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 September 27, 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 October 25, 1997, the number of shares outstanding of the registrant's common
stock was, 16,707,263.
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited, in thousands, except share data)
September 27, December 28,
ASSETS 1997 1996
---------- -------------------- -------------------
Current assets:
Cash $ 1,162 $ 894
Accounts receivable, net 5,907 3,742
Merchandise inventories 151,238 122,731
Prepaid expenses and other current assets 14,652 10,803
-------------------- -------------------
Total current assets 172,959 138,170
Property and equipment, net 44,270 30,654
Intangibles and other assets, net 41,707 42,690
-------------------- -------------------
Total assets $ 258,936 $ 211,514
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 34,350 $ 33,627
Accrued expenses 13,837 10,901
Current portion of long-term debt 1,412 694
-------------------- -------------------
Total current liabilities 49,599 45,222
Long-term debt 62,749 37,997
Deferred items and other non-current obligations 1,819 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 16,697,014
and 16,494,205 at September 27, 1997 and
December 28, 1996, respectively 17 16
Additional paid-in capital 101,997 98,632
Retained earnings 42,755 27,883
-------------------- -------------------
Total stockholders' equity 144,769 126,531
-------------------- -------------------
Total liabilities and stockholders' equity $ 258,936 $ 211,514
==================== ===================
See notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Income
(Unaudited, in thousands, except per share amounts and store data)
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------------ ------------------ ------------------- ------------------
Net sales $ 115,471 $ 104,547 $ 331,995 $ 253,974
Cost of goods sold including
buying and occupancy 83,247 74,312 232,990 178,332
------------------ ------------------ ------------------- ------------------
Gross profit 32,224 30,235 99,005 75,642
Selling, general and administrative
expenses 23,448 21,478 71,554 53,002
Expenses related to integrating E&B Marine 2,995 2,995
------------------ ------------------ ------------------- ------------------
Income from operations 8,776 5,762 27,451 19,645
Interest expense 622 452 2,506 1,070
------------------ ------------------ ------------------- ------------------
Income before income taxes 8,154 5,310 24,945 18,575
Provision for income taxes 3,282 2,194 10,073 7,550
------------------ ------------------ ------------------- ------------------
Net income $ 4,872 $ 3,116 $ 14,872 $ 11,025
================== ================== =================== ==================
Net income per common and common
equivalent share:
Primary $ 0.28 $ 0.18 $ 0.85 $ 0.66
================== ================== =================== ==================
Fully diluted $ 0.28 $ 0.18 $ 0.85 $ 0.66
================== ================== =================== ==================
Weighted average common and common
equivalent shares outstanding:
Primary 17,495 17,629 17,586 16,686
================== ================== =================== ==================
Fully diluted 17,546 17,629 17,587 16,751
================== ================== =================== ==================
Stores open at end of period 176 151
=================== ==================
See notes to condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
39 Weeks 39 Weeks
Ended Ended
September 27, September 28,
1997 1996
-------------------- -------------------
Cash flows from operating activities:
Net income $ 14,872 $ 11,025
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,146 3,550
Change in assets and liabilities:
Accounts receivable, net (2,165) (1,277)
Merchandise inventories (28,507) (4,721)
Prepaid expenses and other (4,022) (3,208)
Accounts payable 723 3,345
Accrued expenses 3,042 4,546
Deferred items 228 (62)
-------------------- -------------------
Net cash provided by (used in) operating activities (9,683) 13,198
Cash flows from investing activities:
Purchases of property and equipment (15,784) (10,249)
-------------------- -------------------
Net cash used in investing activities (15,784) (10,249)
Cash flows from financing activities:
Net proceeds (repayments) from line of credit 23,899 (4,393)
Repayments of long-term debt (1,425)
Sale of common stock pursuant to
associate stock purchase plan 467 301
Exercise of stock options 2,794 2,565
-------------------- -------------------
Net cash provided by (used in) financing activities 25,735 (1,527)
-------------------- -------------------
Net increase in cash 268 1,422
Cash:
Beginning of period 894 399
-------------------- -------------------
End of period $ 1,162 $ 1,821
==================== ===================
See notes to condensed consolidated financial statements.
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Thirty-nine weeks Ended September 27, 1997 and September 28, 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 September 27,
1997 and September 28, 1996; and the interim results of operations and cash
flows for the 13 and 39 weeks then ended. The condensed 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.
The results of operations for the 13 and 39 week periods presented herein are
not necessarily indicative of the results to be expected for the full year.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the fiscal year ended 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 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 39 Weeks Ending 39 Weeks Ending
September 27, September 28, September 27, September 28,
------------- ------------- ------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
Pro forma EPS:
Basic $0.29 $0.19 $0.90 $0.71
Diluted $0.28 $0.18 $0.85 $0.66
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 (Reporting Comprehensive Income), which
------------------------------
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources; and No.
131 (Disclosures about Segments of an Enterprise and Related information), which
-------------------------------------------------------------------
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas,
and major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
NOTE 2 - Capitalized Interest
The Company's policy is to capitalize interest incurred on debt during the
course of major construction projects. Interest capitalized in the third quarter
of 1997 was $404,000. Such amounts were not material in prior quarters.
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 176
stores in 29 states as of September 27, 1997, compared to 151 stores in 25
states as of September 28, 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 $10.9 million, or 10.4%, from $104.5 million during the
third quarter of fiscal 1996 to $115.5 million during the third quarter of
fiscal 1997. This increase was attributable to an increase in net sales from the
Company's Store and Port Supply divisions partially offset by a decrease in net
sales in the Company's catalog division. Store net sales increased $11.3
million, or 13.4%, to $95.8 million during the third quarter of fiscal 1997. Net
sales from comparable stores increased 5.8% and contributed $4.8 million of the
increase in net sales. Catalog net sales decreased $877,000, or 7.4%, to $10.9
million. Catalog net sales were negatively impacted by the UPS strike which
occurred in August, 1997. Port Supply net sales increased $513,000, or 6.2%, to
$8.8 million. Store, catalog and Port Supply net sales represented 82.9%, 9.5%
and 7.6%, respectively, of the Company's net sales for the third quarter of
fiscal 1997 compared to 80.8%, 11.3% and 7.9%, respectively, of the Company's
net sales for the third quarter of 1996.
Net sales increased $78.0 million, or 30.7%, from $254.0 million during the
first nine months of fiscal 1996 to $332.0 million during the first nine 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 $71.6 million,
or 36.4%, to $268.2 million. Net sales from comparable stores increased 4.6% and
contributed $8.6 million of the increase in net sales. Catalog net sales
increased $4.5 million, or 14.3%, to $36.3 million. Port Supply net sales
increased $1.9 million, or 7.5%, to $27.5 million. Store, catalog and Port
Supply net sales represented 80.8%, 10.9% and 8.3%, respectively, of the
Company's net sales for the first nine months of fiscal 1997 compared to 77.4%,
12.5% and 10.1%, respectively, of the Company's net sales for the first nine
months of fiscal 1996.
Gross profit increased $2.0 million, or 6.6%, in the third quarter of fiscal
1997 compared to the third quarter of fiscal 1996. As a percentage of net sales,
gross profit was 27.9% in the third quarter of fiscal 1997 compared to 28.9% in
the same period last year. The decrease in gross profit, as a percentage of net
sales, was primarily due to increased freight cost related to the UPS strike,
and increased labor cost in the distribution centers offset in part by improved
buying costs.
Gross profit increased $23.4 million, or 30.9%, in the first nine months of
fiscal 1997 compared to the first nine months of fiscal 1996. As a percentage of
net sales, gross profit remained constant at 29.8% in the first nine months of
fiscal 1997 compared to the first nine months of fiscal 1996. Gross profit
fluctuations were primarily due to improved buying and distribution leverage
offset by increases in occupancy costs that resulted from the acquisition of the
E&B Marine locations. Beginning in the fourth quarter of 1997 and continuing
into fiscal 1998, the Company intends 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, excluding 1996 expenses related to
integrating E&B Marine, increased $2.0 million, or 9.2%, in the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996, primarily due to
increases in direct expenses related to the growth in stores. As a percentage of
net sales, selling, general and administrative expenses decreased to 20.3% in
the third quarter of 1997 compared to 20.5% in the third quarter of 1996
primarily reflecting a reduction in overhead costs as a result of the merger
with E&B Marine which was offset in part by an increase in store direct
expenses.
Selling, general and administrative expenses, excluding 1996 expenses related to
integrating E&B Marine, increased $18.6 million, or 35.0% in the first nine
months of fiscal 1997 compared to the first nine months of fiscal 1996,
primarily due to direct expenses related to stores. These expenses represented
approximately 91.4% or $16.9 million of the increase. As a percentage of net
sales, selling, general and administrative expenses increased to 21.6% in the
first nine months of fiscal 1997 from 20.9% in the first nine months of fiscal
1996 primarily reflecting the increased store direct expenses due to the
addition of the E&B Marine locations.
Interest expense increased $1.4 million in the first nine months of 1997
compared to the first nine months of fiscal 1996, primarily as a result of
higher average borrowings under the Company's line of credit.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of capital have been income from operations and
borrowings under its line of credit. Net cash used in operations during the
first nine months of 1997 was $9.7 million, consisting primarily of earnings net
of depreciation, a $24.7 million increase in inventory net of payables and other
accrued expenses, a $2.2 million increase in accounts receivable, and a $4.0
million increase in prepaids and other assets. The increase in inventory was
primarily attributable to the addition of 25 new stores over the previous 12
months and the expanded SKU selection offered
by the Company. Net cash used in investing activities was $15.8 million
primarily for the purchase of property and equipment. Net cash provided by
financing activities during the first nine months of 1997 was $25.7 million,
consisting primarily of borrowings under the Company's line of credit and cash
from the exercise of stock options.
Cash increased by $268,000 during the first nine months of fiscal 1997 from
$894,000 at the end of fiscal 1996 to $1.2 million as of September 27, 1997.
West Marine's primary cash requirements are related to capital expenditures for
stores, including leasehold improvement costs, fixtures, and merchandise
inventories. The Company anticipates capital expenditures approximating $6.0
million in the last quarter of fiscal 1997. Management is currently negotiating
a new line of credit and believes that cash flow from operations together with
additional bank debt financing will provide sufficient sources of capital to
fund the Company's operations through the next year. The Company believes the
additional financing will be at comparable rates and conditions as its current
line.
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. The Company
expects sales will become more susceptible to seasonality and weather as it
continues to expand its 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 growth has been fueled principally by the E&B Marine acquisition
and the Company's store operations. 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
10.14 Third Amendment to credit agreement dated September
24, 1997 among WMP, Bank of America National Trust
and Savings Association, and other financial
institutions party 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.
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: November 11, 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