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 April 4, 1998
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 (I.R.S. Employer
Incorporation 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
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
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 May 2, 1998, the number of shares outstanding of the registrant's common
stock was, 16,890,034.
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
(in thousands, except share data)
April 4, January 3,
ASSETS 1998 1998
------- --------- --------
(Unaudited)
Current assets:
Cash ................................................................................ $ 1,745 $ 1,010
Accounts receivable, net ............................................................ 6,742 5,003
Merchandise inventories ............................................................. 181,767 166,290
Prepaid expenses and other current assets ........................................... 12,041 11,660
-------- --------
Total current assets ............................................. 202,295 183,963
Property and equipment, net .............................................................. 57,955 50,815
Intangibles and other assets, net ........................................................ 40,876 41,110
======== ========
Total assets ...................................................... $301,126 $275,888
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable .................................................................... $ 39,053 $ 26,629
Accrued expenses .................................................................... 7,617 5,456
Deferred current liabilities ........................................................ 795 788
Current portion of long-term debt ................................................... 1,811 1,848
-------- --------
Total current liabilities ........................................ 49,276 34,721
Long-term debt ........................................................................... 106,079 92,960
Deferred items and other non-current obligations ......................................... 1,957 1,889
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 16,855,692
and 16,494,205 at April 4, 1998 and
January 3, 1998, respectively ..................................................... 17 17
Additional paid-in capital ......................................................... 104,309 103,245
Retained earnings .................................................................. 39,488 43,056
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Total stockholders' equity ........................................ 143,814 146,318
-------- --------
Total liabilities and stockholders' equity ........................ $301,126 $275,888
======== ========
See notes to consolidated financial statements.
Condensed Consolidated Statements of Income
(Unaudited, in thousands, except per share amounts and store data)
13 Weeks 13 Weeks
Ended Ended
April 4, March 29,
1998 1997
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Net sales ................................ $ 84,173 $ 75,025
Cost of goods sold including
buying and occupancy ................... 62,327 55,290
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Gross profit ........................ 21,846 19,735
Selling, general and administrative
expenses ............................... 22,880 20,762
Expenses related to DC move .............. 3,284 --
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Loss from operations ............... (4,318) (1,027)
Interest expense ......................... 1,728 867
-------- --------
Loss before income taxes ........... (6,046) (1,894)
Benefit for income taxes ................. (2,479) (736)
-------- --------
Net loss
Net loss per common and common
equivalent share: ................. $ (3,567) $ (1,158)
======== ========
Basic ......................... $ (0.21) $ (0.07)
======== ========
Diluted ....................... $ (0.21) $ (0.07)
======== ========
Weighted average common and
common equivalent shares outstanding:
Basic ......................... 16,811 16,521
======== ========
Diluted ....................... 16,811 16,521
======== ========
Stores open at end of period ............. 194 156
======== ========
See notes to consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( In thousands, except per share data)
13 WEEKS 13 WEEKS
ENDED ENDED
APRIL 4, MARCH 29,
1998 1997
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Cash flows from operating activities:
Net loss .................................................................. $ (3,567) $ (1,158)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ......................................... 2,621 1,949
Loss on sale of assets ................................................ (85) 0
Provision for deferred income taxes ................................... 6 0
Provision for doubtful accounts ....................................... 77 65
Accounts receivable, net .............................................. (1,816) (1,508)
Merchandise inventories ............................................... (15,477) (25,580)
Prepaid expenses and other assets .................................... (381) (1,314)
Other assets .......................................................... (90) 0
Accounts payable ...................................................... 12,424 12,506
Accrued expenses ...................................................... 2,671 (2,049)
Deferred items ........................................................ 68 98
-------- --------
Net cash used in operating activities ..................................... (3,549) (16,991)
Cash flows from investing activities:
Purchases of property and equipment ....................................... (6,902) (4,463)
Cash flows from financing activities:
Net proceeds from line of credit .......................................... 11,900 21,700
Net repayments of long-term debt .......................................... (1,268) (135)
Exercise of stock options ................................................. 554 762
-------- --------
Net cash provided by financing activities ................................. 11,186 22,327
-------- --------
Net increase in cash .......................................................... 735 873
Cash:
Beginning of period ................................................... 1,010 894
-------- --------
End of period $ 1,745 $1,767
======== ========
See notes to consolidated financial statements.
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended April 4, 1998 and March 29, 1997 (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 April 4, 1998
and March 29, 1997; and the interim results of operations and cash flows for the
13 weeks then ended. The condensed consolidated balance sheet at January 3,
1998, 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 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 January 3,
1998. 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 January 3, 1998.
Earnings per share are calculated in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share", (SFAS No. 128). Under such
Statement, stock options or common equivalent shares have been excluded from the
calculation of diluted earnings per share during the first quarter of 1998 as
they are anti-dilutive.
NOTE 2 - CAPITALIZED INTEREST
The Company's policy is to capitalize a portion of interest incurred on its debt
during the course of major construction projects. Interest capitalized in the
first quarter of 1998 was $227,000 and was not material in the first quarter of
1997.
NOTE 3 - CHANGES IN ACCOUNTING PRINCIPLES
Effective January 4, 1998, West Marine, Inc. adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their
nature in an annual financial statement. For example, other comprehensive
earnings may include foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on marketable securities
classified as available-for-sale. Comprehensive income does not differ from net
income for West Marine, Inc. for the first quarter of 1998 and 1997.
Item 2 - Management's 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 194
stores in 31 states as of April 4, 1998, compared to 156 stores in 26 states as
of March 29, 1997.
Results of Operations
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Net sales increased $9.1 million, or 12.2%, from $75 million during the first
quarter of fiscal 1997 to $84.2 million during the first quarter of fiscal 1998.
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 $8.6 million, or
14.6%, to $67.3 million during the first quarter of fiscal 1998. Net sales from
comparable stores increased 3.4% and contributed $1.9 million of the increase in
net sales. Catalog net sales decreased $199,000, or 2.4%, to $8.2 million.
Catalog net sales were negatively impacted by new store openings by the Company.
Port Supply net sales increased $768,000, or 9.7%, to $8.7 million. Store,
Catalog and Port Supply net sales represented 79.9%, 9.7% and 10.3%,
respectively, of the Company's net sales for the first quarter of fiscal 1998
compared to 78.3%, 11.2% and 10.6%, respectively, of the Company's net sales for
the first quarter of fiscal 1997.
Gross profit increased $2.1 million, or 10.7%, in the first quarter of fiscal
1998 compared to the first quarter of fiscal 1997. As a percentage of net sales,
gross profit was 26.0% in the first quarter of fiscal 1998 compared to 26.3% in
the same period last year. The decrease in gross profit, as a percentage of net
sales, was primarily due to increased freight and distribution costs.
Selling, general and administrative expenses increased $2.1 million, or 10.2%,
in the first quarter of fiscal 1998 compared to the first quarter of fiscal
1997, primarily due to increases in direct expenses related to the growth in
stores. Store direct expenses represented approximately 78% or $1.6 million of
the increase. As a percentage of net sales, selling, general and administrative
expenses decreased to 27.2% in the first quarter of fiscal 1998 compared to
27.7% in the first quarter of fiscal 1997. This decrease reflected a reduction
in advertising costs in the catalog division, in addition to improvements in
store expenses, offset by the costs of 10 new stores opened this quarter.
Expenses related to DC move, in the first quarter of fiscal 1998, included $3.3
million of non-recurring expenses for the relocation and consolidation of West
Marine's two east coast distribution facilities into one located in Rock Hill,
South Carolina.
Interest expense increased $861,000 in the first three months of 1998 compared
to the first three months of fiscal 1997, primarily as a result of higher
average borrowings under the Company's line of credit.
Liquidity and Capital Resources
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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 three months of 1998 was $3.5 million, consisting primarily of a net loss,
a $15.5 million increase in inventory, a $1.8 million increase in accounts
receivable, and a $471,000 increase in prepaids and other assets, partially
offset by a $15.0 million increase of payables and other accrued expenses and
$2.6 million in non-cash depreciation and amortization. The increase in
inventory was primarily attributable to the addition of 10 new stores in the
first quarter and the 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 $6.9 million primarily spent on new store construction,
the Rock Hill distribution center and software upgrades. Net cash provided by
financing activities during the first three months of 1998 was $11.2 million,
consisting primarily of borrowings under the Company's line of credit and cash
from the exercise of stock options. 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.
Year 2000
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The Company has developed a plan to deal with the Year 2000 (Y2K) issue. The
plan covers systems and vendor issues that will be generated by the change of
the year from 1999 to 2000. The systems portion of the plan includes a detailed
survey of the current systems and associated upgrades, as well as options
relating to the replacement or reprogramming of current systems as would be
required to bring the Company's systems into compliance with the Y2K issue. The
plan, which was developed to address vendor issues, covers product and systems
issues and includes product certification, systems integration, testing, and
communication strategies. There can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems. Customers are not likely to
be affected by the Y2K issue. The Company expects the majority of the system
changes to be complete by early 1999, with final systems and vendor issues
resolved by late summer 1999. The Company will utilize both internal and
external resources to reprogram, or replace, and test the software for Y2K
modifications.
The Company does not expect expenditures related to the Y2K issue to be material
and as such, costs associated with Y2K are not expected to have a significant
impact on the Company's results of operations, liquidity, or capital resources.
Seasonality
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Historically, the Company's business has been highly seasonal. As a result of
the acquisition of E&B Marine in June 1996, 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 1997, 61.9% 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:
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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 new and existing store operations. The Company's Catalog
division has faced market share erosion in markets where stores have been opened
by either the Company or its competitors. Management expects this trend to
continue. 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 those stores profitably, as well as to increase 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. In addition, 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 the Company's operating results and amortization of acquired
intangible assets.
The market for recreational boating supplies is highly competitive. Competitive
pressures resulting from competitors' pricing policies have adversely affected
the Company's gross profit in the past. Furthermore, the 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
10.16 Credit Agreement dated as of November 24, 1997 among
West Marine Finance Company, Inc., Bank of America
National Trust and Savings Association, NationsBank
of Texas, National Association and Fleet National
Bank.
10.16.1 First Amendment to credit agreement dated April 10,
1998 among West Marine Finance Company, Inc., Bank
of America National Trust and Savings Association,
and other financial institutions party thereto.
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: May 19, 1998 WEST MARINE, INC.
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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