15.5 million during the same period a year ago. This increase was
primarily due to an increased number of stores and roll-outs of new products
and merchandise categories in 1999. Merchandise inventories typically increase
during this period in anticipation of increased sales as the busiest time of
the boating season approaches.
Net cash used in investing activities during the first quarter of fiscal 1999
was $4.2 million, compared to $6.9 million a year ago, primarily related to new
store construction and remodels. Net cash provided by financing activities
during the first quarter of 1999 was $11.0 million, down slightly from the
previous year. This amount consisted primarily of $11.6 million of borrowings
under the Company's line of credit, partially offset by approximately $698,000
of net repayments on long-term debt. In management's opinion, cash flows from
operations in conjunction with its bank line of credit will be sufficient to
fund the Company's operations in fiscal 1999.
Segment Information
- -------------------
The Company's customer base overlaps between its Stores and Port Supply
divisions, and between its Catalog and Stores divisions. All processes for the
three divisions within the supply chain are commingled, including purchases from
merchandise vendors, distribution center activity, and customer delivery.
<PAGE>
The Stores qualify as a reportable segment under SFAS 131 as it is the only
division that represents 10% or more of the combined revenue of all operating
segments when viewed on an annual basis. Segment assets are not presented, as
the Company's assets are commingled and are not available by segment.
Contribution is defined as net sales, less product costs and direct expenses.
Following is financial information related to the Company's business segments
(in thousands):
<TABLE>
<CAPTION>
13 Weeks 13 Weeks
Ended Ended
April 3, 1999 April 4, 1998
---------------- ----------------
<S> <C> <C>
Net sales:
Stores $73,674 $67,290
Other 19,898 16,908
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Consolidated net sales $93,572 $84,198
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Contribution:
Stores $ 2,558 $ 4,621
Other 3,097 2,379
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Consolidated contribution $ 5,655 $ 7,000
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Reconciliation of consolidated contribution to net income (loss):
Consolidated contribution $ 5,655 $ 7,000
Less:
Cost of goods sold not included in consolidated contribution (4,532) (4,036)
General and administrative expenses (4,120) (3,998)
Expenses related to distribution center move - (3,284)
Interest expense (1,711) (1,728)
Benefit from income taxes 1,930 2,479
------- -------
Net income (loss) $(2,778) $(3,567)
======= =======
</TABLE>
Year 2000
- ---------
The Company has developed, and is currently implementing, a plan to ensure its
computer systems and applications are compliant for the year 2000 ("Y2K").
Certain computer programs utilized by the Company were originally designed to
recognize calendar years by their last two digits. Unless these programs are
modified, they may read entries for the year 2000 as the year 1900, which may
result in significant data processing delays, mistakes, or failures. The
Company's plan addresses systems and vendor issues related to the change of
the year from 1999 to 2000.
The Company's plan includes a detailed survey of the current systems and
associated upgrades, and a definition of system modifications that will be
required to achieve Y2K compliance. Systems programming and testing of the
modifications were completed during the first quarter of 1999. Final
integration testing will be performed during the second and third quarters of
1999, and implementation is expected in the third quarter of 1999. The Company
expects that by the end of the third quarter of 1999, the majority of system
changes will be complete and outstanding Y2K-related system and vendor issues
will be resolved. In the opinion of management, planned modifications to
existing systems and conversions to new systems will resolve Y2K issues on a
timely basis and will not pose significant operational problems for the Company.
However, there can be no guarantee that the Company's systems will be converted
on a timely basis, 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>
In addition, as a normal part of investing in systems, the Company is currently
upgrading certain systems to improve operational efficiencies, improve services
to customers, and provide better information to management. The upgrades will
ensure that these systems will be Y2K compliant. Systems that have been
upgraded prior to this filing include the Point Of Sale (POS) system, the
wholesale sales system, the warehouse management system, and the basic operating
systems on AS400. Upgrades to the merchandising and finance systems are
expected to be completed in September 1999.
Due to issues related to Y2K, certain planned systems enhancement projects have
been deferred until late 1999 and 2000. Deferring these projects is not
expected to 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 the Y2K
compliance of its vendors. At the end of the first quarter of 1999, the Company
had received responses from approximately 80% of its vendors, of which 78%
reported that they were Y2K compliant. Information about the status of the
remaining merchandise vendors is expected to be available by the end of the
second quarter of 1999. The Company will take measures to replace any of its
vendors that are not Y2K compliant at the end of the third quarter of 1999.
While management believes it is taking adequate measures to protect the Company
from the Y2K problems of other companies, there can be no guarantee that the
systems and products of other companies on which the Company relies will be Y2K
compliant, or that the failure of such systems and products to be Y2K compliant
will not have a material adverse effect on the Company's results of operations,
financial condition, or liquidity.
As of April 3, 1999, the Company had incurred approximately $150,000 of expenses
related to the Y2K issue. The total cost of the Company's Y2K compliance
efforts is expected to be approximately $300,000. The Company has funded and
will continue to fund these expenditures through operating cash flows.
While management is confident that all Y2K related deadlines will be met, the
Company's contingency plans include the reallocation of information systems
resources, if needed, to address areas of concern. In addition, the Company
will work with vendors to consider the need for forward purchases of inventory
in the event that Y2K deadlines are not met.
Seasonality
- -----------
Historically, the Company's business has been highly seasonal. The Company's
expansion through acquisition and new store openings have made the Company even
more susceptible to seasonality, as an increasing percentage of stores sales
occur in the second and third quarters of each year. In 1998, 62.6% of the
Company's net sales and all 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. Management
expects net sales to become more susceptible to seasonality and weather as the
Company 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 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 that adversely
affected gross profit during 1998, and, to a lesser extent, the first quarter of
1999. These costs and inefficiencies may continue. The Company's growth has
been fueled principally by the E&B Marine, Inc. acquisition and the Company's
Stores operations. Its 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, and on increasing net 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 successfully 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 and such pressures are expected to continue. 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
fluctuations in 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.
<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: May 17, 1999 WEST MARINE, INC.
------------
By: /s/ John Edmondson
__________________________
John Edmondson
President and Chief Executive Officer
By: /s/ John Zott
__________________________
John Zott
Senior Vice President, Chief Financial
Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-02-1999
<PERIOD-END> APR-03-1999
<CASH> 6,769
<SECURITIES> 0
<RECEIVABLES> 7,079
<ALLOWANCES> 477
<INVENTORY> 179,604
<CURRENT-ASSETS> 208,001
<PP&E> 61,209
<DEPRECIATION> 37,248
<TOTAL-ASSETS> 310,996
<CURRENT-LIABILITIES> 56,301
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 147,128
<TOTAL-LIABILITY-AND-EQUITY> 310,996
<SALES> 93,572
<TOTAL-REVENUES> 93,572
<CGS> 71,444
<TOTAL-COSTS> 71,444
<OTHER-EXPENSES> 25,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,711
<INCOME-PRETAX> (4,708)
<INCOME-TAX> 1,930
<INCOME-CONTINUING> (2,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,778)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
