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 June 28, 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
- --------------------------------------------------------------------------------
(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 (408) 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 26, 1997, the number of shares outstanding of the registrant's common
stock was 16,687,800.
1
ITEM 1 - FINANCIAL STATEMENTs
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 28, DECEMBER 28,
ASSETS 1997 1996
------ ----------- ------------
(UNAUDITED)
Current assets:
Cash $ 2,351 $ 894
Accounts receivable, net 6,891 3,742
Merchandise inventories 160,203 122,731
Prepaid expenses and other current assets 15,420 10,803
-------- -------
Total current assets 184,865 138,170
Property and equipment, net 41,306 30,654
Intangibles and other assets, net 42,216 42,690
-------- --------
Total assets $268,387 $211,514
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 49,800 $ 33,627
Accrued expenses 18,042 10,901
Current portion of long-term debt 1,691 694
--------- --------
Total current liabilities 69,533 45,222
Long-term debt 58,204 37,997
Deferred items and other non-current obligations 1,757 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 16,658,857
and 16,494,205 at June 28, 1997 and
December 28, 1996, respectively 16 16
Additional paid-in capital 100,994 98,632
Retained earnings 37,883 27,883
-------- --------
Total stockholders' equity 138,893 126,531
-------- --------
Total liabilities and stockholders' equity $268,387 $211,514
======== ========
See notes to condensed consolidated financial statements.
2
Condensed Consolidated Statements of Income
(unaudited, in thousands, except per share amounts and store data)
13 WEEKS 13 WEEKS 26 WEEKS 26 WEEKS
ENDED ENDED ENDED ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
-------- -------- -------- --------
Net sales $141,499 $ 99,480 $216,524 $149,427
Cost of goods sold including
buying and occupancy 94,453 67,752 149,743 104,020
-------- -------- -------- --------
Gross profit 47,046 31,728 66,781 45,407
Selling, general and administrative
expenses 27,344 18,691 48,106 31,523
-------- -------- -------- --------
Income from operations 19,702 13,037 18,675 13,884
Interest expense 1,017 326 1,884 618
-------- -------- -------- --------
Income before income taxes 18,685 12,711 16,791 13,266
Provision for income taxes 7,527 5,134 6,791 5,356
-------- -------- -------- --------
Net income $ 11,158 $ 7,577 $ 10,000 $ 7,910
======== ======== ======== ========
Net income per common and common
equivalent share:
Primary $ 0.63 $ 0.46 $ 0.57 $ 0.49
======== ======== ======== ========
Fully diluted $ 0.63 $ 0.46 $ 0.57 $ 0.48
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding:
Primary 17,791 16,462 17,629 16,242
======== ======== ======== ========
Fully diluted 17,791 16,530 17,629 16,418
======== ======== ======== ========
Stores open at end of period 167 149
======== ========
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
26 WEEKS 26 WEEKS
ENDED ENDED
JUNE 28, JUNE 29,
1997 1996
-------- ---------
Cash flows from operating activities:
Net income $ 10,000 $ 7,910
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,979 2,098
Provision for deferred income taxes
Provision for doubtful accounts
Change in assets and liabilities:
Accounts receivable, net (3,149) (2,467)
Merchandise inventories (37,472) (11,266)
Prepaid expenses and other (4,968) (4,086)
Accounts payable 16,173 10,830
Accrued expenses 7,901 6,087
Deferred items 166 96
-------- --------
Net cash provided by (used in) operating activities (7,370) 9,202
Cash flows from investing activities:
Purchases of property and equipment (10,994) (6,842)
-------- --------
Net cash used in investing activities (10,994) (6,842)
Cash flows from financing activities:
Net proceeds from line of credit 19,100
Repayments of long-term debt (881) (2,221)
Sale of common stock pursuant to
associate stock purchase plan 467 301
Exercise of stock options 1,135 1,244
-------- --------
Net cash provided by (used in) financing activities 19,821 (676)
-------- --------
Net increase in cash 1,457 1,684
Cash:
Beginning of period 894 399
-------- --------
End of period $ 2,351 $ 2,083
======== ========
4
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Twenty-six weeks Ended June 28, 1997 and June 29, 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 June 28, 1997
and June 29, 1996; and the interim results of operations and cash flows for the
26 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.
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 Earnings Per Share "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 26 WEEKS ENDING 26 WEEKS ENDING
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996
--------------- --------------- --------------- ---------------
Pro forma EPS:
Basic $0.67 $0.50 $0.60 $0.52
Diluted $0.63 $0.46 $0.57 $0.49
The results of operations for the 13 and 26 week periods presented herein are
not necessarily indicative of the results to be expected for the full year.
5
Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations
General
- -------
West Marine distributes its merchandise through three divisions, stores (retail
and wholesale) and catalog (retail) under the names of West Marine and E&B
Discount Marine as well as Port Supply (wholesale). West Marine operated 167
stores in 29 states as of June 28, 1997, compared to 149 stores in 26 states as
of June 29, 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
- ---------------------
Net sales increased $42 million, or 42.2%, from $99.5 million during the second
quarter of fiscal 1996 to $141.5 million during the second 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 $37.6 million, or 49.3%,
to $113.7 million during the second quarter of fiscal 1997. Net sales from
comparable West Marine stores increased 1.5% and contributed $985,000 of the
increase in net sales. Catalog net sales increased $3.7 million, or 28.0%, to
$17 million. Port Supply net sales increased $755,000, or 7.5%, to $10.8
million. Store, catalog and Port Supply net sales represented 80.4%, 12% and
7.6%, respectively, of the Company's net sales for the second quarter of fiscal
1997 compared to 76.6%, 13.3% and 10.1%, respectively, of the Company's net
sales for the second quarter of 1996.
Net sales increased $67.1 million, or 44.9%, from $149.4 million during the
first six months of fiscal 1996 to $216.5 million during the first six months of
fiscal 1997. This increase was attributable to increases in net sales from each
of the Company's three divisions. Store net sales increased $60.3 million, or
53.8%, to $172.4 million. Net sales from comparable stores increased 3.7% and
contributed $3.8 million of the increase in net sales. Catalog net sales
increased $5.4 million, or 27.1%, to $25.3 million. Port Supply net sales
increased $1.4 million, or 8.1%, to $18.8 million. Store, catalog and Port
Supply net sales represented 79.6%, 11.7% and 8.7%, respectively, of the
Company's net sales for the first six months of fiscal 1997 compared to 75%,
13.4% and 11.6%, respectively, of the Company's net sales for the first six
months of fiscal 1996.
Gross profit increased $15.3 million, or 48.3%, in the second quarter of fiscal
1997 compared to the second quarter of fiscal 1996. As a percentage of net
sales, gross profit was 33.2% in the second quarter of fiscal 1997 compared to
31.9% in the same period last year. The increase in gross profit, as a
percentage of net sales, was primarily due to improved buying and distribution
leverage offset in part by increased occupancy costs from the acquisition of the
E&B Marine locations.
Gross profit increased $21.4 million, or 47.1%, in the first six months of
fiscal 1997 compared to the first six months of fiscal 1996. As a percentage of
net sales, gross profit was 30.8% in the first half of 1997 compared to 30.4% in
the same period last year. The increase in gross profit, as a percentage of net
sales, was primarily due to improved buying and distribution leverage offset in
part by increased occupancy costs from the acquisition of the E&B Marine
locations. During the next six
6
months, the Company plans to consolidate its North Carolina distribution center
and its Edison distribution center, into 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 $8.7 million, or 46.3%,
in the second quarter of fiscal 1997 compared to the second quarter of fiscal
1996, primarily due to increases in direct expenses related to the growth in
stores. Store direct expenses represented approximately 88.7% or $7.7 million
of the increase. As a percentage of net sales, selling, general and
administrative expenses increased to 19.3% in the second quarter of 1997
compared to 18.8% in the second quarter of 1996 primarily reflecting the
increased selling costs due to the addition of the E&B Marine locations.
Selling, general and administrative expenses increased $16.6 million, or 52.6%
in the first six months of fiscal 1997 compared to the first six months of
fiscal 1996, primarily due to direct expenses related to stores. These expenses
represented approximately 81.7% or $13.5 million of the increase. As a
percentage of net sales, selling, general and administrative expenses increased
to 22.2% in the first six months of fiscal 1997 from 21.1% in the first six
months of fiscal 1996 primarily reflecting the increased selling costs due to
the addition of the E&B Marine locations.
Interest expense increased $691,000 in the second quarter of 1997 compared to
the second quarter of 1996, primarily as a result of higher average borrowings
under the Company's line of credit in the second quarter of 1997 compared to the
second quarter of 1996.
Liquidity and Capital Resources
- -------------------------------
During the first half 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 six months of 1997 was $7.4 million, consisting primarily of
earnings net of depreciation, a $13.4 million increase in inventory net of
payables and other accrued expenses, a $3.1 million increase in accounts
receivable, and a $5.0 million increase in prepaids and other assets. The
inventory increase was primarily attributable to the seasonal build-up of
inventory at West Marine and E&B Marine locations. Net cash used in investing
activities was $11.0 million primarily for the purchase of property and
equipment. Net cash provided by financing activities during the first half of
1997 was $19.8 million, consisting primarily of borrowings under the Company's
line of credit and cash from the exercise of stock options.
Cash increased by $1.5 million during the first half of fiscal 1997 from
$894,000 at the end of fiscal 1996 to $2.4 million as of June 28, 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 $10
million in the last two quarters of fiscal 1997. 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.
7
Seasonality
- -----------
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's results of operations for the second quarter of fiscal
1997 were adversely affected by weather conditions in many regions in the United
States. Furthermore, 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
- -----------------------------------------------------------------------------
1995:
- -----
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.
8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders was held on May 8, 1997.
(b) The following directors were elected at the meeting:
Randolph K. Repass
Crawford L. Cole
Geoffrey A. Eisenberg
Richard E. Everett
James P. Curley
David McComas
Walter Scott
Henry Wendt
The foregoing constitute all members of the Board of Directors of the
Company.
(c) At the annual meeting no proposals were voted on aside from the
election of directors.
Set forth below is a tabulation with respect to the matter voted on at the
meeting:
9
FOR AGAINST OR WITHHELD
---------- -------------------
Election of Directors:
Randolph K. Repass 15,228,966 8,110
Crawford L. Cole 15,228,903 8,173
Geoffrey A.Eisenberg 15,228,872 8,204
Richard Everett 15,228,966 8,110
James P. Curley 15,228,754 8,322
David McComas 15,227,160 9,916
Walter Scott 15,227,760 8,316
Henry Wendt 15,227,872 9,204
(d) Inapplicable.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
10.13 Third amendment to credit agreement dated June 27, 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 Watsonville Freeholders and
West Marine Products Inc. for the Watsonville, California
offices 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 for the period being reported.
10
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 8, 1997 WEST MARINE, INC.
--------------------
By. /s/ Crawford L. Cole
-------------------------------
Crawford L. Cole
President and Chief Executive Officer
By. /s/ John Zott
-------------------------------
John Zott,
Senior Vice President, Chief Financial Officer
11