<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 July 1, 2000
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
Incorporation or Organization) Identification No.)
500 Westridge Drive, Watsonville, CA 95076-4100
---------------------------------------- ----------
(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 July 29, 2000, the number of shares outstanding of the registrant's common
stock was 17,262,496.
<PAGE>
Index
<TABLE>
<C> <S> <C>
Part I
Financial Statements............................................... 2
Notes to Condensed Consolidated Financial Statements............... 5
Management's Discussion and Analysis of Financial Conditions
and Results of Operations........................................ 6
Part II
Other Information................................................... 9
</TABLE>
<PAGE>
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
<TABLE>
<CAPTION>
July 1, July 3, January 1,
2000 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 10,360 $ 11,256 $ 3,231
Accounts receivable, net 8,107 8,091 5,101
Merchandise inventories, net 183,717 168,360 165,838
Prepaid expenses and other current assets 12,691 11,320 9,029
-------- -------- --------
Total current assets 214,875 199,027 183,199
Property and equipment, net 71,413 62,847 66,036
Intangibles and other assets, net 37,088 41,357 37,625
-------- -------- --------
Total assets $323,376 $303,231 $286,860
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52,378 $ 50,593 $ 30,810
Accrued expenses 19,957 18,317 9,828
Deferred income tax current liability 3,333 3,263 3,333
Line of credit and current portion of long-term debt 8,430 1,364 8,689
-------- -------- --------
Total current liabilities 84,098 73,537 52,660
Long-term debt 67,478 69,108 71,843
Deferred items and other non-current obligations 2,640 2,253 2,460
-------- -------- --------
Total liabilities 154,216 144,898 126,963
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: 17,262,466
at July 1, 2000 and 17,190,274 at January 1, 2000 17 17 17
Additional paid-in capital 107,541 106,435 107,015
Retained earnings 61,602 51,881 52,865
-------- -------- --------
Total stockholders' equity 169,160 158,333 159,897
-------- -------- --------
Total liabilities and stockholders' equity $323,376 $303,231 $286,860
======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share and store data)
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $183,344 $176,867 $278,606 $270,439
Cost of goods sold, including buying
and occupancy 126,302 123,826 198,341 195,270
------------- ------------- ------------- -------------
Gross profit 57,042 53,041 80,265 75,169
Selling, general and administrative expense 36,218 33,687 62,164 58,812
------------- ------------- ------------- -------------
Income from operations 20,824 19,354 18,101 16,357
Interest expense 1,579 1,549 3,295 3,260
------------- ------------- ------------- -------------
Income before income taxes 19,245 17,805 14,806 13,097
Income tax expense 7,891 7,300 6,072 5,370
------------- ------------- ------------- -------------
Net Income $ 11,354 $ 10,505 $ 8,734 $ 7,727
============= ============= ============= =============
Net income per common and common
equivalent shares:
Basic $0.66 $0.62 $0.51 $0.45
============= ============= ============= =============
Diluted $0.65 $0.60 $0.50 $0.44
============= ============= ============= =============
Weighted average common and common
equivalent shares outstanding:
Basic 17,223 17,070 17,218 17,036
============= ============= ============= =============
Diluted 17,536 17,651 17,582 17,551
============= ============= ============= =============
Stores open at end of period 233 225 233 225
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
26 Weeks 26 Weeks
Ended Ended
July 1, July 3,
2000 1999
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,734 $ 7,727
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 7,888 7,107
Gain (loss) on sale of assets 0 2
Provision for doubtful accounts 136 342
Compensation expense related to stock benefit plan 0 125
Changes in assets and liabilities:
Accounts receivable (3,142) (3,774)
Merchandise inventories, net (17,879) (8,291)
Prepaid expenses and other current assets (3,662) 254
Other assets (40) 31
Accounts payable 21,568 26,834
Accrued expenses 10,129 13,838
Deferred items 180 198
--------------- --------------
Net cash provided by operating activities 23,912 44,393
--------------- --------------
INVESTING ACTIVITIES
Purchases of property and equipment (12,685) (9,125)
--------------- --------------
FINANCING ACTIVITIES:
Net payments on line of credit (4,200) (24,500)
Net repayments on long-term debt (424) (1,179)
Sale of common stock pursuant to associate stock purchase plan 363 455
Proceeds from exercise of stock options 163 188
--------------- --------------
Net cash used by financing activities (4,098) (25,036)
--------------- --------------
NET INCREASE IN CASH 7,129 10,232
CASH AT BEGINNING OF PERIOD 3,231 1,024
--------------- --------------
CASH AT END OF PERIOD $ 10,360 $ 11,256
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Twenty-Six Weeks Ended July 1, 2000 and July 3, 1999
(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 July 1, 2000 and July 3, 1999; and the interim results of
operations and cash flows for the 13-week and the 26-week periods then ended.
The condensed consolidated balance sheet at January 1, 2000, 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 and the 26- 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 its
audited consolidated financial statements for the fiscal year ended January 1,
2000. 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 interim
financial statements should be read in conjunction with the audited consolidated
financial statements, including the notes thereto, for the fiscal year ended
January 1, 2000, included in the Company's annual report on Form 10-K.
NOTE 2 - Accounting Policies
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which defines
derivatives, requires that derivatives be carried at fair value and provides for
hedge accounting when certain conditions are met. This statement is effective
for the Company beginning in the year 2001. The Company believes adoption of
this statement will not have a material impact on its consolidated financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides the SEC staff's views on selected revenue
recognition issues. The guidance in SAB 101 must be adopted during the
Company's quarter ended December 30, 2000 and the effects, if any, are
required to be recorded through a retroactive, cumulative-effect adjustment as
of the beginning of the fiscal year, with a restatement of all prior interim
quarters in the year. Management does not believe that the adoption of the
provisions of SAB 101 will have a material impact on the Company's income
statement presentation, operating results or financial position.
NOTE 3 - Segment Information
The Company has three divisions (Stores, Catalog, and Wholesale ("Port Supply")
which all sell after market recreational boating supplies directly to customers.
The customer base overlaps between Stores and Port Supply, and between Stores
and Catalog. All processes for all divisions within the supply chain are
commingled, including purchases from merchandise vendors, distribution center
activity, and customer delivery.
The Stores division qualifies 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>
26 Weeks 26 Weeks
Ended Ended
July 1, July 3,
2000 1999
-------------- -------------
<S> <C> <C>
Net sales:
Stores $229,674 $220,131
Other 48,932 50,308
-------------- -------------
Consolidated net sales $278,606 $270,439
============== =============
Contribution:
Stores $ 34,415 $ 30,235
Other 8,154 8,235
-------------- -------------
Consolidated contribution $ 42,569 $ 38,470
============== =============
Reconciliation of consolidated contribution to net loss:
Consolidated contribution $ 42,569 $ 38,470
Less:
Cost of goods sold not included in consolidated contribution (13,102) (13,326)
General and administrative expense (11,366) (8,787)
Interest expense (3,295) (3,260)
Income tax expense (6,072) (5,370)
-------------- -------------
Net income $ 8,734 $ 7,727
============== =============
</TABLE>
5
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations
"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 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 addition, 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 Company's growth has been fueled principally by the Company's
store operations. 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 these Stores profitably, as well as 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.
The market for recreational water sports and boating supplies is highly
competitive. The Company's gross profit may be impacted by competitors' pricing
policies.
Additional factors which may affect the Company's financial results include
inventory management issues, the impact of e-commerce, 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.
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. Currently,
the Company offers its products through 233 stores in 38 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 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.
All references to the second quarter and first six months of fiscal 2000 refer
to the 13-week and 26-week periods, respectively, ended July 1, 2000 and all
references to the second quarter and first six months of 1999 refer to the 13-
week and 26-week periods, respectively, ended July 3, 1999.
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 1999, 62.8% 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.
Results of Operations
---------------------
Net sales increased $6.4 million, or 3.7%, to $183.3 million for the second
quarter of fiscal 2000, compared to $176.9 million for the second quarter of
fiscal 1999, primarily due to increases in net sales in the Company's Stores
division. Stores net sales were $154.5 million for the second quarter of fiscal
2000, an increase of $8 million, or 5.5%, over the $146.5 million recorded for
the same period a year ago. Net sales in new stores opened since the second
quarter 1999 and remodeled stores not included in comparable sales were $6.1
million. Net sales from comparable stores increased 1.4%, or $1.9 million.
Sales recorded by Port Supply increased by $0.2 million, or 1.5%, to $14.0
million for the second quarter of fiscal 2000, compared to $13.8 million for the
second quarter of fiscal 1999. Catalog sales decreased by $1.9 million, or
11.8%, to $14.4 million for the second quarter of fiscal 2000, compared to $16.3
million for the second quarter of fiscal 1999. Stores, Port Supply, and Catalog
net sales represented 84.3%, 7.7%, and 7.9%, respectively, of the Company's net
sales for the second quarter of fiscal 2000, compared to 82.8%, 7.8%, and 9.2%,
respectively, of the Company's net sales for the second quarter of fiscal 1999.
The Company also recorded net sales from its insurance program, which
represented less than 1.0% of the Company's net sales for the second quarter of
fiscal 2000 and 1999.
The Company recorded net sales of $278.6 million for the first six months of
fiscal 2000, an increase of $8.2 million, or 3.0%, over net sales of $270.4
million recorded for the same period a year ago. The increase in net sales was
primarily due to increases in net sales in the Company's Stores and Port Supply
divisions. Store net sales were $229.7 million for the first six months of
fiscal 2000, an increase of $9.7 million, or 4.4%, over the $220 million
recorded for the same period in fiscal 1999. Net sales in new stores opened
since the first six months of fiscal 1999 and remodeled stores not included in
comparable sales were $8.6 million. Net sales from comparable stores increased
0.5%, or $1.1 million, compared to the same period a year ago. Sales recorded by
Port Supply increased by $0.7 million, or 2.8%, to $25.6 million for the first
six months of fiscal 2000, over the $24.9 million the same period a year ago.
Catalog sales decreased $2.3 million, or 9.0%, to $22.8 million for the first
six months of fiscal 2000. Stores, Port Supply and Catalog net sales represented
82.4%, 9.2% and 8.2% respectively, of the Company's net sales for the first six
months of fiscal 2000, compared to 81.4%, 9.2% and 9.3%, respectively of the
Company's net sales for the first six months of fiscal 1999. Catalog sales
decreased in both periods due to market share erosion in areas where stores have
been opened by either the Company or its competitors. Net sales from the
Company's insurance program represented less than 1% of net sales for the first
six months of fiscal 2000 and 1999.
The Company's gross profit increased by $4.0 million, or 7.5%, to $57.0 million
for the second quarter of fiscal 2000, compared to $53.0 million for the second
quarter of 1999. Gross profit represented 31.1% of net sales in the second
quarter of fiscal 2000, compared to 30.0% in the same period a year ago.
6
<PAGE>
The Company's gross profit was $80.3 million for the first six months of fiscal
2000, an increase of $5.1 million, or 6.8%, over the gross profit of $75.2
million for the same period a year ago. Gross profit represented 28.8% of net
sales in the first six months of fiscal 2000, compared to 27.8% in the same
period a year ago. The increase in gross profit as a percentage of sales for
the second quarter of fiscal 2000 and for the first six months of fiscal 2000
was primarily due to a shift to more profitable products.
Selling, general, and administrative expenses increased by $2.5 million, or
7.5%, to $36.2 million for the second quarter of fiscal 2000 compared to the
similar period a year ago. Selling, general, and administrative expenses
represented 19.8% of net sales for the second quarter of fiscal 2000 compared to
19.0% for the second quarter of fiscal 1999. For the first six months of fiscal
2000, selling, general and administrative expenses increased $3.4 million, or
5.7%, to $62.2 million for the same period a year ago. Selling, general and
administrative expenses increased to 22.3% of net sales for the first six months
of 2000, compared to 21.7% for the first six months of 1999. The increase in
both periods is primarily due to increased marketing costs related to the
rollout of the new water sports line and West Advantage customer loyalty
programs.
Interest expense was $1.6 million in the second quarter ended July 1, 2000, an
increase of $0.1 million over the same period a year ago. Interest expense for
the first six months of fiscal 2000 was $3.3 million in both periods ended July
1, 2000 and July 3, 1999. Lower average borrowings were offset by higher
interest rates in the 13-week and 26-week periods ended July 1, 2000.
7
<PAGE>
Liquidity and Capital Resources
-------------------------------
At the end of the second quarter of fiscal 2000, the Company had outstanding a
$40.0 million senior guarantee note, which matures on December 23, 2004, with
the first annual principal payment of $8.0 million due on December 23, 2000.
This note is unsecured and contains certain amended restrictive covenants
including required fixed charge coverage and debt to capitalization ratios, and
minimum net worth. The note currently bears interest at the rate of 7.6%.
At July 1, 2000, the Company had available a $80.0 million credit line which
expires January 2, 2003. 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 of up to 2.25%. At July 1, 2000, borrowings from the credit line
were $35.3 million bearing interest at rates ranging from 8.125% to 8.25%. In
addition, the Company had available a $2.0 million revolving line of credit with
a bank, expiring January 2, 2003. The line bears interest at the bank's
reference rate (9.5% at the end of second quarter of 2000) and has a ten-day
paydown requirement. At July 1, 2000, no amounts were outstanding under this
line of credit.
The Company's primary sources of liquidity are income from operations and bank
borrowings. In the first six months of fiscal 2000 the Company's source of
liquidity was from operations. Net cash provided by operating activities for the
first six months of fiscal 2000 amounted to $23.9 million, consisting primarily
of a $21.6 million increase in accounts payable, a $10.1 million increase in
accrued expenses payable and $8.7 million in net income. These amounts were
partially offset by an $17.9 million increase in merchandise inventories, $3.7
million increase in prepaid expenses and a $3.1 million in account receivable.
The increase in accounts payable and inventories is primarily attributable to
positioning the Company for third quarter sales.
Net cash used in investing activities for the first six months of fiscal 2000
was $12.7 million, compared to $9.1 million a year ago, primarily related to the
capitalization of new computer systems and new store construction and remodels.
Net cash used in financing activities during the first six months of fiscal 2000
was $4.1 million, consisting primarily of $4.2 million of payments on the
Company's line of credit offset by other borrowing activity.
In the opinion of management, cash flows from operations and borrowings under
the Company's credit agreements will be sufficient to fund the Company's
operations throughout 2000.
8
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders was held on May 10, 2000.
(b) The following directors were elected at the meeting:
Randolph K. Repass
John Edmondson
Richard E. Everett
James P. Curley
Geoffrey A. Eisenberg
David McComas
Walter Scott
Henry Wendt
The foregoing constitute all members of the Board of Directors
of the Company.
(c) At the annual meeting, the stockholders voted to approve a
proposal to amend the Associates Stock Buying Plan to increase
the number of shares authorized for issuance thereunder by
400,000.
Set forth below is a tabulation with respect to the matters
voted on at the meeting:
Against or Broker
For Withheld Abstentions Non-Votes
--- ---------- ----------- ---------
Proposal to amend the
Associates Stock Buying
Plan...................... 15,657,934 142,868 10,165 1,391,000
For Nominee Withheld
----------- --------
Randolph K. Repass 15,757,239 53,728
John Edmondson 15,756,742 54,225
Richard E. Everett 15,740,617 70,350
James P. Curley 15,757,675 53,292
Geoffrey A. Eisenberg 15,753,538 57,429
David McComas 15,757,475 53,492
Walter Scott 15,572,175 238,792
Henry Wendt 15,758,339 52,628
Item 5. Exhibits and reports on Form 8-K.
(a) Exhibits
10.18.2 Second Amendment to Credit Agreement Dated January 13, 2000
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.
9
<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: August 15, 2000 WEST MARINE, INC.
---------------
By: /s/ John Edmondson
---------------------------------------
John Edmondson
President and Chief Executive Officer
By: /s/ Russell Solt
---------------------------------------
Russell Solt
Sr. Vice President, and Chief Financial Officer
10
