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
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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 0-22512
WEST MARINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0355502
(State or Other Jurisdiction of (IRS 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
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 [ ]
At July 27, 2001, the number of shares outstanding of registrant's common stock
was 17,660,750.
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of June 30, 2001, December 30, 2000 and
July 1, 2000 ............................................................................................ 3
b) Condensed Consolidated Statements of Income for the 13-weeks ended June 30, 2001 and July 1, 2000
and the 26-weeks ended June 30, 2001 and July 1, 2000 ................................................... 4
c) Condensed Consolidated Statements of Cash Flow for the 26-weeks ended June 30, 2001 and
July 1, 2000 ............................................................................................ 5
d) Notes to Condensed Consolidated Financial Statements ................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................................. 9
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders ..................................................... 10
Item 6. Exhibits and Reports on Form 8-K ........................................................................ 10
2
PART I
ITEM 1 - FINANCIAL STATEMENTS
WEST MARINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001, DECEMBER 30, 2000 AND JULY 1, 2000
(Unaudited) (In thousands, except share data)
June 30, December 30, July 1,
2001 2000 2000
-------- ------------- --------
ASSETS
Current assets:
Cash $ 6,123 $ 2,654 $ 10,360
Accounts receivable, net 7,934 4,964 8,107
Merchandise inventories, net 198,014 180,563 183,717
Prepaid expenses and other current assets 15,308 9,879 12,691
-------- ------------- --------
Total current assets 227,379 198,060 214,875
Property and equipment, net 76,081 73,481 71,413
Intangibles and other assets, net 36,547 36,241 37,088
-------- ------------- --------
TOTAL ASSETS $340,007 $307,782 $323,376
======== ============= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 72,433 $ 42,341 $ 52,378
Accrued expenses 28,808 17,735 23,290
Current portion of long-term debt 8,753 8,729 8,430
-------- ------------- --------
Total current liabilities 109,994 68,805 84,098
Long-term debt 46,718 66,500 67,478
Deferred items and other non-current obligations 4,137 4,217 2,640
-------- ------------- --------
Total liabilities 160,849 139,522 154,216
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: 17,638,493 at June 30, 2001, 17,321,521 at December 30, 2000
and 17,262,466 at July 1, 2000 17 17 17
Additional paid-in capital 108,407 107,987 107,541
Retained earnings 70,734 60,256 61,602
-------- ------------- --------
Total stockholders' equity 179,158 168,260 169,160
-------- ------------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $340,007 $307,782 $323,376
======== ============= ========
See notes to condensed consolidated financial statements.
3
WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (In thousands, except per share and store data)
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales $188,244 $185,062 $277,982 $281,337
Cost of goods sold, including buying and occupancy 127,109 128,368 194,706 201,420
-------- -------- -------- --------
Gross profit 61,135 56,694 83,276 79,917
Selling, general and administrative expense 36,992 35,870 62,866 61,816
-------- -------- -------- --------
Income from operations 24,143 20,824 20,410 18,101
Interest expense, net 1,365 1,579 2,947 3,295
-------- -------- -------- --------
Income before income taxes 22,778 19,245 17,463 14,806
Income taxes 9,111 7,891 6,985 6,072
-------- -------- -------- --------
Net income $ 13,667 $ 11,354 $ 10,478 $ 8,734
======== ======== ======== ========
Net income per share:
- - Basic $ 0.78 $ 0.66 $ 0.60 $ 0.51
======== ======== ======== ========
- - Diluted $ 0.77 $ 0.65 $ 0.59 $ 0.50
======== ======== ======== ========
Weighted average common and common equivalent shares
outstanding:
- - Basic 17,618 17,223 17,595 17,218
======== ======== ======== ========
- - Diluted 17,752 17,536 17,696 17,582
======== ======== ======== ========
Stores open at end of period 240 233 240 233
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
26 Weeks 26 Weeks
Ended Ended
June 30, July 1,
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net income $ 10,478 $ 8,734
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,817 7,888
Provision for doubtful accounts 77 136
Changes in assets and liabilities:
Accounts receivable (3,047) (3,142)
Merchandise inventories (17,451) (17,879)
Prepaid expenses and other current assets (5,429) (3,662)
Other assets (877) (40)
Accounts payable 30,092 21,568
Accrued expenses 11,073 10,129
Deferred items (79) 180
-------- --------
Net cash provided by operating activities 33,654 23,912
-------- --------
INVESTING ACTIVITY -
Purchases of property and equipment (10,846) (12,685)
-------- --------
FINANCING ACTIVITIES:
Net repayments on line of credit (19,400) (4,200)
Repayments on long-term debt and capital leases (359) (424)
Proceeds from issuance of common stock 420 526
-------- --------
Net cash provided by financing activities (19,339) (4,098)
-------- --------
NET INCREASE IN CASH 3,469 7,129
CASH AT BEGINNING OF PERIOD 2,654 3,231
-------- --------
CASH AT END OF PERIOD $ 6,123 $ 10,360
======== ========
See notes to condensed consolidated financial statements.
5
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Twenty-Six Weeks Ended June 30, 2001 and July 1, 2000
(Unaudited)
NOTE 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of West Marine, Inc. without audit, and in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary to fairly present the financial position at June 30, 2001
and July 1, 2000, and the interim results of operations and cash flows for the
13-week and the 26-week periods then ended.
The consolidated balance sheet at December 30, 2000, presented herein, has been
derived from the audited consolidated financial statements of West Marine for
the year then ended, included in West Marine's annual report on Form 10-K. The
results of operations for the 13-week and 26-week periods presented herein is
not necessarily indicative of the results to be expected for the full year.
Accounting policies followed by West Marine are described in Note 1 to its
audited consolidated financial statements for the year ended December 30, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been 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 year ended December 30, 2000, included in
West Marine's annual report on Form 10-K.
NOTE 2: Accounting Policies
On December 31, 2000, West Marine adopted Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS 137 and SFAS 138. SFAS 133 requires all
derivative financial instruments to be recognized on the balance sheet at fair
value. The effect of adopting SFAS 133 was immaterial. During 2000 and the
first six months of 2001, West Marine entered into no derivative financial
instruments.
In July 2001, Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations", was issued by the Financial Accounting Standards Board
(FASB). SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and write-
downs may be necessary. West Marine is required to implement SFAS No. 141 on
July 1, 2001 and it has not determined the impact, if any, that this statement
will have on its consolidated financial position or results of operations.
In July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets", was issued
by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. West Marine is required to implement SFAS No. 142
on January 1, 2002 and it has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
NOTE 3: Segment Information
West Marine has three divisions - Retail, Wholesale ("Port Supply") and Catalog
(including Internet) - which all sell aftermarket recreational boating supplies
directly to customers. The customer base overlaps between our Retail and Port
Supply divisions, and between our Retail and Catalog divisions. All processes
for the three divisions within the supply chain are commingled, including
purchases from merchandise vendors, distribution center activity, and customer
delivery.
The Retail 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 West Marine's assets are commingled and are not available by
segment. Contribution is defined as net sales, less product costs and direct
expenses. The following is financial information related to West Marine's
business segments (in thousands):
6
26 Weeks 26 Weeks
Ended Ended
June 30, July 1,
2001 2000
-------- --------
Net sales:
Retail $229,104 $229,675
Other 48,878 51,662
-------- --------
Consolidated net sales $277,982 $281,337
======== ========
Contribution:
Retail $ 35,477 $ 34,415
Other 7,218 8,154
-------- --------
Consolidated contribution $ 42,695 $ 42,569
======== ========
Reconciliation of consolidated contribution to net income:
Consolidated contribution $ 42,695 $ 42,569
Less:
Cost of goods sold not included in consolidated contribution (10,742) (13,102)
General and administrative expenses (11,543) (11,366)
Interest expense (2,947) (3,295)
Income tax expense (6,985) (6,072)
-------- --------
Net income $ 10,478 $ 8,734
======== ========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
West Marine is the largest specialty retailer of recreational and commercial
boating supplies and apparel in the United States. West Marine has three
divisions - Retail, Wholesale ("Port Supply") and Catalog (including Internet) -
which all sell aftermarket recreational boating supplies directly to customers.
At the end of the second quarter, West Marine offered its products through 240
stores in 38 states and in Puerto Rico, on the Internet at westmarine.com and
through catalogs which it distributes several times each year. West Marine'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. West Marine 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 2001 refer to the
13-week and 26-week periods, respectively, ended June 30, 2001 and all
references to the second quarter and first six months of 2000 refer to the 13-
week and 26-week periods, respectively, ended July 1, 2000.
Seasonality
Historically, West Marine's business has been highly seasonal. Our expansion
into new markets has made us even more susceptible to seasonality, as an
increasing percentage of our store sales occur in the second and third quarters
of each year. In 2000, 63.8% of our net sales were generated during the second
and third quarters, principally during the period from April through July, which
represents the peak boating months in most of our markets. Management expects
net sales to continue to be susceptible to seasonality and weather as we expand
our operations.
Results of Operations
Net sales increased $3.2 million, or 1.7%, to $188.2 million for the second
quarter of 2001, compared to $185.1 million for the second quarter of 2000,
primarily due to increases in net sales at our stores. Retail net sales were
$157.9 million for the second quarter of 2001, an increase of $3.4 million, or
2.2%, over the $154.5 million recorded for the same period a year ago. During
the second quarter of 2001, we opened five new stores and no stores were closed.
Net sales in new stores opened since the second quarter of 2000 and remodeled
stores not included in comparable sales were $8.5 million. Second quarter net
sales from comparable stores increased 0.6%, or $0.9 million. Wholesale sales
were unchanged at $14.1 million for the second quarter of 2001. Catalog
(including Internet) sales decreased by $0.3 million, or 2.2%, to $14.1 million
for the second quarter of 2001, compared to $14.4 million for the second quarter
of 2000. Retail, Port Supply, and Catalog (including Internet) sales represented
83.9%, 7.5% and 7.5%, respectively, of our net sales for the second quarter of
2001, compared to 83.5%, 7.6% and 7.8%, respectively, of our net sales for the
second quarter of 2000.
For the first six months of 2001, net sales decreased $3.4 million, or 1.2%, to
$278.0 million, compared to $281.3 million for the
7
first six months of 2000, primarily due to decreases in net sales in our Catalog
division (including Internet). Retail net sales were $229.1 million for the
first six months of 2001, a decrease of $0.6 million, or 0.2%, compared to the
$229.7 million recorded for the same period a year ago. Net sales in new stores
opened since the first six months of 2000 and remodeled stores not included in
comparable sales were $11.1 million. Net sales from comparable stores for the
first six months of 2001 decreased 2.3%, or $4.9 million. Wholesale sales
decreased by $0.9 million, or 3.6%, to $24.7 million for the first six months of
2001 from $25.6 million for the same period a year ago. Catalog (including
Internet) sales decreased by $1.9 million, or 8.4%, to $20.9 million for the
first six months of 2001, compared to $22.8 million for the same period last
year. Retail, Port Supply, and Catalog (including Internet) sales represented
82.4%, 8.9% and 7.5%, respectively, of our net sales for the first six months of
2001, compared to 81.6%, 9.1% and 8.1%, respectively, of our net sales for the
first six months of 2000.
Our gross profit increased by $4.4 million, or 7.8%, to $61.1 million for the
second quarter of 2001, compared to $56.7 million for the second quarter of
2000. Gross profit represented 32.5% of net sales in the second quarter of
2001, compared to 30.6% in the same period a year ago. Our gross profit was
$83.3 million for the first six months of 2001, an increase of $3.4 million, or
4.2%, compared to gross profit of $79.9 million for the same period a year ago.
Gross profit represented 30.0% of net sales for the first six months of 2001,
compared to 28.4% in the same period last year. Gross profit as a percentage of
sales increased for the second quarter and the first six months of 2001 compared
to the prior year primarily because we reduced operating costs at our
distribution centers, as well as a shift to a more profitable product mix.
Selling, general, and administrative expenses increased by $1.1 million, or
3.1%, to $37.0 million for the second quarter of 2001 compared to $35.9 million
for the same period last year. Selling, general, and administrative expenses
represented 19.7% of net sales for the second quarter of 2001 compared to 19.4%
for the second quarter of 2000. For the first six months of 2001, selling,
general, and administrative expenses increased by $1.1 million, or 1.7%, to
$62.9 million compared to $61.8 million for the first six months last year.
Selling, general, and administrative expenses represented 22.6% of net sales for
the first six months of 2001 compared to 22.0% for the same period a year ago.
The increase in selling, general and administrative expenses for both the second
quarter and the first six months of 2001 is primarily due to operating costs for
new stores opened this year.
Interest expense was $1.4 million in the second quarter of 2001, a decrease of
$0.2 million over the same period a year ago. For the first six months of 2001,
interest expense decreased by $0.3 million, to $2.9 million from $3.3 million.
The decrease in interest expense for both the second quarter and the first six
months of 2001 is primarily due to lower average outstanding indebtedness and
lower average interest rates compared to last year.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and bank
borrowings. During the first six months of 2001, our primary source of
liquidity was from operations. Net cash provided by operations during the first
six months of 2001 was $33.7 million, consisting primarily of an increase in
accounts payable and accrued expenses of $41.2 million and net income of $10.5
million, partially offset by a $17.5 million increase in inventory. The
inventory increase reflects our commitment to increasing fill rates, which
enhance sales, as well as stocking of merchandise at stores during the peak
boating season. The change in accounts payable and accrued expenses reflects
the seasonal increase in trade payables related to inventory, extended payment
terms negotiated with trade vendors and an increase in accrued income taxes.
West Marine's primary cash requirements are related to repayments of debt,
capital expenditures for new stores and remodeling existing stores, including
leasehold improvement costs and fixtures, and information systems enhancements,
and for merchandise inventory for stores. In the first six months of 2001, we
spent $19.8 million for debt repayments and $10.8 million for capital
expenditures. We expect to spend between $19.0 to $20.0 million on capital
expenditures during 2001. We intend to pay for our expansion through cash
generated from operations and bank borrowings.
At June 30, 2001, we had outstanding a $32.0 million senior guarantee note,
which matures on December 23, 2004, and requires annual principal payments of
$8.0 million. The note bears interest at 7.6%. The note is unsecured, and
contains certain restrictive covenants including fixed charge coverage and debt
to capitalization ratios and minimum net worth requirements.
We have an $80.0 million credit line which expires on January 2, 2003.
Depending on our election at the time of borrowing, the line bears interest at
either the bank's reference rate or LIBOR plus a factor ranging from 1.0% to
2.25%. At the end of the second quarter of 2001, we had $21.7 million
outstanding under our credit line, which amount accrued interest at 6.1%.
In addition, we have 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, which was 6.75% at the end of the second quarter of 2001, and has a ten-
day paydown requirement. At the end of the second quarter of 2001, no amounts
were outstanding under the revolving line of credit.
8
Both credit lines are unsecured and contain various covenants which require
maintaining certain financial ratios, including debt to earnings and current
ratios. The covenants include minimum levels of net worth and limitations on
levels of certain investments. These covenants also restrict the repurchase or
redemption of our common stock and payment of dividends, investments in
subsidiaries and annual capital expenditures.
At the end of the second quarter of 2001, we had $1,240,000 outstanding in
stand-by letters of credit and $61,000 outstanding in commercial letters of
credit.
We believe existing credit facilities and cash flows from operations will be
sufficient to satisfy liquidity needs through 2002.
"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. The
following are important factors that could cause our actual results to differ
materially from those expressed in any forward-looking statements:
. Because consumers often consider boats to be luxury items, the market is
subject to change in consumer confidence and spending habits. Recent slowing
of the domestic economy may adversely affect sales volumes, as well as our
ability to maintain current gross profit levels.
. Our 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.
. Our Catalog division (including Internet) has faced market share erosion in
areas where stores have been opened either by us or by our competitors.
Management expects this trend to continue.
. Our growth has been fueled principally by our store operations. Our
continued growth depends to a significant degree on our ability to continue
to expand our operations through the opening of new stores and to operate
these stores profitably, as well as increasing net sales at existing stores.
Our planned expansion is subject to a number of factors, including the
adequacy of our capital resources and our ability to locate suitable store
sites and negotiate acceptable lease terms, to hire, train and integrate
employees and to adapt our distribution and other operations systems.
. Our expansion plans include potential acquisitions of existing businesses.
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 our operating
results and amortization of acquired intangible assets.
. The markets for recreational water sports and boating supplies are highly
competitive. Competitive pressures resulting from competitors' pricing
policies are expected to continue.
Additional factors which may affect our 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 our products and other risk factors disclosed from time to time in
our SEC filings.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe there has been no material change in our exposure to market risk from
that discussed in our 2000 Annual Report filed on Form 10-K.
9
PART II
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 10, 2001, West Marine held its Annual Meeting of Stockholders in
Watsonville, California. Proxies were solicited regarding election of West
Marine's Board of Directors. All eight nominees were nominated by management,
and no solicitation was made on behalf of any persons other than management's
nominees. All eight nominees constitute West Marine's entire Board of Directors
and were elected to the Board of Directors with the following votes:
TOTAL VOTE FOR TOTAL VOTE WITHHELD
EACH DIRECTOR FROM EACH DIRECTOR
-------------- -------------------
Randolph K. Repass 15,925,379 285,582
John Edmondson 15,931,306 279,655
Richard Everett 15,922,466 288,495
Geoffrey Eisenberg 15,925,115 285,846
David McComas 15,928,136 282,825
Peter Roy 15,934,733 276,228
Daniel Sweeney 15,936,125 274,836
William Westerfield 15,938,136 272,825
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed for the period being reported.
SIGNATURES
Pursuant to the requirements 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: August 14, 2001 WEST MARINE, INC.
By: /s/ John Edmondson
--------------------------------------
John Edmondson
President and Chief Executive Officer
By: /s/ Russell Solt
--------------------------------------
Russell Solt
Executive Vice President and Chief
Financial Officer
By: /s/ Eric Nelson
--------------------------------------
Eric Nelson
Vice President, Finance and Chief
Accounting Officer
10