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 March 29, 1997
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
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(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 (408) 728-2700
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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 April 26, 1997, the number of shares outstanding of the registrant's common
stock was 16,610,057
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
(in thousands, except share data)
March 29, December 28,
ASSETS 1997 1996
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(Unaudited)
Current assets:
Cash $ 1,767 $ 894
Accounts receivable, net 5,185 3,742
Merchandise inventories 148,311 122,731
Prepaid expenses and other current assets 11,766 10,803
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Total current assets 167,029 138,170
Property and equipment, net 33,495 30,654
Intangibles and other assets, net 42,541 42,690
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Total assets $243,065 $211,514
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 46,133 $ 33,627
Accrued expenses 8,133 10,901
Current portion of long-term debt 769 694
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Total current liabilities 55,035 45,222
Long-term debt 59,487 37,997
Deferred items and other non-current obligations 1,689 1,764
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 16,568,532
and 16,494,205 at March 29, 1997 and
December 28, 1996, respectively 16 16
Additional paid-in capital 100,113 98,632
Retained earnings 26,725 27,883
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Total stockholders' equity 126,854 126,531
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Total liabilities and stockholders' equity $243,065 $211,514
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See notes to condensed consolidated financial statements
Page 1
Condensed Consolidated Statements of Income
(unaudited, in thousands, except per share amounts and store data)
13 Weeks 13 Weeks
Ended Ended
March 29, March 30,
1997 1996
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Net sales $ 75,025 $ 49,947
Cost of goods sold including
buying and occupancy (55,290) (36,268)
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Gross profit 19,735 13,679
Selling, general and administrative
expenses (20,762) (12,833)
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Income (loss) from operations (1,027) 846
Interest expense (867) (292)
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Income (loss) before income taxes (1,894) 554
Benefit (provision) for income taxes 736 (222)
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Net income (loss) $ (1,158) $ 332
========= =========
Net income (loss) per common and common
equivalent share:
Primary $ (0.07) $ 0.02
========= =========
Fully diluted $ (0.07) $ 0.02
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Weighted average common and common
equivalent shares outstanding:
Primary 16,521 15,912
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Fully diluted 16,521 16,010
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Stores open at end of year 156 77
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See notes to condensed consolidated financial statements.
Page 2
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
13 Weeks 13 Weeks
Ended Ended
March 29, March 30,
1997 1996
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Cash flows from operating activities:
Net income (loss) $ (1,158) $ 332
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,949 1,001
Provision for deferred income taxes
Provision for doubtful accounts 65
Change in assets and liabilities:
Accounts receivable (1,508) (1,581)
Merchandise inventories (25,580) (10,267)
Prepaid expenses and other (1,314) (585)
Accounts payable 12,506 3,796
Accrued expenses (2,049) 83
Deferred items 98 35
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Net cash used in operating activities (16,991) (7,186)
Cash flows from investing activities:
Purchases of property and equipment (4,463) (3,228)
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Net cash used in investing activities (4,463) (3,228)
Cash flows from financing activities:
Net proceeds from line of credit 21,700 5
Proceeds from (repayments of) long-term debt (135) 10,536
Exercise of stock options 762 117
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Net cash provided by financing activities 22,327 10,658
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Net increase in cash 873 244
Cash:
Beginning of period 894 399
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End of period $ 1,767 $ 643
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See notes to condensed consolidated financial statements.
Page 3
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended March 29, 1997 and March 30, 1996 (unaudited)
NOTE 1- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared from the records of 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 March 29, 1997
and March 30, 1996; and the interim results of operations and cash flows for
the 13 weeks then ended. The consolidated balance sheet at December 28, 1996,
presented herein, has been derived from the audited consolidated financial
statements of the Company for the fiscal year then ended.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the fiscal year ended December 28,
1996. 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 year ended December
28, 1996.
Earnings per share are calculated in accordance with Accounting Principles Board
Opinion No. 15, Earnings Per Share. Under such opinion, stock options or common
equivalent shares have been excluded from the calculation of earnings per share
during the first quarter of 1997 as they are anti-dilutive.
In February 1997, Statement of Financial Accounting Standards No. 128 "Earnings
per Share", (SFAS No. 128), was issued. SFAS No. 128 requires dual presentation
of basic EPS and diluted EPS on the face of all income statements issued after
December 15, 1997 for all entities with complex capital structures. Basic EPS
is computed as net income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common stock issuable through stock options, warrants and
other convertible securities. The pro forma effect assuming adoption of SFAS
No. 128 at the beginning of each period is presented below.
13 Weeks Ending 13 Weeks Ending
March 29, 1997 March 30, 1996
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Pro forma EPS:
Basic ($.07) $.02
Diluted ($.07) $.02
The results of operations for the 13 week period presented herein are not
necessarily indicative of the results to be expected for the full year.
Item 2 - Managements Discussion and Analysis of Financial Conditions and Results
of Operations
General
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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 156
stores in 26 states as of March 29, 1997, compared to 77 stores in 19 states as
of March 30, 1996.
On June 17, 1996, West Marine acquired E&B Marine, Inc. The acquisition was
accounted for under the purchase method of accounting. Accordingly, E&B Marine's
results of operations for the period subsequent to the acquisition date are
included in West Marine's results of operations.
Results of Operations
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Net sales increased $25.1 million, or 50.2%, from $49.9 million during the first
quarter of fiscal 1996 to $75.0 million during the first quarter of fiscal
1997. This increase was attributable to increases in net sales from each of the
Company's three divisions. Store net sales increased $22.7 million or 63.2%, to
$58.7 million primarily due to the addition of 79 new or acquired stores in the
twelve months ended March 29, 1997. Net sales from comparable West Marine
stores increased 8.1% and contributed $2.8 million of the increase in net sales.
Catalog net sales increased $1.7 million, or 25.3%, to $8.4 million. Port
Supply net sales increased $646,000, or 8.9%, to $7.9 million. In the first
quarter of 1997, store, catalog and Port Supply net sales represented 78.2%,
11.2% and 10.6%, respectively. In the first quarter of 1996, store, catalog and
Port Supply net sales represented 72%, 13.4% and 14.6%, respectively.
Gross profit increased $6.1 million, or 44.3%, in the first quarter of 1997
compared to the first quarter of 1996, primarily because of the increase in net
sales. Gross profit as a percentage of net sales decreased to 26.3% in the first
quarter of 1997 from 27.4% in the first quarter of 1996, primarily because of
increased occupancy costs from the acquisition of the E&B Marine locations
offset by improved merchandising and logistics leverage resulting from the 50.2%
increase in net sales from the first quarter of 1996 to the first quarter of
1997. During fiscal 1997, the Company plans to consolidate its North Carolina
distribution center and its Edison distribution center, with a new facility in
Rock Hill, South Carolina, which could adversely affect gross profits until the
replacement distribution center has matured.
Selling, general and administrative expenses increased $7.9 million, or 61.8%,
in the first quarter of 1997 compared to the first quarter of 1996, primarily
due to increases in direct expenses related to the growth in stores. Store
direct expenses represented approximately 74.0% or $5.9 million of the increase.
As a percentage of net sales, selling, general and administrative expenses
increased to 27.7% in the first quarter of 1997 compared to 25.7% in the first
quarter of 1996 primarily due to increased selling costs due to the addition of
E&B Marine. (See "Seasonality" for a more complete discussion.)
Interest expense increased to $867,000 in the first quarter of 1997 compared to
$292,000 in the first quarter of 1996, primarily as a result of higher average
borrowings under the Company's line of credit in the first quarter of 1997
compared to the first quarter of 1996.
Liquidity and Capital Resources
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During the first quarter of 1997, the Company's primary source of working
capital has been from borrowings under its line of credit. Net cash used in
operations during the first three months of 1997 was $17.0 million, which
resulted from a net loss of $1.2 million for the quarter , offset by non-cash
charges of $2.0 million, a $15.1 million increase in inventory net of payables
and other accrued expenses, a $1.5 million increase in accounts receivable, and
a $1.3 million increase in prepaid expenses and other. The inventory increase
was primarily attributable to continued build-up of inventory at West Marine and
E&B Marine locations as the Company nears its prime selling season. Net cash
used in investing activities was $4.5 million primarily for the purchase of
property and equipment. Net cash provided by financing activities during the
first three months of 1997 was $22.3 million, consisting primarily of borrowings
under the Company's line of credit and cash from the exercise of stock options.
Cash increased by $873,000 during the first three months of 1997 from $894,000
at the end of fiscal 1996 to $1.8 million as of March 29, 1997. West Marine's
primary cash requirements are related to capital expenditures for stores,
including leasehold improvement costs, fixtures, and merchandise inventory. The
Company anticipates capital expenditures approximating $15 million in the last
three quarters of 1997. In February 1997, the Company amended its bank
agreements extending its available line of credit to $70 million which will be
reduced to $60 million on June 28, 1997. Historically, the Company's borrowings
peak near the end of the first quarter and consequently management believes that
cash flow from operations together with bank debt financing will be sufficient
to fund the Company's operations through the next year.
Seasonality
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Historically, the Company's business has been highly seasonal. As a result of
the acquisition of E&B Marine, the Company is even more susceptible to
seasonality as a larger percentage of E&B Marine stores' sales occur in the
second and third quarters of the year. During 1996, 63.1% of the Company's net
sales and an even higher percentage of its net income occurred during the second
and third quarters, principally during the period from April through July which
represents the peak boating months in most of the Company's markets. In
addition, the Company will become even more susceptible to seasonality and
weather as it continues to expand its operations in the Northeast and Midwest.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
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1995:
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The statements in this filing or in documents incorporated by reference herein
that relate to future plans, events, expectations, objectives or performance (or
assumptions underlying such matters) are forward-looking statements that involve
a number of risks and uncertainties. Set forth below are certain important
factors that could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements.
The Company's growth has been fueled principally by the E&B Marine acquisition
and the Company's store operations. If the Company were to incur unanticipated
costs and difficulties related to the integration of the E&B Marine acquisition
this could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, acquisitions involve a number
of special risks, including the diversion of management's attention to the
assimilation of the operations and personnel of the acquired business, potential
adverse short-term effects on the Company's operating results and amortization
of acquired intangible assets. The Company's continued growth depends to a
significant degree on its ability to continue to expand its operations through
the opening of new stores and to operate these stores profitably, as well as
increasing sales at its existing stores. The Company's planned expansion is
subject to a number of factors, including the adequacy of the Company's capital
resources and the Company's ability to locate suitable store sites and negotiate
acceptable lease terms, to hire, train and integrate employees and to adapt its
distribution and other operations systems.
The market for recreational boating supplies is highly competitive. Competitive
pressures resulting from competitors' pricing policies have adversely affected
the Company's gross profit and such pressures are expected to continue.
Furthermore, the expected consolidation of the Company's East Coast distribution
facilities could disrupt the Company's business and adversely affect gross
profits. In addition, the Company's operations could be adversely affected if
unseasonably cold weather, prolonged winter conditions or extraordinary amounts
of rainfall were to occur during the peak boating season in the second and third
quarters.
Additional factors which may affect the Company's financial results include
consumer spending on recreational boating supplies, environmental regulations,
demand for and acceptance of the Company's products and other risk factors
disclosed from time to time in the Company's SEC filings.
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.1.2 Second amendment to credit agreement dated March 28, 1997 among WMP,
Bank of America National Trust and Savings Association, and other
financial institutions party thereto
10.14 Lease dated March 11, 1997 between W/H No. 31 L.L.C. and West Marine
Inc. for Rock Hill, South Carolina Distribution Facility and other
agreements thereto
11.1 Statement re: computation of earnings per share
27 Financial Data Schedule
(b) Exhibits and Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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 5, 1997 WEST MARINE, INC.
By. /s/ Crawford L. Cole
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Crawford L. Cole
President and Chief Executive Officer
By. /s/ John Zott
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John Zott,
Senior Vice President, Chief Financial Officer