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 March 30, 2002
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 April 26, 2002, the number of shares outstanding of the registrant's common
stock was 19,016,534.
TABLE OF CONTENTS
Page
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PART I - Financial Information
Item 1. Financial Statements
a) Condensed Consolidated Balance Sheets as of March 30, 2002,
December 29, 2001 and March 31, 2001 ............................... 3
b) Condensed Consolidated Statements of Operations for the 13-weeks
ended March 30, 2002 and March 31, 2001 ............................ 4
c) Condensed Consolidated Statements of Cash Flows for the 13-weeks
ended March 30, 2002 and March 31, 2001 ............................ 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 1. Legal Proceedings.................................................. 10
Item 2. Changes in Securities and Use of Proceeds.......................... 10
Item 3. Defaults Upon Senior Securities.................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................ 10
Item 5. Other Information.................................................. 10
Item 6. Exhibits and Reports on Form 8-K .................................. 10
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WEST MARINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 30, 2002, DECEMBER 29, 2001 AND MARCH 31, 2001
(Unaudited, in thousands, except share data)
March 30, December 29, March 31,
2002 2001 2001
--------- ------------ ---------
ASSETS
Current assets:
Cash $ 6,667 $ 1,044 $ 6,294
Accounts receivable, net 7,883 6,302 6,318
Merchandise inventories 214,549 192,748 201,235
Prepaid expenses and other current assets 19,871 12,078 12,886
--------- ------------ ---------
Total current assets 248,970 212,172 226,733
Property and equipment, net 74,029 73,511 74,818
Intangibles and other assets, net 35,362 35,126 36,145
--------- ------------ ---------
TOTAL ASSETS $358,361 $320,809 $337,696
========= ============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,529 $ 38,755 $ 58,101
Accrued expenses 21,183 20,245 15,328
Current portion of long-term debt 8,778 8,774 8,741
--------- ------------ ---------
Total current liabilities 69,490 67,774 82,170
Long-term debt 87,006 59,426 86,011
Deferred items and other non-current obligations 5,837 5,796 4,252
--------- ------------ ---------
Total liabilities 162,333 132,996 172,433
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: 18,931,037 at March 30, 2002, 18,134,152 at December 29, 2001
and 17,586,112 at March 31, 2001 19 18 17
Additional paid-in capital 124,272 113,622 108,179
Retained earnings 71,737 74,173 57,067
--------- ------------ ---------
Total stockholders' equity 196,028 187,813 165,263
--------- ------------ ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $358,361 $320,809 $337,696
========= ============ =========
See notes to condensed consolidated financial statements.
3
WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share and store data)
13 weeks 13 weeks
Ended Ended
March 30, March 31,
2002 2001
--------- ---------
Net sales $97,166 $89,738
Cost of goods sold, including buying and occupancy 72,318 67,597
--------- ---------
Gross profit 24,848 22,141
Selling, general and administrative expense 27,789 25,874
--------- ---------
Loss from operations (2,941) (3,733)
Interest expense, net 1,085 1,582
--------- ---------
Loss before income taxes (4,026) (5,315)
Income taxes 1,590 2,126
--------- ---------
Net loss $(2,436) $(3,189)
========= =========
Net loss per share - basic and diluted $ (0.13) $ (0.18)
========= =========
Weighted average common and common equivalent shares outstanding -
Basic and diluted 18,487 17,572
========= =========
Stores open at end of period 244 235
========= =========
See notes to condensed consolidated financial statements.
4
WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
13 weeks 13 weeks
Ended Ended
March 30, March 31,
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net loss $ (2,436) $ (3,189)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,730 4,551
Tax benefit from exercise of stock options 3,196 -
Provision for doubtful accounts 77 58
Changes in assets and liabilities:
Accounts receivable (1,658) (1,412)
Merchandise inventories (21,801) (20,672)
Prepaid expenses and other current assets (7,793) (3,007)
Other assets (236) (194)
Accounts payable 774 15,760
Accrued expenses 938 (2,407)
Deferred items 41 35
--------- ---------
Net cash used in operating activities (24,168) (10,477)
--------- ---------
INVESTING ACTIVITY -
Purchases of property and equipment (5,248) (5,598)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings on line of credit 27,773 19,700
Repayments on long-term debt and capital leases (189) (177)
Proceeds from exercise of stock options 7,455 192
--------- ---------
Net cash provided by financing activities 35,039 19,715
--------- ---------
NET INCREASE IN CASH 5,623 3,640
CASH AT BEGINNING OF PERIOD 1,044 2,654
--------- ---------
CASH AT END OF PERIOD $ 6,667 $ 6,294
========= =========
See notes to condensed consolidated financial statements.
5
WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen Weeks Ended March 30, 2002 and March 31, 2001
(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
items) necessary to fairly present the financial position at March 30, 2002 and
March 31, 2001, and the interim results of operations and cash flows for the
13-week periods 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.
The consolidated balance sheet at December 29, 2001, 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.
Accounting policies followed by West Marine are described in Note 1 to its
audited consolidated financial statements for the year ended December 29, 2001.
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 29, 2001, included in
West Marine's annual report on Form 10-K.
The preparation of financial statements in conformity with accounting
principals generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The results of operations for the thirteen weeks ended March 30, 2002 are not
necessarily indicative of the results to be expected for the year ending
December 28, 2002 or any other interim period.
NOTE 2: Accounting Policies
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, SFAS 142 includes provisions for the reclassification
of the useful lives of existing recognized intangibles, reclassification of
certain intangibles out of previously reported goodwill and the identification
of reporting units for purposes of assessing potential future impairments of
goodwill.
West Marine adopted SFAS 142 effective December 30, 2001 and, during the first
quarter of 2002, completed a transitional goodwill impairment test. The adoption
of SFAS 142 did not result in an impairment charge. The amortization of existing
goodwill, however, ceased upon the adoption of SFAS 142. During the first
quarter of 2001, West Marine recorded approximately $243,000 of goodwill
amortization. At March 30, 2002, West Marine had approximately $33.5 million of
goodwill recorded, net of amortization.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," that replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS 144 requires that long-lived assets to be disposed of by sale, including
those of discontinued operations, be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. Discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
been incurred. SFAS 144 also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
form the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The provisions of SFAS 144
are effective for our fiscal year 2002, and are generally to be applied
prospectively. The adoption of SFAS 144 did not have a material impact on the
financial position, results of operations or cash flows of West Marine.
NOTE 3: Segment Information
West Marine has three divisions - Stores, Wholesale and Catalog (including
Internet) - which all sell aftermarket recreational boating supplies directly to
customers. The customer base overlaps between West Marine's Stores and Wholesale
divisions and between its Stores 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 Stores 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. Assets are not presented by
segment, as West Marine's assets overlap among segments. Contribution is defined
as net sales, less product costs and direct expenses. The following is financial
information related to West Marine's Stores business segment (in thousands):
13 weeks 13 weeks
Ended Ended
March 30, March 31,
2002 2001
--------- ---------
Net sales:
Stores $79,466 $71,222
Other 17,700 18,516
------- -------
Consolidated net sales $97,166 $89,738
======= =======
Contribution:
Stores $ 2,519 $ 3,258
Other 3,245 2,503
======= =======
Consolidated contribution $ 5,764 $ 5,761
======= =======
Reconciliation of consolidated contribution to net income:
Consolidated contribution $ 5,764 $ 5,761
Less:
Cost of goods sold not included in consolidated contribution (4,319) (4,795)
General and administrative expenses (4,386) (4,699)
Interest expense (1,085) (1,582)
Income tax benefit 1,590 2,126
------- -------
Net loss $(2,436) $(3,189)
======= =======
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
West Marine, Inc. is the largest specialty retailer of recreational and
commercial boating supplies and apparel in the United States. We have three
divisions - Stores, Wholesale (Port Supply) and Catalog (including Internet) -
which all sell aftermarket recreational boating supplies directly to customers.
At the end of the first quarter, we offered our products through 244 stores in
38 states and in Puerto Rico, on the Internet (www.westmarine.com) and through
catalogs. We are also engaged, through our Port Supply division and our stores,
in the wholesale distribution of products to commercial customers and other
retailers.
West Marine, Inc. was incorporated in Delaware in September 1993 as the holding
company for West Marine Products, Inc., which was incorporated in California in
1976. Unless the context otherwise requires, "West Marine" refers to West
Marine, Inc. and its subsidiaries. Our principal offices are located at 500
Westridge Drive, Watsonville, California 95076-4100, and our telephone number is
(831) 728-2700.
All references to the first quarter of 2002 mean the 13-week period ended March
30, 2002, and all references to the first quarter of 2001 mean the 13-week
period ended March 31, 2001.
Seasonality
Historically, our business has been highly seasonal. Our expansion into new
markets has made it even more susceptible to seasonality, as an increasing
percentage of Stores' sales occur in the second and third quarters of each year.
In 2001, 64.8% of our net sales and all of our 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 our markets.
Management expects the seasonal fluctuation in net sales to become more
pronounced as we continue to expand our operations.
Results of Operations
Net sales increased $7.5 million, or 8.3%, to $97.2 million for the first
quarter of 2002, compared to $89.7 million for the first quarter of 2001,
primarily due to increases in net sales at our stores. Net sales attributable to
our Stores division were $79.5 million for the first quarter of 2002, an
increase of $8.0 million, or 11.2%, over the $71.5 million recorded for the same
period a year ago. During the first quarter of 2002, four new stores were opened
and no stores were closed. Net sales in new stores opened since the first
quarter of 2001 and remodeled stores not included in comparable sales were
$5.6 million. First quarter net sales from comparable stores increased 7.9%, or
$5.3 million. Wholesale sales decreased by $0.5 million, or 4.4%, to $10.3
million for the first quarter of 2002, compared to $10.8 million for the same
period a year ago. Catalog (including Internet) sales decreased by $0.1 million,
or 1.0%, to $7.4 million for the first quarter of 2002, compared to the same
period last year. Stores, Wholesale and Catalog (including Internet) sales
represented 81.8%, 10.6% and 7.6%, respectively, of our net sales for the first
quarter of 2002, compared to 79.7%, 12.0% and 8.3%, respectively, of our net
sales for the first quarter of 2001.
Our gross profit increased by $2.7 million, or 12.2%, to $24.8 million for the
first quarter of 2002, compared to $22.1 million for the first quarter of 2001.
Gross profit margins were 25.6% in the first quarter of 2002, compared to 24.7%
in the same period a year ago. Gross profit margins increased for the first
quarter of 2002 compared to the prior year primarily because we reduced
operating costs at our distribution centers.
Selling, general and administrative expenses increased by $1.9 million, or
7.4%, to $27.8 million for the first quarter of 2002 compared to $25.9 million
for the same period last year. Selling, general and administrative expenses
represented 28.6% of net sales for the first quarter of 2002, compared to 28.9%
for the same period last year. The increase in selling, general and
administrative expenses for the first quarter of 2002 is primarily due to
operating costs associated with the seven additional stores opened in 2001.
Interest expense was $1.1 million in the first quarter of 2002, a decrease of
$0.5 million from the same period a year ago. The decrease in interest expense
for the first quarter of 2002 is primarily due to lower average interest rates
compared to last year.
7
Liquidity and Capital Resources
During the first three months of 2002, our primary sources of liquidity were
$27.8 million from bank borrowings and $7.5 million in proceeds from the
exercise of stock options. Our primary cash requirement was related to
merchandise inventories for stores. Net cash used in operating activities during
the first three months of 2002 was $24.2 million, consisting primarily of an
increase in inventories of $21.8 million and an increase in prepaid expenses and
other current assets of $7.8 million. The inventory increase reflects the four
new stores we opened in the first quarter of 2002 and our commitment to
increasing fill rates, which enhance sales, and stocking of merchandise at
stores during the peak boating season. The change in prepaid expenses and other
current assets primarily reflects an increase in prepaid income taxes.
In the first quarter of 2002, we spent $5.2 million for capital expenditures,
primarily for new stores and the remodeling of existing stores, including
leasehold improvement costs and fixtures. We expect to spend a total of $24.0 to
$27.0 million on capital expenditures in 2002. We intend to pay for our
expansion through cash generated from operations and bank borrowings.
At March 30, 2002, we had outstanding a $24.0 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,
debt-to-capitalization ratios and minimum net worth requirements.
On March 4, 2002, we entered into a new $100.0 million credit line, which
expires in three years. At any time prior to March 4, 2004, we have the option
to increase this new credit line to $125.0 million (provided we are not then in
default under the credit line). The credit line includes a $20.0 million
sub-facility for standby and commercial letters of credit, of which up to $15.0
million is available for the issuance of commercial letters of credit and up to
$5.0 million is available for standby letters of credit. The credit line
includes a sub-limit of up to $10.0 million for same day advances.
Depending on our election at the time of borrowing, the line bears interest at
either (a) the higher of (i) the bank's prime rate or (ii) the federal funds
rate plus 0.5% or (b) LIBOR plus a factor ranging from 1.0% to 2.25%. On March
30, 2002 borrowings under the credit line were $70.6 million, bearing interest
at rates ranging from 3.7% to 5.0%.
The new credit line is unsecured and contains various covenants which require us
to maintain certain financial ratios, including debt-to-earnings and current
ratios. The covenants also require us to maintain minimum levels of net worth
and place limitations on the 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 first quarter of 2002, we had $1.2 million of outstanding
standby letters of credit and $0.5 million of outstanding commercial letters of
credit.
We believe existing credit facilities and cash flows from operations will be
sufficient to satisfy liquidity needs through 2003.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995
The statements in this Form 10-Q 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.
These forward-looking statements include, among other things, statements that
relate to West Marine's future plans, expectations, objectives, performance and
similar projections, as well as facts and assumptions underlying these
statements or projections. Actual results may differ materially from the results
expressed or implied in these forward-looking statements due to various risks,
uncertainties or other factors.
Set forth below are certain 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 changes 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 has faced market share erosion in areas where either our
competitors or we have opened stores. Management expects this trend to continue.
8
Our growth has been fueled principally by our stores' 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 to increase net sales at our 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.
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 the Internet and e-commerce on the supply
chain, 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 filings with the Securities and
Exchange Commission.
We assume no responsibility to update any forward-looking statements as a result
of new information, future events or otherwise.
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 2001 annual report on Form 10-K.
9
PART II
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to West Marine's Registration Statement on Form S-1
(Registration No. 33-69604)).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to West Marine's
Registration Statement on Form S-1 (Registration No. 33-69604)).
10.15 Credit Agreement (incorporated by reference to Exhibit 10.15 to
West Marine's Annual Report of Form 10-K, filed with the
Commission on March 29, 2002).
10.16 Guaranty (incorporated by reference to Exhibit 10.16 to West
Marine's Annual Report of Form 10-K, filed with the Commission on
March 29, 2002).
(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: May 13, 2002 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